opportunity recognition - katedra manažerské...

Opportunity Recognition Martin Lukes, July 20, 2011

„ When one door closes another door opens; but we often look so long and so regretfully upon the closed door, that we do not see closed door, that we do not see the ones which open for us.“

Alexander Graham Bell

Real-@uctionchanging the Real Estate market…changing the Real Estate market…

Few years ago, a group of CEMS students presented their business model in ourentrepreneurship class. Their main idea was to improve the matching mechanism in thehousing and office rental market in the Czech Republic by introducing an auctionsystem.Their customers were: 1. People searching flats or offices for rent (demand sidecustomers) and 2. People willing to rent flats or offices (supply side customers). Thecustomers would meet on the internet based auction platform. People willing to rent flatsor buildings would set up an entry in the database via Internet. They would be asked tofulfill some requisites as property information, pictures and preferences, so that allinformation is standardized. Additional services such as 360° pict ures or virtual tourswould be provided at a later stage, which might help to attract further customers. In anauction similar to those known from eBay, the supply side customer would set aminimum price and demand side customers might place their bids during a preset timeminimum price and demand side customers might place their bids during a preset timeperiod. Initial prices would be between the reservation price of the supply side customerand the market price. Consumers would be attracted by offers starting below the marketprice. The demand side client with the highest bid at the end of the auction period wouldreceive the contract. The firm would also act at a later stage as a broker for servicesrelated to the renting of flats and houses such as reallocation services, cleaning servicesand other. The revenue model was based on registration fees from “sellers” (approx. 28EUR for every new customer), percentage of the rent above the minimum price (30%from the difference) and selling customer database upon agreement. Possible fees inthe future might also include commission on the monthly rent, payments for costlyservices such as 360°pictures or solvency checks, etc.Is it a good opportunity? Is it a good business idea?

Content

1. Opportunity and innovation2. Factors influencing opportunity

recognition3. Sources of new ideas3. Sources of new ideas4. Opportunity development, business

concept and business model

What is an opportunity?

• possibility to satisfy market needs trough a new combination of resources that will offer added value(Kirzner, 1973)

• „situation in which new goods, services, raw materials, and organizing methods can be introduced and sold at and organizing methods can be introduced and sold at greater price than their cost of production“ (Shane, Venkataraman, 2000, p. 220)

• 3 central characteristics of opportunities– potential economic value (i.e. potential to generate profit)– newness (i.e. something what did not exist previously)– perceived desirability (of the new product or service in society)(Baron, 2004)

Types of opportunities

1. unfulfilled market needs• value sought

2. unused or inefficiently used resources2. unused or inefficiently used resources• value creation capability

3. recognition of the possibility to connect specific market needs with specific resources

Recognition of opportunities

• Unfulfilled market needs– bad can openers– mobile as a toy for

children – queues at state offices– queues at state offices– large aquapark in Prague– external wooden jalousie– debt recovery– social networks– …


• Unused resources– Possibilities for

advertisement: bench, wall in the men toilette, own foreheadown forehead

– brownfields– ideas of university

researchers that are not commercialized

– …


• Connecting market needs and unused resources

– queues and army of unemployed– dustbin for homeless people– cheap housing close to capital– …

Types of opportunities

Value sought

unidentified identified

undefined dreams problem solving

Valuecreation

capability defined technology transfer business formation

Source: Ardichvili, A., Cardozo, R., Ray, S. (2003) A theory of entrepreneurial opportunity identification and development. Journal of Business Venturing, 18: 105-123.

• Opportunity recognition– Supply and demand are rather obvious, opportunity for

bringing them together needs to be „recognized“ and then implemented

– e.g. franchising

• Opportunity discovery– Only one side exists, the second needs to be discovered– Only one side exists, the second needs to be discovered– e.g. cures for diseases, animals can be used for agro-

tourism

• Opportunity creation– Neither supply nor demand exist in obvious manner,

different inventions in marketing, finance etc. are needed– e.g. Google

Sarasvathy, Venkataraman, Dew, Velamuri (2002)

Sources of

Informationasymmetries

Mistakes of other market participants

Exogenous shocks

Technological changes

Political and regulative changes

Shifts in societal demographicsSources ofOpportunities

Supply sidechanges

New products, services, rawmaterials, production and

organizing methods

Demand sidechanges

New geographical markets

Changes in customer behaviorthrough shifts in perception,

culture, preferencesPrior entrepreneurial

activityAdopted from Frank & Mitterer (2010)

Innovations

• Experiments with synthetice materials and glues led to innovative materials developed in DuPont (Nylon, Teflon, Lycra, Kevlar, Cordura), 3-M (post-in), Goretex

• Jablotron– identified niche for mobile phones

• Changes in life-style: frozen and packed meals, instant coffee, remote garage control, etc.

• Wegmans– Helping you make great meals

easy

Innovation

process of new idea creation or adoption and a subsequent effort to develop it into a new product, service, process or business model with an expected added value for a potential useruser

Entrepreneur of the Year Entrepreneur of the Year –– Czech Czech Republic WinnersRepublic Winners

• 2010: Walach brothers, owners of Walmark

• 2009: Eduard Kučera, owner of Alwil Software

• 2008: Vladimír Kovář, owner of Unicorn

• 2007: Tomáš Březina, owner of BEST

• 2006: Pavel Juříček, owner of BRANO Group

• 2005: Radim Jančura, owner of Student Agency

• 2004: Miroslav Řihák, CEO, ANECT

• 2003: Zbyněk Frolík, CEO, LINET

• 2002: Kvido Štěpánek, CEO, Isolit Bravo

• 2001: Zdeněk Jandejsek, CEO, RABBIT Trhový Štěpánov

• 2000: Kateřina Janků, CEO, Moravia IT

Main innovation types

• product– car navigation, HD TV, geothermal heating pump

• service– SMS payments for public transport tickets– electronic e-tickets

• process– open innovation, virtual teams

• business model– low-cost airlines– HR portal: payments for people hired, not for ads– payment for using toillet in the airplane

What factors influence whether an individual recognizes an opportunity?

X

2. Factors influencing opportunity recognition

• Special cognitive processes of entrepreneurs– e.g., entrepreneurial alertness (Kirzner)– a propensity to notice and be sensitive to information

about objects, incidents, and patterns of behavior in about objects, incidents, and patterns of behavior in the environment, with a special sensitivity to maker and user problems, unmet needs and interests, and novel combinations

(Ray, Cardozo, 1996)

Factors influencing opportunity recognition

• accidental discovery vs. systematic search?– some yes (Bhide, 1994 – 4%), but mostly not– most entrepreneurs recognized, not sought the

opportunities for their firms (Koller, 1998)– more probably „passive search“, to be prepared to – more probably „passive search“, to be prepared to

recognize value of new information

• learning processes – hinder or facilitate opportunity recognition, opportunities

emerge during this process


• Information asymetry and prior knowledge– tendency to notice information that is related to

something we already know

– prior knowledge triggers recognition of the value of – prior knowledge triggers recognition of the value of the new information

– prior knowledge creates a „knowledge corridor“

– key areas of prior knowledge: prior knowledge of markets, prior knowledge of ways to serve markets, prior knowledge of customer problems


• Social contacts– entrepreneurs with different contacts are able to

identify more opportunities(Hills et al., 1997)

– three cognitive activities (information gathering, thinking through talking, resource assessing)(de Koning, 1999)

– networks• inner circle (long-term, stable relationships)• „action set“ (employees)• partnerships (start-up team members)• weak ties (bridges to information sources)


• Personality characteristics– optimism– entrepreneurial self-efficacy– creativity– creativity– innovativeness

… increase chances to recognize opportunities

Opportunity recognition – cultural / national influences

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Perception of good opportunities –demographic differences

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Source: Adult population survey in the Czech Republic within the GEM 2006 project

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3. Sources of new ideas

• Reflect on your own experiences and test it

• Engage in communication with „weak ties“, customers

• Travel abroad and observe the market• Travel abroad and observe the market

• Internet & media– media news– specialized pages (www.mysmallbiz.com,

http://www.entrepreneur.com/businessideas/index.html)– industry specific journals– watching Dragon’s Den, etc.

Sources of new ideas (2)

• Own unsatisfied needs and needs of others– informal mapping and formal survey (how much?)– „would be good, if such a service ...“

• Monitor the distribution channels• Monitor the distribution channels– different parts in the channel – wholesale has

problems with quality of products, retail with wholesale logistics, etc.

• Engage in creative activities

• Get some experience first and learn quickly

Good ideas are not necessarily good opportunities

Opportunities are situational - the window of opportunity must be open long enough to enter, but narrow enough to keep others outnarrow enough to keep others out

What is not an opportunity?

- Good idea, but there are already 20 companies doing the same

- e.g. opening the next P2P online real estate website, the next bezrealitky on the Czech market

- Good idea, but market is not ready for it yet- Good idea, but market is not ready for it yet

- e.g., opening new bezrealitky in Zimbabwe

- Hobbyprojects: I found a business, because I like it and feel the need, but others are not interested / not willing to pay / market is too small

- e.g., opening a car rental in a small village, consulting in dog’s haircuts, selling food for pigeons, ..

Entrepreneurial Opportunities – Personal Observations

• Health sector– e.g. aesthetic medicine

• Social services and education– Private basic schools

• Generally sectors with the high role of state

• R&D commercialization– Nanotech, biotech

• Waste management

• Customer / Sales force focused businesses

4. Opportunity development

Business Business (More or lessdeveloped)

FirmBusiness Idea

Business concept developed)

Business plan

Firmfoundation

4. Opportunity development• The first idea is developed, potential advantages and values for

specific user start to emerge; resources are better defined

• Opportunity → business concept– What products and/or services will be offered?– To whom will the products and/or services be offered and what – To whom will the products and/or services be offered and what

specific needs of these customers will be satisfied?– What is unique and will constitute an added value for the

customer when compared with what the competition has to offer?

– How the products and/or services will be delivered to the market (i.e., the concept of production and logistics, sales and marketing)?

Looking for answers1. What products and/or services do you offer?2. Who are your customers? What their needs do you satisfy?3. What is your current domestic and international competition and

what is your advantage (your unique selling point) against them?4. How big is your market? How will the market develop in the future? 5. How will you make money in this business, i.e. sales revenues and

profits high enough?profits high enough?6. How will your customers get to know you? What marketing

strategies will you use?7. Who are your key suppliers and how do you ensure cooperation

with them?8. Who are the members of your team and what are its strengths?9. What are the major risks and how will you fight them? How do you

plan to sustain your competitive advantage for the future?10. What is your proposition for the investor?

See p. 124-126 in Lukes, Laguna (2010)

Business concept - criteria

• innovativeness of the idea– newness, own original idea

• competitive advantage of the business model – unique selling point, defendable, sustainable, scalability

• profitability of the business model– market attractiveness, market volume, market growth, profit

margin

• realism– can be realized by a presenting team, internally consistent

concept, true information provided, competition well checked

Recommendations for oral presentation

• Come well prepared, but don’t learn presentation by heart.

• Use a hook in the beginning that arouses investor’s business interest.

• Be persuasive and enthusiastic and believe in what you are saying.

• Be persuasive and enthusiastic and believe in what you are saying.

• Tell the names of your team members. Avoid saying „I“, always say „we“.

• Don't focus on details of your products and services, but on the value it brings to your customers.

• In case it is possible, show something tangible - a model, picture or web page of your product or firm.

Further recommendations

• Specify your customers and their needs well.• Present your competitive advantage in a positive way.• Being the first on the market is only a temporary

advantage. How will you prolong it?• Know the numbers, do not let yourself get trapped.• Know the numbers, do not let yourself get trapped.• Be both ambitious and realistic! For one small bakery

you don't need investors. For development of a multi-billion office building you probably do not have enough experience yet.

„Opportunity is missed by most people because it is dressed in overalls and looks like work.“

Thomas Alva Edison

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