Tuesday, March 9, 2010

Opportunities: Are They Created or Discovered?

The phrase “Opportunities are created, not discovered.” refers to the exploitation of a previously untapped market, or a current market which is not being completely satisfied. The phrase suggests that these market opportunities arise from a single method and that they are created by the entrepreneur rather than discovered. This essay will examine these approaches as well as a third, allocative view, identified by Bachanan and Vanberg (1991) and again by Sarasvathy, Venkataraman, Dew and Velamuri (2002) in the work titled ‘Three Views of Entrepreneurial Opportunity’. While many academics such as Ronstadt, Ardichvili and Buenstorf argue that entrepreneurial opportunities are created, others such as Kirzner, Gӧrling and Rehn all disagree, stating that the opportunities are discovered. This essay will propose that the entrepreneurial process regarding opportunity exploitation is not restricted to one view, whether it be the creationist view, discovery view or the allocative view, but in fact argue that opportunities arise from all three circumstances. Overall, while looking into detail at the key differences outlined by Sarasvathy, Venkataraman, Dew and Velamuri (2002), this essay will demonstrate using examples that each of the three views exist and occur in the world of entrepreneurship.

Opportunity, refers to “a situation in which a person can exploit a new business idea that has the potential to generate profit” (Shane, 2003), in other words an opportunity occurs when idea or product is sold to a market. The concept of that idea or product having newness and economic potential is outlined again by Baron (2004) who states “an opportunity involves the potential to create something new that has the potential to generate economic value”. ‘Created’ and ‘discovered’ refer to the method in which the opportunity was realised. One effective way that Sarasvathy, Venkataraman, Dew and Velamuri (2002) differentiate between creation, discovery and, their own, allocative theory is through what they call the ‘domain of application’. This refers to the level of knowledge in the market, when supply and demand for the product is known then the opportunity is founded through the allocative process or opportunity recognition, when only one variable is of no doubt then the opportunity has been discovered, and when neither supply or demand is known, the opportunity has been created.

The creationist theory of entrepreneurial opportunities, although the youngest of the three, is favoured by academic economists such as Bhowmick, as well as Ronstadt, Ardichvili and Buenstorf. As with the other theories behind the opportunity process, the creative view has its origins in philosophy. In the case of the opportunity creation theory the philosophical background lies with James and Dewy and the philosophy of pragmatism. This theory suggests that ignorance is the key opportunity creation, and that the supply of, and demand of, the product or service does not yet exist. Therfore at least one of these needs to ‘created’ and produced by the entrepreneur (Sarasvathy, Venkataraman, Dew and Velamuri, 2002). In doing so, the entrepreneur will have created a new market opportunity. As Buchanan and Vanberg (1991) illustrate, the key idea of this view is that telos, or end product, is not ignored or imposed, and that the market opportunity emerges through interactive human action. For a market opportunity to be considered as opportunity creation, the business venture would need to be completely new, with no prior knowledge available for the entrepreneur making the future of the market unknowable. This is what Knight called true uncertainty. While the level of risk involved in market creation is high, the economic rewards in terms of profits are much greater than in a venture associated with less risk. Studies examining, in detail, the decisions made by entrepreneurs when placed in an environment of Knightian uncertainty provides overwhelming evidence to support the creative process view (Sarasvathy, Venkataraman, Dew and Velamuri, 2002). There are several world wide examples of the creative process, including the internet company Netscape, as well as General Electric, U-Haul, AES Corporation and the MIR space resort distinguished by Sarasvathy, Venkataraman, Dew and Velamuri (2002). The entrepreneurial opportunity that became the architect of Netscape consisted of a new idea, belief and action. The idea was of a user-friendly web browser. The belief was that even though the supply of, and especially the demand for the idea that was Netscape was unknown, a market would be created and the idea could be commercialised. Finally the entrepreneurial action of Marc Anderson and Jim Clark that occurred brought the idea and belief to life. Anderson and Clark’s belief, that while the market situation for Netscape was of true uncertainty; that a demand for the commercialised product could be built meant that this opportunity was not recognised, nor discovered, but in fact it was created. Due to this example being an actual event rather that theoretical occurrence, it proves that opportunities are created. However contrary to the suggestion in the statement, “Opportunities are created, not discovered.”, that only one process can occur, this does not prove that opportunities can not be discovered.

The method of opportunity discovery revolves around the idea that only one market variable is known, whether it be the supply of, or demand for the product or service. Therefore the distribution or market exists but is unknown in advance. Alvarez (2007) describes this type of entrepreneurial opportunity as an opportunity “just waiting to be discovered and exploited by unusually alert individuals”. Kirzner (1997) and Shane (2003) explain that these opportunities can be found by discovering unsatisfied needs and wants in the economy. Therefore opportunity discovery occurs when an existing market which is currently unknown and unsatisfied is realised by an entrepreneur. The entrepreneur is literally discovering or finding the market. This means that when the one side of the market exists, i.e. supply or demand, but other is unknown – the unknown side of the market equation is ‘discovered’. As discussed by Gӧrling and Rehn, not all opportunity discoveries are done so with that intent in mind, a number of opportunity discoveries can be attributed to accidental discovery, i.e. the opportunity is stumbled upon by the entrepreneur, or through accidental incidents, where someone does not discover the opportunity but instead has it thrust upon them. Gӧrling and Rehn (2008) illustrate this using the example of Elvis Presley’s and Kurt Cobain’s death, where someone has made financial gain off an unexpected human incident. While opportunity discovery includes the accidental opportunities described by Gӧrling and Rehn the majority of opportunity discoveries are those that have had individuals searching for a solution. An example of this is often visible in the medical field, where new diseases are being cured by new treatments. The cure to a disease always has a level of demand, however the cure may not always be available, therefore demand exists but the supply needs to be discovered. Once the cure is discovered the market opportunity can be satisfied. This is similar to the market opportunities available in the world of computers. Computer users may demand new software for various reasons, faster RAM speed, or a faster internet connection. The demand is obviously, but to realise and truly discover the market, the problem of supply must be corrected. In this case new editions of computer software are released, such as Microsoft Word 2007, new hardware devices that increase a computers RAM are produced, and the conversion from dial up internet to DSL are all discovered and used to answer the problem of supply, and satisfy consumer demand. The discovery of the answers to the issue of supply, both in the world of computers and diseases, were not stumbled upon, nor were they thrust upon an individual, they were purposely sort after by the entrepreneurial body in an effort to discover, realise and satisfy the presence of a gap in the economy. This indicates that it is possible that entrepreneurial opportunities are not just created, but they can also “be discovered and exploited by unusually alert individuals” Alvarez (2007).

The other method of entrepreneurial opportunity realisation is widely known as opportunity recognition. However, this view has also been called an allocative process by academics such as Dantec (2008) and Sarasvathy (2002). Vesper (1980) introduced this view of opportunity recognition, insisting on the “permanent active sought of viable opportunity which precedes a business venture” (Dantec, 2008). As with the creation and discovery views, allocative theory has its origins in philosophy, this time in the equilibrium based calculus of Marshall, Walras and many others. The allocative process occurs when both market forces are known, that is when supply and demand can be calculated or measured to a degree of accuracy. Due to this, opportunity recognition involves the least amount of risk for the entrepreneur when compared to the discovery method and especially the creation process. Baron (2004) describes opportunity recognition as the perception of complex patterns by an entrepreneur allowing him, or her, to interpret the environmental stimuli in a way that can be used to create economic value. Baron characterised this as the active cognitive process. Lindmark (2006) on the other hand, suggests that in opportunity recognition supply and demand exist quite obviously, indicating the complex patterns expressed by Baron do not apply. Clear occurrences of the allocative theory in action are in the form of franchising. In New Zealand for example, Hells Pizza is a major pizza franchise situated all across the North Island. While the idea of selling pizza is not a new one, the entrepreneurs involved with the company used allocative theory, connecting their supply of pizza with the customer demand in multiple locations throughout the North Island. Other examples include the franchise businesses of Mitre 10, New World, and Green Acres. It is clearly evident that the process of opportunity recognition occurs frequently in the world of business and entrepreneurship. Therefore the statement suggesting that new business ventures and entrepreneurial opportunity only occur through the process of creation is incorrect.

This essay, using factual examples and interpretations of the works from several reputable academic economists, has demonstrated how the phrase “Opportunities are created, not discovered.” is not completely accurate. While many of the economists explicitly argue for the creationist theory, such as Ardichvili, Bhowmick, Buenstorf, and Ronstadt, it is impossible to deny the existence of entrepreneurial opportunities being identified through the discovery and allocative processes. This is particularly shown in the works of Sarasvathy, Venkataraman, Dew and Velamuri. As with any argument there is another view point, Kirzner, Shane, and Gӧrling and Rehn, all believe in the opportunity discovery theory, while Dantec, Lindmark, and Vesper argue the opportunity recognition side of the debate. This essay also demonstrates how their views are not completely accurate either. It suggests and explains that entrepreneurial opportunity occurs in all three forms, recognition, discovery and creation. The real life occurrences portrayed in this essay illustrate the reality of each of these three opportunity identification processes. While it may be argued that seizing an opportunity through the creation process is more entrepreneurial than the opportunities presented by discovery and recognition, due to the level of risk involved in successfully implementing a business venture via market creation, it still does not exclude the actuality of the existence of discovery and recognition. Overall this essay expressed and embodied the idea that “Opportunities are created, not discovered.” and concluded that the statement is inaccurate due to the existence of business ventures originating from opportunity discovery, such as medical cures and new computer software, and opportunity recognition, such as Hells Pizza, Mitre 10 and New World.
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References:
Sarasvathy, S. D., Venkataraman, S., Dew, N., & Velamuri, R. (2002). Three Views of Entrepreneurial Opportunity. Invited chapter in The Handbook of Entrepreneurship Research, edited by Acs et.al. Dordecht, NL; Kluwer.

Shane, S. (2003). A General Theory of Entrepreneurship: The Individual -
Opportunity Nexus. Cheltenham, UK; Edward Elgar.

Baron, R. A., (2004). The Cognitive Perspective: A Valuable Tool For Answering Entrepreneurship’s Basic “Why” Questions. Journal of Business Venturing, 19, 221-239.

Buchanan, J. M., & Vanberg, V. J. (1991). The Market As A Creative Process. Economics and Philosophy 7, no. 2, 167-186.

Alverez, S., & Barney, J. B. (2007). Toward A Creation Theory of Entrepreneurial Opportunity Formation. Retrieved April 4, 2009 from www.uky.edu/Ag/AgEcon/seminars/alvarez-may07-txt.pdf

Kirzner, I. M., (1997). Entrepreneurial Discovery And The Competitive Market Process: An Austrian Approach. Journal of Economic Literature, 35(1): 60-85.

Gӧrling, S., & Rehn, A. (2008). Accidental Ventures: A Materialist Reading of Opportunity And Entrepreneurial Potential. Scand. J. Mgmt. 24, 94-102.

Dantec, A. R., (2008). Entrepreneurial Opportunity Recognition: A Cause And Outcome Exploration of the Influence of Profit Motives on Entrepreneurial Activities In France. Nottingham, UK; Nottingham University.

Lindmark, L. (2006). Sources of Enterpreneurial Opportunities. Stockholm, Sweden; Stockholm School of Economics. Retrieved April 4, 2009 from www.ncsb2006.se/pdf/Sources%20of%20Opportunities.pdf

4 comments:

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