What if everything you were taught about entrepreneurship and entrepreneurs was wrong? No more hero-entrepreneur, visionary, reckless, ready to risk everything for the development of their company, alone against everyone. With the theory of Effectuation, it is in fact the emergence of “entrepreneurship for all”, where Mr. or Ms. Everybody seeks to involve their surroundings to “create something”.
The Study
The entrepreneur, due to their very specific situation, does not act like any “normal” company would, established in its business, with market knowledge and extensive resources.
The study of how successful entrepreneurs proceed has allowed an understanding of the approach used by them to launch their business. This gave birth to a new paradigm: Effectuation.
Its author, Saras D. Sarasvathy, is a researcher and professor in management and entrepreneurship. She took an interest in the cognitive part of the act of entrepreneurship: do successful entrepreneurs have special abilities that allow them to stand out? For example: foresight, tenacity, risk-taking,…
She interviewed a number of entrepreneurs. The processing of their answers allowed her to isolate successful attitudes. She then established her theory on Effectuation. More than a theory, it is a new paradigm that challenges many myths surrounding the entrepreneur for ages.
The Myth of the Lone Wolf
In a dying textile industry, declared by all experts to be in inevitable decline, emerges Amancio Ortega, who became the second richest man in the world with his company Inditex and his star brand Zara.
In an uncertain market, two professors and a writer launch Starbucks Coffee, which does better than hold its own: it becomes the world’s largest coffee chain.
Ingvar Kamprad creates the trend of self-assembly kit furniture and becomes one of the richest men in the world.
Closer to our time, Jack Ma, an English teacher with a long list of failures and disappointments on his CV, launches Alibaba and becomes the richest man in China.
Based on a brilliant idea, Stacy Madison and Mark Andrus create Stacy’s, the largest American brand of flavored chips, and sell it to PepsiCo for $60 million.
The myth built around these stories is: a lone entrepreneur (or a couple), visionary, who is sure of their analysis and diagnosis, contradicting all the specialists in the sector, launches with their idea and vision, taking all the risks and against all odds manages to create their company and succeed.
The study showed that the vast majority of these business creators had no idea of the scale of the business they were engaging in. Everyone remembers Mark Zuckerberg’s reaction in the film The Social Network when he first heard the figure of a Billion dollars.
The Causal Approach
The causal approach is the usual approach, studied in all marketing and management courses. It is the way to proceed when operating in a “predictive” environment. Indeed, the vast majority of companies, when they want to launch a new product or service, first study its impact, the size of its market, its cost price, its production costs, financing needs,… and establish a marketing plan for the product launch.
This way of doing things is effective when you have a reasonable knowledge of the field you are entering, the market you are serving, and the customer you are targeting. It is especially valid when past market knowledge and experience in the field are sufficient to predict its evolution in the near future. This excludes predicting any discontinuity in its evolution.
The Failure of Experts
“There is no reason anyone would want a computer in their home,” said Ken Olson, founder and chairman of Digital Equipment (DEC) in 1977.
“The horse is here to stay. But the automobile is only a novelty, a fad,” said the President of Michigan’s Savings Bank when speaking to Henry Ford’s lawyer.
“We will never make a 32-bit operating system,” stated Bill Gates in 1989.
In 2005, Sir Alan Sugar, founder of Amstrad stated: “By next Christmas, the iPod will be dead, finished, gone, kaput.”
“I believe OS/2 is destined to be the most important operating system, and possibly program, of all time,” predicted Bill Gates in 1987.
It is clear that predicting the future of technologies and their uses is no easy task. Even great recognized experts in the field sometimes fail. For a simple reason: in general, predictions are based on a past trajectory or current market knowledge. This knowledge is, in fact, already obsolete.
So, if even experts often fail to predict the future of a new technology, how do entrepreneurs who succeed proceed?
The theory of effectuation (in English Effectual) serves to maneuver in highly uncertain environments, such as when a new technology appears or when approaching a market for which knowledge is very partial.
1st principle of effectuation: A bird in the hand is worth two in the bush
The usual approach of a company is to start from an idea, as big as possible, evaluate its potential, the resources necessary for its realization, and acquire them to begin the implementation of the idea.
For the entrepreneur, the central element is not the idea, but themselves. Starting from who you are, your assets, and the means at your disposal: your parents’ garage to launch, the cousin who comes to help on weekends, your knowledge of a certain field, a sum of money to acquire certain equipment. All these represent available means that allow starting “something”. Even if often this “something” is not a very ambitious project of significant size, most often it aims to support the needs of the project creator. Rarely more.
So, what is needed is not to get stuck searching for the brilliant, revolutionary idea that won’t come. Move to action quickly with available means and refine the idea over time. Also plan for failures: these are opportunities to bounce back and try something else. As we will see, also plan for a few good surprises and prepare to seize them.
On the other hand, there is no need for extravagant means. It could even be a handicap to start with a lot of money, as Sarasvathy tells us: “People who start with a lot of money may be much more likely to lose. In part, because they have less momentum to innovate.”
Let’s go back to Ingvar Kamprad. It is wrongly believed that he had his brilliant idea for kit furniture from the launch of Ikea. In reality, in his early days, he sold small leather goods, tablecloths, and nylon stockings! Same for Jack Ma of Alibaba and for most others.
It is actually about considering one’s assets and starting an activity quickly. An opportunity to observe market behavior. You will have many opportunities to change activity later.
2nd principle of effectuation: acceptable losses
A stubborn misconception is that the entrepreneur is a reckless person. That they are so sure of the validity of their idea that they are ready to take all risks for the realization of their project. These risks include significant losses in money, time,…
In reality, to move forward, the entrepreneur defines what they are willing to lose. Defining the maximum losses they are able to accept puts them in a serenity that allows them to face the uncertainties of the economic world. It is then much easier to act.
Furthermore, to limit these losses as much as possible, the entrepreneur advances in small steps. They commit their resources progressively. They also have the opportunity to share risks with other people.
This is the way most entrepreneurs proceed to face hazards, especially at the start of their activity, when their market knowledge is extremely limited.
3rd principle of effectuation: the crazy patchwork
The mythology around the entrepreneur often tells the story of lone individuals who succeed all by themselves. In reality, a significant part of success is linked to the ability to involve other people, other skills,… because no reasonable project can be carried out by a single person. Often, in biographies, the role of these people is reduced to satisfy the leader’s ego.
For example, Henry Ford was not alone, he launched his company with Alexander Malcomson and James Couzens. Steve Jobs first had two co-founders and then benefited from the collaboration of many experienced people like Michael Scott, Mike Markkula, and John Sculley.
Successfully involving co-founders (often among friends), investors (sometimes in the family circle), the first employees, the first clients, such that everyone benefits is no easy task, but it is a necessary condition for starting the adventure. This is what the author calls the “crazy patchwork”.
4th principle of effectuation: lemonade principle
What would you do if you found yourself with a large quantity of lemons? Probably lemonade. This is the principle of opportunism.
Almost as much as failures, the entrepreneur sometimes faces good surprises: unforeseen things that emerge from their activity. For example, we spoke earlier of Stacy Madison and Mark Andrus who created the largest brand of flavored chips. This was precisely an impromptu discovery made while they were trying to keep unhappy customers waiting in their restaurant.
The ability to seize this kind of opportunity, to dare to change course, to experiment with something else that looms on the horizon constitutes one of the great qualities of the successful entrepreneur. We could call this opportunism, seen from a positive angle, obviously.
It will also involve experimenting with other forms of entrepreneurship: social or non-profit entrepreneurship, intrapreneurship,… The ability to experiment and seize opportunities that arise is the common point in all these situations.
When in 1998, the Netscape team realized its failure, noting by the way that it was not economically viable to live from a web browser and face Internet Explorer provided for free by Microsoft, its members decided to try something else: putting their browser’s code under an open source license. This led to the creation, in 2003, of the Mozilla Foundation and the invention of a new economic model that allowed the project to continue to exist.
5th principle of effectuation: the pilot of the plane
We imagine the entrepreneur with a gift of foresight that allows them to see the trend where all the specialists and other experts have failed. In reality, as we saw above, when entrepreneurs make predictions about the future, they are just as wrong as others.
It turns out that the entrepreneur is not in a mental state to predict the future. They are rather in a position to control it, to design it.
By creating new products, the entrepreneur is in the situation of changing people’s behavior, rather than trying to predict it. And for that, they do not take any current situation as a fatality.
In 2007, Nokia, then the world leader in telephony, was trying to maintain its dominance in the market by producing dozens of smartphone models to occupy all possible user niches: the trendy, the demanding, the connected, the athletic, the geeks, those in a hurry…
Conversely, Steve Jobs had a unique idea of what the smartphone should be. He created the iPhone, that single model he imagined. He then pushed all customers to adapt their behaviors. By doing so, the whole market had to follow: that is the entrepreneurial attitude.
When Airbnb releases its product, it changes our way of consuming hotel services. When Travis Kalanick creates Uber, it changes our way of moving… The entrepreneur feels and acts like the pilot in the plane: they hold the destiny of people in their hands, they have the power to act on people and the future, and for that, they take no situation as a fait accompli.
Summary
As we have just seen through these paragraphs, many results of this study are counter-intuitive. They are mostly in opposition to the ideas conveyed by the media or taught in our business schools.
It is therefore time to update our teachings to match reality. That would then be the emergence of a new form of entrepreneurship: an entrepreneurship much less elitist, intended for everyone, of any age, from any social class or level of education.
