A Meta-Analytic Review of Effectuation and Venture Performance


1. Executive Summary

It is useful, when interpreting the findings from entrepreneurship research, to understand the underpinnings of the work. One of the core assumptions common to much published research on entrepreneurship is that the task of the entrepreneur is to discover opportunities and exploit them. When new venture creation is viewed from that perspective, it is easy to see the importance of ideas such as entrepreneurial alertness and entrepreneurial orientation. However, there is new thinking that approaches the challenge of venture creation from a different perspective. Effectuation, for example, assumes not that opportunities are waiting to be discovered, but that opportunities emerge when created by an entrepreneur and her partners. In this context, a series of different ideas become important in understanding new venture creation. Ideas such as what each player brings to the opportunity creation process, how each player manages risk, and how flexible all players are when faced with the surprises that challenge a start-up, offer insight to the aspiring entrepreneur.

In this study, we seek to measure the relationship between effectual principles and new venture performance. We do this by examining every study presented in every issue of this journal and carefully selecting variables that measure one of the effectual principles presented in Table 1 of this article. Our effort yields two useful practical results. The first is a precise measurement of effectuation. Starting with the core theoretical principles from Table 1, we have refined the operationalization of effectuation to a level where independent researchers can systematically identify specific venture features as effectual. In addition to offering clear constructs to researchers conducting future study of effectuation, this precision can also aid the practical entrepreneur in implementing an effectual strategy. From our investigation, we highlight the following refinements to the core definition of effectuation in Table 1:

Means: while each individual is endowed with a wide range of means, only those that are relevant to the venture constitute effectual means and should be considered when measuring new venture performance against effectual strategy.
Partnerships: an entrepreneur or a venture may build many relationships, but only those in which both parties share the risk of the venture and benefit from the success of the venture constitute effectual partnerships.
Affordable Loss: what matters in affordable loss is not the risk inherent in the industry or the individual venture, but whether the entrepreneur manages that risk by attempting to measure upside opportunity potential, or effectually considering the worst-case scenario.
Leverage Contingency: having a business plan does not imply a lack of ability to leverage contingency – the important issue is the entrepreneur’s willingness to change when confronted with new information, means or surprises.

The second useful practical result of this study is a quantitative analysis of the relationship between effectual principles and new venture performance. Our findings from a sample of 9897 new ventures spanning industries, geographies, time and individual founders indicate that all the heuristics which describe effectuation except Design, which we were not able to measure, and Affordable Loss, which returned insignificant results, are positively and significantly related to new venture performance.

2. Introduction

While much study in the area of entrepreneurship seems focused on “finding” and exploiting existing opportunities, Sarasvathy (2001a) offers the alternative view that opportunities come to be when they are “co-created” by the entrepreneur and her committed stakeholders. The notion of effectuation opens intriguing potential to rethink how we teach and research entrepreneurship, but there is currently no information on whether it actually generates positive outcomes for startups. The consequent research question for our study is a deceptively simple one: is there a general connection between effectuation and new venture performance? Though easily stated, the complexity around our question emerges from two sources. The first is that effectuation, although well developed theoretically, has yet to be measured empirically. To complete our investigation, we would have to learn how to operationalize effectuation precisely. The second is that we seek to measure effectuation against new venture performance generally – across time, individuals, industries and geographies – to offer a generalizable result. In order to assemble a data set of the scale that matches our aspirations, we would have to create a way to benefit from prior work of our colleagues in the entrepreneurship domain.

The presentation of our investigation includes three basic elements. We begin by reviewing the entrepreneurship literature through the “found versus made” lens to determine whether effectuation offers a genuinely novel basis for entrepreneurial study. Consistent with Alvarez and Barney (2005), we find the historical focus of the entrepreneurship literature centered on the process of discovery (Kirzner, 1979). This effort enables our first contribution, a clear picture of the foundations of entrepreneurship research along the dimensions of positioning (where opportunities are found) and construction (where opportunities are made).

The second element articulates our research method. Our desire to use the work of our colleagues suggested meta-analysis. A meta-analytic approach enables researchers to summarize the results of numerous studies investigating the same phenomena. However, effectuation had not been investigated before we set off on our quest. Solving this problem led us to our second contribution, the articulation of a systematic methodology for selecting variables from prior studies to measure new constructs. Combining meta-analysis with the idea of inter-rater reliability (James et al., 1984) and learning and holdout samples, we developed and documented an approach that yielded 94 variables from 48 studies. The results of our analyses of these data suggest positive relationships between new venture performance and all the effectual constructs we were able to measure, except Affordable Loss. These findings contribute to the entrepreneurship discussion, offering insight into the utility of effectuation in particular, and offering the first meta-analysis of new venture performance factors we believe the field has seen.

Perhaps more important than the quantitative results is the third element of our investigation, a description of what we learned in the process of measuring effectuation. Effectuation touches ideas that have been part of the entrepreneurship discussion for years, demanding that operationalization of effectuation be thoughtful and precise in order to distinguish it clearly from prior work. Our contribution in this area is a specific set of guidelines for what empirically represents each of the theoretical heuristics associated with effectuation. It is our intention that these guidelines will benefit anyone investigating effectuation, regardless of method, enabling the field to advance quickly in the study of effectuation in specific and of the “made” view of entrepreneurship in general.

3. Literature review

It is broadly acknowledged that the search for a distinctive theory of entrepreneurship (Shane and Venkataraman, 2000, Phan, 2004) continues. One of the explanations for why scholars have been able to gain little ground on a theory of entrepreneurship may rest in the underlying “found or made” question (Alvarez and Barney, 2005, Alvarez and Barney, 2007, Miller, 2007). While research efforts that assume opportunities are found and exploited by alert entrepreneurs (McMullen and Shepherd, 2006) can be traced back to Kirzner (1973), Alvarez and Barney contend that, in reality, most entrepreneurship effort is undertaken in an uncertain environment (Knight, 1921), where entrepreneurial strategies of creation are at work. They further argue that entrepreneurship research has concentrated on discovery, and that an insufficient body of knowledge exists about the potentially more relevant issue of how entrepreneurs create opportunities.

In an effort to examine the veracity of Alvarez and Barney’s claim, we seek to project the major themes within the entrepreneurship literature against a backdrop that will let us evaluate an emphasis on a discovery or creation-oriented foundation in relation to existing work. Fortunately, the effort of empirically determining seven major areas of convergence within the entrepreneurship literature (Gregoire et al., 2006) has already been done, so we build upon that effort, focusing on the theoretical foundations of each convergence area. Below, we trace in more detail the theoretical roots specific to each major convergence area so that we may determine assumptions that pervade the entire area.

To construct a backdrop, we identified a recent framework used by Wiltbank et al. (2006) to review the strategic management literature along the dimensions of control and prediction. This approach enables a clear distinction between positioning strategies, intended to orient a firm within an exogenous environment (opportunities found), and construction strategies, intended to shape an endogenous environment (opportunities made). This framework is relevant not only because it enables us to orient existing work along the dimensions of discovery and creation, but also because Wiltbank et al. (2006) explicitly draw a positive theoretical connection between construction strategies and uncertain environments such as those faced by entrepreneurs. The result offers a descriptive summary of the foundations of the major convergence areas in entrepreneurship research today, organized according to theoretical foundation across the dimensions of control and prediction.

We proceed with a brief discussion of the seven major convergence areas in entrepreneurship research (Gregoire, et al., 2006), positioning each within the Wiltbank framework, and directing the reader interested in more detail to Gregoire et al.’s (2006) thorough treatment of the topic (areas ordered alphabetically).

Dynamics of new venture emergence: starting with the foundation of Penrose (1959), this stream of entrepreneurship research has combined her work with that of Schumpeter (1942) to develop two areas of entrepreneurship theory, connected by a common foundation. These are the resource base view (Barney, 1991) and the population ecology view (Aldrich and Auster, 1986). Despite their differences, these views share common assumptions in that neither is reliant on prediction or control to account for advantage. Whether a firm possesses superior resources or not, advantage is derived largely from the adaptability of the organization in this formulation.

Factors and dynamics of new venture performance: on the strength of Porter’s (1980) corporate strategy work, the theme common to this convergence area is the role industry plays in venture success (Hobson and Morrison, 1983). Upon that belief, strategies for best exploiting current and future industry structure are proposed and prediction offers a key lever for the entrepreneur.

Firm-level behaviors: Schumpeter’s (1934) treatise can be traced forward to current discussions regarding the construct of Entrepreneurial Orientation (Lumpkin and Dess, 1996). The foundation of this view casts the entrepreneur as uniquely able to “carry out new combinations” (Schumpeter, 1934), though those new combinations are created to fulfill existing needs. Therefore, while the entrepreneur is good at predicting what will be successful, she is also good at constructing a solution. As such, we place this convergence area near the middle of our framework.

Identification and exploitation of opportunities: starting with Kirzner, 1973, Kirzner, 1979, a body of scholars has developed the notion of Entrepreneurial Alertness (Kaish and Gilad, 1991). The similarity in name to Entrepreneurial Orientation is deceptive, as Entrepreneurial Alertness views the entrepreneur as a gifted and perceptive identifier of opportunity that exists within the environment, and a determined pursuer of that existing opportunity.

Individual characteristics: early study in the field was based on McClelland’s (1961) expectation that there must be some significant psychological difference between entrepreneurs and the general population, but current entrepreneurship researchers have largely abandoned this view. The lack of empirical evidence for such a notion has shifted focus elsewhere. For the purposes of our review, however, if such evidence were found, it would rely on neither prediction nor control to explain the entrepreneurial process.

Social networks, social capital: Aldrich and Zimmer (1986) highlight the importance of social networks to management in general, and Birley (1985) has applied the concept to entrepreneurship in particular. And while interest in social networks has waxed and waned over the years, the foundation, rooted in the sociology literature, has remained. This foundation suggests that what entrepreneurs learn from social networks provides them with an advantage in positioning for an existing opportunity.

Venture capital: the final area of convergence in the entrepreneurship literature, initiated by MacMillan et al. (1985), seeks to understand the role of venture capital in the entrepreneurial process. Like the social networks area, this stream suggests that entrepreneurs gain innovation and network advantages from association with venture capitalists, which enable entrepreneurs to effectively position for an existing opportunity.

3.1. Existing literature focused on positioning

Our findings in the literature review are consistent with scholars who have noted a research bias toward opportunity discovery in entrepreneurship research (Alvarez and Barney, 2005). Clearly, there is existing work that would fall into the construction half of Wiltbank et al.’s (2006) framework. But that work is more likely to represent individual novel ideas as opposed to significant bodies of research where numerous scholars have converged around a core foundation (Gregoire et al., 2006). Our next question revolves around whether convergence on positioning is appropriate. Is the positioning half of the framework where significant aspects of entrepreneurial advantage can be explained? Is there any advantage at all to be considered in the construction half of the framework?

3.2. Effectuation

In an effort to pursue that question, we introduce effectuation. Effectuation was induced from empirical studies of entrepreneurship as a form of expertise (Sarasvathy, 2001a) under uncertainty (Knight, 1921). Drawn from Simon’s (1981) work in The Sciences of the Artificial, the effectual process of non-predictive design positions the manager of a new venture as discounting prediction, as it does not account for the future impact of her actions on her new venture. She seeks to shape the future of her product, firm and market in conjunction with her partners and through her own actions. Described as a set of heuristics for decision making in uncertain environments, effectual reasoning consists of strategies that combine available means with unanticipated contingencies to construct a series of stakeholder commitments. Effectuation has seen gathering interest in theoretical discussions relating to management (Augier and Sarasvathy, 2004, Sarasvathy, 2001a) as well as economics (Dew et al., 2004) and psychology (Sarasvathy, 2003). And although effectuation was developed around the new venture creation setting, it has more recently been extended to address finance (Sarasvathy and Wiltbank, 2002) and innovation questions (Dew and Sarasvathy, 2001).

3.3. Principles of effectuation

The principles of effectuation are presented in Table 1. Each of the five principles represents an approach to decision making that does not rely on prediction, instead assuming the impact of willful individual creation.

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Stuart Read
Michael Song
Willem Smit
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