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LITERATURE REVIEW

Christensen, Madsen, & Peterson (1989; p. 3) defined opportunity recognition as, "either a) perceiving a possibility to create new businesses, or b) significantly improving the position of an existing business, in both cases resulting in new profit potential." In one of the earliest relevant writings on the subject, Vesper (1980) cited several ways that new venture ideas may be identified and suggested the possibility of a systematic search effort. However, systematically searching for ideas may not always be the best method of identifying entrepreneurial opportunities. Teach, Schwartz, & Tarpley (1989), for example, used field survey data to examine how software firms identified their first market opportunity. They found that firms founded on "accidentally" discovered venture ideas and which had not been subjected to formal screening achieved break-even sales faster than those firms that had undergone more formal search and planning techniques. Teach, et al. (1989) also found different styles of opportunity recognition among the software firm presidents studied. Only about half favored systematic approaches to searching for opportunities.

Rather than focus on search, other theorists have investigated opportunity recognition as an innate skill or cognitive process. Gaglio & Taub (1992), for example, examined whether the concept of entrepreneurial alertness to new business opportunities can be operationalized as a set of unique cognitive skills and strategies. When a sample of business owners and corporate managers were presented with an ambiguous business situation and asked to search for new business opportunities or ideas, they found that the two groups appeared to approach the task differently. Similarly, based on Kirzner's (1979) work, Kaish & Gilad (1991) compared 51 company founders with 36 executives in one large company and found that entrepreneurs spent more time searching for information on their own time and used different information sources than executives including paying special attention to cues about the risks of new opportunities. The findings reinforced the idea that entrepreneurs are opportunistic learners.

A third area of inquiry related to the environmental influences on the opportunity recognition process, both social and business. For example, Long & McMullan (1984) found support for a four-stage model of opportunity identification. The first stage was labeled pre-vision and refers to uncontrollable and controllable factors such as environmental and job forces as well as venture alertness cultivation. Bhave (1994) identified two types of opportunity recognition in his process model of venture creation. First, was externally stimulated opportunity recognition, where the decision to start a venture preceded opportunity recognition. These entrepreneurs engaged in an ongoing search for opportunities which they filtered, massaged, and elaborated in an opportunistic fashion. An alternative path 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.

Although "alertness" and individual search techniques are certainly important concepts, we must also recognize that individuals are limited in their ability to process and store information which results in bounded rationality (Simon, 1976). One's network can help expand the boundaries of this rationality by expanding knowledge from which to assess and determine a course of action. From this perspective, it is possible that through an entrepreneur's network a solid business idea/opportunity can be identified, screened and assessed, and then, if appropriate, acted upon. Christensen & Peterson (1990) examined the sources of new venture ideas using four structured case field studies with 15 ventures and a survey of 76 companies. One of their primary conclusions was that, in addition to profound market or technological knowledge, specific problems and social encounters are often a source of venture ideas.

From several of the above studies we can see that entrepreneurs' networks were often found to be important to opportunity recognition; however, it is not specifically clear how they may be important. To address these issues, we turn our attention to the literature on social networks. In his classic paper on the strength of weak ties, Granovetter (1973) argued that weak ties act as "bridges" to information sources not necessarily contained within an individual's immediate (strong-tie) network. For most people, their closest friends and/or relatives (strong ties) will all know each other, but casual acquaintances (weak ties) will remain anonymous to the "inner circle." Yet, based on Granovetter's (1973) discussion, the casual acquaintance is more likely to provide unique information than are close friends because most people have more weak ties than they do strong ties. Also, there are many access points between the individual and strong ties (if one friend does not reveal information another one will). In contrast, there is only one connection to the casual contact and thus only one connection to the information.

Burt's (1992) work on "structural holes" follows a rationale similar to the weak ties argument. He argues that it is not the strength of the relationship between network ties that predicts access to unique information, but rather the "spaces" between network relationships. Defining the space between nonredundant contacts as "structural holes," he shows the potential benefits and importance of the holes within a network. While a large network can offer more information, if an entrepreneur has a highly dense network (one where everyone knows everyone else) the entrepreneur will be exposed to redundant information. Theoretically, an entrepreneur with a network which contains many structural holes will have access to a much more expansive and diverse level of knowledge. This can give him a competitive advantage in terms of recognizing and taking advantage of opportunities by exposing him to greater quantities of nonredundant information. To summarize, based on the weak-tie and structural hole arguments, a potential entrepreneur who only interacts with a small group of tight-knit friends has a much smaller chance of obtaining valuable information about a potential entrepreneurial opportunity than one with an extensive network of contacts that includes many weak ties.

Based on this review of the literature, the remainder of the paper will explore the opportunity recognition perceptions and behaviors of entrepreneurs, as well as examine the importance of social networks to entrepreneurial opportunity recognition. The next section describes the methodology used in this study.

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