The previous instalments have suggested that a set of principles based on effectuation thinking might be more helpful that business plans for many new ventures. Those principles are:
1. An enterprise is a goal-realisation device.
2. Don’t commit more than you can afford to lose.
3. Start from where you are.
4. Carry out reality checks and plans
5. The only reliable test is a real one.
6. Get some momentum.
7. Act for uncertainty and respond to the unforeseen.
8. Build, and use, relevant social capital.
9. Look for opportunities and respond to what you find.
10. Produce a formal business plan only when you need one.
The instalments have challenged the assumption that a business plan is a universal tool for new enterprise starts. Instead it suggests that new enterprise starts are, and should be seen as, a form of exploration which may, or may not, lead to a business, and that exploration principles may therefore be a better guide.
In causal thinking the fixed point is the goal, which is specified, and therefore the focus is on establishing the best means by which to achieve it. In effectual thinking the fixed point is where to start, which is based on what the venture is and has (in terms of skills, contacts, experience, etc – and the affordable loss). The focus then is on exploring what can be done from that starting point to achieve the benefits the venture desires. These benefits are not fixed in advance and what is desired may change as the venture proceeds and new possibilities/opportunities revealed. This is a process of exploration and is what many explorers do. Some may have looked for a route to particular destination – Columbus was looking for a route to Japan, while others have sought a specific natural resource, such as deposits of gold. All stood to benefit however if they were open to other possibilities which their explorations might reveal. Thus, in causal terms Columbus might be said to have failed, because he did not get to Japan, but in effectual terms he succeeded because he revealed to Spain, and others in Europe, the potential benefits of the Americas, including its stocks of gold.
Another key distinction between the two approaches lies in the way they treat uncertainty and risk. If the difference between uncertainty and risk is that uncertainty means that the odds are not known whereas risk implies that they are, then a business plan approach tries to reduce uncertainty by assessing risk through research and prediction. The heart of a business plan is generally the sales forecast based on some form of market research. It is on this forecast that the projected production capacity and staffing requirements and consequent financial projections, profitability estimates and sensitivity analysis can then be based.
However, if the market research is not reliable, then the plan is based on sand. Also the business plan sets psychological blinkers because its projections shape the anticipated dimensions of the business and its expected potential. Because the plan suggests how the future is expected to turn out it encourages those using a plan to follow the selected path rather than to look for other possibilities.
Some of those who favour the business plan approach have likened it to preparing a road map[i] which implies that you can know enough about the future to know where the roads will be. An exploration approach instead accepts that the future is uncharted territory and, until you start to explore it, you won’t know where the roads are and whether they will be suitable for the journey. An exploration approach is therefore is likely to appeal to venturers – people seeking to start a new venture – and to help them. A business plan approach however may be more likely to appeal to their advisers and supporters, because they often have different objectives.
However the two approaches are not exclusive and, in practice, because both approaches have some advantages, they should be selected, as appropriate, for different situations or stages. Think of them as different tools – each appropriate for different circumstances. As Saras Sarasvathy has said:
‘I do not teach effectuation as the only way to do entrepreneurship. Instead the course is built around the notion of two toolboxes – causal and effectual – and how to use them effectively in the creation of new ventures. … It is important to re-emphasize here that the point of exploring contrasting perspectives … is not to prove one superior to the other, but to learn to understand and use both.’[ii]
These instalments suggest, however, that an effectuation approach will be the better initial tool for many new venture starts.
[i] For instance P. Burns, Entrepreneurship and Small Business (3rd Edition), (Basingstoke: Palgrave, 2011) and Creating a Business Plan. (Boston, Mass: Harvard Business School Press, 2007)
[ii] S. D. Sarasvathy, Effectuation: Elements of Entrepreneurial Experience, (Cheltenham: Edward Elgar, 2008) p.231