I have written several articles about Sarasvathy’s conception of effectuation by entrepreneurs. Effectuation is a theory of entrepreneurial activity based on experiential learning by organizations.
Effectuation is a prescription for innovating when the risk is unknown and unknowable. Effectuation comprises four principles presented in contrast to the causal model of marketing strategy (Sarasvathy 2001):
- Affordable loss rather than expected returns,
- Strategic Alliances rather than competitive analysis,
- Exploitation of contingencies rather than exploitation of preexisting knowledge, and
- Controlling an unpredictable future rather than predicting an uncertain one.
In other words: just do it! Get in the ring and start fighting… But how does a budding entrepreneur actually use this procedure? How can you enter a market on a shoestring, effect its development, and develop a product? Many people find it hard to visualize how effectuation can be put into action.
How to effectuate?
There are multiple ways to effectuate. One way that I observed is to consult in a promising area and get paid to solve problems that users are experiencing. A decade ago I worked for and with a number of firms that were supporting the transition of financial trading from manual to online transactions. There was a need for online trading platforms, real time risk management tools, and online clearing. A number of firms that started as consultants or custom software solution vendors realized that their solutions would suit multiple users and reformed themselves as product companies.
Search or Discovery?
Interestingly some of the firms had started doing the custom work with the goal of eventually entering the market with products while others had fully intended to do custom work but realized that their solutions were of value. In entrepreneurship research a clear distinction is made between opportunity search or discovery; in practice the only way to tell the difference in these startup firms was to know their intent in advance.
Consulting or custom work enabled these software or internet firms to enter a promising market with very limited financial risk, to ally with leading users, to exploit the opportunities the users brought to them, and to shape the future in those markets: classic effectuation.
What were the key issues they faced when they decided to launch as product startups? A big one one course was IP issues – did they own the products they had developed as a result of their consulting efforts. The “search” firms, who had intended to enter the market all along, often had an advantage here since they had structured contracts and deals with their future launch in mind.
Virtually all other key issues were Marketing, classic issues in branding, channels, segment, etc.
The marketing issues before launch included:
- Is there a standard product? Is customization minimized?
- Intellectual property issues and strategy
- Target Markets and segments
- Sales Channels: Direct, resellers, partners?
- Sales and Marketing support, inside or out
Some of the best firms stayed flexible and were able to experiment with the marketing elements as they went forward, continuing the effectuation process.
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