Innovation

Organization & Management

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Innovation, effectuation, and uncertainty

Joel A. Ryman & David C. Roach

To cite this article: Joel A. Ryman & David C. Roach (2022): Innovation, effectuation, and
uncertainty, Innovation, DOI: 10.1080/14479338.2022.2117816
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INNOVATION: ORGANIZATION & MANAGEMENT
https://doi.org/10.1080/14479338.2022.2117816

ARTICLE

Innovation, effectuation, and uncertainty

Joel A. Rymana and David C. Roach b

a
College of Business, California State University, Monterey Bay, CA, USA; bRowe School of Business,
Dalhousie University, Halifax, Nova Scotia, Canada

ABSTRACT ARTICLE HISTORY

Innovation theory clearly differentiates between innovation processes Received 19 November 2021
and entrepreneurial processes through its distinction between uncer­ Accepted 22 August 2022
tainty and risk. The authors’ premise is that innovation and entrepre­ KEYWORDS
neurship are interdependent, where the role of the innovator is to Effectuation; uncertainty;
reduce uncertainty, while the role of the entrepreneur is to manage risk; innovation
uncertainty to a point where risk can be assessed. Taking an effectual management; SME; firm
innovation approach, innovation is modelled as uncertainty manage­ performance
ment requiring experimentation and flexibility, while entrepreneurial
risk management is modelled as pre-commitments and affordable loss.
Using data from the innovation processes of 169 US SMEs, the authors
propose and test an exploratory empirical model which distinguishes
uncertainty from risk and its impact on innovation and firm perfor­
mance. The authors contend that once uncertainty and risk manage­
ment aspects are isolated, their relationship to innovation performance
can be investigated. The results indicate that uncertainty management
does positively impact innovation performance, while a risk manage­
ment approach impacts firm performance. Our model suggests that it
may be helpful to segregate uncertainty and risk at the entrepreneur­
ship–innovation interface.

Uncertainty. This concept has been imbedded in both the entrepreneurship and innovation
literatures dating back to classical and neoclassical economics (Casson et al., 2006). This
interdependent relationship was formalised in the works of Knight (1921) and Schumpeter
(1934), who together see the entrepreneur as bearing uncertainty in the innovation process.
The former emphasises uncertainty as a precondition for entrepreneurship, while the latter
focuses on the relationship between the entrepreneur and innovation (Antonelli, 2015;
Brouwer, 2000). Adding to the debate is that in many cases, the innovative individual is
often interpreted as the innovative entrepreneur (Varis & Littunen, 2010). This leads to
questions as to whether entrepreneurship can really exist without innovation, or whether
novelty and invention can ever be considered innovation if they are not commercially or
socially adopted? Academics (Alsos et al., 2019; McKelvie et al., 2019) and practitioners
(Drucker, 1954; Ries, 2011) alike have debated, discussed, and theorised about this relation­
ship, however, there still remains much to be learned about the complex influence of
uncertainty in the innovation and entrepreneurship process.

CONTACT David C. Roach david.roach@dal.ca

Supplemental data for this article can be accessed online at https://doi.org/10.1080/14479338.2022.2117816.
© 2022 Informa UK Limited, trading as Taylor & Francis Group
2 J. A. RYMAN AND D. C. ROACH

Entrepreneurship research is still considered a relatively remote managerial discipline,

which has often focused on innovation at the individual level (i.e., the entrepreneur as
innovator; McMullen & Shepherd, 2006). However, emergent theoretical work in the
area of effectuation (Sarasvathy, 2001) has begun to unpack some aspects of this relation­
ship; in particular the role of uncertainty within the process. Effectuation is significant in
that it represents one of the few theories that has emerged from within the domain of
entrepreneurship itself (Alsos et al., 2019). It espouses a significant departure from
traditional causational approaches which build upon economic thinking (Brettel et al.,
2012; Perry et al., 2012; Read et al., 2009; Sarasvathy, 2001), focusing on the search and
exploitation of opportunities (Shane & Venkataraman, 2000). While these traditional
causational approaches fit the prevailing paradigm of managing uncertainty through
prediction, effectuation relies on managing uncertainty through the application of the
means at the entrepreneur’s disposal to create and introduce novel artefacts into the
marketplace. In a recent exploration of effectuation’s impact on other disciplines, Alsos
et al. (2019) reviewed the entire body of work from 1998 to 2016, confirming that
uncertainty is present in all of the works examined. Although innovation does not
officially form part of this entrepreneurship theory, most researchers generally agree
that opportunities often involve some form of innovation (Shane & Venkataraman,
2000). Although effectuation is quickly gaining attention beyond entrepreneurship
scholars as a theory-in-the-making (Alsos et al., 2019; McKelvie et al., 2019), to date,
little attention has been devoted to bridging the gap with innovation theory, where
uncertainty is an antecedent (Alsos et al., 2019), and innovation is an outcome.
Recently, scholars have begun examining the role of uncertainty in both the entre­
preneurship and innovation management literatures. As a multidimensional construct,
uncertainty is fundamental to entrepreneurship theory, since entrepreneurs often make
decisions in the face of uncertain and unknowable futures (McKelvie et al., 2011).
Similarly, uncertainty has become popular among innovation scholars (e.g., Gales &
Mansour-Cole, 1995; Tatikonda & Rosenthal, 2000), although there is no general agree­
ment on the conceptualisation of the notion itself (Gales & Mansour-Cole, 1995). The
overwhelming majority of the literature narrowly perceives uncertainty as detrimental to
the innovation process (Dew et al., 2008b; Jalonen, 2012; McMullen & Shepherd, 2006),
which limits dialogue on its favourable aspects.
In the mainstream management literature, however, uncertainty and risk are often con­
fused or mistakenly treated as interchangeable (Alsos et al., 2019; Sicotte & Bourgault, 2008;
Smith et al., 2008). Scholars tend to view uncertainty very broadly, with much of entrepre­
neurship research focused narrowly on environmental uncertainty within which the entre­
preneur finds themselves (Bstieler & Gross, 2003; Heavey & Simsek, 2013; McKelvie et al.,
2011; Milliken, 1987; Song & Montoya-Weiss, 2001; Ting et al., 2012). Unfortunately, this
limits the discourse since it does not adequately address the role of uncertainty in the
innovation process. Some exceptions include Brettel et al. (2012) who examined corporate
R&D, finding that market and technological uncertainty impacted innovativeness. Jalonen
(2012) went a step further adding regulatory, social/political, managerial and timing uncer­
tainty, however he acknowledges that technological and market uncertainty are the two most
common and have the greatest interactive effect (Sicotte & Bourgault, 2008). Thus, it appears
that reducing technological and market uncertainty should be the goal of the innovation
management process (Reymen et al., 2017).
 INNOVATION: ORGANIZATION & MANAGEMENT 3

As a result, it may be more useful to reframe the narrative of uncertainty from the
domain of entrepreneurship to that of innovation management and examine innovation
through an effectuation lens to separate uncertainty and risk, wherein innovation man­
agement is about reducing uncertainty, while the entrepreneurial process is about
managing uncertainty to a point where risk can be assessed. Under this approach,
effectuation’s means (i.e., who, what and whom I know; Sarasvathy, 2001) become the
resources available to the entrepreneur to carry out their role. The firm’s ability to engage
in an iterative cycle of experimentation and to leverage contingencies then become
uncertainty management rather than risk management capabilities. Pursuing this line of
logic, managing innovation is fundamentally about reducing uncertainty (Mansoori &
Lackéus, 2019), to a point where the entrepreneur can assess the risk of the innovation-
driven venture. Paradoxically, uncertainty is necessary because it creates opportunity
from the innovation system through a process of experimentation (Thomke, 2020).
The objective of this paper is twofold. First, the entrepreneurship and innovation
literatures are reviewed to delineate the role of the entrepreneur from that of the
innovator, establishing their roles in the management of uncertainty and risk. Using
this approach, effectuation theory is disaggregated into its uncertainty and risk compo­
nents in an effort to delineate their effects. Second, using data collected from the
innovation processes of 169 US SMEs, we propose and test an exploratory empirical
model which distinguishes uncertainty from risk and its impact on innovation perfor­
mance. Once uncertainty and risk management aspects are isolated, their various rela­
tionships to innovation and firm performance can be investigated.

Theoretical background
Innovation and entrepreneurship
The roots of innovation theory are usually attributed to Schumpeter (1934) and Knight
(1921). Schumpeter stresses innovation, while Knight emphasises uncertainty as pre­
conditions for entrepreneurship (Brouwer, 2000).
At its core Schumpeter’s life works focuses on the relationship between the entrepreneur
and innovation (Antonelli, 2015), where innovation is defined in terms of product (or
service), process, organisation or markets. Furthermore, his innovative individual is often
interpreted as the innovative entrepreneur (McMullen & Shepherd, 2006; Varis & Littunen,
2010). In a Schumpeterian world, the initial innovations are first created by the most
talented and rare entrepreneurs, whose success subsequently encourages the lesser talented
to follow. Invention is the precursor to innovation and may create the components of
innovation only if these are sufficiently evolved to become viable and ready for adoption
(Casson, 1982). At some point, the stock of invention is depleted, creating a lull in waves of
innovation in a process of creative destruction. In Schumpeter’s (1947) later and lesser-
known work, he synthesises the origins, causes and consequences of innovation, emphasis­
ing the concept of ‘creative reaction’ as a driver of innovation (Antonelli, 2015).
Knight on the other hand emphasises the entrepreneur as the recipient of profit for bearing
the cost of uncertainty (Casson, 1982; McMullen & Shepherd, 2006). He distinguishes
uncertainty from risk as the situation where the probabilities of alternate outcomes cannot
be determined a priori, since there is no precedent to assess probability. This uncertainty is
4 J. A. RYMAN AND D. C. ROACH

pervasive to business choices, where decisions on inputs must be made before future outputs
are known. He sees the entrepreneur as the central contractual agent who must implement an
action plan, where residual ‘pure profit’ is a return on good judgment or in some cases simply
pure luck (Casson et al., 2006). Thus, the entrepreneur’s differential quality is their good
judgment and ability to foresight, which he considers scarce.
Building upon Schumpeter, Knight and others, Shane and Venkataraman (2000) posit that
entrepreneurship is less concerned with business performance and more concerned with the
identification, evaluation and exploitation of opportunities. This opportunity-centric vision of
entrepreneurship aligns well with the Schumpeterian view that economic growth is driven by
the recognition of new opportunities, and captured through innovation (Kirchhoff et al.,
2013). They argue that entrepreneurship does not necessarily follow a rational planned
process, where identification always precedes evaluation. Missing from this argument is the
system of crafting innovations into opportunities which we contend is a process of uncertainty
reduction to a point where risk can be assessed. In his opinion, ‘all efforts to exploit
opportunities involve some innovation’ (Shane, 2012, p. 18) and those entrepreneurs are
the bearers of uncertainty and in some instances may prefer uncertainty. This perspective does
not, however, delineate innovation from entrepreneurship, leaving the emerging theory of
effectuation to shed light on the role of uncertainty in the entrepreneurial process. As a result,
we will argue that it does not fully explain the role of uncertainty in the innovation manage­
ment process.

Effectuation, innovation, uncertainty, and risk

Effectuation theory (Sarasvathy, 2001) has been gaining momentum in the entrepreneurship
literature over the past 15 years as an alternative theory of entrepreneurship (Brettel et al.,
2012; Perry et al., 2012; Read et al., 2009; Sarasvathy, 2001). In her original study, Sarasvathy
et al. (1998) extricated the underlying logic employed by expert entrepreneurs, deriving five
behavioural principles related to both effectuation and causation. These included: 1) begin
with a given set of means; 2) focus on how much one can afford to lose; 3) emphasise
relationships with partners and garner pre-commitments; 4) leverage unexpected environ­
mental contingencies; 5) control an unpredictable future through one’s human action
(Sarasvathy et al., 1998). She later described effectuation as ‘a logic of entrepreneurial expertise,
a dynamic and interactive process of creating new artifacts in the world’ (Sarasvathy et al.,
2008, p. 8). This characterisation infers that effectuation processes are essentially innovation
processes (Dew et al., 2008b; H. Simon, 1969). Much like Schumpeter (1947), and therefore
foundational to this logic, is the critical role of human action in shaping the future context
through creative action (reaction) to produce innovation. This innovation process does not
begin with pre-existing goals, but instead focuses on what individual actors can control and
apply, namely the resources or means at their disposal. These ‘available means’ drive and
direct creative action, resulting in both positive and negative outcomes, which in turn become
the new goals. Within this process, uncertainty is not to be avoided, but instead embraced.
These unpredictable (or uncertain) outcomes become the genesis of opportunities, which feed
subsequent cycles in the innovation process. In this description of effectuation, one can see the
centrality of Schumpeter’s (1947) concept of creative action (reaction) producing novel
 INNOVATION: ORGANIZATION & MANAGEMENT 5

artefacts as the goal of an innovation process. These creative processes fundamentally reduce
uncertainty through what we argue are the embedded innovation practices of these effectual
firms.
What is clear from the literature is that the concept of innovation cannot be separated from
that of the entrepreneur, since they are interdependent and synergistic. Effectuation releases
entrepreneurs from specific, predetermined goals and allows them to convert uncertainty into
opportunity (Deligianni et al., 2017). Without the entrepreneur, innovations will remain
merely inventions or lost opportunities. Without innovation inputs and supporting systems,
the entrepreneur will be unable to configure the innovations into opportunities. Thus, by
integrating these arguments it may leave room for processes that allow innovations to emerge
via an effectual approach rather than a systematic causal approach. However, literature to date
has not explained how these mechanisms interact. This suggests that the main consequence of
effectuation might be the reduction of uncertainty for a given innovation and that future
research should consider how to operationalise uncertainty as a variable.
For effectuation to become a mature theory, it will have to delve deeply into uncertainty
reduction (Alsos et al., 2019). McKelvie et al. (2019) argue that in circumstances of high
uncertainty, effectuation decision-making processes may be associated with better outcomes.
Although their argument is compelling, they admit that ‘it has not been adequately adopted
in the extant literature thus far – and certainly has not been exhaustively empirically tested’
(McKelvie et al., 2019, p. 27). Loch et al. (2008), argue that research to date has insufficiently
addressed the a priori identification of the type of uncertainty faced by a new venture using
the term “unforeseeable uncertainty”, which they argue is only manageable through either
selectionism – trial and error experimentation or probe-and-learn questioning. Mansoori
and Lackéus (2019) refer to this as uncertainty management, where a condition of insuffi­
cient information exists in what is referred to as blind risk (Mazzarol & Reboud, 2017) where
iterative information gathering is necessary to increase the odds. Deligianni et al. (2017)
found that effectuation may provide a helpful explanation leading them to call for transfer­
ring effectuation to other areas of entrepreneurship research and call for improvements in
measurement tools to move effectuation research to a more advanced state.
With effectuation emerging as one of the few theories from within the domain of
entrepreneurship and that uncertainty is central to all of the works examined (Alsos et al.,
2019), it stands to reason that disaggregating uncertainty from other aspects, such as risk,
should make a significant contributions to both the effectuation discussion and to broader
literature on uncertainty’ (Alsos et al., 2019, p. 11).

Hypothesis development
Uncertainty reduction through flexible experimentation
Experimentation has been shown to positively affect strategic outcomes (Brettel et al., 2012)
and as a means of coping with uncertainty (Deligianni et al., 2017; Thomke, 2020).
Uncertainty thus can only be effectively managed through a flexible experimental process
that converts assumptions into facts (Mansoori & Lackéus, 2019). As a result, the application
of experimentation is the initial step in an effectual innovation process because it demarcates
the problem space. By carving out this fertile cognitive space from what Sarasvathy described
as, ‘the relatively unexplored jungle where goal ambiguity, Knightian uncertainty, and
6 J. A. RYMAN AND D. C. ROACH

endogenous markets dominate the landscape’ (Sarasvathy, 2003, p. 206), the firm can begin to
develop a variety of innovation hypotheses. The process of generating ‘ideas’ and then testing
hypotheses through collaborations with partners, is the work of the design synthesis process
(Kolko, 2010). Design synthesis, is an iterative process where novel design hypotheses are
imagined (ideation), evaluated, prioritised, and ultimately, selected. Design synthesis is
essentially a way to apply abductive logic within the confines of an innovation problem
(Coyne, 1988). Abduction has been defined as the adopting of a hypothesis that has been
inferred from incomplete (or uncertain) information (Weiss & Burks, 1958). It is effective
in situations of uncertainty because it does not rely on complete information, but instead
allows gaps in knowledge to be covered by ‘best guesses’ and logical leaps (Kolko, 2010).
According to Latham and Braun (2009) traditional structures, processes and routines tend to
suppress the flexibility required to implement innovation activities. Thus, organisational
flexibility is required to expose uncertainty in an effort to enhance innovation concepts. As
a result,

H1: Experimentation is positively related to flexibility

Uncertainty reduction through collaborative discovery

The partnership dimension actively reduces the uncertainty inherent in innovative projects
(Brettel et al., 2012). The nature of these relationships is characterised by a mutuality where
self-selecting partners seek at times to persuade and at other times to be persuaded (Dew et al.,
2008b; H. A. Simon, 1993). This recognises that to improve the quality of the innovation, the
firm must form cooperative relationships with key stakeholders who can provide needed
resources and inputs into the process. Collaborations are seen as a means to reduce high rates
of uncertainty that are typical in young firms (Fernández-Olmos & Ramírez-Alesón, 2017).
Collaborations can extend to suppliers and even customers, all of whom can provide
information and resources needed in a co-innovation process. In fact, the recombination of
resources may be at the core of how uncertainty is embedded in the creation of novelty
(Luthfa, 2019). Extending the innovation process in this way serves to reduce uncertainty,
thereby positively impacting innovation (Brettel et al., 2012). This engagement of stakeholders
throughout each of the cycles and iterations of the innovation process creates new contin­
gencies and emergent opportunities while reducing the inherent uncertainty. Thus, from an
innovation management perspective,

H2: Partnerships mediate the relationship between experimentation and flexibility

Risk management through collaborative risk sharing

Securing pre-commitments from collaborating partners to support the innovation process is
a form of transitioning from uncertainty management to risk mitigation. This flexibility in
decision-making encourages the adoption of innovation made possible through the avail­
ability of additional information from sources outside of the firm (Pichlak, 2016). From an
entrepreneurial perspective, collaborations – rather than influencing the innovation through
 INNOVATION: ORGANIZATION & MANAGEMENT 7

uncertainty reduction, take on a risk management role. SMEs in particular, due to their
liability of smallness, benefit from collaborations that jointly leverage resources to mitigate
risks (Gnyawali & Park, 2009). This is accomplished through distributing the risk of innova­
tion to external partners.
Antecedent to these entrepreneurial pre-commitments is an innovation process that is
experimental, collaborative, and flexible. This uncertainty reducing process results in proto­
types that are now increasingly viable. Thus, these pre-commitments rely upon a flexible
innovation process which has systematically reduced uncertainty to a point where risk can be
assessed, quantified, and perhaps mitigated. Thus, pre-commitments play an important role
because they rely on the discipline of the innovation process to ensure that the co-developed
innovation has greater potential to be adopted. Thus, in an effectual process, the gaining or
withholding of pre-commitments by innovation partners is based on risk assessment. Pre-
commitments thus act as an ‘investment’ of resources by the partner in an effort to reduce
their risk exposure. Thus,

H3: Flexibility is positively related to pre-commitments

Risk management
Risk management has to do with quantifying uncertainty a priori allowing firms to make
decisions divorced of much of the uncertainty surrounding the innovation. Affordable loss in
the context of effectuation presents itself as how firms proactively assume or mitigate risk
(Thaler et al., 1997). Pre-commitments on the other hand involves sharing and mitigating risk
through partnerships. In either case, these risk mitigation strategies should have little or no
impact on the performance of the innovation, thus,

H4a: Pre-commitments are not related to innovation performance

H4b: Affordable Loss is not related to innovation performance

Pre-commitments and affordable loss

Pre-commitments and taking an affordable loss perspective are different forms of risk
management. The former is an investment from partners based on a risk-reward assess­
ment, while the latter relates to how much the firm is willing to bet on the outcome of the
innovation process. Pre-commitments are decisions made external to the firm, while
affordable loss are internal firm decisions based on their appetite for risk. Validations
from external partners can influence the internal affordable loss calculation (i.e., partners
bring both resources and market knowledge unavailable to the firm), which may make
innovation decisions less risky. As a result, there is likely a relationship between pre-
commitments and affordable loss where,

H5: Pre-commitments are positively related to affordable loss

8 J. A. RYMAN AND D. C. ROACH

An effectual innovation process and innovation performance

Foundational to the logic of effectuation is the critical role of human action in shaping the
future environmental context through creative action to produce the novel. In contrast to
causal approaches to innovation, this effectual innovation process focuses on what individual
actors can control, namely the resources or means they have at their disposal. Flexibility is an
integral part of these decision-making activities that encourage innovation (Pichlak, 2016)
through a process of uncertainty reduction as more information is garnered (Mazzarol &
Reboud, 2017). Flexibility is a hallmark of the entrepreneurial process where administrative
structures, processes, and routines tend to remain open to opportunities needed to promote
innovative ideas (Latham & Braun, 2009). Within this flexible innovation process, uncertainty
is not to be avoided, but instead embraced. These contingencies become the genesis of
opportunities in the form of new means and goals, which feed subsequent cycles in the
innovation process. Through a culture of collaborative innovation, experimentation, and
flexibility, the organisation is able to adapt as more information becomes available with
each iteration of the process. Thus, in an effectual innovation process we would expect that:

H6: Flexibility is positively related to innovation performance.

Risk and firm performance

Firm performance is based on many factors from strategic orientation (Deshpandé & Farley,
1998; Jaworski & Kohli, 1993) to operational excellence (Drucker, 1954). An assessment of risk
is fundamental to driving organisational performance, since firms must weigh all of their
decisions based on risk-reward outcomes. Pre-commitments and affordable loss are different
aspects of risk management, the former reduces the risk of innovation through risk sharing
with partners, while the latter establishes how much the organisation is willing to bet on the
successful outcome of the innovation. In either case, these assessments of risk once uncertainty
of the innovation has been established should lead to increased firm performance, thus:

H7a: Pre-commitments are positively related to firm performance.

H7b: Affordable loss is positively related to firm performance

Uncertainty management and firm performance

In an effectual innovation model, antecedents of innovation performance are based on
uncertainty management, which in turns drives innovation performance. Innovation perfor­
mance in our model measures the superiority of product and services rather than other
aspects, such as technological orientation (Grinstein, 2008). We also know that innovation has
an influential and strong relationship with SME performance (Roach et al., 2016; Rosenbusch
et al., 2011; Verhees & Meulenberg, 2004; Wolff & Pett, 2006). Thus, we would expect that
innovation performance should have a positive impact on firm performance:
 INNOVATION: ORGANIZATION & MANAGEMENT 9

Figure 1. PLS-SEM Model.

H8: Innovation performance is positively related to firm performance.

The proposed model with hypotheses is presented in Figure 1 – PLS-SEM Model

below:

Methods and results

Construct measurement
Performance is as complex to measure as uncertainty (Sicotte & Bourgault, 2008). Thus, in
order to determine innovation performance, we use scales established from two of the most
widely used measures of firm-level innovativeness (namely Calantone et al., 2002; Gatignon &
Xuereb, 1997; Paladino, 2007). These scales represent innovation performance based on the
behavioural predisposition to produce innovative products and services (Roach et al., 2016).
Recent work by Deligianni et al. (2017) used Chandler et al.’s (2011) measures for
experimentation, affordable loss, flexibility and pre-commitments. Similarly, our research
used scales based on Roach et al. (2016) which were adapted from existing effectuation scales
from Chandler et al. (2011), and supported by Read et al.’s (2009) extant meta-literature
review. These scales were deemed more appropriate since they were previously used to
reflect innovation-centric measures, rather than entrepreneurship measures (see Appendix
1). Individual indicators are presented with their respective loadings using PLS-SEM, boot­
strap samples built by re-sampling 5000 times, well above the suggested lower limit of 200
considered to lead to reasonable standard error estimates (Tenenhaus et al., 2005).

Sample size and characteristics

The model was tested on a sample of US small and medium-sized enterprises (SMEs)
engaged in the manufacturing sector (NAICS Code 334 – Computer and electronic
product manufacturing) having greater than 5 employees and less than 250 employees.
The method of data collection was a self-reported on-line survey using seven-point Likert
scales (see Appendix 1), answered by senior company key informants defined as senior
10 J. A. RYMAN AND D. C. ROACH

managers (e.g., General Managers through to CEOs). These senior executives were
deemed the best candidates based on their familiarity with both the innovation activities
of the firm and overall organisational performance. After elimination incomplete
responses, this method resulted in 169 responses, which translates into a response rate
of 2.03% of the total population (N = 8295). This relatively low response rate is due to the
nature of the survey (i.e., an online survey to senior executives of SMEs). As a result, the
analysis was assessed for the possible occurrence of common method bias by examining
the factor-level VIFs. In every case, the related VIFs did not exceed 3.3 (Kock, 2015),
supporting that common method bias did not materially impact the results.

Analysis and the measurement model

A partial least squares (PLS) structural equation modelling (SEM) technique was
employed to analyse the data using SmartPLS (Ringle et al., 2015). The measurement
and structural models were examined separately. In all but four cases, the outer loadings
exceeded 0.70 and are significant (see, Table 3). The items that fell below 0.70 met the
recommended guidelines (Hair et al., 2017, 2019). Composite reliability and average
variance extracted exceeded recommended guidelines (Hair et al., 2019) for all construct
(see, Table 1), demonstrating convergent validity (Henseler et al., 2015). Discriminant
validity was evaluated based upon recommended guidelines (Hair et al., 2017). Following
the Fornell and Larcker (1981) criteria, the square roots of the AVEs for all of the
constructs were higher than the inter-construct correlations (see, Table 2).

Structural model results

Figure 2 represents the model and the structural relationship between the constructs. It
shows the direct effects, indicated by the beta coefficients for each path, as well as level of
significance. Since partial least squares models predict variance, R2 values are also
included within each endogenous latent construct. Figure 2 also indicates the significance
levels of each path. Highlights of the key results of the structural model analysis are
summarised in Table 4.
The model indicated support of Hypothesis 1 that experimentation is positively related to
flexibility (β = .59, t = 5.31, p < .001). With respect to Hypothesis 2, an examination of the
indirect effects of partnering on the relationship between experimentation and flexibility
yielded a statistically significant effect (β = .28 t = 3.88, p < .05) indicating a mediating
relationship, thus confirming Hypothesis 2. In order to establish the impact of this effect, we
removed this relationship from the model and recomputed the R2 values. The results indicate
that removing this mediation effect reduced the R2 of flexibility from R2 = 0.525 to R2 = 0.457
a reduction of R2 = 0.068 (or 12.9%). There was minimal impact on either innovation
performance or firm performance. Jumping to a consideration of Hypothesis 6, the results
of model, indicate that flexibility is very strongly and positively related to innovation perfor­
mance (β = .74, t = 10.1, p < .0001). Together, the confirmation of Hypotheses 2, 3 and 6
indicate that an uncertainty management process that is collaborative, experimental, and
flexible in nature yields higher levels of innovation performance. In fact, this combined
relationship predicted nearly 54% of the variance in innovation performance. More discussion
of this foundational relationship is expanded upon in our discussion section.
 INNOVATION: ORGANIZATION & MANAGEMENT 11

Table 1. Measurement model assessment.

Items Cronbach’s Alpha Composite Reliability AVE
Affordable Loss 1.00 1.00 1.00
Experimentation 0.73 0.76 0.62
Firm Performance 0.90 0.89 0.59
Flexibility 0.79 0.79 0.55
Innovation Performance 0.84 0.84 0.51
Partnerships 0.75 0.75 0.51
Precommitments 0.70 0.71 0.55

Table 2. Fornell-Larcker.
1 2 3 4 5 6 7
1. Affordable Loss 1.00
2. Experimentation 0.12 0.79
3. Firm Performance 0.29 0.22 0.77
4. Flexibility 0.29 0.65 0.44 0.74
5. Innovation Performance 0.23 0.34 0.35 0.73 0.72
6. Partnerships 0.16 0.27 0.29 0.45 0.31 0.71
7. Precommitments 0.19 0.09 0.29 0.29 0.16 0.56 0.74

Table 3. Factor loadings.

Affordable Innovation Experi- Pre- Firm
Loss Performance Flexibility mentation Partnerships commitments Performance
1.00 0.23 0.29 0.12 0.16 0.19 0.29
0.10 0.74 0.55 0.29 0.24 0.13 0.25
0.23 0.77 0.54 0.29 0.20 0.01 0.33
0.19 0.72 0.55 0.24 0.17 0.09 0.24
0.23 0.77 0.56 0.28 0.19 0.05 0.28
0.05 0.56 0.40 0.15 0.32 0.30 0.15
0.26 0.56 0.72 0.38 0.31 0.28 0.33
0.21 0.58 0.79 0.58 0.38 0.16 0.30
0.17 0.29 0.57 0.86 0.23 0.09 0.21
0.18 0.26 0.46 0.66 0.20 0.04 0.12
−0.03 0.49 0.73 0.54 0.32 0.22 0.35
0.10 0.27 0.39 0.23 0.83 0.47 0.25
0.17 0.15 0.23 0.14 0.58 0.34 0.20
0.09 0.21 0.33 0.22 0.71 0.42 0.19
0.11 0.07 0.18 0.03 0.51 0.74 0.17
0.16 0.15 0.25 0.11 0.35 0.73 0.26
0.20 0.34 0.29 0.13 0.15 0.24 0.72
0.22 0.28 0.34 0.16 0.12 0.18 0.70
0.13 0.35 0.38 0.21 0.32 0.24 0.85
0.29 0.13 0.25 0.12 0.25 0.19 0.64
0.30 0.31 0.40 0.26 0.24 0.24 0.92
0.23 0.21 0.34 0.14 0.26 0.25 0.74

Moving to consideration of risk management, Hypothesis 3 was confirmed since

flexibility is positively related to pre-commitments (β = .29, t = 2.243, p < .01). The
confirmation of this relationship indicates an important juncture in the model where
the innovation process transitions into consideration of risk management.
Hypotheses 4a and 4b are confirmed as the two risk management constructs, pre-
commitments (β = −.08, t = .824, n/s) and affordable loss (β = .03, t = .375, n/s) are
not related to innovation management. Importantly, however, these constructs are
12 J. A. RYMAN AND D. C. ROACH

Figure 2. PLS-SEM Model (p-values and R2).

Table 4. Structural model results.

Hypothesis Path Relationship Coefficient t-value p-value Status
H1 Experimentation is positively related to flexibility 0.59 5.305 0.001 Confirmed
H2 Partnerships mediate the relationship between 0.28 1.733 0.05 Confirmed
experimentation and flexibility (significance of indirect
effect)
H3 Flexibility is positively related to pre-commitments 0.29 2.243 0.010 Confirmed
H4a Pre-commitments is not related to innovation performance −0.08 0.824 n/s Confirmed
H4b Affordable loss is not related to innovation performance 0.03 0.375 n/s Confirmed
H5 Pre-commitments are positively related to affordable loss 0.19 1.859 n/s Rejected
H6 Flexibility is positively related to innovation performance 0.74 10.082 0.001 Confirmed
H7a Pre-commitments is positively related to firm performance 0.21 2.077 0.05 Confirmed
H7b Affordable loss is positively related to firm performance 0.19 2.068 0.05 Confirmed
H8 Innovation performance is positively related to firm 0.28 2.856 0.001 Confirmed
performance

positively related to firm performance, confirming hypotheses 7a (β = .21, t = 2.077,

p < .05) and 7b (β = .188, t = 2.068, p < .05). Interestingly, there appears to be no
significant relationship between pre-commitment and affordable loss, thus H5 is
rejected. Finally, the model confirms Hypothesis 8 that innovation performance is
positively related to firm performance (β = .281, t = 2.856, p < .001).
In addition, for the sake of completeness, we confirmed and examined the mediating effect
of pre-commitments between flexibility and firm performance. This resulted in a reduction in
firm performance from R2 = 0218 to R2 = 0.174, a reduction of R2 = 0.044 (or 20.2%). We the
consider meaning of this result in our discussion and implementation section below.

Discussion: implications for theory and practice

The fundamental objective of this paper is to separate innovation and entrepreneurial
capabilities through the distinction between uncertainty and risk. Although innovation
and entrepreneurship are interdependent, the role of innovation is to reduce uncertainty,
while the role of entrepreneurship is to manage uncertainty to a point that risk can be
assessed. Under the framework of effectuation theory, innovation management is an
 INNOVATION: ORGANIZATION & MANAGEMENT 13

uncertainty management approach modelled as experimentation and flexibility

(Thomke, 2020), while engaging stakeholders in a collaborative innovation process.
Conversely, risk management is modelled as securing pre-commitments and considering
the financial resource limitations of the affordable loss heuristic.
Examining the uncertainty management portion of the model, H1 confirms that
experimentation is an antecedent of firm flexibility – the ability to leverage con­
tingencies towards new goals on the path to innovation outcomes. Of interest as
well is the partial mediating effect of partnerships on the experimentation – flex­
ibility relationship. H2 confirms that partnerships act as a mediator, indicating that
there is a role within the innovation process for stakeholders to enhance experi­
mentation through encouraging flexible behaviour in the innovation process. This
experimental and flexible behaviour which incorporates partners in a co-innovation
process leads to innovation performance, as confirmed by H6. The results of the
model also confirm the centrality of flexibility in the innovation process. Our
findings indicate that flexibility is enhanced through partnerships that increase
flexibility of the innovation process through collaborative efforts to reduce the
inherent uncertainty associated with new product and service development. These
findings highlight the importance of innovation processes that not only engage in
experimentation, but are also willing to adapt their innovations in response to what
they learn through these experiments and through joint innovation with partners.
Not surprisingly, innovation performance, driven by uncertainty management, is
a strong predictor of firm performance (R2 = 0.218) as confirmed by H8. Overall,
the model results indicate that an uncertainty management process, characterised by
experimentation and the vital mediating influences partnering and flexibility lead to
higher levels of innovation performance.
The risk management portion of the model indicates that flexible organisations
not only engage partners as co-innovators, they also actively seek to establish the
commitments of those partners to the mutually developed innovations, thereby
reducing their risk exposure. As predicted, pre-commitments and affordable loss,
both activities related to risk management, are not related to innovation perfor­
mance, as confirmed by H4a and H4b. However, unexpectedly there appears to be
no strong relationship between these two risk measures, indicating that they are
likely two distinct aspects of risk management. Furthermore, there appears to be
a partial mediation effect of pre-commitments between flexibility and firm perfor­
mance. This suggests that pre-commitments (i.e., investment of resources) are
a necessary component of the transition from an uncertain innovation process to
an entrepreneurial risk-based approach. This appears to indicate that pre-
commitments from partners involve additional mechanisms of the evolution from
uncertainty to risk which impact overall firm performance. Lastly, both risk mea­
sures are positively related to firm performance, indicating that firms conducting
these two risk management activities increase their performance as confirmed by
H7a and H7b.
The results of this study indicate that the innovation processes of firms align with the
essential elements of an effectual innovation process. Firms who employ uncertainty manage­
ment practices of experimentation and flexibility enhance their innovation performance. This
experimentation and flexibility are enriched through the means available to them (e.g.,
14 J. A. RYMAN AND D. C. ROACH

Partnerships) who collectively enhance innovation performance. When entrepreneurial pro­

cesses are taken into consideration, a risk management approach in conjunction with pre-
committed partners is employed which augments the predictability of the model. This is
somewhat intuitive since we would expect that risk management should have limited impact
on innovation performance, but as expected, does have an overall impact on firm
performance.

Theoretical implications
This study is one of the few that has connected effectuation and innovation theory.
In doing so, it develops a model of innovation that connects effectual processes to
an underlying framework of innovation. It has shown that these effectual beha­
viours yield the important benefit of enhanced innovation performance. This, we
believe, is a significant theoretical contribution to both the effectuation and inno­
vation literatures, by creating a fledgling bridge between entrepreneurship and
innovation theory. This paper also addresses some of the shortcomings of effectua­
tion theory and builds upon Sarasvathy and others (e.g., Dew et al., 2008b) who
assert that effectuation at its core involves uncertainty management. It establishes
a link between effectuation theory and the innovation process of firms (Dew et al.,
2008a) and indicates that effectuation theory has application beyond the strict
confines of entrepreneurship literature (Dew et al., 2008b). This provides an
opportunity to connect with other relevant literatures as espoused by Arend et al.
(2015).
This exploratory study also indicates that risk and uncertainty impact firm perfor­
mance in different ways. Risk management impacts firm performance directly, while
uncertainty management impacts firm performance through the performance of the
innovation itself. Firms that embrace flexible experimentation and collaborative discov­
ery can adapt to contingencies and enjoy higher levels of innovation performance. Firms
that manage risk throughout the innovation process perform better than those who
merely innovate for the sake of innovation. Together, these aspects appear to ultimately
amplify firm performance. This study, however, does not discern between the various
aspects of uncertainty and risk, nor the various dimensions of innovation beyond
product/service innovation. Uncertainty is a multi-dimensional construct that pervades
the literatures of entrepreneurship, innovation, and beyond. Unlike environmental
uncertainty that dominates the entrepreneurship literature (Kreiser & Marino, 2002;
Ting et al., 2012) our constructs appear to measure market and technological uncertainty
(Jalonen, 2012; Reymen et al., 2017; Song & Montoya-Weiss, 2001) as it relates to
products and services, however no effort has been made to discern between them.
Neither does our model tackle the pandora’s box of risk. In our model, risk is measured
through two narrow constructs, namely pre-commitments and affordable loss. The
former measures the partners commitment to the innovation process once risk has
been assessed, while the latter measures how much the firm is willing to bet –
a somewhat narrow and controversial aspect of risk management (Martina, 2019). In
any event, our model perhaps opens the door a crack for deeper understanding into how
uncertainty and risk interact within innovation and entrepreneurship.
 INNOVATION: ORGANIZATION & MANAGEMENT 15

Managerial implications
In his aptly title article – Managers fail to innovate and academics fail to explain
how, Dougherty (2018) suggests that managers tend to avoid uncertain activities –
specifically innovation and that academics need to probe more deeply into the root
causes of this phenomena. Others contend that the main difference between non-
entrepreneurial and entrepreneurial decision-making lies in the latter’s perception of
risk from this uncertainty (Alvarez & Barney, 2005). As a result, they contend that
entrepreneurs may rely more on their perception of risk rather than the objective
properties of the risk itself.
Our results indicate that an effectual approach to innovation appears to have an
impact on innovation performance. It suggests that uncertainty reduction through
collaboration with network partners, combined with experimental and flexible processes,
leads to superior innovation performance. Our study establishes that the collaborative
and iterative ways in which firms develop their products or services should ultimately
impact the performance of their innovation. Risk on the other hand, is a necessary
process of assessing the innovation once uncertainty has been reduced to a point
where risk can be assessed in some fashion. The correct role of partners in enhancing
the innovation process is through risk reduction leading to a pre-commitment of
resources. This is central to the ultimate performance of the firm. From a practitioner’s
perspective, the right mix of partnerships, pre-commitments and risk tolerance may be
a more optimal way to approach innovation management.
Our model also suggests that it may be practical to segregate uncertainty and risk
at the entrepreneurship–innovation interface. Neither entrepreneurship nor innova­
tion theory clearly delineate between the role of the innovator and that of the
entrepreneur. Much like the relationship between the entrepreneur and the capital­
ist, where sometimes the entrepreneur acts as their own capitalist and assumes risk,
it could be argued that when the innovator moves from their uncertainty reduction
role into assessing risk, they cross the boundary and take on the entrepreneurship
role. Under this scenario, the individual that has the capability as an innovator, may
or may not have the capability to execute at the same level when they take on the
entrepreneurship role, or vice versa. For instance, assessing risk, with its many
dimensions, is a different skill set than, for instance, reducing technical uncertainty.
Just as the entrepreneur may not have the capability to be a capitalist, neither can
we assume that the innovator has the capability to be an entrepreneur. Thus
practitioners, whether capitalist, entrepreneurs or innovators may want to critically
assess their capabilities before taking on a role that they may be ill-suite for. This
role confusion likely affects both the performance of the innovation process and that
of the entrepreneurial firm.

Limitations
Most of the entrepreneurship literature tends to emphasise environmental uncertainty
(Bstieler & Gross, 2003; Freel, 2005; Kreiser & Marino, 2002; Milliken, 1987). Our model,
on the other hand, focuses on product or service innovation, based on technological and
market uncertainty (Reymen et al., 2017; Song & Montoya-Weiss, 2001). These uncertainty
16 J. A. RYMAN AND D. C. ROACH

themes appear to be based on both market adoption uncertainty (i.e., is there value to the end
user) and technical uncertainty (i.e., will the product or service perform as expected). As
affirmed by McKelvie et al. (2011) researchers should ‘take more care when describing the
specific type of uncertainty that is operationalized in their research’ (p. 275). Our model
unfortunately does not test other aspects of uncertainty, nor does it determine which aspects
of technological or market uncertainty drive the model. This results in a significant limitation
to the study, so care should be taken when interpreting the results of this exploratory research.
Future research should attempt to separate technological and market uncertainty as indepen­
dent variables to establish their impact on innovation performance.
Also, according to Alsos et al. (2019), effectuation’s focus on reducing uncertainty may
precede causational steps such as management and optimisation of risk. Our study did not
account for the fact that effectuation and causational approaches may be used interchangeably
in an organisation depending on the outcomes sought (Reymen et al., 2017). Effectuation may
not be appropriate in all decision-making contexts that involve uncertainty and thus research
must continue to fill the gaps by more fully addressing the boundary conditions of extant
studies and measures. In circumstances of high levels of uncertainty, entrepreneurs may be
more likely to use effectual decision-making processes, preferring to use causation decision-
making processes where uncertainty is low (McKelvie et al., 2019). Lower market and
technological uncertainty is often followed by an increase in the use of causal logic (Reymen
et al., 2017). These may be associated with better outcomes, leading Alsos et al. (2019) to
suggest that entrepreneurs should ‘do effectuation when facing uncertainty and do causation
when facing risk’ (p. 11). Our study only reports on effectual outcomes and makes no attempt
to link our results to causational approaches to uncertainty and risk management.
This research also acknowledges that network collaborations change over time as the firm
develops increased capability to negotiate more attractive terms (Rosenbusch et al., 2011)
which can influence innovation performance. There are also many other internal factors that
could impact the nature of collaborations including investment structure, absorptive capacity,
collaboration experience and customer relationship capability. External factors such as net­
work type, industry lifecycle and market turbulence among others could also impact results
(Fernández-Olmos & Ramírez-Alesón, 2017). Thus, the nature of the collaboration has not
been explicitly measured nor controlled for in this study.
Given the exploratory nature of our study, there are numerous other limitations. Our
results are country and industry specific, since we relied exclusively on data collected from
firms in the United States in a specific sector – namely computer and electronic product
manufacturing. Our measurement instrument (see Appendix 1) is also based on a specific
definition of innovation, namely product of service innovation. As a result, this study does not
address the breadth of innovation areas as espoused by Schumpeter (1947) including organi­
sational, market or process. This study is also based on cross-sectional data and as result no
causal implications can be drawn. Future research would benefit from longitudinal research
that could reveal more detailed cause-and-effect relationships between constructs over time
(Deligianni et al., 2017). Also, as with many studies, our research suffers from survivor bias
which could impact the generalisability of our findings.
However, even given the significant limitations of this study, the authors believe that
this research provides an early insight into innovation from an effectuation perspective as
well as how uncertainty and risk affect innovation performance within the firm.
 INNOVATION: ORGANIZATION & MANAGEMENT 17

Conclusion
This exploratory study has many noteworthy outcomes when kept within the context of
the study’s limitations.
This study suggests that there is a theoretical relationship between innovation and
effectuation. Specifically, innovation appears to be an uncertainty management
approach that allows the firm to manage their innovation process more successfully,
resulting in improved innovation performance. This approach is enhanced by the
means available to the firm, specifically, the role of networks and partnerships available
to it. These networks help reduce uncertainty in the innovation process through
technology collaboration, market understanding and other resource advantages. Their
alternate role can be in reducing risk by providing pre-commitments to new product
and services and reducing the firm’s entrepreneurial risk. However, uncertainty appears
to have the largest impact on innovation performance, while aspects of risks impact
overall firm performance.
In conclusion, despite its many limitations, we believe that this research is an impor­
tant first step in the understanding of effectuation in the context of firm-level innovation
and the connection between uncertainty and risk in the process.

Disclosure statement
No potential conflict of interest was reported by the author(s).

ORCID
David C. Roach http://orcid.org/0000-0002-5043-2229

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