Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 2: 243–257 (2008)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/sej.47

THE VIRTUOUS CYCLE OF DISCOVERY AND

CREATION OF ENTREPRENEURIAL OPPORTUNITIES
SHAKER A. ZAHRA*
Carlson School of Management, University of Minnesota, Minneapolis,
Minnesota, U.S.A.

Researchers have debated whether entrepreneurial opportunities are discovered or created.

However, they have often overlooked the importance of the contextual variables that stimulate,
shape, and define the entrepreneurial act. This article focuses on entrepreneurial activities
within technology-based established companies and shows how and why certain contexts are
more conducive for discovery, while others promote the discovery and creation of opportuni-
ties. The article suggests a virtuous and dynamic cycle where discovery enriches creation
which, in turn, fosters the discovery of new opportunities. The focus on the context and key
features of entrepreneurial search contributes to the behavioral theory of and the debate on
the origins of opportunities. Copyright © 2008 Strategic Management Society.

INTRODUCTION entrepreneurs’ cognition, perceptions, and actions

The debate on the origin of opportunities has
sparked significant interest among entrepreneurship
scholars, attracting vocal protagonists and antago-
nists. This interest and passion are understandable
because a growing number of researchers define the
domain of the entrepreneurship field as centering on
opportunity recognition, evaluation, and exploitation
(Aldrich and Ruef, 2006; Shane and Venkataraman,
2000; Venkatraman, 1997), though this definition is
by no means universally accepted (e.g., Davidsson,
2004). In particular, disagreements persist about
the origin and nature of entrepreneurial opportuni-
ties (Eckhardt and Shane, 2003). Some researchers
observe that these opportunities exist independent of
Keywords: opportunities; discovery; creation; behavioral
theory of the firm; corporate entrepreneurship
*Correspondence to: Shaker A. Zahra, Department of Strategic
Management and Organization and Gary S. Holmes Center for
Entrepreneurship, Carlson School of Management, University
of Minnesota, 321 19th Ave. South, Minneapolis, MN 55455,
U.S.A. E-mail: zahra004@umn.edu
(Shane and Venkataraman, 2000). Noting the limita-
tions of this view, Alvaerz and Barney (2007) have
argued that some opportunities are created and others
are discovered. The distinction between discovery
and creation has important implications for research
on the nature of entrepreneurial opportunities.
Focus and objectives
In this article, I propose that however we concep-
tualize opportunities and their origin, we can gain
greater richness from examining the context in
which the entrepreneurial act unfolds (Hill, 2008).
Context refers to those variables which shape the
characteristics of a setting, as well as the motiva-
tions and behaviors of different actors in that setting.
Alvarez and Barney (2007) observe that some con-
texts are especially conducive to the discovery of
opportunities, but others foster opportunity creation.
While there are significant merits to this distinction,
discovery and creation sometimes form a virtuous
and dynamic cycle where entrepreneurial opportu-
nities that have been discovered at a point in time
become a platform for the creation of a myriad of

Copyright © 2008 Strategic Management Society

244 S. A. Zahra
additional opportunities at a later time. In turn, this
sparks further discovery of varied and more lucra-
tive opportunities. However, this self-generating and
reinforcing virtuous cycle is not automatic. Contex-
tual forces shape this cycle’s emergence, unfolding,
and persistence. Thus, while Alvarez and Barney
(2007) contrast the contexts in which discovery and
creation of opportunities ex post, I will attempt to
delineate some of these contexts ex ante. This focus
provides a richer depiction of how certain contexts
might promote the discovery versus the creation of
opportunities and why contextual influences really
matter. In doing this, I adopt Eckhardt and Shane’s
definition of entrepreneurial opportunities as ‘situa-
tions in which new goods, services, raw materials,
markets, and organizing methods can be introduced
through the formation of new means, ends, or means-
ends relationships’ (2003: 336).
The virtuous cycle I have just sketched out has
been noted in two decades of research on corporate
entrepreneurship (Burgelman and Sayles, 1986),
innovation (Dosi, 1984, 1988), and technical search
(Fleming and Sorenson, 2004). These different
research streams explore innovative ways to revitalize
companies’ operations by developing new businesses,
embodying elements of exploration and exploitation
(March, 1991). Given the widespread prevalence of
this cycle in diverse organizational settings, I will
emphasize entrepreneurial activities that occur in
established companies, especially those that compete
primarily in technologically advanced and sophisti-
cated markets. In these companies, science and tech-
nology provide a major foundation for discovering
and creating opportunities (Audretsch, 1995; Zahra,
1996). These opportunities arise from market condi-
tions, as well as the firm’s own internal capabilities,
resources, and skills (Adner and Levinthal, 2001;
Audretsch, 1995; Christensen, 1997), and determine
companies’ evolution (Burgelman and Grove, 2007)
In technology-based companies, search is typi-
cally carried out formally through specialized units
and staffs, and informally by interested entrepre-
neurs who frequently explore technological frontiers
that fall outside the current official definitions of
business domains. Driven by curiosity, interest, intu-
ition, or ambition, corporate entrepreneurs frequently
discover and create opportunities that have the
potential to transform their units, divisions, or com-
panies. Given the different foci and styles of search
conducted in different parts of the organization, the
technological opportunities these entrepreneurs dis-
cover or create might differ significantly from those
Copyright © 2008 Strategic Management Society
identified by the formal units and staff assigned to
monitor and assess technological change.
The behavioral theory of the firm (March and
Simon, 1958) and technological research stream
(Fleming and Sorenson, 2004) usually adopt a prob-
lemistic view of search for opportunities (e.g., Hill,
2008; Levinthal, 1997; Nelson and Winter, 1982).
Accordingly, search for opportunities is triggered
by the problems the firm encounters and usually
has a satisficing character—building initially on the
firm’s knowledge base, but increasingly venturing
into new terrains if a satisfactory solution is not
found (Hill, 2008; Rosenkopf and Nerkar, 2001;
Tushman and Anderson, 1986). Thus, search for
opportunities will be constrained. Yet, a vast body
of research shows that corporate entrepreneurs have
demonstrated considerable skillfulness in gaining
autonomy and discretion in searching broadly for
opportunities (Burgelman and Sayles, 1986; Pinchot
and Pellman, 1999). Consequently, whereas Alvarez
and Barney (2007) proffer that search would have no
real meaning within their creation theory, I propose
that search is an essential and integral part of the
definition of entrepreneurial opportunities. Passive
search characterizes discovery, whereas proactive
search is central to the creation theory. As a result,
real and genuine differences exist in the nature of
the search process undertaken by entrepreneurs who
discover versus create opportunities. The nature of
this search is shaped by the relevant contextual vari-
ables. Of course, the characteristics of the search
process itself also define the nature and definition
of entrepreneurial opportunities. Search processes
vary considerably in their scope, duration, novelty,
participants, goals, and underlying knowledge bases.
Differences in these attributes can significantly influ-
ence an entrepreneur’s perception, cognition, defini-
tion and recognition of opportunities.
Overall, this article articulates the nature and key
features of context and how they shape the discovery
of opportunities. It draws attention to the underlying
variables that define and shape the recognition of
opportunities, building on the behavioral theory of
the firm (March and Simon, 1958). This discussion
makes it important for entrepreneurship researchers
to give attention to the context of the entrepreneurial
act, instead of treating it simply as a control variable.
By defining the salient dimensions of the context
and search, the article adds to discussions of the
behavioral theory of the firm, while offering execu-
tives a basis to understand and frame their firms’
entrepreneurial activities.
Strat. Entrepreneurship J., 2: 243–257 (2008)
DOI: 10.1002/sej

Both discovery and creation have advantages
when theorizing about entrepreneurship. Each
view also has its shortcomings, and senior execu-
tives hoping to nurture entrepreneurship frequently
have to work through complex organizational
issues, such as developing effective organizational
designs, observing corporate cultures, and offering
appropriate incentives that engage employees and
sustain their interest in entrepreneurship (Burgelman
and Sayles, 1986). The virtuous cycle that unfolds
between discovery and creation offers these execu-
tives a forum in which they can enrich the variety
and viability of entrepreneurial opportunities.
DISCOVERY VERSUS CREATION OF
ENTREPRENEURIAL OPPORTUNITIES
The concept of opportunities occupies a central
place in the study of entrepreneurship (Stevenson
and Jarillo, 1990; Venkataraman, 1997). Though not
universally accepted as the crux of entrepreneurial
activities (e.g., Davidsson, 2004), it offers an intel-
lectual meeting place for researchers to identify the
domain of entrepreneurship as a scholarly discipline.
Selecting the right opportunities to pursue can also
make a significant difference in how an entrepreneur
performs (Ardichvili, Cardozo, and Ray, 2003). Yet,
disagreements persist today on what constitutes an
opportunity, as well as on the origin of these oppor-
tunities. An opportunity is ‘the chance to meet a
market need (or interest or want) through a cre-
ative combination of resources to deliver superior
value . . . But opportunities describe a range of phe-
nomena being formed and become more developed
through time’ (Ardichvili et al., 2003: 108). Recent
discussions of the origin of opportunities have iden-
tified two perspectives: discovery and creation.
Discovery versus creation
Eckhardt and Shane (2003: 338) define entrepreneur-
ial discovery as ‘the perception of new means-ends
framework to incorporate information . . . that has
the potential to be incorporated in prices and thereby
efficiently guide the resource allocation decisions of
others.’ Discovery, which is accomplished by entre-
preneurs working alone or in teams, independently
or within existing companies (Eckhardt and Shane,
2003), is predicated on the alertness of the entre-
preneur (Kirzner, 1973, 1997). Alertness reflects
the entrepreneur’s prior knowledge (Kirzner, 1973,
Copyright © 2008 Strategic Management Society
Cycle of Discovery and Creation 245
1997; Shane, 2000), which usually revolves around
market needs, ways of serving customers, and ways
of addressing particular customer problems. Prior
knowledge heightens the entrepreneur’s alertness to
potential opportunities.
In technology-based companies, scientists with
deep knowledge of their disciplines often make
important discoveries—some of which are acciden-
tal—because of such prior knowledge. R&D per-
sonnel and staff frequently engage in innovation
activities that generate insights that produce break-
throughs. Corporate entrepreneurs, often working
informally, rely on their prior knowledge in discov-
ering opportunities for new business fields where
their companies can build new markets. Scientists,
engineers, R&D personnel, and entrepreneurs alike
sometimes make technological breakthroughs by
combining different types of knowledge with orga-
nizational processes (O’Connor and Rice, 2001).
Some researchers view opportunity recognition
as a ‘continuous, proactive process essential to the
formation of a business’ (Ardichvili et al., 2003:
109). This view recognizes that opportunities occur
as individuals shape ideas into full-blown busi-
ness plans (Ardichvili et al., 2003). This iterative
process usually involves scanning and sensing the
environment; identifying gaps in covering market
needs; exploring the fit between that gap and a
given resource; and developing the mechanisms by
which this gap is filled (Alvaerz and Barney, 2007;
Ardichvili et al., 2003; Christensen, 1997).
Creation involves a great deal more than simply
recognizing opportunities that already exist; it requires
sensing, developing, evaluating, and reframing oppor-
tunities (O’Connor and Rice, 2001). Organizations
adept at innovation understand that idea recognition
is simply the beginning of a cycle of activities that
give technological, business, and strategic meaning to
the idea. They need to invest in building the routines
and systems that can bring the idea to market. It also
requires promoting ideas within the organization and
positioning them to gain the attention and support of
management (Burgelman and Sayles, 1986). Some-
times, it also means creating the institutions that give
birth to a new industry, legitimizing products (e.g.,
radically new technologies), and setting technologi-
cal standards.
Whether discovered or created, opportunities
differ significantly in their duration because of their
ease (difficulty) of imitation, the knowledge required
to extend their shelf life (Eckhardt and Shane, 2003),
their knowledge base, and their comprehensibility.
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DOI: 10.1002/sej
246 S. A. Zahra
Opportunities grounded in new science, for example,
become a foundation for new technological fields, as
well as reinforce the firm’s competitive position.
Some of these opportunities are hard for others to
comprehend due to their scientific base and the fact
that innovators control access to science. Science
is also integrated with and embedded in different
organizational systems and processes that enable the
innovator company to gain an advantage.
Opportunity creation through science and techno-
logical development, therefore, could be worthwhile
because imitation is slow. Additional business oppor-
tunities are created as science becomes better devel-
oped, process innovations are developed to build on
emerging scientific findings, and new mechanisms
are employed to embed science into existing prod-
ucts, systems, and processes. In this fashion, creation
of opportunities gives meaning to scientific discov-
eries through successive uses of emerging results
and findings, learning from transforming science
into products, and interacting with the market and
key stakeholders (such as distributors, customers,
and suppliers). The unfolding of the discovery and
creation activities could be simultaneous or lagged,
as entrepreneurs absorb what they learn and ponder
the usefulness of the newly acquired knowledge.
SEARCH: LOCAL, TETHERED,
UNCONSTRAINED, AND
FREEWHEELING EXPEDITIONS
Entrepreneurship in established companies
Corporate entrepreneurship refers to the set of
activities companies and their members undertake
to enter new market arenas that offer opportunities
for growth and profits. Some of these activities are
usually formalized and focus on particular markets
and technological domains. These formal activities
are guided and induced by the firm’s formal strategy
(Burgelman and Sayles, 1986). Investments in new
R&D fields that create new businesses are examples.
Other entrepreneurial activities are autonomous and
usually reflect the efforts of different individuals,
teams, groups, and units to nurture entrepreneurial
activities (Burgelman, 1983).
Informal entrepreneurial activities often comple-
ment formal initiatives and sometimes broaden
organizational search for opportunities by ventur-
ing beyond the officially sanctioned organizational
domain. Venturing ideas emanating from informal
Copyright © 2008 Strategic Management Society
initiatives could clash with those sanctioned by
management. Champions of informal initiatives may
wish to push the firm into areas of science and tech-
nology that fall outside its accumulated knowledge
and prior RandD activities. Entrepreneurs might
discover new opportunities that lie at the intersec-
tion of two or more fields. This is happening today,
where the integration of biological and pharma-
ceutical knowledge is paying huge dividends for
some companies, or where nanotechnology builds
on the convergence of multiple technological and
scientific fields. This integration, however, could
disrupt the identity and culture, as well as the future
of existing units and their relative standing in the
company. Therefore, managers devote considerable
time and energy to managing the tensions that might
erupt between formal and informal entrepreneurial
activities.
A key objective of formal and informal corporate
entrepreneurial activities is to promote organiza-
tional learning. Burgelman (1991: 255) suggests that
‘Firms overcome the liabilities of newness by accu-
mulating and leveraging organizational learning . . .’
Teece et al., (1994) also observe that a key quality
of organizational learning is enabling the firm, as a
whole, to surmount the bounded rationality of their
key individuals. Entrepreneurial activities promote
a broader search for opportunities than is typically
depicted in the standard treatments of the behavioral
theory of the firm, indicating that bounded rational-
ity limits the scope of search (Adner and Levinthal,
2001; Rosenkopf and Nerkar, 2001). Path dependen-
cies also perpetuate search along well-known and
familiar trajectories (Teece et al., 1994). Conse-
quently, search is usually tightly linked to the firm’s
dominant products and technologies.
The technology base of the firm
and entrepreneurship
Discussions of corporate entrepreneurial activities
frequently overlook the fact that many established
technology-based companies are technologically
diversified (Granstrand, Patel, and Pavitt, 1997). This
diversification (i.e., the spread of a firm’s competen-
cies across technical fields) reflects management’s
concern over rapid technological obsolescence, the
need for many technologies to create and develop a
new product, and historical accumulation of technol-
ogies (Malerba, 2006). Technological diversification
protects the company against lock in by provid-
ing opportunities for learning. It also provides a
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platform in which opportunities for growth and prof-
itability are discovered or created.
Larger companies are usually technologically
diversified (Granstrand et al., 1997)—they need to
integrate multiple technologies to develop a family
of winning products (Kodama, 1995). Integration
in these companies is often formalized based on
market research or scientific developments, some-
times leading to radical innovations. Incremental
innovations could also be integrated to generate
opportunities for radical innovation that fuels further
discovery and creation. In the diversified firm, there-
fore, entrepreneurial opportunities might lie along
the same trajectories of normal technological evolu-
tion or even outside the firm’s boundaries.
Research on technological search also provides
rich insights into the origin of entrepreneurial oppor-
tunities. Grounded in the behavioral theory of the
firm (March and Simon, 1958), this research shows
that search for opportunities embodied in its diverse
technological portfolio is usually initiated close to
the firm’s knowledge base. Opportunities that exist
within each technological field result from: scientific
discoveries, infusing technologies across fields, inte-
grating and converging different fields, and fusing
technologies by combining seemingly unrelated
technologies to create new-to-the-world industries
(Kodama, 1995). Companies tend to explore radi-
cally new technological fields when existing ones
have approached their natural maxima. Technologi-
cal discontinuities and attendant crises could also
push the firm to explore distant fields (Kim, 1998;
Christensen, 1997). Technological convergence also
generates entrepreneurial opportunities that redefine
what companies do and where they explore for addi-
tional opportunities.
Researchers have found that distant searches—
those that are conducted far from the well-known
technological domains within the firm’s portfolio—
often generate even more novel solutions and inno-
vations (Sorenson and Fleming, 2004; Hill, 2008).
However, these radical innovations lack the neces-
sary political support within the company and fail
to create profits. A blind spot in established com-
panies’ thinking is focusing on known technologies
and assuming they will follow a natural evolutionary
path, possibly ignoring nascent technologies.
Seeking to counteract inertia and escape the rigid-
ities that arise from their path dependency, some
companies have devoted a portion of their R&D
resources to exploring frontier technologies, allying
with start-ups and establishing corporate venture
Copyright © 2008 Strategic Management Society
Cycle of Discovery and Creation 247
capital programs, as well as connecting with start-ups
and venture capitalists (Chesbrough, 2002). These
formal activities also benefit from informal entrepre-
neurial activities, which are freewheeling and search
broadly. The fact that many individuals working
at different parts of the organization are actively
engaged in these freewheeling search efforts can
enrich the formal—but often constrained—search
for opportunities, far afield from the dominant busi-
ness definition. Freewheeling expeditions, however,
need to be taken seriously because they generate
considerable insights about the nature of emerging
opportunities in distant technological fields and what
they might mean to the company’s overall strategy.
CONTEXT, SEARCH, AND THE
VIRTUOUS CYCLE OF DISCOVERY
AND CREATION
Hill (2008) observes that prior research on corpo-
rate entrepreneurship and behavioral theory has been
handicapped by ignoring the context of the entre-
preneurial act (e.g., discovery versus creation). She
proposes that greater richness could emerge from
exploring the cognitive and temporal dimensions
of the context. This is an important insight, espe-
cially in view of the unfolding nature of opportunity
recognition (Ardichvili et al., 2003).
Search context in technology-based companies
Alvarez and Barney (2007) posit that discovery and
creation theories thrive in different contexts. They
characterize these differences along multiple dimen-
sions that include leadership, decision making,
human resource practices, strategy, finance, mar-
keting, and ways of sustaining competitive advan-
tage. Alvarez and Barney (2007) clearly explicate
effective entrepreneurial actions in discovery and
creation contexts ex post. This focus facilitates culti-
vating opportunities once they have been defined. It
is also beneficial in learning how to develop a setting
where discovery and creation can flourish.
However, this focus does not serve the inter-
ests of novice entrepreneurs or those entrepreneurs
exploring nascent technological domains. These
entrepreneurs typically chart a new terrain without
compasses, maps, or signposts. Their imagination
and labor combine to determine what happens and
how it unfolds, as well as when and where an activ-
ity (outcome) has been completed. Even then, their
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248 S. A. Zahra
task is almost never done because their entrepre-
neurial creations or discoveries become inputs into
yet another search cycle. This makes it important to
delineate ex ante the contexts in which discovery
and creation activities thrive.
Context refers to those variables that shape the
characteristics of a setting and the behavior of dif-
ferent actors within that setting. Within an organi-
zation, these variables may include the assumptions
held and goals pursued (Alvarez and Barney, 2007);
the organizational structures and corporate cultures
that give rise to action, symbols, relationships, and
networks that connect actors; and the political and
aspirational climate within the company (Kim,
1998; Kodama, 1995). Externally, contextual vari-
ables might include the state of science, the nature
and intensity of competition, technological prowess
of rivals, and the historical patterns of knowledge
accumulation (Fleming and Sorenson, 2004; Dosi,
1984, 1988; Kim, 1998; Malerba, 2006).
The diversity of the technology base
In considering entrepreneurial activities, the firm’s
technology base serves as a key contextual variable
that influences search. The knowledge structure of
these technologies varies from simple to exceed-
ingly complex and incomprehensible, even to the
most advanced inventor. Knowledge also varies in
its newness, with some technologies in their develop-
mental stages and others in the emerging, established,
or maturing stages. Technologies also differ in their
relatedness to the firm’s knowledge base, with some
being closely connected to the company’s traditional
technologies and others being unrelated. These dif-
ferences in relatedness usually manifest the extent
to which firms vary in their historical technological
diversification strategies which, in turn, are driven
by prior investments, knowledge, and resource accu-
mulation patterns, as well as strategic moves, such
as acquisitions and alliance activities. The knowl-
edge base of the firm’s technologies provides fertile
ground for discovering and creating opportunities
that generate revenue and support growth.
Differences in the composition and attributes of
the firm’s technology base define the context of
search for opportunities. Some companies might
venture into unrelated territories; others might seek
greater strategic coherence in their technological
base as well as competitive strategy. According to
Teece et al. (1994: 2) ‘Firms are coherent to the
extent that their constituent businesses are related to
Copyright © 2008 Strategic Management Society
one another.’ The firm’s business definition, in turn,
shapes its technological resources and capabilities
and vice versa. Entrepreneurs factor these variables
into their calculations of different opportunities that
could redefine the firm’s technological base.
Companies diversify their technological base to
broaden or deepen their knowledge. Technological
diversification, which adds new knowledge to the
firm’s existing skills in new fields, could be related
or unrelated. The pattern of technological diversi-
fication, therefore, can enhance the variety of the
firm’s knowledge base, allowing entrepreneurs to
discover opportunities in these new areas or across
fields. This could enrich the strategic variety and
novelty of the firm’s strategy and product offer-
ing. Technological diversification also deepens the
firm’s knowledge base, reinforncing its dominance
and control of particular types of knowledge. Deep
mastery of knowledge can also promote break-
through technological discoveries (Zahra, Ireland,
and Hitt, 2000).
Diversification by entering new fields often
deepens the firm’s mastery of given technologies,
but does not create value, at least in the short term.
Much depends on the pattern of knowledge accu-
mulation and corresponding capability building by
the organization. For example, in the biological,
pharmaceutical, and chemical industries, ‘products
are created at the molecular level and inseparable
from their process’ (Kotabe and Swan, 1995: 625).
Knowledge does not add cumulatively and discover-
ies may render prior science obsolete. In industries
that are grounded in engineering, products are made
by assembling different parts. As a result, conver-
gence of different technologies is common, as is
happening today in the nanotechnology and ICT
industries. While new paradigms might bring new
regimes of innovation, it is still possible to assemble
and use parts of technologies in making new ones.
These patterns of knowledge accumulation could
make important differences in how entrepreneurs
perceive the opportunity set their companies have.
Both discovery and creation of opportunities are
likely to thrive, capturing opportunities arising from
the changing patterns of knowledge accumulation.
The literature on the behavioral theory of the
firm shows that the search for novelty that gives
rise to definition and exploitation of opportunities is
often arduous (Adner and Levinthal, 2001; Fleming
and Sorenson, 2004; Malerba, 2006). Entrepreneurs
usually have to navigate a complex and highly
political internal landscape to bring their notions of
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opportunities to capture the interests of organizational
power brokers and senior executives. To verify their
hunches, some entrepreneurs undertake skunk work
and other underground efforts to craft their notion of
opportunities, test and establish their boundaries and
articulate their strategic, financial and organizational
ramifications (Pinchot and Pellman, 1999).
Informal probes (e.g., skunk work) help novice
and experienced entrepreneurs better define their
concept of opportunity and where it fits organiza-
tionally. These probes also engage entrepreneurs in
important knowledge conversion cycles that trans-
form basic scientific findings into organizational
concepts and models. They make technical and sci-
entific concepts accessible to other organizational
members, especially senior executives (Zahra, Van
de Velde, and Larraneta, 2007). Once such transla-
tion has occurred, management can easily consider
different business opportunities that could emerge
from the firm’s technological base and the related
business models that could harvest these opportuni-
ties. Thus, discovery could encourage and promote
creation of (new) entrepreneurial opportunities.
Figure 1 graphically depicts the relationship
between informal and formal search activities in
the technology-based company. Consistent with the
behavioral theory of the firm, formal search is likely
to be bounded by the company’s technological base
and focused on opportunities in close proximity
to that core, as illustrated in Figure 1 by the
solid black dots. Some search activities might be
Search
scope
Close
Formal search
Figure 1. Entrepreneurial behavior and scope of search for opportunities
Copyright © 2008 Strategic Management Society
Cycle of Discovery and Creation 249
expeditionary, probing new frontiers on the edge and
removed from the technology base of the firm. Some
of these activities are officially sanctioned by senior
managers and typically guided by their vision of the
company’s evolution.
Informal search that is carried out by organiza-
tional members also starts close to the technologi-
cal base of the firm, but quickly explores a large
set of options that are increasingly distant from
that base. Informal search, therefore, is likely to
venture into uncharted territories, exploring diverse
and frequently radically different opportunities. The
above discussion suggests that informal search that
unfolds through autonomous entrepreneurial activi-
ties is likely to result in diverse opportunities that
vary in their relatedness to a company’s technology
base, time horizons, and skills needed for successful
exploitation and potential payoff. These observa-
tions suggest the following propositions:
Proposition 1: Formal search takes place close to
the firm’s technological core, whereas informal
search occurs far beyond that core.
Proposition 2: Compared to formal search, infor-
mal search leads to the recognition of more varied
opportunities outside the company’s technologi-
cal base.
Opportunities identified through informal search
are likely to vary in their radicalness; many are likely
Distance from the firm’s technology base For
Informal search Company’s technology base
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250 S. A. Zahra
to fall beyond the scope of the company’s techno-
logical and business base (Figure 1). Freewheeling
search is unlikely to be constrained by organiza-
tional mandates, budgets, or existing systems. Of
course, not all opportunities will be radical or orga-
nizationally or strategically viable. Champions of
these opportunities, therefore, have to work hard to
get senior management’s attention and support. In
fact, senior managers are likely to focus on those
opportunities that are closest to their companies’
technology base—where their firms have techno-
logical capabilities. These observations suggest the
following proposition:
Proposition 3: Formal (induced) search leads to
the recognition of opportunities close to the firm’s
technological base.
Still, the creation of opportunities often involves
enactment (Alvarez and Barney, 2007), conjecture,
and social construction of knowledge about tech-
nological trajectories and their effects on the future
state of the industry and the firm’s evolutionary
paths (Dosi, 1984, 1988). This process of enactment,
in turn, could lead to discovery of other technology-
related entrepreneurial opportunities. For example,
corporate entrepreneurs could discover opportuni-
ties as they consider the convergence of technologi-
cal fields (Kodama, 1995). They might also discover
additional opportunities as they assess the firm’s
technological portfolio and reuse and prune aging
technologies to support new strategic initiatives.
Opportunities are also discovered when entrepre-
neurs consider ways to revive the firm’s maturing
technologies or reactivate dormant capabilities by
integrating existing technologies or marrying old
and new technologies. Thus, creation can fuel the
discovery of additional and varied entrepreneurial
opportunities.
As the above discussion indicates, discovery can
lead to the creation of entrepreneurial opportunities
and vise versa, often forming a virtuous cycle. This
cycle (Figure 2), unfolds over time and in different
parts of the organization, leading to the recogni-
tion of multiple opportunities. Parts of this cycle are
driven by informal or autonomous search by different
corporate entrepreneurs and could, therefore, iden-
tify opportunity sets that differ significantly in their
novelty, magnitude, fit with the firm’s mission and
systems, market arenas, and the capabilities needed
for their success. The diversity of these opportunities
could lead managers to consider different growth
Copyright © 2008 Strategic Management Society
Creation
Discovery Discovery
Creation
Figure 2. The discovery-creation virtuous cycle of
opportunity recognition
vectors, opening up new market spaces—sparking
another round of the discovery-creation cycle. These
observations suggest the following proposition:
Proposition 4: Discovery and creation form a
virtuous cycle where discovery promotes the cre-
ation of entrepreneurial opportunities and vice
versa.
Another important aspect of the virtuous cycle
displayed in Figure 2 is that the discovery of oppor-
tunities can spark additional discoveries. It sets the
stage for exploitation—a process that entails consid-
erable trial-and-error learning (Zahra, Sapienza, and
Davidsson, 2006). Learning generates knowledge
that gives important clues about market conditions,
gaps that exist in meeting market needs, and ways
to satisfy these needs. Learning also augments and
sometimes revises prior knowledge that triggers new
and varied conceptions of entrepreneurial opportu-
nities. Consequently, exploitation could lead to the
discovery or creation of opportunities.
For technology-based companies, opportuni-
ties lie not only in knowledge creation (Nonaka
and Takeuchi, 1995), but also knowledge conver-
sion (Zahra et al., 2007) and exploitation (Kodama,
1995). Researchers have long recognized the impor-
tance of technological diversification for creating
knowledge and building the capabilities needed for
knowledge production that stimulates innovation
(Kodama, 1995). Each of these activities, of course,
could provide fertile ground for entrepreneurial dis-
covery and/or creation. Still, knowledge creation
Strat. Entrepreneurship J., 2: 243–257 (2008)
DOI: 10.1002/sej

Tech
Discovery
audience
- - Horizontal knowledge conversion
Vertical knowledge conversion
Figure 3. Knowledge conversion as a source of opportunities
does not automatically lead to effective knowledge
exploitation for profit. Newly developed knowl-
edge has to be converted into ideas that are refined
and improved, increasingly becoming a basis for
opportunity recognition through discovery and/or
creation.
Conversion means changing knowledge from one
form to another. It translates scientific and techno-
logical discoveries into information that is accessible
to other technology and business audiences who can
appreciate relevant opportunities and their potential.
This is illustrated by the various activities that occur
along the horizontal axis in Figure 3. Technologi-
cal discoveries are further enriched by the diverse
interpretations and conjectures about their potential
uses, with increasing levels of specificity in terms of
potential applications.
Conversion also occurs vertically. For instance,
scientific discoveries could lead to additional and
varied discoveries within the same domain of
research. Other discoveries are converted horizon-
tally for other audiences, and within these domains
greater and more detailed conversions occur verti-
cally (Figure 3). As technological discoveries are
translated in this fashion, they become progressively
useful as a foundation for conjectures about the
nature and magnitude of entrepreneurial opportuni-
ties. This conversion cycle is carried out by differ-
ent groups of people who have different mindsets,
cognitive styles and skills. These differences
Copyright © 2008 Strategic Management Society
Cycle of Discovery and Creation 251
Business
applications
accentuate the emergent but varied nature of oppor-
tunities that are the result of either discovery or
creation, as illustrated in Figure 3.
ABSORPTIVE CAPACITY,
KNOWLEDGE CONVERSION,
AND OPPORTUNITIES
Having highlighted the importance of knowledge
conversion in opportunity recognition, it is impor-
tant to note that the outcomes of this conversion
depend on the firm’s absorptive capacity. Accord-
ing to Cohen and Levinthal (1990), this capacity
reflects the company’s ability to recognize and value
knowledge coming from external sources, as well
as absorb and assimilate that knowledge. Zahra and
George (2002) have proposed that this capacity has
two components: potential and realized. Potential
capacity refers to the firm’s ability to gain and
absorb new knowledge. Realized capacity indicates
the firm’s ability exploit that knowledge through
conversion and integration for competitive advan-
tage. Thus, the knowledge production function of
the technology-based firm sets the stage for two
separate, yet related, activities. The first is trigger-
ing the knowledge conversion process I have just
described, thus inducing and fueling exploitation.
The second is enriching the firm’s absorptive capac-
ity, which interacts with knowledge conversion to
Strat. Entrepreneurship J., 2: 243–257 (2008)
DOI: 10.1002/sej
252 S. A. Zahra

Knowledge Knowledge Knowledge

production conversion exploitation

Absorptive
capacity

Figure 4. The role of absorptive capacity in knowledge production and exploitation for opportunity recognition

promote discovery and creation of entrepreneurial
opportunities, as illustrated in Figure 4.
Technological prospecting
The discovery-creation cycle described in Figure 2
leads to the identification of important opportuni-
ties and generates important knowledge about the
locus and potential effect of these opportunities for
the firm’s evolutionary path (Zahra, Nielsen, and
Bogner, 1999). It also generates knowledge useful
in reconfiguring or redefining the firm’s technology
base, assets, and capabilities. For instance, this cycle
unmasks major gaps in the firm’s technology port-
folio and prompts entrepreneurs to seek ways to fill
or work around them. It also highlights areas where
new technological skills could be built and deployed
to improve the firm’s knowledge-production capa-
bility (the capacity to conceive, develop and use new
knowledge). In turn, this knowledge could enhance
the firm’s absorptive capacity, facilitating the assim-
ilation and exploitation of new knowledge in defin-
ing additional, and perhaps radical, entrepreneurial
opportunities. Improvements in the firm’s knowl-
edge base, through accumulation of knowledge that
expands absorptive capacity, can promote techno-
logical prospecting—the formal and informal search
for opportunities to develop and commercialize new
technologies or adopt them in the firm’s technologi-
cal portfolio. Whether performed formally or infor-
mally, technological prospecting serves as a search
process for opportunities in existing and potential
technological domains.
The technological prospecting process I have just
described can further activate the discovery-creation
cycle by creating opportunities to learn and open
the door to the discovery and creation of additional
Copyright © 2008 Strategic Management Society
opportunities. Learning through technological pros-
pecting transcends merely gaining knowledge about
the technology and its constituent components; it
also covers the rules that govern technological evo-
lution, as well as conjectures about technological
trajectories, industry development, and the various
organizational forms that would benefit from new
technological regimes. Each of these areas offers
interested entrepreneurs an arena in which they can
discover and/or create opportunities. Organizational
learning that materializes through these iterative
activities simultaneously prompts and serves to per-
petuate the virtuous cycle between discovery and
creation.
Technological prospecting offers also opportu-
nities for learning, knowledge accumulation, and
subsequent technological diversification. These out-
comes become possible when there is a systematic
effort devoted to knowledge integration (Zahra and
George, 2002). Integration crystallizes points of
intersection, the depth and breadth of the firm’s tech-
nological and knowledge base, and fills voids that
exist in the firm’s technological capabilities. This
integration could be done formally or informally
piecing together diverse (often divergent) types of
knowledge, providing inputs that perpetuate the
virtuous cycle of opportunity discovery and creation
(Figure 2).
To summarize, the above discussion suggests an
ongoing dynamic cycle where discovery promotes
the creation of opportunities which, in turn, stimu-
lates discovery. This discussion also suggests the
following proposition:
Proposition 5: The outcomes of the virtual dis-
covery-creation cycle depend on: (a) knowledge
conversion, (b) technological prospecting, and
(c) the firm’s absorptive capacity.
Strat. Entrepreneurship J., 2: 243–257 (2008)
DOI: 10.1002/sej

CONTEXT AND THE VIRTUOUS
DISCOVERY-CREATION CYCLE
Recognizing the ongoing discovery-creation cycle
could revise our concepts related to search. Alvarez
and Barney (2007) suggest that discovery does not
involve search. However, the preceding discussion
suggests it does—albeit in a different form—at least
in the case of corporate entrepreneurial activities.
Considering the nature of corporate entrepreneur-
ship, search associated with discovery and creation
are quite different from those observed among inde-
pendent entrepreneurs. As suggested earlier and
shown in Figure 1, discovery-related search tends
to be more autonomous, atomistic, individual based,
discrete, and serendipitous than the search character-
izing creation.
Creation-related search appears to be more delib-
erate, induced, cumulative, team based, and elabo-
rate than discovery-related search. One reason for
this is that corporate entrepreneurs typically have
to address a myriad of technological and business
issues before opportunities become visible. Since
solutions to these problems are of the satisficing
nature, search processes are likely to persist and
unfold in unforeseen ways. The speed of evolution
depends on the patterns of knowledge accumulation,
inertial forces, political agenda, state of technologi-
cal development, and quest for strategic coherence
(Teece et al., 1994). As with independent entre-
preneurs, creation and discovery of opportunities
have serendipitous qualities but, as widely accepted,
fortune favors the prepared.
This raises the question of when discovery predom-
inates and overshadows creation of entrepreneurial
opportunities. The discussion presented earlier sug-
gests that this is likely to happen in Schumpeterian
environments (Malerba, 2006), where the industry
knowledge base is young, technology is emerging,
the firm is specialized (or deliberately targets a par-
ticular emerging technology), and the firm has a
coherent strategic focus. In these settings technolog-
ical opportunities are abundant and, therefore, easier
to discover. Corporate entrepreneurs, venturing away
from the firm’s technology base, are apt to discover
radical and lucrative opportunities (see Figure 1).
Opportunities are discovered through knowledge
conversion, integration (Figure 3), and embodiment
in the firm’s absorptive capacity (Figure 4).
Creation of opportunities is most likely to prevail
in technologically diversified firms, seeking to
deepen or broaden their skills and capabilities. These
Copyright © 2008 Strategic Management Society
Cycle of Discovery and Creation 253
companies are also likely to marshal resources to
create opportunities when there is a sense of urgency
to build new capabilities or change their competi-
tive arena (Christensen, 1997; Kim, 1998; Kodama,
1995). Creation is also likely to dominate when the
firm’s technology portfolio is stable or maturing and
there is a need for strategic renewal (Zahra, 1996).
This renewal goes beyond acquiring and exploiting
new technological assets and resources; it is likely to
demand building the infrastructure and institutions
that effect the evolution of the firm’s markets and
businesses.
DISCUSSION
Discovery and creation theories offer contrasting
views of opportunity recognition and exploitation.
Alvarez and Barney (2007) emphasize that both
theories hold different assumptions about the nature
and origin of opportunities and therefore apply
within different contexts. Focusing on entrepreneur-
ship in established technology-based companies,
this article suggests that both discovery and creation
of entrepreneurial opportunities (a) play important
and often complementary roles, (b) exhibit differ-
ent search processes, and (c) form a self-regenerat-
ing and reinforcing dynamic cycle where discovery
promotes future creation and vise versa. The firm’s
formal and informal search processes influence how
this cycle unfolds.
The cycle of discovery and creation generates
new knowledge about opportunities and how the
firm can search for novelty, perpetuating the link
between discovery and creation. In turn, this pro-
motes organizational learning and fuels entrepre-
neurial activities that augment and exploit the firm’s
technological base. Thus, in this setting, neither the
discovery nor creation of opportunities is a one-shot
deal. The iterative and ongoing cycle provides a rich
milieu within which entrepreneurs find plentiful and
varied opportunities. This is one reason we find dif-
ferent types of corporate entrepreneurial activities
percolating at any point in time within established
firms. Entrepreneurs working at different parts of the
company convert the knowledge they have about an
invention into inputs that they process—using their
prior knowledge (Shane, 2000), intuition, and imagi-
nation—to define new opportunities. This conver-
sion generates a multitude of possible options and
ideas that entrepreneurs reframe as opportunities.
Strat. Entrepreneurship J., 2: 243–257 (2008)
DOI: 10.1002/sej
254 S. A. Zahra
This conversion cycle embodies both discovery and
creation.
Separating discovery from creation of entre-
preneurial opportunities, as done in the preceding
paragraphs, could irreparably damage the firm’s
capacity to identify and recognize ideas. Creation
requires discovery, and discovery is often insuffi-
cient to generate value without the various activi-
ties associated with creation. Greater value is gained
from appreciating and capitalizing on the ongoing
cycle of discovery and creation; the link between
discovery and creation is what gives opportuni-
ties their substance and meaning. While bounded
rationality might limit formal search (March and
Simon, 1958), informal entrepreneurial activities
broaden it. Equally important, these activities make
managers aware of radically new opportunities that
might signal the emergence of new paradigms to be
exploited for advantage.
MANAGERIAL IMPLICATIONS
Formal and informal entrepreneurial activities
engender a virtuous cycle between discovery and
creation. As this article makes clear, how this cycle
unfolds depends on the way these entrepreneurial
activities are managed and harmonized. This could
be a challenging task for managers (Burgelman and
Grove, 2007; Burgelman and Sayles, 1986). Oppor-
tunities discovered or created by entrepreneurs often
fall well beyond management’s thinking and stra-
tegic vision (Figure 1). Even when they match the
company’s goals and formal definition of viable
opportunities, considerable effort is necessary to
integrate them with other ongoing business initia-
tives. Still, a key advantage of informal efforts is
widening the search for organizational novelty and
strategic variety (Figure 1), making managing these
initiatives a priority.
If we believe that opportunities are discovered and
not created, then companies can help their employ-
ees and managers by training them in creativity tech-
niques. This training can help employees recognize
patterns and connect seemingly unrelated dots that
constitute the basis of an emerging opportunity.
Training can also improve employees’ knowledge of
the company’s technologies, processes, and strategic
priorities and, therefore, facilitate their discovery of
opportunities.
However, if creation is an important means of
recognizing opportunities, it becomes important for
Copyright © 2008 Strategic Management Society
senior management to develop their employees’ skills
in identifying, framing, positioning, and selling their
ideas to others—especially middle managers. Learn-
ing how to communicate what these opportunities
mean, evaluate the risks and costs associated with
them, and show their relatedness to existing busi-
nesses are important skills to master. Engineers and
scientists do not always have the appropriate acumen
to sell their notions of emerging opportunities and
get a fair hearing in the organization. Their closeness
to the technology or science might even blind them
to the business and strategic risks involved. Train-
ing and providing champions and mentors can help
remedy some of these problems.
This article has also suggested that discovery can
fuel creation and vice versa (Figure 2), especially in
ongoing corporate entrepreneurial activities. Manag-
ing the interplay between discovery and creation can
influence the evolution of the company’s business
and technological development. Formal develop-
ment activities could benefit greatly from freewheel-
ing technological prospecting (Figure 1)—an activity
that depends on the availability of slack resources
and supportive organizational culture. The real chal-
lenge that awaits managers is recognizing where
big or potentially radically innovative opportunities
come from and how to integrate those opportunities
into the firm’s technological and business base.
IMPLICATIONS FOR THEORY AND
FUTURE RESEARCH
This article suggests that firms both discover and
create opportunities, stimulating an ongoing virtu-
ous cycle. This cycle not only generates opportuni-
ties for new business development, but also offers
a way to expand organizational search beyond the
company’s familiar business and technological
base. Waves of search outside known domains can
soften the effect of creeping rigidity that arises from
inertia and bounded rationality. Researchers seeking
to understand how companies venture beyond the
scope of their traditional domains need to under-
stand and explore the implications of this virtuous
cycle.
A related issue that needs additional attention is
the negative implications of discovery on creation
and vice versa. As with the supply of money, the
abundance of politically appealing opportunities
might stifle the discovery or creation of radically
innovative opportunities. The opposite might also be
Strat. Entrepreneurship J., 2: 243–257 (2008)
DOI: 10.1002/sej

true—companies might be obsessed with locating big
opportunities, missing some lucrative opportunities
based on incremental innovation. Another concern
is that informal entrepreneurial activities could over-
shadow formal initiatives and stifle opportunity rec-
ognition. Therefore, it would be beneficial to explore
when informal and formal entrepreneurial efforts
augment, substitute, or even stifle one another.
The variables that help perpetuate the cycle of dis-
covery and creation also deserve attention in future
studies. These variables center on slack resources,
managerial tolerance, and encouragement of explo-
ration, as well as the supply of entrepreneurs in a
company. This supply reflects entrepreneurs’ talents,
knowledge, and skills, as well as the existence of
an organizational context that fosters discovery and
creation. The technological opportunities that exist
in the firm’s industry are another source of inspira-
tion for entrepreneurs (Zahra, 1996). Perhaps it is
no coincidence that companies working in growing
technological fields attract and retain a large cadre
of entrepreneurs. If this is true, then there is a need
to study the context of discovery and creation,
but also the effect of this context on the supply of
entrepreneurs.
The growing emphasis on technology integration,
fusion, and convergence might create conditions that
favor the participation of different types of entrepre-
neurs who play different, but complementary, roles
in the cycle of discovery and creation. Research-
ers might benefit from identifying these different
types of entrepreneurs, the roles they play, and the
skills that marshall to map out different opportuni-
ties. Entrepreneurship researchers have given con-
siderable attention to the discrete events that define
opportunities. Studying how discovery and creation
unfold and reinforce each other can provide greater
richness in theorizing about the nature of entrepre-
neurial opportunities. Framing these discussions
within the context of technological evolution can
add clarity regarding the roles entrepreneurs play
throughout this process.
This article depicts a virtuous cycle between cre-
ation and discovery. Clearly more research is needed
to identify the contingencies that influence the dura-
tion and unfolding of this cycle. In particular, there is
a need to understand how the unfolding of this cycle
contributes to the development of new business. The
article suggests that knowledge conversion, knowl-
edge integration, and building of absorptive capacity
play important roles in this respect. Understanding
how these variables converge and foster opportunity
Copyright © 2008 Strategic Management Society
Cycle of Discovery and Creation 255
recognition and identification in a company is an
important future research avenue.
CONCLUSION
Opportunity recognition, evaluation, and exploita-
tion are core concepts in the study of entrepreneur-
ship. Alvarez and Barney (2007) have compellingly
argued that there are situations that promote the dis-
covery of opportunities, whereas other conditions
foster the creation of these opportunities. Focusing
on corporate entrepreneurial activities, this article
has argued that discovery and creation often form a
dynamic and ongoing virtuous cycle where creation
encourages discovery and vice versa. This cycle
benefits from the formal and informal initiatives that
occur within a company, as well as the diversity of
its technological base. This virtuous and ongoing
cycle can enrich the novelty and strategic variety of
the firm’s repertoire, as well as its capacity to build
and exploit capabilities for advantage.
ACKNOWLEDGEMENTS
This article has benefitted from discussions with
participants in the Strategic Management Society’s
New Faculty Workshop (2007), the 16th Annual High
Technology Small Firm Conference at the University
of Twente, the Netherlands (2008), and the Strate-
gic Management and Organization Seminar Series at
University of Minnesota. I am grateful for Nachiket
Bhawe, Michel Ehrenhard, Aard Groen, Jeroen Kraai-
jenbrink, Peter Rich, Els Van de Velde, Changyi Zhao,
and Patricia H. Zahra for their comments and sugges-
tions. The generous support of the 3TU professorship
and Nikos (The Dutch Institute for Knowledge-Intensive
Entrepreneurship) at University of Twente, where this
article was written, is acknowledged with gratitude.
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