The Search For And Discovery Of Different Types Of Entrepreneurial Opportunities: The Effects Of Tacitness And Codification

Brett R. Smith, University of Cincinnati
Charles H. Matthews, University of Cincinnati
Mark T. Schenkel, Belmont University

Abstract

The role of different types of opportunities in the entrepreneurial process remains relatively underdeveloped. To address this issue, we draw upon a distinction from the domain of knowledge management to suggest the existence of two different types of opportunities – tacit and codified. Using qualitative and quantitative data, we explore the existence of these different types of opportunities and their relationships to both the entrepreneurial discovery process and prior experience. We find codified opportunities are more likely to be discovered through a systematic search while prior experience is more useful for the discovery of tacit opportunities.

Introduction

One of the fundamental research questions in the field of entrepreneurship continues to be “why, when and how some people and not others discover and exploit opportunities” (Shane & Venkatraman, 2000). Given the relative lack of success of early research efforts focused solely on the role of the entrepreneur, the domain of the field has been re-specified to include two phenomena: the aforementioned presence of enterprising individuals and the presence of opportunities (Venkatraman, 1997). While the inclusion of the role of the opportunity has refocused much attention on important entrepreneurial processes such as opportunity recognition, relatively little attention has been paid to the opportunity itself. This is somewhat surprising given “variation in opportunities themselves can account for at least some of the observed patterns in entrepreneurial activity” (Shane, 2003, p.18).

Borrowing from the domain of knowledge management, we propose to partially address this oversight by drawing a key distinction between two types of opportunities – tacit and codified. While some researchers have suggested that opportunities rarely come in neat packages (Shane, 2003; Venkataraman, 1997), we believe an empirical examination of this assumption is necessary. After examining the existence and prevalence of these two types of opportunities, we draw on the individual-opportunity nexus framework to illustrate the potential theoretical implications of these two types of opportunities for the entrepreneurial process. Specifically, we develop a typology linking opportunity type, entrepreneurial discovery process and prior experience.

Theroetical Background

Research on the Role of Opportunities

While much research in the field of entrepreneurship focused on the role of the individual entrepreneur, the person-centric approach has been less than satisfactory in explaining the -phenomenon of entrepreneurship (Gartner, 1990). The limited success of this research is due to the somewhat myopic focus on the entrepreneur. More recently, a general framework for the field of entrepreneurship has been developed that looks at not only the role of the individual entrepreneur but also the role of the opportunity (Shane, 2003). This framework has refocused attention away from the exclusive focus on the entrepreneur towards an understanding of the nexus of enterprising individuals and opportunities (Venkataraman, 1997). The emergence of this framework mandates a better understanding of the role of opportunities in the entrepreneurial process (Eckhardt & Shane, 2003).

Consistent with prior definitions of entrepreneurial opportunities (Eckhardt & Shane, 2003; Casson, 1982), we define entrepreneurial opportunities as “situations in which new goods, services, raw materials, markets and organizing methods can be introduced through the formation of new means, ends or means-ends relationships.” Almost a decade ago, research on entrepreneurial opportunities was identified as “virgin territory” (Venkataraman, 1997). Despite the continued call for research on entrepreneurial opportunities and its increasingly important role in the individual-opportunity nexus, the dearth of research has continued.

One notable exception is a theoretical work that identifies taxonomies of entrepreneurial opportunities (Eckhardt & Shane, 2003). In this work, three different taxonomies of entrepreneurial opportunities are identified: the locus of changes, the source of the opportunities, and the initiator of the change. Drawing on previous literature, these taxonomies are offered to provide guidance for future research in understanding the entrepreneurial process. First, drawing on Schumpeter (1942), the locus of change taxonomy suggests the five different foci of changes that have been incorporated into the aforementioned definition of an entrepreneurial opportunity. Second, the taxonomy on sources of opportunities considers four types of opportunities resulting from: information asymmetry vs. exogenous shocks, supply versus demand side opportunities, productivity opportunities vs. rent-seeking opportunities and the catalysts of change that generate opportunities. Third, the taxonomy of the initiator of the change identifies different entities (e.g. government, universities, competitors, etc.) that may initiate changes that lead to entrepreneurial opportunities.

Clearly, the theoretical work on the identification of these three taxonomies is an encouraging step in research on the role of opportunities. Greater scrutiny of these taxonomies, however, may be in order. Upon closer examination, only one of the three taxonomies (locus of change) directly addresses the opportunity itself while the other two address antecedents of the opportunity. For example, the taxonomy of change initiator examines how “different types of entities initiate the changes that result in entrepreneurial opportunities” rather than the entrepreneurial opportunity itself. In addition, very little empirical work has done utilizing the taxonomy of locus of change. While these latter two taxonomies may be of great interest, it may be premature to shift attention away from the opportunity itself given the relative infancy of research in the area. We believe a more thorough understanding of the specific attributes of the opportunity may be necessary before proceeding to an examination of the antecedents of the opportunity.

The Tacit Distinction

In the domain of knowledge management, the nature of knowledge has been distinguished by the degree to which the knowledge is tacit or codified. The codification of knowledge, with reference to codes, relates to the degree to which knowledge is able to be made explicit or documented primarily through codes (Cowan, David and Foray, 2000). Knowledge is codified to the extent that it can be articulated or transmitted in formal, symbolic language. As such, one can draw the conclusion that “everything that is articulable is codifiable, and that everything that has been articulated is actually codified (Johnson, Lorenz, & Lundvall, 2002).” By comparison, tacit knowledge is context-specific, more challenging to articulate and represented by the absence of agreed upon language. Polanyi (1966) suggested we know more than we can communicate. As such, the tacit dimension refers to something that is difficult to codify or communicate. Yet, rather than existing as mutually exclusive categories, these two forms of knowledge exist along a continuum that has been useful for explicating such issues as the transferability of the knowledge (Hansen, 1999). In the entrepreneurship literature, the tacitness of knowledge is an underlying core concept of Austrian economists (Adaman & Devine, 2002, p.335). It can be argued, however, that the assumption that tacitness can only be an attribute of the knowledge rather than an attribute of the opportunity suffers from the same person-centric approach to entrepreneurship that plagued the early research in the field.

For our purposes, we borrow this distinction of tacitness and codification but apply it not as an attribute of knowledge of the entrepreneur but rather as an attribute of an entrepreneurial opportunity. Based upon this application, we propose that there are two different types of opportunities – codified and tacit – and that the type of opportunity influences the entrepreneurial process. Integrating this distinction of tacitness and codification with our definition of an entrepreneurial opportunity, we define a codified opportunity as a situation that is well-documented, articulated or communicated, in which a person can create a new means-ends framework for recombining resources. As before, this recombination can include new goods, services, raw materials, markets and organizing methods. For example, a codified opportunity may be illustrated by a franchise in which the opportunity is clearly documented. By comparison, a tacit opportunity is a situation that is difficult to codify, articulate or communicate, in which a person can create a new means-ends framework for recombining resources.

Although some researchers have suggested “opportunities rarely present themselves in neat packages” (Venkataraman, 1997), we believe the possibility does exist that opportunities may come in the form of well articulated “neat packages” termed codified opportunities. In addition, given the preponderance of examples such as franchises or clearly articulated opportunities, we believe the occurrence of codified opportunities (rather than being rare) is quite common.

Proposition 1: Codified opportunities are more prevalent than tacit opportunities.

The Individual-Opportunity Nexus

While the role of the opportunity is of significant importance to the entrepreneurial process, it is the nexus of the individual and opportunity rather than the opportunity in isolation that represents the ability to further our understanding of the phenomenon of entrepreneurship (Shane, 2003). As such, if different types of opportunities are identified, it is necessary to bring the entrepreneur back into the picture to understand the relationship between the type of opportunity and the entrepreneurial process.

Systematic Search vs. Discovery

Two different processes have been postulated in the extant literature as paths to the identification of an entrepreneurial opportunity – systematic search and discovery (for a brief review of these processes, see Shane, 2000). In the case of systematic search, prospective entrepreneurs intentionally seek out entrepreneurially opportunities to the extent that the marginal benefits (information) gained by the search exceed the marginal costs (time) of conducting the search (Stigler, 1961). Implicit in the search model is the assumption that people know the outcome for which they are searching. By comparison, Austrian economists have argued in favor of a discovery rather than systematic search process. From this perspective, an “opportunity for pure profit, by its nature, cannot be the object of systematic search (Kirzner, 1997)” because it is “unknown until it is discovered (Kaish & Gilad, 1991.)” Yet, this paradox of being unable to search for something unknown is not unique to the field of entrepreneurship but is rather endemic to our own experience as researchers: the experience of searching for a problem, as a scientist searches in pursuit of a discovery.

To see a problem that will lead to a great discovery is not just to see something hidden, but to see something of which the rest of humanity cannot even have an inkling. All this is commonplace; we take it for granted without noticing the clash of self-contradiction entailed in it. Yet Plato pointed out this contradiction in the Meno. He says that to search for the solution of a problem is an absurdity; for either you know what you are looking for; and then there is no problem; or you do not know what you are looking for, and then you cannot expect to find anything. (Polanyi, 1966, p.22)

The argument presented by Plato and echoed by the Austrian economists seems contingent upon the “nature of the opportunity” or something inherent in the problem. That is, one cannot search for something that one does not know exists because the opportunity is “hidden” (Polanyi, 1966) or “utterly overlooked” (Kirzner, 1997). The attribute of tacitness solves the paradox of search for the Meno and potentially for entrepreneurship. While an opportunity cannot be searched when it is unarticulated, undocumented, and tacit, it may be possible to search for an opportunity that is well-documented, articulated, and codified. As such, we argue that the process of the recognition of the opportunity is contingent upon the type of entrepreneurial opportunity. Different types of opportunities are related with different recognition processes. We concur with the discovery process offered by Austrian economists in the case of tacit opportunities (Shane, 2000). However, to the extent that an opportunity comes in a clearly articulated, well-documented neat package, we argue that codified opportunities can and will be searched. The above argument suggests our second proposition.

Proposition 2: People are more likely to discover opportunities through systematic search when the opportunity is codified.

Role of Prior Knowledge

The role of prior knowledge has been identified as an important individual difference in the identification of entrepreneurial opportunities. As suggested in the extant literature, prior knowledge creates a knowledge corridor that allows people to recognize certain opportunities (Venkataraman, 1997; Hayek, 1945). Through qualitative research, Shane (2000) provided evidence that people’s prior knowledge of markets, how to serve markets and customer problems were related to their prior knowledge. This evidence provided an interesting look at why some people discover certain opportunities but not other opportunities.

While this work provides some evidence to a fundamental question in the entrepreneurship domain, we also believe the findings may be underspecified. Relying again on the distinction between tacit and codified opportunities, we suggest the utility of prior knowledge will be greater for certain types of opportunities. Knowledge obtained through prior industry work experience allows one to add to the stocks of knowledge in a specific domain. It is this domain specific knowledge that allows people to then identify previously unarticulated and undocumented opportunities within those domains. This argument leads to the suggestion of our third proposition.

Proposition 3: Prior knowledge will be more likely to lead to the discovery of tacit -opportunities.

Methods

Sample and Data Collection

To examine these propositions, we used a multi-method design combining both quantitative and qualitative data. First, we drew on archival data from the Panel Study of Entrepreneurial Dynamics (ERC/PSED). The PSED database was specifically developed and designed by the Entrepreneurial Research Consortium (ERC) to address questions related to nascent entrepreneurial activity (see Reynolds (2000) for an extended review of this database’s development and content). Accordingly, because the PSED sample is nationally representative, it provides an excellent means of complementing our qualitative data in order to enhance the interpretability and generalizability of the present research findings.

To augment the quantitative data, we conducted in-depth interviews using a sample of eight entrepreneurial opportunities. These opportunities were selected using theoretical sampling to minimize differential influences of industry and the environment (for a review, see Shane, 2003). As such, all eight opportunities (see Figure 1) were contained within the same industry and located within a half-mile radius of each other in a small mid-western city. In total, fifteen interviews totaling twenty-two hours were conducted.

Measures

Opportunity Type – Two Operationalizations. We used items from PSED to operationalize the variable of opportunity type (1 = codified; 0 = tacit). Because no single item fully captured the construct of codification, we used multiple items to derive our measure. In addition, given the exploratory nature of the research, we used two related but different operationalizations of opportunity type to examine the robustness of the findings.

For both measures, we used item Q190 to identify a sub-sample of all opportunities selecting only those that were independent businesses, franchises or purchases of existing businesses eliminating start-ups supported by a corporation or unknown responses. Using this sub-sample, we used item QA7d, [How much new information was acquired in recognizing this new business opportunity?”] “Was this new information widely available to others” to code opportunities as 1 for codified (if the information was widely available) or 0 for tacit (if the information was not widely available). Finally, we used two different items QA6 (“How much new information was acquired in recognizing this new business opportunity?”) and QK1i (“the opportunity may not be available”) in conjunction with QA7d to form the two measures of opportunity type.

For the first measure of opportunity type (1 = codified; 0 = tacit), we used items QA7d and QA6 to form our measure. The quantity of new information acquired (QA6) was used as a measure of documentation because it can be suggested that the greater the information is documented the more information can be acquired. If a moderate amount or a great deal of new information was collected, the opportunity was coded 1 for codified; otherwise it was coded 0 for tacit.

For the second measure of opportunity type (1 = codified, 0 = tacit), we used items QA7d and QK1i to form our measure. The future availability of the opportunity was used as a measure of the documentation of the opportunity because the more documented the opportunity, the more likely it would not be available in the future. This variable was scored on a five-point scale (1=completely disagree to 5=completely agree). Opportunities where the respondent either agreed or completely agreed were coded as 1 for codified. Opportunities where the respondent either disagreed or completely disagreed were coded as 0 for tacit.

Systematic Search. We used continuous responses (1=completely disagree to 5=completely agree) to item QK1j “I have engaged in a deliberate, systematic search for an idea for a new business” as the measure of systematic search. As such, higher scores indicated a search process occurred.

Prior industry experience. We used dichotomous responses (1 = checked; 0 = not checked) to item QA5b (“Which of the following led to your business idea? My experience in a particular industry or market”) as the measure of utility of prior industry experience in the recognition of the opportunity.

Results

Table 1 presents descriptive statistics and correlations. Both measures of opportunity type are highly correlated (p £ .01) suggesting evidence of convergent validity.

To examine Proposition 1, about the prevalence of different types of opportunities, we conducted a chi-square test of differences using the categorical variable (1 = codified and 0 = tacit) of opportunity type to determine if the distribution of opportunities differed from an equal distribution across opportunity type (see Table 2). Using both measures of opportunity type, we find evidence suggesting a meaningful difference in the rates at which these opportunities occur. Contrary to prior suggestions in the extant literature, both measures suggest strong support (p £ .01) for a greater prevalence of codified rather than tacit opportunities. The percentage of codified opportunities to total opportunities ranged from 0.64 to 0.81.

To explore Proposition 2, about the discovery process based on opportunity type, we conducted t-tests to compare the means of systematic search between opportunity types (see Table 3). For both measures of opportunity type, a positive and significant difference (t ranges from 2.22 to 3.53; p £ .05) between the group means of codified and tacit opportunities existed. As such, we find support for our proposition suggesting that codified opportunities are more likely to be identified through a systematic or intentional search process. Turning to the qualitative data, we also found evidence to support the relationship between an intentional search for an opportunity and the identification of codified opportunities. For example, all four of the codified opportunities were identified after an intentional search. In some cases, the search was narrowly targeted as in the case of Company E where the entrepreneur claimed he continued to search for the ideal location in a college town for a period of more than two years. By comparison, three of the four tacit opportunities were recognized when the entrepreneurs were not actively engaged in a search for an opportunity. In the case of Company D, the lead entrepreneur was busy with the launch of another business he had recently started when he simply “realized” the current opportunity.

To examine Proposition 3, about the role of prior industry experience in the discovery of the opportunity, we conducted a t-test to compare mean differences between opportunity types (see Table 3). For both measures, tacit opportunities were positively related to the role of prior industry experience in the discovery of the entrepreneurial opportunity. The relationship was positive and significant (p £ .05) for both measures of opportunity type. As proposed, we found positive support for this proposition suggesting the role of prior industry experience is significantly more important for tacit rather than codified opportunities. This relationship was also seen in the qualitative data. In all four cases, the entrepreneurs who recognized tacit opportunities had prior experience within the industry. More importantly, the prior experience was instrumental in recognizing the opportunity. For example, the lead entrepreneur, who identified a tacit opportunity of Company A, suggested, “I would have known nothing about the opportunity had I not previously worked in a coffee shop…The specific coffee shop experience naturally led us to identifying a coffee shop.” By comparison, only two of the four entrepreneurs who identified a codified opportunity had prior industry experience. In both cases, the entrepreneurs had previously explored opportunities in industries where they did not have prior industry experience.

Discussion

We have provided an exploratory look into the role of an opportunity attribute – the degree of tacitness or codification -- in the entrepreneurial process. These findings contribute to the scholarship of entrepreneurship by suggesting an important contingency in prior research on the opportunity discovery search process and the role of prior experience based on the type of entrepreneurial opportunity. Combining these findings, we offer a typology (see Figure 2) integrating opportunity type, the role of prior experience and the entrepreneurial discovery process.

The typology presented has several implications. First, the typology suggests that different types of opportunities will be discovered through different types of processes. While different discovery processes have been suggested by the neoclassical view of systematic search and the Austrian view of recognition, our typology suggests the type of recognition process is contingent upon the type of entrepreneurial opportunity itself. That is, in the case of codified opportunities, (e.g., a franchise), the neoclassical view of systematic search is possible. However, in the case of tacit opportunities, the Austrian view of recognition is much more likely given the unarticulated, tacit nature of the opportunity.

Second, the typology also offers a perspective on the role of prior knowledge. While prior knowledge was found to be more useful in discovering tacit opportunities, no such prior knowledge was observed in the discovery of codified opportunities. Even without the benefit of prior industry experience, potential entrepreneurs were able to systematically search for codified opportunities. In can be argued, however, that in the case when the opportunity is tacit, and no prior knowledge existed, the opportunity would tend to be overlooked as suggested by Austrian economists (Kirzner, 1997). Without the prior knowledge and associated knowledge corridor, the opportunity would not be recognized by the potential entrepreneur. In the case when prior knowledge existed and the opportunity was codified, the search could be more focused on opportunities within the field of experience.

While we did not explore the relationship between opportunity type and risk, a codified opportunity should represent a lower degree of risk given its clearly articulated nature. Theoretically, this argument can be made. The pursuit of new opportunities involves greater risk because time, effort and money must be invested before the distribution of returns is known (Knight, 1921; Venkataraman, 1997). Knight (1921) distinguished between risk (where the probability distribution of outcomes could be calculated) and uncertainty (where the distribution of outcomes was unknowable). Imploring this Knightian distinction between risk and uncertainty, we suggest that a codified opportunity lends itself more to a calculation of probable outcomes due to the clear articulation of the opportunity. Through our qualitative data, we saw evidence of perceived lower risk in the case of codified opportunities. For example, one of the entrepreneurs from Company G suggested their opportunity “had very little downside” because they were buying a “proven business model.” Clearly, we believe future research should examine the trade-offs made between expected value and risk based on opportunity type.

Limitations And Future Research

Our work is limited is several areas. First, we did not have a direct measure of opportunity type. While the use of a nationally representative data set offers several benefits, we used existing measures as a proxy for opportunity type. However, the use of multiple measures of opportunity type and mixed methodology did allow further support for the robustness of our findings. Nonetheless, future research is needed to clearly define how to appropriately measure the degree of tacitness of an opportunity. Borrowing from existing measures in the field of knowledge management, researchers could export and modify these measures to examine the tacit dimensions of an opportunity with specific emphasis on the degree of articulation or documentation.

Second, in the current study, we viewed the opportunity as an objective phenomenon (Shane & Venkataraman, 2000). While the objective view of the opportunity represents an interesting direction, other researchers have argued for different views on the opportunity (Sarasvathy, Dew, Velamuri, & Venkataraman, 2003). Further research should examine if degree of codification has both objective and subjective components. For example, it may be useful to have several people examine the same opportunity to see if the degree of codification is only an objective attribute of the opportunity or both an objective and subjective attribute.

Third, our study focuses only on the opportunity type and recognition process implications. Future research is needed to explore the influence of opportunity type on important entrepreneurial outcomes such a performance. For example, the extant literature argues that opportunities differ in expected value (Eckhardt & Shane, 2003). However, we did not examine the expected value of tacit and codified opportunities. While the distinctive advantage offered by a tacit opportunity may lead to a higher expected value, the potential lower risk of a codified opportunity may also impact the expected value of the opportunity. We do not know whether or not tacit or codified opportunities have higher expected values. Future research may help guide both researchers and practitioners in this regard.

Conclusion

The current research identified two different types of entrepreneurial opportunities – tacit and codified. Based upon the findings in this study, the type of entrepreneurial opportunity was related to both the individual differences in past experience and the discovery process of the opportunity. Continued research in the area of entrepreneurial types is needed to continue to move the field of entrepreneurship forward.

CONTACT: Charles Matthews, University of Cincinnati, Cincinnati, OH, charles.matthews@uc.edu

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