Recognizing Opportunities and Generating Ideas

Part II

Diane M. Sullivan (2007)

Sections Modified from Barringer & Ireland’s (2006) Chapter 2
Personal Characteristics of the Entrepreneur

Characteristics that tend to make some people better

at recognizing opportunities than others

Prior Experience Social Networks

Cognitive Factors Creativity

 Prior Industry Experience

 Prior Industry Experience

 Prior industry experience helps entrepreneurs recognize
opportunities because
 An individual may spot a market niche that is underserved
 Can build a network of social contacts who provide insights that
lead to new opportunities
 Technical term: The Corridor Principle
 Cognitive Factors

 Opportunity recognition may be an innate skill

or cognitive process
 Entrepreneurs may have a “sixth sense” so
they see opportunities that others miss
 This “sixth sense” is called entrepreneurial
alertness
 The ability to notice things without engaging in
deliberate search
 Social Networks

 Characteristics of one’s social network affects

opportunity recognition and venture development
Refers to any relationship
Network Tie you have with another
• A graphical representation of a
person
network of relationships is
called a network map. The people represented in a
network are generally called
• People indicated as
You “actors”
dots/circles
When mapping the network
• Relationships indicated as
of one individual, that
lines
person is called the “focal
actor”
Important Network Characteristics
 Certain network tie characteristics associated with
better outcomes (e.g., more opportunities recognized,
better firm performance, power positions, etc.)
 Network Size
 Network Tie Strength
 Strong Ties
 Weak Ties
 Cohesive Ties
 Structural Holes
 Bridging Ties
 Network Size

You You

Large Network characterized by many ties Small network characterized by few ties

Benefits of Larger Networks Benefits of Smaller Networks

1. Very helpful in earlier stages of venture 1. Helpful in later stages of venture
development development
2. More opportunities identified i. Provides a more parsimonious
3. Better firm performance group of “helpers” later on
4. Faster IPO
5. Network growth
 Network Tie Strength: Strong Ties
Mom Strong Ties are determined as such by three
Dad characteristics of these relationships:
1. Long duration of relationship
You Spouse
2. Closeness of relationship (close/very close)
Best
Friend 3. Frequency of contact (frequently interact)

In depicting a “network map”, strong ties are

Strong-ties: characterized by frequent
interactions between coworkers, friends, and
spouses
Benefits of Strong Ties
1. Generally trustworthy
2. Provides depth of information
3. Usually helpful in early-stage funding
indicated by solid lines from the focal actor to
the connecting strong tie.
Drawbacks of Strong Ties
1. Provide access to redundant information
2. Provide access to similar or redundant
contacts (e.g., no help in expanding an actor’s
network)
 Network Tie Strength: Weak Ties
Weak Ties are determined as such by three
characteristics of these relationships:
1. Short duration of relationship
You
2. Closeness of relationship (not close)
3. Frequency of contact (infrequently interact)

In depicting a “network map”, weak ties are

indicated by, dotted, lines from the focal actor
to the connecting weak tie. Weak-ties: characterized by infrequent
interactions between acquaintances

Drawbacks of Weak Ties Benefits of Weak Ties

1. May be difficult to sort through information 1. Provide unique perspectives
2. Over time tend to become strong ties 2. Helpful for identifying opportunities
3. Sometimes difficult to create exchange 3. Helps entrepreneurs expand their
relationship with (requires cues of legitimacy) network
 Cohesive Ties

You

Cohesive ties describe ties that link an actor with another actor in the network that has
at least one other tie within the network

Benefits of Cohesive Ties Drawbacks of Cohesive Ties

1. Generally trustworthy relationships 1. Generally only provide redundant
2. Provide more, potentially sensitive, information
information 2. Tend to possess many characteristics of
3. Provide more detailed information strong ties
Group 1
Structural Holes
Group 2

Group 3

• Structural holes describe the situation where there are gaps, or holes, between different
groups of network partners.
• People usually focus on activities inside their own network group, which creates “holes” in
the information flow between groups, called, structural holes (Burt & Ronchi, 2005).
• Structural holes are important because they present areas where diverse information relative
to the focal actor may reside.
• A lack of structural holes in one’s network  redundant information flow, and the potential
to miss important information relative to the venture, industry, market, technology, etc.
 Bridging Ties
Group 1
Group 2

You

Broker
between 3
network
groups
Group 3

Bridging ties describe the situation where an actor is tied to another actor within the network who has no
other links with that network.
Benefits of Bridging Ties Drawbacks of Bridging Ties
1. Actors holding bridging positions are more likely to 1. If you do not hold the bridging
receive novel information vs. the rest of the network position, you may be in a weak
2. Bridging actors more likely to receive new information position
earlier than others in the network
3. This leads to more power and control benefits for the
actors holding the bridge position (e.g., the brokering
position)
 Other Important Entrepreneurial Network
Issues to Consider
 Understanding your network can help to know where network
contact “gaps” need to be filled
 Understanding other’s networks can help to know where they
can add value and where they need value added
 Note: Understanding your partner’s networks can also help you
understand what they value (e.g., what your value proposition must/must
not do for them)
 The types of networks that are beneficial to entrepreneurs vary
during different phases of venture development
 For example, early-stage entrepreneurs seem to benefit from large,
diverse networks. Later-stage entrepreneurs seem to benefit from more
parsimoniously diverse networks.
 Creativity

 Creativity
 Creativity is the process of generating a novel AND useful
idea.
 Opportunity recognition may be, at least in part, a creative
process.
 Per the text, for an individual, the creative process can be
broken down into five stages (next slide)
 Creativity
Evolutionary View2.2
Figure of the Process of
Creative Idea Generation
Five-Steps to Generating Creative Ideas
Variation

1 3
2 4

6
Retention Evaluation and Selection
5
 Creative Process and Entrepreneurial
Opportunity Construction
More

V
Extent of R S
Venture
Organization
R S
V

Less R S

Entrepreneur(s) Network/Resource Market/Industry

Providers/Venture Team

Idea Generation Idea Exploration Idea Exploitation

 Initial Steps for Protecting Ideas
 Step 1
 Put idea in a tangible form (e.g., enter into a physical idea
logbook or computer disk)
 Include the date when the idea was first conceived
 Step 2
 Secure the idea (e.g., password protect, put in safe, etc.)
 Step 3
 Avoid inadvertent or voluntary disclosures
 Doing so could forfeit the right to claim exclusive rights to it
 Other, more formal, steps
 Copyright, Trademarks, Patents, etc.
 Discussed in more detail in Chapter 8
Evaluating Entrepreneurial Opportunities Relative
to an Industry’s Structure

Diane M. Sullivan (2007)

 Industry Structures
 An industry’s structure indicates the stage of an industry its life
cycle
 Suggests types of firms that will likely be successful in the industry
 Helps us determine if the window of opportunity is open for new entrants
 Suggests strategic moves that new entrants or existing firms can take to
capitalize on opportunities created as a result of industry characteristics
 5 general structures an industry can take (these are not mutually
exclusive):
1. Emerging
2. Fragmented
3. Mature
4. Declining
5. Global
 Industry Structures: Emerging
 Indicated by: Newly created or re-created industries
 Primary causes: technological innovations, changes in demand, the emergence of
new customer needs, etc.
 Examples: microprocessors, digital music, cell phones, biotechnology
 Entrepreneurial opportunities present in emerging industries:
 Gain a first-mover advantages via:
 Technology leadership: can create the technology standard (e.g., Microsoft), gain low-
cost position due to economies of scale (Wal-Mart), obtain patent protection
 Caution: second-mover advantages may occur where imitators can duplicate the first movers’
patents—research shows imitators can do this for 65% of the cost of the first-mover
 Strategically valuable assets (e.g., required resources to compete in industry): access
to raw materials (e.g., mining industries), favorable geographic locations (Wal-Mart in
medium-sized cities before competition), valuable product market positions (breakfast
manufacturers; luxury vehicles)
 Create customer switching costs: create a cost for customers to change to another
firm’s offerings (e.g., software, pharmaceuticals, even some grocery stores)
 Industry Structures: Fragmented
 Indicated by:
 A large number of small to SME firms in the industry
 No one has dominant market share
 No one creates a dominant technology
 Primary causes: few barriers to entry, no economies of scale, may need
close local control over enterprises to ensure quality
 Examples: service industries like retailing, commercial printing, dry cleaning,
local movie houses
 Entrepreneurial opportunities present in fragmented industries:
 Consolidation: firms can consolidate (e.g., purchase firms) the industry to move
create a smaller number of larger firms
 Examples:
 Blockbuster consolidated the video rental industry
 Service Corporation International (SCI) in the funeral industry (found new economies of scale)
 Midas has consolidated muffler repair shops
 Industry Structures: Mature
 Indicated by:
 Slowing industry growth
 Development of repeat customers
 Slowing of production capacity
 Slowdown in new product/service introductions
 Increased international competition
 Overall reduction in profitability of firms in industry
 Primary causes: technology diffusion, reduction in innovation rate
 Examples: fast food; motor oil, large discount retailers; laundry detergents, kitchen appliances
 Entrepreneurial opportunities present in mature industries:
 Product refinement: focus on extending/improving current products and technologies (e.g., additives to
motor oil, more concentrated laundry detergents; front-loading washing machines; Silk Soymilk)
 Investment in service quality: increase customer service quality (e.g., restaurant industry and the casual
dining segment—Applebee's; Chili's—versus fast-food service)
 Process innovation: activities used to design, product and sell products/services (e.g., US automobile
industry; Dell and supply-chain management in PC industry)
 Industry Structures: Declining
 Indicated by: An industry that has experienced an absolute decline in unit sales
over a sustained period of time.
 Examples: Traditional video rental industry; US defense industry after the Cold War
in the 1980s
 Entrepreneurial opportunities present in declining industries:
 Market Leadership: wait out shakeout period; facilitate shakeout by purchasing
competitors’ product lines, then try to gain majority of market share (e.g., Martin
Marietta in defense industry acquiring GE’s aerospace business—then merged with
Lockheed to become Lockheed Martin)
 Market Niche: reduce scope of operations and focus on narrow segments in
industry (e.g., Polaroid with instant photography)
 Harvest: long, systematic, phased withdrawal from industry while extracting as
much value as possible
 Divestment: quickly withdraw from industry after industry decline pattern is
established so no additional costs incurred (e.g., can sell product lines to competitors)
 Industry Structures: Global
 Indicated by: industry experiencing significant international sales
 Examples: athletic shoes; internet auctions; fast food
 Entrepreneurial opportunities present in global industries:
 Pursue Multidomestic Strategy: customize product/service offerings per
each market’s specific needs/wants (fast food; eBay)
 Pursue Global Strategy: approach each market with the same offerings
(e.g., Nike)
 Determine which strategy appropriate by similarity of consumers’
tastes across markets