Opportunity exploitation
Johan Wiklund
Definition
Opportunity exploitation refers to activities con ducted in order to gain economic returns from the discovery of a potential entrepreneurial opportunity. It involves the decision to act upon a perceived opportunity and the associated behaviors aimed at realizing the value of the opportunity. During opportunity exploitation people acquire and organize requisite resources and competencies to develop a product or service and take it to an existing or new market.
The Decision to Exploit an Opportunity
Not all opportunities being perceived are acted upon. The marshaling of resources is associated with costs and the outcomes of an attempt to exploit a perceived entrepreneurial opportunity are uncertain. Therefore, deciding on whether or not to exploit an opportunity involves weighing the potential value of the opportunity against the costs of exploiting it, and comparing this to the outcomes of other possible courses of action. Two factors influence whether or not individuals choose to exploit discovered opportunities: the nature of the opportunity and the nature of the individual (Shane and Venkatara man, 2000). Opportunity exploitation will be more costly for individuals with less resource endowments who need to acquire the resources necessary for exploitation than for those who already possess substantial human, social, and financial capital. However, these resources can be valuable also for pursuing other courses of action. Therefore, individuals with access to more resources are better able to exploit opportunities, but may have incentives for not choosing to do so. In addition, people make different conjectures about how appropriate an opportunity is, depending on prior experience and psychological characteristics such as their belief in their ability to exploit the opportunity (i.e., their self efficacy).
The degree of innovativeness of the opportunity also influences the likelihood of exploitation. Attempting to exploit innovative opportunities of a path breaking nature entails substantial uncertainty because it is impossible to know the chances of success. Imitative opportunities, largely replicating what already exists, may be risky, but it is possible to have an idea of the chances of succeeding. While the potential returns of innovative opportunities may be greater, people are generally skeptical of entrepreneurial endeavors where the chances of success are unknowable. Therefore, assuming risk aversion, exploitation of innovative opportunities is less likely than exploitation of imitative opportunities.
Organizational Mode of Exploitation
In principle, it is possible to identify two organizational modes for exploiting opportunities. The first is through the start up of a new firm and the other is to exploit opportunities within the framework of an existing firm. The choice between these organizational modes is influenced by the resources needed to pursue the opportunity. If these resources are embedded within the resources of an existing firm, the internal mode is more likely. Existing firms often have access to know how, financial capital, and other resources valuable to opportunity exploitation. On the other hand, these firms may be unwilling to devote those to initiatives that are not in line with current business. If there are no relationships between the resources needed for the new opportunity and the resources of an existing firm, the start up mode is more likely. In other words, incremental and competence enhancing opportunities, which rely on existing resources and competencies, are more likely to be pursued by incumbent firms, while radical and competence destroying opportunities more likely will be pursued by new entrants (Tush man and Anderson, 1986). In addition, the situation and incentives of individuals discovering opportunities, such as employment status and the possibility of appropriating the value of exploiting the opportunity, influence the choice of mode.
The Opportunity Exploitation Process
Several different models describing the process of opportunity exploitation have been developed. In particular, the start up mode of organizing has been described. One important insight from these empirical studies is that the discovery and exploitation processes are intimately entwined and that the opportunity as first conceived may change during the exploitation process as a result of learning about the market and about the possibility of delivering the product or service.
These studies have also found that it is far from a linear process, and that the behaviors, their sequencing and pacing, differ across exploitation processes. To deal with the multitude of processes, typologies have been suggested (e.g., Bhave, 1994; Sarasvathy, 2001). Research findings suggest exploitation processes can be classified depending on whether an innovative or an imitative opportunity is pursued. Different types of strategies, knowledge, and behaviors appear important depending on which type of opportunity is pursued. Carefully planned processes can be contrasted with adaptive exploitation processes. The former are characterized by projections of the future and incremental behaviors following predetermined patterns. The latter are associated with adaptive trial and error strategies where the outcomes of previous behaviors guide the behaviors conducted in the future. The decision to exploit an opportunity can be triggered by the discovery of a potential opportunity, but such a decision (e.g., by starting an independent business) may also pre cede opportunity discovery – thus, exploitation processes will differ.
Success and Failure
The capability of appropriately acquiring and organizing resources for opportunity exploitation largely resides in the know how of individual entrepreneurs, embedded in their human and social capital. Research suggests that specific decision making strategies based on heuristics enable individuals to come up with innovative solutions in complex and uncertain situations (Alvarez and Busenitz, 2001). For example, using heuristics can involve significant thought leaps leading to innovative ideas in situations where information is scarce. Further, in formation acquired from social networks helps reduce uncertainty about, and assists in acquiring other resources necessary for, opportunity exploitation.
In the process of exploiting a new opportunity, resources are shifted from their existing uses and put to new use. This entails uncertainty, because the productivity of existing resource combinations is known, while the productivity of a new combination is unknown (Moran and Ghoshal, 1999). Once a new opportunity has been pursued and reaches some success, the specific resource combination pursued becomes explicit and knowable to competitors, and the uncertainty associated with it drops dramatic ally. To sustain a competitive advantage, initial exploiters must create barriers, such as first mover advantages or intellectual property protection, or start exploiting new opportunities.
Many attempts to exploit opportunities fail, as evidenced by high rates of abandoned efforts to create new ventures and high failure rates among newly founded ventures. These failures can be attributed to entrepreneurs pursuing opportunities that, in fact, are not lucrative, or poor understanding of opportunities that may well be lucrative, or poor execution of the exploitation of opportunities. The causes of failure are not easily teased out and conflicting views in the literature largely depend on how opportunities are conceptualized and studied. However, it is safe to say that many failures occur because of poorly executed exploitation, irrespective of the characteristics of the opportunity or how well it was understood.
Bibliography
Alvarez, S. A. and Busenitz, L. W. (2001). The entrepreneurship of resource-based theory. Journal of Management, 27: 755 75.
Bhave, M. P. (1994). A process model of entrepreneurial venture creation. Journal of Business Venturing, 9: 223 42.
Moran, P. and Ghoshal, S. (1999). Markets, firms, and the process of economic development. Academy of Management Review, 24 (3): 390 412.
Sarasvathy, S. D. (2001). Causation and effectuation: Toward a theoretical shift from economic inevitability to entrepreneurial contingency. Academy of Management Review, 26: 243 63.
Shane, S. A. and Venkataraman, S. (2000). The promise of entrepreneurship as a field of research. Academy of Management Review, 25: 217 26.
Tushman, M. L. and Anderson, P. (1986). Technological discontinuities and organizational environments. Ad ministrative Science Quarterly, 31: 439 65.