Diane M. Sullivan (2007)

Sections Modified from Barringer & Ireland’s (2006) Chapter 2

Recognizing Opportunities and Generating Ideas

Part II

Personal Characteristics of the EntrepreneurPersonal Characteristics of the Entrepreneur

Characteristics that tend to make some people better at recognizing opportunities than others

Prior Experience Social Networks

Cognitive Factors Creativity

Prior Industry ExperiencePrior Industry Experience

Prior Industry ExperiencePrior Industry Experience Prior industry experience helps entrepreneurs recognize Prior industry experience helps entrepreneurs recognize

opportunities becauseopportunities because An individual may spot a market niche that is underservedAn individual may spot a market niche that is underserved Can build a network of social contacts who provide insights that Can build a network of social contacts who provide insights that

lead to new opportunitieslead to new opportunities Technical term: Technical term: The The Corridor PrincipleCorridor Principle

Cognitive FactorsCognitive Factors

Opportunity recognition may be an innate skill Opportunity recognition may be an innate skill or cognitive processor cognitive process

Entrepreneurs may have a “sixth sense” so Entrepreneurs may have a “sixth sense” so they see opportunities that others missthey see opportunities that others missThis “sixth sense” is called This “sixth sense” is called entrepreneurial entrepreneurial

alertnessalertnessThe ability to notice things without engaging in The ability to notice things without engaging in

deliberate searchdeliberate search

Social NetworksSocial Networks

Characteristics of one’s social network affects Characteristics of one’s social network affects opportunity recognition and venture developmentopportunity recognition and venture development

You

Network Tie

Refers to any relationship you have with another

person

The people represented in a network are generally called

“actors”

When mapping the network of one individual, that

person is called the “focal actor”

• A graphical representation of a network of relationships is called a network map.

• People indicated as dots/circles

• Relationships indicated as lines

Important Network CharacteristicsImportant Network Characteristics

Certain network tie characteristics associated with Certain network tie characteristics associated with better outcomes (e.g., more opportunities recognized, better outcomes (e.g., more opportunities recognized, better firm performance, power positions, etc.)better firm performance, power positions, etc.) Network SizeNetwork Size Network Tie StrengthNetwork Tie Strength

Strong TiesStrong Ties Weak TiesWeak Ties

Cohesive TiesCohesive Ties Structural HolesStructural Holes Bridging TiesBridging Ties

Network SizeNetwork Size

You You

Large Network characterized by many ties Small network characterized by few ties

Benefits of Larger Networks1. Very helpful in earlier stages of venture

development2. More opportunities identified3. Better firm performance4. Faster IPO5. Network growth

Benefits of Smaller Networks1. Helpful in later stages of venture

developmenti. Provides a more parsimonious

group of “helpers” later on

Network Tie Strength: Strong TiesNetwork Tie Strength: Strong Ties

Strong Ties are determined as such by three characteristics of these relationships:

1. Long duration of relationship

2. Closeness of relationship (close/very close)

3. Frequency of contact (frequently interact)

In depicting a “network map”, strong ties are indicated by solid lines from the focal actor to the connecting strong tie.

Drawbacks of Strong Ties

1. Provide access to redundant information2. Provide access to similar or redundant contacts (e.g., no help in expanding an actor’s network)

Strong-ties: characterized by frequent interactions between coworkers, friends, and spouses

Benefits of Strong Ties1. Generally trustworthy2. Provides depth of information3. Usually helpful in early-stage funding

You

MomDad

Spouse

Best Friend

Network Tie Strength: Weak TiesNetwork Tie Strength: Weak Ties

Weak-ties: characterized by infrequent interactions between acquaintances

You

Benefits of Weak Ties1. Provide unique perspectives2. Helpful for identifying opportunities3. Helps entrepreneurs expand their

network

Weak Ties are determined as such by three characteristics of these relationships:

1. Short duration of relationship

2. Closeness of relationship (not close)

3. Frequency of contact (infrequently interact)

In depicting a “network map”, weak ties are indicated by, dotted, lines from the focal actor to the connecting weak tie.

Drawbacks of Weak Ties

1. May be difficult to sort through information2. Over time tend to become strong ties3. Sometimes difficult to create exchange relationship with (requires cues of legitimacy)

Cohesive TiesCohesive Ties

Cohesive ties describe ties that link an actor with another actor in the network that has at least one other tie within the network

Benefits of Cohesive Ties1. Generally trustworthy relationships2. Provide more, potentially sensitive,

information3. Provide more detailed information

Drawbacks of Cohesive Ties1. Generally only provide redundant

information2. Tend to possess many characteristics of

strong ties

You

Structural HolesStructural Holes

• Structural holes describe the situation where there are gaps, or holes, between different groups of network partners.

• People usually focus on activities inside their own network group, which creates “holes” in the information flow between groups, called, structural holes (Burt & Ronchi, 2005).

• Structural holes are important because they present areas where diverse information relative to the focal actor may reside.

• A lack of structural holes in one’s network redundant information flow, and the potential to miss important information relative to the venture, industry, market, technology, etc.

Group 1

Group 3

Group 2

Bridging TiesBridging Ties

Bridging ties describe the situation where an actor is tied to another actor within the network who has no other links with that network.

Benefits of Bridging Ties1. Actors holding bridging positions are more likely to

receive novel information vs. the rest of the network 2. Bridging actors more likely to receive new information

earlier than others in the network3. This leads to more power and control benefits for the

actors holding the bridge position (e.g., the brokering position)

Drawbacks of Bridging Ties1. If you do not hold the bridging

position, you may be in a weak position

You

Broker between 3 network groups

Group 1

Group 3

Group 2

Other Important Entrepreneurial Network Other Important Entrepreneurial Network Issues to ConsiderIssues to Consider

Understanding your network can help to know where network Understanding your network can help to know where network contact “gaps” need to be filledcontact “gaps” need to be filled

Understanding other’s networks can help to know where they Understanding other’s networks can help to know where they can add value can add value and and where where they need value they need value addedadded NoteNote: Understanding your partner’s networks can also help you : Understanding your partner’s networks can also help you

understand what they value (e.g., what your value proposition must/must understand what they value (e.g., what your value proposition must/must not do for them)not do for them)

The types of networks that are beneficial to entrepreneurs vary The types of networks that are beneficial to entrepreneurs vary during different phases of venture developmentduring different phases of venture development For example, early-stage entrepreneurs seem to benefit from large, For example, early-stage entrepreneurs seem to benefit from large,

diverse networks. Later-stage entrepreneurs seem to benefit from more diverse networks. Later-stage entrepreneurs seem to benefit from more parsimoniously diverse networks. parsimoniously diverse networks.

CreativityCreativity

CreativityCreativity Creativity is the process of generating a novel Creativity is the process of generating a novel ANDAND useful useful

idea.idea. Opportunity recognition may be, at least in part, a creative Opportunity recognition may be, at least in part, a creative

process.process. Per the text, for an individual, the creative process can be Per the text, for an individual, the creative process can be

broken down into five stages (next slide)broken down into five stages (next slide)

CreativityCreativity

Figure 2.2

Five-Steps to Generating Creative Ideas

12

34

Variation

Evaluation and SelectionRetention

Evolutionary View of the Process of Creative Idea Generation

5

6

Creative Process and Entrepreneurial Creative Process and Entrepreneurial Opportunity Opportunity ConstructionConstruction

V

SR

V

SR

V

SR

Entrepreneur(s) Network/Resource Market/Industry Providers/Venture Team

More

Extent of

Venture

Organization

Less

Idea Generation Idea Exploration Idea Exploitation

Initial Steps for Protecting IdeasInitial Steps for Protecting Ideas

Step 1Step 1 Put idea in a tangible form (e.g., enter into a physical idea Put idea in a tangible form (e.g., enter into a physical idea

logbook or computer disk)logbook or computer disk) Include the date when the idea was first conceived Include the date when the idea was first conceived

Step 2Step 2 Secure the idea (e.g., password protect, put in safe, etc.)Secure the idea (e.g., password protect, put in safe, etc.)

Step 3Step 3 Avoid inadvertent or voluntary disclosuresAvoid inadvertent or voluntary disclosures Doing so could forfeit the right to claim exclusive rights to it Doing so could forfeit the right to claim exclusive rights to it

Other, more formal, stepsOther, more formal, steps Copyright, Trademarks, Patents, etc.Copyright, Trademarks, Patents, etc.

Discussed in more detail in Chapter 8 Discussed in more detail in Chapter 8

Diane M. Sullivan (2007)

Evaluating Entrepreneurial Opportunities Relative to an Industry’s Structure

Industry StructuresIndustry Structures An industry’s structure indicates the stage of an industry its life An industry’s structure indicates the stage of an industry its life

cyclecycle Suggests types of firms that will likely be successful in the industrySuggests types of firms that will likely be successful in the industry Helps us determine if the window of opportunity is open for new entrantsHelps us determine if the window of opportunity is open for new entrants Suggests strategic moves that new entrants or existing firms can take to Suggests strategic moves that new entrants or existing firms can take to

capitalize on opportunities created as a result of industry characteristicscapitalize on opportunities created as a result of industry characteristics 5 general structures an industry can take (these are not mutually 5 general structures an industry can take (these are not mutually

exclusive):exclusive):

1.1. EmergingEmerging

2.2. FragmentedFragmented

3.3. MatureMature

4.4. DecliningDeclining

5.5. GlobalGlobal

Industry Structures: EmergingIndustry Structures: Emerging Indicated by: Newly created or re-created industries

Primary causes: technological innovations, changes in demand, the emergence of new customer needs, etc.

Examples: microprocessors, digital music, cell phones, biotechnology

Entrepreneurial opportunities present in emerging industries:

Gain a first-mover advantages via:

Technology leadership: can create the technology standard (e.g., Microsoft), gain low-cost position due to economies of scale (Wal-Mart), obtain patent protection

Caution: second-mover advantages may occur where imitators can duplicate the first movers’ patents—research shows imitators can do this for 65% of the cost of the first-mover

Strategically valuable assets (e.g., required resources to compete in industry): access to raw materials (e.g., mining industries), favorable geographic locations (Wal-Mart in medium-sized cities before competition), valuable product market positions (breakfast manufacturers; luxury vehicles)

Create customer switching costs: create a cost for customers to change to another firm’s offerings (e.g., software, pharmaceuticals, even some grocery stores)

Industry Structures: FragmentedIndustry Structures: Fragmented Indicated by:

A large number of small to SME firms in the industry

No one has dominant market share

No one creates a dominant technology

Primary causes: few barriers to entry, no economies of scale, may need close local control over enterprises to ensure quality

Examples: service industries like retailing, commercial printing, dry cleaning, local movie houses

Entrepreneurial opportunities present in fragmented industries:

Consolidation: firms can consolidate (e.g., purchase firms) the industry to move create a smaller number of larger firms

Examples: Blockbuster consolidated the video rental industry

Service Corporation International (SCI) in the funeral industry (found new economies of scale)

Midas has consolidated muffler repair shops

Industry Structures: MatureIndustry Structures: Mature Indicated by:

Slowing industry growth

Development of repeat customers

Slowing of production capacity

Slowdown in new product/service introductions

Increased international competition

Overall reduction in profitability of firms in industry

Primary causes: technology diffusion, reduction in innovation rate

Examples: fast food; motor oil, large discount retailers; laundry detergents, kitchen appliances

Entrepreneurial opportunities present in mature industries:

Product refinement: focus on extending/improving current products and technologies (e.g., additives to motor oil, more concentrated laundry detergents; front-loading washing machines; Silk Soymilk)

Investment in service quality: increase customer service quality (e.g., restaurant industry and the casual dining segment—Applebee's; Chili's—versus fast-food service)

Process innovation: activities used to design, product and sell products/services (e.g., US automobile industry; Dell and supply-chain management in PC industry)

Industry Structures: DecliningIndustry Structures: Declining Indicated by: An industry that has experienced an absolute decline in unit sales

over a sustained period of time.

Examples: Traditional video rental industry; US defense industry after the Cold War in the 1980s

Entrepreneurial opportunities present in declining industries:

Market Leadership: wait out shakeout period; facilitate shakeout by purchasing competitors’ product lines, then try to gain majority of market share (e.g., Martin Marietta in defense industry acquiring GE’s aerospace business—then merged with Lockheed to become Lockheed Martin)

Market Niche: reduce scope of operations and focus on narrow segments in industry (e.g., Polaroid with instant photography)

Harvest: long, systematic, phased withdrawal from industry while extracting as much value as possible

Divestment: quickly withdraw from industry after industry decline pattern is established so no additional costs incurred (e.g., can sell product lines to competitors)

Industry Structures: GlobalIndustry Structures: GlobalIndicated by: industry experiencing significant international sales

Examples: athletic shoes; internet auctions; fast food

Entrepreneurial opportunities present in global industries:

Pursue Multidomestic Strategy: customize product/service offerings per each market’s specific needs/wants (fast food; eBay)

Pursue Global Strategy: approach each market with the same offerings (e.g., Nike)

Determine which strategy appropriate by similarity of consumers’ tastes across markets