Entrepreneurial opportunity

Introduction

Entrepreneurial opportunity is often considered as the heart of entrepreneurship; without ongoing generation or identification of opportunities, the field of entrepreneurship would seize to exist. Accordingly, entrepreneurship involves sourcing and identifying profitable opportunities and the individuals who engage in exploiting these opportunities (Venkataraman, 1997; Shane and Venkataraman, 2000). The entrepreneurial opportunity process typically involves the identification or recognition, the exploitation and the evaluation phase (Shane; Venkataraman, 2000; Ardichvili et al., 2003), even though some scholars have chosen one or two phases to represent the entire process (Baron, 2008; Companys and McMullen 2007).

Opportunity identification in the whole entrepreneurial opportunity process has received much scholarly attention over the years, both in terms of conceptual (Shane and Venkataraman, 2000; Ardichvili et al., 2003) and empirical (Shepherd and DeTienne, 2005; Ucbasaran et al., 2008; DeTienne and Chandler, 2007) studies. This review seeks to examine these studies to see the extent to which they provide an explanation to the review question above. The rest of the review includes discussion of the various factors that explain entrepreneurial opportunity identification, evaluating the claims and findings made by these authors and a concluding remark.

Until the work of Shane and Venkataraman (2000), the field of entrepreneurship and opportunity identification had not received much attention and there was lack of clarity regarding a conceptual frame work that could explain empirical outcomes specific to the field. The study provided a conceptual framework for studying entrepreneurial opportunities and by so doing, proposed some factors and boundaries that would drive opportunity identification in the opportunity process. This study proposed that opportunity identification (occurring as a result of information asymmetry or market imperfections) is influenced by the individual’s prior knowledge or information about a particular opportunity (either in the product or capital market) and the cognitive properties of the individual in identifying opportunities. For example, from the cognitive domain, counterfactual thinking could distinguish between an entrepreneur and non-entrepreneur. The conceptual model of Shane and Venkataraman (2000) proposed that two main individual factors – prior knowledge and cognitive properties – influence entrepreneurial opportunity identification.

Many studies followed this path dependent conceptual paper (Shane and Venkataraman, 2000). The study of Ardichvili et al., (2003) uses the combination of perception, creation and discovery in conceptualising opportunity identification. Using serial entrepreneurs and Dubin’s Theory Building framework (1978), the study moves beyond the personality factors of opportunity identification such as prior knowledge and personal traits (including optimism, self-efficacy and creativity) to include social networks or ties and the type of opportunity as equally important factors that influence opportunity identification. They argue that weak ties and limited entrepreneurial networks do not help in the successful identification of entrepreneurial opportunities. Accordingly, they hypothesised that social network elements such as strong ties, action set, partnerships and an inner circle all influence opportunity identification. A higher proportion of these variables would lead to higher levels of opportunity identification, all things being same. In addition, the study proposed the nature of the opportunity sought after as a driver of identification. Consequently, they argue that the origin and the degree of development of an opportunity influence the success of its identification. Like the study of Shane and Venkataraman (2000), this study developed a conceptual framework and provided very useful boundary conditions on which entrepreneurial opportunity identification could be successful.

Since these two conceptual papers, there have been empirical studies that seek to answer the review question under consideration. Using cognitive and the theory of motivation, Shepherd and DeTienne (2005) examine how the level of prior knowledge and potential financial reward influence the opportunity identification process. This study is similar to the first two studies (Shane and Venkataraman, 2000; Ardichvili, 2003) in that it examines prior knowledge as a determinant of opportunity identification. Operationalising opportunity identification as the number of opportunities identified and the value (innovativeness) of the opportunities, empirical results from a survey of MBA students show that prior knowledge (measured as prior knowledge of customer problems) aids the identification of more and innovative opportunities. Thus, through cognition and experience, prior knowledge can increase the ability of an individual to identify more profitable business ideas. Based on the theory of motivation, the study also found a positive relationship between potential financial reward and the number of opportunities identified, but not the innovativeness of the opportunity. Thus, once individuals are presented with opportunities that look attractive in terms of financial reward, they are motivated to work towards identifying more of these opportunities, making financial reward a pull factor. Indeed the study further suggested potential financial reward as an antecedent, as poor financial conditions could push an individual into entrepreneurship.

From a human capital approach, Ucbasaran et al, (2008) investigated what accounts for the variations in entrepreneurial opportunity identification. They investigated general human capital (education and work experience) and entrepreneur-specific human capital (business ownership experience, managerial experience, technical capabilities). From a study of 588 randomly sampled UK businesses, findings showed that specific entrepreneurial human capital rather than general human capital leads to more opportunities identified and pursued. Specifically, with the exception of education that had a positive association with opportunities identified, none of the variables of general human capital could either explain opportunities identified or pursued. All the specific entrepreneurial human capital had a positive association with both measures of opportunity identification except, technical capability that related to only opportunities pursued. All things being the same and according to the findings of this paper, resources ought to be directed to developing specific entrepreneurial human capital rather than general human capital in the opportunity identification process.

Earlier, it was proposed that networks (Ardichvili et al., 2003) and prior information (Shane and Venkataraman, 2000) influenced opportunity identification. Accordingly, from the domain of information processing and networking, Ozgen and Baron (2007) explored the effect of three social sources of opportunity-related information (mentors, informal industry networks, and participation in professional forums like conferences and seminars) on entrepreneurial opportunity identification. From a survey of 201 individuals who had recently founded IT firms, the study found that all three social sources of information had a direct positive and significant effect on opportunity identification. However, the effect of mentors and professional forums was mediated by schema – a cognitive factor. This study is significantly different from the previous studies, as it moves away from the traditional method of considering individual factors to using some social factors.

Some authors have tried to answer the review questions from the perspective of gender. DeTienne and Chandler (2007) employed social feminism and human capital theories to examine gender differences in entrepreneurial opportunity identification. In their presentation, opportunity identification is conceptualised and measured as a two-dimensional construct – the sequence or process of identification and the value of the opportunity identified. With two different samples (students and entrepreneurs) and two different studies (experiment and survey), the study found in both samples that men and women identify opportunities in different processes using different levels of human capital, even though there are no substantive differences in the innovativeness of the opportunities identified.

The last study worth considering in this review is that of Smith et al., (2009). While most previous studies have looked at how individual differences and some social factors influence the opportunity identification process, this study examines how the different types of opportunity affect opportunity identification. The type of opportunity used in the study are is codified and tacit opportunities. Analysing secondary data from the panel study of entrepreneurial dynamics, the study found that codified opportunities are more likely to be identified through a systematic search approach, while a high degree of tacit opportunities would be identified through prior experience. In effect, the impact of prior knowledge on opportunity identification, as has been investigated by some studies above, significantly depend on the degree of tacitness of the opportunity in question. Researchers should therefore pay some attention to the varying characteristics of the dependent variable (opportunity identification) because different types of opportunities are influenced by different factors.

It is clear from the above that, different authors have advanced different variables and theories in explaining the factors that influence opportunity identification and the implications thereof. The review will now evaluate the basis of the claims made by the studies and the extent to which these findings can be generalised.

Evaluation of Claims

The conceptual paper by Shane and Venkataraman (2000) on entrepreneurial opportunities, including opportunity identification, has undoubtedly provided a path dependency for most subsequent researchers. Their proposition and claim that individuals’ possession of prior information and cognitive properties are the major factors needed to identify opportunities have been validated and confirmed by many other empirical studies (Ucbasaran et al., 2009 and DeTienne, 2005). To date, this study has been the point of reference for most studies as far as the debate of opportunity identification is concerned. However, it is important to note that the conceptual model and propositions presented do not reflect all the determining factors of opportunity identification. Extant literature in the field of entrepreneurship makes us understand that entrepreneurship involves the existence of opportunities and individuals who are able to recognise or identify these opportunities and act upon them. Therefore for this conceptual study to limit the determining factors of opportunity identification only to individual factors and ignoring the environmental conditions out of which these opportunities existed, gives a reason for concern.

The theory development of opportunity identification by Ardichvili et al. (2003) has also contributed significantly to the debate of the determinants of opportunity identification by including other non-individual level determinants like social networks and the type of opportunity. The claims of the model are significant as they proposed the possibility of how different types of prior knowledge (knowledge of markets, knowledge of customer problems and knowledge of ways to serve customers) could influence the opportunity identification process differently. Again, to avoid bias and the tendency of over generalisability of subsequent studies that wish to empirically test these propositions, the study set out boundaries for the theory’s application in the domain of new business creation. It is therefore not surprising that other studies (Ozgen and Baron, 2007) have empirically validated the key determinants proposed in their conceptual model. However, there are some critical concerns that can reduce the strength of the study. There are few attempts to link some specific theories (whether from psychology or organisational studies) to explain the factors affecting the process of opportunity identification. For example, in developing the proposition that ‘personality traits such as optimism and creativity have a direct relationship to opportunity identification’, there are no clear theoretical explanations to support this claim. With such deficits, it would be quite difficult for future studies to have theoretical support of findings if such propositions were empirically tested.

Shepherd and DeTienne (2005) contribute to the literature of opportunity identification by looking at prior knowledge and a new variable – financial reward. A useful point in this study is operationalising opportunity identification with a two-dimensional construct – number of opportunities identified and the innovativeness of the opportunity. This undoubtedly enhances the extant literature and further advances the findings of the study in particular and the entire debate in general. Again, the research design adopted (quasi-experimental) helps increase the acceptance level of the study findings because such designs reduce bias such as the self-reporting that is often associated with survey designs. Some of the findings and their generalisability, especially with respect to prior knowledge, are however problematic. Studies (Ardichvili et al., 2003) have shown that prior knowledge is a multi-dimensional construct and should be measured as such, if a study is to capture its full effect on opportunity identification. In contrast, Shepherd and DeTienne (2005) adopted only a single measure (prior knowledge of customer problems) to measure prior knowledge. With such a limited measure of prior knowledge, Shepherd and DeTienne (2005) cannot accurately claim that total prior knowledge has a direct impact on opportunity identification. The study should have measured all aspects of prior knowledge in order to increase the generalisability of these findings

The findings of Ozgen and Baron (2007) introduced a new dimension to the opportunity identification debate by employing some social sources of information to explain the key role information play in opportunity identification. Importantly, their findings on prior information and social networks empirically validate earlier conceptual models and bring new insight to the theoretical and practical implication of factors, such as participation in professional forums on opportunity identification. Again, analysing and including three additional nested models and comparing these to the proposed model, show the robustness and usefulness of the proposed model in explaining the study’s findings. Nevertheless, a few setbacks are worth noting as they serve as the basis for challenging some portions of the findings. For example, there are inconsistencies in the conceptualisation and operationalisation of opportunity identification. While the study conceptualised opportunity identification as a future act or ability, it was measured as a retrospective act by asking participants to report on their past abilities to identify opportunities. In addition to the above challenge, the self-reported measures of opportunity identification by the study participants are also problematic because of the many biases associated with such measures. Moving forward, the study would have achieved greater efficiency in terms of generalisability if it had included quantitative data from a secondary data source on the number of identified opportunities so as to confirm the accuracy of the self-reported data.

The study by Ucbasaran et al., (2008) is also significant as it has useful findings and implications. The distinction between general human capital and entrepreneur-specific human capital brings clarity as to what actually explains the variation in opportunity identification as far as human knowledge is concerned. Theoretically, the study is also well grounded as its findings confirm the theory of human capital and information search. Surprisingly, the conceptualisation and measurement of the main construct – opportunity identification – introduce a major concern into generally accepting some of the study’s claims. They conceptualised opportunity identification as number of opportunities identified and successfully pursed. Even though the study stated unequivocally that opportunity pursued does not imply exploitation, the measurement and subsequent discussion of the study’s findings imply otherwise. First, opportunities identified is not the same as opportunities pursued because of the different processes involved in identification and pursual. Secondly, assuming that the two items measure the same construct (at least according to Ucbasaran et al., 2008), there are still inconsistencies in conceptualising, measuring and discussing the construct. For example while it was measured as opportunity evaluation in the data description section, it was explained and discussed as opportunity exploitation in the discussion section of the paper. In effect, using pursuit of opportunities as one of the dimensions of identifying opportunity does not contribute well to the current debate and reduces the strength of the claims.

According to DeTienne and Chandler (2007), their study was the first of its kind to explore gender differences in entrepreneurial opportunity identification. Though such studies may lack adequate confirmation of its findings from previous studies, its exploratory nature brings new insights to the debate of opportunity identification. Conceptualising and measuring the main construct of opportunity identification as a process (learn/replicate; learn/innovate; learn/acquire; and innovate/educate) and not a single act strengthens the study findings and its implications. Again, the method of data collection employed makes the results robust and significant. Thus, unlike many others, this study used self-reported data in opportunity identification as well as quantitative data from a secondary data source. The degree of correlation (.98) between these two different data sets gives the results some significance. The study sample used in the study, however, presents some critical issues that could limit the generalisability of the findings. The population used had more males and this affected the sampling frame; females comprised only 13 per cent of the study sample. This biased sampling may have prejudiced the study’s findings, limiting the generalisability of the findings.

Lastly, this review evaluates the findings of Smith et al., (2009). The strength of this paper lies in the clear distinction between the different types of opportunity and how each is influenced by certain factors. For example, unlike the general findings (Shepherd and DeTienne, 2005) that prior knowledge influences opportunity identification, this study found that prior knowledge is more likely to influence tacit opportunity compared with codified opportunity. Thus, this study has moved to a new paradigm that recommends that, instead of always looking at the individual in the entrepreneurial process, researchers should begin to focus attention on the attributes of the opportunity itself in the identification process. This finding is convincing as it answers in part the conceptual model of Ardichvili et al. (2003), where the nature of the opportunity was in the model that influences opportunity identification. Despite this paradigm shift in the extant literature, some of the implication or claims of the study cannot totally hold. For example, in explaining and measuring the codified or tacit opportunity, the authors viewed opportunity as only an objective phenomenon, even though from the discovery and creation view of opportunity, opportunities could either be objective or subjective. The results for objective opportunity identification cannot be generalised for subjective opportunity identification since the degree of codification or tacitness could vary with respect to objective and subjective opportunities.

Conclusion

This review paper has critically reviewed extant literature and the debate on the factors that influence entrepreneurial opportunity identification. While most of the findings and their implications are worth considering, their generalisability cannot be taken holistically due to construct usage and measurement, and the method of study among many other limiting factors. Many of the studies are mostly geared to studying the individuals who are engaged in these opportunities. Perhaps other areas such as the type and nature of the opportunity and macro factors like environmental dynamism and national policies could be explored in future research to see how they influence opportunity identification.