Three Theoretical Models of Opportunity Recognition - Literature review Example

?Opportunity Recognition: A Critical Evaluation The field of entrepreneurship is fraught with numerous theories that attempt to provide conceptual clarity. Most theories in this field look at prior research and draw upon the wealth of research from closely allied fields such as sociology and human behavior. In this essay, we attempt to critically evaluate the three theoretical models of opportunity recognition. We also look at the impact of cognition, social and human capital on the opportunity recognition process. We structure our essay in this manner: in our first section, we explore the various theoretical constructs that underpin opportunity recognition and how they contribute to the field of entrepreneurship. In our second section, we de-construct the factors that impact opportunity recognition. Here, we explain the various ways in which cognition impacts opportunity recognition. In our third section, we study the influence of human and social capital on the opportunity recognition process. In our fourth and last section, we summarize the arguments and provide concluding remarks. I. Opportunity Recognition: theoretical constructs The capacity to identify and spot a successful business opportunity is the hallmark of a preliminary stage in any new entrepreneurial venture creation (Ardichvili, Cardozo & Ray 2003). Once an opportunity is recognized, the individual then proceeds to analyze it through different angles. What distinguishes an individual’s capability to identify the right opportunity? This forms the basis of the discussion for our paper. When we extend the unit of analysis from an individual to a firm, then we can also infer that opportunity recognition follows from a careful, analytical process (Denrell, Fang & Winter 2003). Possibly, we could conclude that an individual may not possess all the resources that are at the disposal of a firm, yet an individual develops his or her own methods to evaluate a business opportunity. Certain individuals are able to spot an opportunity more easily than others. What factors could explain this phenomenon? First, such an individual may have better access to information about the opportunity (Shane 2003 p. 60). Secondly, there could be certain behavioral attributes of the individual which predisposes the subject to examine the business idea impartially. These form the broad backbone of the opportunity recognition process. Shane (2003 p.60) also lists out three factors that influence the possibility of gaining information access: 1) prior life and work experience, 2) the social network structure and 3) information search. Previous experiences in a particular field helps people gain awareness and confidence about the domain. Sometimes, this translates into a deeper capacity for identifying unexplored business possibilities within the chosen business realm (Bishop 2011). Again, if the individuals belong to a family that has predominantly focused on their own businesses, this could influence them to spot business opportunities more easily. In essence, family occupation could influence individuals’ attitude and thought processes about business. Certain functional domains could also guide individuals towards entrepreneurial domains. For examples, people with more exposure to sales and marketing tend to have a good grasp of the market. They understand consumer behavior to some extent and can appreciate the process flow of business. This could be one factor that gives them an entrepreneurial spirit. Membership of a network also assists in the opportunity recognition process. Ozgen & Baron (2007) suggest that individuals may gain information about new business ventures from their mentors, business networks and professional associations. For individuals who have been entrepreneurs before, this would help them identify new business ideas more easily (Ucbasaran, Westhead & Wright 2009). Networks could be formal ones such as that of colleagues sharing the same work function at the employer’s premises. Another possibility is a group that meets informally after office hours. Such relationships could foster information sharing and accordingly influence the members of the group. Just like harmless flow of ideas and idle banter, such a group could also influence more serious attitudes such as the development of an entrepreneurial spirit. Evidence from literature suggests that entrepreneurs are different from others in their search for information. Unless information about a new business venture is sought, it may not be easily obtained. Another viewpoint to this is provided from the intersection of social networks and opportunity recognition literature (Ma, Huang & Shenkar 2011). These authors suggest that different countries could foster diverse entrepreneurial tendencies. Country factors could possibly explain the emergence of an entrepreneurial spirit. Expert entrepreneurs may look for information that is not public. They may seek new business related information from private sources (Shane 2003, p. 48). Accordingly, one may find that such people are eager to repeatedly venture into newer businesses. Their passion for entrepreneurial ventures has not waned. II. Impact of Cognition on Opportunity Recognition People vary in terms of their ability to process and interpret information. This has given rise to a whole new perspective in understanding their innate nature and its influence on opportunity recognition. In broad terms, we call this cognitive ability. In non-literary circles, this can simply be termed as intelligence. With regard to business literature, we explore different facets of cognition. Another field which has parallels with cognition is sensemaking. This field also draws upon the mental capabilities of the individuals. Effectively, an individual’s variation in interpretation and making sense of diverse events impacts his penchant for exploring new business ventures. If growth intentions are defined as the specific path the venture will take (Dutta & Thornhill 2008), then cognitive abilities could shape the entrepreneur’s efforts in a particular direction. The author explores the evolution of entrepreneurial ventures in Canada over a five-year span. The primary methodology was in the form of face-to-face interviews. In-depth interviews helped establish certain key findings. Firstly, the intentions of entrepreneurs were heterogeneous. Secondly, their intentions varied with the phase of growth. Thirdly, the growth intentions were influenced by their perception of the competitive environment. In essence, we can infer that cognitive styles led to variations in perception of the competitive environment. Accordingly, the entrepreneurs planned and executed their strategy in different ways. Baron (2004) provides a different perspective through his exploration of the rationale for the entrepreneur’s orientation. He suggests that cognitive differences underpin the essence of answering the ‘why’ questions of an entrepreneur. Schenkel, Mathews & Ford (2009) go one step further and study the cognitive influences on the nascent stages of an entrepreneurial venture. They suggest that the ‘need for closure’ provides a compelling reason for entrepreneurs’ efforts to persist and move forward with their business idea. This quest could be dependent on their cognitive abilities. Individuals with better cognitive skills are more likely to show perseverance and take the entrepreneurial venture forward. A question that arises at this juncture is whether entrepreneurs persist with their ventures due to their deep understanding of the market and untapped potential or they persist on account of their intuition. In an attempt to answer this, Blume & Covin (2011) posit that knowledge about the competitive business environment could be of help; however, they also suggest that intuition combined with cognitive abilities help them in the founding process. A critical thought that springs to mind is whether there is an interplay between cognition and intuition. Perhaps intuition could be shaped by the knowledge gained during the information search. There are no clear answers to these perplexing questions. The ‘black box’ of cognition and its impact on opportunity recognition has been viewed through a different lens: uncertainty. Uncertainty is inherent in all nascent entrepreneurial ventures. The ability of entrepreneurs to make sense of this construct and respond appropriately (McKelvie, Haynie & Gustavsson 2011) defines their application of cognitive skills. The level of uncertainty is deciphered by application of cognitive skills of the potential new businessman. In other words, cognitive abilities assist in tackling the uncertain elements of the business environment through active reasoning, interpretation and response. III. Impact of Social & Human Capital on Opportunity Recognition While cognition has been reasonably well accepted as a construct that bears on opportunity recognition, we explore the impact of social and human capital on the recognition of a business opportunity. Social capital is a construct that dwells on the collective strength of individuals in a society. In a closely related manner, human capital dwells on individual talent accumulated within a firm or a business enterprise. It attempts to quantify the wealth of expertise resident within the human brain, which is manifested through task execution – both of a routine nature and intellectual one. In the context of a flood of new business ventures in the used college textbooks market, Dimov (2011) brings out the entrepreneurial ventures of over 300 different small firms which intended to exploit this nascent opportunity. In his paper, he explores the founding of Chegg.com which went to become one of the important business ventures in the used college textbooks business. The business model dealt with renting, buying or selling used textbooks to students of neighboring colleges. The key point for us is that this was a social phenomenon understood as a business opportunity. The strategic insight gained here is that social factors could spur entrepreneurial ventures or they could assist in identifying the right opportunities. In a small scale industry set-up, the role of social networks is quite prominent. It was noticed by Bhagavatula, Elfring, van Tilburg & van de Bunt (2010) during their study of Indian craftspeople working in the weaving industry. The authors studied the impact of social networks on opportunity recognition. Key insights obtained include the overwhelming impact of skills such as professional expertise, language skills and work experience on the recognition of business opportunity. In places where skill sets were low, the social capital stepped in and served as a bridge to identify and exploit nascent opportunities. Individuals could vary in their ability to spot opportunities based on their membership of networks. Belonging to different networks is akin to bestowing individuals with different set of innate capabilities. People who belonged to a closed network behave differently compared to those who are members of several weakly linked, open networks (Arenius & De Clercq 2005). The authors here also trace some relevance of human capital on opportunity spotting. They observe that the level of education is positively related to opportunity identification potential. Among entrepreneurial ventures in their nascent stages, it was observed that the individuals were able to draw benefits through bonding – both with weak ties and strong ties (Davidsson & Honig 2003). In this case also, the authors observe evidence of linkages between human capital and the potential to spot untapped opportunities. They notice that the presence of formal education and previous entrepreneurial experience helps in predicting which set of individuals would engage in nascent entrepreneurial activities. Haynie, Shepherd & Patzelt (2010) observe that evidence of prior entrepreneurial experience helps individuals spot untapped potential in business much faster. They seem to suggest that entrepreneurship is a construct that is influenced by prior learning and an iterative process. Human capital which is treated as an objective measure of human talent that can be capitalized and brought into accounting books has been observed as one of the intangibles that affect opportunity recognition. Extending this to the social capital, where networks and membership play a critical role, we observe from scholarly literature that it has an impact on the potential to spot opportunity gaps. Human emotions, a peripheral factor in the human capital construct could possibly have an impact on opportunity recognition. This has been explored by studying the impact of fear, joy and anger on entrepreneurial exploitation (Welpe, Sporrle, Grichnik, Michl & Audretsch 2011). The authors observe that while fear reduces exploitation, the presence of joy and anger was positively related to opportunity exploitation. IV. Summary & Conclusions We have explored the various theoretical constructs underpinning opportunity recognition. In particular, we have understood the different perspectives of the need for information search, the presence and criticality of networks and the role of previous work experience. Subsequently, we explored the impact of cognition on opportunity recognition. Here we identified different main as a well as peripheral constructs leading to opportunity assessment. In our third section, we also looked at the impact of social and human capital on the subject of opportunity recognition. We could possibly conclude by emphasizing certain broader findings. Firstly, a wealth of research has identified the importance of opportunity recognition as an important stage in the run-up to the new venture creation (Brown, Davidsson & Wiklund 2001). Secondly, an individual’s background, experience and skills influence his proclivity for an entrepreneurial venture assessment. This can be referred to as a mix of human capital and cognitive abilities. What we can further infer is that human cognitive abilities in turn are dependent on absorptive capacity of the individuals. Human capital is influenced by the membership of networks. Thirdly, social networks play a critical role in determining the individual inclinations towards opportunity recognition. Social networks play an active role and also mediate the relationship between human capital and the recognition of a business venture. Our paper also points out directions towards further research in the field of entrepreneurship. For example, there could be vital questions such as: How does one account for the success of some ventures while others fail?, can we influence human capital or social capital so as to create more entrepreneurs, who ultimately lead to better wealth creation for the society and the nation? What is the role of ethics in understanding sustainable entrepreneurship? (Harris, Sapienza & Bowie 2009) And lastly, we can also explore if cognitive abilities can be developed through the right set of education programs. This would result in more academic and practitioner oriented studies in the field. Reference List Ardichvili, A, Cardozo, R & Ray, S 2003, ‘A theory of entrepreneurial opportunity identification and development’, Journal of Business Venturing, vol. 18, pp. 105-123. Arenius, P & De Clercq, D 2005, ‘A Network-based Approach on Opportunity Recognition’, Small Business Economics, vol. 24, pp. 249-265. Baron, R 2004, ‘The cognitive perspective: a valuable tool for answering entrepreneurship’s basic “why” questions’, Journal of Business Venturing, vol. 19, no. 2, pp. 221-239. Bhagavatula, S., Elfring, T., van Tilburg, A., & van de Bunt, GG 2010, ‘How social and human capital influence opportunity recognition and resource mobilization in India’s handloom industry’, Journal of Business Venturing, vol. 25, no. 3, pp. 245-260. Bishop, P 2011, ‘Knowledge, diversity and entrepreneurship: a spatial analysis of new firm formation in Great Britain’, Entrepreneurship & Regional Development, pp. 1-20. Blume, BD., & Covin, JG 2011, ‘Attributions to intuition in the venture founding process: Do entrepreneurs actually use intuition or just say that they do?’, Journal of Business Venturing, vol. 26, no. 1, pp. 137-151. Brown, TE., Davidsson, P., & Wiklund, J 2001, ‘An operationalization of Stevenson’s conceptualization of entrepreneurship as opportunity-based firm behavior’, Strategic Management Journal, vol. 22, no. 10, pp. 953-968. Davidson, P & Honig, B 2003, ‘The role of social and human capital among nascent entrepreneurs’, Journal of Business Venturing, vol. 18, no. 3, pp. 301-331. Denrell, J., Fang, C., & Winter, SG 2003, ‘The Economics of Strategic Opportunity’, Strategic Management Journal, vol. 24, no. 10, pp. 977-990. Dimov, D 2011, ‘Grappling With the Unbearable Elusiveness of Entrepreneurial Opportunities’, Entrepreneurship Theory and Practice, vol. 35, no. 1, pp. 57-81. Dutta, DK. & Thornhill, S 2008, ‘The evolution of growth intentions: Toward a cognition based model’, Journal of Business Venturing, vol. 23, pp. 307-332. Harris, JD., Sapienza, HJ., & Bowie, NE 2009, ‘Ethics and entrepreneurship’, Journal of Business Venturing, vol. 24, no. 5, pp. 407-418. Haynie, JM, Shepherd, D. & Patzelt, H 2010, ‘Cognitive Adaptability and an Entrepreneurial Task: The Role of Metacognitive Ability and Feedback’, Entrepreneurship Theory and Practice, pp. 1-29. Ma, R., Huang, Y, & Shenkar, O 2011, ‘Social Networks And Opportunity Recognition?: A Cultural Comparison Between Taiwan And The United States’, Strategic Management Journal, vol. 32, pp. 1183-1205. Mckelvie, A., Haynie, JM., & Gustavsson, V 2011, ‘Unpacking the uncertainty construct?: Implications for entrepreneurial action’, Journal of Business Venturing, vol. 26, no. 3, pp. 273-292. Ozgen, E., & Baron, R 2007, ‘Social sources of information in opportunity recognition: Effects of mentors, industry networks, and professional forums’, Journal of Business Venturing, vol. 22, no. 2, pp. 174-192. Schenkel, MT, Matthews, CH & Ford, MW 2009, ‘Making rational use of “irrationality”? Exploring the role of need for cognitive closure in nascent entrepreneurial activity’, Entrepreneurship & Regional Development, vol. 21, no. 1, pp. 51-76. Shane, Scott 2003, ‘A General theory of Entrepreneurship.’ Cheltenham, Edward Elgar. Ucbasaran, D., Westhead, P., & Wright, M 2009, ‘The extent and nature of opportunity identification by experienced entrepreneurs’, Journal of Business Venturing, vol. 24, no. 2, pp. 99-115. Welpe, IM., Sporrle, M, Grichnik, D, Michl, T, & Audretsch, DB, 2011, ‘Emotions and Opportunities: The Interplay of Opportunity Evaluation, Fear, Joy, and Anger as Antecedent of Entrepreneurial Exploitation’, Entrepreneurship Theory and Practice, no. 9, pp. 1-28. Read More