Frontiers of Entrepreneurship Research 1995

Frontiers of Entrepreneurship Research
1995 Edition

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    FRONTIERS OF ENTREPRENEURSHIP RESEARCH 1995.


    OPPORTUNITY RECOGNITION BY SUCCESSFUL ENTREPRENEURS
    A PILOT STUDY

    Gerald E. Hills, University of Illinois at Chicago

    ABSTRACT

    A small group of highly successful entrepreneurs were selected and they were determined to, 1) have engaged repeatedly in opportunity recognition behaviors, 2) perceive their own opportunity alertness as "special," 3) disagree among themselves regarding opportunity recognition as a deliberate process, but with half strongly disagreeing that it is deliberate, 4) perceive certain information sources for identifying ideas as particularly important, and 5) perceive formal marketing research for evaluating opportunities as less important than their "gut feel."

    INTRODUCTION

    First I would like to share a personal note. I first became interested in opportunity recognition after having observed such entrepreneurial behaviors. Specifically, guest entrepreneurs to the university were often taken to the top floor of the one tall building on campus to be given an aerial tour. Perhaps eight times out of ten they looked down and said, "Gerry, do you know who owns that land?" They were referring to the one vacant lot in the area, owned by the Chicago School Board. This striking sensitivity or alertness to opportunity combined with my marketing discipline background, compelled me to pursue this topic.

    LITERATURE REVIEW

    Entrepreneurship is a process and opportunity recognition occurs in the early stages, prior to venture launch. Yet it may also occur in greater and lesser degrees throughout the life of the enterprise and the life of the entrepreneur. Although opportunity evaluation has been treated substantially in the academic literature, opportunity recognition has only received attention in recent years. Fortunately, significant contributions have been made in conceptualizing the phenomenon and empirical studies have begun to generate new knowledge. Yet there is still very little known about the sensitivity of entrepreneurs to opportunities or the cognitive processes they use to identify opportunities. We also know very little about their self perceptions regarding this phenomenon.

    Even definitions of entrepreneurship have increasingly focused on opportunity as existing at the heart of our understanding of the phenomenon. In one of the earliest relevant writings in the entrepreneurship field, Vesper (1980) cited several ways that new venture ideas may be identified and suggested the possibility of a systematic search effort. Long and McMullan (1984) proposed a model of the opportunity identification process with four stages including pre-vision, point of vision, opportunity elaboration, and the decision to proceed. Pre-vision is affected by both uncontrollable and controllable factors such as environmental and job forces as well as venture alertness cultivation, moonlight venturing, and job selection (p. 575). Two exploratory studies provided empirical evidence in support of this model.

    Kaish and Gilad (1991) tested three hypotheses derived from the theoretical writings of Kirzner (1979) and compared 51 founders of companies with 36 executives in a large company. Entrepreneurs spent more time searching for information in their off hours, employed different information sources than executives and paid special attention to risk cues about new opportunities. The findings reinforced the idea that entrepreneurs are opportunistic learners, but not necessarily in a verbal, social networking manner.

    Teach, Schwartz and Tarpley (1989) examined how software firms identified their first market opportunity with a field survey. Statements about the recognition of opportunities were analyzed and four distinct clusters were found. The Searchers believed in doing one's homework as part of a deliberate search process; the Pin Stripes had a strong commitment to formal planning and evaluation processes; the Innocents developed their software on their own time, not on that of their employer; and the Blue Jeans saw product development as an accidental process and eschewed formal planning and evaluation.

    Christensen and Peterson (1990) examined the sources of new venture ideas using four structured case field studies with 15 ventures and a survey of 76 companies. They concluded that specific problems and social encounters are often a source of venture ideas, but also that profound market or technological knowledge is a prerequisite for venture ideas.

    Gaglio and Taub (1992, pp. 136-147) examined whether the concept of entrepreneurial alertness to new business opportunities can be operationalized as a set of unique cognitive skills and strategies. A small sample of business owners and corporate managers was presented with an ambiguous business situation and asked to search for new business opportunities or ideas. The analysis found that the two groups appeared to approach the task differently.

    Bhave (1994), as part of his process model of venture creation, found two types of opportunity recognition. First was externally stimulated opportunity recognition, where the decision to start a venture preceded opportunity recognition. These entrepreneurs engaged in a search for opportunities with filtration of opportunities, massaging of ideas, and elaboration. Opportunistic search, as cited by Cyert and March in 1963, was pursued. An alternative path found was internally stimulated opportunity recognition. Here the entrepreneurs discovered problems to solve or needs to fulfill and only later decided to create a venture and become an entrepreneur.

    RESEARCH OBJECTIVES

    There are diverse research objectives due to the exploratory nature of the study in a new subject realm. They were as follows:

    To identify the variety and quantity of selected opportunity recognition behaviors;
    To measure self-perceived entrepreneurial alertness;
    To test often proposed fundamental causes of entrepreneurial opportunities;
    To explore the concept of opportunity recognition as a deliberate process with many related issues;
    To measure the relative importance of information sources for identifying major new business opportunities; and,
    To measure entrepreneurs' perceptions of the role of market research in evaluating ideas and the criteria they use for such evaluation.

    METHODOLOGY

    It was decided to identify a sample of exceptionally successful entrepreneurs in the Chicago area. Over a three year period, more than 100 entrepreneurs were searched for and identified, both for this study and to be inducted into the UIC Entrepreneurship Hall of Fame. A qualitative as well as a quantitative rating scale were used by trained MBA students (who possessed prior business experience) and then faculty and professional staff rated the entrepreneurs. The better candidates were then personally interviewed and rated by Arthur Andersen Enterprise Group professionals, using a questionnaire developed by the writer. The information obtained for each individual was also confirmed to be valid. Finally, all of the information was sent to a distinguished panel of judges, comprised of private sector professionals and previously inducted entrepreneurs. The final selection was then made by the judges.

    This is the first stage of a study which will eventually sample and compare the perceptions of these most successful entrepreneurs to small business owners and corporate managers as well as to the general public. Cross-cultural comparisons will also be made in Brazil and Poland.

    For this pilot study, a small subsample of 15 successful entrepreneurs was selected and invited to participate in focus groups.* Four focus groups have been conducted to date by the writer, yielding a rich discussion of opportunity recognition and related issues. Personal interviews were then conducted to obtain the structured responses reported in this study. In addition to numerous new items, the questionnaire replicated with permission selected items from the above noted studies by Teach, Schwartz and Tarpley and Christensen and Peterson.

    FINDINGS

    It may be seen in Table 1 that the entrepreneurs have a considerable experience base with opportunities. All of them have pursued major, new business opportunities in the past five years, with 50 percent having pursued 3-4 opportunities and 29 percent 5-10 opportunities. Eighty-six percent are the founder or cofounder of the business and 92 percent started a major new part of the business. Thirty one percent had acquired a new type of business. Eighty percent had ideas in the past month which "could have possibly become a new business" and 85 percent in the past year. Also, 60 percent had identified other types of significant opportunities in the past month. Finally, it is striking that many of the new business opportunities identified were unrelated to their existing business. These opportunity recognition behaviors are impressive, both in their variety and quantity. As just noted, I plan to collect data from other, more representative business owners and non-business owners to provide comparisons.

    (Table 1)

    Table 2 reports the results of several entrepreneurial alertness measures. All but one of the respondents perceived themselves as having a "special alertness or sensitivity toward opportunities." All of the other measures find consistent results. They see themselves as opportunistic, as seeing more opportunities than non-business owners, and they enjoy thinking about opportunities. However, although more than half say they can spot an opportunity better than professional researchers, more than a third are not sure. More than half "strongly" see themselves as opportunistic over several measures, a striking finding despite the expectation that the results would be supportive of this conclusion.

    (Table 2)

    In Table 3, several of the measures are replicated from Christenson and Peterson's (1990) work. Although the entrepreneurs overwhelmingly agreed on the need to focus on the needs of a specific customer group, more than half disagreed that the business idea for their businesses was strictly market driven. More than three-quarters disagreed that the business idea was technology driven. The greatest support was found for business opportunities arising in connection with a solution to a specific problem. More than three quarters strongly agreed, and all but one respondent agreed. This corroborates my advice to students in recent years to solve a heartfelt problem rather than just satisfy a need. The responses are widely split over the statement that ideas for new business opportunities require a particular market or technological insight. Overall, the support for these causes of entrepreneurial opportunities is not as strong as expected.

    (Table 3)

    Table 4 has a wide array of items relating to identifying opportunities, many of which address the process. Several items are replicated from Teach, Schwartz and Tarpley (1989). More than 90 percent agree that identifying opportunities is a process rather than a one-time occurrence and that an idea should be developed over time. Nearly half, however, agree that the problem is not to get the idea, but to get capital and other resources. Also, more than half agree that ideas are a dime a dozen--evaluation is the key. Everyone agreed that creativity is important to identifying business opportunities and nearly half said they set aside a few minutes each day or week to be creative. There is considerable support for the idea that opportunities are often related and one leads to another. Also that immersion in a particular industry and marketplace is very important. The basic idea underlying Ronstadt's corridor principle (1988) receives further support with over 90 percent agreeing that once in the market, one must be prepared to quickly adjust a new product/service to what the market requires. This is consistent with "listening extremely well to what customers say" and the importance of being in frequent, direct contact with customers. Although other people often bring ideas to the entrepreneurs, cooperating with other companies to identify ideas receives mixed support. Most of the companies "experiment" with new ideas which results in both failures and successes. Half of the entrepreneurs strongly disagreed that they engaged in a deliberate effort to search for an idea to start a business. Yet half also strongly disagreed that it was an accidental process. More than one-third, however, agreed that they engaged in a deliberate search, a sizable minority. Nearly half developed the business concept while employed by another firm, although half did not. Only about one-third claimed the business ideas as theirs alone. Two-thirds knew who their first customers would be before introducing their first product/service. Formal methods to develop and refine the original ideas were not used by most of the business owners. Informal procedures were employed, however. Imitation played a role with half of the respondents saying that a similar business concept was actually seen in another context.

    (Table 4)

    In Table 5, sources for identifying major new business ideas are rated in importance, and some of the most important sources are customers, employees, suppliers, personal friends, professional acquaintances and magazines and trade publications. Some of the least important are patent filings, technical literature, strangers, libraries, distributors, investors, and hobbies. Prior employment yielded only mixed results.

    (Table 5)

    Finally, Table 6 presents the results on the evaluation of new business opportunities. It may be seen that all of the entrepreneurs consider intuitive judgment or "gut feel" to be the most important part of judging market potential. More than 90 percent also agreed that the most important thing is to believe in the idea. At the same time, several items resulted in lukewarm to negative findings about formal market research. Several criteria for evaluating ideas were also presented. It is perhaps striking that most of the entrepreneurs agreed that only new business opportunities that fit their current strategies are acceptable. This is often assumed to be true of large companies, but less true of privately held companies. High value for customers and ability to assemble the right leadership team are considered particularly important in evaluating ideas.

    (Table 6)

    CONCLUSIONS AND LIMITATIONS

    A small sample and the preliminary analyses reported in this paper limit its value. Yet several findings are strongly supported or rejected by the entrepreneur respondents. The most fundamental finding is that the entrepreneurs strongly see themselves as having a special alertness to opportunity. At the same time, more than half agree that ideas are a dime a dozen--evaluation is the key. And that identifying opportunities is really a process of several learning steps over time. These and the numerous other issues herein are exciting, challenging issues to further address.

    REFERENCES

    Bhave, M. P. (1994). A process model of entrepreneurial venture creation. Journal of Business Venturing, 9, 223-242.

    Christensen, P. S. (1989). Strategy: Opportunity identification and entrepreneurship. Denmark: Aarhus University Institute of Management.

    Christensen, P. S. & Peterson, R. (1990). Opportunity identification: Mapping the sources of new venture ideas (paper presented at the 10th annual Babson Entrepreneurship Research Conference, April 1990). Denmark: Aarhus University Institute of Management.

    Cyert, R. M. & March, J. G. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice Hall.

    Drucker, P. F. (1985). Innovation and entrepreneurship. New York: Harper & Row.

    Galio, C. M. & Taub, R. P. (1992). Entrepreneurs and opportunity recognition. In N. C. Churchill, et al. (Eds.), Frontiers of Entrepreneurship Research. Wellesley, MA: Babson College, 136-147.

    Hills, G. (1985). Market analysis in the business plan: Venture capitalists perceptions. Journal of Small Business Management, 23, 38-46.

    Kaisch, S. & Gilad, B. (1991). Characteristics of opportunities search of entrepreneurs v. executives: sources, interest, and general alertness. Journal of Business Venturing, 6, 45-61.

    Kirzner, I. M. (1979). Perception, opportunity and profit. Chicago: University of Chicago Press.

    Long, W. & McMullan, W. E. (1984). Mapping the new venture opportunity identification process. In J. A. Hornaday (Eds.), Frontiers of Entrepreneurship Research. Wellesley, MA: Babson College, 567-590.

    Ronstadt, R. (1988). The corridor principle. Journal of Business Venturing, 3, 31-40.

    Teach, R. D., Schwartz, R. G., & Tarpley, F. A. (1989). The recognition and exploitation of opportunity in the software industry: A study of surviving firms. In R. H. Brockhaus, et al. (Eds.), Frontiers of Entrepreneurship Research. Wellesley, MA: Babson College, 383-397.

    Timmons, J. A., Muzyka, D. F., Stevenson, H. H., & Bygrave, W. D. (1987). Opportunity recognition: The core of entrepreneurship. In N. C. Churchill, et al. (Eds.), Frontiers of Entrepreneurship Research. Wellesley, MA: Babson College.

    *Thanks go to Timothy Hedrich and James Grosspietsch for their able assistance with data collection.


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