The Role of Opportunities in the Process of Entrepreneurship - Essay Example

Opportunities and Entrepreneurship Opportunities and Entrepreneurship Introduction Entrepreneurship involves doing things not done in business routine, essentially being a phenomenon which comes under leadership’s wider aspect. Further, it involves a subconscious discovery process where a person utilizes alertness to discover an opportunity and envisage its solution. The entrepreneur then pursues the opportunity regardless of the resources under one’s influence and control. Entrepreneurs and their new businesses make a massive contribution to the economy of their resident countries. In the UK, entrepreneurial ventures account for 99.9% of all 4.8 million businesses at the start of 2009 (Sahlman, 2009 p26). Entrepreneurial ventures provide more jobs than large firms. In the 70s and 60s, small enterprises had a net gain, despite severe recessions, in job creation. In the US, small firms account for two thirds of jobs created in the private sector (Sahlman, 2009 p26). Interestingly, over the same period, an approximated 500 companies lost five million jobs. Small and medium enterprises provide the local population with employment. This helps promote the development of such areas as inner cities. Sponsorship of local events also helps discover new talent which when developed proves beneficial to the local economy. Entrepreneurial opportunities can be defined as situations whereby new organizational methods, markets, raw materials, services, and goods can be introduced to existent ways of business operations. The introduction is via formation of new ends, means or means-ends relationships. The situations do not require a change in economic exchange terms in order to become entrepreneurial opportunities. Rather, all they need is potential to change the economic exchange terms. Entrepreneurial decisions, unlike satisfying or optimizing decisions, are creative decisions. This means that the entrepreneur creates the ends, means, or both in the chain. The creation of these frameworks of new means-ends in entrepreneurial making of decisions marks a crucial difference in optimization of previously established frameworks. They cannot be optimized for exploitation since they are unknown. Entrepreneurial decisions involve identification or creation of new ends or means previously undetected by participants in the market (Audretsch, 2010 p67). This paper aims to explain the role of opportunities in the process of entrepreneurship. It also seeks to examine entrepreneurship through a framework focused on the existence and characteristics of entrepreneurial opportunities. Finally, the paper seeks to discuss the identification of entrepreneurial opportunities. 2. Discovery of Opportunities Entrepreneurship depends on the ability of the entrepreneur to identify an opportunity, his/ her willingness to practice entrepreneurship, and their ability to take and exploit it. Since entrepreneurs act as the difference between success and failure of an entrepreneurial venture, understanding the entrepreneur’s mindset is essential (Audretsch et al, 2006 p78). In order for an entrepreneur to identify and exploit an opportunity, he/she needs a combination of traits. These are passion, initiative, determination, optimism, propensity for taking risks, and a strong need to achieve. Additionally, the entrepreneur needs self-confidence, creativity, control locus, and a need for autonomy. Entrepreneurs create new frameworks for decision making on ends-means into the system of prices. They do this via belief and perception formation on how to allocate resources. By encouraging entrepreneurs to purchase resources, utilize them for varying purposes, and sell their products, they create new markets via these perceptions as well as updating of old markets (Baron & Scott, 2008 p109). Prices created or updated through the process lead to an increase in decision accuracy for those who coordinate optimization of resources within a market that is price based. Formulation of a profitable conjecture relating to an opportunity is more advanced than optimization of resources within existing frameworks since it needs formation of price expectations at which services and goods not yet in existence will exist (Garcia et al, 2007 p34). If these conjectures prove correct, then the entrepreneur earns entrepreneurial profit. However, if the conjecture proves wrong, then they incur entrepreneurial loss. The opportunity discovery process describes how a person working alone perceives previously unknown or unseen ways. He then proceeds to form new items via previously undiscovered means. In order to establish the value of the opportunity, the entrepreneur must first conjecture the existence of a positive probability that the item’s future price exceeds expense and that there will be future demand. This latter case involves the individual needing to conjecture on the probability that once other individuals get the product, the response will be positive (Garcia et al, 2007 p34). The individual, in both cases, must try and foresee future market characteristics in the determination of ex ante should the opportunity possess potential value. It is not possible to predict, with certainty, the occurrence of such things since they require possession of information that is unavailable at that time. Even with the existence of working prototypes, current customers are not likely to forecast accurately on future demand for the new products (Garcia et al, 2007 p35). Individuals operating in firms or alone lack enough information needed for the establishment of whether there has been a discovery. Discovery, in this case, is the recognition or possession of information that can lead to updating of prices. In the process of opportunity exploitation, entrepreneurs come to acquire resources, while engaging in activities that provide others with information and change prices (Garcia et al, 2007 p35). The interaction and exchange process provides information which increases market participants’ mutual awareness about the opportunity’s characteristics. The information may either discourage or encourage the entrepreneur in continuance of opportunity pursuit. The only confirmation that unknown or unseen opportunity with value is, in fact, in existence occurs after creation of a new market for the item (Garcia et al, 2007 p35). Without market confirmation, no entrepreneurial perception’s validity, no price recorded knowledge there would be no updating of production preferences and plans of the entrepreneur. 3. Life Cycle of Opportunities When an entrepreneur discovers an opportunity that is valuable which then goes on to give entrepreneurial profit, the resulting profit is often transient because of internal and external factors (George & Adam, 2012 p26). First, new shocks replace existent ones generated initially by the opportunity, which leads to opening up of new ventures to be exploited. They also shut down the existing ones. Second, even in the absence of triggering of new shocks, competition exhausts opportunities. The asymmetry of information that created the opportunity reduces due to information diffusion on the opportunity. When the entrepreneur exploits the opportunities, transfer of information and the pursuit on the opportunity occurs. The opportunity is at first legitimized by the imitation, but competition exhausts all avenues to the point that incentive no longer exists (George & Adam, 2012 p26). Thirdly, information concerning the opportunity diffuses to owners of the resource. They may seek to bring increase profit by increasing their resource’s price, responding to generated information from entrepreneurial action on their resource’s new value. The opportunity’s half life, however, can last shorter or longer. This is dependent on various factors. First, imitation limitation mechanisms instituted by entrepreneurs such as monopoly contracts, patent protection, and trade secrecy, prolong the opportunity’s lifespan (George & Adam, 2012 p28). Second, mechanisms which slow down the recognition or transmission of information concerning the opportunity hinder its imitation. This increases the opportunity’s life. Situations whereby the opportunity’s knowledge is in the possession of a few parties also limit overexploitation of the opportunity. This is in spite of demonstrations of the opportunity. 4. Types of Opportunities Opportunities for entrepreneurial activities manifest in various ways. These are the locus of changes that create the opportunity, by source of the opportunities, and by what initiated the change. 4.1 Locus of Changes Entrepreneurial opportunities can result from changes in various portions of the chain of value (Steyaert & Daniel, 2008 p90). There are five loci of the changes: those stemming from new service or product creation, new geographical market discovery, those emerging from discovery or creation of raw materials, those coming from new production methods, and those generated from new organizational methods. Creation of new services or goods can develop an opportunity for profit. However, new organizational modes that do not need mortar and brick locations can generate opportunities for profit from entrepreneurship. New production methods have also provided entrepreneurial profit opportunities. 4.2 Source of Opportunities Opportunities vary according to their source (Steyaert & Daniel, 2008 p92). There are four ways of source categorization of opportunities. These are listed thus: consideration of differences between those opportunities resulting from asymmetries in information that exists between participants in the market and opportunities resulting from new information’s exogenous shocks, comparison between demand and supply side opportunities, difference between rent seeking and productivity enhancing opportunities, and identification of change catalysts, which generate the opportunity. 4.3 Initiators of Change The final dimension used to characterize opportunities for entrepreneurial activity is by actors which initiate changes. Various entities initiate the variations which result in opportunities for entrepreneurship. The initiator influences the discovery process, as well as the duration and value of the opportunity (Steyaert & Daniel, 2008 p98). Actors who influence the changes include universities or governments, existing industrial commercial entities, new industrial commercial entities, and other diverse actors. There exist two actor sets that are vital in the creation of opportunities. These are agencies for the creation of specialized knowledge such as research laboratories and universities and firms existing within the chain of industry. The latter includes customers and suppliers. These two actor sets generate opportunity creating variations under varied knowledge conditions of the industry. The changes that induce opportunities are most likely fashioned by the consumers, incumbent firms, and upstream suppliers (Steyaert & Daniel, 2008 p98). 5. Implications for Theory Building on Opportunities in Entrepreneurship. The classical definition of entrepreneurship translates into entrepreneurship rooted in assumptions about differences in equilibrium between consumers and the entrepreneur. However, entrepreneurship embeds the disequilibrium concept and incomplete opportunity information (Zoltán & David, 2010 p21). The basis of activity in entrepreneurship grounds itself in a system of economics where information about opportunities distributes unevenly across people. Possession of information leads to identification and existence of opportunities in entrepreneurship. A perspective on entrepreneurship that is opportunity based provides a general framework for the explanation of various aspects of the entrepreneurial process (Zoltán & David, 2010 p21). Opportunity thus comes off as the driving force of entrepreneurship. It is as a result of this opportunity based framework that entrepreneurship theories can be tested in opportunity exploitation and discovery evaluation. For example, entrepreneurial finance research can be linked to opportunity evaluation and discovery research in a framework based on opportunity. Explanations on how opportunities can be discovered, and linked to utilization of social capital and mechanisms for contracting, can be explained better on the basis of opportunity based entrepreneurship. Using the process of entrepreneurship itself is the best study of entrepreneurship, rather than focusing on individual entrepreneurial performance (Sahlman, 2009 p125). The perspective based on opportunity indicates that the process of entrepreneurship depends on factors which individual entrepreneurs cannot control. The variance in opportunities discovered by entrepreneurs is crucial to the process of entrepreneurship (WüStenhagen, 2008). Focusing on opportunities in entrepreneurship moves the argument away from assumptions that all entrepreneurs take part in the process correctly. For example, it is possible to predict various factors, which lead an entrepreneur to hire people, raise money, and make business plans without assuming that these processes affect the overall performance of the entrepreneurial venture. Explaining the existence and the emergence of opportunities in entrepreneurship is vital (Sahlman, 2009 p125). It is essential to understand how technological, legal, regulatory, political, and social changes eliminate and create opportunities. The structural and environmental approaches to entrepreneurship which may be included in the arguments are an essential part of the entrepreneurial field. 6. Identification of Entrepreneurial Opportunities An entrepreneurial opportunity is a latent or apparent possibility brought about by a sequence of events and suitable circumstances which can be utilized for the creation of new sources of value (Butler, 2006 p12). Opportunities could involve new routes of distribution, raw materials, processes, products, services, and improved service. While opportunities are ideas, ideas only become opportunities after evaluation and vetting. These opportunities come from ideas caused by several factors. One is change, which could be as a result of economic forces, social forces, technological advances, and political changes. Entrepreneurship instigates and adapts to change (Butler, 2006 p12). These entrepreneurs are innovation agents, who create value by exploiting the innovation to do something in a new way. The ability to identify of opportunities relies on several factors. The individual must have some access to knowledge and information through social sources, domain knowledge and experience, and systematic research (Fiet, 2008 p56). Several cognitive factors like perceptions and beliefs, alertness, and creativity, also come into the equation. When identifying an opportunity, the entrepreneur identifies trends, both technologically and socially. These trends relate to education, health, business, and the environment. Next, the entrepreneur needs to identify the target group. These could be the elderly, travelers, and managers. Their needs, wants, and challenges intersect. On identification of the project, the entrepreneur then converts the challenge into an opportunity. After identification of the opportunity, evaluation follows. During this evaluation, the entrepreneur has to utilize the six thinking modes. Doing this reduces complexity and ensures that evaluation of the opportunity occurs thoroughly from all angles. Hats can be used to represent these modes (Fiet, 2008 p57). A blue hat represents control and includes sequence and focus setting, process monitoring, reflection, summarization, and conclusion. The red hat represents emotional and intuitive thinking. This hat entails what the potential entrepreneur thinks about the idea, and his gut reactions to the idea. The white hat represents a mode of information seeking. It seeks to identify the facts, available data, and needed resources. A yellow hat represents a constructive and positive thinking mode. Here, the entrepreneur debates the benefits of the idea and what about it is achievable (Shane, 2003). The black hat represents caution and requires the entrepreneur to identify the dangers involved, as well as the problems and difficulties involved in the opportunity. Finally, a green hat represents a creative thinking mode, where the entrepreneur looks for fresh ideas, identifies how to solve them, and looks for alternatives. The entrepreneur should focus more on the control thinking mode, setting a focus when beginning, monitoring during the process itself, and conclusion of the process (Fiet, 2008 p58). The entrepreneur needs to engage the constructive mode of thinking before the caution, since positive thinking becomes difficult after being critical (Brem, 2007). The entrepreneur needs not spend too much time on his intuitions and emotions. Individuals have many sources of new entrepreneurial ventures. When there is inefficiency in the current market, and one has an idea to correct it, as well as the capability and resources to pull off the idea, then an opportunity arises (Greene, 2012). An individual could see a service or product, consumed in one market, that is not available in another, and import that service or product to their home market (Butler, 2006 p12). Most entrepreneurial ideas come from existing businesses. It is possible to license the right for the provision of an idea. The entrepreneur could discuss the opportunity with an employer who has no interest in the development of that business. The best and most reliable sources of new information are the customers. Listening to customers helps an entrepreneur identify what they want, how they prefer a product supplied, where they want it supplied, at what price, and when they would prefer to be supplied. Employers should also listen to employees, and any ideas they come up with, as they could be lucrative entrepreneurial opportunities. It is necessary to ascertain if there is any other supplier of the service or product in the current market (Butler, 2006 p13). The entrepreneur needs to be sure of what the other participants in the market are doing for their clients. The entrepreneur can better understand the needs that are unmet at the moment. In order to assess the opportunity, it is crucial to understand whether the industry in which the opportunity resides is shrinking or growing (Forbat, 2007). This is vital in ascertaining if the opportunity is viable. The entrepreneur also requires ensuring that they understand the regulations governing the industry. This is especially pertinent in determining the feasibility of the opportunity as an entrepreneurial venture. Identification of these factors provides the entrepreneur with information as to whether the opportunity is worth pursuing. This approach to opportunity discovery identifies the opportunity, seeks to understand the competition, and the constraints involved (Butler, 2006 p14). In doing this, the entrepreneur gauges the value of the opportunity as an entrepreneurial venture. 7. Conclusion The purpose of this paper was to discuss and clarify the key role of opportunities in the process of entrepreneurship. The paper also explained the dominant approach of equilibrium to entrepreneurship. The paper then made a case for entrepreneurship to be viewed through a framework of disequilibrium. The paper went further to discuss the existence of opportunities in entrepreneurship, relating them to the system of prices in the market, as well as the limits of the price system in explaining the process of entrepreneurial opportunities. Finally, the paper discussed the various ways in which opportunities can be identified, going on to innovate ways in which an entrepreneur can determine the existence of a real opportunity and its viability. References Audretsch D. B. 2010. Handbook of Research on Innovation and Entrepreneurship. Cheltenham: Elga. Audretsch D. B, Max C. K, and Erik L. 2006. Entrepreneurship and Economic growth. Oxford; New York: Oxford University Press. Baron R. A, Scott A. S. 2008. Entrepreneurship: a process perspective. Mason (OH): Thomson/South-Western, cop. Butler J. E. 2006. Opportunity identification and entrepreneurial behavior. Greenwich, Conn.: Information Age Publ. Brem, A. 2007. 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A. 2009. The entrepreneurial venture: readings selected. Boston, Mass.: Harvard Business School Press. York: Springer, 2010. Sahlman, William Andrews. The entrepreneurial Venture: readings selected. Boston, Mass.: Harvard Business School Press, 2009. WüStenhagen, R. 2008. Sustainable innovation and entrepreneurship. Cheltenham, UK, Edward Elgar. Read More