Theories of Opportunity Recognition - Coursework Example

? Opportunity Recognition: A Clearer Understanding There are numerous theories on opportunity recognition as seen from the viewpoints of business experts and analysts, and some are in contradiction with other existing theories, but definitely possess salient points that cannot be ignored. The subject of opportunity recognition gives rise to certain dilemmas as scholarly materials abound with different takes on the subject. Are opportunities created or discovered? Some experts like Ardichvili, Buenstorf and Ronstadt argue that entrepreneurial opportunities are created, while others namely Kirzner, Goring and Rehn contend that opportunities are discovered (Mighty Entrepreneur, 2010). Any which way, academicians are one in saying that opportunity recognition is not limited to one theory or belief, and is in fact a confluence of three different views or theories, namely: the Creation theory; the Discovery Theory and the Allocative Theory which are discussed by other experts in their own particular ways and methods of analysis. Opportunity recognition is the ability to discern or identify a premise or an idea that may afford one to gain profit or advantage. G. T. Lumpkin describes it as “the ability to identify a good idea and transforms it into a business concept that adds value and generates revenues (2005)”. It is said to be a crucial element in business entrepreneurship (Ozgen,2011), and has been the subject of numerous research and theories by business scholars and researchers because of the various arguments and interpretations attributed to it. Opportunity recognition is based on the premise that profitable business is ever present (Blue, 2010) around us, but they are only recognized by people with cognitive, entrepreneurial mind-set, that is, people who have the genetic predisposition to recognize opportunities when they see one, because of their inherent, genetic thought processes. These are people who are said to have a business eye, and are normally open to new experiences and changes. Opportunity recognition has been given due importance because it is the initial step to entrepreneurship, which is very essential in a nation’s whole economic set-up, and is being considered as part of the educational curriculum to assist would-be entrepreneurs to effectively discern these opportunities and chances, which may escape them, if they do not possess the inherent knack for identification and recognition. The Creation Theory of Opportunity Recognition The creation theory of opportunity recognition can be described simply as the creation of new products or ideas that possess the potential to generate economic value (Baron,2006). In this theory, it is the product (or creation) which comes first, with the perception that this new product or creation will cater profitably to the market (people). In this theory, the new product or concept will likewise create the market for it (Baron,2006; Dyer, et al, 2008). Creation is based on different factors among which are: the market needs, people’s demography, social strata, government laws and policies, social preferences, economic status, people’s culture, etc. In this theory, the variables of supply and demand are still unknown and undetermined, and there is a high level of risks, as market reception to a new creation or concept is yet to be established; economic returns and prospects are anchored on perceived market behavior based on feasibility studies and surveys. Industry giants particularly those pertaining to the electronic and computer industries are creators of new gadgets and systems based on perceived market needs, and these creations are capable of generating maximum profits for the creator/entrepreneur. Consider the creations of computer software/hardware like Windows, Photoshop, Nero Media and other computer software, which are all based on existing needs, and how these products generated millions or billions of dollars for their creators. Other known creators that have generated world markets are Pierre Omidyar (eBay); the late Steve Jobs (Apple); Marc Zuckerberg (Facebook); Jeff Bezos (Amazon.com) and many more young entrepreneurs who were able to create what the public wants. However, this does not mean that opportunities are anchored only on new creations, in fact, other opportunities can also be discovered from already existing products and ideas, and most of these are improvements/innovations which can address other consumer needs, wants, or preferences. In this theory of creation, experts are unanimous in pointing at knowledge, or search for or acquisition of knowledge, as a very essential factor in developing awareness for business opportunities. Knowledge may be classified as active or passive (Baron, 2006). Knowledge is also anchored on a person’s inherent mental capacities or over-all intelligence, the ability to extract ideas or draw conclusions from everyday events and circumstances and to readily identify the opportunity when it emerges. Active knowledge comes from public information like magazines, newspapers, journals, trade publications, and even through personal social interactions and networks. Awareness of environment relating to demographics, i.e., people’s particular behavioral patterns, likes and dislikes, social strata, government rules and policies, advancement in technology, geographical locations, cultures and taboos, etc. all allow certain impact and influence on how a person can spot a definite entrepreneurial opportunity. Education and exposure to social environment are also key factors. Education, in fact, normally limits or restrains an entrepreneur’s vision of opportunity because of his knowledge specialization: generally, opportunities relating to a person’s line of study or specialization makes a person toe the single line, i.e., teachers go to book publishing, dentists become dental suppliers and technicians, architects and engineers become builders and constructors, etc. and these professionals always see opportunities related in their fields of specialization one way or another. Family traditions see family businesses down the line for younger generations: children normally establish business similar to their parents’. This is because they are acting on passive knowledge, knowledge that does not have to be unfolded or researched, as it already exists, and opportunity recognition for these will mean not the opportunity per se, but the discovery of improvements or innovations for better service, efficiency and higher profits. Passive knowledge are also not sought, they just become imminent due to market needs and demands, and the ability of the entrepreneur to spot an opportunity will largely depend on his high level of intelligence, creativity and alertness. This will enable him to distinguish new solutions to market and customer needs and demands, and to promulgate new products and services that are not presently available. Other characteristics, aside from creativity, also play important roles in alertness like optimism, and keen perception of entailed risks (Baron, Feb. 2006). A prominent premise is the one by Robert A. Baron (2006), where he determined that opportunity recognition is facilitated by one’s cognitive frameworks which have been acquired through experiences, events, and trends and many other external factors enabling a person to develop pattern recognition which is imperative to serve as basis for new ventures. Although theories and propositions relating to opportunity recognition are so diverse that some have been contradictory with one another, there are certain parameters that are constantly present in all theories, although interpretations, inferences and applications may slightly differ to some degrees. One of these common parameters among scholars is the presence of knowledge, whether acquired knowledge (through education and research) or intuitive knowledge (gut feel), that a person possess about a particular venture before he can actually proceed to the actual realization and implementation phase of his business. The Discovery Theory of Opportunity Recognition The discovery theory of opportunity recognition refers to market variables which needs are unmet, or waiting to be discovered. The potential for discovery may be present to fill a particular void or need; or the discovery may be just accidental, or unplanned or unsearched, and the opportunity was just thrust spontaneously because of external factors uncalled for. In the first instance, where discovery is to fill a particular need, the need may pertain to a particular supply, or it may be a particular demand (The Mighty Entrepreneur, 2010). A concrete example is in the field of medicine, where there may be a demand for a particular medicine to cure a particular illness, wherein the medicine is not yet discovered. In this context, there is a demand for the medicine, but there is no supply yet available, so efforts are undertaken by drug companies to find the right medication, to fulfill the demand for it, at the same time recognizing the opportunity to achieve financial gain when the medicine is discovered. Other opportunities are discovered accidentally, sometimes creating blockbuster products. Take the case of the glutathione, which has feverishly swept the whole of Asia and other countries for its whitening effect on skin: the glutathione was principally used as an anti-oxidant particularly for the liver, but it was discovered that people under this therapy developed fairer skin and complexion such that later on, it has been marketed as skin whitening agent up until now. The skin whitening glutathione has become a major global business. In instances when opportunities are just thrust spontaneously in the open market, a very salient example is the death of a certain celebrity whose fame is global, sparking renewed interest for memorabilia or works of the celebrity during his lifetime. A recent example is the death of pop icon Michael Jackson. His record labels suddenly found the opportunity to cash in on the renewed fervor because of his death that reproductions of his previous recordings were immediately made available to fill in the sudden surge in demand. It was recently announced that of all dead celebrities, Michael Jackson got the highest earnings. The discovery of opportunities in already existing products and ideas are brought about by the desire to make these products more efficient or user friendly, more affordable, more compact, more attuned with the times, in short, discoveries for opportunities are more often actually innovations and improvements for better performance. Examples of this abound in the field of computers: the need for higher memory capabilities gave rise to memory cards and devices; the need for other conveniences gave rise to plug-in connectivities; laptops were discovered for portable use; usb plug-it devices enabled mobile internet connections/applications etc. Discoveries of better product editions easily promote obsolescence of electronic and computer products but alert traders also recognized profitable opportunities for these: they are promoted and exported to third world countries, where markets are less discerning and demanding. Emotions in Opportunity Recognition Baron’s theory of pattern recognition will greatly aid the entrepreneur in “connecting the dots” (Baron, 2006), the ability to connect trends, changes and events together to create or discover a new venture. However, Baron’s theory of pattern recognition is based on past experiences, or what can be considered already historical data (past) or prior knowledge. Some entrepreneurs have cited that they recognize opportunities through their own “gut feel’ or hunches, or intuition, and this cannot be ignored, as ‘gut feel’ is almost always true, and is distinct for the particular individual. In line with this personal, intuitive gut feel is a person’s own emotions. A study conducted by Malavika Sundararajan even went further to discuss how emotions impact the opportunity recognition process, and these emotions he called as part of cognitive psychology (Sandararajan), and relates how emotions interact with self-efficacy and prior knowledge and experiences. Sandararajan based his emotional theories on the findings he gleaned from numerous authors among which are George and Zhou (2002); Roseman (2001); Scehrer (2001); Isen (1999); Salovey, Mayer, Goldman, Turvey and Palfai (1995), with emotions as part of psychology literature and also the works of Lane, Nadel, Allen and Kazniak (2000); Damasio (2000); (1999), with emotions as part of neuroscience literature. In essence, these authors, in one way or another, consider that emotions have great impact on an individual’s appraisal and decision-making processes. Emotions heavily influence a person’s preferences in deciding upon a business venture: he may be so excited that he failed to see the flaws; he may be overcome with jealousy over another person’s success in business that he sees his own opportunity to have the same; he may have an extreme dislike and aversion to the location that he failed to see the market potential; etc. It is in this irrational emotional context that people normally are blinded, with either their negative or positive emotions, that critics argue that emotions should not play a part in any business or corporate decision. The Allocative Theory of Opportunity Recognition In this theory, both markets, the supply and demand, are already known and opportunities can be readily measured to lessen entrepreneurial risks. Of all the theories, this allocative theory has the least risks, as the entrepreneur can logically and systematically calculate existing market trends of supply and demand. A concrete example of this is the business of franchising, where the business has established, built-in opportunity for growth, although the business itself needs no further creation or discovery. Franchising allocates the business to numerous areas where there is perceived business due to its population’s consumer trends and preferences, and such other external factors like culture, demography, etc. Other theories different from these three are mostly analyses which can be directly related to the three abovementioned theories. Identification, evaluation and exploitation (Gonzales) can be analogously interpreted as: identification of a product or concept (creation); evaluation on how to improve or innovate on a product (discovery); exploitation of an opportunity by realization or actual application (can be allocative). Other theories and premises on opportunity recognition though differing in sequence and interpretation are all cognitive of the importance of empirical data, the factors in the external environment, changes in industry structures, availability of resources, people’s culture, etc. as determinants of the viability of any business endeavor (Ozgen and Minsky, 2007) The Role of Human and Social Capital in Opportunity Recognition Social relationships and social networks have been considered by academicians to play a very important role in information conveyance and assimilation, and the structure of one’s social circle determines the quality and the quantity of information, which may be utilized to craft or discover new ventures (Dyer et al, 2008). Social networks give out verbal information, which are normally based on typical day-to-day occurrences, giving the entrepreneur a more realistic, down-to-earth approach. Studies have shown that entrepreneurs have more diverse networks than non-entrepreneurs as supported by authors Renzulli, Aldrich, Moody, Stuart and Ding (Dyer, et al 2008). However, certain experts like Stuart and Sorenson disagree, and instead expound that social networks enhance resource mobilization, and not opportunity recognition (Dyer, et al 2008). Social networks are very essential in entrepreneurship, for they are the market gauge for new products and ideas. The people factor is constantly present in the scenario of business feasibility and opportunity recognition, for they are the patrons in any business venture. Closer observation of people’s habits and preferences will reveal some opportunities for business that will not be studied in any formal school or university. Businesses unheard of before have yielded profitable returns. A case in point is the business of event organizing, like the wedding planner: couples getting married are often caught in the hub of activities that distract them from their regular jobs, coupled with unfamiliar paper works, down to the minutest detail, enough to keep the couples’ nerves at each other. This gave rise to hiring someone to do the job, to free the couple from all attendant stress in preparing for the wedding. The wedding planner, with her retinue of assistants and runners, depending upon the scope of work as agreed upon, can take care of everything from the invitation, the whole wardrobe, down to the catering. From being a wedding planner, the entrepreneur can widen her horizon to recognize the opportunity for other ventures: she may become a printer (for the invitations); a fashion designer (for the wedding entourage); a florist (for the flower arrangements; a travel agent (for honeymoon destinations); a merchandiser (for the wedding give-aways); or even a caterer (for the reception). With these expansions in her ventures, the planner will open more business opportunities and her network of services will consequently expand. Aside from information dissemination, social networks will enable the entrepreneur not only to recognize opportunities but likewise can enable him to expand an already existing business by indirect advertising and recommendation through word-of-mouth. As of the present time frame, to gain access to social networks’ sea of information may no longer be that indispensable, as the internet has made interconnections and communications to even millions already possible. Conclusion Opportunity recognition is the product of the cognitive capabilities of the human mind, coupled with creativity and alertness, to discern profitability of a product or concept, as set against a backdrop of external and environmental factors, among which are the people’s particular culture and demography, preferences, financial capacity, social relationships, etc. To say that certain individuals have the mind set or propensity to easily recognize opportunities when they emerge is like inviting a lot of arguments, for certain studies have proven otherwise. With the present continuously emerging global economy, where big capitalists are almost breathing into our necks, spreading their wings even in small and medium scale business, the independent entrepreneur is finding the competition getting tighter than ever, driving him to a highly specialized line of business, to stay on top of competition. Under this scenario, the entrepreneur’s intelligence, creativity and alertness will be his perfect guide, plus access to a wider social network made possible by today’s wireless technology. References: Baron, R 2004, ‘Opportunity recognition: A cognitive perspective’ Academy of Management Best Conference Paper, Lally School of Management & Technology pp.A1-A6 Baron, RA 2006, ‘Opportunity recognition as pattern recognition: how entrepreneurs “connect the dots” to identify new business opportunities’ Academy of‘ Management Perspectives Vol. 20 Issue 1 pp. 104-119 Baron, RA; Ensley, MD 2006, ‘Opportunity recognition as the detection of meaningful patterns: evidence from comparisons of novice and experienced entrepreneurs’ Management Science. Blue, K 2010, ‘What is opportunity recognition?’ eHow Dyer,JH; Gregersen, HB; Christensen, C 2008, ‘Entrepreneur behaviors, opportunity recognition, and the origins of innovative ventures’ Strategic Entrepreneurship Journal 2:pp. 317-338 Gonzales, D ‘The impact of social networks in the entrepreneurial opportunity recognition process-a gender perspective’ Tecnologico de Monterrey. Lindsay, NJ; Craig,J 2002, ‘A framework for understanding opportunity recognition’ Journal of Private Equity, Vol. 6, Issue 1 pp. 13-23. Lumpkin, GT 2005 ‘The role of organizational learning in the opportunity-recognition process’ Ma, R; Huang, YC 2008, ‘Social network and opportunity recognition: a cultural perspective’, Academy of Management Annual Meeting Proceedings, p. 1-6. McCline, RL; Bhat, S; Baj, P 2000, ‘Opportunity recognition: an exploratory investigation of a component of the entrepreneurial process in the context of the health care industry’ Entrepreneurship: Theory and Practice Vol. 25 ‘Opportunities: are they created or discovered?’ The Mighty Entrepreneur 09 Mar.2010 Ozgen, E 2011, ‘Porter’s Diamond model and opportunity recognition: a cognitive perspective’ Academy of Entrepreneurship Journal Ozgen,E; Minsky, BD 2007, ‘Opportunity recognition in rural entrepreneurship in developing countries’, International Journal of Entrepreneurship, The Dream Catchers Group,Vol.11 Sundararajan, M, ‘How do emotions impact the opportunity recognition process?’ Association for Small Business & Entrepreneurship 35th Annual Conference pp. 320-340. Townsend, D; Harkins, JA 2005, ‘Clairvoyance or something sinister: a model of market insights and opportunity recognition ‘Academy of Management Annual Meeting Proceedings, pp. R1-R6. Read More