Chapter 2: Recognizing Opportunities and Generating Ideas
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CHAPTER 2
RECOGNIZING OPPORTUNITIES AND GENERATING IDEAS
LEARNING OBJECTIVES
1.
Explain the difference between opportunities and ideas.
2.
Describe the three general approaches entrepreneurs use to identify opportunities.
3.
Discuss the personal characteristics of entrepreneurs that contribute to their ability
to recognize business opportunities.
4.
Identify and describe techniques entrepreneurs use to generate ideas.
CHAPTER OVERVIEW
This chapter begins by describing the difference between an opportunity and an idea.
Students are reminded that many firms fail, not because the entrepreneurs involved didn’t
work hard, but because there was no real opportunity to begin with. The four components
of a favorable opportunity (attractive, durable, timely, and anchored in a product, service,
or business that adds value) are then discussed.
The middle of the chapter focuses on the three primary ways that entrepreneurs discover
opportunities: by studying environmental trends, solving a problem, or finding gaps in the
CHAPTER OUTLINE
I. The Difference Between Opportunities and Ideas
II. Three Ways to Identify Opportunities
A. Observing Trends
B. Solving a Problem
C. Finding Gaps in the Marketplace
III. Personal Characteristics of the Entrepreneur
A. Prior Industry Experience
B. Cognitive Factors
C. Social Networks
D. Creativity
IV. Techniques for Generating Ideas
A. Brainstorming
B. Focus Groups
Chapter 2: Recognizing Opportunities and Generating Ideas
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C. Library and Internet Research
D. Other Techniques
CHAPTER NOTES
I. The Difference Between Opportunities and Ideas
A. An opportunity is a favorable set of circumstances that creates a need for a
new product, service, or business.
C. For an entrepreneur to capitalize on an opportunity, its window of opportunity
must be open.
2. The term “window of opportunity” is a metaphor describing the time
1. An idea is a thought, impression, or notion. It may or may not meet the
criteria of an opportunity. This is a critical point because, as we noted in
Chapter 1, many businesses fail not because the entrepreneurs that started
them didn’t work hard, but because there was no real opportunity to begin
with.
II. Three Ways to Identify Opportunities
A. Observing Trends—The first approach to identifying opportunities is to
observe trends and study how they create opportunities for entrepreneurs to
pursue.
1. Economic Forces
a. Economic forces affect consumers’ level of disposable income.
Individual sectors of the economy have a direct impact on consumer
buying patterns.
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2. Social Trends
a. An understanding of the impact of social forces on trends and how
they affect new product, service, and business ideas is a fundamental
piece of the opportunity recognition puzzle.
b. The persistent proliferation of fast-food restaurants, for example, isn’t
due primarily to people’s love for fast food but rather to the fact that
people are busy—the number of households with both parents working
remains high.
c. Some of the social trends that allow for new opportunities are as
follows:
Aging of the population
The increasing diversity of the population
Increased participation in social networks
Growth in the use of mobile devices
3. Technological Advances
a. Given the rapid pace of technological change, it is vital for
4. Political Action and Regulatory Changes
a. Political action and regulatory changes also provide the basis for
opportunities. For example, new laws create opportunities for
entrepreneurs to start firms to help companies comply with these laws.
Chapter 2: Recognizing Opportunities and Generating Ideas
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This is currently happening as a result of the passage of the Affordable
Care Act.
b. Political change also engenders new businesses and product
B. Solving a Problem
1. Sometimes identifying opportunities simply involves noticing a problem
and finding a way to solve it.
3. Some business ideas are clearly gleaned from the recognition of problems
in emerging trends. For example, some older people find traditional cell
phones hard to use—the buttons are small, the text is hard to read, and it’s
often difficult to hear someone on a cell phone in a noisy room. To solve
these problems, GreatCall, a recent start-up, is producing a cell phone
called the Jitterbug, which is designed specifically for older users.
a. A serendipitous discovery is a chance discovery made by someone
with a prepared mind.
C. Finding Gaps in the Marketplace
1. The third approach to identifying opportunities is to recognize a need that
2. Large retailers compete primarily on price by serving large groups of
customers with similar needs. They do this by offering the most popular
items targeted toward mainstream consumers. Although this approach
allows the large retailers to achieve economies of scale, it leaves gaps in
the marketplace.
a. This is the reason that small clothing boutiques and specialty shops
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3. A common way that gaps in the marketplace are recognized is when
people become frustrated because they can’t find a product or service that
they need and recognize that other people feel the same way.
III. Personal Characteristics of the Entrepreneur
Researchers have identified several characteristics that tend to make some people
better at recognizing opportunities than others. These characteristics are as
follows.
A. Prior Industry Experience—Several studies show that prior experience in an
industry helps entrepreneurs recognize business opportunities.
1. By working in an industry, an individual may spot a market niche that is
underserved. It is also possible that while working in a particular area, an
individual builds a network of social contacts in that industry that may
provide insights that lead to opportunities.
B. Cognitive Factors—Opportunity recognition may be an innate skill or a
cognitive process.
1. There are some who think that entrepreneurs have a “sixth sense” that
allows them to see opportunities that others miss. This sixth sense is called
entrepreneurial alertness.
2. Entrepreneurial alertness is formally defined as the ability to notice things
without engaging in deliberate search.
C. Social Networks—The extent and depth of an individual’s social network
affects opportunity recognition.
1. In one study, the differences between solo entrepreneurs (those who
identified their business ideas on their own) and network entrepreneurs
(those who identified their business ideas through social contacts) were
2. An important concept that sheds light on the importance of social
networks to opportunity recognition is the differential impact of strong-tie
versus weak-tie relationships. Relationships with other people are called
ties.
3. Strong-tie relationships are characterized by frequent interactions, such as
ties between coworkers, friends, and spouses. Weak-tie relationships are
characterized by infrequent interaction, such as ties between casual
Chapter 2: Recognizing Opportunities and Generating Ideas
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acquaintances. It is more likely that entrepreneurs will get business ideas
via weak-tie versus strong-tie relationships.
D. Creativity—Is the process of generating novel or useful ideas. Opportunity
recognition may be, at least in part, a creative process. It is easy to see the
creativity involved in forming many products, services, and businesses.
1. For an individual, the creative process can be broken down into five
stages, as shown in Figure 2.4 in the textbook. The five steps are:
a. Preparation—Is the background, experience, and knowledge that an
entrepreneur brings to the opportunity recognition process.
IV. Techniques for Generating Ideas
A. Brainstorming
1. Is used to generate a number of ideas quickly. It is not used for analysis or
decision making.
2. A brainstorming “session” is targeted to a specific topic about which a
group of people are instructed to come up with ideas.
3. The number one rule of brainstorming is that no criticism is allowed,
including chuckles, raised eyebrows, or facial expressions that express
skepticism or doubt. Criticism stymies creativity and inhibits the free flow
of ideas.
a. There are two reasons brainstorming generates ideas that might not
arise otherwise.
Chapter 2: Recognizing Opportunities and Generating Ideas
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i. First, because no criticism is allowed, people are more likely to
offer ideas than they would in a traditional setting.
ii. Second, brainstorming focuses on creativity rather than evaluation.
B. Focus Groups
1. A focus group is a gathering of 5 to 10 people who are selected because of
2. The strength of focus groups is that they help companies uncover what’s
on their customers’ minds through the give-and-take nature of a group
discussion. The weakness is that because the participants do not represent
a random sample, the results cannot be generalized to larger groups.
C. Library and Internet Research
1. Libraries are often an underutilized source of information for generating
2. Internet research is also important.
a. If you are starting from scratch, simply typing “new business ideas”
D. Other Techniques
1. Customer advisory boards. Some companies set up customer advisory
2. Day-in-the-life research. Other companies conduct varying forms of
anthropological research, such as day-in-the-life research.
Chapter 2: Recognizing Opportunities and Generating Ideas
BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING
Savvy Entrepreneurial Firm
Solving Problems via Social Ventures
1.
Refer to Figure 2.1. Are there differences between social ventures and for-profit
organizations in regard to the essential qualities of an opportunity? If so, what are
the differences?
Answer: Figure 2.1 looks at the four essential qualities of an opportunity –
attractive, timely, durable, and anchored in a product or service. Social ventures
deal with “wicked” or difficult to solve problems, as the UCLA food wastage
situation points out. This means that opportunities in social ventures may not fit
easily with all the four qualities of an opportunity indicated above. For example,
the UCLA students saw food waste, noticed that it was a problem, but this was not
readily anchored in a product or service. The same goes for Soko and Drive for
Change.
2.
For the social ventures highlighted in the feature, what was the role of changing
environmental trends in enabling the social venture to address the problem it is
tackling?
Answer: Key environmental trends common to all three is increasing income
disparity on the one hand (artisans in sub-Saharan Africa versus arguably middle-
class youth in the U.S.) and a growing consciousness that societal problems need
to be tackled as otherwise they would not go away.
3.
How can social ventures attract talented employees, given that they typically do
not pay as much as for-profit organizations?
Answer: Pay disparity is a challenge that most not-for-profits and social ventures
face. They typically cannot match the salaries that for-profit companies will pay.
The key is to ensure that there are other motivations at work – the satisfaction of
addressing a societal need, for example. In addition, given that most of such
organizations are understaffed, growth opportunities and increasing work
responsibilities can motivate people to join such firms.
4.
Would you enjoy working for a social venture? If so, why? Which of the social
ventures highlighted in this feature interests you the most? Explain your answer.
Answer: Student responses will vary. Swipe Out Hunger deals with food wastage,
Soko is an artists’ cooperative and Drive For Change rehabilitates felons by
getting them to work on a food truck business. Each one has attractions for some
people.
Chapter 2: Recognizing Opportunities and Generating Ideas
What Went Wrong?
Why a Company that Solved a Problem with a Great Product Went Out of Business
1.
In the context of this chapter, make a list of three “takeaways” from this feature
that you can learn from and try to avoid if you set out to solve a problem by
launching a business.
Answer: This is a good question for a group or individual assignment. Three
potential takeaways are as follows: (1) When building a business, it is important to
focus on both the quality of the product and business that needs to be built to bring
the product to market. Everpix spent too much time on the quality of the product at
the expense of the business; (2) Web-based apps are much more compelling if they
are viral. If a user can share with friends and family what he or she is doing on an
app, then the app is more likely to grow; (3) Marketing matters—you may build
the best product or service in the world, but if no one knows about it, it will
ultimately fail.
2.
To what degree is there a difference between pursuing an opportunity to solve a
problem and building a business? In what ways did Everpix fail to do both?
Answer: There is a big difference. An entrepreneur can pursue an opportunity and
build a very elegant solution to a problem. But a profitable “business” must
ultimately be built to take the solution to market. Everpix built an elegant solution
in part, but it wasn’t viral, which was a big handicap. Everpix failed in terms of
building a profitable business.
3.
According to the feature, Everpix spent almost nothing on advertising and
promotions. How large of a role do you think that decision played in Everpix’s
failure?
Answer: Most students will say that the decision to spend almost nothing on
advertising or promotions played a large role in Everpix’s failure. There has to be
a way for a company to “get the word out” about its business for people to know
about it. Everpix’s shortcoming in this area was compounded by the fact that the
service wasn’t viral, so they weren’t getting as many customers as they might have
via word of mouth.
4.
Venture capitalists are often accused of swinging for the fences—in other words,
they don’t invest in firms that are hitting singles, doubles, or triples. They want
home runs. In hindsight, do you think Everpix was building a business that had the
potential to hit singles, doubles, or triples, or a business that had the potential to be
a home run? Explain your answer.
Answer: Most students will say that Everpix wasn’t thinking big enough—and
ultimately was building a business that was akin to a single or a double rather than
a home run. Although they were trying to solve a compelling problem (i.e., helping
Chapter 2: Recognizing Opportunities and Generating Ideas
people store and organize photos in a manner that would encourage people to go
back and look at them), they built a site that wasn’t viral and wasn’t marketed
sufficiently to attract a large number of users.
Partnering for Success
Want Help Converting a Business Idea Into a Profitable Company? Find a Mentor
1.
At this point in your educational process, your business (if you’re starting one),
and in your life in general, in what areas do you believe you could benefit the most
from having a mentor? What would your expectations be for the mentor/mentee
relationship?
Answer: Students will vary in their answers to this question.
2.
Make a list of the opportunities on your campus and the surrounding community
for connecting with potential mentors. Which opportunities do you think would be
the best bet for you in terms of connecting with a potential mentor?
Answer: Most students will say that having a mentor could make a substantial
difference between an entrepreneur succeeding or failing. An inclination in this
direction results from the fact that most students have had a coach, a teacher, or an
older relative or friend who has “mentored” them in some way, so they see
mentoring as a useful process. Students will vary in terms of what areas of the
entrepreneurial process that they believe mentors are called upon the most. It’s
been our experience that mentoring is particularly helpful in the areas of
manufacturing and production (for start-ups with a physical product) and in raising
financing or funding.
3.
Go to LinkedIn and type in the name of your university and a functional area
(marketing, finance, entrepreneurship, engineering, etc.) in which you have an
interest. How many search results did the query produce? As you scanned the
search results, did you notice anyone with whom you would like to connect?
Answer: Students will vary in their answers to this question. Challenge your
students to be as exhaustive as possible in the list they complete for their area.
4.
To what degree do you believe that having a mentor can make the difference
between an entrepreneur succeeding or failing? Have you had a mentor at any
point in your life? If so, briefly relate the manner in which your mentor was able to
help you.
Chapter 2: Recognizing Opportunities and Generating Ideas
Answer: Students will vary in their answers to this question. A reasonable answer
is to listen to advice, and then pursue the advice that resonates with you. Another
way of thinking about this is to record the advice from different people, and then
pursue the advice that seems to represent the consensus of the people that you talk
to.
REVIEW QUESTIONS
2-1.
What is a product opportunity gap?
Answer: A product opportunity gap is the gap between what is currently on the
market and the possibility for a new or significantly improved product, service,
or business that results from emerging trends.
2-2.
How can an entrepreneur tell if a product opportunity gap exists?
Answer: Via careful observation and then via (1) emphasizing or enhancing
personal characteristics that contribute to opportunity recognition, such as prior
experience, cognitive factors, social networks, and creativity and (2) utilizing the
techniques highlighted in the chapters for improving opportunity recognition,
such as brainstorming, focus groups, and library and Internet research.
2-3.
What is an opportunity?
Answer: An opportunity is a favorable set of circumstances that creates a need
for a new product, service, or business.
2-4.
What are the qualities of an opportunity, and why is each quality important?
Answer: An opportunity has four essential qualities: it is (1) attractive, (2)
durable, (3) timely, and (4) is anchored in a product, service, or business that
creates or adds value for its buyer or end user. An opportunity would not be
attractive if any of the qualities were missing.
2-5.
What four environmental trends are most instrumental in creating business
opportunities? Provide an example of each environmental trend and the type of
business opportunity that it might help create.
Answer: The four environmental trends (or factors) that are most important in
creating business opportunities are: economic factors, social factors,
technological advances, and political action and regulatory changes.