OPPORTUNITY RECOGNITION AS A CREATIVE PROCESS
Gerald E.
Hills, University of Illinois at Chicago
Rodney C. Shrader, University of
Illinois at Chicago
G. T. Lumpkin, University of
Illinois at Chicago
ABSTRACT
INTRODUCTION
LITERATURE REVIEW
METHODOLOGY
RESULTS
DISCUSSION
TABLE 1
TABLE 2
FIGURE 1
CONTACT
REFERENCES
Opportunity recognition (OR) represents one of the most important early aspects of entrepreneurship. Prior attempts to model OR have suggested that it is a multifaceted process influenced by many external factors such as the business environment, social forces and individual attributes. By contrast, this paper suggests that entrepreneurial opportunity recognition is a special case of the creative process (Wallas, 1926). Using responses to 31 OR items from a survey of 165 entrepreneurs, a factor analysis was conducted. Based on these findings and our theoretical arguments, we propose a creativity-based model of opportunity recognition.
Opportunity recognition (OR) is an important component of the entrepreneurial process. Entrepreneurs are often characterized by their ability to recognize opportunities (Bygrave & Hofer, 1991) and the most basic entrepreneurial actions involve the pursuit of opportunity (Stevenson & Jarillo, 1990). But what is opportunity recognition? Most scholarly attempts to model opportunity recognition have characterized it as the confluence of many factors such as the background of the entrepreneur and the influence of the business and general environment (Gaglio & Taub, 1992; Long & McMullan, 1984). Others have emphasized the social network context in which opportunities are conceived and tested (Singh, 1998) or the availability of resources (Timmons, 1994). Many such models depict opportunity recognition as a staged process (e.g., Bhave, 1994); often, however, the outcome of such a process is also defined as recognition (Christensen, Madsen & Peterson, 1994).
The purpose of this paper is to propose a somewhat different approach to understanding the opportunity recognition process. We suggest that opportunity recognition is a special case of the creative process. The elements of the creative process as modeled by Wallas in 1926 are still used today in scholarly studies of creativity (Csikszentmihalyi, 1996). Most scholars who ascribe to cognitive models of the creative process acknowledge the seminal contribution made by Wallas (e.g., Nystrom, 1979). In this paper, we suggest that the opportunity recognition process consists of the same elements of the creative process that were first introduced by Wallas (1926)—preparation, incubation, insight, and evaluation. Later versions of Wallas’ creativity model were updated to include a fifth element—elaboration (Csikszentmihalyi, 1996; Kao, 1989).
Drawing on extant opportunity recognition and new venture research, this paper briefly discusses each of these five dimensions as they relate to opportunity recognition. Then, we present the results of analyzing a survey of 165 entrepreneurs, including a factor analysis of 31 opportunity recognition items. Based on these findings and our theoretical arguments, we propose a model of the opportunity recognition process that builds on Wallas’ (1926) model of the creative process. Finally, we discuss the implications and suggest avenues for future research.
Prior research into the opportunity recognition process has tended to focus on the interaction of key variables. Timmons (1994) proposed a basic model that captures most of these variables and describes opportunities in terms of “fit” among three key elements—the entrepreneur, available resources, and the opportunity (or business concept) itself. The idea of marshaling resources and the nature of the opportunity itself are typical of OR models that highlight the characteristics of the external environment for opportunities (e.g., Bhave, 1994; Stevenson & Gumpert, 1985). Other opportunity recognition studies investigate the characteristics of entrepreneurs and how their background and know-how influence the process (e.g., Gaglio & Taub, 1992; Long & McMullan, 1984). Few opportunity recognition studies, however, have focused primarily on the creative aspects of the opportunity recognition process. This paper suggests that the stages of Wallas’ (1926) model of creativity provides the necessary steps for modeling opportunity recognition.
It is important to note that opportunity recognition as presented here is primarily an individual-level phenomenon. Although there are aspects of the opportunity recognition process that may involve an entrepreneurial team or an entrepreneur’s social network, the nature of the creative process is, especially in the early stages, typically an individual process. Thus, we regard opportunity recognition as a unique application of the creative process.
The stages of the creative process originated by Wallas (1926) include preparation, incubation, insight, and evaluation. Later, the notion of elaboration was added to the model to highlight the importance of advancing a creative idea (Kao, 1989). In the subsections that follow, each of these five elements is discussed in terms of how they relate to the process of opportunity recognition.
Preparation
Preparation refers to the base of experience and knowledge that precedes the creative journey (Kao, 1989). Such preparation is typically a conscious effort based on one’s interest and curiosity about a given domain (Csikszentmihalyi, 1996). Wallas’ original formulation included “interest,” that is, a compelling attraction to an area of study, as a preliminary step; later models have tended to integrate the interest component into the preparation phase. During the period of preparation, one becomes immersed and develops a sensitivity to the issues and problems in a field of interest.
In the context of opportunity recognition, preparation refers to the background and experience that an entrepreneur brings to the opportunity recognition process. As in the preparation that is necessary for artistic creativity, an entrepreneur generally needs a knowledge base to draw-on to identify opportunities. Such knowledge is derived from one’s personal background, training, work experience and knowledge of a field. This is consistent with prior research that indicates that 50 to 90 percent of start-up ideas emerge from a person’s prior work experience (see Bygrave, 1997 and Vesper, 1980). However, since potential entrepreneurs may be unaware that they will someday launch a new venture, the preparation is often neither systematic nor deliberate.
Previous research efforts to model opportunity recognition have often identified numerous factors that form the background for a recognition experience. Gaglio and Taub (1992), for example, refer to this collection of forces as a “pre-cognition stew.” These models have tended to emphasize external factors such as cultural forces and market demand. We agree that such factors are important, but argue that they form a background for a process that is essentially personal. As such, knowledge of and sensitivity to these forces form a part of a potential entrepreneur’s preparation.
Incubation
Incubation involves “mulling things over” (Wallas, 1926). It is the part of the process that occurs when a person is thinking about a problem or considering an idea. Discussions of the incubation phase often make reference to a specific problem that someone is trying to solve. But Campbell (1985) notes that incubation often goes on while a creative person is engaged in activities unrelated to a specific issue. Csikszentmihalyi agrees that during incubation, “ideas churn around below the threshold of consciousness” (1996: 79). This “subconscious” aspect of incubation highlights the importance of intuition to the creative process. However, among academics, there is disagreement over how or even if incubation takes place as Wallas originally proposed it (King, 1990).
Incubation refers to that part of the opportunity recognition process in which an entrepreneur is contemplating an idea or a specific problem. It does not, however, refer to conscious problem-solving or systematic analysis. Instead, it is typically an intuitive, non-linear, nonintentional style of considering possibilities or options. Incubation, because it involves the intermingling of ideas in an unstructured fashion, is the stage of the process in which the “new combinations” that Schumpeter (1942) emphasized might emerge.
Insight
Insight refers to the “eureka” experience. Whereas incubation refers to an ongoing process, insight refers to a moment of recognition. Wallas (1926) originally referred to this component as “illumination” and suggested that it is the point at which the whole answer or core solution springs into awareness suddenly and spontaneously. The experience, however, is not necessarily one that pushes the process forward, but instead may feed back to the incubation and preparation stages for further consideration, i.e., thinking about an idea unconsciously and drawing on past experience to understand it (Csikszentmihalyi, 1996).
With regard to opportunity recognition, we envision three different types of insights that may occur. First is the experience of spontaneous or momentary recognition of a business opportunity. This is the “aha” experience in a new venture context. Prior research suggests that entrepreneurs often have the experience of being immediately confident that an idea will work (Hills, 1995). The second would be the occasion when a person gets the idea that solves the problem s/he has been considering. In scholarly discussions of innovation, this is a frequently noted example of when creativity is most common (e.g., Nystrom, 1979). A third possibility is that it represents the moment when an idea becomes available to you via your social network. Recent research has indicated that entrepreneurs with a wider network of social contacts will identify more ideas and recognize more opportunities than entrepreneurs with fewer contacts (Singh, 1998). For entrepreneurs, therefore, the insight phase may consist of three different types of insights all of which are experienced as moments of illumination.
Evaluation
Evaluation is the phase in the process when insights are analyzed for their viability. Wallas (1926) termed this stage “verification” since it involves research into whether a concept is workable, whether the creator has the skills necessary to accomplish it, and whether it is truly novel enough to pursue. It is this aspect of creativity that Csikszentmihalyi (1996) suggests may be the most challenging because it requires the creative person to be brutally honest about the prospects for his/her new insight. Often, the results of this analysis feeds back to the incubation and preparation phases for more earnest consideration, both in terms of consciously learning more about the matter (preparation), and unconsciously contemplating issues that might make the insight more viable (incubation).
In the context of launching new ventures, evaluation involves feasibility analysis. Prior research has emphasized that what seems to be a good entrepreneurial idea may not, in fact, be a bonafide business opportunity (Timmons, 1994). In this phase of the process, ideas are put to the test via various forms of investigation such as preliminary market testing, financial viability analysis and/or feedback from business associates and others in one’s social network. The basic question is, “Is the business concept sufficiently valuable and worthwhile to pursue?” This is often the phase that tests an entrepreneur’s commitment and willingness to commit to a business launch (Campbell, 1985). Yet, neglecting this type of analysis is one of the frequently cited reasons for new venture start-up failures (Vesper, 1996).
It should be noted that at the evaluation stage, the process usually ceases to be primarily an individual and personal process and the opportunity is subject to consideration by others. The entrepreneur needs feedback from both knowledge experts and the marketplace regarding the viability of the business concept. By some standards, it could be argued that the OR process ends with evaluation because it either leads to elaboration or proves to be infeasible. Even so, we have included elaboration because it constitutes the next step in the entrepreneurial start-up sequence.
Elaboration
Elaboration is the stage in which the creative insight is actualized, that is, put into a form that is ready for final presentation. The idea of elaboration was not part of Wallas’ (1926) original model of the creative process which ended after evaluation/verification. Subsequent uses of the Wallas framework, however, have often included some version of it. For example, Csikszentmihalyi (1996) argues that elaboration is generally the most difficult and time consuming part of the process. Kao uses the term “exploitation” rather than elaboration to express, in the context of entrepreneurial creativity, the importance of “capturing value from the creative act” (1989:17).
In the case of an entrepreneurial business opportunity, elaboration represents the process of business planning. Assuming that a business idea has survived the evaluation stage and is still regarded as viable, this is the stage when many details are worked out. In that process, as small problems become apparent or impediments arise, the details of elaboration will also feed back to earlier stages of the creative process in terms of better preparation, more incubation, and further evaluation. Although both scholars and entrepreneurs often note that entrepreneurship involves risk taking, some researchers have argued that the better entrepreneurs endeavor to understand a new venture well enough before launching it that they do not perceive a high level of risk (Timmons, 1994). The process of elaboration is where the skilled entrepreneur engages in planning activities to reduce uncertainty.
Some theorists have criticized Wallas’ model as not useful to innovation because it is “purely cognitive” (King, 1990). Indeed, the Wallas model may be inadequate to explain entrepreneurship comprehensively or the innovation process in particular. But as a representation of the critical early aspects of entrepreneurial behavior—opportunity recognition—it seems to be very descriptive. Wallas’ model has also been criticized for being an overly-structured staged model whereas the creative process is recursive and not time sensitive. We agree that the process is often characterized by feedback loops and iterations that are necessary before an idea becomes verified, especially in terms of how insights are refreshed and updated by ongoing processes of incubation and evaluation.
Research Instrument
To derive the items used in the opportunity recognition questionnaire, five focus groups were conducted with seasoned entrepreneurs, yielding a rich discussion of OR and related issues. These results were valuable for questionnaire design. In addition to numerous new questionnaire items, the questionnaire replicated and modified selected items from studies by Teach, Schwartz and Tarpley (1989), Christensen and Peterson (1990), and Kaish and Gilad (1991). The questionnaire was extensively pre-tested in the focus groups as well as in a convenience sample of 47 business owners (not reported here). A wide range of questions were developed for the study. Respondents were asked to use a Likert scale to indicate the degree to which they agreed or disagreed with 31 different statements regarding the process of opportunity recognition. Specific questionnaire items used in the study are paraphrased in Table 1.
Respondents were also asked, “How many new, major business opportunities have you pursued (invested time and money) in the last 5 years?” The choices were 0, 1–2, 3–4, 5–10, and >10.
Sample
Data for the study were collected by a mail survey of business owners/entrepreneurs in the seven-county Chicago area. The sampling frame/list was obtained from Dun and Bradstreet (D&B). D & B randomly selected 1,500 organizations (from a total of 18,000) with revenues between $5 and $100 million. A cover letter and questionnaire were mailed to 1,419 entrepreneurs from the list. Eighty one of the individuals were eliminated either because the entity was a non-profit organization or the contact individual was not the owner, president, or CEO. Following the first mailing, another 128 of the 1,419 in the sample were eliminated because: 1) The firm had either moved or gone out of business and had not provided a forwarding address; 2) The individual to whom the survey was addressed was no longer with the firm; or 3) The business entity was a non-profit organization. This left a total potential sample of 1,291 businesses. Following the mail survey and one post card follow up, 187 useable surveys were returned for a response rate of 14.5 percent. To determine if there was a difference between the business owners who chose to complete and return the survey and those who did not, the annual revenues and number of employees of respondents and non-respondents was compared. This revealed no statistically significant differences between the two groups.
As noted above, 187 completed surveys were returned. However, for purposes of analysis six franchisees were deleted. In addition, any respondents who were not founders, cofounders, or who had not started a “major, new part of (the) business” were deleted. This left 165 respondents who could definitionally be considered by scholars to be “entrepreneurs.” The companies ranged in size from $3 million to $100 million in annual revenues and employed between 2 and 1,100 people. The mean values for this entrepreneurial sample were $16.7 million in annual revenues and 121 employees.
Analytical Technique
Principal components factor analysis with pairwise deletion and varimax rotation was used to determine underlying dimensions of opportunity recognition. Multiple regression analysis was used to analyze the relationship between each of the factors identified and the dependent variable: number of opportunities pursued.
The results of the principal components factor analysis indicated a six factor solution. All but one of the 31 items had factor loadings with an absolute value of .40 or higher; none had cross loadings higher than + .40. The six factor solution (see Table 1) explained 48% of the variance among the opportunity recognition items. The findings suggest that the components of the opportunity recognition process constitute a multidimensional construct consisting of factors labeled sensitivity to ideas, gut feeling, radical innovation, incremental innovation, prior experience and serendipity.
Each of these factors correspond roughly to the stages of the creative process as follows: Factor 5, prior experience, represents part of the preparation phase of the creative process. Responses that emphasized “immersion in an industry” (v. 25) and “my business idea stemmed from prior jobs” (v. 26) indicate the importance of experience in a given domain as preparation for opportunity recognition. The idea of incubation is suggested by Factor 1, sensitivity to ideas. Items such as “I enjoy thinking about ideas” (v. 5) and negative loadings on variables such as “I am not very creative” (v. 6) and “seeing opportunities is not natural to me” (v. 1) evidence the importance of creative musing as a natural process that leads to insights and breakthroughs. The insight phenomena is suggested by Factor 6, serendipity. The variables in this factor connote the three types of insights outlined above. “My business idea seemed to suddenly appear” (v. 27) sounds like the sudden insight suggested by the eureka experience. “An accidental process led to my business idea” (v. 28) is indicative of several types of unexpected sources for opportunities including when an idea is shared by a person’s social network. “Opportunities arise from specific problems” (v. 30) reveals the type of insight that might occur when someone is seeking a creative solution to a problem.
None of the factors seem to represent evaluation in the sense of systematic feasibility analysis. However, the remaining three factors all appear to suggest different approaches to evaluation and elaboration. Factor 3 is labeled radical innovation. The items in this factor suggest major revisions based on feedback from others. Four of the items suggested radical change: “My business offered something different” (v. 14) that was “technologically driven” (v. 13) and “led to big product changes” (v. 15) that “represented a major improvement” (v. 12). These changes were “market driven” (v. 16) and relied on “customer feedback” (v. 15) and “other people” (v. 17) in the development of new ideas. The second of these is Factor 4, incremental innovation. Respondents to this Factor view themselves as “innovation leaders” (v. 21). The negative loading on “Pursues existing, not new opportunities” (v. 22) suggests that they recognize the importance of being innovative but their ideas tend to be “like one seen in another context” (v. 19) suggesting an incremental approach to evaluating opportunities. Factor 2, gut feeling, seemed to represent elaboration without evaluation. This factor emphasizes trusting ones intuition and getting to market fast without benefit of “in-depth analysis” (v. 8), “formal market research” (v. 9) or “customer surveys” (v. 10). This suggests that one method of elaboration involves pursuing opportunities without engaging in formal evaluation.
Multiple regression analysis was conducted to determine if any of the factors related to the number of opportunities pursued (see Table 2). Regression results indicated that the three factors identified as part of the creative/opportunity recognition process—prior experience (Factor 5), sensitivity to ideas (Factor 1) and serendipity (Factor 6)—were not significantly related to the number of opportunities pursued. Our view is that these activities precede the actual pursuit of opportunities just as the early stages of creativity precede the elaboration of a creative idea. Thus, we would not expect them to be related to opportunities pursued. By contrast, the three factors that represent different aspects of evaluation and elaboration—gut feeling (Factor 2), radical innovation (Factor 3) and incremental innovation (Factor 4)—were all related positively and significantly to the pursuit of opportunities. The gut feeling factor had the strongest relationship to number of opportunities pursued (p < .01). Again, this is what we would hypothesize–entrepreneurs who elaborate on a business concept by following their gut feelings will be more likely to pursue many opportunities than entrepreneurs who engage in careful evaluation.
Based on these findings and our theoretical arguments, we have proposed a creativity-based model of opportunity recognition (see Figure 1). The model is consistent with Wallas’ (1926) original framework. Wallas proposed, in essence, a linear model wherein each activity followed upon the last. We also suggest that OR is a staged process that involves the possibility of feedback loops from the moment of insight or the results of evaluation to greater preparation and ongoing incubation. Preparation in this context refers to “doing one’s homework”—activities that may occur after an initial insight such as additional research, skills development and trend analysis. Both preparation and incubation precede the moment of insight in the proposed OR model, but our view is that incubation may not be dependent on preparation as Wallas suggested, but occur simultaneously. Regarding evaluation, the model acknowledges that some entrepreneurs proceed directly from an insight to elaboration. This is consistent with Singh’s (1998) finding that 13 percent of entrepreneurs claimed to have founded firms to pursue a given opportunity within days of recognizing the opportunity. Nevertheless, we also note that, for a majority of entrepreneurs, evaluation may be essential to the process of determining whether a business idea or an intuitive insight is in fact a bonafide opportunity. Thus, the opportunity recognition process depicted in Figure 1 includes all the stages joined by solid lines; elaboration is incorporated into the model via dashed lines to acknowledge that it is the next step in a venture launching process that begins with opportunity recognition.
Opportunity recognition is central to entrepreneurship (Kirzner, 1973). In this paper, we have argued that opportunity recognition is an example of the creative process as it was formulated by Wallas (1926) and used in numerous scholarly contexts (e.g., Csikszentmihalyi, 1996; Nystrom, 1979). Many entrepreneurship scholars have acknowledged that creativity is an essential aspect of entrepreneurship (e.g., Kao, 1989; Schumpeter, 1942). In the context of the resource-based view of the firm, Mosakowski (1998) identified four entrepreneurial resources that were likely to contribute to competitive advantage: creativity, foresight, intuition and alertness. Prior entrepreneurship research, however, has provided few examples of the mechanism of creativity in the process of new venture creation. This paper attempts to fill that gap by demonstrating how the opportunity recognition aspect of the entrepreneurial process is essentially a creative process. We also provided empirical support for that proposition. A survey of 165 entrepreneurs using 31 items that were derived from prior OR research and in-depth conversations with successful entrepreneurs was conducted. We then factored analyzed the items and obtained a six factor solution that tends to correspond to the opportunity recognition model in Figure 1.
In our model, entrepreneurial opportunity recognition refers primarily to the activities that are joined by solid lines. That is, OR precedes elaboration and in some cases does not even include evaluation as when an entrepreneur goes directly to elaboration based on a business insight. As Hills (1995) has noted previously, opportunity recognition may or not involve evaluation. That is, some entrepreneurs will plunge forward into elaboration without further consideration of the feasibility of the concept that they have recognized. This was found to be true in a group of highly successful entrepreneurs (Hills, 1995) even though other OR research has suggested that successful opportunity recognition requires evaluation (Timmons, Muzyka, Stevenson, & Bygrave, 1987). Their confidence may be based on their accumulated prior experience—their preparation–but it may also represent an innate trait that distinguishes such entrepreneurs from others who launch businesses only after careful evaluation. Investigating this apparent contradiction, and the implications for successful pursuit of opportunities, is a fruitful area for future research.
Viewing opportunity recognition as a special case of the creative process has numerous implications for both practitioners and entrepreneurship scholars. First, there has been a great deal of research into the creative process and how it can enrich both individuals (e.g., Campbell, 1985) and organizations (e.g., Gundry, Kickul, & Prather, 1994). If opportunity recognition, which is central to entrepreneurship, represents a creative process, then years of research into the nature of creativity can be applied to the study of entrepreneurship. Additionally, the field of entrepreneurship may want to turn to those engaged in the creative arts for insights about how creative ventures might be recognized, thus opening the door to opportunities that may exist outside traditional business contexts.
Much has been written about organizational creativity and innovation in organizations (e.g., Amabile, 1988; Woodman, Sawyer & Griffin, 1993). But there the emphasis is often on creativity by teams, and structural arrangements that provide autonomy and support implementation of innovations. The creativity involved in entrepreneurial opportunity recognition described herein is primarily an individual activity that often occurs before an organization is formed. This pre-founding creativity may be a more “pure” form of creativity, a special case, as we have argued, of the creative process. But it may also represent a type of creativity that is only individual. If opportunity recognition as modeled in Figure 1 is only an individual level phenomenon, can it work at the organizational level? Can opportunities be recognized by teams?
Investigating such questions may help clarify the distinction between creativity and innovation. Both refer to a process of perceiving something new (Slappendel, 1996). But innovation, as modeled in the creativity literature, involves the practical implementation of a creative insight. Is there a distinction between creativity and innovation? Does opportunity recognition relate to that distinction? Perhaps a more compelling question, in the context of entrepreneurship, is when does creativity end and “creative destruction” (Schumpeter, 1942) begin? And if it’s not clearly an issue of beginning and ending in a linear fashion, then what is the relationship between “creation” and “destruction” in terms of entrepreneurship as an engine of economic growth? Viewing opportunity recognition as a creative process may help illuminate the important relationship between creativity and entrepreneurship.
CONTACT: Gerry Hills, University of Illinois at Chicago, Institute for Entrepreneurial Studies (MC 244) 601 South Morgan St., Chicago, Illinois 60607; (T) 312-996-2670; (F) 312-413-1265; gehills@uic.edu
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