Theory of Effecuation

THEORY OF EFFECUATION
Effectuation is a way of thinking and decision making that is based on the idea that entrepreneurs
create their future by taking action and making things happen. Theory of Effectuation basically states
that the decision-making process should be done by identifying the next, best step by assessing the
resources available and not by assuming and preplanning. It is specifically essential in the
entrepreneurship process since the environment is full of uncertainties and risks.
Effectual decision-making therefore involves design, the generation of alternative goals, rather than
choice among already existing ends. It is said that entrepreneurs can change their environments into
new things like products, opportunities, companies, and markets by using effective reasoning. For
Example: An effectual cook first looks at the ingredients available in the fridge and then imagines
what meals can be made, and then decides one.
THE PRINCIPLES
1. Bird in Hand Principle – Start with your means. Use what is available to you and don’t keep
waiting for the perfect opportunity
2. Affordable Loss Principle – Evaluate opportunities based on whether the downside is
acceptable, rather than on the attractiveness of the predicted upside.
3. Lemonade Principle – Mistakes and Uncertainties are inevitable and should be accepted and
tried to be converted into new opportunities.
4. Crazy-Quilt Principle – Form partnerships with people and organizations willing to make a
real commitment to jointly creating the future—product, firm, market—with you. They can
bring the project new funds and direction.
5. Pilot in the Plane Principle- Control the controllable. The four specific principles above
represent different ways entrepreneurs interact with the environment to shape the
environment. Not everything is within our control since the business environment is dynamic
and unpredictable so we should focus on controlling the things we can control.
WHY THE EFFECUATION MODEL?
1. Effectuation theory teaches us to make the most of what we have instead of trying to predict
the future. Thus, we should conduct initial interviews on basis of our knowledge and
strengths and use our academic knowledge to draft questions. It would be especially relevant
while interviewing and questioning entrepreneurs as we should be able to improvise our
questions in accordance to their answers.
2. The Lemonade principle suggests that we should use mistakes made during earlier
interviews in our favour and use these findings to refine our questions thereby asking more
specific questions to get more suitable answers for our research. Even young entrepreneurs
should make use of this principle to their greatest possible extent. By the use of this method,
entrepreneurs can embrace uncertainties as opportunities and use them for the
improvement of the company and its product.
3. We could apply the Affordable Loss principle by keeping constraints on time, effort and
resources we apply during every part of the research. We should focus on key sources that
are the most relevant to our research.
4. Convincing the entrepreneur to apply these principles in his work would not only help them
improve the current process but also help in building trust between the client and WTFund.
Making them understand that instead of keeping grand goals they should just take small
steps with what they already have at their disposal would be beneficial for them.
5. Collaboration is essential for the growth of any company; every entrepreneur should make
sure their company has a proper feedback setup for customers to log their complaints and
suggestions which would lead in the overall development of any enterprise. Urging startup
founders to take care of this aspect would surely help in growth of their startup.
REAL LIFE APPLICATIONS
AIRBNB
Startups are known to bloom and fade rapidly, and Airbnb was no different. However, Airbnb’s
ascent from a modest startup to a global powerhouse stands as a solid proof to the
transformative power of design and customer retention.
The founders of Airbnb started their company with the least number of resources available at
their disposal (Bird in the Hand Principle). They couldn’t afford to invest in large amounts of
capital, so they worked with a few air mattresses in their apartment during their local design
conference in San Francisco.
They built customer trust through enhancing their experience and addressing their issues of
trust regarding the digital platform (Lemonade Principle) improving their customer retention
rates. Airbnb tracks user satisfaction via ratings and reviews, monitors engagement levels of
both hosts and guests, and evaluates the impact of design innovations on revenue and market
expansion.
They didn’t plan to make a multi-billion-dollar company but focussed on controlling things
within their control (Pilot in the Plane Principle) which ended in the overall development of the
enterprise. Now, it’s a multi-billion-dollar enterprise operating in nearly 192 countries,
redefining the travel experience for millions.

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THEORY OF EFFECUATION

REAL LIFE APPLICATIONS

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