What is an Entrepreneurial Opportunity? Pontus Engström, PhD, MSc

Session 1

What is Entrepreneurship?

From the French words entre (between) prendre (to take). Cantillion (1680-1734) described as the crucial agent in economic activity

Four schools 1.  Joseph Schumpeter - primus motor, creative destruction, an

innovator 2.  Israel Kirzner – entrepreneur as arbitrageur 3.  Frank Knight – entrepreneurs takes on uncertainty, not risk 4.  Jean Baptise Say – entrepreneur as the coordinator Recent research combines or further elaborates on the four schools. -  An entrepreneur is someone who creates or discovers an

entrepreneurial opportunity -  Someone who imagines an opportunity no one else can see or is

willing to finance. Moves the economy to or from equilibrium. 2

Schumpeter (1934) The Theory of Economic Development

•  At the center is the entrepreneur who seeks for changes to reach an improved economic state, the primus motor.

•  Through innovation, the entrepreneur mixes the available

resources, such as markets, products, production methods, etc., into new combinations.

•  Calls the creative process for “Creative descruction” •  “entrepreneurs are a special type” (p. 84) which may explain why

much research is concerned with the description of who the entrepreneur is.

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Who is the entrepreneur?

Source: Timmons, 1999

Inventor Entrepreneur

Manager Administrator Promoter

High

Low High General management skills, business know-how & networks

Creativity & Innovation

Kirzner

•  Opportunities exist because of imbalances in the market or in efficient use of existing resources

•  Entrepreneurs are creators of equilibrium

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The process of entrepreneurship

Shane & Venkataraman (2000) The Promise of Entrepreneurship as a Field of Research Source: The Academy of Management Review

Seeking answer to why, when and how entrepreneurial opportunities come to

exist, are discovered, and are exploited. Sequential conditions:

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Existence of Entrepreneurial Opportunities

Discovery of Entrepreneurial Opportunities

Decision to Exploit Entrepreneurial Opportunities

Entrepreneurship

Entrepreneurial Opportunity

Opportunity is actually a word we use when talking about a situation in which we can do something that we want to do.

Possibility is when we talk about something that may happen or

be true Economic definition: Any idea for a new product, service, raw material, market, or production process that can be successfully exploited so as to generate economic benefits for stakeholders.

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How do entrepreneurs recognize ideas?

“By noticing a need that is not now being met and filling it – preferably in a way no one else is currently doing.” (Baron and Shane, 2008)

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Why do some see these needs, and what does it take to act on seeing these needs?

Individuals Opportunities

Right Person, Right Place, Right Time

•  Better access to crucial information—information helpful in recognizing opportunities or formulating new ideas

•  Better able to utilize information—to combine it or

interpret in ways that reveal the opportunities overlooked by others

Human cognition and opportunities – three key processes

1.  Idea generation – the production of ideas for something new 2.  Creativity – the generation of ideas that are both new and

potentially useful 3.  Opportunity recognition – the process through which

individuals conclude that they have identified something new that has the potential to generate economic value.

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Global Innovation Index 2016

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https://www.globalinnovationindex.org/analysis-indicator

A Cognitive Perspective

Human cognition—the mental processes through which we

•  Acquire information

•  Enter it into storage

•  Transform it

•  Use it to accomplish a wide range of tasks

Cognitive processes are the basis for generating new ideas, for creativity and for opportunity recognition

Learning and life experience is key. Two questions: 1)  What are these cognitive systems for retaining and processing

information like? 2)  Can they be stretched or improved in ways that enhance

creativity and the ability to recognize opportunities?

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Our cognitive system for retaining and processing information

Memory The more experience the more likely to identify opportunities Includes: Working memory – limited information for brief period Long-term memory – retain information long term (unlimited

space) Various forms: Factual knowledge – facts and figures Personal knowledge – your first love, your first trip to dentist Procedural memory – why athletes perform well, or how a

musician remembers an entire song. Information that cannot be readily expressed in words.

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The role of cognitive mental frameworks

-  Interpreting and integrating information are essential for creativity and for recognizing opportunities

-  Prototypes: idealized representations of the most typical member of a category, for instance “house” or “car”

-  A business opportunity is a form of “prototype”

-  Ability to add information is unlimited, but ability to process information is not à leads to us adopting mental shortcuts or tactics for stretching our limited capacity as far as possible.

-  Leads to errors, often due to our tendency to rely on heuristics – simple rules for making complex decisions.

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Examples of thinking “tilts” in human cognition

•  Optimistic bias refers to the tendency to expect things to turn out well. One example is the planning fallacy.

§  Confirmation bias refers to the tendency to notice, process, and remember information that confirms our current beliefs.

§  Illusion of control refers to the tendency to assume that our fate is under our control to a great extent that it is…

§  Escalation of commitment refers to the tendency to stick with decisions that yield negative results even as the negative results continue to mount.

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See Table 3.1 in “Cognitive Foundations of Entre-preneurship” for more examples of sources of errors

Drivers of creativity?

Creativity – items or ideas that both novel and useful Emerges from a small set of basic cognitive processes: 1.  How we internally organize the information

2.  Human intelligence

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Creativity and Organizing the information Stretching or expanding the internal cognitive frameworks/concepts we construct, e.g.:

a.  Vehicle -- bicycle, airplane, automobile and elevatorb.  Clothing -- shoes, shirts, jeans and jacket

+ Internal structure enhances our ability to retrieve information -  Internal processes are so strong that we find it very difficult to

escape them (e.g. Sony and the CD or the Incas and wheels)

Combining concepts – “Luxury SUVs” or “nonalcoholic beer” Expanding concepts – Horse-drawn carriages and railroad carriages or early TV looking like a furniture. Analogy – Perceiving similarities between objects that are otherwise dissimilar. “My love is like a red rose”. A Red Santa?

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Is Flying Lawnmovers perhaps an opportunity?

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https://www.youtube.com/watch?v=9Yrt9qkBQ2Q

“An old thing becomes new if you detach it from what usually surrounds it.”

--Robert Bresson

Creativity and Human Intelligence

Intelligence – individual´s abilities to understand complex ideas, to adapt effectively to the world around them, to learn from experience, to engage in various forms of reasoning, and to overcome a wide range of obstacles (i.e. not just IQ). a.  Analytical intelligence – abilities to thin critically and

analyticallyb.  Creative intelligence – ability to formulate new ideasc.  Practical intelligence – being adept at solving problems of

everyday lifed.  (Social intelligence) – the ability to understand others and

get along well with themCombining all into successful intelligence (Sternberg)

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Successful Intelligence

Practical Intelligence

Creative Intelligence

Analytic Intelligence Success Successful

Intelligence

What can be done to enhance creativity?

Creativity emerges from the operation of several kinds of memory, the expansion or merging of concepts, and related processes – the confluence approach

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Broad, Rich Knowledge Base

•  Having varied work experience •  Having lived in many different

places •  Having a broad social network

Opportunity Recognition – why are some better than others at discovering opportunities?

(1)  Better access (2)  Able to utilitze --- i.  Active Search ii.  Alertness iii.  Prior Knowledge iv.  Social Networks

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Opportunities sometimes go unrecognized for decades

Opportunity recognition as pattern recognition

Noticing meaningful patterns in complex events, trends, or changes 1)  Recognizing links between trends, changes, and events that

seem at first glance to be unconnected 2) Noticing that these connections form an identifiable pattern Influenced by cognitive frameworks within individuals, developed on the basis of past experience

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Experienced entrepreneurs focus more on factors likely to influence business success, whereas novice entrepreneurs focus on novelty and intuition

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Can individuals be trained to be more successful at recognizing opportunities?

Individuals can learn to be more proficient at recognizing patterns and thus opportunities – pattern recognition perspective. Steps to recognize more valuable opportunities: •  build a broad, rich and organized knowledge base •  Increased access to information •  Actively searching for opportunities •  Increasing practical intelligence

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Signal Detection Theory

HIT Opportunity present and recognized

FALSE ALARM Opportunity not

present, but judged to be

present

MISS Opportunity is

present, but not judged to be present

CORRECT REJECTION

Opportunity not present and judged to be

absent

Yes No

Actual Presence of Opportunity

Yes

No

Judgment About Presence

TheSevenDomainsFramework

“An opportunity: why will or won’t this work?”

TheNewBusinessRoadTestThe New Business Road Test

Designed to help entrepreneurs:

•  Assess opportunities (our focus today) •  Shape opportunities

The New Business Road Test

Order it online:

Opportunity Analysis Involves assessment of the: (1-2) Market (3-4) Industry (5-7) Team dimensions

The New Business Road Test

The Seven Domains of Attractive Opportunities

Macro Level

Micro Level

Industry Domains

Mission, Ability to Aspirations, Execute Propensity on CSFs for Risk Connectedness up and down Value Chain

Team Domains

Market Attractiveness

Target Segment Benefits and Attractiveness

Industry Attractiveness

Sustainable Advantage

The New Business Road Test

Market Domains

Thank you for the attention!

Pontus Engström, PhD, MSc. Stockholm School of Economics E-mail: pontus.engstrom@hhs.se