Robert E Wiltbank, Ph.D.wiltbank@willamette.edu

The Entrepreneurial ProblemFor Profit / Social / Otherwise

• Goals are rarely well known & specified

• The future is extremely unpredictable

• People don’t ‘follow instructions’

Effectual vs. Predictive Logic

GivenGoals

M1

M2

M3

M4

M5

Distinguishing Characteristic Of Predictive Logic:

Selecting various means to achieve pre-determined goals

New means may be generated over time

Distinguishing Characteristic of Effectuation:

Imagining & Selecting various goals using a given set of means

E2

E3

E

En

Given Means

M1M2

M3

M4

M5

E1

ImaginedEnds

Effectual vs. Predictive Logic

What CAN we do, rather than what SHOULD we do.

• Causal reasoning takes a particular effect as given and focuses on selecting between means to create that effect.

What should we do?

What can we do?

• Effectual reasoning takes a set of means as given and

focuses on selecting between possible effects that

can be created with that set of means.

6 Definition of one of several possible markets

Adding Segments/Strategic Partners

Segment Definition(through strategic partnerships & “selling”)

Market Definition

Segmentation(using relevant variables such as age, income, etc.)

Effectuation

Causation Model from Expert Managers

Targeting(based on evaluation criteria

such as expected return)

Positioning(through mktg strategies)

Effectuation as Used by Expert Entrepreneurs

CustomerIdentification(through Who am I?

What do I know?

Whom do I know?)

THE CUSTOMER

• Causal principles (red) generally taught in bschool

7

• Effectual principles are always in Blue

The Principles of Effectuation

8

• Means. The basis for decisionsand new opportunities:

– Who I am

– What I know

– Whom I know

Where to Start• Goals. Given (based on predictions)

• Expected Return. Calculate upside potentialand pursue the (riskadjusted) best opportunity.

9

• Affordable Loss.Calculate downside potential and risk no more than you can afford to lose.

Risk, Return and Resources

10

Partnership. Build your “future” together with customers, suppliers and even prospective competitors.

Attitude Toward Others

Competition. Set up transactionalrelationships with customers and

suppliers.

11

When things pop up

• Leverage Surprises.Surprises can present new opportunities.

• Avoid them. Surprises are not good

12

Underlying Logic & What to Do

To the extent we can predict the future, we can control it.

⇒⇒⇒⇒ PLAN

To the extent we can control the future, we don’t need to predict it.

⇒⇒⇒⇒ CO-CREATE

Prediction: efforts to position the venture for success based on forecasts of important market elements.

Control: efforts to directly construct important market elements, in order to lead the venture to success.

A Critical Difference

Prediction Control when facing uncertainty.

Predictive. The future is a reliable continuation of the past. Accurate prediction is possible and useful.

Transformative. The future as shaped (at least partially) by actions of all players. Prediction is neither easy nor useful.

5. Approach

Avoid Contingencies. Surprises are bad. Contingencies are managed by careful planning and focus on targets.

Leverage Contingencies. Surprises are good. New developments encourage imaginative re-thinking of possibilities and continual transformations of targets.

4. Contingency

Perform Competitive Analysis. Protect. Strategy is driven by potential competitive threats.

Form Partnerships. Grow. Strategy is created jointly through partnerships to create new opportunities.

3. Attitude

Toward Outsiders

Calculate Expected Return. Pursue the (risk adjusted) largest opportunity and accumulate required resources. Maximize upside potential.

Set Affordable Loss. Pursue interesting opportunities without investing more resources than you can afford to lose. Set a limit on downside potential.

2. Risk, Return and Resources

Set a Goal. Goals determine actions. For example, the goal of achieving X, will dictate I need person A with skills matched to X.

Assess Your Means. Take action based on what you have available:

* Who I am* What I know* Whom I knowExample: I have person A, I can achieve X, Y, or Z

1. Where to Start

Tactics for PredictionTactics for Control

Predictive. The future is a reliable continuation of the past. Accurate prediction is possible and useful.

Transformative. The future as shaped (at least partially) by actions of all players. Prediction is neither easy nor useful.

5. Approach

Avoid Contingencies. Surprises are bad. Contingencies are managed by careful planning and focus on targets.

Leverage Contingencies. Surprises are good. New developments encourage imaginative re-thinking of possibilities and continual transformations of targets.

4. Contingency

Perform Competitive Analysis. Protect. Strategy is driven by potential competitive threats.

Form Partnerships. Grow. Strategy is created jointly through partnerships to create new opportunities.

3. Attitude

Toward Outsiders

Calculate Expected Return. Pursue the (risk adjusted) largest opportunity and accumulate required resources. Maximize upside potential.

Set Affordable Loss. Pursue interesting opportunities without investing more resources than you can afford to lose. Set a limit on downside potential.

2. Risk, Return and Resources

Set a Goal. Goals determine actions. For example, the goal of achieving X, will dictate I need person A with skills matched to X.

Assess Your Means. Take action based on what you have available:

* Who I am* What I know* Whom I knowExample: I have person A, I can achieve X, Y, or Z

1. Where to Start

Tactics for PredictionTactics for Control

Effectual Decision Making

Kevin DeWhitt, Agilyx, affordable loss and co-creation

Padmasree Harish, Easy Auto: persistence, inter subsjective, commitments

Yan Cheung, ACN to Nine Dragons, transformation, $3,800, 10 years.

Take Stock of your means: who, whom, what.

What can you do for near zero; Or where you can afford to lose?

What commitments have you attracted and followed?

What surprises are you taking advantage of so far?

New means

New goals

Who I amWhat I knowWhom I know

Expanding cycle of resources

Means

Converging cycle of constraints on goals

Goals

What canI do?

Call peopleI know

Stakeholder commitments

Yngve’s Effectual Process

New means

New goals

Expanding cycle of resources

MeansEngineerSummer Travel BizRelationship with Sakada

Converging cycle of constraints on goals

Goals

What canI do?

Interact with people

Stakeholder commitments

New markets

Effectuation in Action

Take Stock of your means: who, whom, what.

What can you do for near zero; Or where you can afford to lose?

What commitments have you attracted and followed?

What surprises are you taking advantage of so far?

New means

New goals

Who I amWhat I knowWhom I know

Expanding cycle of resources

Means

Converging cycle of constraints on goals

Goals

What canI do?

Call peopleI know

Stakeholder commitments

Your Effectual Process

Distinguishing Effectuation in Venture Investing

• Select ventures that appear most capable of influencing critical market elements.

Create and Influence localized markets vs. compete in large “ideal” ones.

• Emphasize current means & capabilities rather than on plans for acquiring the “best” means to reach original goals.

1. Adjusting goals is less expensive than acquiring means.

2. Commitment is more important than Best.

• Encourage the venture to make smaller investments that get to cash flow positive rather than investing in the resources suggested by market research to “hit plan.”

Overhead trails growth

• Avoid prediction as the basis for investment decisions.Emphasize affordable loss over maximizing expected values.

Effectuation is related to a reduction in failures, but ‘homeruns’ appear random.

25

How we’ve learned

Do experts make decisions differently?

It appears so: very different from novices AND from expert managers.

Marketing Under Uncertainty: An Effectual Approach.

Journal of Marketing 2009, vol 73 (May) p1-18

with N. Dew, S. Read, S. Sarasvathy

Effectual versus predictive logics in entrepreneurial decision-making.

Journal of Business Venturing 2009, v24(4): 287-309.

with N. Dew, S. Read, S. Sarasvathy

26

How we’ve learned

Does the level of uncertainty actually matter?

It appears so: as uncertainty is greater, groups of strategic action, and their sequence significantly effect valuations.

Making Sense: Patterns of Competitive Actions and Valuation of New Firms.

Strategic Management Journal, 2010, v31(13): 1474-1497.

with V. Rindova, W. Ferrier

27

How we’ve learned

Does the use of effectuation affect evaluation?

It appears so: similarities between investors and entrepreneurs increases likelihood of investment and investment amount.

I Like How You Think: The Role of Cognitive Similarity as a Decision Bias

Journal of Management Studies 2011 48:7, p 1533-1561.,

with C. Murnieks, M.Haynie, T.Harting

28

How we’ve learned

Does the use of effectuation affect outcomes?

It appears so: effectual angel investors experience fewer failures and the same rate of homeruns.

Prediction and Control Under Uncertainty: Outcomes in Angel Investing

Journal of Business Venturing 2009, vol 24 p 166-133

with S. Read, N. Dew and S. Sarasvathy.

A meta-analytic review of effectuation and venture performance

Journal of Business Venturing 2009

S. Read, M. Song, W. Smit.