On Effectual vs. Causal Entrepreneurship

On Effectual vs. Causal Entrepreneurship
Ziya G. Boyacigiller
This presentation was created and given by Ziya
Boyacigiller who was leading Angel Investor and a loved
mentor to many young entrepreneurs in Turkey. We have
shared it on the web for everyone’s benefit. It is free to
use but please cite Ziya Boyacigiller as the source when
you use any part of this presentation. For more about
Ziya Boyacigiller’s contributions to the start-up Ecosystem
of Turkey, please go to www.ziyaboyacigiller.com

Effectual vs Causal
Entrepreneurship*:
Ziya G. Boyacıgiller
*Based on work by
Saras D.SarasvathyShort-Version (c) Ziya G. Boyacigiller 2012 2
How to Plan Your Business
– or, Should You Plan at All?

Q:
Where is Entrepreneurship Needed?
A. For-profit / Not-for-profit organizations
B. Governmental / Private sectors
C. Low / High technology industries
D. New / Established companies
Ziya G. Boyacigiller (c) 2008 (c) Ziya G. Boyacigiller 2012 3

Adizes:
Life-Cycle of Corporations
http://www.wghill.com/books
/prime.htm (c) Ziya G. Boyacigiller 2012 4

Who is an entrepreneur?

Research Shows:
When comparing the attributes of entrepreneurs to
others, no single attribute is a good predictor of who is
more likely to become an entrepreneur
No unique bundle of attributes appears to be "required"
for entrepreneurial activity
Entrepreneurs and non-entrepreneurs are, in general,
similar in their attributes
Entrepreneurs and non-entrepreneurs have been shown
to be risk averse, but entrepreneurs are slightly less risk
averse than others
Source: Amit and Mueller (1993)

Effects of Mental State
realism & optimism

Working Definition of
Entrepreneur
Founder or executive of an
enterprise,
who creates a new stream of
revenues
by building a new business
(i.e., organizing a venture)
Ref: Christoph Zott, IESE, Prof of Entrepreneurship

Why do you
want to be an
entrepreneur?

Complete the sentence:
As a child, what fun it is to…
Ziya G. Boyacigiller (c) 2008 11(c) Ziya G. Boyacigiller 2012

(c) Ziya G. Boyacigiller 2012
If you love what
you do,
you don’t work a
day
in your life…
Confucius
Ziya G. Boyacigiller (c) 2008 12

“Flow” is Fun Zone
Improve
skills
{take a
challenge}
Use status-quo
skills
{stay in comfort
zone}

We need
4 key skills
to succeed in
business...

1. Creativity

2. Problem Solving

3. Decision Making

4. Planning

games to learn to
Prepare for Life
 Deterministic
 Chess / Go
 Bridge
 …
Teaches game-theory –
HOW TO ANALYZE TO
MAKE A DECISION
 Stochastic
 Backgammon
 Poker
 …
Teaches probability –
HOW TO ANALYZE TO
TAKE A CHANCE…

Find a way to win in
Tic-Tac-Toe

Find a way to win in
Checkers

Can you find a way to win
in Chess?

Can you find a way to win
in Backgammon?
Bet
Luck
MULTIPLIER 
UNCERTAINITY 
Can you
affect luck?

How much of an “EDGE” do
you have?

What…
… does all this have
to do with starting a
new business???

… and Entrepreneurship !
game  venture
board setting  initial situation
moves  actions
dice throw  uncertainty (ambiguity)
initial bet (ante)  initial investment
increasing bets  follow-on investments
piece advantage  physical advantage
positional advantage  strategic advantage
- - -  - - -
next game  next venture 

Every game/venture…
…is a “test” – a learning
opportunity…
What makes one aWhat makes one a greatgreat business person?business person?

Entrepreneurship is a Profession.
Be a “Serial Entrepreneur”,
Not a “One Time Entrepreneur”
Improve
skills
{take a
challenge}
Use status-quo
skills
{stay in comfort
zone}

 In 2000, there were 454 spinoffs, within all American academic
institutions, pp57
 In 2000, average was 4.2% spinoffs-to-disclosures ratio within 26
selected universities (~37% of total with spinoffs) in USA. Pp68
 During 1980-1996, MIT spinoffs = 134, went public = 24, 18% public
“spin-off ratio, pp19 & pp30
 Using 4.2% and 18%, we get 0.76%. This means
only ~8 spinoffs for each 1,000 disclosures
succeed to go public (IPO). (Note that this ratio is for MIT and is much
higher than non-academic success rates. For example, the rate for most
startup companies is probably over 100 times worse!)
< 8 in 1,000 success rate…

?
Now, you may have more
questions than answers…
1. Can a business be “planned” when there is so much detail and ambiguity
looking into the future?
2. How can I write a business plan when the competitive environment is
changing all the time? My plan will be obsolete by the time I’m done
with it, if I waste my time planning.
3. Will writing a business plan really help me? Or, should I just start the
business without a plan?
4. Doesn’t luck have a lot to do with success in business?
5. - - - - -
6. Is there such a thing as “Entrepreneurial Thinking”?
7. Can anyone be an Entrepreneur? Or, are you born one?
8. Can you teach Entrepreneurship?

Develop a business plan for:
A. Simit vendor
in Bebek
B. Global IPTV*
set-top box
manufacturer
* IPTV = Internet TV

How would you plan your
“business” ?
1. If your business is like tic-tac-toe?
2. If your business is like
backgammon?

Cooking as an Analogy
Case 1:
Causal Approach:
Your friend asks you to cook
“imam bayildi”.
You plan what you need before
you start. You decide that
you will need eggplants,
tomatoes, onions, olive oil,
garlic, salt, pepper.
You go shopping since there are
no eggplants in the house.
You know exactly what to do
at each step of the cooking
process.
Case 2:
Effectual Approach:
You decide to cook for your
friend.
You open the refrigerator and
find tomatoes, onions, olive
oil, garlic, parsley,
eggplants, flour, eggs, salt,
pepper…
You can cook with these “imam
bayildi” or “pasta with
marinara sauce” or
“eggplant salad”. You end
up creating your “own dish”
while cooking since some
ingredients are not fit to
use...
Why can’t you write a
detailed plan in Case 2?

Business Schools (often)
teach “Causal Reasoning”
Causal or Predictive
reasoning is used in
all business
functional areas;
when developing a
business plan or
planning to achieve
business goals.

“Causal Planning” is like
building a Jig-Saw Puzzle…
The picture you will end up with is known (it is on the box),
There is ONLY ONE SOLUTION !
The pieces are all available (inside the box),
What you do is: make them fit together…

Causation Models…
…are based on the logic of prediction,
To the extent that you can predict
the future,
you can control it.
(Translation: You believe that the more exactly you can
predict the future, the more precisely you can control it.
Therefore, before you shoot you spend a lot of your time
and attention on aiming…)

Causation Models…
Puzzle Business
Causal reasoning begins
with a given goal to be
created
the picture on the box vision for a business
and consists of
principles, techniques,
and criteria
shapes, colors,
pictures of the puzzle
pieces
business skills,
knowledge and tools
based on the logic of
prediction for generating
and selecting between
possible means /
alternatives
puzzle pieces courses of action
to achieve the given
goal.
to build the puzzle to build the business

Real Life Entrepreneurs use
“Effectuation”
Build the
mountain as
you climb !

Effectual Planning is like
Building a Lego Sculpture…
Here, you have an idea of what you want to build (but you don’t have an exact
picture of it). There are approximate shapes available as Lego bricks (but you
have to improvise as to which piece to use where). What you do is, use creativity to
pick and fit together the best pieces available to form the exact shape “as you go one
brick at a time”… Note that, you can end up with many different-looking results with
this approach. If the expected result is to build a man, there are multitude shapes
that this man could end up with – fat, thin, black, white, short, tall, bald or hairy,
etc..
Build “a man”
out of Lego
bricks

Effectuation Models…
…are based on a logic of control,
To the extent that you can control the
future,
you do not need to predict it.
(Translation: If you think that you can be in control no matter what
would take place in the future, you don’t need to predict exactly
what will take place in the future. You assume you will “find a
way” to deal with any situation in the future… So you shoot first,
and aim later…)

Effectuation Models…
Legos Business
Effectual reasoning
begins with a given
set of means, and
the Lego bricks knowledge,
resources, assets
consists of principles,
techniques, and
criteria
shapes, colors,
types of Lego bricks
business skills,
experience, tools
based on the logic of
control for generating
and selecting between
possible effects and
results
Lego brick
combinations
courses of action
that can be created
with those means as a
result
to build the Lego
sculpture
to build the
business

Comparing Causal vs Effectual Planning
Causal Planning is useful
in domains where
 Rationality
 Pre-existent goals
 Environmental
selection
are primary factors that
influence outcomes.
Effectual Planning is
useful in domains
where prediction is
 Untenable
 Goals are ambiguous
 Decisions influence the
environment,
and functions in a non-
random fashion to
make reasonable and
informed choices.

Two Approaches to Business
Planning
Causal: Jig Saw has a given solution that you are
driven to achieve – a defined goal.
Effectual: Lego has no specific solution – you can
end up with many different solutions and results.

Effectuation Rules in Chaos:
Like Intel or PayPal did, it
is quite possible…
… to start moving with a plan in mind
(Plan A),
and as time goes by,
to end up with a quite different
plan (Plan n).

Getting back to
Entrepreneurship…

Definition of
Entrepreneurship
“The Pursuit of Opportunity
Without Regard to Resources
Controlled”
Howard Stevenson
Harvard Business SchoolZiya G.
Boyacigiller (c)
2008 (c) Ziya G. Boyacigiller 2012 47

Improved Definition of
Entrepreneurship
“An entrepreneur is someone who is
always on the lookout for problems that
can be turned into opportunities, and
finds creative ways to leverage limited
resources to reach their goals.”Tina Seelig
Stanford Business SchoolZiya G.
Boyacigiller (c)

Ziya’s Definition of
Entrepreneurship
“An entrepreneur is someone who is
motivated to solve a problem,
imagines a solution and decides it is a
worthwhile opportunity to pursue,
then works passionately and patiently
to find-a-way to make this
dream come true.”Ziya G. Boyacigiller
Ziya G.
Boyacigiller (c)

What …
…are the
differences
between
successful
entrepreneurs
and others? Saras D. Sarasvathy study,

Recipe for Entrepreneurs
What they use to create their businesses
1. Who they are
(their traits, tastes, abilities, values,…)
2. What they know
(their education, training, expertise, experience…)
3. Whom they know
(their social and professional networks)

Recipe for Entrepreneurs
What they use to create their businesses
4. plus Effectual Reasoning !

Effectual Reasoning “finds a
way” when no path exists…
Unlike causal reasoning, which comes to life through careful
planning and subsequent execution (aim first/shoot next),
effectual reasoning lives and breathes execution (shoot
first/aim later).
Plans are made and unmade and revised and recast through
daily action and interaction.
Yet there is always a vision that keeps the team together, a
picture of an attractive future or a compelling story
that attracts in more stakeholders in a journey into
unmapped territories, and keeps them motivated to reach
out further and deeper than ever...

While Causal Thinkers are like
generals seeking to conquer
fertile land,
Effectual Thinkers are like
explorers setting out on
voyages into uncharted waters.

Why are Entrepreneurs Right
to Use Effectual Reasoning?
 If you are in a predictable market, there
can always be someone else with more
resources who can
• predict it better than you, or
• execute better than you
 If you are in an uncertain market, you
have equal chances to create the market
as others. (Creativity is to see what
others fail to see…)  more on this later

Edison “Creating the Future”
What do you
think?
Did Thomas Alva use
Effectual or Causal
planning when he
changed the world
with his inventions?

An option…
1. Risky but predictable future
2. Risky and “to be created” future
(what entrepreneurs believe in – their vision -
when they use effectual logic)
By the way, Edison succeeded to created the
light-bulb but failed in concrete

How does one control an
unpredictable future?
 Is future a continuation of the
present?
 To what extent can human action
change its course, or “Create the
Future”?

Did Microsoft Create the
Future? Did Intel?
 When Bill Gates decided to develop the
DOS for IBM PCs, he had no picture in his
mind of what the world would look like
today. Nor did Andy Grove /Robert
Noyce/Gordon Moore (founders of Intel,
left to right).
 They just kept on planning for the next
step, and taking that next step…
 The steps that they chose to take, (and
steps they did not take) resulted in
“today” as we know it. They created the
future we live in today with their next
choices…
 If you could ask them “if they were trying
to create the future”, they would say “of
course not”. They were simply trying to
control the next decisions to be made
so it would be best for their businesses…

Where is Luck in all this…
 In an uncertain environment, luck is the throw of dice that
determines what it is that the future holds for you.
 Effectual planning accepts that luck will show the options
available, and knows that there are infinite possible options in
the future – therefore, defers the “decision making” to the time
when the dice are thrown and the options are visible. Keeps
options available to the last second… Choices you make “Creates
the Future” as you go…
 Your goal is to keep the initiative – so you force the others to
respond to your moves, rather than make their choices freely.
 Causal planning assumes that options are predictable ahead of
time (minimal effect of luck), and plans a course of action for
each option so they will reach the goal.

Ying-Yang in
Entrepreneurial Thinking
One person can use both “causal” and
“effectual” thinking at different times depending
on what the circumstances call for…

Applying What We Learned:
1. Create a vision
(“Best way to predict the future is, to create it.”)
2. Pick a business within your means
(i.e. “means” you now have or can
get/buy/develop/create)

Applying What We Learned:
3. Develop a detailed plan only for the next
“foreseeable phase” of your business.
(“When driving in the fog, you can only plan to drive as far
as you can see…”)
plan to
drive only
as far as
you are able
to seeto minimize risk

Once Again:
Three Principles of
Effectual Entrepreneurship
1. Effectual reasoning is about committing the fewest
resources to a new idea, not generating the highest
returns from it.
( plan to minimize risk, find your 1st
customer and get help from
them from the beginning and then on…)
2. Effectual reasoning depends on strategic
partnerships, not on competitive analyses.
( transform 1st
customers and suppliers into partners to shape new
product and new market…)
3. Effectual reasoning is about leveraging the
unexpected, not making predictions.
( make lemonade when you are given lemons… Key skills are
“creative mindset + deal making + negotiation” (don’t accept the
status quo, don’t be afraid to walk into the forest to see what is next,
have a bias for action, fail often & fail small …)

In summary:
 Predictable businesses are started with a
written business plan that is detailed and implies
that this plan can be followed to the letter with
controllable changes.
 Unpredictable businesses are started with a
flexible plan (using a slide presentation and a
short written executive-summary), which implies
that plans will change in the future as the
assumptions and/or the environment changes.
Only the foreseeable future is planned in detail.

On Effectual vs. Causal Entrepreneurship

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