Different approaches to reasoning
Entrepreneurship is all about risk and uncertainty. Two different approaches to reasoning, however, are used to manage risk and to deal with uncertainty. Very broadly speaking, risk is managed by employing a causal approach. It basically entails sequential planning, statistical analysis and predictive logic. On the other hand, effectuation is used to deal with uncertainty. Effectual logic does not rely on predictions to determine the future; instead effectual logic use means already available to control the future. Meaning that when effectual logic is applied, one will look at: who am I, what do I know, and who do I know to draw from means available to control, rather predict the future.
Causation & effectuation
Very simply the differences are in the way means (resources) are deployed to mitigate risk or deal with uncertainty. During causation (also said to be managerial thinking) means are selected to achieve a predetermined given goal. During effectuation (also said to be entrepreneurial thinking), a possible new end is imagined by using a given set of means. This means that when causation is used, means need to be acquired to achieve the predetermined end goal. When effectuation is used the available means are used to imagine a possible end.
What drives each approach?
Causation as a form of reasoning, relies on data and analytics to make good decisions. Effectuation relies on principles which are (1) affordable loss, (2) strategic alliances, (3) exploiting contingencies, and (4) control over an unpredictable future.
To simplify – effectuation differs from causation by focusing on:
(1) Affordable loss – what one is willing to lose, rather than attempting to predict possible future states.
(2) Strategic alliances – formulating partnerships that will deliver strategic value, over competitive analysis (mapping out the competitors, and strategically evaluating their positions in a specific market to determine their strengths and weaknesses).
(3) Exploiting contingencies – using unexpected barriers in the market to your advantage with innovative approaches, rather than attempting to reconstruct numerous scenarios to predict numerous possible counter actions.
(4) Controlling an unpredictable future – focusing on who they are, what they know and who they know, rather than attempting to predict an uncertain future.
It is important to be aware of these approaches as it was stated that the ability to shift between them is becoming an important competency for an entrepreneur to develop.