Summary for Chapter 2 “Recognizing Opportunities and Generating Ideas”

In this chapter, we discuss the importance of understanding the difference between ideas and opportunities. Not every idea is in fact the source of an opportunity for an entrepreneur to pursue. In addition to describing the differences between ideas and opportunities, this chapter also discusses approaches entrepreneurs use to spot opportunities, as well as factors or conditions in the external environment that may result in opportunities.

The Differences Between Opportunities and Ideas

Essentially, entrepreneurs recognize an opportunity and turn it into a successful business. An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business. A common mistake entrepreneurs make in the opportunity recognition process is picking a currently available product or service that they like or are passionate about and then trying to build a business around a slightly better version of it. Although this approach seems sensible, such is usually not the case. The key to opportunity recognition is to identify a product or service that people need and are willing to buy, not one that an entrepreneur wants to make and sell. an opportunity has four essential qualities: It is (1) attractive, (2) timely, (3) durable, and (4) anchored in a product, service, or business that creates or adds value for its buyer or end-user.

For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open. The term window of opportunity is a metaphor describing the time period in which a firm can realistically enter a new market. Once the market for a new product is established, its window of opportunity opens. As the market grows, firms enter and try to establish a profitable position.

Three Ways to Identify Opportunities

There are three approaches entrepreneurs use to identify an opportunity their new venture can choose to pursue

Observing Trends

The first approach to identifying opportunities is to observe trends and study how they create opportunities for entrepreneurs to pursue. The most important trends to follow are economic trends, social trends, technological advances, and political action and regulatory changes. As an entrepreneur or potential entrepreneur, it’s important to remain aware of changes in these areas. When looking at environmental trends to discern new business ideas, there are two caveats to keep in mind. First, it’s important to distinguish between trends and fads. Second, even though we discuss each trend individually, they are interconnected and should be considered simultaneously when brainstorming new business ideas.

Economic Forces

Understanding economic trends is helpful in determining areas that are ripe for new business ideas, as well as areas to avoid. When the economy is strong, people have more money to spend and are willing to buy discretionary products and services that enhance their lives. In contrast, when the economy is weak, not only do people have less money to spend, they are typically more reluctant to spend the money they have, fearing the economy may become even worse, and that in turn, they might lose their jobs because of a weakening economy.

Social Forces

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. Often, the reason that a product or service exists has more to do with satisfying a social need than the more transparent need the product fills. Here is a sample of the social trends that are currently affecting how individuals behave and set their priorities:

■ Aging of the population

■ The increasing diversity of the workforce

■ Increased participation in social networks

■ Growth in the use of mobile devices

■ An increasing focus on health and wellness

■ Emphasis on clean forms of energy, including wind, solar, biofuels, and others

■ Continual migration of people from small towns and rural areas to cities

■ Desire for personalization (which creates a need for products and services that people can tailor to their own tastes and needs)

Technological Advances

Advances in technology frequently dovetail with economic and social changes to create opportunities. Technological advances also provide opportunities to help people perform everyday tasks in better or more convenient ways. Another aspect of technological advances is that once a technology is created, products often emerge to advance it.

Political Action and Regulatory Changes

Political and regulatory changes also provide the basis for business ideas. The combination of new regulations, incentives for doctors and hospitals to shift to electronic records, and the release of mountains of data held by the Department of Health and Human Services (on topics such as hospital quality and nursing home patient satisfaction), is motivating entrepreneurs to launch electronic medical records start-ups, apps to help patients monitor their medications, and similar companies.

Solving a Problem

The second approach to identifying opportunities is to recognize problems and find ways to solve them. Problems can be recognized by observing the challenges that people encounter in their daily lives and through more simple means, such as intuition, serendipity, or chance. There are many problems that have yet to be solved. Commenting on this issue and how noticing problems can lead to recognizing business ideas. If you’re having difficulty solving a particular problem, one technique that is useful is to find an instance where a similar problem was solved and then apply that solution to your problem.

Finding Gaps in the Marketplace

Gaps in the marketplace are the third source of business opportunities. There are many examples of products that consumers need or want that aren’t available in a particular location or aren’t available at all. Product gaps in the marketplace represent potentially viable business opportunities. 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.

Personal Characteristics of the Entrepreneur

There are some characteristics that tend to make some people better at recognizing opportunities than others :

Prior Experience

Several studies show that prior experience in an industry helps entrepreneurs recognize business opportunities. Although prior experience is important in an industry in most instances, there is anecdotal evidence suggesting that people outside an industry can sometimes enter it with a new set of eyes, and as a result innovate in ways that people with prior experience might find difficult. 

Cognitive Factors

Opportunity recognition may be an innate skill or a cognitive process. 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, which is formally defined as the ability to notice things without engaging in deliberate search. Most entrepreneurs see themselves in this light, believing they are more “alert” than others. Alertness is largely a learned skill, and people who have more knowledge of an area tend to be more alert to opportunities in that area than others.

Social Networks

The extent and depth of an individual’s social network affects opportunity recognition. People who build a substantial network of social and professional contacts will be exposed to more opportunities and ideas than people with sparse networks. This exposure can lead to new business starts. Research results over time consistently suggest that somewhere between 40 percent and 50 percent of those who start businesses got their ideas through social contacts. In a related study, the differences between solo entrepreneurs (those who identified their business ideas on their own) and network entrepreneurs (those who identified their ideas through social contacts) were examined. The researchers found that network entrepreneurs identified significantly more opportunities than solo entrepreneurs, but were less likely to describe themselves as being particularly alert or creative.

Creativity

Creativity is the process of generating a novel or useful idea. Opportunity recognition may be, at least in part, a creative process. On an anecdotal basis, it is easy to see the creativity involved in forming many products, services, and businesses. Increasingly, teams of entrepreneurs working within a company are sources of creativity for their firm. There are five steps to generating creative ideas :

Preparation. Preparation is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process. Just as an athlete must practice to excel, an entrepreneur needs experience to spot opportunities. Over time, the results of research suggest that as much as 50 to 90 percent of start-up ideas emerge from a person’s prior work experience.

Incubation. Incubation is the stage during which a person considers an idea or thinks about a problem; it is the “mulling things over” phase. Sometimes incubation is a conscious activity, and sometimes it is unconscious and occurs while a person is engaged in another activity. One writer characterized this phenomenon by saying that “ideas churn around below the threshold of consciousness.”

Insight. Insight is the flash of recognition when the solution to a problem is seen or an idea is born. It is sometimes called the “eureka” experience. In a business context, this is the moment an entrepreneur recognizes an opportunity. Sometimes this experience pushes the process forward, and sometimes it prompts an individual to return to the preparation stage. For example, an entrepreneur may recognize the potential for an opportunity, but may feel that more knowledge and thought is required before pursuing it.

Evaluation. Evaluation is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. Many entrepreneurs mistakenly skip this step and try to implement an idea before they’ve made sure it is viable. Evaluation is a particularly challenging stage of the creative process because it requires an entrepreneur to take a candid look at the viability of an idea. We discuss how to evaluate the feasibility of new business ideas in chapter 3.

Elaboration. Elaboration is the stage during which the creative idea is put into a final form: The details are worked out and the idea is transformed into something of value, such as a new product, service, or business concept. In the case of a new business, this is the point at which a business plan is written.

Techniques for Generating Ideas

In general, entrepreneurs identify more ideas than opportunities because many ideas are typically generated to find the best way to capitalize on an opportunity. Several techniques can be used to stimulate and facilitate the generation of new ideas for products, services, and businesses.

Brainstorming

A common way to generate new business ideas is through brainstorming. In general, brainstorming is simply the process of generating several ideas about a specific topic. The approaches range from a person sitting down with a yellow legal pad and jotting down interesting business ideas to formal “brainstorming sessions” led by moderators that involve a group of people. In a formal brainstorming session, the leader of the group asks the participants to share their ideas. One person shares an idea, another person reacts to it, another person reacts to the reaction, and so on. 

Focus Groups

A focus groups is a gathering of 5 to 10 people who are selected because of their relationship to the issue being discussed. Focus groups are used for a variety of purposes, including the generation of new business ideas. Focus groups typically involve a group of people who are familiar with a topic, are brought together to respond to questions, and shed light on an issue through the give-and-take nature of a group discussion. Focus groups usually work best as a follow-up to brainstorming, when the general idea for a business has been formulated—such as casual electronic games for adults—but further refinement of the idea is needed. Usually, focus groups are conducted by trained moderators. The moderator’s primary goals are to keep the group “focused” and to generate lively discussion.

Library and Internet Research

A third approach to generating new business ideas is to conduct library and Internet research. A natural tendency is to think that an idea should be chosen, and the process of researching the idea should then begin. This approach is too linear. Often, the best ideas emerge when the general notion of an idea—like creating casual electronic games for adults—is merged with extensive library and Internet research, which might provide insights into the best type of casual games to create. Libraries are often an underutilized source of information for generating business ideas. The best approach to utilizing a library is to discuss your general area of interest with a reference librarian, who can point out useful resources, such as industry-specific magazines, trade journals, and industry reports. Internet research is also important. If you are starting from scratch, simply typing “new business ideas” into Google or Bing will produce links to newspaper and magazine articles about the “hottest” and “latest” new business ideas.

Other Techniques

Firms use a variety of other techniques to generate ideas. Some companies set up customer advisory board that meet regularly to discuss needs, wants, and problems that may lead to new ideas. Other companies conduct varying forms of anthropological research, such as day-in-the-life research.

Encouraging the Development of New Ideas

In many firms, idea generation is a haphazard process. However, entrepreneurial ventures can take certain concrete steps to build an organization that encourages and protects new ideas. Let’s see what these steps are.

Establishing a Focal Point for Ideas

Some firms meet the challenge of encouraging, collecting, and evaluating ideas by designating a specific person to screen and track them—for if it’s everybody’s job, it may be no one’s responsibility.

Encouraging Creativity at the Firm Level

There is an important distinction between creativity and innovation. As indicated in chapter 1, innovation refers to the successful introduction of new outcomes by a firm. In contrast, creativity is the process of generating a novel or useful idea; however, creativity does not require implementation of an idea. In other words, creativity is the raw material that goes into innovation.