DOES ENTREPRENEURIAL EXPERIENCE INFLUENCE OPPORTUNITY IDENTIFICATION?
Deniz
Ucbasaran, University of Nottingham
Paul Westhead, University of Nottingham
Evidence suggests habitual entrepreneurs (i.e., those with prior business ownership experience) are a widespread phenomenon. Appreciation of the existence of multiple entrepreneurial acts gives rise to the need to examine differences between habitual and novice entrepreneurs (i.e., those with no prior business experience as a founder, inheritor or purchaser of a business). This paper explores differences between the attitudes and behavoirs of novice and habitual entrepreneurs in terms of opportunity identification. The study also reports findings on number of opportunities identified and pursued and the quantity and nature of information sources used in the search for opportunities.
Studies conducted during the 1960s and 1970s enhanced our understanding of the personalities, backgrounds, early experiences and traits reported by entrepreneurs and non-entrepreneurs. Results from these studies, however, failed (Low & MacMillan, 1988) to specifically focus upon the behavior of entrepreneurs particularly in relation to opportunity search, recognition and exploitation.
Several studies have made a distinction between habitual entrepreneurs and novice entrepreneurs (Kolvereid & Bullvåg, 1993; Westhead & Wright, 1998, 1999). Novice entrepreneurs are individuals with no prior independent business ownership experience in an independent business. In contrast, habitual entrepreneurs are individuals who currently own or have owned more than one independent business. In addition to the above work, several studies draw attention to the importance of entrepreneurial experience though they do not explicitly delineate between novice and habitual entrepreneurs (e.g. Chandler & Jansen 1992; Cooper, Folta & Woo, 1995; Reuber & Fischer, 1999). Since experiences are a key contributor to the development of knowledge, exploring the differences between novice and habitual entrepreneurs may offer some important insights into the heterogeneity of entrepreneurial behavior.
A small body of literature has explicitly examined the effects of entrepreneurial experience by comparing novice and habitual entrepreneurs. Much of this work has focused on differences between habitual and novice entrepreneurs with respect to their backgrounds and other characteristics. McGrath & McMillan (2000) suggest that habitual entrepreneurs have a set of characteristics in common which forms what the authors term the entrepreneurial mindset: they passionately seek new opportunities; they pursue opportunities with enormous discipline; they pursue only the very best opportunities and avoid exhausting themselves and their organizations by chasing after every option; and they engage the energies of everyone in their domain. Despite these exceptional qualities, few empirical studies have found that habitual entrepreneurs report superior business performance relative to their novice counterparts. At best, inconsistent relationships have been detected. Neither Kolvereid & Bullvåg (1993), Birley & Westhead (1993) nor Westhead & Wright (1998b, 1999) were able to identify performance differences between businesses founded by novice entrepreneurs and those founded by habitual entrepreneurs. Further, few studies have explored the differences between these two groups in terms of entrepreneurial behavior (e.g. opportunity identification and exploitation) with the exception of Alsos & Kolvereid, 1998 who explored business gestation practices.
Previous estimates have indicated that habitual entrepreneurship is an important phenomenon. Westhead and Wright (1998a) reviewing existing studies reported figures ranging from 11.5% to 45.5% for the United Kingdom. In the United States, Ronstadt (1986) and Schollhammer (1991) found that 63% and 51% of entrepreneurs were habitual entrepreneurs, respectively. Nevertheless, despite a plea over a decade ago that to really understand entrepreneurship there is a need to research entrepreneurs who had undertaken more than one venture (MacMillan, 1986), relatively few studies explictly focusing upon the behavior and attitudes of habitual entrepreneurs have been conducted (see Westhead and Wright, 1998b for a review).
While there has been a surge in the number of studies focusing on the entrepreneur as the unit of analysis and on the behavior of entrepreneurs (Ucbasaran et al., 2001a), relatively few studies have focused on the experience accumulated by entrepreneurs (Shane, 2000) and how this impacts on subsequent behavior. Further, theoretical work suggests that habitual entrepreneurs are likely to possess a different mindset than novice entrepreneurs (i.e. entrepreneurs with no prior entrepreneurship experience) (Ucbasaran et al., 2001b). This leads to the expectation that there will be variations in the behavior of habitual and novice entrepreneurs. By utilizing a human capital framework (as discussed below), we provide evidence that attempts to address the following broad research question:
How do habitual and novice entrepreneurs differ in their behavior with regards to opportunity identification?
Using evidence from a novel large-scale survey of 4,324 entrepreneurs conducted in 2000/1, which yielded a final sample of 773 usable responses, we focus on various aspects of opportunity identification behavior. First we examine variations among entrepreneurs with respect to the sources and quantity of information they utilize in identifying and evaluating opportunities. Second, we examine habitual and novice entrepreneurs with regards to their attitudes towards opportunity identification. Third, we investigate whether or not habitual entrepreneurs identify (not necessarily pursue) a greater number of opportunities than novice entrepreneurs. Finally, we explore differences in the most recent opportunity identified by novice and habitual entrepreneurs.
The conceptual framework underlying this work is based on a human capital approach to entrepreneurship. The term human capital includes accumulated work and other habits that may have a positive or negative effect on productivity both in market and non-market sectors (Becker, 1993). Entrepreneurs can leverage their human capital to gain access to and accumulate different types of resources (such as social and financial resources) over time that can be utilised to gain access to a predictable uninterrupted supply of critical resources (Cooper et al., 1994; Greene and Brown, 1997; Dahlqvist et al., 2000).
Since entrepreneurs (and firms) are heterogeneous with respect to their resources and capabilities, they are also likely to differ in the actions to formulate and implement strategy. Entrepreneurs with more diverse levels of human capital are purported to have the ability to develop relevant skills and contacts and are able to tap into dense information and resource and information networks. In general, studies reveal that businesses were more successful when owner-founders possessed greater amounts of human resources.
In this study, we use a human capital perspective to explain the dynamic entrepreneurial process. This perspective appreciates that habitual entrepreneurs can acquire resources during their entrepreneurial careers. Previous business ownership experience may provide entrepreneurs with unique resources (i.e., assets) that can add value to the entrepreneur’s subsequent activities. Two aspects of prior business ownership experience have been identified. First is the static aspect of experience that associates prior business ownership experience with assets and liabilities (Starr and Bygrave, 1991). Consequently, business ownership experience may influence an individuals subsequent entrepreneurial career as a founder and / or acquirer of businesses. Prior business ownership experience can be associated with assets (i.e., extended networks, increased expertise and wisdom, and enhanced reputation) as well as liabilities (i.e., entrepreneurs may be associated in dulled motivation, weak ties with relevant parties, hubris and denial, etc.). Second is the dynamic aspect which relates to the various learning techniques and cognitive behaviors displayed by experienced entrepreneurs in relation to their inexperienced counterparts. To a varying degree, habitual entrepreneurs evaluate and learn from their previous business ownership experiences. The extent to which experiences are evaluated is likely to be influenced by an entrepreneur’s cognitive thought processes. Further, entrepreneurial experience may influence these cognitive patterns and the manner in which information is subsequently processed.
One of the fundamental reasons for the fascination with entrepreneurs and the inventions that they develop centers on why and how they see new opportunities. An entrepreneurial opportunity invariably involves the development of some new idea that most others overlook. Very few studies have focused upon opportunity recognition and information search processes exhibited by different types of entrepreneurs (Alsos and Kolvereid, 1998). In addition few studies have looked at differences in the way these two groups of entrepreneurs exploit venture opportunities. While stocks of information create mental schemas providing a framework for recognizing new information, opportunity recognition and information search by entrepreneurs may be a function of an individual’s capacity to handle complex information (Venkataraman, 1997). Knowledge (and information) differences, cognitive differences and behavioral differences among entrepreneurs may in turn influence this capacity.
Simply being in possession of valuable information is insufficient for entrepreneurship. The ability to make the connection between specific knowledge and a commercial opportunity requires a set of skills, aptitudes, insights, and circumstances that are neither uniformly nor widely distributed (Venkataraman, 1997). The extent to which individuals recognize opportunities and search for relevant information will depend on the make-up of the various dimensions / aspects of an individual’s human capital.
Two perspectives relating to opportunity and search behavior have been identified (Kaish and Gilad, 1991; Woo, Folta and Cooper, 1992). With the first perspective, the entrepreneur is seen as an economic agent undertaking a conscious search for profit opportunities in targeted direction (Stigler, 1961; Caplan, 1999). This stream of research generally assumes that entrepreneurs know a priori where the invention needs to be made and can accurately weight the cost and benefits of acquiring new information relevant to the invention. Fiet (1996) argues that entrepreneurs invest in specific information surrounding a targeted invention enabling them to be in a better position to discover the new opportunities. The level and nature of knowledge acquired over time may influence the search for information. Individuals with no prior business ownership experience have fewer benchmarks to assess whether the information they have collected is appropriate to identify and exploit a business opportunity. Cooper, Folta & Woo (1995) have suggested that novice entrepreneurs would search for less information, due to their limited understanding of what is needed. Conversely, habitual entrepreneurs would attend to more signals and have better appreciation of the value of information being sought than novice entrepreneurs. It follows, therefore, that habitual entrepreneurs will generally seek more information than novice entrepreneurs. Contrary to expectation, Cooper, Folta &Woo (1995) detected that novice entrepreneurs, on average, sought more information than habitual entrepreneurs. However, their assertion is based on the assumption that all experienced entrepreneurs are ‘experts.’
Experience-based knowledge may initially direct attention, expectations, and interpretations of market stimuli, thus facilitating the generation of ideas (Gaglio, 1997). McGrath & MacMillan (2000: 3) suggest that habitual entrepreneurs avoid “analyzing ideas to death” and may therefore avoid deliberate, time-consuming and analytically correct models. Fiet, Piskounov & Gustavsson (2000) suggest that habitual entrepreneurs may be less likely to engage in extensive search strategies. In contrast, habitual entrepreneurs may be more likely to concentrate on searching within a more specific domain of venture ideas based on routines that worked well in the past. Ronstadt (1988) asserted that the best new venture opportunities may only be revealed when the individual is involved in a venture since greater information becomes available about relevant contacts, viable markets, product availability and competitive resources during this process. The impact of experientially acquired knowledge on information search suggests that novice entrepreneurs will search for more information than habitual entrepreneurs. Based on this discussion the following hypotheses are derived:
H1: Habitual entrepreneurs will search for less information than novice entrepreneurs in the opportunity identification process.
H2: Habitual entrepreneurs will utilize fewer sources of information than novice entrepreneurs.
The second perspective, argues that the search for discovery cannot be accurately modelled as a rational search process. Rather, the focus of attention needs to be on “entrepreneurial alertness,” the ability to see where products (or services) do not exist or have unsuspectedly emerged as valuable. Alertness exists when one individual has an ability to recognize the value of an opportunity when it presents itself while others do not (Kirzner, 1997). However, this approach largely ignores the possibility that there may be variations among entrepreneurs in the way opportunities are identified. Indeed, psychologists presume that all skills abilities, including alertness and opportunity identification, fall along continua and are best conceptualized and measured in these terms. Gaglio and Katz (2001) argue that Kirzner’s alertness theory relates to one extreme of such a continuum but does not explore the possibility of other points on the continuum.
Expert information processing theory may provide some insight into explaining the role of experience in opportunity identification. Evidence from the expert information processing literature suggests that there are differences between novices and experts in the way they process information. Often, these differences have been attributed (at least partly) to experience in the specific domain (Abelson and Black, 1986). Since their knowledge is organized into broad and complex structures, experts are able to make broader inferences, unify superficially disparate problems by underlying, often subtle and implicit, features (Glaser and Chi, 1988), and make qualitatively more sophisticated, critical judgements (Polanyi, 1962). Experts are also able to manipulate incoming information into recognizable patterns and then match the information more strongly and to appropriate actions (Lord and Maher, 1990). This capacity reduces the burden of cognitive processing and can result in two advantages (Hillerbrand, 1989): First, information can be more easily encoded in memory (providing further cognitive resources). Second, the expert’s attention can be concentrated on novel or unique material. As a result, habitual entrepreneurs may be able to spot opportunities far more frequently as they are better able to organize complex information in the environment. Further, because they have greater information processing capacity due to increased cognitive resources, the opportunities they identify may be more novel and innovative. Nonetheless, though habitual entrepreneurs may be more innovative with regards to the opportunities they identify, they may be more likely than novice entrepreneurs to identify opportunities in domains where they have had prior experience. While knowledge relating to a paricular market is likely to be crucial in identifying opportunities in that area (Shane, 2000), it may have the effect of narrowing the domain of search for opportunity identification. An entrepreneur’s previous investments and repetoire of routines (i.e. history) can constrain future behavior (Minniti & Bygrave, 2001). From the above discussion, we derive the following hypotheses:
H3: Habitual entrepreneurs will report different attitudes to opportunity identification than novice entrepreneurs
H4: In a given period, habitual entrepreneurs will identify a greater number of opportunities than their novice counterparts.
H5: With regard to their current business opportunity, habitual entrepreneurs will report higher levels of innovativeness than their novice counterparts.
H6: Habitual entrepreneurs will report higher levels of business similarity between their current business opportunity and their previous main business activity than novice entrepreneurs.
A structured questionnaire was designed to ascertain whether entrepreneurs had ever had an equity stake in more than one independent business. To address content validity issues, several leading practitioners and academics in the field of entrepreneurship were asked to comment on the structured questionnaire. A pilot study was also conducted prior to the main study in which novice, serial and portfolio entrepreneurs appraised the face validity of the questionnaire. Telephone interviews were conducted with six respondents (i.e., two respondents from each of the novice, serial and portfolio entrepreneur categories). No major problems were detected but suggestions relating to the phrasing of questions were incorporated.
Since there is no comprehensive list of novice, serial and portfolio entrepreneurs who have (an) ownership stake(s) in independent businesses in the UK, a pragmatic approach was taken in the construction of the sampling frame. Industry-sampling proportions were identified for a stratified random sample of private independent businesses located throughout the UK by four broad industrial categories (agriculture, forestry and fishing, production, construction and services) from summary tables detailing the population of legal units (or businesses) registered for Value-Added-Tax in 1999 (Office for National Statistics, 1999).
A stratified random sample (by industry) of 4,324 independent firms was drawn from a cleaned list of business names provided by Dun and Bradstreet. Given the nature of the businesses, the structured questionnaire was posted during September 2000 to a key single respondent in each firm, generally a founder and / or the principal owner.
During the four month data collection period, 12 responses were returned that indicated that the previous owner had retired, the business was no longer trading or had been taken-over, the business was a not for profit organization, the business was a subsidiary or the business had been recently floated on the Stock Exchange. These non-valid respondents were removed from the sampling frame. A further 54 respondents were not a founder and / or the principal owner of the business and were therefore considered non-respondents.
After a three-wave mailing, 773 valid questionnaires were obtained from a valid sample of 4,312 independent firms. Respondents to the survey indicated that they were either the founder or the principal owner of the surveyed business. A 17.9% valid response rate was achieved. This response rate was considered acceptable, and compares very favorably with similar studies (Storey, 1994) which generally have much shorter and less detailed research instruments.
To assess whether the results from the sample can be generalized to the population of UK independent businesses, chi-square and Mann Whitney ‘U’ tests were conducted. With regard to area, industry, age, legal status and employment size of the business, no statistically significant response bias was detected between the respondents and non-respondents. On these criteria, we have no cause to suspect this sample of independent firms is not a representative sample.
A variety of univariate and multivariate tests will be utilized to test the propositions and examine the data.
Differences between habitual and novice entrepreneurs with regards to information search were tested for using a non-parametric Mann-Whitney test. To measure the intensity of information search by these two groups, a search intensity measure was used based on a similar measure used by Cooper et al. (1995). Table 1 shows that in line with expectations, habitual entrepreneurs reported lower information search intensity than their novice counterparts. This difference, however, was not significant. In contrast to expectations, Table 1 also shows that habitual entrepreneurs utilized a greater number of information sources than novice entrepreneurs. This difference was not significant. Based on this evidence, hypotheses H1 and H2 cannot be accepted.
Attitudes towards opportunity identification were examined based on a number of statements derived from work by Hills et al. (1997). The extent to which habitual and novice entrepreneurs agreed with these statements is summarized in Table 2. Habitual entrepreneurs were significantly more likely to emphasize the importance of the following in comparison to novice entrepreneurs: ‘the problem is not to identify the idea but to obtain capital and other resources,’ ‘the consideration of one opportunity often leads to other opportunities,’ ‘I would describe myself as opportunistic,’ ‘I enjoy just thinking about and / or looking for new business opportunities’ and, ‘new business opportunities often arise in connection with a solution to a specific problem.’ This evidence provides some support for the hypothesis that habitual entrepreneurs will report different attitudes to opportunity identification than novice entrepreneurs (H3).
The items listed in Table 2 were factor analyzed, producing two factors (see Table 3). These factors were interpreted as summarizing two approached to opportunity identification; an ‘alertness’ approach and a ‘developmental’ approach to opportunity identification. Habitual and novice entrepreneurs were compared with regards to these two factors (using factor means). Table 4 illustrates that habitual entrepreneurs reported significantly higher levels of agreement with the ‘alertness’ approach to opportunity identification. Though habitual entrepreneurs also scored higher on the developmental approach to opportunity identification, the difference between the two groups was not significant. Overall, this evidence provides some support for H3 that habitual and novice entrepreneurs will report different attitudes to opportunity identification.
Table 5 demonstrates that, as expected, in a given period (past 5 years) habitual entrepreneurs identified (not necessarily pursued) a significantly greater number of opportunities. On average, novice entrepreneurs identified 1 opportunity (standard deviation 1.73), while habitual entrepreneurs identified 2 opportunities (standard deviation 2.07). This evidence supports H4.
With regards to the nature of the opportunity identified (i.e. the surveyed business), habitual and novice entrepreneurs were compared in terms of the level of ‘innovativeness’ and similarity with the entrepreneur’s previous main business or job. Supporting H5, habitual entrepreneurs reported significantly higher levels of innovation in their venture than novice entrepreneurs (based on measure derived from Manimala (1992)). Habitual entrepreneurs did not report higher levels of business similarity than their novice counterparts. Therefore, H6 cannot be accepted.
The study found no significant differences between habitual and novice entrepreneurs with respect to information search. This suggests that despite their experience, habitual entrepreneurs still search for information and utilize a variety of sources. With a given amount of information, however, habitual entrepreneurs may be more likely to identify opportunities. Indeed, the evidence in this study suggests that habitual entrepreneurs identified a greater number of opportunities than novice entrepreneurs (opportunities identified were clearly distinguished from opportunities pursued / exploited). Difference in opportunity identification between the two groups may be the result of differences in their cognitive mindset (Ucbasaran et al., 2002). An entrepreneur’s cognitive mindset may be influenced not only by their experience and knowledge but also other cognitive processes.
Differences in the mindset of habitual and novice entrepreneurs may manifest itself in terms of reported attitudes towards opportunity identification. The study found that habitual and novice entrepreneurs have different attitudes to opportunity identification. Habitual entrepreneurs highlighted that opportunities often emerge in connection to problems but also that one opportunity often leads to another. They also highlighted that while ideas are important obtaining the necessary resources and capital was also important. In this respect, opportunity identification may follow a developmental process suggesting that opportunities may emerge overtime. Habitual entrepreneurs were, however, also likely to emphasize the importance of spontaneity and alertness. This group was more likely to agree that they were opportunistic and that they enjoyed looking for and being alert to opportunities.
With regards to the nature of opportunities identified, habitual entrepreneurs reported significantly higher levels of innovativeness. One interpretation of this is that habitual entrepreneurs may have a unique mindset that allows them to not only identify more opportunities but more innovative ones. Ucbasaran et al. (2002) propose that habitual entrepreneurs may have a unique mindset that is influenced by a set of cognitive processes that allows this group to be distinguished from novice entrepreneurs even from the onset of their entrepreneurial career. These cognitive processes include a greater reliance on entrepreneurial heuristics that allow the entrepreneur to have at his/her disposal greater cognitive resources, which in turn facilitate higher levels of innovative activity.
The implications for researchers are that entrepreneurs are heterogeneous and this needs to be accommodated in the design of future studies. Differences among entrepreneurs in terms of human capital endowments, partly determined by previous entrepreneurial experience, need to be acknowledged when deriving generalizable conclusions. Future research should use a variety of multivariate techniques to explore the extent to which entrepreneurial experience influences opportunity identification. Researchers should also acknowledge that there may also be heterogeneity among these two groups. Extant research reports differences between habitual entrepreneurs who are involved in ventures sequentially and those who are involved in venture concurrently. Novice entrepreneurs may also be a heterogeneous group. While some novices may only ever be involved in one venture, other novice entrepreneurs may move on to become habitual entrepreneurs.
CONTACT: Deniz Ucbasaran, Business School, University of Nottingham, Jubilee Campus, Wollaton Road, Nottingham, NG8 1BB, UK; (T) +44 (0)115 8466665; (F) +44 (0)115 9515204; deniz.ucbasaran@nottingham.ac.uk
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