Opportunity, Strategy & Entrepreneurship: A Meta-Theory, Volume 2
BUSINESS ISSUES, COMPETITION AND ENTREPRENEURSHIP y OPPORTUNITY, STRATEGY nl AND ENTREPRENEURSHIP: A META-THEORY O VOLUME TWO: THE SOURCES OF OPPORTUNITY, RESOURCES, SKILLS, COMPETENCIES AND CAPABILITIES, fs NETWORK, THE COMPETITIVE ENVIRONMENT AND THE OPPORTUNITY FRAMEWORKooPr
BUSINESS ISSUES, COMPETITION AND ENTREPRENEURSHIP Additional books in this series can be found on Nova’s website under the Series tab. y Additional E-books in this series can be found on Nova’s website under the E-book tab. nl O fsooPr
BUSINESS ISSUES, COMPETITION AND ENTREPRENEURSHIP y OPPORTUNITY, STRATEGY AND ENTREPRENEURSHIP: nl A META-THEORY O VOLUME TWO: THE SOURCES OF OPPORTUNITY, RESOURCES, SKILLS, COMPETENCIES AND CAPABILITIES, NETWORK, THE COMPETITIVE ENVIRONMENT fs AND THE OPPORTUNITY FRAMEWORKoo MURRAY HUNTERPr Nova Science Publishers, Inc. New York
CONTENTS y nl Preface vii Chapter 1 The Sources of Opportunity 1 Chapter 2 Resources: The Bedrock of Opportunity Exploitation 89 Skills, Personal Competencies and Enterprise Capabilities 119 Chapter 3 Chapter 4 Chapter 5 Chapter 6 O Networks: Technical Know who Is what Makes a Business The Competitive Environment: A Framework for Observing Industry Evolution Strategy: The Means of Opportunity Exploitation 185 215 243 fs Chapter 7 The Opportunity Framework 325 Summary 355 Index 357 ooPr
PREFACE y The first volume of this book dealt with the nature of opportunity, time and space, the nl vision platform, and making connections. In the first volume, chapter one introduced the concept of opportunity. Opportunity was described as both an environmental and individual phenomenon where aspirations and imagination were just as important as changing social, economic, technological, and regulatory structures and conditions. It was explained how four O basic types of opportunities exist. Imitation based opportunities occur with little innovation and value creation. Allocative opportunities occur because of mismatches in supply and demand. Discovery based opportunities occur from shifting consumer preferences, regulation, and economic conditions. Construction based opportunities don’t exist until someone constructs and develops them through the process of effectuation. Opportunity was seen as a dynamic and ever shifting, where successful firms are those that match their strategy with opportunity. Opportunities begin through images which are connected with other images fs forming concepts which are developed, evaluated, and elaborated into ideas. The chapter concluded with a discussion about emotional sensitivity and the role it plays in seeing opportunities, the idea evaluation process, and chance and fate. Chapter two examined opportunity from the socio-economic, economic history, economic geography, political economy, and biographical perspectives. Chapter two arguedoo that opportunity and our consequential actions occur within the realm of time and space. Due to our evolutionary accumulation of knowledge, technology advancement, and social evolution being time and spatially based, opportunity to a large degree is a product of time and space. For ideas to become valid opportunities, all the elements that enable opportunity gestation and its subsequent exploitation must be in place. The trajectories that entrepreneur/inventors take are also a product of time and space as opportunity and strategy are socially bounded. This chapter was divided into three parts. Part one examined the phasesPr of national development through the stages of a traditional economy, under-developed economy, developing economy, developed economy, and post industrial economy. Each particular stage of national development lends itself to certain types and scope of opportunities. The second part of the chapter looked at the biographies of a number of inventor/entrepreneurs during the industrial revolution to the turn of the twentieth century. Looking directly at biographical contexts allowed us to look at the flow of events in time and space in terms of innovation, invention, promotion, and effect on society at the time and into the future. This approach provided a window into how inventor/entrepreneurs gained insight and were able to develop their inventions into commercial reality. One can also get some
viii Murray Hunter feeling about the motives they had, challenges they faced and see how their development of business models was crucial to the success of their ventures. Part three took us into the twentieth century beginning in the post World War II era. A look was taken at some of the important entrepreneurial events during each decade until today. Certain entrepreneurs and their ventures were examined in the light of the social and economic conditions evident through those times. Chapter three examined the ways we look at the world through a number of different paradigms and metaphors. The chapter was an attempt to explain how we perceive and what influences our thinking. This chapter was also broken into three parts. The first part looked at how we perceive through examining the sociological factors influencing us. These include y demographic factors like family and peers, domicile outlook, the need to survive, work and life experiences, education, skills and abilities, age, and gender. The section finished with a look at generational differences and culture. Part two explained how our cognitive system nl works, emphasizing its limitations and how this is compensated for. Part three took us into the psychological domain where a number of mechanisms influence how we perceive, think, and make decisions. These include our emotions, emotional attachment, our ego, identity, and self, the unconscious, defence mechanisms, group views of reality, transference, symbolic and ritualistic delusion, groupthink, motivational bias, tiredness and complacency, cognitive traps, O personality traits, entrepreneurial typologies, power and conflict, genetic inheritance, and mid life crisis and transition. Imagination, passion, enjoyment, energy, personal discipline, and what constitutes a motivational trigger are examined as processes that facilitate a person see and react to opportunity. Finally the chapter hypothesized that opportunity is as much a product of ourselves as it is of the environment around us. Chapter four was concerned with creativity, a concept that is not totally agreed upon as some people see creativity as a process, while others view creativity as a product. Creativity fs is totally interlaced with opportunity, strategy, and entrepreneurship where both its process and product are fundamental to the whole phenomenon. Creativity is necessary in idea creation, its evaluation, opportunity construction and effectuation, developing the sources of opportunity, the gathering and combining of resources, networking, and the crafting ofoo strategy to achieve a vision and solve problems along the way. Although we know most of the cognitive processes related to creativity and can identify most of the characteristics associated with it, we still need to explore creativity through metaphors, various styles, and applications. The second half of the chapter looked at a few different approaches to applying creativity and concluded with a discussion about the barriers to creativity and how they can be overcome. In this volume, chapter one introduces the sources of opportunities. As opportunities can be considered gaps in the market where there is potential to do something and create value,Pr these gaps must have a causal source. There are six basic major sources of opportunity consisting of market voids, technology infusion, structural changes, resource monopolies, regulation and non-innovative sources. Any opportunity is likely to be based on one or more of these sources, carrying multiple characteristics, but they are in fact very hard to really see and understand. Once the correct sources of opportunity have been identified, resources, capabilities, networks, can be configured to develop strategies to exploit them. Chapter two considers the issue of resources in relation to opportunity exploitation. Resources comprise of anything that is of use to an entrepreneur, either within a tangible or intangible form. A business model can be considered a higher level resource, as it reflects how an entrepreneur combines resources to create value from those at his or her disposal. The
Preface ix chapter briefly discusses how needed resources for a new value chain can be identified and allocated within the venture to build the resource base. The resources base is from where enterprise capabilities and ultimately strategies are built upon. Difference types of resources are needed during different stages of a firm’s evolution. Eventually the entrepreneur will be able to build specialized resources that cannot easily be copied by competitors and can form the basis of some form of competitive advantage. The chapter concludes with a brief discussion about how resources can be utilized as barriers to entry and outlines the resource cycle of a firm. Chapter three considers skills, personal competencies, and enterprise capabilities. The beginning of the chapter looks at personal talents and abilities and how they can be developed y into skills. Various types of skills exist along a continuum spanning between those that are domain specific and the broader cognitive and interpersonal skills. Sets of skills can be developed into personal competencies which enable a person to become an expert in a nl particular field and within an entrepreneurial start-up, form the basis of enterprise capabilities. Enterprise capabilities are distinctive enterprise competencies directly related to various aspects of the business. They include management capabilities, entrepreneurial capabilities, organizational culture, learning capabilities, innovative capabilities, and dynamic capabilities which assist the firm change according to the trajectory of opportunities within the O environment. Enterprise capabilities form the basis of strategy that the firm employs to exploit opportunities. Chapter four examines networks which are an entrepreneur’s connection both within his or her organization and to the outside environment. Networks can be formal or informal and enable the entrepreneur to acquire resources and finance, gather market intelligence, develop new products, develop bridges where they lack capabilities, gain access to new markets, and enable the sounding out of ideas and access to emotional support. There are many formal fs network mechanisms including licensing agreements, sub-contracting, strategic alliances, agency and distribution agreements, and routine mechanisms like sales calls. Informal mechanisms can include social connections, family and peers. Networks are an important source of learning and have diverse influences upon decision making. The remainder of theoo chapter looks at network based strategies such as strategic alliances, relationship marketing, and looks briefly at network based opportunities, and network building strategies. Chapter five outlines the composition of the competitive environment, the actual field where opportunities manifest and are exploited. The competitive environment incorporates customer and supplier influences, substitute and complementary good influences, barriers to entry, and the competitive field itself. This is continually influenced by the state of the economy, social trends, technology, and government intervention. Consequently thePr competitive environment is dynamic and continually changing with its own lifecycle, which influences the nature of competition. Firms are able to segment the competitive field or with radical new technology, new processes, and/or business models, create new competitive fields. The opportunity-strategy nexus is based on the sources of opportunity, the nature of the firm’s resources and capabilities, which form the basis of strategy creation. The chapter concludes with a brief discussion about the steps involved in environmental analysis. Chapter six concerns strategy, where strategy is seen as a process of finding out what works within the competitive field through effectuation and trial and error. Strategy is seen as an intuitive rather than an analytical process. Developing strategy requires prior knowledge and experience about ‘what works’, constrained by the firm’s resources and capabilities.
x Murray Hunter There are a number of basic strategies, and those listed in this chapter are not exhaustive. A firm will usually adopt and modify a particular type of strategy for specific purposes. Basic strategic typologies may be modified or merged to form new types of strategies particularly suited to the firm’s situation. The chapter concludes with a discussion on the components of strategy, developing barriers to entry to prevent other firms imitating a firm’s strategic position. The final chapter synthesizes all the elements; time and space, the vision platform, making connections, resources, skills, competencies and capabilities, networks, the competitive environment, and strategy into what can be called the opportunity framework. Each element is influenced by and influenced the other elements, forming an entropic pattern, y where all the elements are required to create a true opportunity. The essence of the meta- theory is that when any entrepreneur visualizes any potential opportunity. All the elements must exist for there to be any real opportunity. Likewise when the entrepreneur attempts to nl exploit the opportunity, strategy must be built around these interrelationships. O fsooPr
Chapter 1 y THE SOURCES OF OPPORTUNITY nl INTRODUCTION 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 O 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, identified, or constructed 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 fs 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 (Frederick & Kuratko 2010). An innovation can be seen as theoo 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 socialPr 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 and 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.
2 Murray Hunter 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, y 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, nl 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, O 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. fs 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. Joseph Schumpeter (1934), the famous Austrian economist was one of the first to recogniseoo the role of entrepreneurship in economic development and identified five sources of (innovative) opportunity; 1. The introduction of a new product, either novel or an improvement upon what is available in the market, 2. The introduction of a new method of production, way of handling things, not necessarily as a result of new technology,Pr 3. The opening up of a new market that has not previously been entered, 4. The conquest of a new source of supply of raw materials or intermediate goods, and 5. The development of a new way of organizating within an industry. Schumpeter saw the economy developing across an evolutionary path where it is in a continued state of dynamic disequilibrium (Schumpeter 1942). Entrepreneurs would find new materials, new processes and ways of organizing that would replace the existing products, methods of production and organization of the business, in a processes of creative destruction. This is in contrast to invention, which may bring a revolutionary change to an
The Sources of Opportunity 3 industry. The effects of evolutionary and revolutionary change to industry are shown in Table 1.1. Through the forces of change derived from dynamic disequilibrium new firms will be formed by entrepreneurs commercializing new products or services, to create new demand and wealth. Consequently the cycle leads to the formation, growth and decline of firms that are replaced by new ones (Kirchhoff 1994). Firms therefore must either adapt through innovation or die. Creative destruction continually changes the economic structure from within, replacing it with a new one. This can be evidenced by the decline in the average lifespan of companies on the S&P 500 from 35 years in 1975 to less than 20 years today (Byers et. al. 2010). y A good example of continuous change is the music industry. The first commercially available recorded music medium was the vinyl record which lasted into the early 1980s, when the cassette tape emerged. The cassette tape disappeared when the compact disk nl appeared the mid 1980s, completely overshadowing other recorded music mediums due to better sound quality. The compact disk industry peaked around the mid to late 1990s when the internet emerged as a means to obtain recorded music. Apple launched the iPod in 2001 and iTunes eventually became accepted as a major means of obtaining music within the music entertainment business. In a world of change entrepreneurs need to reinvent their existence O and continue to seek new opportunities which include the development of new products, the use of new materials in production, the development of new processes of production, the creation of new ways of organizing and entry into new markets to prevent themselves becoming irrelevant (Knopper 2009). Igor Ansoff, regarded by many as the father of strategic planning applied Schumpeter’s sources of opportunity to determining growth vectors and strategies for the firm. Ansoff (1965) divided the product-market field into a grid representing four distinctive growth fs options available to a firm. Corresponding growth strategies based on appropriate sources of opportunity could be developed to meet the growth objective of a firm. Each sector of the field represents a potential growth vector. Pursuing growth through existing products in existing markets requires market penetration strategies. Pursuing growthoo through existing products in new markets requires market development strategies. Pursuing growth through new products in existing markets requires product development strategies and pursuing growth through new products in new markets requires diversification strategies (see Figure 1.1.). Table 1.1. The effects of evolutionary and revolutionary change to industryPr Evolutionary Innovation Revolutionary Innovation Incremental changes to the Major changes to the product/market/industry. product/market/industry. Usually inter-industry changes. Maintain the competitive position within the Creates new industries and may destroy old industry. ones. Part of rivalry strategies within an industry. Results in large scale industry transitions, creating new positions and balances. Short-run economic changes, maybe Long run economic changes of the industry. providing temporary advantage.
4 Murray Hunter Markets Existing New Existing products to Existing products to existing markets new markets Existing Market Market Penetration Development Products y New products to New products to new nl existing markets markets New Product Diversification Development O Figure 1.1. The product-market field matrix. Each sector implies corresponding sources of opportunities that consequent strategies would be based upon. For example, the present technology processed by a firm for its existing products can be utilized for developing similar new products. The firm will couple the source fs of opportunity with its objectives to develop a product-market and growth vector scenario. Through the corresponding strategies the firm may develop a situation where its competencies match the scenario and the objective-product/market-opportunity-strategy-competencies are in synergy. This heightens the firm’s ability to compete in the market with competitive advantage over its rivals (Ansoff 1968, P. 99). Competitive advantage is a driver of change asoo firms must respond to the development of new forms of competitive advantage by rivals through new innovations to maintain their position in the market. However sources of competitive advantage should not be mistaken for sources of opportunity. Alternatively, a new technology through in-house R&D can be used to develop breakthrough new products for the firm, which may make its competitors products obsolete. These breakthroughs or disruptive innovations can create entirely new markets through the introduction of a new kind of product or service that established market leaders have troublePr coping with. This can be seen with the disruption to the airline industry through the establishment of low cost airlines and the need of many post offices around the world to diversify their business operations. The basis of strategy depends upon finding opportunities in the product-market field and synergising competencies to achieve its objectives through deliberate actions. According to Ansoff (1968, P. 100) inherently profitable opportunities are found through threading the product/market scope, growth vector, competitive advantage and competencies together in response to the external environment. Ansoff saw the importance of synergy as a key ingredient to make a product/market entry successful.
The Sources of Opportunity 5 Porter (1980) examined innovation in regards to industry evolution and saw that three types of innovation can lead to opportunities for growth. Product innovation is a major source of industry change through technological innovations. Product innovation can widen markets and drive industry growth. Product innovations can come from outside the industry like digital calculators and watches and completely change the marketplace where incumbents within the industry have little flexibility (Porter 1980, P. 178). Marketing innovations involve novel uses of advertising, new marketing themes and new channels to reach new consumers and reduce price sensitivity through greater product differentiation. Innovation in marketing and distribution can affect industry mobility and cost levels, thus changing the balance of competitive advantage within the industry. Finally process innovation can change industry y structure through changes in manufacturing methods. Innovation can make a manufacturing process more of less capital intensive, thus changing the economies of scale of the process. For example publishing technologies have reduced in cost allowing smaller firms or nl individuals to enter the industry. Polaroid cameras dramatically lost market share when digital camera technology emerged. Porter (1980, pp. 180-184) also mentioned a number of changes that would create new sources of opportunities. Structural changes in adjacent industries could have potential consequences for the direction of industry evolution. Hypermarkets and chain variety stores O have changed the nature of retailing, thus lessening potential opportunities for individual stand-alone retail formats but increasing opportunities for global distribution. Government regulation change about what products can be sold and how products can be sold has great affect upon the types of products in the market and companies that produce and sell them. Government policy in various areas will affect the nature and structure of the products companies offer and the nature of competition and the industry, i.e., medical insurance fs automobile insurance, medical services, types of agricultural products and medicines that can be sold, entertainment and gambling laws, trade practices and regulation, etc. The barriers of entry and exit and capital set up costs involved within an industry have great bearing upon opportunities within that industry. Entry costs as a deterrent are relative to the size and growth of an industry. Incumbents that have great infrastructure advantages,oo maybe sufficient to keep other companies out of the industry. However according to Porter (1980, P. 183) sometimes these high entry costs can be circumvented by developing new brands and business models as US firms did when they entered the low cost wine market. Peter Drucker’s (1985) seminal book Innovation and Entrepreneurship stated clearly that innovation is the specific function of entrepreneurship, whether it is in an existing business, in a public service institution, or within a new venture. Innovation is the means by which the entrepreneur develops new resources or improves the efficiency of existing resources byPr which more wealth is achieved (Drucker 1998). Drucker continues on to state that although there may be innovations that spring from pure genius, but most innovations are the result of conscious, purposeful, search for innovation opportunities, which are found only in a selected number of situations. Drucker identified seven sources of innovation, which account for the vast majority of all innovation opportunities; • Unexpected occurrences, • Incongruities, • Process needs,
6 Murray Hunter • Industry and market changes, • Demographic changes, • Changes in perception, and • New knowledge. Drucker’s seven sources of innovation largely went unnoticed until a about decade ago, when writers within the discipline of entrepreneurship realized their importance in explaining the nature of opportunity and the practice of entrepreneurship. Both Schumpeter’s and Drucker’s sources of innovation are very similar except where Drucker identified unexpected occurrences as a source of opportunity. Although the y unexpected success or failure shows a person’s or group’s limited vision or blindness (Drucker 1985, P. 41), the unexpected should not directly be considered as a source of innovative opportunity. The unexpected is a sign of other factors in operation. What may look nl like chance isn’t, as there are a number of underlying factors in the background, which can either accelerate the process by which an industry develops (Porter 1990, P. 112). For example, the Coca Cola Company by chance had the opportunity to rapidly expand distribution around the world due to US involvement in World War II. In 1980 PZ Cussons Australia launched the ultra dishwashing detergent Morning Fresh1. The product had poor O consumer off-take until a transport strike in 1982. After a few days only bottles of Morning Fresh remained in the dishwashing section of supermarkets and consumers had to purchase the brand if they wanted any dishwashing liquid. Once consumers had the forced opportunity to try the product sales continued to rise until it became the No. 1. dishwashing detergent on the Australian market. Chance events are outside the control of firms. These can include discontinuities that may cause demand surges, factors that nullify the advantages of natural fs leaders, breakthroughs in basic technologies, external political developments, or major shifts in foreign based demand which create unforeseen opportunities from a number of different sources of opportunity that can reshape the industry structure. Chance is what happens when unrelated events churn around the planet. Luck occurs when a highly alert person snatches meaning from chance. Luck doesn’t just happen, itsoo arranged, by one’s own doing. Lucky people or firms are those that co-opt chance and exploit it. Bad luck occurs when one is blind to events. Edward de Bono (1993) gave a list of attributes that can in combination be seen as sources of opportunity. If employed correctly these characteristics will place the firm with distinct advantage in the marketplace, and thus may be seen as sources of opportunity. De Bono talks about developing value monopolies, as against physical monopolies, where competitors cannot complete. This is achieved through creating product/service value throughPr some form or mix of; • Physical uniqueness, i.e., a hotel or restaurant location, • Technological uniqueness, i.e., a patent on a valuable technology behind a product like Polaroid Cameras, where Polaroid won a court case over Kodak for infringement over patents in 1986. • Name recognition, i.e., James Bond, Disney, Calvin Klein, Caltex, Toyota, Soy, Microsoft. 1 An ultra dishwashing liquid is a concentrated one.
The Sources of Opportunity 7 • Dominance, i.e., Boeing, Toyota, IBM, Nokia. • Cost of Entry, i.e., Disneyland, Boeing, Airbus, Toyota, etc. • Brand Image, i.e., McDonalds, Nokia, Wal-Mart, London School of Economics, and • Segmentation, i.e., McDonalds, Nokia, Wal-Mart. Together these attributes can create a market positioning that is extremely difficult to compete against, thus ensuring leadership for the firm that can develop these characteristics and therefore in an integrated way be seen as a source of opportunity. y THE PHASES OF OPPORTUNITY DEVELOPMENT Business development is concerned about the art of seeing and exploiting opportunity for nl 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, O 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 fs 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), Raimondoo (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 aPr 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
8 Murray Hunter 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) y 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 nl 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 O 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 fs 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 theoo 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’.Pr 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.
The Sources of Opportunity 9 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 1.2. 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 y 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. nl Field Opportunities O Domain Opportunities fs Motivation & Strategic View Time Intent oo Self Hypothesis Prior Alertness & Opportunity Knowledge Sensitivity Intellect Self efficacy. Prior knowledge The ability to see An understanding Perception of skills, within the domain change within the about what to look capabilities, and field of environment that for in regards to competencies & operations. the majority of potential Pr resources. Experience. others cannot see. opportunities. Views of ability to Expertise and The ability to focus An ability to visualize influence the various types of in on these changes future scenarios environment, etc. knowhow and see potential based on what is A predictive value of connections and seen. the future. scenarios. An intuitive ability to weigh up a potential opportunity Figure 1.2. The components of the strategic view.
10 Murray Hunter 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. y 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 nl innovation. For example, very few people in Malaysia could afford to purchase a new Proton Saga car when it was launched in 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 O 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. For the purposes of this meta-theory, 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- fs categories (see Figure 1.3.). 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 sourcesoo 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/or • Make revolutionary changes through radical new additions to the market place thatPr 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).
y nl Sources of Opportunity (Opportunity Anchors) O Market Void Technology Structural changes Resource Regulation Non‐Innovative Infusion Monopoly Incongruities Invention Changes in Physical Resource Effect on Personal Industry Product Service & Consulting Incremental Capability Resource Demographic Effect on Process Improvement New Changes Duplication Processes Legal Resource Adaptation fs Perceptual Adaptation, Extension Brand Resource Changes combination & integration New Processes Copy/ Scarcity Power Imitation New Materials Cost/value Shift o Strategies for each source of opportunity Figure 1.3. The potential sources of opportunity (Opportunity anchors) for a firm.ro
12 Murray Victor Hunter 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 y 7. New ways of managing relationships between entities. Sources of opportunities are also viewed from different perspectives depending upon who nl 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 O 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. fs MARKET VOID 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, discussed below.oo 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 anPr 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.
The Sources of Opportunity 13 Incongruities express change whether caused by changing industry structures, changes in perception, changes in demographics, changes in regulations, or changes in technologies. Therefore there are several different types of incongruities. The first type of incongruity is between what an industry is today and what it should be because of the economic realities of the time. For example, tariffs put on to protect many automobile industries in the 1950s and 1960s led to the production of basic, inefficiently produced and overly priced cars in many markets. With rapid improvements in the production of Japanese cars with lower prices, good fuel economy and many standard extras, an incongruity grew between what is available and what Japanese cars could offer the consumer. This type of incongruity showed how difficult it is to sustain a protected industry producing y inferior goods to those available in other markets. The second form of incongruity is between a present reality and what could be. This source of opportunity occurs where improvements in a business process could bring new nl potentials to the business or industry. Drucker (1985, pp. 62-63) cited the transformation of the international ocean freight industry that transported loose cargo within their ships up to the 1950’s with roll-on, roll-off container shipping that came in the 1960’s. People wrongly perceived that ocean freight would be replaced by air freight, except for bulk commodities and were looking at speeding up ships rather than changing processes as the solution. O There are incongruities between perceived and actual customer values and expectations. This congruity can often occur because of own sets of assumptions about consumers or arrogance in believing we know what consumers want. For example, many pet food companies believed that only low cost pet food would sell in developing markets because consumers would not pay premium prices for the product. However premium pet food sells well in many developing countries because some consumers care deeply for their pets and want the best for them. Likewise, cosmetics are one of the first luxury goods, before other fs types of luxuries that people begin to buy when income gets above a certain threshold in developing markets because of women’s improving sense of self identity. Modelling and acting schools appeal to peoples’ aspirations, an incongruity between what where they are and where they want to be. Companies that can see these types of incongruities before others haveoo a strong source of opportunity to fuel rapid growth. There are sometimes incongruities with a process that consumers have to undertake, where one action in the process is out of step with all the others. Most consumers or users are aware of this it, but it takes someone to pick up this problem and find a solution to it. For example, dishwashing machines need a precise dosage of a caustic detergent to clean dishes and glassware properly. These products are usually powders which have to be scooped from a box and placed in a small compartment inside the door of the dishwashing machine. APr household cleaning product manufacturer adopted the concept of using a tablet rather than a powder to provide a precise dose to the dishwashing process with great success, making the whole machine dishwashing process much cleaner and streamlined1. 1 Ironically this same idea was tried earlier for laundry but failed miserably.
14 Murray Hunter 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. Age distribution within a specific population is an important determinant of consumption patterns because different age groups buy things for different reasons throughout their life. y For example, teenagers may buy shoes for the brand image and style, but later in life buy shoes for comfort and durability. Peoples needs change over their lives and therefore as demographics change, so do opportunities. nl Consequently demographics are patterns that exist in the external field of the firm where new opportunities can be seen as demographics shift, if studied carefully. Demographics are far from static and continually evolve, change, and underlie emerging trends in an industry/market. A firm must continue to study shifting demographics to maintain its relevance to the community of consumers it serves. O Demographic change has two affects. Firstly, a change in any major demographic distribution shifts demand away from where it exists presently towards new market and industry sectors that may or may not exist. This in turn triggers a shift in resources towards these new market and industry sectors, thus changing its structure and nature of economic activities within it. Demographics therefore has a strong impact on demand, and viewing changing demand through defined demographic definitions and vice versa, helps us identify potential opportunities. fs For example, nations with a high proportion of children are likely to devote a high proportion of resources to their care, which will provide opportunities in related market/industry sectors. In contrast if most of the population is of working age, this will add greatly to economic growth and domestic consumption, providing opportunities in relevantoo market/industries. If a large proportion of the population consists of the elderly then large resources will have to be allocated to their care, which will open opportunities in relevant market/industry sectors. Age distribution is an influential demographic, which affects the level and type of savings, investment, productivity, and consumption in an economy (Bloom & Canning 2001). So as the age distribution changes resources will be reallocated towards producing goods and services that emerging dominant age groups require. The different types of products and services a person requires throughout their life are depicted in Figure 1.4.Pr Other demographics also influence demand and the types of opportunities that will prevail within any economy. Different demographics combine their effect in complex ways and change markets. The surge of young people in many countries within South-East Asia is increasing the affluence of their respective countries through the increases in productivity they bring once entering the workforce, increasing demand for consumer goods, housing, motor vehicles and education, etc. The increasing urbanized workforce quickly dilutes established traditional and replaces them with new modes of behaviour. Demand for traditional goods and services declines in favour of branded goods. With rural-urban drift the cost of firms servicing rural areas is increasing as markets are declining. Urban markets are becomes cheaper to service as population intensifies in concentrated areas. The position of
The Sources of Opportunity 15 women within the workforce is also intensifying, leading to a new class of single professional women with wealth and spending power. Consequently women are having children later in life or forgoing childbirth to concentrate on their careers (McElroy 2001). People’s values are shifting leading to more demand for consumer goods and branded products, rather than the lower quality generic products they bought in the past. Wars and natural disasters also alter demographics, demand patterns, and shape opportunities. Immigration can create an abundance of opportunities through the multiplier effect within an economy (Straubhaar & Zimmermann 1993). Very rarely does a population remain static and different parts of the world will go through different demographic changes, as can be seen through the selected demographics of some countries in Table 1.2. below. y Changing demographics leads to changes in demand for goods and services. Urbanization brings new demand patterns from the same population that once lived in rural areas. The first generation of offspring will be completely urbanized, tending to adopt new urban nl cosmopolitan values, rather than traditional values. With urban values come tastes for the latest electronic gadgets, brands, and goods not long before seen as luxuries to the country. In countries where young populations are declining, local university enrolments will decline, requiring the recruitment of foreign students or investments in lifelong education programs to take up the slack in university enrolments. Aged population will require more care and O medical services, leading to a larger need to retirement and special care homes. Changing demographics lead to behavioural changes which lead to new opportunities. Retirement Age fs Medical Services Entertainment Working life Retirement Clothing Elderly Homes Computer Hobbies equipment oo Lifelong etc Fashion Education Travel & (various forms Leisure and types through age Childcare spectrum) Accommodation Working Dependency Car & Transport Adulthood University Pr Sports Schooling Teens Toys Kindergartens Baby products Infant Figure 1.4. Timeline showing the different types of products and services a person requires during their life.
The Sources of Opportunity 17 Country Population 0-14 15- 65+ Pop. % % % Net % 64 % Growth Unemployed Poverty Urban Mig. % % /1000 Uganda 33,398,682 50 49.7 2.1 3.563 N/A 35 13 -0.02 Ukraine 45,415,596 13.7 70.7 15.5 -0.619 8.8 35 68 -0.1 United 61,284,806 16.5 67.1 16.4 0.282 7.6 14 90 2.15 Kingdom United 310,232,863 20,1 66.9 13 0.97 9.3 12 82 4.25 States Uzbekistan 27,865,738 27.3 68 4.7 0.938 1.1 26 37 -2.84 Venezuela 27,223,228 30 64.7 5.3 1.515 7.9 37.9 93 0 y Vietnam 89,571,130 25.6 68.8 5.5 1.096 6.5 12.3 28 -0.37 Yemen 23,495,361 43.5 53.9 2.6 2.713 35 45.2 31 N/A Zambia 12,056,923 44.8 52.9 2.3 1.617 50 86 35 -2.61 nl Shifts in demographics do not occur instantaneously, they slowly drift towards new patterns, in a similar waythat the age structure of the population evolves. For example, the aging of the baby boomer generation is a gradual process, where demand for products and services that the aged require increases on a year to year basis. Therefore new opportunities O based on changing defined demographics occur gradually and grow according to the size and distribution of the demographic (see Figure 1.5.). Magnitude fs Opportunity too small for incumbent firms to exploit Fertile area for Opportunity start‐up firms oo Increasing shift in demographic Time Pr Figure 1.5. The growing magnitude of an opportunity as demographics change. When potential opportunities based on demographics begin to emerge they are often ignored by firms within the industry, which either just don’t see the changes occurring or refuse to acknowledge that change is occurring. Many established firms that actually spot the changes early also fail to act because the new emerging opportunities represent very small market segments initially. Small market segments suit small start-up firms who can grow with a new emerging market rather than incumbent firms whose infrastructure is organized around existing market segments. Once an incumbent firm sees that the new emerging market
18 Murray Hunter segment is growing rapidly, it is often too late for them to dominate the new segment because start-up firms have become the new incumbents in the newer segments. Changing demographics together with advances in technology can shift the boundaries of an industry. This is especially so if incongruities develop, which cannot be met by existing products3. For example the colour television market once consisted of portable, table models, and consoles, etc. However LED and plasma technologies have created new television market segments, along with home movie systems and colour televisions incorporated into cellular phones. These new market segments merge into other industries. Changing demographics create new market/industry segments where opportunities are to be discovered. To find new opportunities, one must look at the market through currently y defined demographics or create new demographic definitions, see how they are changing, and work out what it means. Creativity is the key here in finding new ways to segment the market/industry, and in identifying new classes of potential new buyers (Porter 1985, P. 248). nl This may involve the discovery of new segments which don’t yet exist in the market and go beyond conventional and accepted industry classification schemes. For example the automobile market was defined by the U.S. automobile industry by income segmentation. This missed the potential of segmenting cars according to lifestyle where many new potential opportunities for creative segments could have been identified and were identified by others O in the 1980s. These were the safety segment – Volvo, SAAB and Mercedes Benz, city commuting segment– many Honda, Toyota, and Suzuki models, and the off road 4WD and SUV models. It can then be appraised how these new potential segment appeals to different demographics and what designs, functions, benefits and channels they would require (this may result in eliminating features that the identified group does not consider important in their purchase decisions). This may create a new product bundle that can exploit a newly discovered opportunity like the development of discount, no frills hotels that have the fs important amenities that the buyer group requires, without services that are not considered important4.oo 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. For example some countries in the South-East Asian region have been developing economically very rapidly over the last few decades. SizablePr population has groups have transformed from living a quiet rural life to a hectic urban 3 New technologies can on their own create incongruities where consumers decide that the new functions and/or benefits of the new technology, reflected in the product become a desire, want, or need. 4 Various models for budget hotels exist. The US first saw budget hotels in the 1970s. Motel concepts often follow budget concepts. Japan saw the introduction of capsule hotels in 1979 where the basics are provided within a small capsule the size of a bed. More recently another no frills or limited service concept Tune Hotels was launched by Air Asia in 2007 for the Malaysian market with basic and clean amenities that can be booked online in advance at various rates according to season and demand. These hotels don’t have conference rooms, swimming pools or other amenities one would expect in other hotels, but they are conveniently located near airports, railway stations and shopping centres. New outlets are being currently opened around the Asian region, UK, and Australia.
The Sources of Opportunity 19 lifestyle, in the quest for economic prosperity, by taking up employment opportunities in the large cities. This demographic change has occurred relatively quickly in South-east Asia, changing drastically self perception and the nature of markets. A once rural orientated person is now a prosperous urban consumer. Although the change can be seen as economic and geographic, the major importance of this change is attitudinal. Perceptual changes occur because of transformative drifts in attitudes originating from transitions in lifestyle, working life, education, domicile outlook, and evolving aspirations driven by increasing affluence. Transformative drifts in attitudes are also by influenced experience and new knowledge, global convergence within society, and exposure to new consumer technologies that create new desires. This must be a societal rather than individual y phenomenon. Figure 1.6. shows some of the factors that influence perceptual changes in society. Paramount to any perceptual change is a person’s domicile outlook, explained in chapter nl three of volume one of this book. Domicile outlook to a great degree frames a person’s self identity. If one was born into the black working class of the United Sates in the 1950s or the rural aboriginal population of Australia in the in the last decades of the 20th century, one may feel that this is their station in life that is fixed and adopt a self identity compatible with that belief. As a consequence aspirations will be confined to that station in life where one will O accept where they are now and not aspire to other potential lifestyles. However growing education and employment opportunities and contact with urban culture and global-centric ideas can bring very quick change to perceptions and attitudes, resulting in very different demand patterns. New knowledge about health, fitness, fs food, etc. Urbanization, New growing Changing confidence about Knowledge Domicile social status, etc. Experience Outlook oo Changing traditions Perceptual The Aspirations Changes Environment Where am I now? Where do I Attitudes want to be? Pr Peers and Role New Changing Models Global technology Affluence Convergence Figure 1.6. Some of the factors that influence perceptual changes in society.
20 Murray Hunter In China during the 1970s, the “Flying Pigeon” bicycle was called by Deng Xiaoping a symbol of prosperity, as the whole country moved by bicycles. However over the last decade the bicycle has been almost totally replaced by cars in urban centres. The bicycle is seen as a working class relic, where they now have very little place in daily life. They are reserved for old ladies and men. Car ownership in China has risen from one million in 1999, to over 4.5 million today, and is expected to be over 6 million by 2015. The bicycle today is seen as the past, something old and Chinese now aspire to owning a car and very proud of it once they get it. Table 1.3. Purchases by major US Food Companies of Ethical/Organic Companies y Purchasing Company Purchased Company Takeover date Kraft Boca Foods February 2000 nl Back to Nature September 2003 Pepsi Naked Juice November 2006 General Mills Cascadian Farm December 1999 Larabar June 2008 Dean Horizon May 1999 Alta Dena July 1998 ConAgra Cadbury Schweppes Coca Cola Kellogg O White/Wave Silk Lightlife Alexia Foods Green & Black’s Odwalla Honest tea Morning Star Farms/Natural Touch May 2002 July 2000 July 2007 May 2005 October 2005 February 2008 November 1999 fs Kashi June 2000 Bear Naked November 2007 M&M Mars Seeds of Change 1997 Hershey Foods Dagoba October 2006 Hain Celestial Westbrae October 1997 Westsoyoo Bearitos Little Bear DeBole’s April 1998 Garden of Eaten Arrowhead Mills Nile Spice December 1998 Breadshop April 1999 CasbahPr Health Valley Earth’s Best September 1999 Celestial Seasonings March 2000 Imagine Rice/Dream Soy December 2002 Walnut Acres Spectrum Organics June 2003 SunSpire August 2005 MaraNatha March 2006