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opportunity recognition and the entrepreneur

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opportunity recognition and the entrepreneur

OPPORTUNITY RECOGNITION AND THE ENTREPRENEUR

    source University College

    /nbs/busman/clio/sec/open_access/ideas_to_market/opp_recog.htm (no longer available)

1. Where Do Ideas Come From?

    'The key to entrepreneurship is the ability to identify, pursue and capture the value from

    business opportunities (Birley and Muzyka, 2000, p.31)

    2. Introduction

    The ability to find, recognise and exploit new opportunities is a vital skill of business success. All business are started with the idea that there is an opportunity to make money, but it is a characteristic of entrepreneurs that the pursuit of opportunities continues beyond the early stages of their businesses and becomes the 'engine' for growth and success. However, although finding opportunities is vital for business success, it is important to remember that every good opportunity has its risks and problems, therefore it is essential to identify these at an early stage, so that they can be reduced or eliminated.

    For entrepreneurs the starting point of a new business is usually the recognition of an opportunity in the market place. Entrepreneurs are particularly tuned in to new

    opportunities and many academics argue that entrepreneurial behaviour consists of a passionate, obsessional, sometimes irrational, pursuit of opportunities. The problem is that for smaller businesses opportunities often involve risk, hassle, and dilution of effort. Yet, these very same businesses cannot afford not to look for them. As opportunity recognition is key to the entrepreneurial process, this section discusses the concept of opportunity recognition, and the generation of opportunities.

    3. What Is An Opportunity?

    Birley and Muzyka (2000, p.32) define opportunity as "a business concept that, if turned into a tangible product or service offered by a business enterprise, will result in financial profit". They suggest that there are a number of important issues which should be considered when thinking about opportunities.

    4. Where Do Opportunities Come From?

    Opportunities can come in many guises and from many different sources, and for many entrepreneurs are related to their past work experience, hobbies or social environment (Birley and Muzyka, 2000).

    Timmons (1999) argues that opportunities are created from change, chaos, contradiction and confusion in an industry or market. Rather than protecting themselves from the uncertainty resulting from this type of situation, entrepreneurs see it as providing opportunities for new ventures (Alvarez and Busenitz 2001). Therefore, it is important to constantly monitor the environment, and the changes, problems, needs and gaps within it, in order to identify opportunities, or to create them (Chell, 2001).

Table 1: Important points to consider in opportunity recognition

    Opportunities are Opportunities are about creating value, not necessarily lowering about creating value cost. If the opportunity helps to increase effectiveness and/or

    efficiency, the customer will pay if they perceive the opportunity

    to be of value

    Opportunities are Not everyone is equally equipped to identify or capture not the same for opportunities. Each individual' perspective, advantages and skills everyone are different. In addition, it is important to consider whether the

    opportunity can be implemented

    Not everyone Real initiative is required to pursue opportunities. Many people pursues and companies will not pursue opportunities if they are satisfied

    opportunities, even with their current situation.

    if they are obvious

    Complex The more complex the opportunity is (involving a number of opportunities people or a number of steps or components), the more unlikely it breakdown is to come to fruition or work in the long run.

    Opportunities are Pursuing opportunities that everyone else has seen may not not provide a value-added approach for the individual. It is important always found in to distinguish between a growth trend (e.g. the Internet) and a

    well-documented growth market

    growth

    markets

    Opportunities are Many entrepreneurs search for opportunities based on some kind not necessarily the of technological break through. Although this may be desirable, it result of inventions is not necessary. This type of opportunity is the exception rather by the than the rule

    Entrepreneur

    Adapted from Birley and Muzyka (2000, p.32)

    4.1 The Role Of Ideas

    "Ideas for opportunities come from within the realm of our existing knowledge and usually result from our mind connecting seemingly unrelated ideas" (Birley and Muzyka,

    2000, p.34).

    The interaction of an idea with what's going on in the 'real world' and an entrepreneur can result in an opportunity from which a new venture can be created (Timmons, 1999). Finding a good idea is the first stage in the opportunity recognition process, however, it is important remember that for this good idea to succeed there must be a need for the product or service, and a market who is willing to use/purchase it (Bhave, 1994).

    Timmons (1999) suggests that opportunities are the result of ideas and entrepreneurial creativity. The role of the entrepreneur is not necessarily to generate the idea, but rather to creatively structure a new venture around the opportunity in order to implement the idea (Birley and Muzyka, 2000). Generating new ideas is discussed further in the creativity section.

4.2 Generating Business Opportunities

    For any particular business or industry, ideas for new opportunities can be generated

    from a range of sources, as shown in the diagram below:

    Figure 1: Sources of business opportunity (Adapted from Trott, 1998 -, p.144) 4.3 Practical Sources Of Opportunity

    There are several practical sources which can be used to generate ideas. Table 2: Practical sources of opportunity

    Gaps in the market New operating practices

    New markets New ways of delivering the product/service to customers

    New ways of informing the customer about New products or services products/services

    Improved products or New ways of managing relationships within/between

    services organisations

    New means of production Multiple innovations (combining them in new ways) Drucker (1985) suggests a number of alternative sources:

    ; The unexpected success/failure or external event

    ; The incongruity between reality as it actually is and reality as it is perceived

    ; Innovation based on process needs

    ; Changes in industry structure or market structure that catch everyone unawares

    ; Changes in demographics (age, social, working patterns, etc.)

    ; Changes in perception, mood or meaning

    ; The dissemination of new knowledge, both scientific and non-scientific

5. Types Of Opportunity

    Opportunities can vary in terms of their potential and their degree of risk. Some entrepreneurs are concerned with identifying and pursuing high-potential, high risk opportunities, for example, a radical new technology. Others are prepared to accept a lower profit in return for a lower risk, for example, finding new markets or new methods of distribution for their products. Fry (1993) suggests that the risks of a new venture are likely to be higher if:

    ; The amount of capital required is high

    ; The payback period is long

    ; The product is totally new

    ; It is a single product venture

    ; There are no alternative uses of the product

    ; The product can be easily copied

    ; The investment in fixed assets is high

    5.1 Key Issues

    Although the entrepreneurs we tend to hear about in the press have founded complex, 'hi-tech' businesses (for example, Richard Branson, Bill Gates), many successful entrepreneurs have based their opportunity on a relatively simple idea, for example Lee Kingston and Tony Bond who formed Envirodent in January 1999. Entrepreneurship is

    about adding value, not just for customers, but also for the entrepreneur and their business. There a number of issues to consider when deciding whether a potential opportunity is right for you.

    Table 2: Key points in evaluating what makes a good opportunity

    This will depend on: How big does the

    opportunity have to be?

    ; How much value you want to create

    ; What will attract and retain your interest

    ; What size is required to attract investors

    ; What is the expected growth rate

    Economics How much profit will be made, and where will this profit be

    created?

    How long will it last? How long can you pursue the opportunity before competitors

    'jump on the bandwagon'?

    Fit and belief in the How does the opportunity fit in with your personal values and opportunitygoals? Do you like the opportunity? Do you believe in it?

    Will it lead to others? An opportunity that creates possibilities for future

    opportunities has more value

    Will it help you build Good opportunities are those which help the business build skills?skills which can be used to pursue new ideas

    Competition Are your competitors aggressive? Will you be able to survive

    In the market/industry you are considering?

    Adapted from Birley and Muzyka (2000, pp.56-59)

6. Spotting Opportunities

    For different businesses, opportunities will occur in different ways. However, it is clear that the 'discovery' of all business opportunities always involves varying degrees of: knowledge, alertness, research and analysis and creativity.

6.1 The Importance Of Knowledge

    Most successful business opportunities are spotted by people who are already knowledgeable about the market, industry or business in which the potential opportunity resides. A good knowledge of the way in which your 'business environment' operates will give you a head start in knowing where the opportunities may occur. An understanding of such things as: market trends; technological advances; or customer preferences; can give your business the edge when it comes to developing innovative products or services.

    6.2 Types Of Knowledge Needed

    Wickham (1998) suggests that identifying opportunities requires knowledge about the following areas:

    ; how the product/service is produced

    ; of customers' needs and the buying behaviour they adopt

    ; of distributors and distribution channels

    ; of how the product or service might be promoted to the customer

    ; of competitors - who they are, the way they act and react

    ; about the technology behind the product/service

    6.3 Alternative Approaches

    Being immersed in the 'common sense' or 'received wisdom' of an industry can blind you to some opportunities. Sometimes the 'naive' approach, where you don't know much about the business, can highlight opportunities. The classic example is when an entrepreneur takes a particular idea from one business and introduces it to a whole new market/ industry.

    6.4 Being Alert To Business Opportunities

    You'll never spot an opportunity if you're not looking for one

    Being alert for opportunities is half the battle. For instance, have you ever been thinking about changing your car? Suddenly, the roads seem to be full of the type that you're considering. You've become alert to them! They were there before, its just that you

    weren't looking for them.

    Try to make a habit of consciously searching for new business opportunities. However, be prepared to junk most of them … but don't forget them completely, as you may be able to combine one later on with another, newer, potential opportunity.

6.5 Researching And Analysing The Situation

    Successful entrepreneurs often have an 'intuitive radar' for good opportunities. Although it could be argued that this is something which is difficult to learn, there is one element of entrepreneurial behaviour that we can all learn from - their ability to rapidly assess and analyse an opportunity. This is critical to the successful selection of 'go-ers'. In order to do this entrepreneurs must thoroughly research and analyse the market for their business opportunity.

    One way of doing this is to develop a business plan. Although the business plan is usually considered to be the final stage of the overall opportunity analysis process, the first stage of business planning is to develop a feasibility study. This is essentially a 'mini business plan' that requires some crucial key questions to be answered early on in the process, before the lengthy commitment of developing a full business plan is undertaken.

    6.6 Creativity

    Creativity is the final ingredient in the opportunity-spotters recipe. Much has been written about different approaches to developing creativity, but little is applicable in every situation. Trott (1999, p13.) defines creativity as "the thinking of novel and appropriate ideas" Appropriate in that the solution should be useful, fit the problem and have value.

    7. The Role Of Creativity

    Entrepreneurs need to be creative in their thinking, both in terms of generating and recognising opportunities, and in terms of implementing these opportunities (Timmons, 1999). The generation of ideas requires the ability to think creatively and to see relationships others may not see - to think laterally, to think round corners, and to think beyond the problem in hand (Chell, 2001).

    7.1 Where Does Creativity Come From

    Two abilities are required for creative output:

    ; Divergent thinking - The intellectual ability to think of many original, diverse

    and elaborate ideas

    ; Convergent thinking - The intellectual ability to logically evaluate, critique and

    choose the best idea from a selection of ideas

    There are several perspectives on creativity:

    ; Creativity is a divine quality - something only gifted people have.

    ; Creativity is serendipitous - much evidence supports the lucky break theory

    ; Creativity results from planned luck - looking for opportunties

    ; Creativity results from endurance - hard work and persistence

    ; Creativity can be encouraged by idea generation methods

    7.2 Approaches for generating creative ideas

    Creativity can be developed and improved. The following are suggestions for techniques/approaches that may help:

    ; Use focus groups to discuss customer needs.

    ; Use creative groups to discuss ideas/concepts.

    ; Use perceptual maps to plot competitor products/services on key product

    dimensions, and look for gaps.

    ; Use feature stretching to develop new concepts.

    ; Use reverse engineering to scrutinise competitor products/services.

    ; Use product blending to develop new concepts.

    In addition the techniques of brainstorming (http://www.brainstorming.co.uk/) and

    mind mapping (http://www.mind-mapping.co.uk/) can be used to encourage people to

    think creatively and generate creative ideas.

    There are a number of web sites that provide information about creativity and using creativity techniques see useful web sites.

8. Involving Others

    It is rare that entrepreneurs develop an opportunity on their own. Investigations of successful entrepreneurs, and their approaches to identifying and developing potential opportunities, suggests that they usually seek out others who will bring new and additional skills to the process (Birley and Muzyka, 2000).

    8.1 Networking

    When discussing entrepreneurs, academics emphasise their skills in 'social networking'. Entrepreneurs use extensive networking to ensure that their dream becomes a reality. Most successful entrepreneurs seem to keep in contact with a whole range of people who may prove to be useful in helping them to realise their business opportunities. They see social networking as a key means of accessing knowledge resources. Their networks of contacts can prove to be critical in getting the job done.

    8.2 Communication

    Communicating and sharing the entrepreneurial vision is critical for convincing others

    of the feasibility of the opportunity. Entrepreneurs have a 'vision', a clear understanding of the concept and of what they're trying to do. Entrepreneurs involved in a project can tell you what the resulting business will look like, how it will work and what is possible once it's up and running. This vision can be communicated in two ways:

    1. Through 'rational' means such as the business plan

    2. By communicating on a more emotional level, using 'persuasive' approaches such as:

    ? 'I have a dream' the explicit vision expressed passionately. The idea is that people will want to be part of the dream - buying into it at an emotional level.

    ? Talking strategy 'means' rather than 'ends'. Demonstrating how a difficult concept can operationalised.

    ? Story-telling. Stories are a powerful part of the human psyche. Many entrepreneurs will start to explain their opportunity by telling the story of how they came up with the idea.

? 'Why things can be better'. Emphasising current dissatisfactions.

    ? 'What's in it for you'. Appealing to their self-interest.

    9. Opportunity Screening

    Once an opportunity has been spotted it is important to assess its viability. Opportunity assessment or screening is the process of collecting information, reviewing the opportunity in the light of this information, and reformulating the opportunity if necessary. Birley and Muzyka (2000) suggest that a number of factors should be considered in this process.

    Table 3: Factors to consider when assessing the viability of an opportunity

    Market potential Is there a genuine need and is it already recognised?

    How can the market be defined?

    Is there more than one potential market?

    How big is the potential market?

    How many potential customers are there?

    Where are they located?

    Routes to market Can you reach your potential market?

    Is there potential for an independent business?

    How will competitors react?

    Protection It is important to protect your idea. There are three legal

    forms of protection: patents; registered design and copyright

    Business viability Can you make a profit?

    Is your forecast cash flow sustainable?

    Crawl-out costs What are you prepared to lose if things go wrong?

    Adapted from Birley and Muzyka (2000, p.37)

Recommended Reading

    1. Allen, K R (1999) Growing and Managing an Entrepreneurial Business. New York,

    Houghton Mifflin Company.

    2. Birley, S and Muzyka, D (2000) Mastering Entrepreneurship. London, Prentice Hall.

    3. Ceserani, J and Greatwood, P (1995) Innovation & creativity. London:Kogan Page

    4. Lumkin, G T, Hills, G E and Shrader, R C (2001) Opportunity Recognition. A CEAE

    White Paper prepared for the Coleman Foundation.

    http://www.colemanchairs.org/files/documents/21/lumpkin_final_06_20.pdf

    (accessed 29th January 2003)

References

    1. Allen, K R (1999) Growing and Managing an Entrepreneurial Business. New York,

    Houghton Mifflin Company.

    2. Alvarez, S A and Busenitz, L W (2001) 'The entrepreneurship of resource-based

    theory' Journal of Management, Vol.27, pp.755-775.

    3. Bhave, M P (1994) 'A process model of entrepreneurial venture creation' Journal of

    Business Venturing, Vol. 9, pp.223-242.

    4. Birley, S and Muzyka, D (2000) Mastering Entrepreneurship. London, Prentice Hall.

    5. Chell, E (2001) Entrepreneurship: Globalizsation, Innovation and Development.

    London, Thomson Learning.

    6. Drucker, P F (1985) Innovation and Entrepreneurship. New York,Harper and Row.

    7. Fry, F L (1993) Analyzing entrepreneurial opportunities. Minneapolis/St Paul, West

    Publishing Co.

    Timmons, J A (1999) New Venture Creation: Entrepreneurship for the 21st

    Century. Boston, Irwin McGaw-Hill.

    8. Trott, P (1998) Innovation Management and New Product Development Financial

    Times Management, London.

    9. Wickham,P A (1998) Strategic entrepreneurship :a decision-making approach to

    new venture creation and management. London, Pitman.

Useful web sites

    http://www3.babson.edu/

    Web site of Babson College, USA, which provides information and academic articles on all

    aspects of entrepreneurship including opportunity recognition

http://www.hatch.ca/Technologies/Technology_Transfer_Service/opportunity.htm

    Site of Hatch, a global supplier of technical and strategic services. Provides case studies

    and information about innovation and opportunity recognition

    http://www.babson.edu/entrep/fer/papers97/hills/hill1.htm

    Online academic article from Babson College, USA about entrepreneurship and opportunity recognition

    The following web sites provide information on creativity and thinking creatively

    http://www.creativityatwork.com/

    www.creativitypool.com

    www.infinn.com/innovationhouse.html

    http://www.brainstorming.co.uk/

    http://www.mind-mapping.co.uk/

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