Entrepreneurial opportunity
Sankaran Venkataraman and Troy Harting
An entrepreneurial opportunity is the chance for an individual (or a team) to offer new value to society, often by introducing new products or services. This chance arises at the nexus of an enterprising individual(s), unfolding macro forces, and changing human needs and prefer ences – a nexus that permits the crystallization of a business idea in the mind of a person and the motivation to take action on this idea. Entre preneurial opportunities contain possibilities for both an economic gain and a loss for the entrepreneur pursuing the idea. Knight (1921) pointed out an important quality about entre preneurial opportunities: there is a fundamental uncertainty about them. He observed that one cannot collect more information or perform more analysis before making key investments to reduce uncertainty. Rather, only the collective actions of competing entrepreneurs, resource suppliers, and customers can reduce uncertain ties. There is no meaningful way in which to predict the future economic prospects of an entrepreneurial opportunity and then act on it. Knight pointed out this important distinction between uncertainty (outcomes that cannot be 100 entrepreneurial opportunity imagined and are unknowable) and risk (both outcomes and their probabilities can be subject ively assigned). You can insure against or diver sify away risk, but you cannot insure against or diversify away uncertainty.
The Oxford English Dictionary defines oppor tunity as ‘‘a time, juncture, or condition of things favorable to an end or purpose, or admit ting of something being done or effected.’’ Thus, an opportunity involves a purpose, and condi tions favorable to the achievement of it. For purpose to exist there must be an ‘‘original mind.’’ Norbert Wiener has commented that at the beginning stages of a new idea, the effective ness of the individual is enormous: ‘‘Before any new idea can arise in theory and practice, some person or persons must have introduced it in their own minds’’ (1993: 7).
In the case of an entrepreneurial opportunity, the ‘‘things favorable’’ for the ‘‘original mind’’ consist of two categories: (a) forces and trends in society conducive to entrepreneurship; and (b) the ‘‘original mind’s’’ beliefs about these forces and trends.
The Raw Material of Opportunities: Macro Forces and Trends
We can identify three classes of forces or trends that are the raw materials of opportunities. In the first class are forces endogenous to existing organizations in an economy. These include in efficiencies, limits to knowledge, and incongru ities. Inefficiencies arise because of (1) structural rigidities within a system such that it is difficult to remove poorly used resources from where they are currently employed and reapply them in ways that are more useful; and (2) when infor mation does not flow easily and reliably within any system. When different people have differ ent information and conjectures about the nature, quality, value, and price of resources, products, customer needs and preferences, sup plier capabilities, distribution, and so forth, ‘‘in efficiencies’’ arise and offer a rich pool of opportunities for value creation. Practically every industry has pockets of such inefficiencies.
Similarly, every industry faces knowledge frontiers and this presents new opportunities for value creation. For example, every industry faces technological limits in design, manufactur ing, distribution, sales, marketing, logistics, quality, etc. and these are sources of both known and unexpected opportunities.
Finally, we have incongruities. According to Drucker (1985: 57), an incongruity is a ‘‘discrep ancy, a dissonance, between what is and what could be.’’ Incongruities exist when the reality of an industry clashes with the assumptions about it (when the things people within the industry ‘‘know’’ and ‘‘think’’ about themselves, are dif ferent from the things people outside ‘‘know’’ and ‘‘think’’ about them). Whenever and wher ever these incongruities are large, there is an opportunity for some to carve out profitable new enterprises.
The second class of trends is the exogenous changes in social, political, demographic, and economic forces that are largely outside the con trol of individuals. These large scale macro forces give rise to fundamental changes in how we live, where we live, and what we prefer, thus providing numerous opportunities for entre preneurs to create and market new products and services. Indeed, these changes also provide op portunities to renew and reinvent existing prod ucts and services. When existing firms cannot or will not adapt to these changes, opportunities are created for entrepreneurs in new firms.
The third class of forces or trends is inventions and discoveries that produce new knowledge. Technological developments and breakthroughs in science, arts, crafts, and music present conditions for fashioning entre preneurial opportunities. These developments may occur in scientific labs as much as in craft shops, garages, studios, and basements.
Almost all technological breakthroughs first begin as scientific or artistic discoveries or in ventions. When knowledge is embodied in prod ucts of everyday use the intellectual property of the artist, scientist, or the lab becomes a tradable item, and can be produced and exchanged for profit. Whenever and wherever artistic and sci entific breakthroughs occur, conditions are created for converting the new knowledge into products and processes either to solve existing problems or to create new needs and markets for these needs.
Social, political, and technological changes alter existing needs, change preference structures entrepreneurial opportunity 101 for existing products and services, and create new needs in society. More important, such changes make people open minded to change and to new possibilities. This open mindedness is very useful for entrepreneurs because people are more willing to try new things and to experi ment. Further, it allows the entrepreneur to shape new needs and preferences.
As consumers, change provides information to all of us about new possibilities – new ways of solving old problems – and creates new problems and therefore opportunities for new solutions. Thus, change induces new needs or alters existing needs in a wide variety of areas, includ ing health, education, entertainment, financial security, housing, travel, etc. Changing needs present conditions that are favorable to the cre ation of something new.
OriginalMinds, Forces, andNeeds: The Nexus of Opportunity and the Individual
In an open society, where market forces are allowed to work, the conditions for creating something new are ubiquitous and abundant. But it is never clear beforehand which new ideas will lead to economic gains and which to losses. It is not the macro forces themselves that are interesting from the point of view of entre preneurial opportunities. Rather, it is the indi vidualism and idiosyncrasy that each individual brings to the forces that makes entrepreneurial opportunities compelling. Just as, starting with exactly the same set of objects, a Degas, a Dali, and a novice would create completely different still life paintings, it is conceivable that with the exact same set of macro forces, different entre preneurs might create entirely different business possibilities for themselves and their stakehold ers. Thus, a major source of variation in the nature of opportunities are the differences among people and their life experiences.
For example, three people pass by a vacant storefront on Main Street. The first person, who worked for a number of years as an equipment distributor to restaurants, sees the storefront and envisions an Italian restaurant comfortably filling that space. The second, who just moved from another city where an eclectic furniture store was popular, sees an opportunity for a similar store to open here and repeat the success. The third, having just read about the tough economic times hitting the town, sees no oppor tunity at all in the storefront, since it is almost sure to fail whatever it becomes, and continues walking.
Because these three people carry different sets of information and attitudes, their impression of the vacant storefront ranges from a strong op portunity for profit to a money sinkhole. This fictional example highlights several other points. First, individual differences matter. People’s values, experiences, and the information they carry shapes what they see in the world. If all three individuals saw the same possibility for the vacant storefront, it wouldn’t be vacant for long. Second, for creation to take place, resources need to come together with the right individual in what is a nexus of the entrepreneur and the opportunity. Even if the two potential entrepreneurs considered other uses for the storefront, the former equipment distributor may make a poor retail manager, and the person who saw the furniture store opportunity might not have the skills to run a restaurant. Third, there is no guarantee that an opportunity will be noticed. Perhaps the storefront is an ideal place for a copy center, given its close proximity to the city’s university, dormitories, and many local businesses, but no one has thought of it yet.
In the words of Sarasvathy (2001), ‘‘entrepren eurship is a function of individuality: who you are, what you know, and who you know.’’ We cannot imagine how certain firms could have come to be aside from the particularity of certain individuals: Disney without Walt Disney, Ford without Henry Ford, General Electric without Thomas Edison, Wal Mart without Sam Wal ton, and Microsoft without Bill Gates.
Thus, entrepreneurial opportunities are very much a function of the specific individuals who pursue them. In other words, the potential eco nomic gain or loss from pursuing an idea is only partly a function of the macro forces. In large part it is a function of the specific social, human, moral, and intellectual capital of the pursuer and even more importantly the manner in which the pursuer combines and leverages this capital. The same idea when pursued and executed by two different individuals or teams will unfold differ ently and have very different outcomes because 102 entrepreneurial opportunity of the differences in the endowments and the manner in which they use this endowment.
Endowments and the manner of combining endowments can vary due to a variety of circum stances. Sometimes it can be because of blind luck. This happens by virtue of a particular person being in a particular place at a parti cular time and interacting with particular indi viduals. She does not consciously search or plan for this experience; rather, she acts on it seren dipitously. For example, Bill Gates receives a visit from IBM executives who are looking for an operating system for their proposed personal computer business and think that Microsoft has such an operating system. Not finding such a product at Microsoft, the IBM executives visit another company in Silicon Valley who they understand has such a product. When the Sil icon Valley firm is not able to meet IBM’s re quirement, the executives come back to Microsoft requesting them to develop such an operating system. Using his social network, Paul Allen, a co founder of Microsoft, identifies an other company in Seattle that has a rudimentary operating system (DOS), and negotiates to buy it outright for $50,000. By modifying this operat ing system platform, Microsoft creates a new operating system for the IBM PC. Thus, by pure chance, Microsoft has become involved in an entrepreneurial venture of IBM. Although there is little people can do to specifically receive contingent experience, the size and characteris tics of their networks, their habits, attitudes, and behavioral patterns can influence the type of con tingent experience they are likely to encounter.
Sometimes the development of the nexus is influenced by the idiosyncratic experiences and social networks that a particular person encoun ters simply by virtue of being that person. For example, a new immigrant from India who lives in the US will encounter experiences that are different from that of a person who was born and brought up in the US. The Indian immigrant will have a social and professional network of Indian friends and acquaintances and will access ethnic sources of information (such as the Indian media), in addition to having an incipient social and professional network of non Indians. Even within the group of Indian immigrants, there are individual level heterogeneities such as previous education, professional experience, family back ground, and certain stable psychological charac teristics.
Finally, specialized knowledge that comes from particular educational training and profes sional experience also influences the develop ment of the nexus. Renaissance man aside, depth of knowledge tends to occur at the expense of breadth of knowledge. This phenomenon is attributable, of course, to our cognitive limita tions as human beings. Specialized knowledge makes it possible for individuals to ‘‘know more and more about less and less.’’
Such knowledge is explicit and tacit. Special ization leads to each of us operating in know ledge corridors, which means that we tend to see opportunities in our areas of specialization. For example, Shane (2000) found that eight entre preneurial teams pursued eight different and totally unrelated opportunities from a single in novation that they all had access to, a three dimensional printing process, that came out of the MIT labs. The original inventors never im agined the many possibilities that eventually transpired.
Thus, the individuality of a person dictates how the person perceives macro forces and trends, acts on them, and endows specificity to entrepreneurial opportunities. In summary, an entrepreneurial opportunity as discussed above transcends purely subjective and purely objective notions. An opportunity presupposes actors for whom it is perceived as an opportunity; at the same time, the opportunity has no meaning unless the actor/s actually act upon the real world of interacting forces within which the opportunity eventually has to be given shape.
Bibliography
Drucker, P. (1985). Innovation and Entrepreneurship. New York: Harper and Row.
Knight, F. H. (1921). Risk, Uncertainty and Profit. Chicago: University of Chicago Press.
Sarasvathy, S. (2001). What makes entrepreneurs entrepreneurial? University of Washington working paper series.
Shane, S. (2000). Prior knowledge and the discovery of entrepreneurial opportunities. Organization Science, 11 (4): 448 69.
Wiener, N. (1993). Invention: The Care and Feeding of Ideas. Cambridge, MA: MIT Press.