How did Michael Dell come up with the idea of a “build it yourself” computer company? How did Dave Roberts, the founder of PopCap Games, figure out that there is a large and growing market for “casual” electronic games?
Researchers have identified several characteristics that tend to make some people better at recognizing opportunities than others. We’ve already defined an opportunity as a favorable set of circumstances that create the need for a new product, service, or business, but the term opportunity recognition refers to the process of perceiving the possibility of a profitable new business or a new product or service. That is, an opportunity cannot be pursued until it’s recognized. Now let’s look at some specific characteristics shared by those who excel at recognizing an opportunity.
1. Prior experience
Several studies show that prior experience in an industry helps entrepre- neurs recognize business opportunities. For example, evidence over time about the founders of firms appearing on the Inc. 500 list shows that well over 40 percent of those studied got the idea for their new businesses while working as employees for companies in the same industries.15 This find- ing is consistent with those reported by scholars studying the relationship between industry experience and being able to recognize opportunities.16
There are several explanations for these findings. By working in an industry, an individual may spot a market niche that is underserved. It is also pos- sible that while working in a particular area, an individual builds a network of social contacts in that industry that may provide insights that lead to opportunities.17
Although prior experience is important in an industry in most instances, there is anecdotal evidence suggesting that people outside an industry can sometimes enter it with a new set of eyes, and as a result innovate in ways that people with prior experience might find difficult. An example is provided by Sam Calagione, the founder of Dogfish Head Craft Brewery, a very success- ful brewery based in Milton, Delaware. As indicated in the following quote, Milton set aside current industry best practices to craft some of his most popular products:
In the mid-‘90s, some beer enthusiasts and experts called us heretics for brewing beers with ingredients outside of the “traditional” water, yeast, hops, and barley. So, I started researching ancient brewing cultures and learned that long ago, brewers in every corner of the world made beer with whatever was beautiful and natural and grew beneath the ground they lived on. We (Dogfish Brewery) now make a whole series of Ancient Ales inspired by historic and molecular evidence found in tombs and dig sites.18
2. Cognitive Factors
Opportunity recognition may be an innate skill or a cognitive process.19 There are some who think that entrepreneurs have a “sixth sense” that allows them to see opportunities that others miss. This sixth sense is called entrepreneur- ial alertness, which is formally defined as the ability to notice things without engaging in deliberate search.20 Most entrepreneurs see themselves in this light, believing they are more “alert” than others. Alertness is largely a learned skill, and people who have more knowledge of an area tend to be more alert to opportunities in that area than others. A computer engineer, for example, would be more alert to needs and opportunities within the computer industry than a lawyer would be.
The research findings on entrepreneurial alertness are mixed. Some re- searchers conclude that alertness goes beyond noticing things and involves a more purposeful effort. For example, one scholar believes that the crucial difference between opportunity finders (i.e., entrepreneurs) and nonfinders is their relative assessments of the marketplace.21 In other words, entrepre- neurs may be better than others at sizing up the marketplace and inferring the likely implications.
3. Social networks
The extent and depth of an individual’s social network affects opportunity rec- ognition.22 People who build a substantial network of social and professional contacts will be exposed to more opportunities and ideas than people with sparse networks. This exposure can lead to new business starts. Research re- sults over time consistently suggest that somewhere between 40 percent and 50 percent of those who start businesses got their ideas through social con- tacts.23 In a related study, the differences between solo entrepreneurs (those who identified their business ideas on their own) and network entrepreneurs (those who identified their ideas through social contacts) were examined. The researchers found that network entrepreneurs identified significantly more opportunities than solo entrepreneurs, but were less likely to describe them- selves as being particularly alert or creative.24
An important concept that sheds light on the importance of social networks to opportunity recognition is the differential impact of strong-tie versus weak- tie relationships. Relationships with other people are called “ties.” We all have ties. Strong-tie relationships are characterized by frequent interaction, such as ties between coworkers, friends, and spouses. Weak-tie relationships are characterized by infrequent interaction, like ties between casual acquain- tances. According to research in this area, it is more likely that an entre- preneur will get a new business idea through a weak-tie than a strong-tie relationship, because strong-tie relationships —which typically form between like-minded individuals —tend to reinforce insights and ideas the individuals already have.25 Weak-tie relationships, on the other hand, which form between casual acquaintances, are not as apt to be between like-minded individuals, so one person may say something to another that sparks a completely new idea. An example might be an electrician explaining to a restaurant owner how he solved a business problem. After hearing the solution, the restaurant owner might say, “I would never have heard that solution from someone in my com- pany or industry. That insight is completely new to me and just might help me solve my problem.”
Creativity is the process of generating a novel or useful idea. Opportunity rec- ognition may be, at least in part, a creative process. On an anecdotal basis, it is easy to see the creativity involved in forming many products, services, and businesses. Increasingly, teams of entrepreneurs working within a company are sources of creativity for their firm.26
For an individual, the creative process can be broken into five stages, as shown in Figure 2.4.27 Let’s examine how these stages relate to the opportunity recognition process. In the figure, the horizontal arrows that point from box to box suggest that the creative process progresses through five stages. The verti- cal arrows suggest that if at any stage an individual (such as an entrepreneur) gets “stuck” or doesn’t have enough information or insight to continue, the best choice is to return to the preparation stage—to obtain more knowledge or experience before continuing to move forward.
Preparation. Preparation is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process. Just as an athlete must practice to excel, an entrepreneur needs experience to spot opportunities. Over time, the results of research suggest that as much as 50 to 90 percent of start-up ideas emerge from a person’s prior work experience.
Incubation. Incubation is the stage during which a person considers an idea or thinks about a problem; it is the “mulling things over” phase. Sometimes incubation is a conscious activity, and sometimes it is un- conscious and occurs while a person is engaged in another activity. One writer characterized this phenomenon by saying that “ideas churn around below the threshold of consciousness.”
Insight. Insight is the flash of recognition when the solution to a problem is seen or an idea is born. It is sometimes called the “eureka” experience. In a business context, this is the moment an entrepreneur recognizes an opportunity. Sometimes this experience pushes the process forward, and sometimes it prompts an individual to return to the preparation stage.
For example, an entrepreneur may recognize the potential for an oppor- tunity, but may feel that more knowledge and thought is required before pursuing it.
Evaluation. Evaluation is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. Many entre- preneurs mistakenly skip this step and try to implement an idea before they’ve made sure it is viable. Evaluation is a particularly challenging stage of the creative process because it requires an entrepreneur to take a candid look at the viability of an idea. We discuss how to evaluate the feasibility of new business ideas in Chapter 3.
Elaboration. Elaboration is the stage during which the creative idea is put into a final form: The details are worked out and the idea is trans- formed into something of value, such as a new product, service, or busi- ness concept. In the case of a new business, this is the point at which a business plan is written.
Figure 2.5 illustrates the opportunity recognition process. As shown in the figure, there is a connection between an awareness of emerging trends and the personal characteristics of the entrepreneur because the two facets of op- portunity recognition are interdependent. For example, an entrepreneur with a well-established social network may be in a better position to recognize emerg- ing technological trends than an entrepreneur with a poorly established social network. Or the awareness of an emerging technology trend, such as digitiza- tion, may prompt an entrepreneur to attend conferences or workshops to learn more about the topic, expanding the social network.
Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.