CHAPTER 4

Opportunity Emergence and Evolution

Discovery

Kirzner (1997) considered an entrepreneur is an individual “alert” to opportunities. He posited that alertness is a key difference between entrepreneurs and nonentrepreneurs. Theories of entrepreneurial opportunity reflect an assumption that entrepreneurs either search to discover opportunities or create opportunities without searching. Alvarez and Barney (2007) opined that discovery and creation should be viewed as two conflicting theories of entrepreneurship.

Discovery is about searching the environment for competitive imperfections brought about by external changes. Creation assumes that opportunities do not necessarily evolve out of preexisting industries or markets. Discovery research emphasizes deliberate search as the primary mode of entrepreneurial discovery. The approach assumes the deliberations of the entrepreneurs are critically important in opportunity identification.

Creation involves actions by the entrepreneur’s, which result in opportunity recognition that cannot be known prior to undertaking the activity. Hence, entrepreneurs cannot anticipate the possible outcomes of their actions because the information required has not yet been created. The entrepreneur does not search to find opportunities; they develop their new proposition and observe how customers and markets respond to their ideas. In contrast, discovery assumes competitive imperfections result in exogenous opportunities arising from changes in technology, society, regulatory, or the political environment. These opportunities are objective and observable. Should everybody associated with a particular industry or market know about the opportunities, then they could all become involved in exploiting them. This does not occur because it is only entrepreneurs who differ from the majority through their ability to identify or exploit these opportunities (Edelman and Yli-Renko 2010).

Support for the perspective that the creative entrepreneurial decision-making process differs from the logical structured planning approach utilized by conventional managers was generated by Sarasvathy’s (2001) study of 27 of the United States’ most successful entrepreneurs. She termed the conventional approach to decision making as being “causal,” being based upon a deductive reasoning in the acquisition and analysis of information. In contrast, entrepreneurs exhibited an intuitive approach she labeled “effectuation.”

Sarasvathy posited that effectual logic occurs in the earlier stages of venture creation with a transition to more causal strategies as the new firm moves from uncertainty into a more predictable environment. She noted effectual logic is likely to be most effective in settings characterized by high levels of uncertainty. Effectuation dictates that, in highly uncertain and dynamic environments, target customers can only be defined ex-post as being whoever buys a product or service. Instead of focusing on goals, entrepreneurs are more concerned about those things over which they have control. At the individual level, this includes personal knowledge, skills, and social networks.

Knowledge

Discovery entrepreneurs often have specific knowledge about exploiting an opportunity they have discovered. One reason is they have acquired specialized knowledge and information. In some industries, this specialized knowledge may be embodied more in human capital than in physical capital. Entrepreneurs in these industries can sometimes take advantage of specialized knowledge acquired from their employers and leave to start their start their own businesses (Chaston 2004).

In addition to knowledge gained from their own experience, individuals looking to exploit discovery opportunities may be able to access additional information. The impact of available information may alert innovators to potential new discovery opportunities. Many of those engaging in discovery will have a clear idea of the potential outcomes associated with exploiting an opportunity. In contrast, entrepreneurs often do not know with any certainty the potential scale of opportunity resulting from their discovery. The range of possible outcomes associated with exploiting a discovered opportunity may suggest a high level of risk. However, by using past industry or market experience, industry-specific technical or market-related knowledge and past experience, innovators can often gauge the riskiness associated with opportunity exploitation (Withers, Drnevich and Marino 2011).

Schumpeter (1954) opined that the possession of idiosyncratic information allows people to see particular opportunities that are not obvious to others. This is because variations in information and knowledge influence individuals to identify different values in a commercial proposition. The question arises why do some individuals discover entrepreneurial opportunities and not others? One answer is people recognize those opportunities related to information and knowledge that they already possess. Each individual’s prior knowledge creates a knowledge corridor that results in the recognition of certain opportunities. This occurs because prior knowledge influences the ability to comprehend, extrapolate, interpret, and apply new information in a way that was lacking in information available to others (Von Hippel 1994).

Shane (2000) posited that prior knowledge moderates the relationship between the attributes of a technology and the recognition of entrepreneurial opportunity. He theorized that (i) any given technological change will generate a range of entrepreneurial opportunities that are not obvious to all potential entrepreneurs, (ii) entrepreneurs may discover these opportunities without searching for them, and (iii) any given entrepreneur will discover only those opportunities related to his or her prior knowledge.

At the heart of new product development is the emergence of something new or novel. Identification of novel information and knowledge is a key input to new product development. Hence, the search that directs attention toward new information and knowledge leads the searcher to develop new behaviors, interactions, strategies, and processes that are useful in new product development. Li et al. (2013) posited that the search process involves two components, namely “search selection,” which focuses on the locations that managers select to direct their attention to during search, and “search intensity,” which describes the cognitive effort and persistence that managers use when searching. These two dimensions are relevant because attention can be wasted when encountered information search is irrelevant, or alternatively, relevant knowledge is not recognized or examined in detail.

Li et al. employed the notion of “terrain unfamiliarity,” “terrain distance,” and “terrain source diversity” as key dimensions within search selection. Unfamiliar, distant, and diverse terrains are more likely to contain novel, salient, and vivid information that is more likely to capture searchers’ attention. Consequently, such new knowledge is more likely to enable searchers to detect insights and breakthroughs related to radical product innovation. In addition to capturing the searchers’ attention better, unfamiliar, distant, and diverse terrains are also more likely to yield new information, which helps searchers update their knowledge base and gain insights into the detection, development, and deployment of new products.

Smith et al. (2005) found the rate of new product introduction to be a function of knowledge workers’ ability to combine and exchange information. They determined that novel information enables firms to develop new ideas about how to allocate resources better and how to co-ordinate innovation efforts. Furthermore, novel information allows firms to discard obsolete knowledge. This is critical because replacing obsolete knowledge can help reduce the possibility of firms becoming trapped in behavior based on competences developed and used in the past.

Search intensity has an important influence on the success of innovation outcomes. Gregoire and Shepherd (2012) suggested that where managers stop gathering information after finding a satisfactory alternative, they may remain ignorant of better alternatives. In the context of developing new products, increased search effort and persistence provide searchers with enhanced capacity to notice, interpret, and make sense of information and knowledge in ways that foster the detection, development, and deployment of new products.

Discontinuity

In many industries, there are long periods where there is little change other than incremental technical improvement. However, there can be periods when discontinuities emerge, which are fundamentally different and reflected in order-of-magnitude improvements in the cost or quality of the product (Anderson and Tushman 1990). These product discontinuities are fundamentally different product forms that provide the basis for entrepreneurial technological change. Examples include the jet versus piston engines, diesel versus steam locomotives, CT scanners versus x-rays, and integrated circuits versus discrete transistors.

Anderson and Tushman characterized technological discontinuities as competence-enhancing or competence-destroying. The impact of a discontinuity is the greatest when there is a radical advance in technology. In many cases, the early form of radical innovation is crude, but nevertheless will result in technological uncertainty. This period of uncertainty is characterized by two selection processes, namely competition (a) between existing and new technical regimes and (b) within the new technical regimes. This period of substantial uncertainty eventually ends with the emergence of a dominant technology.

Competition between old and new technologies can be fierce. The new technologies may be criticized because they frequently perform poorly or demand new competences that are inconsistent with the existing established technologies. This criticism is often accompanied by an increase in the level of innovativeness among firms committed to an existing technology. Concurrent with competition between old and new technologies is competition between the supporters of the new technology. This is reflected in the emergence of several entrepreneurial versions of the new technology that appear. This occurs because the technology is not well understood, and each pioneering firm has an incentive to differentiate their variant from their rivals. This latter type of competition often results in initial designs rapidly improving as the innovators gain understanding of the new technology and the nature of market demand.

Anderson and Tushman concluded the length of the era of competition is contingent on the nature of the technological discontinuity. When a technology generates a completely new knowledge base and many rival designs appear, it will take longer for the market to choose the winner. Furthermore, firms confronted with the choice of abandoning existing know-how in the face of competence destroying technical change will defend older technology more stubbornly, prolonging uncertainty about whether the new technology will become dominant. The process of converging on adoption of a new industry standard will be hampered by a lack of common understanding among entrepreneurs about the exact nature of the opportunities created by the new technology. However, once a new dominant design emerges, future technological progress will tend to be based on incremental improvements elaborating upon what is now the accepted industry standard. The emergence of a dominant design permitted firms to move toward standardized and interchangeable parts and the optimization of organizational processes to achieve higher volumes and efficiency. From the customer’s perspective, dominant designs reduce product-class confusion and usually result in lower product cost.

During the era of rapid technological innovation, potential customers are confronted with several different versions of the new technology. Choosing any variant in the absence of a standard is risky. Hence, the majority of potential adopters will await the emergence of an industry standard before purchasing a radically different new product or new process technology. This scenario led Anderson and Tushman to argue that the emergence of a standard is a prerequisite to mass adoption and volume production of a new generation of technology.

Bold Innovation

Once entrepreneurial products enter the market maturity phase, there is a tendency for firms, in the face of increasing competition, to engage in commoditization. Innovation involving line extensions, modifications, and minor performance upgrades become the priority. As a consequence, resources are assigned to new-product development efforts in the wrong areas, namely in flat markets, mature technologies, and tired product categories, which eventually constitute the majority of firm’s product portfolio (Chaston 2016).

To avoid this outcome, Cooper (2011) posited that what is required is “bold innovation” involving the firm focusing R&D efforts on the most attractive arenas for future market growth. For this to occur, the firm will need to create a positive climate for entrepreneurial innovation, support radical innovation at every opportunity, and to welcome ideas from all employees. Furthermore, there is the need for having the right senior leadership that can drive and support the innovation effort with words as well as through actions. Unfortunately, many businesses lack the needed climate, culture, and leadership for innovation, and as a consequence, fail to engage in larger scope and more imaginative development projects.

Cooper noted that generating great ideas is only half the battle. Success also requires that there is an effective rapid idea-to-launch system in place. Additionally, there is the issue that many businesses have lots of good new product ideas, but lack the appetite to invest in larger-scope, more risky projects, despite the fact they promise to be tomorrow’s growth engines. Part of the problem can be the lack of a solid business case. This is because big concept projects are innovative and risky. It is difficult to get the accurate data and construct a solid, fact-based business case to convince senior management to make the investment. Senior management should drop their reliance upon financial tools and return-on-investment methods to make their go or no-go decisions. These methods work for smaller, less innovative projects, but may lead to the wrong decisions when it comes to larger-scope, riskier innovation programs. Instead, there is a requirement to assess ideas in relation to fertile strategic arenas identified as likely to offer major new sources of market growth through the development of radically new products or services.

Cooper posited that the potential for success is likely to be much higher when based on a philosophy of attacking from strength. This approach relies upon identifying the firm’s unique capabilities that could be leveraged to advantage in other markets, applications, and sectors. He suggested that specification of these strategic areas is fundamental to defining the nature of major new product development efforts. Without this, the search for specific new product ideas or opportunities is likely to remain unfocused, and the portfolio of new product projects can contain a lot of unrelated projects, in many different markets, technologies, or product types.