Chapter 2 - Innovation and Ideas PDF

CHAPTER 2 INNOVATION AND IDEAS In the field of observation, chance only favors minds which are prepared. - Louis Pasteur - IDENTIFYING AND RE...

CHAPTER 2 INNOVATION AND IDEAS In the field of observation, chance only favors minds which are prepared. - Louis Pasteur - IDENTIFYING AND RECOGNIZING OPPORTUNITIES Essentially, entrepreneurs recognize an opportunity and turn it into a successful business. An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business. Most entrepreneurial ventures are started in one of two ways. Some ventures are externally stimulated. In this instance, an entrepreneur decides to launch a firm, searches for and recognizes an opportunity, and then starts a business, as Jeff Bezos did when he created Amazon.com. In 1994, Bezos quit his lucrative job at a New York City investment firm and headed for Seattle with a plan to find an attractive opportunity and launch an e-commerce company. Other firms are internally stimulated, like BenchPrep. An entrepreneur recognizes a problem or an opportunity gap and creates a business to fill it. Regardless of which of these two ways an entrepreneur starts a new business, opportunities are tough to spot. Identifying a product, service, or business opportunity that isn’t merely a different version of something already available is difficult. 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. As shown in Figure 2.1, 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. For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open. 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 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.  Figure 2.1 Four Essential Qualities of an Opportunity It is important to understand that there is a difference between an opportunity and an idea. 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. Types of Opportunities Opportunities can develop from market demand or from new technological possibilities. These opportunities are “demand pull” and “technology push” respectively. With demand-pull opportunities, an entrepreneur begins by assessing a need or problem that cries out for a solution. An example is the need for a pharmaceutical that can mitigate or cure the effects of AIDS. The founders of new industries capitalize on demand pull to create disruptive innovations that lead to new products that satisfy the demand. As Vinod Khosla, the co-founder of Sun Microsystems and a well-known venture capitalist, is fond of saying, “Every problem is an opportunity.” In turn, great opportunities are often disguised as difficult problems. Successful new ventures are often initiated by people who have experienced significant painful problems. While Sam Goldman, the founder was living in Benin, his neighbor’s son was badly burned by a kerosene lamp. This inspired him to create a new source of light, which could match kerosene lamps on price, but be safe for use around small children. The d.light now creates extremely efficient LED lights that are 8 to 10 times brighter than a kerosene lamp and 50 percent more efficient than fluorescent lights. Technology-push opportunities might be said to begin with a solution, such as the one developed by Cook. The discovery of a new technology, such as HDTV in consumer electronics or stem cells in biotechnology, leads entrepreneurs to search for ways to apply it. For example, Sandra Lerner and Leonard Bosack formed Cisco Systems in 1984 to exploit the capabilities of a router to transmit and translate data to and from disparate computers. By 2012, Cisco had revenues of over $46 billion. 2  The power of serendipity—making useful discoveries by accident—can also lead to good opportunities. Working in a microwave lab, Percy Spencer observed a chocolate bar melting by microwave power—thus, leading to the microwave oven. Would-be entrepreneurs need to be careful, however, not to mistake a new technology for a solution in itself. Ultimately, customers want a need filled or a problem solved. Thus, entrepreneurship is not about having a great technological idea, but rather about creating a new business that solves a problem. Figure 2.1 summarizes and illustrates demand-pull and technology-push opportunities. In the demand-pull case, the entrepreneur begins with a market need. That need may be filled with several potential products, which may (or may not) have special technological capabilities. In the technology-push case, the entrepreneur begins with a technological capability, which is often a new technology or a new application of an existing technology. This capability needs to be combined with other capabilities to make a cohesive product (and, often, the capability can be applied to multiple products). In turn, the selected product may be applied to various market and customer needs. In both cases, however, the ultimate task of the entrepreneur is to match an important need with a good solution. FIGURE 2.1 Demand Pull and Technology Push Opportunities Source: Kingon, 2014. Table 2.1 further dissects different opportunities into nine categories, which we use to describe additional ways of identifying opportunities. The first category, and perhaps most common, is to increase the value of the product or service. This increased value can include improved performance, better quality or experience, and improved accessibility or other values unique to the product. TABLE 2.1 Nine categories of opportunity. 1. Increasing the value of a product or service 2. New applications of existing means or technologies 3. Creating mass markets 4. Customization for individuals 5. Increasing reach 6. Managing the supply chain 7. Convergence of industries 8. Process innovation 9. Increasing the scale of the firm 3  The second category seeks new applications of existing means or technologies. Credit cards with magnetic stripes were available in the 1960s, but a thoughtful innovator recognized the application of this technology to hotel door cards and created a wholly new application and industry. The third category concentrates on creating mass markets for existing products. Let us say that Company ABC follows niche marketing techniques to sell its products. The business’s marketing team adopted a mass marketing strategy to increase sales. They advertised their products on television, radio, and social media. This led to a 30% increase in sales. Customization of products for individuals, category 4, affords a new opportunity for an existing product or technology. Examples of customization can be found in the streaming music business. Spotify lets users play songs from their own libraries as well as from Spotify’s collection of millions of tracks. Users can access music via a desktop app, tablet, or smart phone. Spotify also integrates with social network sites, including Facebook. Expanding geographic reach or online reach, category 5, allows a new venture to increase its number of customers. Founded in Scotland, Optos developed a novel eye exam technology and innovative pay-per-use business model. Backed by angel investors for many years, it carefully expanded its operations into the United States and Germany. It is now a viable public company listed on the London stock exchange. Managing the supply chain, category 6, is a powerful force for improvement. Wal-Mart integrated inventory-information systems in each store with its broader distribution system to reap economic benefits from improved inventory management. Convergence of industries, category 7, affords new opportunities by creating novel combinations of markets and technologies. For example, genetic engineering is the convergence of electron microscopy, micromanipulation, and supercomputing. Business and manufacturing process innovations, category 8, are another source of opportunity. For example, FedEx and other airborne shipping systems changed the way in which individuals and organizations ship goods to one another. Finally, the ninth category of opportunity is the increasing scale or consolidation of industry. Historically, the railroad industry provides a powerful example of consolidation in the United States. Consolidation of the railroads began by the turn of the twentieth century. Today, there are five major railroad companies, down from the thousands of companies in the late 1890s. More recent consolidation examples include the automobile manufacturing industry, cable and satellite TV broadcasters, and telecommunications carriers. Through mergers and acquisitions, an industry can be consolidated with attendant cost savings and value for the customer. The entrepreneur’s personal background is key to the process of opportunity identification. In fact, since prior knowledge, experience and motivation play a major role in opportunity identification, different people may not recognize or perceive the same opportunity.The people whom an entrepreneur knows, the activities she pursues, and even the books and magazines she reads can shape her awareness of opportunities. 4  Good opportunities can also vary from person-to-person since it is the entrepreneur who adds value to the opportunity by creating a response. The opportunity, and even a general response to it, is not unique—many people may recognize it. Few of them, however, will possess the relevant passion and capabilities to solve the problem. For example, many people propose to exploit the new science of nanotechnology to solve various problems, but few of them will act. The true entrepreneur finds the best opportunity that matches his or her interests, skills, and knowledge—and acts to get it done. Thus, it is really the passion and capabilities that distinguish an entrepreneurial team. TYPES AND SOURCES OF INNOVATION Innovation is based on teamwork and creativity, and is defined as invention that has produced economic value in the marketplace. Innovations can be new products, new processes, new services, and new ways of doing business. There are several different types of innovation, as illustrated in Figure 2.4. Incremental innovation is characterized by faster, better, and/or cheaper versions of existing products. Thus, entrepreneurs engaged in incremental innovation take an existing idea and creatively expand on it. To be successful, the incremental innovator must understand specific customer needs that are unmet by current offerings. For example, portable, battery-driven radios have been used since the 1950s. But Trevor Bayles saw an opportunity to bring information to remote Africa by creating a wind-up spring- and dynamo-powered radio. Twenty-five seconds of winding gives the user one hour of listening. Figure 2.4 Four types of innovation. Like incremental innovation, architectural innovation leaves core design concepts untouched. But, architectural innovation changes the way in which components of a product are linked together. Thus, the components remain unchanged, but the architecture of module connection is the innovation. Architectural innovation occurs when new products or services use existing technology to create new markets and/or new consumers that did not purchase that item before. For example, the smart watch used existing cell phone technology and was repackaged into a watch. By contrast, modular innovation is focused on the innovation of new components and modules. But it does not disrupt the linkages between modules. Since the original iPhone, Apple has continued to use Modular innovation in their products. The iPad, for example, was based on the same framework as the iPhone. However, instead of a phone-sized screen, it had a larger tablet-sized screen. This was made possible as it allowed Apple to reuse the same components from the iPhone and just make slight modifications to them. 5  Finally, radical innovation or disruptive innovation uses new modules and new architecture to create new products. The Internet is an example of a network system with new modules and new architecture – a radical or disruptive innovation. Disruptive innovation transforms the relationship between customer and supplier, restructures markets, displaces current products, and often creates new product categories. Disruptive products also introduce a new value proposition. For example, e-mail is an application on the Internet that is a disruptive application (often called a “killer app”) and is one reason that the Internet so widely used. An emerging disruptive innovation is three-dimensional (3D) printing. It provides a faster and less costly alternative to machining (cutting, turning, grinding and drilling solid materials). Used for making prototypes as well as final products, 3D printing evolved from the “rapid prototyping” industry. Time will tell the extent of 3D printing’s impact, but, for now, dozens to hundreds of startups and many bigger companies are betting their time and money that it will be the next big thing [Economist, 2012a]. APPROACHES ENTREPRENEURS CAN USE TO IDENTIFY AN OPPORTUNITY Now let’s look at the three approaches entrepreneurs can use to identify an opportunity, as depicted in Figure 2.2. Once you understand the importance of each approach, you’ll be much more likely to look for opportunities and ideas that fit each profile. Figure 2.2 Three Ways to Identify an Opportunity Observing Trends. The most important trends to follow are economic trends, social trends, technological advances, and political action and regulatory changes. When looking at environmental trends to discern new business ideas, there are two caveats to keep in mind. First, it’s important to distinguish between trends and fads. New businesses typically do not have the resources to ramp up fast enough to take advantage of a fad. Second, even though we discuss each trend individually, they are interconnected and should be considered simultaneously when brainstorming new business ideas. For example, one reason that smartphones are so popular is because they benefit from several trends converging at the same time, including an increasingly mobile population (social trend), the continual miniaturization of electronics (technological trend), smartphones wouldn’t be as successful as they are and wouldn’t hold as much continuing promise to be even more successful as is the case. Figure 2.3 provides a summary of the relationship between the environmental factors just mentioned and identifying opportunity gaps. Next, let’s look at how entrepreneurs can study each of these factors to help them spot business, product, and service opportunity gaps. 6  Figure 2.3 Environmental Trends Suggesting Business or Opportunity Gaps Economic Forces. Understanding economic trends is helpful in determining areas that are ripe for new business ideas as well as areas to avoid. When the economy is strong, people have more money to spend and are willing to buy discretionary products and services that enhance their lives. In contrast, when the economy is weak, not only do people have less money to spend, they are typically more reluctant to spend the money they have, fearing the economy may become even worse—and that in turn, they might lose their jobs because of a weakening economy. Paradoxically, a weak economy provides business opportunities for start-ups that help consumers save money. Examples include GasBuddy and GasPriceWatch.com, two companies started to help consumers save money on gasoline. A poor or weak economy also provides opportunities for firms to sell upscale and everyday items at a “discount.” For example, daily deal sites like Groupon and LivingSocial have experienced rapid growth by providing consumers’ access to local providers of massages, trips to museums, high-end restaurants, and similar products or services at deep discounts It’s also important to evaluate how economic forces affect people’s behaviors—beyond looking for discounts and the most value for their money. For example, when the economy is weak, more people go back to school, largely as a result of poor employment prospects. This trend provides opportunities for not only traditional and online colleges and universities but for businesses that develop products to assist them. An example is BenchPrep which sells Apple iPhone and Android apps that help people prepare for college admission tests, is benefiting from an increase in college enrollments. Similarly, when the economy is poor, more people start businesses. Web-based businesses like Etsy, which provides a platform for people to sell handmade items, thrive when an increasing number of people are looking to open full-time or part-time businesses. 7  An understanding of economic trends can also help identify areas to avoid. For example, this is not a good time to start a company that relies on fossil fuels, such as airlines or trucking or perhaps even local transportation-related businesses such as a taxicab company, because of high fuel prices. There are also certain product categories that suffer as result of economic circumstances. This is not a good time to open a store or franchise that sells premium-priced food products like cookies or ice cream. Social Forces. Often, the reason that a product or service exists has more to do with satisfying a social need than the more transparent need the product fills. The proliferation of fast-food restaurants, for example, isn’t primarily because of people’s love of fast food but rather because of the fact that people are busy and often don’t have time to cook their own meals. Similarly, social networking sites like Facebook and Twitter aren’t popular because they can be used to post information and photos on a Web site. They’re popular because they allow people to connect and communicate with each other, which is a natural human tendency. Here is a sample of the social trends that are currently affecting how individuals behave and set their priorities: ▪ Aging of baby boomers ▪ The increasing diversity of the workforce ▪ Increasing interest in social networks such as Facebook and Twitter ▪ Two-working-parent families ▪ Rising middle class of developing nations ▪ Changing role of women in society ▪ Broadening access to education ▪ Proliferation of mobile phones and mobile phone apps ▪ An increasing focus on health and wellness ▪ Emphasis on clean forms of energy including wind, solar, biofuels, and others ▪ Increasing number of people going back to school and/or retraining for new jobs ▪ Increasing interest in healthy foods and “green” products Technological Advances. Advances in technology frequently dovetail with economic and social changes to create opportunities. For example, there are many overlaps between an increased focus on health and wellness and technology. Airstrip Technologies, a recent start-up, enables doctors to monitor critical patient information remotely on a smartphone or computer. The company’s founding was motivated by a desire on the part of doctors to stay in closer contact with their critical care patients while away from the hospital and while those patients are receiving treatment in locations outside a hospital. Advances in wireless technologies made the system possible. In most cases the technology isn’t the key to recognizing business opportunities. Instead, the key is to recognize how technologies can be used and harnessed to help satisfy basic or changing needs. Technological advances also provide opportunities to help people perform everyday tasks in better or more convenient ways. For example, OpenTable.com is a Web site that allows users to make restaurant reservations online and now covers most of the United States. If you’re planning a trip to San Diego, for example, you can access OpenTable.com, select the area of the city you’ll be visiting, and view descriptions, reviews, customer ratings, and in most cases the menus of the restaurants in the area. You can then make a reservation at the restaurant and print a map and the directions to it. The basic tasks that OpenTable.com helps people perform have always been done—looking for a restaurant, comparing 8 prices and menus, soliciting advice from people who are familiar with competing restaurants, and getting directions. What OpenTable.com does is help people perform these tasks in a more convenient and expedient manner. Another aspect of technological advances is that once a technology is created, products often emerge to advance it. For example, the creation of the Apple iPod, iPhone, iPad and similar devices has in turned spawned entire industries that produce compatible devices. An example is H2OAudio, a company that was started by four former San Diego State University students, which makes waterproof housings for the Apple iPhone and iPod. The waterproof housings permit iPhone and iPod users to listen to their devices while swimming, surfing, snowboarding, or engaging in any activity where the device is likely to get wet. Table 2.5 lists several other technology-related trends and opportunities. Table 2.5 Technology-Related Trends and Opportunities ▪ Life science: Genetic engineering, ▪ Fuel cells: Electrochemical conversion of genomics, biometrics hydrogen or hydrocarbon fuels into ▪ Information technology: Internet, wireless electric current device, cloud computing ▪ Superconductivity: Energy savings on ▪ Food preservation: Improved distribution of utility power lines food ▪ Designer enzymes: Protein catalysts that ▪ Video gaming: Learning, entertainment accelerate chemical reactions in living ▪ Speech recognition: Interface between cells for consumers and health products computers and people ▪ Cell phones: Communications and ▪ Security devices and systems: Identification computing devices, baggage checkers, protective ▪ Software security: Blocking unsolicited clothes e-mail (spam), preventing “phishing” ▪ Nanotechnology: Devices 100 nanometers ▪ Robots: Teams of small coordinated or less for drug delivery, biosensors robots for monitoring and safety ▪ Renewable energy: cells and wind turbines Political Action and Regulatory Changes. Political and regulatory changes also provide the basis for opportunities. For example, new laws create opportunities for entrepreneurs to start firms to help companies, individuals, and governmental agencies comply with these laws. For example, the No Child Left Behind Act of 2002, which is based on the notion of outcome-based education, requires states to develop criterion-based assessments in basic skills to be periodically given to all students in certain grades. Shortly after the act was passed, Kim and Jay Kleeman, two high school teachers, started Shakespeare Squared, a company that produces materials to help schools comply with the act. On some occasions, changes in government regulations motivate business owners to start firms that differentiate themselves by “exceeding” the regulations. For example, several years ago, the Federal Trade Commission changed the regulation about how far apart the wood or metal bars in an infant crib can be. If the bars are too far apart, a baby can get an arm or leg caught between the bars, causing an injury. An obvious business idea that might be spawned by this type of change is to produce a crib that is advertised and positioned as “exceeding” the new standard for width between bars and is “extra safe” 9 for babies and young children. The change in regulation brings attention to the issue and provides ideal timing for a new company to reassure parents by providing a product that not only meets but exceeds the new regulation. Some businesses and industries are so dependent on favorable government regulations that their literal survival is threatened if a regulation changes. An example of a business that fits this profile is Almost Family, a company that provides home health nursing services. Almost Family receives the majority of its income via fixed payments from Medicare based on the level of care that it provides its clients. As a result, the company’s profitability is highly sensitive to any changes in Medicare reimbursement policies. Political change also engenders new business and product opportunities. For example, global political instability and the threat of terrorism have resulted in many firms becoming more security conscious. These companies need new products and services to protect their physical assets and intellectual property as well as to protect their customers and employees. The backup data storage industry, for example, is expanding because of this new trend in the tendency to feel the need for data to be more protected than in the past. Table 2.1 offers additional examples of changes in environmental trends that provided fertile soil for opportunities and subsequent concepts to take advantage of them. Table 2.1 Examples of How Changes in Environmental Trends Provide Openings for New Business And Product Opportunities Changing Environmental Trend Resulting New Business, Companies That Resulted Product, and Service Opportunities Economic Trends Search for alternatives to Ethanol, biodiesel, solar power, Windspire Energy, Solix traditional fossil fuels like wind-generated power Biofuels, eSolar gasoline Sales of upscale items at a Deal of the day sites, discount Groupon, LivingSocial, Gilt discount stores, niche sites that sell Groupe, e.l.f. specialized items at a discount Social Trends Increased interest in different, Healthy-fare restaurants, Chipotle, Great Wraps, White tastier, and healthier food organic foods, healthy-focused Wave, Whole Foods grocery stores Increased interest in fitness as Fitness centers, in-house Fitbit, Cool Palms, Runkeeper, the result of new medical exercise Shapes for Women information warning of the equipment, weight-loss centers, hazards of being overweight fitness-focused smartphone apps Technological Advances Development of wireless Smartphones, smartphone apps, Airstrip Technologies, networks Wi-Fi networks, GPS devices ScriptPad, TomTom, DLO 10  Miniaturization of electronics Laptop computers, MP3 players, ASUS Eee PC, Research In patient monitoring devices Motion, MiLife Political and Regulatory Changes Increased EPA and OSHA Consulting companies, software ESS, PrimaTech, Compliance standards to monitor compliance Consulting Services, Inc. Threat of terrorism Security consulting, explosives BJ Smith Consulting, Xplosafe detection devices, secure computer networks Solving a Problem The second approach to identifying opportunities is to recognize problems and find ways to solve them. These problems can be recognized by observing the challenges that people encounter in their daily lives and through more simple means, such as intuition, serendipity, or chance. There are many problems that have yet to be solved. Examples of people who launched businesses to solve problems are included in Table 2.2. Table 2.2 Businesses Created to Solve a Problem Entrepreneur(s) Year Problem Solution Name of Business That Resulted Arlene Harris 2006 Many cell phones are too Design cell phones that are GreatCall complicated and the easy to use and have large buttons are too small for buttons. older people. Sam Goldman 2008 Hundreds of millions of Create affordable and d.light and Ned Tozen “base of the pyramid” durable portable consumers in developing solar-powered lanterns. countries lack access to reliable electricity. Roger Marsh 2009 Concrete block Alter traditional methods of Bolt-A-Blok construction takes time, concrete block construction Systems requires water; and, a to enable the assembly of building built with concrete the block to be completed blocks cannot be occupied in a manner that requires immediately because the no water, has immediate building’s mortar needs occupancy, and is faster time to cure. than current procedures. Peter Chen, 2009 No easy-to-access platform Create a Web-based Kickstarter Yancey Strickler, for funding creative “crowdfunding” and Charles projects, like indie films, platform that helps artists, Adler record albums, or food- musicians, related projects. 11  and people involved in other creative projects raise money from the public. Tommy 2008 Men’s undershirts don’t fit Create long-tailored Tommy John Patterson well and don’t stay tucked undershirts that fit well in. and stay tucked in. Finding Gaps in the Marketplace Gaps in the marketplace are the third source of business ideas. There are many examples of products that consumers need or want that aren’t available in a particular location or aren’t available at all. Part of the problem is created by large retailers, like Walmart and Costco, which compete primarily on price and offer the most popular items targeted toward mainstream consumers. While this approach allows the large retailers to achieve economies of scale, it leaves gaps in the marketplace. This is the reason that clothing boutiques and specialty shops exist. These businesses are willing to carry merchandise that doesn’t sell in large enough quantities for Walmart and Costco to carry. Product gaps in the marketplace represent potentially viable business opportunities. For example, in 2000, Tish Cirovolo realized that 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. Another company that is filling a gap in the marketplace is ModCloth. ModCloth sells vintage and vintage-inspired clothing for 18- to 32-year-old women, which is a surprisingly large market. Additional examples of companies started to fill gaps in the marketplace are provided in Table 2.3. Table 2.3 Businesses Created to Fill a Gap in the Marketplace Gap in the Marketplace Resulting New Business Opportunity Name of Businesses That Resulted No fitness centers that are 24-hour fitness centers to Snap Fitness, 24 Hour open 24 hours a day accommodate people who work odd Fitness hours Lack of toys and toy stores Toy stores, toy manufacturers, and Discovery Toys, Sprig Toys, that focus on a child’s Web sites that sell educational toys Kazoo & Company intellectual development Restaurants that are both Fast-casual restaurants that combine Panera Bread, Chipotle, fast and serve good food the advantages of fast-food (fast Cosi, Bruegger’s service) and casual dining (good food) Shortage of clothing stores Boutiques and retail chains that sell Casual Male, Ashley Stewart, that sell fashionable clothing fashionable clothing for hard-to-fit iGigi, RealKidz for hard-to-fit people people, including plus size clothing and clothing for tall or short people 12  A common way that gaps in the marketplace are recognized is when people become frustrated because they can’t find a product or service that they need and recognize that other people feel the same way. This scenario played out for Lorna Ketler and Barb Wilkins, who became frustrated when they couldn’t find stylish “plus-sized” clothing that fit. In response to their frustration, they started Bodacious, a store that sells fun and stylish “plus size” clothing that fits. A related technique for generating new business ideas is to take an existing product or service and create a new category by targeting a completely different target market. This approach essentially involves creating a gap and filling it. An example is PopCap games, a company that was started to create a new category in the electronic games industry called “casual games.” The games are casual and relaxing rather than flashy and action-packed and are made for people who want to wind down after a busy day. One thing a new firm has to be careful about is that if it says it’s capitalizing on an environmental trend, solving a problem, or filling a gap in the marketplace, it has to deliver on its promises. If a start-up’s initial customers find out its more hype than substance, they will quickly abandon it. Personal Characteristics of the Entrepreneur Researchers have identified several characteristics that tend to make some people better at recognizing opportunities than others. The term opportunity recognition refers to the process of perceiving the possibility of a profitable new business or a new product or service. That is, an opportunity cannot be pursued until it’s recognized. Now let’s look at some specific characteristics shared by those who excel at recognizing an opportunity. Prior Experience. Several studies show that prior experience in an industry helps entrepreneurs recognize business opportunities. By working in an industry, an individual may spot a market niche that is underserved. It is also possible that while working in a particular area, an individual builds a network of social contacts in that industry that may provide insights that lead to opportunities. Once an entrepreneur starts a firm, new venture opportunities become apparent. This is called the corridor principle, which states that once an entrepreneur starts a firm, he or she begins a journey down a path where “corridors” leading to new venture opportunities become apparent. The insight provided by this principle is simply that once someone starts a firm and becomes immersed in an industry, it’s much easier for that person to see new opportunities in the industry than it is for someone looking in from the outside. Cognitive Factors Opportunity recognition may be an innate skill or a cognitive process. This is called entrepreneurial alertness, which is formally defined as the ability to notice things without engaging in deliberate search. Most entrepreneurs see themselves in this light, believing they are more “alert” than others. Alertness is largely a learned skill, and people who have more knowledge of an area tend to be more alert to opportunities in that area than others. A computer engineer, for example, would be more alert to needs and opportunities within the computer industry than a lawyer would be. 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. An important concept that sheds light on the importance of social networks to opportunity recognition is the differential impact of strong-tie versus weak-tie relationships. Strong-tie relationships 13 are characterized by frequent interaction and ties between coworkers, friends, and spouses. Weak-tie relationships are characterized by infrequent interaction and ties between casual acquaintances. According to research in this area, it is more likely that an entrepreneur will get a new business idea through a weak-tie than a strong-tie relationship because strong-tie relationships, which typically form between like-minded individuals, tend to reinforce insights and ideas the individuals already have. Weak- tie relationships, on the other hand, 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. An example might be an electrician explaining to a restaurant owner how he solved a business problem. After hearing the solution, the restaurant owner might say, “I would never have heard that solution from someone in my company or industry. That insight is completely new to me and just might help me solve my problem.” Creativity. Creativity is the process of generating a novel or useful idea. Opportunity recognition may be, at least in part, a creative process. On an anecdotal basis, it is easy to see the creativity involved in forming many products, services, and businesses. Increasingly, teams of entrepreneurs working within a company are sources of creativity for their firm. For an individual, the creative process can be broken into five stages, as shown in Figure 2.4. Let’s examine how these stages relate to the opportunity recognition process. In the figure, the horizontal arrows that point from box to box suggest that the creative process progresses through five stages. The vertical arrows suggest that if at any stage an individual (such as an entrepreneur) gets “stuck” or doesn’t have enough information or insight to continue, the best choice is to return to the preparation stage—to obtain more knowledge or experience before continuing to move forward. Figure 2.4 Five Steps to Generating Creative Ideas Preparation. Preparation is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process. Just as an athlete must practice to excel, an entrepreneur needs experience to spot opportunities. Incubation. Incubation is the stage during which a person considers an idea or thinks about a problem; it is the “mulling things over” phase. Sometimes incubation is a conscious activity, and sometimes it is unconscious and occurs while a person is engaged in another activity. Insight. Insight is the flash of recognition—when the solution to a problem is seen or an idea is born. It is sometimes called the “eureka” experience. In a business context, this is the moment an entrepreneur recognizes an opportunity. Sometimes this experience pushes the process forward, and sometimes it prompts an individual to return to the preparation stage. For example, an 14  entrepreneur may recognize the potential for an opportunity but may feel that more knowledge and thought is required before pursuing it. Evaluation. Evaluation is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. Many entrepreneurs mistakenly skip this step and try to implement an idea before they’ve made sure it is viable. Evaluation is a particularly challenging stage of the creative process because it requires an entrepreneur to take a candid look at the viability of an idea. Elaboration. Elaboration is the stage during which the creative idea is put into a final form: The details are worked out and the idea is transformed into something of value, such as a new product, service, or business concept. In the case of a new business, this is the point at which a business plan is written. Figure 2.5 illustrates the opportunity recognition process. As shown in the figure, there is a connection between an awareness of emerging trends and the personal characteristics of the entrepreneur because the two facets of opportunity recognition are interdependent. For example, an entrepreneur with a well-established social network may be in a better position to recognize emerging technological trends than an entrepreneur with a poorly established social network. Or the awareness of an emerging technology trend, such as digitization, may prompt an entrepreneur to attend conferences or workshops to learn more about the topic, expanding the social network. Figure 2.5 The Opportunity Recognition Process OPPORTUNITY EVALUATION Alongside the identification of opportunities, entrepreneurs should work to evaluate these opportunities. In fact, a critical task of the entrepreneur is to distinguish between an idea and a true opportunity. Good opportunities have the potential to solve important and timely problems. As shown in Table 2.6, attractive opportunities also have the potential to be profitable and can be pursued under a favorable regulatory and industry context. 15  Table 2.6 Five characteristics of an attractive opportunity. ▪ Timely—a current need or problem ▪ Profitable—the customer will pay for ▪ Solvable—a problem that can be the solution and allow the enterprise solved in the near future with to profit accessible resource ▪ Context—a favorable regulatory and ▪ Important—the customer deems the industry situation problem or need important The review of opportunities will always include the evaluation of alternatives. Most entrepreneurial teams instead follow a basic five-step process, as outlined in Table 2.7. The goal is to assess these five characteristics – capabilities, novelty, resources, return, and commitment – to quickly weed out unpromising ventures and thus conserve energy and time for the promising ones. In general, however, an entrepreneur works through the five steps and eliminates the opportunities that do not pass muster. Those that do pass a quick review are worth looking into further. Table 2.7 Basic five-step process of evaluating an opportunity. 1. Capabilities: Is the venture opportunity consistent with the capabilities, knowledge, and experience of the team members? 2. Novelty: Does the product or service have significant novel, proprietary, or differentiating qualities? Does it create significant value for the customer—enough so that the customer wants the product and will pay a premium for it? 3. Resources: Can the venture team attract the necessary financial, physical, and human resources consistent with the magnitude of the venture? 4. Return: Can the product be produced at a cost so that a profit can be obtained? Is the expected return of the venture consistent with the risk of the venture? 5. Commitment: Do the entrepreneurial team members feel compelled to commit to this venture? Are they passionate about the venture? When evaluating an opportunity, the entrepreneur considers whether it fits or matches the contextual conditions, the team’s capabilities and characteristics, and the team’s ability to secure the necessary resources to initiate a new venture based on the opportunity. Figure 2.5 shows a diagram of fit or congruence that can be used to review an opportunity. A big diamond with high grades of fit are best. 16  Figure 2.5 Diagram of the fit of an opportunity, the context, the entrepreneurial team, and the resources required. Rate each factor on a scale of 0 to 100 percent. Consider an opportunity that has existed for over 100 years—the electric automobile. We will assume that a capable set of engineers is available and the entrepreneurial team has the attitudes and capabilities required. However, the team is insecure about the risky nature of the venture, given the numerous failures over the past century. We will rate the entrepreneurial team at 75 percent on the team scale. The characteristics of the context are very mixed since regulations and support for electric cars are continually changing as potential customers and government organizations adjust their assessment of the benefits and costs of these vehicles. We will rate this opportunity as only 50 percent on the context scale. Next, we turn to the opportunity, which is challenged by costs, limited life batteries, and short ranges before a recharge is required. The characteristics of the opportunity call for a rating of 75 percent on the opportunity scale. Given these ratings, most teams would be severely limited in their ability to secure the tens of millions of dollars required to launch this venture. Thus, we rate it only 50 percent on the resource scale. Clearly, this opportunity is a challenging one. At the same time, however, Tesla and other electric car companies have demonstrated that the right team backed by significant resources can make the electric automobile opportunity much more attractive. 17 TECHNIQUES FOR GENERATING IDEAS In general, entrepreneurs identify more ideas than opportunities because many ideas are typically generated to find the best way to capitalize on an opportunity. Several techniques can be used to stimulate and facilitate the generation of new ideas for products, services, and businesses. Let’s take a look at some of them. Brainstorming A common way to generate new business ideas is through brainstorming. In general, brainstorming is simply the process of generating several ideas about a specific topic. The approaches range from a person sitting down with a yellow legal pad and jotting down interesting business ideas to formal “brainstorming sessions” led by moderators that involve a group of people. In a formal brainstorming session, the leader of the group asks the participants to share their ideas. One person shares an idea, another person reacts to it, another person reacts to the reaction, and so on. A flip chart or an electronic whiteboard is typically used to record all the ideas. A productive session is freewheeling and lively. The session is not used for analysis or decision making—the ideas generated during a brainstorming session need to be filtered and analyzed, but this is done later. We show the four strict rules for conducting a formal brainstorming session in Table 2.8. Table 2.8 Rules for a Formal Brainstorming Session Rule 1 No criticism is allowed, including chuckles, raised eyebrows, or facial expressions that express skepticism or doubt. Criticism stymies creativity and inhibits the free flow of ideas. 2 Freewheeling, which is the carefree expression of ideas free from rules or restraints, is encouraged; the more ideas, the better. Even crazy or outlandish ideas may lead to a good idea or a solution to a problem. 3 The session moves quickly, and nothing is permitted to slow down its pace. For example, it is more important to capture the essence of an idea than to take the time to write it down neatly. 4 Leapfrogging is encouraged. This means using one idea as a means of jumping forward quickly to other ideas. Approaches to brainstorming are only limited by a person’s imagination. For example, to teach her students an approach to utilizing brainstorming to generate business ideas, Professor Marcene Sonneborn, an adjunct professor at the Whitman School of Management Syracuse University, uses a tool she developed called the “bug report” to help students brainstorm business ideas. She instructs her students to list 75 things that “bug” them in their everyday lives. The number 75 was chosen because it forces students to go beyond thinking about obvious things that bug them (campus parking, roommates, scraping snow off their windshields in the winter), and think more deeply. On occasions, students actually hold focus groups with their friends to brainstorm ideas and fill out their lists. Focus Groups A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issue being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas. 18  Focus groups typically involve a group of people who are familiar with a topic, are brought together to respond to questions, and shed light on an issue through the give-and-take nature of a group discussion. Focus groups usually work best as a follow-up to brainstorming, when the general idea for a business has been formulated, such as casual electronic games for adults, but further refinement of the idea is needed. Usually, focus groups are conducted by trained moderators. The moderator’s primary goals are to keep the group “focused” and to generate lively discussion. Much of the effectiveness of a focus group session depends on the moderator’s ability to ask questions and keep the discussion on track. For example, a retail establishment in which coffee is sold, such as Starbucks, might conduct a focus group consisting of 7 to 10 frequent customers and ask the group, “What is it that you don’t like about our coffee shop?” A customer may say, “You sell 1-pound bags of your specialty ground coffees for people to brew at home. That’s okay, but I often run out of the coffee in just a few days. Sometimes it’s a week before I get back to the shop to buy another bag. If you sold 3-pound or 5-pound bags, I’d actually use more coffee because I wouldn’t run out so often. I guess I could buy two or three 1-pound bags at the same time, but that gets a little pricey. I’d buy a 3- or 5-pound bag, however, if you’d discount your price a little for larger quantities.” The moderator may then ask the group, “How many people here would buy 3-pound or 5- pound bags of our coffee if they were available?” If five hands shoot up, the coffee shop may have just uncovered an idea for a new product line. Library and Internet Research A third approach to generate new business ideas is to conduct library and Internet research. A natural tendency is to think that an idea should be chosen, and the process of researching the idea should then begin. This approach is too linear. Often, the best ideas emerge when the general notion of an idea, like creating casual electronic games for adults, is merged with extensive library and Internet research, which might provide insights into the best type of casual games to create. Libraries are often an underutilized source of information for generating business ideas. The best approach to utilizing a library is to discuss your general area of interest with 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 on a topic can spark new ideas. Very powerful search engines and databases are also available through university and large public libraries, which would cost hundreds or thousands of dollars to access on your own. Internet research is also important. If you are starting from scratch, simply typing “new business ideas” into Google or Yahoo! will produce links to newspaper and magazine articles about the “hottest” and “latest” new business ideas. Although these types of articles are general in nature, they represent a starting point if you’re trying to generate new business ideas from scratch. If you have a specific idea in mind, a useful technique is to set up a Google or Yahoo! “e-mail alert” using keywords that pertain to your topic of interest. Google and Yahoo! alerts are e-mail updates of the latest Google or Yahoo! results including press releases, news articles, and blog posts based on your topic. This technique, which is available for free, will feed you a daily stream of news articles and blog postings about specific topics. Another approach is to follow business leaders and experts in the industries you’re interested in on Twitter. The best way to locate people on Twitter you might be interested in following is by typing into the search bar labeled “Who to Follow” relevant keywords preceded by the “#” sign. For example, if you’re interested in solar power, type “#solarpower” into the search bar. All the results will be people or companies who tweet about solar power topics. 19  Once an entrepreneur has an idea, it often needs to be shaped and finetuned. One way to do this, in conjunction with the suggestions made previously, is to enlist a mentor to help. Other Techniques Firms use a variety of other techniques to generate ideas. Some companies set up customer advisory boards that meet regularly to discuss needs, wants, and problems that may lead to new ideas. Other companies conduct varying forms of anthropological research, such as day-in-the-life research. Intuit, the maker of Quicken, Quickbooks, and TurboTax, practices day-in-the life research. The company routinely sends teams of testers to the homes and businesses of its users to see how its products are working and to seek insights for new product ideas. ENCOURAGING AND PROTECTING NEW IDEAS In many firms, idea generation is a haphazard process. However, entrepreneurial ventures can take certain concrete steps to build an organization that encourages and protects new ideas. Let’s see what these steps are. 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. An example of an idea bank would be a password-protected location on a firm’s intranet that is available only to qualified employees. It may have a file for ideas that are being actively contemplated and a file for inactive ideas. Other firms do not have idea banks but instead encourage employees to keep journals of their ideas. Encouraging Creativity at the Firm Level There is an important distinction between creativity and innovation. Innovation refers to the successful introduction of new outcomes by a firm. In contrast, creativity is the process of generating a novel or useful idea but does not require implementation. In other words, creativity is the raw material that goes into innovation. A team of employees may come up with a hundred legitimate creative ideas for a new product or service, but only one may eventually be implemented. Of course, it may take a hundred creative ideas to discover the one that ideally satisfies an opportunity. An employee may exhibit creativity in a number of ways, including solving a problem or taking an opportunity and using it to develop a new product or service idea. Although creativity is typically thought of as an individual attribute, it can be encouraged or discouraged at the firm level. The extent to which an organization encourages and rewards creativity affects the creative output of its employees. Table 2.9 provides a list of actions and behaviors that encourage and discourage creativity at both the organizational level and the individual supervisor level. 20  Table 2.9 Actions and Behaviors that Encourage and Discourage Creativity Organizational Inhibitors of ▪ Failing to hire creative people Level Creativity ▪ Maintaining an organizational culture that stifles people ▪ Retaining people in the same job for years, preventing them from broad and deep experiences ▪ Promoting a mentality suggesting that the best solutions to all problems are known Facilitators of ▪ Supporting and highlighting creativity’s importance in all parts Creativity of the firm ▪ Overtly rewarding those demonstrating creativity in their work ▪ Investing in resources for the purpose of helping employees become more creative ▪ Hiring people with different skills and viewpoints compared to current employees Individual Inhibitors of ▪ Being pessimistic, judgmental, and critical Supervisory Creativity ▪ Punishing people for failed ideas Level ▪ Insisting on precision and certainty early in the creative process ▪ Being inattentive, acting distant, and remaining silent when employees want to discuss new ideas Facilitators of ▪ Listening attentively for the purpose of openly acknowledging Creativity and supporting ideas early in their development ▪ Treating employees as equals for the purpose of demonstrating that status isn’t important ▪ Speculating, being open, and building on others’ ideas ▪ Protecting people who make honest mistakes and commit to learning from them Protecting Ideas from Being Lost or Stolen Intellectual property is any product of human intellect that is intangible but has value in the marketplace. It can be protected through tools such as patents, trademarks, copyrights, and trade secrets. As a rule, a mere idea or concept does not qualify for intellectual property protection; that protection comes later when the idea is translated into a more concrete form. At the opportunity recognition stage, however, there are three steps that should be taken when a potentially valuable idea is generated: Step 1 The idea should be put into a tangible form—either entered a physical idea logbook or saved on a computer disk—and dated. When using a physical logbook, be sure that it is bound so that it cannot be alleged that a page was added. Make all entries in ink and have them witnessed. If an idea has significant potential, the signature of the person who entered the idea into the logbook and the witness should be notarized. Putting the idea into tangible form is important for two reasons. First, if the idea is in concrete form, is original and useful, and is kept secret or is disclosed only in a situation where 21  compensation for its use is contemplated, the idea may qualify as a “property right” or “trade secret” and be legally protected under a variety of statutes. Second, in the case of an invention, if two inventors independently come up with essentially the same invention, the right to apply for the patent belongs to the first person who invented the product. A properly maintained idea log provides evidence of the date that the idea for the invention was first contemplated. Step 2 The idea, whether it is recorded in a physical idea logbook or saved in a computer file, should be secured. This may seem like an obvious step, but it is one that is often overlooked. The extent to which an idea should be secured depends on the circumstances. On the one hand, a firm wants new ideas to be discussed, so a certain amount of openness in the early stages of refining a business idea may be appropriate. On the other hand, if an idea has considerable potential and may be eligible for patent protection, access to the idea should be restricted. In the case of ideas stored on a computer network, access to the ideas should be at a minimum password protected. Step 3 Avoid making an inadvertent or voluntary disclosure of an idea in a way that forfeits your claim to its exclusive rights. In general, the intellectual property laws seek to protect and reward the originators of ideas as long as they are prudent and try to protect the ideas. For example, if two coworkers are chatting about an idea in an elevator in a public building and a competitor overhears the conversation, the exclusive rights to the idea are probably lost. In summary, opportunity recognition is a key part of the entrepreneurial process. As mentioned, many firms fail not because the entrepreneurs did not work hard, but because there was no real opportunity to begin with. 22