Where do entrepreneurial opportunities come from?
The sources of opportunity
An opportunity is a gap in the market where there is the potential to do something different and create value (Wickham 2004). This represents a potential to serve customers better than they are already being served through a product or service that offers consumers more utility in terms of satisfying human needs than existing products or services. An opportunity must solve a problem, fulfil a need or want, create a fad or trend for any exploitation of it to have a chance of succeeding. New opportunities continually emerge but don’t necessarily present themselves openly. They must be seen, discovered and identified, which is the task of entrepreneurs and managers of firms. Not every idea is worthy enough to take action upon. The potential return on the investment of time and effort must be large enough to offset the opportunity cost of exploiting another idea or doing something else (Kirzner 1973).
All opportunities have a basis or rationale of being. If the opportunity is to be considered entrepreneurial, it must originate from a source of innovation, as entrepreneurial market activity is novel by definition (Kuratko & Hodgetts 2004). An innovation can be seen as the source that enables the successful exploitation of ideas into new products, services, processes or business models. Innovation is critical to enable a firm to grow and remain profitable. Innovation combines knowledge and the needs and wants of consumers that are the base of opportunities. Innovation is not just about the improvement of technology but covers all aspects of a business and the way it organizes itself and operates. Innovation is an ingredient needed to construct most opportunities that seek to exploit changes within the environment. Innovation combines knowledge, resources, capabilities and competencies with social networks to create new means of creating value.
Innovation can create new sources of competitive advantage for a firm when it enables incremental changes in the market. Revolutionary innovation can create new industries with new breakthroughs in technology and methods of organization. However there must be a reason for innovation, not just something done for the sake of doing it like what occurred with the launch of New Coke, replacing the well accepted Classic Coke during the 1980s. Likewise technology alone does not automatically yield innovation, imagination, development and marketing skills are needed. Innovation must provide the basis or source of opportunity that is intended to exploit a gap within the marketplace.
However not all sources of opportunity need be innovative and most ventures usually start with non-innovative ideas. In fact very few enterprises have neither, the time, resources, technology or expertise to research and develop new business ideas and innovations (Johnson & Tilley 1999).
A business begins with an idea that has been deemed an opportunity through some form of analysis and a person is motivated enough to act upon it. The majority of ideas are derived from the following categories;
1. An old type of business that can be given a new twist or professionalism, i.e., McDonalds or herbal products,
2. A standard product or service that can be customised, i.e., recording birthdays on customer records so that congratulatory messages can be individually sent to customers by a company,
3. New technology that can be adapted to manufacture old products, i.e., desktop publishing, compact disks, faxes and email, etc.
4. Imported products that can be replaced with domestic products, i.e., the basis of many domestic automobile industries,
5. The changing of business models, i.e., sourcing products from a third party rather than manufacturing them,
6. Developing the same business identity in another geographical location, i.e., The opening up of Coca Cola, KFC and Pizza Hut franchises in other states and countries, and
7. Replicating another business and competing against the original business, i.e., the opening up of a bakery, milk bar, convenience store near another one.
Although entrepreneurship has been associated with opportunity, there has been very little written about the sources of opportunity. Attention has been focused upon the sources of innovation, rather than the sources of opportunity, which can be innovative or non-innovative.
Business development is concerned about the art of seeing and exploiting opportunity for the creation of value, which may contribute to the firm’s profitability, growth and/or survival. This process goes through four basic phases;
1. The discovery, identification or construction of ideas about opportunities through the creative process,
2. The screening of these ideas to determine whether an opportunity exists that has potential to be exploited,
3. The crafting of a useful strategy that is able to exploit the identified opportunity, and
4. The implementation of the strategy in a way that adds value to the firm.
There is an abundance of management theory about the identification and exploitation of opportunities from various points of view. Andrews (1965), Ansoff (1965) and Porter (1980, 1985, 1990) take the point of view that opportunity identification and strategy development is rational and analytical through convergent thinking process. Ohmae (1982), Mintzberg (1994) and Stacy (1993) see opportunity identification and strategy development as more intuitive and a creative process through divergent thinking. Others like Wilson (1994, 1998), Raimond (1996), Liedtka (1998a, 1998b) and Heracleous (1998) see opportunity identification and strategy development as a mixture of art and science. What seems to be important is a firm’s ability to recognise what information is important in opportunity recognition and subsequent innovative processes, its prior and related knowledge and experience (Cohen & Levinthal 1990), and its alertness, self efficacy, creativity, social networks and the type of opportunity itself (Ardichvili et. al. 2003). Previous entrepreneurial experience may assist in developing an ‘opportunity intellect’ that aids the identification of opportunities and provides a framework that allows informed and experienced based decisions about how to exploit an identified opportunity (Kaish & Gilad 1991).
The process of opportunity identification would appear to be an emergent rather than a deductive process, requiring divergent rather than convergent thinking. Innovation is generated through social interaction where data cannot be analyzed in logical ways. For example quantitative market research may be very limited in the information it can provide a person who foresees the possibility of opening a sandwich bar next to a commuter train station or a courthouse. Understanding consumer behaviour, their wants and needs will be more important in making any decision to exploit the perceived opportunity. Therefore seeing opportunity is more related to the ability to imagine and associated emotions. New ideas are constructed, not analyzed. The future cannot be forecast, it can only be explored (Schumacher 1974, P. 200).
In order to see the potential sources of opportunity one must be able to take a strategic view of the firm and the environment. A strategic view is one that can pick up subtle changes in the environment through a degree of sensitivity and alertness and be able to extrapolate any linkages and connections discovered into idea scenarios that can be evaluated. An individual will tend to be more sensitive and alert in domains that he or she already has knowledge and experience.
To see opportunity there must be motivation or intent. Hamel and Prahalad (1989) conceptualized the concept of strategic intent where there is an intuitive vision of the future direction of the firm. This helps to provide focus on the domain and selective parts of the environment that are considered important to the firm’s future. Therefore as well as being a motivator, strategic intent concerns itself with the immediate domain and the firm’s perceived capabilities and prior learning linked through prior knowledge. Strategic intent also gives a sense of destiny and direction (Hamel & Prahalad 1994, pp. 129-130).
The discovery of useful sources of opportunity in the construct of opportunities is tied to observation of environment changes over time. Changes in the environment usually occur in an evolutionary manner which the average person will not be aware and think about. Connectiveness of the past and present to the future must be incubated by the individuals who make up the firm over reflection and time.
Alternatively sources of opportunity may be driven by new technologies, either as an incremental step or breakthrough. New technologies incorporated into products, services or improve production processes can potentially add value to a firm. With novel breakthrough technologies a firm may be able to create a new market segment, i.e., P&Gs development of Pert/Rejoice 2 in 1 shampoo, or even a new industry, i.e., the advent of cellular phones created a new industry separate to existing landline phone networks.
The firm will operate according to a ‘self hypothesis’ which is influenced by learning and prior knowledge. A ‘self hypothesis’ is a shared mental model of the environment and the firm’s place within it. The firm’s ‘self hypothesis’ is where the firm perceives its own strengths and weaknesses, those of its competitors, the potential reactions of competitors to an aggressive stance taken by the firm, weak spots and barriers within the field and areas where the firm should not enter or is safe to enter. The ‘self hypothesis’ is the firm’s view of the world, generating a perception of its own self efficacy. The ‘self hypothesis’ can be a barrier to seeing opportunities if one is not aware of the assumptions behind it.
Most influence of prior knowledge is manifested through the firm’s ‘self hypothesis’. Prior knowledge contains learning about what can and cannot be done within the market by the firm. One important role prior knowledge plays is in technical and tacit knowledge about products, business models, technology, consumers, and competitors, etc. Through incubation prior knowledge assists the cognitive system make linkages and connections which identify new sources of opportunity for the firm. The huge majority of ideas already exist in one form or another within the existing or another domain, another geographical location or in another time. We remember different ideas from past experience or observation of the environment. Past knowledge may assist in creating unique insights into the consequences of change occurring within the environment.
Alertness and sensitivity are qualities needed to see and pick up subtle changes in the environment. Our focus also plays a role in assisting to narrow down our attention to what is relevant to potential new opportunities. Finally it is important to know what to look for in finding new opportunities. Our opportunity intellect is a specialised knowledge which guides us through the discovery, evaluation and scenario building process of a potential opportunity. It is a strong entrepreneurial intuitive ability. The components influencing the strategic view are shown in Figure 1.
Figure 1. The components of the strategic view.
Therefore new sources of opportunity can be pushed out by a firm as a new product or service into the marketplace or be pulled by unsatisfied customer needs. Some innovations go on to be successful as the product or service is what customers are looking for, while others miss fulfilling any latent customer need and fail. In the case of failure mistakes can be felt very quickly with a product, service, or even business failure, which may prove very expensive.
The sources of opportunity
Peter Drucker (1985, P. 34) remarked that we cannot develop a full and complete theory of the sources of opportunity, yet we can understand where opportunities may come from. The overwhelming majority of successful innovations exploit social, economic and regulatory change or new and improved technologies. New to the world breakthrough inventions may provoke change as did the aeroplane to commercial aviation, the telephone to communication and the television to entertainment, etc. New technologies often make great changes to the way we live our lives as we are beginning to see through new advances in biotechnology and genomics.
Innovation requires a systematic and disciplined way of work based upon what the innovator sees and learns from the environment, particularly in his or her own domain. All sources of opportunity must be based on purchasing power which is the ultimate driver of innovation. For example, very few people in Malaysia could afford to purchase a new Proton Saga car when it was launched in Malaysia during 1984, if it was not for the innovative leasing packages attached to purchases of the vehicles. Finance packages made the Proton Saga car available to many new potential car buyers through its easy access to lower middle income groups. This was the innovative part of the proton business model that enabled the company to gain over a 70% market share in Malaysia during the late 1980s and throughout the 1990s. Finance changed the Malaysian car market from a supply driven to a demand driven market. These forms of social innovation often have much more impact than technical innovation.
The author has divided the sources of opportunity into six main categories, market void, technology infusion, structural changes, resource monopoly, regulation and non-innovative. Each main category has a number of sub-categories (see Figure 2). Further, each source of opportunity will have a different impact upon the environment. It may;
- Increase efficiency with small intensely focused productivity improvements by improving what already exists through minimal investment. These types of sources of opportunity can be seen in many quality programs that manufacturing and service industries engage upon.
- Make evolutionary changes incremental to the market place focused on improving existing products and services like bank ATMs, Dell Computer’s mass customization of home computers as per customer preferences and Toyota’s development of specialized distribution channels for the Scion brand targeted at Gen Y, etc., and
- Make revolutionary changes through radical new additions to the market place that change the way people think about and do things, which may lead to changes in existing structure of the industry and/or marketplace, like the invention of the motor vehicle at the beginning of the 20th century and Henry Ford’s development of the mass production line around 1914 which brought the product from something only the elite could afford to something affordable to the middle classes of the United States (Dent 1994).
Figure 2. The potential sources of opportunity (Opportunity anchors) for a firm.
The result of utilizing a source of opportunity will be;
1. The development of new products which may exploit established technology, simply an improvement of what is already available or may offer a new radical way of doing something.
2. New services,
3. New production technologies,
4. New operating practices,
5. New ways of delivering the product to the customer,
6. New means of informing the customer about the product, or
7. New ways of managing relationships between entities.
Sources of opportunities are also viewed from different perspectives depending upon who is looking at the environment. Individuals with limited ideas, capital, experience, expertise and networks may look for an opportunity that returns them a wage rather than a profit. An entrepreneur with good domain knowledge and experience within an industry may have his or her own theory of ‘how things can be done better’ believing they have a personal theory of success and be very focused upon specific types of opportunities. A corporation will take a strategic view and analyse potential opportunity space looking at how to minimize or eliminate risks and uncertainty before moving into any form of action. Therefore each individual will look at different levels of return and profitability and approach the environment with different levels of capital, resources, skills and capabilities and networks.
A brief description of each source of opportunity is described below.
Market void opportunities are those potential opportunities that may exist due to an unnoticed gap or un-serviced portion of the market. They include incongruities, demographic, and perceptual changes.
Incongruities: Peter Drucker in his book Innovation & Entrepreneurship identifies incongruities as a source of innovation. He defines an incongruity ‘as a discrepancy, a dissonance, between what is and what ‘ought’ to be’ (Drucker 1985, P. 57). An incongruity is a symptom of an opportunity to innovate. Consumers are aware of them, but not in an overtly conscious way that leads to the expression of their unmet needs. It may be a latent need, a yearning for some improvement or a want that there was something that could solve their problem. However these incongruities may only be visible to people with experience of the industry, being very difficult to detect by those outside the industry. Alternatively they may be visible to people who have that need. If incongruities are detected and exploited, they can be very powerful sources of opportunities that can lead to substantial growth for a firm.
Demographic Changes: Demographics represent differences in population distribution, age structure, ethnic and racial composition, employment levels, education status, and income distribution, etc. The proportion and number of women in the population, ratio of blue to white collar workers, unemployed to self employed, births, deaths, and immigration influences both the types and magnitude of opportunities available in a society. What people want, need, and purchase in aggregate can be correlated to specific demographic groups.
Perceptual Changes: Opportunities are created when a sizable proportion of a population change perception. A change in perception does not alter the facts, but the understanding and identity of a population alters to the point where meanings change. Changing perception is about changing attitudes, which lead to changing habits.
Technology Infusion: Technology infusion is an extremely important source of opportunity. The infusion of new technology into a field brings change and that change usually exposes further sets of opportunities. This can be clearly seen with the introduction of the internet in the 1990s, where over the last decade and a half the way people interact with each other and the rest of the community has drastically changed. Email has replaced letter writing, chat groups and other social media link individuals to the general community and special interest groups. People now seek news and information from conventional and alternative news sites and various sites that contain product information. People purchase products, airline tickets, make concert bookings and use commercial services like eBay, Amazon, Alibaba, etc.
Invention: An invention is a new product that may be a device, a composition or a process based on new knowledge which may be a breakthrough in technology, but not necessarily. an invention is the creation of something as the result of articulated and tacit knowledge, opportunity recognition or construction ability, entrepreneurial capacity and the use of techniques that aid in the process of creation.
Incremental Improvement: The technological evolution of an industry is usually characterized with a breakthrough product, followed by periods of incremental product change. The initial breakthrough product or radical innovation that commences the cycle of innovation is usually a form of product that utilizes a substantially different core technology to what is already in the market. The product also provides substantially higher customer benefits relative to established products within the industry (Chandry & Tellis 1998). During the subsequent evolutionary cycle of product improvement, firms alter the attributes and benefits the products they sell (Abernathy & Clark 1978, Anderson & Tushman 1990) while maintaining a specific core technology and form (Dosi 1982, Georghiou et. al. 1986, Henderson & Clark 1990) until another breakthrough of radial innovation disrupts the mark
Adaptation: Opportunities may be created by adapting some form of technology from one domain and applying it to another in new ways that create or enhance a product, service or process. The key aspect of adaptation is the ability to see other potential applications for existing technology and create or modify products, services or processes. Adaptation may utilize either fundamental or applied technology for the development of other unrelated purposes, or simply analogize an existing technology into another use. Some very good examples of adapting technology into other applications are the spin-offs of NASA technology developed during the space program.
New Processes: Where opportunities are based on new technical processes, many people within that domain will know that a need exists for process improvement, but are not sure of how to do this. New process improvement is usually sharply focused. There is a specific objective and a disciplined undertaking in trying to develop a better way of doing something. Opportunities for new process development are usually found systematically, often the result and follow on from the discovery of a new material, discussed in the next section. New processes often intertwine and overlap with new business process change discussed under the section of structural change. A new technical process often brings about a new business process. For example, the computerization of the banking industry and the development of the ATM, the process of undertaking electronic bank transactions have revolutionized the way people undertake their banking practices.
New Materials: New materials are usually the product of a disciplined development process, or sometimes occur by accident. New material development may also be motivated by regulatory change that bans or restricts the use of an existing substance or material. New materials exploit incongruities where a better product, if available would be appreciated and desired by users and consumers. New materials can bring a breakthrough or incremental innovation to an industry. An example of the influence of new materials on society can be seen through the development of industrial rubber. Rubber made a big impact on the manufacture of many products in a wide number of fields.
Structural changes are important sources of opportunities and can occur through changing external factors or through the firm constructing them through strategy. These are discussed in the next three sections.
Changes in Industry Structure: Industry structure will usually change when shifts in costs, relationships alter, potential profits and emerging customer needs from economic, sociological, regulatory, or technological forces as detected and exploited. This presents itself in the conceptual elevation of a new product or service that may emerge to the level of being a potential and viable opportunity (Porter 1980, P. 215). This is often very difficult to see from within the industry as existing firms accept the tacit rules of the industry, have developed their capabilities and competencies according to the existing structure of the industry and become complacent. This was seen in the U.S. automobile and retail industry in the 1960s and the airline industry in the 1970s, where many incumbent firms did not detect industry changes (or ignored them) and made no changes to their strategy. New entrants came into these industries without much resistance from the incumbents and eventually took over market leadership.
New Processes: Another source of opportunity that alters structure are new processes. A new process within a business/or industry improves efficiency, enhances a service or product delivery and provides extra features and benefits to users and consumers, thus giving the innovative firm some form of competitive advantage over its rivals. New processes take advantage of incongruities, changing demographics, new target consumer groups, or regulatory changes, etc. New processes create business that didn’t exist before, either through creating new customers or winning over customers from rivals. A process change usually occurs through either the development of new technology or curiosity that creates the following types of questions:
- How can this be done better?
- How can this process be changed to solve our existing problems?
- How can the process change to meet the needs of consumers better?
- How can this process be simplified?
- How can this process create extra benefits to consumers?
A process change strengthens something that is operating less than optimal.
Adaptation, Combination and Integration: A firm’s success and also its survival are dependent upon the ability to adapt to the changing environment. Failure to do so will leave the market open to other competitors that have more relevant strategies and capabilities to exploit standing opportunities. The optimal position of the firm in relation to presenting opportunities is when its strategies, resources, capabilities, skills and networks are aligned to the target opportunity. However this alignment is not a permanent position as opportunity is continually shifting. Therefore a firm must be able to adapt its strategy structure, deployment of resources and relevant capabilities to the shifting opportunity. Alignment must match opportunity and the firm must adapt to it’s continually shift to maintain alignment.
Very few industries actually operate according to perfect competition. Firms develop and exercise some form of insulation from other firms by means of real or fancied product differences from their rivals (Stigler 1968, P. 308). There are numerous products in the market but demand for them is far from being a random action. This applies to housing, automobiles, electrical appliances, travel and holidays, utilities (electricity, water and gas), food, and toothpaste. Products in each category do not necessarily compete directly, yet there is rivalry (Stigler 1968, P. 310). Every firm has some degree of latitude in setting prices before customers will start looking for substitutes. In this way firms have some degree of monopoly.
A resource monopoly is a general term referring to a situation where a firm controls all the resources necessary to produce a product, perform a service, or generally undertake business in a defined area. It is an economic term but also describes a source of opportunity when a firm has a monopoly advantage over a specific resource. In general the less competition from other goods and services and availability of substitutes, the stronger will be the monopoly position. Monopolies occur for different reasons, physical location, access to a particular raw material, control over a capability, a legal concession and restriction on other firms to compete, or a form of monopoly through powerful branding. These forms of monopoly will be examined in more detail in this section.
Physical Resource: A unique barrier to entry to other firms in a market is the procession of some form of unique physical resource. The mining industry is a good example of firms that can exercise market power over the exclusive access to a particular precious material or mineral. MMC Norilsk Nickel of Russia controls over 90% of the world’s nickel and the world’s leading producer of palladium. The De Beers group of companies controlled almost all diamond mining and trading in Southern Africa and Canada until the late 1990s through various methods of restricting the market (Kretschmer 1998). Companies that hold strategic claims for minerals that have, or are likely to have strong demand in the future will be in a position to make massive profits. For example, a mineral like lithium may have a large future as a material needed in batteries for hybrid cars. Mining companies that hold these resources will be in a good position to grow exponentially in the near future, if battery technologies require the use of lithium.
Capacity Resource: A capacity resource is an exclusive capability of an individual or firm to carry out a particular activity. This can usually be achieved in three ways; the need of specified qualifications or licensing to carry out a function, through specific skills and capabilities a person or firms have at their disposal, or through shear dominance and strength. Professional occupations like doctors, lawyers, architects, engineers, pilots, veterinarians and psychologists, etc., require a formal degree recognisable by a governing association of the profession and license to practice.
Legal Resource: Governments usually grant a restricted number of operating licenses to firms in the banking, finance, petrol distribution, communications and broadcasting industries. This creates an oligopoly situation where firms have some degree of pricing power, especially if they can combine another source of monopoly like branding and product differentiation. Governments may also limit the granting of licenses to gambling concessions and casinos forming legal monopolies where revenue above costs are shared between the government and concessionaire as taxes and profits respectively. Non-government organizations like sports federations also restrict membership of sports clubs like football which have some of the characteristics of a monopoly.
Brand Resource: Products and services produced by companies differ in terms of quality, reputation, location convenience, and so on. These factors influence the desirability of a product to various buyers. Each product or service has some form of uniqueness (monopoly power), and yet has many rivals. Porter (1980) defined two forms of competitive strategy that can build some degree of product uniqueness through product differentiation and focus upon specific niche markets. Porter postulated that through differentiation and focus a firm can develop some form of competitive advantage over its rivals. De Bono (1993) outlined the criteria through which a firm can develop a value monopoly, listing physical uniqueness, technological uniqueness, name recognition, dominance, cost of entry, brand image, and segmentation, as factors that contribute to creating a brand name that is desired by consumers over other brands. Chan Kim and Mauborgne (2005) took the concept of differentiation and creating product uniqueness further in their book Blue Ocean Strategy.
Scarcity Power: Certain types of businesses like retail providers located within a tourist, historical or sports precinct, entertainment, food and beverage in shopping malls and food vending in restricted places like airports, train stations, and the aircraft and trains themselves, etc, can exercise some degree of scarcity power. Scarcity power is a term used by Time Hardford (2006) in his book The Undercover Economist to describe a situation where a business can charge a price above the standard or going price in a particular location because of the unique location of the business away from other potential competitors at a crowd drawing location. This is why a cup of coffee is relatively expensive in many tourist locations, airports, and historical sites around the world.
Changes in the Cost or Value of Resources: Changing resource costs or values create new opportunities by changing industry and product cost structures. A change in the cost of a resource will make it either more or less attractive to consumers of that resource. For example the rise in the cost of petroleum makes the use of petroleum as an energy source less attractive. Due to short term inelastic demand, consumption will not necessarily decline, but will encourage serious consideration of alternative energy sources. From the demand perspective, an increased interest in ‘green technologies’ will increase the value of renewable resources, perhaps making them viable alternatives to conventional energy sources. This is the rationale behind the development of alternative energies and their relative economic feasibility to conventional fuels. As petroleum prices increase the viability of alternative fuels increase.
Regulation determines who is able to enter a market/industry, how many, how firms must behave, and what other legal requirements they must satisfy. Regulation in some form covers most aspects of our society and influences the opportunities available to the population within it, be it the general population at large or a small select qualified group within it, with the barriers to entry it creates. Regulation determines what is legitimate and legal in society and what is illegitimate and illegal. Regulation determines what customers should expect, how protected they are in the decisions they make, and institutionalizes these expectations and protections. Regulation can define the product cost and pricing structures of an industry, determining its attractiveness to investors.
Effect on Process: Regulation concerning process determines which firms can enter a market through licensing, the ‘rules of the game’, how easy or difficult it is to start up a firm, environmental compliance, occupational health and safety, ethics, corporate governance and social responsibility, consumer protection and the raising of capital.
Effect on Product: Regulation concerning product specifies standards, what products are forbidden, and specific restrictions on the use of certain materials in the manufacture of nominated products.
Non-innovative opportunities are those which are not based on breakthroughs, incremental improvements in technology, or in utilizing novel business models to gain competitive advantage. Non-innovative opportunities include personal services and consulting, duplication of other businesses, extension of other business concepts, or copy and imitation of other products. Non-innovative businesses are risky, rely on hard and continuous work to succeed and survive.
Personal Service & Consultancy: Personal services and consultancy includes a wide range of activities including investment advising, personnel recruitment, real estate sales, tax advising, legal services, house conveyance, managerial consultancy, interior decorating, fortune telling, and any other personal service or consultancy that requires the provision of personal advice or any other service to clients. This type of business depends upon an individual having personal knowledge and experience in a discipline that people are willing to pay for, good personal reputations, personal selling skills, and contacts and deal making skills (Bhide 1999). These businesses are totally orientated towards exploiting short term consulting opportunities and success depends upon the ability to design and develop a good product (service) and the ability to deliver it well to solve the client’s problems. The industries that these businesses operate within are usually fragmented and sometimes localized. Little innovation can be utilized in developing products in this industry as it will be duplicated almost immediately by competitors. Flexibility is the key in being able to tailor solutions directly to the client’s needs. Customer loyalty can only be created by solving client’s direct problems with an excellent level of personal service and that he or she is satisfied in the value for money of the service. Developing a business plan to start up these types of businesses is of not much use because it is hard to gauge what business will come from where and for how long it will last.
Duplication: The concept of duplication is about a firm replicating its business model within a different business location, whether locally, regionally, nationally, or internationally. Duplication is a widely utilized source of opportunity (even by the most innovative forms) by many types of businesses involved in retailing, distribution, manufacturing, and service industries as a basis of their growth strategies. The aim of duplication is to replicate something successful in one place into another place. Where factors are similar, e.g. location variables, market size, demographics, consumer profiles, and the like, this process is relatively straight forward. Duplication is the central concept behind the opening of a new Wal-Mart, Costco or Carrefour store, a McDonald’s or KFC outlet, the Body Shop, a 7-Eleven, a Starbucks or Gloria Jean’s coffee shop, or a Kinokuniya bookstore. The duplicated businesses are controlled and coordinated through various forms of organization and control, including centralized management, centralized accounting and data capturing systems, decentralized management with highly formal procedural systems, or franchise agreements, etc.
Extension: Extension covers a number of sources of opportunity that resemble three of Ansoff’s strategy typologies, being pursuing growth through launching existing products into new markets or market development, launching new products into existing markets or product development, and in some cases launching new (modified) products into existing markets or diversification. Through such a gamut, extension is one of the most commonly utilized sources of opportunity exploited.
Launching existing products into new markets extends the boundaries of a firm’s existing scope of business and is thus termed market development. This is where a firm opens up a new market for its existing product or range of products. In order to succeed, the firm must extend its ability to market, promote, sell and distribute its products in the new market. The firm may simply duplicate what it is already doing in its existing markets into the new market scenario. If environmental or market variables are different then the firm may have to adapt its strategies to the different environment.
Copy/Imitation: The majority of businesses in the world are copies of other businesses somewhere else. They are basically a copy of a business or the proprietor has copied some of the elements of other businesses and incorporated them into his or her own. This is unavoidable as there is demand for products and services almost everywhere. Therefore there is a need for convenience stores, supermarkets, newspaper vendors, shoe stores, shoe repair stalls, coffee lounges and kiosks, fast and take-away food vendors, sandwich bars, boutiques, discount stores, second-hand stores, electrical stores, computer stores, accounting services, lawn mowing services, home repair services, mobile phone stores, etc. in more than one location, and consequently there is always an opportunity to copy a successful business model and place it somewhere else.
Relating sources of opportunity to strategy
After identifying and explaining each source of opportunity individually, it must be said that a firm rarely utilizes only one source of opportunity within its working business model. The lines between each source of opportunity are also blurred and entrepreneurial ventures may utilize two or even three different sources of opportunity within their working business models.
Opportunities can originate externally from the environment or internally through innovation within the organization. Common to both sources of opportunity is that creativity constructed the strategy to exploit the discovered opportunity. Consequently there are various sources of opportunity available to exploit and make a profit. This includes the creation of tangible products like automobiles, aircraft, soap and processed foods, intangible products like computer games and software, the use of physical distribution channels like supermarkets and discount stores, or through the internet by creating or utilizing a high traffic website. Some new products emerge through discovery or by using materials for different applications than what they were designed for. Other opportunities are created through the development of new production processes, or the creation of new business models.
Sources of opportunity are found through discovering new information that complements what a person already knows. New information that brings new perspectives changes a person’s meaning. This process of discovery may occur through a change in social demographics or attitudes, economic changes, technology changes, or regulatory changes. This could be a gradual process or be triggered by something drastic like a disaster of some kind, or an unexpected success or failure (Drucker 1986, P. 37). For example the development of strong anti-trust legislation in the United States created many opportunities in trucking, railroads, banking, airlines, and natural gas (Winston 1998). As we have seen in chapter two, opportunities occur according to a time, place, and stage of economic development and as we will see in chapter nine, opportunities are also the result of a particular competitive situation. In some situations chance plays a role in developing opportunities. Ventures may produce dis-continualties that allow shifts in competitive positions that may nullify the advantages of existing competitors and can result from the strategic decisions firms make. For example the apparel industry developed in Singapore during the 1980s as European countries placed quotas on apparel imports from Japan (Porter 1990, P. 124). Some opportunities may require a prior domain research, while others may not (Klevorick et. al. 1995). The best conditions for opportunities to emerge are when a market grows faster than production capacity, thereby creating more opportunities to add more production capacity. Growing markets will eventually segment (Christenesen & Bower 1996), allowing firms to specialize in particular niches (Geroski 2001).
Opportunity conditions tend to be more favourable for exploitation where there may be barriers of entry to prevent others from exploiting the same opportunity. For example in sources of opportunity based on technology infusion, the intellectual property framework provides for innovating firms to protect their inventions or innovations through patents. Methods of protection of innovations will vary from industry to industry, where company proprietary knowledge maybe a better way to protect information than through the formal intellectual property protection system (Levin et. al. 1987), particularly where technology changes rapidly or innovations are unable to be patented.
Different sources of opportunities require different levels of creativity ranging from no originality to radical innovation. Peoples’ capacity for execution differs as well. Revolutionary creativity will throw a stagnant market into turmoil and may attract violent retaliation from competitors. On the other hand creative ways of adding to markets can develop enterprises without the need of new technology or independent innovation such as is seen in the computer and mobile phone accessories market. Where there is no innovation involved, it is very important t understand the needs of customers to be successful. Innovation is an unnatural process in firms as we build up roadblocks against it (Crawford & di Benedetto 2002, P.15).
All new businesses have many factors in common; however an entrepreneurial business will have some form of intrinsic quality that will stand that business out from others. People with entrepreneurial and creative skills that try to do something different that result in the change of an industry are a minority in the population. Therefore most businesses start small and don’t last long. A large proportion of these businesses remain small without any significant growth because they don’t have the ideas or products necessary to differentiate themselves from their competitors. They fail to use strategy to develop some form of competitive advantage over their competitors.
Any strategy begins with identifying the sources of opportunity to exploit. These sources of opportunity should be relevant to the present scope of an existing firm or evoke a sense of purpose and passion from a person who is intending to engage upon a start-up venture (Dundon 2002, P. 147). A source of opportunity should be relevant to the firm and the market it will serve, the technology that the firm is accustomed to, and compatible with the people within the firm it interrelates with. The idea should be simple, must be able to be supported by an overall business strategy, must be distinctively new and better than what is already available, must be proven, profitable, implementable within the ability of the firm, and finally must be meaningful to consumers.
It is impossible to accurately foretell whether an exploited opportunity will end up being large and successful. There are too many internal and external variables that may get in the way of success. What’s necessary is that strategy be implemented effectively and the strategy itself aims to create leadership over competitors. This requires hard work rather than the ability to discover opportunities and strategic brilliance. Focus, determination, flexibility and ingenuity are the important qualities in strategy implementation. For this to successfully occur, the entrepreneur’s ability must be aligned with the needs of the opportunity and strategy components to be effective. It is important to understand the abilities and disabilities of the firm in relation to any opportunities and the change needed in strategy to pursue them, i.e., which type of strategies is a firm able to cope with and which types of strategies is the firm unable to perform? Therefore the set of core organizational competencies will need to change as new opportunities are pursued. This also requires the firm’s values that influence what type of competencies are valued to change as well over time. Certain values reflect the firm’s cost structures and control what an organization may or may not do. For example if a firm requires a margin of 40% on products, then any decisions will reflect that. Such a company would not be capable of going into low margin high volume businesses, even though that type of business may represent new channels and opportunities. Different companies exhibit different values and thus make different decisions on the situations they face.
Whether a firm is successful in exploiting any opportunity partly depends upon the firm’s strengths, competencies, networks, and resources. Strong competencies like good distribution networks lay down the infrastructure for a firm to launch successive products into a market. It is important that assets, competencies and capabilities the firm has at its disposal are suitable to support the strategy direction. In entrepreneurial start-ups where resources and competencies may be lacking, these must be compensated for through finding creative ways to cut corners or the use of charisma to assist in developing strategic relationships with potential customers, suppliers, and other resource providers.
Continually solving customer’s problems creates new opportunities for differentiation and erects new barriers to entry, perpetuating competitive advantage (Calvin 2002). Differentiation can be created by developing excellence in sales, marketing, customer relationships, cost, pricing, niche marketing, and operational procedures and efficiencies, etc. Proper differentiation creates a perceived competitive advantage in the minds of customers. However competitors can easily copy an innovative product. What they will have trouble emulating is the systems that incorporate many distinct and complementary capabilities that build the product. A business with attractive product lines, integrated manufacturing systems and logistics, close relationships with customers and suppliers, a culture of customer responsiveness, and the capabilities to continue producing a stream of innovative products is hard to copy (Bhide 2000, P. 15). Strategy must try to build up barriers to competitors and be executed well so it is difficult to copy.
Exploring new ideas in new and changing industries is much easier than making waves in mature industries. Product standards and the rules of competition have not yet been defined. Products that are too revolutionary may be difficult to educate consumers and not worth the investment. Companies in fast growth industries usually require a revolutionary idea with a leader that has an evangelistic ability in the implementation stage, i.e., Bill Gates, Steve Jobs and Richard Branson, to lure investors, customers, financiers, employees, suppliers, and build an organization. Founders who spend a long time in research, reflection and planning are no more likely to survive in their first three years than people who just seized the opportunity without any planning (Bhide 2000, P. 57). Entrepreneurs recognise their mistakes when they implement strategy and adjust it as they go along. However perseverance and tenacity can be both a strength and a weakness during the early days of a start-up firm.
Most firm strategy is about manipulating their current position rather than seeking wide differentiation and outright competitive advantage. Much strategy is reactionary, out of fear, rather than vision and thus tends to be short term and focused on risk minimization. Therefore most strategy follows primarily generic patterns which can be commonly seen in many types of product and service markets.
One of the most common strategies used by firms is to directly copy the competitor’s product or service just utilizing their own brand name or trademark. Other competitors may modify the product superficially in terms of colour, pack size, fragrance, taste, etc, within their own quality and branding paradigms, i.e., an economy version or a bonus size pack, etc. A third option is through creative imitation where the competitor adopts some common product configurations as the incumbent product (the imitation aspect), and develop their own twists or variations upon the product (the creative aspect).
A successful product or service is usually expanded in a number of ways. Firstly, a product can be launched in a new geographic market. Secondly, a product’s distribution can be expanded through new distribution channels. Thirdly, a product or service can be franchised or licensed to other companies in other markets, e.g. McDonalds, KFC, Pizza Hut, or Coca Cola, or a different type of product licensed with a well known brand name, e.g. Disney, Gucci. Finally, a spin-off firm can be developed utilizing the same brand and technology into another industry, e.g. consumer detergent and cleaning product manufacturers enter the institutional, industrial and commercial cleaning markets.
Firms will have to decide whether they should become early pioneers in a new market or make a delayed entry. Early market pioneers tend to be technically focused, proponents of radical change, visionary within the market context, project orientated, willing to take risks, willing to experiment, self-sufficient, and tend to communicate horizontally across disciplines (Geoghegan 1994). Although earlier entry may give the firm incumbency advantage, later entrants have time to look for product and strategy defects, pick up the incumbent’s blind spots, or launch a product with a superior form of technology, thereby outflanking the incumbent.
Opportunity models developed by strategy and marketing researchers may not fully apply to start-up venture opportunities. On more than one occasion, strongly embedded competitors like IBM have asked themselves how young upstarts have been so successful in pursuing opportunities that were not even on their radar screens.
The nature of opportunity pursued will define the strategies required and the type and shape of organization needed to support those selected strategies. The important question that needs to be answered is can the vision derived from the discovered or constructed opportunity be developed into a working strategy? (Walters 2002). The organization must be configured with the correct assets, structure, processes, values, leadership, resources, competencies, and networks to be able to creatively develop the capacity to execute strategies developed to exploit the identified opportunity, in order to be successful. Although this is very intangible, one must as Peters and Waterman (1981) put it “stick to the knitting” to enable an exceptional capacity for execution in order to tip the competitive balance into the firm’s favour. Many firms have struggled to exceptionally execute strategy in products closely aligned, but different from their core business. For example, as previously mentioned S.C. Johnsons sold off their personal care product arm to focus back on their core household products business and more recently Foster’s the Australian Brewer sold off their wine division to focus back on their core beer business (Fenner 2010).
Originally published in Orbus, July 2012
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