An NPD Professional’s Entrepreneurial Journey Using the Principles of Effectuation
Originally published: 2013 (PDMA Visions Magazine • Issue 3, 2013 • Vol 37 • No 3)
Read time: 9 minutes
The book, “Effectuation: Elements of Entrepreneurial Expertise,” published in 2008 by Dr. Saras Sarasvathy and colleagues, culminated a nearly decade-long exploration of the theory of effectuation in the academic literature. The research demonstrated significant insights into the consistent motivations and behaviors of entrepreneurs. This theory of effectuation is important for both academics and practitioners because it provides an explanation and methodology for what has previously been described as the mercurial and often frantic early stages of a start-up business.
This article illustrates the effectuation concept in action within the context of a new venture undertaken by a former corporate new product development (NPD) manager. The tension developed in this story emerges from applying effectuation theory to an entrepreneurial venture versus being fully engaged in a causation-oriented corporate environment using Stage-Gate® and other tools. While this particular story is ongoing, the hope is to encourage other corporate-based NPD mangers to consider an alternative experience—the sometimes frustrating but personally rewarding journey of entrepreneurship.
The Business of Color
The name of my new business venture, Alumaware, comes from the color-anodized aluminum tumblers, bowls, pitchers and ashtrays that were popular during the 1960s and 1970s. While these items were a great novelty when entertaining guests and keeping your drinks ice cold, they were easily scratched and dented. Consequently, the product became unpopular. Color anodizing is achieved through an electro-chemical process and is still used widely today. Brightly colored handheld flashlights in shades of red, green and blue are an example of the application of color anodized aluminum. However, the issues that have historically plagued anodizing still remain—the color surfaces are easily marred or scratched, making these products highly susceptible to corrosion from liquids and to dramatic color loss when exposed to the sun for a prolong period of time.
The concept of effectuation explains that successful entrepreneurs do not engage in haphazard and “seat of the pants” decision-making, and that there is a definite methodology employed by what are termed “expert” entrepreneurs.
By embedding nano-sized ceramic particles into the porosity of the metal, Alumaware uses a revolutionary new process that significantly increases the durability of color anodized aluminum. The result is an extremely corrosion-resistant, wear-resistant, low-friction and UV-inhibiting surface that far exceeds the current performance of commercial anodizing processes. The company targets recreational and tactical industry segments using this new proprietary process. These industries include climbing and mountaineering, marine hardware, cycling, tactical illumination (scopes and flashlights) and technical rescue equipment. These industries value the use of color to differentiate their products and the extreme durability that nano-ceramic anodizing provides.
The story of Alumaware didn’t begin with effectuation, but certainly during this entrepreneurial journey the principles of effectuation were embraced and implemented. I am convinced that the application of the principles of effectuation has enabled this venture to accomplish two important goals: to convince buyers of the value of a new metal finishing technology in a very mature By embedding nano-sized ceramic particles into the porosity of the metal, alumaware uses a revolutionary new process that significantly increases the durability of color anodized aluminum industry and to shift customers’ perceptions about the durability and variety of applications for colored metal surfaces.
The Logic of Effectuation
Sarasvathy defines effectuation as a “logic of entrepreneurial expertise that both novice and experienced entrepreneurs can use in the highly unpredictable start-up phase of a venture to reduce failure costs for the entrepreneur.” There are an abundance of articles and books on entrepreneurs and entrepreneurship, including personality types, motivations and how these individuals have changed the world. Though certainly very inspiring, these stories tend to be anecdotal and of little use to entrepreneurs who are seeking a methodology that can produce positive results, especially during the time and resource-constrained start-up phase. The concept of effectuation explains that successful entrepreneurs do not engage in haphazard and “seat of the pants” decision-making, and that there is a definite methodology employed by what are termed “expert” entrepreneurs.
An entrepreneur can be defined as “a person who organizes, manages and assumes the risk of business,” and entrepreneurship is “the character, practice or skill of an entrepreneur.” Sarasvathy accordingly defines effectuation as being “part of an entrepreneurial method (similar to the scientific method) whereby effectual logic can be used as the fuel to create more effective experiments by entrepreneurs testing their theories in the real world.” Expert entrepreneurs, through trial and error, create heuristics that define how they approach the creation of a new venture. Effectuation assumes that these entrepreneurs have a limited set of means and an evolving set of goals that emerge as new experiments are conducted.
The effectual thinking approach has a high degree of fluidity, as opposed to the more inflexible causational reasoning that is practiced by most corporate NPD professionals. With causal reasoning, one begins with a specific goal and a given set of means for reaching it.
There are Four Principles of Effectuation, Including:
- Affordable loss
- Lemonade; and
- Patchwork quilt.
The first principle of effectuation, Bird-inhand, implies that expert entrepreneurs start by examining their resources. Instead of waiting for the perfect opportunity, expert entrepreneurs begin taking action immediately, using whatever they currently have available to them. It’s all about what you know, who you are and who you know. For example, the general knowledge and skill sets that I know well are the process of NPD, consumer research and manufacturing. I also have the experience of two previous ventures and the lessons associated with the success and failure of each. As far as I was concerned, there were no obstacles to getting started to see where things might eventually lead with this newly developed metal finishing process.
Many would-be entrepreneurs are reluctant to pursue a new venture. We may wait for just the right product concept to come along, a perfect break between jobs or assignments, or a comfortable amount of personal funds to cover the risk of a failed new business.
Sarasvathy says do what is doable and not delay the pursuit of a potentially great idea because you are waiting for some perceived perfect timing.
Affordable loss, the second principle of effectuation, states that “expert entrepreneurs limit risk by understanding what they can afford to lose at each step, instead of seeking large all-or-nothing opportunities. They choose goals and actions where there is upside even if the downside ends up happening.” In the earliest stages of venture creation, one way to overcome the inhibition of starting a new business is to construct a short list of interim objectives, each with an associated amount of limited financing. This is especially useful for a potentially disruptive process, where no one can be sure what new opportunities may be uncovered along the way.
Using Alumaware as an example, I began with six stages with specific objectives in the initial development of the business:
- To conduct research on pricing for competitive products;
- To make personal sales calls to gauge interest in the process;
- To provide samples to qualified prospects;
- To produce samples using the prospects’ own components for evaluation as well as visualization;
- To encourage clients to field test the colored components; and
- To provide pricing quotes for conversion to purchase orders.
Each stage was pursued with a predetermined amount of funding that was measured in terms of what I could afford to lose. More importantly, each stage served as an opportunity to learn exactly what potential clients might want and how the value proposition could be modified to sustain momentum. Affordable Loss serves in stark contrast to the definitive high-risk go/no-go decision points, as typified by causational decision making.
The next principle of effectuation is lemonade. The lemonade principle describes how to leverage all information, positive or negative, in an effort to evaluate current goals and form new ones. This is the basis of the flexibility employed by expert entrepreneurs. Effectuation logic tells us that “expert entrepreneurs invite the surprise factor. Instead of making what-if scenarios to deal with worst-case scenarios, experts interpret bad news and surprises as potential clues to create new markets.”
For example, I discovered early on that by targeting multiple industry segments, I had to learn that each segment had one or more statements of product positioning around colorized metal.
Each benefit provided by the nano-ceramic surface may or may not be critical to the value proposition for each segment. This required experimenting with different sales pitches and through careful questioning and listening, the ability to determine which value proposition(s) belonged with which industry segment.
Experimentation—including research, testing and analysis—is a key concept of effectuation. Whether it’s your company’s positioning, estimated revenues and costs, industry segments to serve or what general business model to follow (such as a broker or direct model or both as is the actual case with Alumaware), entrepreneurs like to experiment. This contrasts with traditional causal reasoning whose overall objective is to predict and avoid any unexpected outcomes and not to embrace them with effectual thinking.
The fourth and final principle of effectuation is patchwork quilt. Effectuation logic states that “expert entrepreneurs build partnerships with self-selecting stakeholders. By obtaining pre-commitments from these key partners early in the venture, experts reduce uncertainty and co-create the new market with its interested participants.”
An example of how I have employed the patchwork quilt principle is by working closely with local sailboat rigging firms. These select few companies are experimenting with treated components and testing the effectiveness of products we have designed for the marine hardware industry. Simultaneously, they may also serve as a potential key distributor in the future, not to mention a great source for “groundswell” advertising for the application. I have enlisted these local rigging firms as stakeholders in the development of the process and have obtained their commitment that they will promote the new product line if we succeed.
There have clearly been instances where I have drawn upon my experience as NPD professional in the corporate environment for each of the ventures I have pursued. Knowledge of the product development process and the discipline required to adhere to methodologies such as Stage-Gate® has been extremely useful.
However, any attempts to predict the future when starting a new business, especially one that is potentially disruptive and where the unknowns are great, can be met with frustration and a high risk of failure. I encourage all NPD professionals to be brave and break out, even if temporarily, from the customary method of developing new products and services that I would consider a confine of causational “plan and execute” strategies.
Based on my own trials and tribulations as an entrepreneur, I recommend when you eventually do pursue an idea that you are absolutely passionate about, consider the principles of effectuation as a “thinking framework” and increase your own chances of success.
About the Author
Lee Goldring has been a New Product development Professional for more than 20 years, establishing a successful track record leveraging technical, product and marketing expertise to deliver innovative products and services across a broad range of industries. in addition to managing his new venture, alumaware, Goldring serves as an adjunct instructor at stetson university’s school of Business administration in deland, Fla.