Launching a new product or business? Here's a framework for success

Business schools teach that prediction is critical in strategic decision-making based on the assumption that what can be predicted can be controlled. Trying to get a startup off the ground? Be prepared to face the world of unknowns: Will customers buy your product? Can you outpace competitors? How will you secure funding? Can your venture survive its early stages? Serial entrepreneurs excel at managing these uncertainties. Over the years of starting and leading multiple companies, they’ve developed an arsenal of tools and techniques and know how to use them. Now, University of Virginia Darden School of Business Professor Saras Sarasvathy offers a new way for founders and managers leading innovation in their organizations to tap this wisdom: the CAVE framework.

Understanding the CAVE Framework:

The CAVE framework helps novice founders and established business leaders leverage proven toolboxes such as lean startup, business model canvas and effectuation, reducing the occurrence of costly mistakes. (Effectuation — a term Sarasvathy coined to describe how expert entrepreneurs make decisions in highly uncertain situations — involves techniques that minimize the use of predictive information. For more, listen to Sarasvathy discuss effectuation on the “Hidden Brain” podcast.) CAVE stands for Causal, Adaptive, Visionary and Effectual. These represent four different strategic approaches, arranged in a two-dimensional space:

•     Causal: Relies on prediction and planning
•     Adaptive: Focuses on pivoting and adapting to the environment
•     Visionary: Seeks to compel the world to follow
•     Effectual: Emphasizes shaping and co-creating elements of  the environment

Why CAVE Matters: 

Business schools teach that prediction is critical in strategic decision-making based on the assumption that what can be predicted can be controlled. Entrepreneurs, however, learn from experience that prediction is not the only lever for formulating strategy. In a startup environment, for example, where very little is predictable, it may be useful to separate prediction from control, just like Sarasvathy does in the CAVE framework. This gives entrepreneurs more options as they can access not one, but two levers. In real life, entrepreneurs move from quadrant to quadrant, using different tools in different situations. They also mix and match strategies from all quadrants as needed.

Let’s explore each quadrant:

The Causal Quadrant:

The tools in this quadrant rely on prediction. It’s all about planning based on market research and financial forecasts. While prediction-based decision tools can be effective in a stable, mature environment, they can lead to costly failures and delays in a new entrepreneurial setting, notes Sarasvathy. There are situations, however, when tools — such as hypothesis testing from lean startup — can be used in market research. “Let’s say you have 50,000 followers on Instagram, and 2,000 are buying your product,” says Sarasvathy. “If you want to introduce a complementary product line, you can use hypothesis testing but with actual customers. You’re not predicting potential customers; you’re testing your hypothesis in a more predictable space, in which the market exists because it’s the market you created.”

The Adaptive Quadrant:

Tools in this quadrant don’t depend on prediction or control. According to Sarasvathy, most novices start here. They focus on learning, adapting faster and being more flexible in responding to changes in the environment than their competitors. “You can be effectual, and you can be adaptive,” says Sarasvathy. “If something unpredictable happens, you can act effectually and try to turn that surprise into an opportunity, using the Lemonade Principle from effectuation. But sometimes that’s not possible and you may need to adapt and pivot.”

The Visionary Quadrant:

Companies in this space have market power, and their visionary founders impose their view of the future on the environment. They persistently shape the environment to achieve desired outcomes.

“Founders acting effectually may need to become visionaries when they pitch to investors, just like marketers craft visionary sales pitches of new products,” says Sarasvathy. “They may also use tools from the causal quadrant to help construct and deliver a winning pitch or a compelling sales campaign.” A persuasive pitch needs robust information and data connecting elements of the business model — such as product features and customer needs — with a strong value proposition. That, in turn, requires research, whether through conventional market analysis or a discovery process from lean startup or design thinking. “Effectuation is always a default option available to you as a founder,” says Sarasvathy. “But the CAVE framework shows you how to draw from multiple toolboxes and leverage different tools.”

The Effectual Quadrant:

This quadrant is about choosing control over prediction. Business leaders typically believe that prediction leads to control, but the serial entrepreneurs Sarasvathy has studied recognize the future is unpredictable and use control as a strategy. “To achieve control over an unpredictable future, you have to co-create that future with other people,” she says. Effectual entrepreneurs start with their available resources and collaborate with stakeholders, including customers and suppliers, who are willing to commit their time, money and expertise to the fledgling venture. Sarasvathy notes that partners who “put skin in the game” in exchange for the chance to reshape a new venture can help generate unexpected, innovative and valuable goals, kickstarting what she calls the “co-creation of new futures.”
Using effectual approaches in a venture’s early stages doesn’t mean an entrepreneur can’t draw from the causal quadrant. “Imagine you have a partner, whom you got effectually, and you’re building an app together,” says Sarasvathy. “So now it’s 100% predictable in the sense that you’re both committed. To get things done, you may want to get causal and use planning and project management tools.”
Sarasvathy’s CAVE framework can help business leaders in charge of innovation reduce delays and costly mistakes. It also offers a blueprint for educating novice entrepreneurs. “It’s one thing to teach students an ad hoc set of popular tools,” says Sarasvathy. “It’s another to organize those tools into a rigorous framework to help guide their use.” Darden Professor Saras Sarasvathy discusses the CAVE framework in an article “Lean Hypotheses and Effectual Commitments: An Integrative Framework Delineating the Methods of Science and Entrepreneurship,” published in the Journal of Management on 26^th March 2024.