When it comes to recognising opportunities, knowledge is crucial
Opportunity recognition and pattern recognition. When it comes to recognising opportunities, knowledge is crucial.
Information from the external environment, prior knowledge of the entrepreneur, and the entrepreneurs’ cognitive frameworks interact when entrepreneurs recognize opportunities (Baron, 2006). Having that in mind, let’s look closely at each type of opportunity recognition.
Opportunity discovery means that an entrepreneur uses existing information to search for ‘holes’ in the market (Kirzner, 1973). Entrepreneurs discover an opportunity in imperfect markets in which certain, rather visible, customer needs remain unsatisfied. The task of entrepreneurs is then to recognise these needs and provide a solution. To recognise these opportunities, entrepreneurs need to actively search for them by observing their external environment. The more changes and trends they are able to distinguish, the more connections/patterns between these developments they can recognise.
When discovering an opportunity, entrepreneurs begin with a need that is unfulfilled. There may be already products that to a certain extent fulfil this specific need. An entrepreneur may then propose another solution. Or, an entrepreneur may take an existing product or service to a new (e.g. international) market.
Opportunities can also be created as combinations of existing resources (Schumpeter, 1934). When creating opportunities, entrepreneurs usually begin with their ideas for technology, product or service to provide a solution for latent (hidden) needs. The idea comes out of the person’s prior knowledge. Entrepreneurs creating opportunities are able to make connections between what they already know, what they have learnt in the past and what they observe around them. This ability is rather unique and is based on the cognitive frameworks from a person’s experience (Baron, 2006).
An entrepreneur capable of ‘connecting the dots’, i.e. connecting patterns of events, behaviour, trends, and information, is able to come up with an entirely new product or service that has not yet existed on the market. The next step is to create a market for the new products.
Take the iPad as an example. Tablets had existed before 2008, but they had been mainly used by narrow business segments, and not by the mass market. While the largest computer companies focused on developing netbooks (small computers with a limited computing power), Apple put its resources on developing a tablet with a screen which you could operate with your finger instead of a special pencil. With this new product, the company created a new market, as iPads were suited for entertainment unlike netbooks that could be used for work. As history shows, netbooks have been replaced by tablets. Now every computer company has a tablet in their product portfolio.
Not everybody has the ability to recognise patterns from the changes in the external environment, potentially unrelated events, and experience. However, opportunity recognition can be learnt. People who want to become entrepreneurs but lack an idea, can train themselves by actively searching for new developments, being alert to what is happening around them and to other people’s needs.
More reading on opportunity recognition (recommended)
Aldrich, H. E., & Yang, T. (2014). How do entrepreneurs know what to do? Learning and organizing in new ventures. Journal of Evolutionary Economics, 24(1): 59–82.
Baron, R. A. (2006). Opportunity recognition as pattern recognition: How entrepreneurs “connect the dots” to identify new business opportunities. Academy of Management Perspectives, 20(1): 104–119.
Costa, S. F., Ehrenhard, M. L., Caetano, A., & Santos, S. C. (2015). The Role of Different Opportunities in the Activation and Use of the Business Opportunity Prototype. Creativity and Innovation Management.
Frederiks A.J., Englis B.G., Ehrenhard M.L.,Groen A. J., (2018). Entrepreneurial cognition and the quality of new venture ideas: An experimental approach to comparing future-oriented cognitive processes, Journal of Business Venturing.
Kirzner, I. (1973). Competition and Entrepreneurship. Chicago, Chicago University Press.
Schumpeter, J. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle. Cambridge, MA.
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