Entrepreneurial Opportunity

The Right Place at the Right Time

Greg Clydesdale

• Publisher: Routledge
• Year: 2009
• Print ISBN: 9780415997096
• eBook ISBN: 9781135276447
• Topic: Business
• Subtopic: Business General
• Index: Business

Successfully starting a new business venture depends upon more than having a brilliant idea, getting funding, and getting the product or service to market. Entrepreneurs must also learn to read the market and understand the environments in which they must operate. Entrepreneurial Opportunity places the emphasis on reading and making the most of things that may be beyond the entrepreneur's control, from defaulting contractors to the opening and closing of business niches. It also considers previously under-considered options, such as "the political entrepreneur." This long over-due text provides a far more realistic view of entrepreneurial opportunity and the importance of the business environment.

Yet despite its realist stance, the book is decidedly optimistic, showing readers how markets evolve over time and present opportunities through that evolution. As Clydesdale states, "it's not always fair out there," but this book captures the excitement of the market and its role in delivering opportunities.

Drawing on a broad range of academic research, Entrepreneurial Opportunity is written in a manner that is accessible for students and practitioners, with examples and mini-cases from a variety of industries, including high technology, hospitality, and motion pictures.

Chapter 1
If You’re Such a Genius, Why Aren’t You Rich?

An expanding economy is ripe territory for motivational experts. It is a time when you can follow your hunches, research what looks like a market opening, raise a loan and launch your product. Before long, you sell 50,000 products and your business survives a critical period. The local newspapers hail you as an entrepreneur with great foresight. You can look back upon your achievement with pride.

In a declining economy, you can do exactly the same things: follow a hunch, get a loan and launch a new product. But you only sell 45,000 products, not enough to survive those crucial early years. Your business goes bankrupt and you experience the shame and self-doubt of failure. Although you acted exactly the same, the results were very different. It is very hard for a small entrepreneur to estimate market demand for a new product. A difference of 10% is not great, but it can be crucial. Perhaps you should have paid greater attention to the changing economic conditions, but there is so much to do when you launch a product. And what happens if circumstances turn midstream?

Many entrepreneurs have succeeded not because they were particularly bright but because they rode a wave, while many intelligent entrepreneurs have failed because the tide turned. Often circumstances are more important than any thing done by business leaders. However, pointing this out is not always a rewarding task. Those who note that failure was beyond the power of any one person are “apologists,” while those who credit success to fortunate circumstances are likely to be considered “small minded” or “petty.”¹

This book suggests that not enough attention is given to the role the environment plays in determining whether an entrepreneur succeeds. Many fortunes have been made because entrepreneurs have caught a wave of environmental change. An entrepreneur needs to be able to read market dynamics and the signals they give to achieve sustainable success. Drawing on research on entrepreneurship and industrial development, this book examines environmental and industrial forces that open up windows of opportunity. With greater knowledge on market dynamics, I hope you will be empowered to catch the wave that provides the many opportunities that will exist in the future.

* * *

The football game had finished and the conversation turned to more serious topics. “What you need is a new idea.” He lowered his glass to the bar. “Something no one has ever thought of before.”

“Why does it have to be a new idea?” I asked.

“Because if it wasn’t, someone else would have already taken it.”

“But maybe,” I suggested, “there’s another reason someone hasn’t delivered on the idea. Maybe no one has found a way of making it work. Think about the scooter. A couple of years ago, someone made a mint selling scooters to kids. There was nothing new in that.”

He thought about it. “You’re right. But it has to be a good idea.”

The preceding conversation is common enough. The words might change, but the theme is always the same. People recognize that entrepreneurial success is built around an idea. However, an idea by itself is not sufficient. Millions of people possess ideas that never turn into the golden egg. Getting a business started involves a lot more than just having an idea. It involves a whole range of activities from hiring employees, buying machinery and plants, renting facilities, marketing, raising finance, forming relationships with suppliers, and so on. Chiasson and Saunders suggest that, when entrepreneurs act, they follow “scripts” or recipes that they borrow, follow and modify to get things done.² To keep the language in this book consistent with that used by the business world, I will replace the term “script” with the term “business model.” Many entrepreneurs, when starting a business, simply imitate the models of the businesses they see around them. The business model might require some modification. On the other hand, entrepreneurs may come up with something new, in which case they will still look for guidance from the businesses around them.

When entrepreneurs consider starting a business, they need to put together a number of ingredients and make a number of connections to create a business that works. It is such a daunting process that it is not surprising that many budding entrepreneurs never get started. Entrepreneurs are often left with the question “where do I start?” People who have experience in their industry have the advantage in that they can look at how their previous employers operated. Their old employers provide the model to follow. It is no surprise that entrepreneurs generally do better in businesses in which they have experience. But what if you have no experience in that industry? Or what if you are introducing a new product?

How can you get financiers and suppliers committed to you if your model has not been seen before? The success of your business is highly dependent on the perception of others. But these people can also be a source of valuable information on how to fine-tune your model for success. Various customers, venders, government agencies and other stakeholders communicate positive and negative feedback to the entrepreneur about the use and structure of a business model. But given your reliance on these people for capital and resources, Chiasson and Saunders state that a business model will only work if it these stakeholders consider it morally and practically acceptable, if it provides the entrepreneur with control over the necessary resources, and if they allow the user to act quickly to achieve results. With this in mind, the business model is very dependent on the environment in which it operates. For example, a business model for a restaurant in 1970s Japan may not produce the same results if used for a New York restaurant in 2004. Consequently, the business environment plays a large role in determining which businesses will succeed and which will fail.

For success, entrepreneurs need to be aware of the need to modify their business model to the environment in which they operate. Entrepreneurs need to be sensitive to the differences in various environments and develop an ability to read the environment. In this light, opportunity identification can be redefined as the selection and modification of business models for the environment in which entrepreneurs operate. However, once you have established a business model, it is not set in stone. You will continually need to modify the model as the environment changes and you learn more about the environment in which you act. Business is a process of ongoing modification and response to environmental signals.

The problem all entrepreneurs face when building their businesses is that, because of the time involved in putting it all together, they are effectively building for a situation that occurs some time in the future. Markets exist in time and space, and time and space evolve and transform. This means it is not sufficient to be able to read the environment in its current state. Entrepreneurs must anticipate what the environment will be when their business is up and running. However, the future is uncertain, and attempts to predict it open up a large range of possibilities. Will the economy go up or down? Will new competitors arrive? Will terrorist actions affect the market for my product? People’s predictions are based on their own personal experiences, the information they have access to and how they interpret that information. Given this uncertainty and the subjective nature of thinking, it is no surprise that people with different knowledge have vastly different views of the prospects of a business. When trying to gain support for their projects, entrepreneurs often have to deal with people who don’t share their optimism.

Individuals interpret their past experiences differently from others and then build on these interpretations to construct their own subjective view of the future. Because their knowledge differs, their expectations of the future diverge from those around them. And when the future does arrive, entrepreneurs will be faced with new flows of information that will cause them to revise their plans and modify their models.³ It is no surprise, then, that what some consider an opportunity to start a business others consider “pie in the sky.” Each person’s view of the future and business potential is unique. Consequently, Sarason, Dean and Dillard state that opportunities “do not exist as singular phenomenon but are idiosyncratic to the individual.”⁴ The sad thing is some of those projections will be wrong, and even the most accurate will still be in need of modification to account for unforeseen circumstances and new information flows. Some of the new situations that occur in the environment may in fact be a result of the entrepreneur’s own actions. In that way, the business and environment interact and co-evolve. But even this evolution will be idiosyncratic as entrepreneurs are exposed to new personal experiences that cause them to reflect and interpret the new information that their own actions have generated.

One of the things that all entrepreneurs dread is waking up one morning to find they have mis-anticipated the readiness of the environment for their business. Often the success of a business is constrained by features of the environment that are needed to support its feasibility. These include favorable demand conditions and technological advance. For example, my home town is close to a mountain on which an excellent ski field could be built. There is nothing new in the idea of making the field and it is well known to all. However, no one has launched this business because of insufficient demand. In time, as airfares fall and tourism increases, the feasibility of the project will change. But that demand threshold needs to be crossed first.

Of course, through a well-planned and resourced marketing campaign, you can help to raise demand levels to a necessary threshold. However, the small entrepreneur lacks the marketing resources of large companies. We are more dependent on capturing the trends in the environment or, at least, moving with them. A small business will struggle if it tries to swim against the tide. On the other hand, if it catches a wave, it can ride a path to prosperity.

The difference between an idea and an opportunity is its feasibility, and feasibility is strongly determined by features of the environment.⁵ When an environmental threshold is passed, the idea becomes possible and an opportunity opens. Thresholds are not opened only when markets shift. They are also created when technological thresholds are passed. With new technologies, ideas that once were not feasible become opportunities for entrepreneurs to seize. Each new technology creates an opening, but when technological frontiers are reached, those windows close.

The business environment constantly changes, creating thresholds that open opportunities. Entrepreneurs who are in the right place at the right time when those thresholds are reached are the ones who often succeed. For the individuals concerned, luck can play an important role. However, preparation and foresight help people to become lucky.

The effect of the environment is not just limited to determining success. Directly or indirectly, the environment is the source of all business ideas. For an obvious example, a ski field could not be developed if there was not a suitable mountain in the environment. The environment also has a more subtle impact. It determines what information is available. Employers and education facilities determine what skills we obtain, and financial institutions determine what venture capital possibilities are available. All these factors in the environment determine what we think about and the ideas we construct. However, in stressing the environment, we do not mean to downplay the role of creativity, for the available knowledge and information still needs to be synthesized. This is where creative entrepreneurs stand out from their peers who have access to the same information and resources.

Given the widespread recognition of the importance of the business environment for venture creation, there is a paucity of research on the subject. Most entrepreneurship research has focused on business planning, raising capital, and the motivation and personality of entrepreneurs. They give little attention to the environmental forces that create business opportunities. This book attempts to address this deficiency and to throw light on some of the factors that determine entrepreneurial success or failure. Hopefully, it will stimulate more work in the area. There is some similarity to marketing books that stress the need to identify trends; however, this book is different in that its focus is on the entrepreneur and it draws on research from industrial economics.

What To Do: Trade, Make or Speculate?

“Value for money” is an old and simple phrase, but in the world of entrepreneurship, it explains so much. Business is about the exchange of value. If you want my money, give me something of value in return. If you can’t give me something I value, the only alternative way of getting my money is deceit or theft. Value exchange is at the core of all three paths of entrepreneurship: arbitrage, speculation and production. Arbitrage occurs when an entrepreneur finds that a product is sold in one market for a cheaper price than it is in another. For example, you might find that pineapples are cheaper in Hawaii than in New York. In this case, your logical response would be to export pineapples from Hawaii to New York.

Arbitrage was the most common form of entrepreneurship in pre-industrial days, as people traded goods that were readily available in their local environment for exotic luxuries. Spices were exchanged for ceramics from China or silver from South America. This type of entrepreneur was normally called a merchant or trader. To be successful in this line of business, a number of capabilities are needed. First, one needs knowledge of the selling market. A trader has to make judgments as to what sort of volumes the market could take and what is a suitable selling price. Mechanisms that facilitate a smooth flow of goods and reduce the costs and dangers of trade need to be in place. This includes reliable distribution mechanisms with appropriate inventory levels. Knowledge of shipping, storing and marketing are also required, as are skills in negotiating supply. The sorts of people who succeed at arbitrage are those who have knowledge of two different markets or, alternatively, have contacts in different markets. Immigrants often do well in this as they have knowledge of the markets in their old home and their new home.

The form of arbitrage mentioned above occurs when two markets are separated geographically, but arbitrage can also be done in different markets in the same town. For example, a secondhand dealer can buy furniture at an auction for a low price and then resell it at a secondhand store. But even here an intimate knowledge of the market is required. A secondhand book dealer once told me how difficult it was to succeed in his business:

Anyone can get a loan, go to an auction and buy a pile of secondhand books. But they invariably buy the wrong books. They’ll buy children’s books that their children enjoyed, or university textbooks that are no longer used. They might buy old English cookbooks when the trend is for Italian. This market changes all the time. It’s subtle, and if you are not in touch with what the consumer is buying, you fail. The number of times I’ve seen new shops loaded with stock they can’t sell … I can’t tell you. And these guys have loans to pay off. They soon go down.

A second common form of entrepreneurship is speculation. This involves buying something with the belief that its value will go up in the future. In which case, you can sell it at a later date and make what is hopefully a comfortable profit. Common targets for speculation include property, shares, gold and, in Japan, golf-course membership.

All forms of entrepreneurship involve some degree of crystal-ball gazing, but with speculation the ability to read the future is the sole basis of action. If we could be projected five years into the future and read the business papers, then be sent back in time, we would be highly successful at speculation. Without a time machine, we need to have knowledge of the factors that affect the long-term supply and demand of the commodity in question, as it is this that determines its final price.

The biggest danger with speculation occurs when speculative bubbles are created. This occurs when the market becomes dominated by speculators wanting to make a future profit. With so many buyers in the market, the price is pushed higher so that it no longer reflects its intrinsic value. We saw this with the recent dot-com bubble. Investors bought shares with little regard for their potential to pay dividends. While people were prepared to buy, the price went higher, and this only encouraged more people to speculate. As is always the case, such bubbles invariably burst.

In times of bubbles, investors hope to make a quick profit buying low and selling before the bubble bursts. But how do you know when the bubble is about to burst? If you sell too early and the share price begins to rise, you become poorer compared with those around you. The idea is to hang out until the market peaks. Of course, by then it’s too late. Joe Kennedy claimed that “only a fool holds out for top dollar.” Kennedy was lucky. He had shares in RCA, which was subject to a takeover in 1929. He sold his shares just before the Wall Street Crash. While those around him lost fortunes, he became the 12th richest man in the United States with the resources to later fund his son’s presidential campaign.

A dangerous but not uncommon practice during share bubbles is borrowing money to buy shares. Many did this in the 1920s and, when the bubble burst and the share price fell, many were left holding valueless shares and big debt. It was a disaster for many that illustrates the folly of borrowing to speculate. Prices can come down. On the other hand, many people have made small fortunes from speculation. The simple rules are spend only what you can afford to lose and don’t be greedy.

The last common pathway for entrepreneurs is to produce a product or service valued by customers. This includes those in mining who provide resources for industrial customers, farmers engaged in agricultural production, manufacturers from Henry Ford to Bill Gates and service providers from gardeners to taxation services.

Value for Money and New Ideas

The economist Joseph Schumpeter stressed that a key function of entrepreneurs is innovation.⁶ According to Schumpeter, it is innovation that defines an entrepreneur. Schumpeter claimed that entrepreneurs innovate by introducing new goods and production methods, opening new markets, conquering new sources of materials, and creating new types of industrial organization. This view shows that entrepreneurs are not victims of environment, but it is the environment that is changed by the entrepreneur. Which view is correct?

It also leads to the question “Do all entrepreneurs have to innovate?” It depends on your definition, but in this book we say no. Entrepreneurship is about mobilizing resources, taking risks and capturing a market. This can be done in established industries with tried-and-true techniques. For...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of Figures
• List of Tables
• 1 If You’re Such a Genius, Why Aren’t You Rich?
• 2 Creativity and Opportunity Recognition
• 3 Environmental Change and Windows of Opportunity
• 4 Technology, New Products and Pioneers
• 5 Market Evolution: Niches and Opportunities
• 6 Trajectories and Emerging Niches
• 7 Industrial Development: Linkages and Opportunities
• 8 Environments of Constraint and Abundance
• 9 It’s Not Always Fair Out There
• 10 Leaping, Failing, Learning—Success!
• 11 Government Policy and New Business Development
• 12 What Type of Entrepreneur Should I Be?
• References