1. Prior Experience
Several studies show that prior experience in an industry helps entrepreneurs recognize business opportunities. For example, evidence over time about the founders of firms appearing on the Inc. 500 list shows that well over 40 percent of those studied got the idea for their new businesses while working as employees for companies in the same industries. This finding is consistent with the findings of research studies the National Federation of Independent Businesses' group has completed over time. There are several explanations for these findings. 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.
2. Cognitive Factors
Opportunity recognition may be an innate skill or a cognitive process. There are some who think 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. 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.
The research findings on entrepreneurial alertness are mixed. Some researchers conclude that alertness goes beyond noticing things and involves a more purposeful effort. For example, one scholar believes that the crucial difference between opportunity finders (i.e., entrepreneurs) and nonfinders is their relative assessments of the marketplace. In other words, entrepreneurs may be better than others at sizing up the marketplace and inferring the likely implications.
3. 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. This exposure can lead to new business starts. Research results over time consistently suggest that somewhere between 40 percent and 50 percent of those who start businesses got their ideas through social contacts. In a related study, the differences between solo entrepreneurs (those who identified their business ideas on their own) and network entrepreneurs (those who identified their ideas through social contacts) were examined. The researchers found that network entrepreneurs identified significantly more opportunities than solo entrepreneurs but were less likely to describe themselves as being particularly alert or creative.
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. Relationships with other people are called “ties.” We all have ties. Strong-tie relationships 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 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.