Reflections and Extensions on Key Papers of the First Twenty-Five Years of Advances

Jerome A. Katz, Andrew C. Corbett, Jerome A. Katz, Andrew Corbett

• Publisher: Emerald Publishing Limited
• Year: 2018
• ISBN:
  9781787564374
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

Advances in Entrepreneurship, FirmEmergence and Growth provides an annual examination of the major currentresearch, theoretical and methodological efforts in the field ofentrepreneurship and its related disciplines, including firm emergence andgrowth research. The Advances series also publishes papers from other fields, such as strategy, organizational behavior or sociology, that useentrepreneurial samples or make a contribution to entrepreneurial theory orresearch. It is a key source of articles-of-record for major concepts in thediscipline of entrepreneurship.
Volume 20, Reflections andExtensions on Key Papers of the First Twenty-Five Years of Advances, is thefirst in a two volume collection that celebratesthe series' anniversary and embodies the idea of "past as prologue." This first volume showcases some of the mostimportant and well-cited papers from the series including works by DeanShepherd, Zach Zacharakis, and Connie Marie Gaglio. Reflections on their original works by eachauthor as well as commentary by rising scholars of today are also included. The volume demonstrates the timelessness ofthe original classic works and demonstrates how they connect and energizeleading-edge contemporary research in entrepreneurship today.

CHAPTER 1

OPPORTUNITY IDENTIFICATION: REVIEW, CRITIQUE, AND SUGGESTED RESEARCH DIRECTIONS

Connie Marie Gaglio

WHY STUDY OPPORTUNITY IDENTIFICATION?

Theories about the function of entrepreneurs vary widely thereby creating controversy about the nature of entrepreneurship, the need for the construct, and the legitimacy of a discipline devoted to its study.

Economics, the theoretical foundation for the study of market actors and their behaviors, essentially ignores entrepreneurial activity (Barrett, 1989; Baumol, 1968; Casson, 1982; Denisetz, 1983; Hebert & Link, 1988, Kirzner, 1979). The neglect is attributed to the narrow focus of economic theory which defines itself as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses” (Robbins, 1962, p. 16). Consequently, the central issues for economic theory are how a perfectly decentralized system efficiently allocates resources and how market actors make decisions regarding the allocation of resources (Demsetz, 1983). The measure of efficiency in the market system is the paucity of opportunities and the speed with which they are eliminated. The exploitation of opportunities, such as those indicated by price discrepancies, is the sine qua non of economic behavior (Hogarth & Reder, 1986). Historically, economists have been more interested in predicting the outcomes of allocation decisions than in understanding the behavioral decision making process (Hogarth & Reder, 1986; Lopes, 1994; Simon, 1978). Therefore, they make some assumptions about the process. First, they assume all actors intend to maximize profits while minimizing costs. Secondly, it is assumed that knowledge about the marketplace, including opportunities, resource availability and costs, is universally known and understood. It is also assumed that available resources are insufficient to achieve the fulfillment of all desires. Finally, economists assume that the ends, the means, and the opportunities simply exist.

Schumpeter (1934), the father of modern entrepreneurship, argues that it is necessary to pay attention to the ways in which new opportunities, new ends, and new means arise in the market, if only to explain why an efficient market, which should be stagnant, never is. He advocates the reintroduction of entrepreneurship as the explanation of market change and development. The entrepreneurial tactic is the discovery or creation and subsequent exploitation of market opportunities.

The perception and exploitation of market opportunities form the basis for other entrepreneurial functions such as uncertainty bearing and new venture creation. Economists (Demsetz, 1983; Kirzner, 1979, Schumpeter, 1934) maintain that when entrepreneurs exploit opportunity through arbitrage or new venture creation, they behave in essentially the same ways as other market actors; that is, they display the same kind of rational choice behavior by exercising good management practices in order to maximize the potential profit from committed resources given the constraints of scarcity (Jevons, 1970; Robbins, 1992). Naturally, the scale of resource commitment for a new venture differs from that of a large firm but the overall process and responsibilities for entrepreneurs and managers at this point are the same. However, as agents of the firm, managers do not have an obligation for creating or identifying innovations nor for developing “new combinations of productive means” (Schumpeter, 1971, p. 47) although they do have an obligation to consider viable opportunities as such become available (Hogarth & Reder, 1986).

Consequently, opportunity identification or creation represents a theoretically distinct difference between entrepreneurs and other market actors. Understanding the opportunity identification process and event represents a core intellectual problem for scholars interested in developing a theory of entrepreneurship (Kirzner, 1979; Timmons, Muzyka, Stevenson, & Bygrave, 1987). Therefore, it is appropriate to review what, if anything, is known about opportunity identification and examine whether current definitions and frameworks advance our understanding of this discriminating characteristic in ways that also advance theoretical development in the discipline.

The purpose of this chapter is to organize and review the literature regarding opportunity creation and identification: what behaviors are necessary and sufficient for theory? Can we identify and measure them? Can we form predictions about how these variables relate and interact such that an entrepreneurial opportunity is discovered or created (Bygrave & Hofer, 1991; Stevenson & Harmeling, 1990)?

While the area of opportunity identification has not received its fair share of empirical attention, three conceptual frameworks have been published in the literature: Long and McMullan (1984) adapt Schumpeter’s creative person and sketch a process based on creative insights. Herron and Sapienza (1992) adapt March and Simon’s (1958) thinking about the development of innovative programs and model opportunity identification in terms of the motivation to search. Kirzner (1985, 1979) outlines a theory of entrepreneurial behavior that depends on a unique ability, entrepreneurial alertness. These conceptualizations are not necessarily competing explanations; rather, each seems to emphasize different aspects of the process. A description of each and an evaluation of the available empirical evidence are presented. Finally, an alternative conceptual framework of the opportunity identification process is offered. It is argued that this alternative integrates the useful properties of prior frameworks; provides a testable model; and facilitates both empirical and theoretical comparisons between entrepreneurs and other market actors.

SCHUMPETER’S LEGACY REGARDING OPPORTUNITY IDENTIFICATION

Before delving into the intricacies of each framework, it is worth taking a moment to consider the influence Schumpeter’s assertion has had on the way investigators think about opportunity identification. First, it is important to note that Schumpeter does not address the issue of opportunity identification directly, but, like other economists, concentrates on its outcomes, that is, on those innovations entrepreneurs introduce thereby “creatively destroying” (Schumpeter, 1950, p. 83) existing markets. To the extent that Schumpeter does consider the genesis of such innovations, he attributes it to the creative spirit and extraordinary will of individual entrepreneurs, a tradition some investigators try to follow today (Fernalds, 1988; Gilad, 1984; Kirzner, 1979; Long & McMullan, 1984; Whiting, 1988).

The implications of Schumpeter’s characterization of entrepreneurs as actors who discover and exploit opportunities are four-fold. First, there is a tension regarding the duality of the role requirements. When making new combinations of production factors, individuals are acting as entrepreneurs; when creating new ventures to produce and distribute these new combinations, individuals are behaving like other rational economic actors. In terms of theory, how far does one have to go before it can be said one is no longer behaving as an entrepreneur? Kirzner (1979) argues that one behaves like an entrepreneur only for that moment when he or she recognizes the commercial potential of an idea. Long and McMullan (1984) believe that one must also determine that the idea can be implemented and is desirable to do so. Herron and Sapienza (1992) attempt to steer a middle ground. Obviously, in the real world, an individual will identify and exploit opportunities but where is the line between these two qualities drawn in order to sustain the analytical distinction that defines entrepreneurship?

Secondly, there is some confusion about the definition of an opportunity. Following the same type of reasoning outlined above, when does an idea become a business opportunity? Kirzner argues that the transformation comes from the mere recognition of the commercial value. The others require some consideration of exploitation issues.

Third, there is also some confusion about the nature of entrepreneurial opportunities. Is there a difference between ordinary business opportunities available in the market and entrepreneurial opportunities? Schumpeter is clear in his intention that there is a difference and the differentiating characteristic is the scale of innovation – incremental innovations are those which efficient markets seize, entrepreneurial innovations creatively destroy whole industries. Entrepreneurial opportunities, then, are innovations at the industry level and Schumpeter (1971, 1934) provides several examples to underscore his point:

• (1) the introduction of a new product or service;
• (2) the introduction of a distinctive improvement in the level or quality for a product or service;
• (3) the introduction of a new method of production or distribution;
• (4) the opening of a new market;
• (5) the capture or creation of a new source of supply; and
• (6) new forms of organization within an industry.

It is these types of discontinuities that represent problems for traditional economic theory and requires the presence of entrepreneurs as part of the explanation. Kirzner embraces this scale of opportunity but it is not entirely clear whether the others do, partly because both associate entrepreneurial opportunities with new venture creation. Herron and Sapienza do refer to innovation but their discussion suggests that innovation occurring on an individual level (e.g., someone who never ran an art gallery before but starts one now) can be considered an appropriate entrepreneurial opportunity.

The question of scale has methodological implications too. Many surveys operationally define entrepreneurship as venture founders. This definition includes imitative small business owners and self-employed professionals along with Schumpeter’s innovators. The resulting noise makes it difficult to detect any true patterns among innovators, if they exist. Furthermore, some (e.g., Gunderson, 1990) argue that one can perceive Schumpeter’s types of innovation only in retrospect. However, as will be shown during the discussion of the alternative framework, this argument confounds the opportunity to innovate with the success of the innovation.

Finally, there is an assumption that opportunity identification is a stochastic process. Long and McMullan and Kirzner accept this characterization while Herron and Sapienza question whether it must be so. If opportunity identification is a randomly occurring event, how can anyone claim to study this entrepreneurial behavior unless one is accidentally looking at just the right moment? This may be one reason why the opportunity identification process has received little empirical attention. Again, the alternative framework suggests some ways around this dilemma.

CONCEPTUALIZATIONS REGARDING THE OPPORTUNITY IDENTIFICATION PROCESS

As noted earlier, the entrepreneurship literature offers three conceptual frameworks about the opportunity identification process. All the frameworks assume that opportunity identification is best explained at the individual level of analysis (that is, in the thoughts, feelings, and actions of individual entrepreneurs or entr...