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Thought Leadership: Tiago Ratinho on Effectuation

Tiago Ratinho, assistant professor of innovation management and entrepreneurship in the

Tiago Ratinho, assistant professor of innovation management and entrepreneurship, discusses the principles of effectuation

We've always thought about entrepreneurs as visionaries—people who are better than the rest at predicting trends and envisioning the future. Effectuation suggests that entrepreneurs create the future rather than even try to predict it. They take action and build new things.
                                           -Tiago Ratinho

Merrick School of Business, is an acknowledged expert on the world of the modern entrepreneur. And not just how these amazing self-starters find success in a globally competitive business environment—but how they think, behave and make decisions in a way that can drive toward a positive outcome.

Here, Prof. Ratinho offers his insights into "effectuation"—a type of logic that so-called "super entrepreneurs" make use of as they map out business strategies, product development, and so on.

Merrick School of Business: What are the principles of effectuation?

Tiago Ratinho: Effectuation is a decision-making logic used by expert entrepreneurs when faced with extreme uncertainty. It is based on starting with what you currently control, teaming up with self-selected partners, and determining how much they can afford to lose. Effectual entrepreneurs would rather take action and control their future, instead of relying on predictive information about the future.

MSB: How do these principles challenge traditional thinking when it comes to new business creation?

TR: We've always thought about entrepreneurs as visionaries—people who are better than the rest at predicting trends and envisioning the future. Effectuation suggests that entrepreneurs create the future rather than even try to predict it. They take action and build new things.

Entrepreneurship often occurs in a highly uncertain environment—either because the market is non-existent or there are product development challenges. So classic management tools, such as market research, do not apply. Effectual entrepreneurs understand this and apply effectuation principles to their venture development.

MSB: Are there any local entrepreneurs who you consider to be models of the effectuation principles—super-entrepreneurs?

TR: Local or not, all successful entrepreneurs follow, to some extent, one or more effectuation principles. Take the affordable loss principle, for example—it postulates that entrepreneurs think about how much they can afford to lose rather than try to predict future returns. We know that entrepreneurs do this one way or another, whether because they do not have the initial capital to invest or to minimize risk.

MSB: Do you have to follow these principles in order to be a super-entrepreneur? Why or why not?

TR: There is no expected relationship between effectuation and performance. My own research suggests that effectuation and its opposite, causation, are both used by entrepreneurs depending on a venture's stage of development, the market conditions, and the current focus of entrepreneurs. This means that entrepreneurs can apply effectuation principles in the face of uncertainty, or act in a more "classic" manner when working in a less uncertain environment.

MSB: What have you observed through your research that convinces you that the effectuation principles are indeed a strong indicator for someone becoming a super entrepreneur?

TR: Entrepreneurship is a skill set, but even experts rarely get everything right. Effectuators are closer to succeeding—or at least failing less spectacularly. They always take control and act, rather than relying exclusively on predictive information. They seek to attract partners by allowing them to shape the venture idea. These are normally good indicators of a higher chance of success.

Those who start off by planning rather than doing are in a weaker position. Excessive reliance on studying competition, financial forecasting or working toward a very defined goal distracts you from creating something that your customer wants. Also, it may lead to discussions about an idealized future that most likely will not materialize.

MSB: How is the School of Business teaching and incorporating effectuation principles into our classes, at the undergraduate and MBA levels?

TR: All of our entrepreneurship classes include, to some extent, effectuation principles. Students in the Entrepreneurship specialization/concentration study effectuation in detail, and devise how they can develop their venture ideas using these principles. Also, our teaching is not based on outdated pedagogies such as business planning. Our students learn how to recognize an entrepreneurial opportunity, and also how to connect with the outside world to share and co-create products and services that people want. More importantly, they learn how to think like an entrepreneur rather than deliver a simplistic forecasting exercise.

MSB: What resources are out there to learn more about the effectuation principles?

TR: You can find out more about effectuation at the website for the Society of Effectual Action.

Learn more about Prof. Ratinho.