Chapter 2

Recognizing
Opportunities and
Generating Ideas

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 Chapter Objectives
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1. Explain why it’s important to start a new firm when its

“window of opportunity” is open.
2. Explain the difference between an opportunity and an
idea.
3. Describe the three general approaches entrepreneurs use
to identify opportunities.
4. Identify the four environmental trends that are most
instrumental in creating business opportunities.
5. List the personal characteristics that make some people
better at recognizing business opportunities than others.

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 Chapter Objectives
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6. Identify the five steps in the creative process.

7. Describe the purpose of brainstorming and its use
as an idea generator.
8. Describe how to use library and Internet research to
generate new business ideas.
9. Explain the purpose of maintaining an idea bank.
10. Describe three steps for protecting ideas from being
lost or stolen.

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 What is An Opportunity?
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An opportunity is a favorable
Opportunity Defined set of circumstances that
creates a need for a new
product, service, or business.

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• A common mistake entrepreneurs make in the
opportunity recognition process is picking a currently
available product or service that they like or are
passionate about and then trying to build a business
around a slightly better version of it. Although this
approach seems sensible, such is usually not the case.
The key to opportunity recognition is to identify a product
or service that people need and are willing to buy, not one
that an .entrepreneur wants to make and sell.
• An opportunity has four essential qualities: It is (1)
attractive, (2) durable, (3) timely, and (4) anchored in a
product, service, or business that creates or adds value
for its buyer or end user.4 For an entrepreneur to
capitalize on an opportunity, its window of opportunity
must be open.
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• The term window of opportunity is a metaphor describing
the time period in which a firm can realistically enter a new
market. Once the market for a new product is established,
its window of opportunity opens. As the market grows,
firms enter and try to establish a profitable position. At
some point, the market matures, and the window of
opportunity closes. This is the case with Internet search
engines. Yahoo!, the first search engine, appeared. in
1995, and the market grew quickly, with the addition of
Lycos, Excite, AltaVista, and others. Google entered the
market in 1998, sporting advanced search technology.
Since then, the search engine market has matured, and
the window of opportunity is less prominent. Today, it
would be very difficult for a new start-up search engine
firm to be successful unless it offered compelling
advantages over already established
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• competitors or targeted a niche market in an exemplary
manner. Bing, Microsoft’s search engine, is enjoying
success with approximately 27 percent market share
(compared to 68 percent for Google), but only after
Microsoft has exerted an enormous amount of effort in
head-to-head competition with Google.
• . An idea is a thought, an impression, or a notion. An
idea may or may not meet the criteria of an opportunity.
This is a critical point because many entrepreneurial
ventures fail not because the entrepreneurs that
launched them didn’t work hard, but rather because
there was no real opportunity to begin with. Before
getting excited about a business idea, it is crucial to
understand whether the idea fills a need and meets the
criteria for an opportunity.
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 What is an Opportunity?
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Four Essential Qualities of an Opportunity

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 Three Ways to Identify an Opportunity

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 First Approach: Observing Trends
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• Observing Trends
– Trends create opportunities for entrepreneurs to pursue.
– The most important trends are:
• Economic forces
• Social forces
• Technological advances
• Political action and regulatory change
– It’s important to be aware of changes in these areas.

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First Approach: Observing Trends
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Environmental Trends Suggesting Business

or Product Opportunity Gaps

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 Trend 1: Economic Forces

Example of Economic Trend

Creating a Favorable Opportunity
Economic trends help
determine areas that are • A weak economy favors
start-ups that help consumers
ripe for new start-ups and
save money.
areas that start-ups should
• An example is GasBuddy.com,
avoid.
a company started to help
consumers save money on gas.

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 Trend 2: Social Forces

Examples of Social Trends

Social trends alter how
people and businesses • Aging of baby boomers
behave and set their • The increasing diversity of
priorities. These trends the workplace
• Increasing interest in social
provide opportunities for networks such as Facebook
new businesses to and Twitter
accommodate the • An increasing focus on health
changes. and wellness
• Increasing interest in “green”
products
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 Trend 3: Technological Advances
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Examples of Entire Industries

Advances in technology
frequently create business
opportunities.
that Have Been Created as the
Result of Technological
Advances
• Computer industry
• Internet
• Biotechnology
• Digital photography

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 Trend 3: Technological Advances
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Example: H20Audio
Once a technology is
An example is H20Audio, a
created, products often company started by four
emerge to advance it. former San Diego State
University students, that
makes waterproof housings
for the Apple iPhone and
iPod.

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 Trend 4: Political Action and Regulatory
Changes
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General Example
Political action and Laws to protect the environment
regulatory changes also have created opportunities for
provide the basis for entrepreneurs to start firms that
opportunities. help other firms comply with
environmental laws and
regulations.

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 Trend 4: Political Action and Regulatory
Changes
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Specific Example

Company created to help The No Child Left Behind Act

of 2002 requires states to
other companies comply develop criterion-based
with a specific law. assessments in basic skills to be
periodically given to students in
certain grades. Kim and Jay
Kleeman, two high school
teachers, started Shakespeare
Squared, a company that helps
high schools comply with the
act.
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 Second Approach: Solving a Problem
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• Solving a Problem
– Sometimes identifying opportunities simply involves
noticing a problem and finding a way to solve it.
– These problems can be pinpointed through observing
trends and through more simple means, such as intuition,
serendipity, or change.

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 Second Approach: Solving a Problem
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• A problem facing the U.S. and

other countries is finding
alternatives to fossil fuels.
• A large number of
entrepreneurial firms, like
this solar farm, are being
launched to solve this problem.

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 Third Approach: Finding Gaps in the
Marketplace
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• Gaps in the Marketplace

– A third approach to identifying opportunities is to find a
gap in the marketplace.
– A gap in the marketplace is often created when a product or
service is needed by a specific group of people but doesn’t
represent a large enough market to be of interest to
mainstream retailers or manufacturers.

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 Third Approach: Finding Gaps in the
Marketplace
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Product gaps in the
marketplace represent
potentially viable
business opportunities.
Specific Example
In 2000 Tish Cirovolv
realized there were no guitars
on the market made
specifically for women. To
fill this gap, she started Daisy
Rock Guitars, a company that
makes guitars just for women.
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Personal Characteristics of the Entrepreneur

Characteristics that tend to make some people better

at recognizing opportunities than others

Prior Experience Cognitive Factors

Social Networks Creativity

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 Prior Experience

• Prior Industry Experience

– Several studies have shown that prior experience in an
industry helps an entrepreneur recognize business
opportunities.
• By working in an industry, an individual may spot a market niche
that is underserved.
• It is also possible that by working in an industry, an individual
builds a network of social contacts who provide insights that lead
to recognizing new opportunities.

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 Cognitive Factors

• Cognitive Factors
– Studies have shown that opportunity recognition may be an
innate skill or cognitive process.
– Some people believe that entrepreneurs have a “sixth
sense” that allows them to see opportunities that others
miss.
– This “sixth sense” is called entrepreneurial alertness, which
is formally defined as the ability to notice things without
engaging in deliberate search.

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 Social Networks
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• Social Networks
– The extent and depth of an individual’s social network
affects opportunity recognition.
– People who build a substantial network of social and
professional contacts will be exposed to more opportunities
and ideas than people with sparse networks.
– Research results suggest that between 40% and 50% of
people who start a business got their idea via a social
contact.
• Strong Tie Vs. Weak Tie Relationships
– All of us have relationships with other people that are called
“ties.” (See next slide.)
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 Social Networks
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• Nature of Strong-Tie Vs. Weak-Tie Relationships

– Strong-tie relationship are characterized by frequent
interaction and form between coworkers, friends, and
spouses.
– Weak-tie relationships are characterized by infrequent
interaction and form between casual acquaintances.
• Result
– It is more likely that an entrepreneur will get new business
ideas through weak-tie rather than strong-tie relationships.
(See next slide.)

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 Social Networks
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Why weak-tie relationships lead to more new business ideas

than strong-tie relationships
Strong-Tie Relationships
These relationships, which
typically form between like-
minded individuals, tend to
reinforce insights and ideas
that people already have.
Weak-Tie
Relationships
These relationships, which
form between casual
acquaintances, are not as
apt to be between like-
minded individuals, so one
person may say something
to another that sparks a
completely new idea.
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 Creativity
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• Creativity
– Creativity is the process of generating a novel or useful
idea.
– Opportunity recognition may be, at least in part, a creative
process.
– For an individual, the creative process can be broken down
into five stages, as shown on the next slide.

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 Creativity
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Five Steps to Generating Creative Ideas

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 Full View of the Opportunity Recognition
Process
Depicts the connection between an awareness of emerging trends
and the personal characteristics of the entrepreneur

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 Techniques for Generating Ideas

Brainstorming Focus Groups

Library and
Internet Research

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 Brainstorming

• Brainstorming
– Is a technique used to generate a large number of ideas and
solutions to problems quickly.
– A brainstorming “session” typically involves a group of
people, and should be targeted to a specific topic.
– Rules for a brainstorming session:
• No criticism.
• Freewheeling is encouraged.
• The session should move quickly.
• Leap-frogging is encouraged.

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 Focus Groups

• Focus Group
– A focus group is a gathering of five to ten people, who
have been selected based on their common characteristics
relative to the issues being discussed.
– These groups are led by a trained moderator, who uses the
internal dynamics of the group environment to gain insight
into why people feel the way they do about a particular
issue.
– Although focus groups are used for a variety of purposes,
they can be used to help generate new business ideas.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 2-33

 Library and Internet Research
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• Library Research
– Libraries are an often underutilized source of information
for generating new business ideas.
– The best approach is to talk to a reference librarian, who
can point out useful resources, such as industry-specific
magazines, trade journals, and industry reports.
– Simply browsing through several issues of a trade journal
or an industry report on a topic can spark new ideas.

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 Library and Internet Research
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Examples of Useful Search

Large public and Engines and Industry Reports
university libraries • BizMiner
typically have access to • ProQuest
search engines and • IBISWorld
industry reports that would • Mintel
cost thousands of dollars • LexisNexis Academic
to access on your own.

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 Library and Internet Research
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• Internet Research
– If you are starting from scratch, simply typing “new
business ideas” into a search engine will produce links to
newspapers and magazine articles about the “hottest” new
business ideas.
– If you have a specific topic in mind, setting up Google or
Yahoo! e-mail alerts will provide you with links to a
constant stream of newspaper articles, blog posts, and news
releases about the topic.
– Targeted searches are also useful.

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 Other Techniques

• Customer Advisory Boards

– Some companies set up customer advisory boards that meet
regularly to discuss needs, wants, and problems that may
lead to new ideas.
• Day-In-The-Life Research
– A type of anthropological research, where the employees of
a company spend a day with a customer.

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 Encouraging New Ideas

• Establishing a Focal Point for Ideas

– Some firms meet the challenge of encouraging, collecting,
and evaluating ideas by designating a specific person to
screen and track them—for if it’s everybody’s job, it may
be no one’s responsibility.
– Another approach is to establish an idea bank (or vault),
which is a physical or digital repository for storing ideas.
• Encouraging Creativity at the Firm Level
– Creativity is the raw material that goes into innovation and
should be encouraged at the organizational and individual
supervisory level.

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Protecting Ideas From Being Lost or Stolen

• Step 1
– The idea should be put in a tangible form such as entered
into a physical idea logbook or saved on a computer disk,
and the date the idea was first thought of should be entered.
• Step 2
– The idea should be secured. This may seem like an obvious
step, but is often overlooked.
• Step 3
– Avoid making an inadvertent or voluntary disclosure of an
idea, in a manner that forfeits the right to claim exclusive
rights to it.

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 5 Principles of innovation
• 1. The first step is to begin with an analysis of the opportunity.
• 2. The opportunity should be analyzed to see if anyone will be interested in
using the innovation.
• 3. The innovation must be simple and clearly focused on a specific need in
order to be effective.
• 4. Effective innovations start small, not big. By appealing to a small, limited
market, a product or service requires little money and few people to produce
and sell it, compared to larger endeavors. As the market grows, the
entrepreneur has time to fine tune its processes and stay ahead of the
competition that is also entering the market.
• 5. Lastly, the entrepreneur should aim at attaining and maintaining market
leadership. If the entrepreneur does not aim at leadership from the
beginning, then he or she is unlikely to be innovative enough to successfully
establish themselves and their company. Leadership here does not have to
mean large market control, but can mean dominating a small market niche.

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 Business incubators
• What it is: Business incubators are organizations geared toward speeding up the
growth and success of startup and early stage companies. They’re often a good path
to capital from angel investors, state governments, economic-development coalitions
and other investors.
• The National Business Incubation Association has more than 1,400 members in the
United States -- and a total 1,900 members in 60 nations.
• How it works: Incubators vary in their strategies. Some are located in an actual
physical space meant to foster networking among entrepreneurs and their coaches.
Others operate on a virtual basis.
• Incubators sometimes call themselves accelerators instead, often when they’re
geared toward jumpstarting businesses that are more developed.
• Many have potential capital to invest, or links to potential funding sources. There’s
access to services such as accountants and lawyers -- not to mention invaluable
coaching and networking connections through the staff and other entrepreneurs at the
incubator..
• Upside: Your business not only gets access to a potential buffet of capital choices,
but also a host of intangible benefits including mentorship, expertise and networking. 
• Downside: The very benefits that can make incubators so useful -- constant
mentorship and networking with entrepreneurs -- can damage your focus during 2-41
crucial early stages.
• Think hard about whether your business is at a stage where it could benefit
from an incubator. And don’t move in to the first one you come across,
either. Shop around and find the one with the services that are the best fit.
• How to find them: The National Business Incubation Association has a 
search engine, not to mention a directory of state business incubation
associations. 
• The directory, however, is limited. And it is important to find an incubator that
is the best fit for your business. Other good sources for finding an incubator
include state and local economic development departments, as well as
local SBA offices. 

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