How entrepreneurs dig out the opportunities for their startups and what is the impact on their business performance

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Author Dávid Merényi Student Number 11087234

Email merenyidavid@hotmail.com Submission Date 17-06-2016

Version Final

Institution University of Amsterdam Programme MSc Business Administration

Track Entrepreneurship & Innovation Supervisor Emiel Eijdenberg

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Statement of originality

This document is written by Student Dávid Merényi who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Index of Tables and Figures

Table 1: Conceptual model ... 40

Table 2: Scales to measure the factors of opportunity identification ... 46

Table 3: Items to measure the factors of opportunity identification ... 46

Table 4: Reliability of scales ... 49

Table 5: Correlation matrix ... 50

Table 6: Linear regression: path (c) ... 51

Table 7: ANOVA: path (c) ... 51

Table 8: One-WAY ANOVA analysis results: path (a) ... 52

Table 9: One-WAY ANOVA Descriptive statistics ... 53

Table 10: Tukey post-hoc test: Significance level of differences between groups . 53 Table 11: Multiple linear regression of business performance: path (b) ... 54

Table 12: ANOVA: path (b) ... 55

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Abstract

he purpose of this thesis is to examine the causal relationship between the opportunity identification and the business performance of startups, namely “how do startups identify their business opportunities and what is the impact on their business performance?”.

The conceptual model assumes that the three types of opportunity identification - namely, recognition, discovery and creation - influence both directly and indirectly through special entrepreneurial skills and factors the business performance of startups. Current research is relevant and important for the academic literature, because it does not only test already proposed relationships deduced from existing theory, but it investigates possible new linkages and relationships between the domains of opportunity identification and business performance; and therefore, it contributes to the better understanding of the entrepreneurial activity and success. By doing so, 102 European startups have been investigated through a survey approach using web-questionnaires. The findings indicate that none of the examined predictor variables influences the entrepreneurial performance on a statistically significant level, which suggests that there is no one best way to identify business opportunities which would lead up the highest business performance, but rather every entrepreneur seeks to use and fully benefit from the resources and capabilities at hand to get out the best possible outcome. They do this, because both the different types and factors of opportunity identification seem to be useful under different problem spaces and context, which allows entrepreneurs to adapt to the environmental circumstances by applying the right tools to create new value on the market.

Key words: opportunity; opportunity identification; opportunity recognition; opportunity

discovery; opportunity creation; business performance; entrepreneurial success

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1. Introduction

he emergence of startups caused serious headaches for large existing companies, since much of the new wealth and value is created by newcomers on the market in most industries (Hamel, 1999). Incumbents struggle to defend their castle and try to battle against the flexible and opportunity-seeking new ventures which are founded to exploit changes and disruptions in the market they often generate (Freeman & Engel, 2007). Though incumbents have competitive advantage because of their gigantic resources and experience in operating, they are less effective in identifying new opportunities (Ireland et al., 2003). In contrast, small entrepreneurial ventures are very successful in developing and identifying new business opportunities, thus they threaten to overtake incumbents; moreover they force long-established and experienced firms to adapt their strategies in the hope of survival. These entrepreneurial startups are often built around technology or business model innovations (Freeman & Engel, 2007), therefore, they can easily gain ground with their extremely novel, innovative and revolutionary offerings tailored completely to the recent and upcoming market needs within the nowadays dynamic changing and digital world. Startups even tend to create demand towards their imaginary ideas by targeting latent markets and prospective customers among others on the internet on crowd funding platforms, which allow the founders of startups to raise money from the interested general public before bringing the offerings to the market (Schwienbacher & Larralde; 2010). Large companies can react only relatively slowly to the fast changing trends and suddenly emerging niche markets, because they are restricted by their existing assets and investments in the past, which anchor incumbents in their ordinary business and way of thinking (Hockerts & Wüstenhagen, 2010). This aggravates incumbents to look “out of the box” and pick a fight with the extremely successful, agile and adaptive startups.

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7 Nonetheless, the fact should be highlighted and admitted that the great majority of startups fail and only a very little share of them survives and becomes successful. New ventures have liabilities of smallness and newness, therefore their failure rate is much higher than the failure rate of their large and old competitors (Freeman & Engel, 2007). According to different online management publishers (like Forbes, The Wall Street Journal and Statistic Brain), the failure rate of startups can be realized from 70 up to 90 percent in the first five years of operating. According to Sambasivan et al (2009), only 10% of the 700.000 annually started new ventures in the US survive and become successful. So, the majority of startups remain less well known, and purely those startups become truly reputable and famous which stay alive and achieve incredible success. In addition to this, new ventures have several disadvantages vis-á-vis already existing companies: they usually have less knowledge, experience, financial and human capital, less brand presence and alliances, and their business processes are often incomplete (Freeman & Engel, 2007). Still, they are able to out-innovate and overcome their long established competitors by identifying and pursuing new and novel business opportunities. However, it is less straightforward how and where these young entrepreneurial ventures obtain their novel and often surprisingly simple business ideas from, under what context they identify opportunities and operate, and how their success or business performance is influenced by the process of opportunity identification (Lim & Xavier, 2015; Rauch et al., 2009; Alvarez & Barney, 2007; Sambasivan et al., 2009).

Therefore, the research goal of the thesis is to investigate startups about the method and way they look for and grab their business ideas or opportunities, moreover to disclose what factors and tools are applied by entrepreneurs to foster successful identification and exploitation of opportunities. Additionally, the influence of the types and factors of opportunity identification on the business performance of startups are examined in the hope of shedding light on the potential key for the entrepreneurial success. Current research is relevant and important for

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8 the academic literature, because it does not only test already proposed relationships between some factors of opportunity identification and business performance (Lim & Xavier, 2015; Sambasivan et al., 2009; Rauch et al., 2009; Wiklund et al., 2005), but it also involves additional factors to examine, and it unfolds potential new linkages between the types of opportunity identification and the business performance of startups. To my knowledge, these propositions have never been examined before, so they tend to fill gaps in the literature. Moreover, the research investigates possible pre-determinations between the types and factors of the identification process which relationships have been only hypothesized (Alvarez & Barney, 2007; Hunter, 2013; Hechavarría et al., 2015; Kirzner, 1973; Buenstorf, 2007; Shane, 2000; Eckhardt et al., 2003; Vaghely et al., 2010), but not tested for the time being. These all contribute to the expansion of literature about the field of entrepreneurship, moreover to the better understanding of the entrepreneurial opportunity identification and the success of startups.

But before jumping into the exact research question, it would be obvious to have a short look at the current state of literature and existing theory which deal with the entrepreneurial opportunity identification and serve as the basis of this thesis. There are many approaches from different authors to grab the essence of opportunity identification, however, most of them are focusing only on a particular perspective of the topic: the Neoclassical notion maintains the attribute of entrepreneurs as critical in identifying opportunities and assumes equilibrium, the Psychological view focuses on the basic nature of people, and the Austrian theory emphasizes the importance of possessing and acquiring information about opportunities in the process of opportunity identification (Kihlstrom et al., 1979; Hayek, 1945; Kirzner, 1997; Shane, 2000; Shane & Venkataraman, 2000). Some authors regard the process of opportunity identification as a discovery of existing opportunities (Shane, 2000; Eckhardt et al., 2003; Kirzner, 1997); others believe opportunities are created (Schumpeter,

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9 1934; Sarasvathy, 2001). After all, Sarasvathy et al. (2010) and Miller (2007) drawing from Knight (1921), Hayek (1945) and Buchanan & Vanberg (1991) took a bird’s eye view and elaborated three distinctive views – ‘opportunity recognition’, ‘discovery’ and ‘creation’ about entrepreneurial opportunity, which embrace a comprehensive framework related to the entrepreneurial activity of opportunity identification by focusing on the domain of market application. Accordingly, the allocative view of the opportunity recognition is used when both supply and demand are known, wherein opportunity is seen as a possibility to put resources to good use to achieve given ends. In line, the opportunity discovery is best applicable when only supply or demand is known in the market, wherein opportunity is defined as the possibility of correcting errors in the system and creating new ways of achieving given ends. Finally, the opportunity creation is essential when both supply and demand are unknown, and opportunity is considered as the possibility of creating new means and ends as well (Sarasvathy et al., 2010; Miller, 2007; Buchanan & Vanberg, 1991; Hunter, 2013). Similar to the type of grabbing the opportunity, different authors highlight different factors playing key roles in the successful identification of opportunity, namely: entrepreneurs tend to identify opportunities according to their prior knowledge which reflects unique and valuable information about the market and customer needs (Shane, 2000; Hayek, 1945; Sambasivan et al., 2009; Ardichvili et al., 2003); according to their social network which implies important resources and potential capital to identify business ideas (Lim & Xavier, 2015; Ozgen, 2003); and according to their entrepreneurial alertness which means the vigilantness to overlooked opportunities and changed conditions on the market (Kirzner, 1985). Engaging in an active and systematic search for opportunities (Ardichvili et al., 2003; Baron, 2006; Sambasivan et al., 2009) and entrepreneurial orientation (Lumpkin & Dess, 1996; Wiklund & Shepherd, 2005; Rauch et al., 2009) also seem to be important and frequently used factors in the process of exploiting opportunities. The deviations between the works of different authors and their

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10 incomplete, one-sided or even more-sided but in practice unproved approaches regarding the types and factors of opportunity identification leave a research gap in the literature which is meant to be filled with this thesis.

In alignment with the above mentioned ambitions and based on the achievements of the emphasized authors, the research questions sounds as following: “How do startups identify their business opportunities and what is the impact on their business performance?” As the

research question is quite compact, it is disassembled in the following sub-questions to make the relevance and importance of the research more obvious:

1. How do entrepreneurs actually identify business opportunities or ideas (recognition,

discovery or creation of opportunity), and does the type of opportunity identification

influence the business performance of startups?

2. Which factors (among prior knowledge, alertness, social network, active search, and

entrepreneurial orientation) are proved to play the key roles in the successful

identification of opportunities, and do they influence the business performance of

startups?

3. Does the type of opportunity identification pre-determine which factors of

identification entrepreneurs rely on?

To underpin the research goals, the research was designed in the guise of positivism philosophy in order to test hypotheses deduced from existing theory. Survey strategy was used in order to generalize the findings of the structured data which was collected by compiling and distributing a web-questionnaire to European startups. The questionnaire measured the applied type and factors of opportunity identification and gauged the business performance of startups by using validated measurements of relevant literature published by peer-reviewed journals. The responses were retrieved by asking the respondents for

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self-11 report the perceived performance and answer the questions related to the launch of their startup-ideas, habits and business rituals.

The structure of the thesis is compiled as following: in section 2, the current state of literature is discussed in details by reviewing the theory; moreover the conceptual model and the assumed hypotheses of the research are delineated as an outcome. Section 3 explains how the data was collected and which research method and design was tailored to examine the research question. In section 4, results of the data-analysis are described, and in line, the following section 5 portrays the discussion of results. Finally, in section 6, key findings and merits of the research are concluded, moreover the limitations of the study and suggestions for further research are articulated.

2. Literature review

2.1 Overview of entrepreneurship literature

n the literature review, the domains of ‘startup’ and the entrepreneurial process of ‘opportunity identification’ are discussed in order to lead up to the research question at the end. By doing so, all the upcoming terms are linked to and explained by the literature of entrepreneurship: firstly, the meaning of ‘entrepreneurial opportunity’ and ‘entrepreneurial opportunity identification’ are clarified, secondly, the ‘factors’ and ‘types’ of the entrepreneurial opportunity identification are highlighted. Meanwhile, connection between the types and factors of opportunity identification is intended to erect related to existing literature. Furthermore, this section purposes to unfold what kind of relationship has been revealed so far between the factors of opportunity identification and the business performance of entrepreneurs based on previous research. This will help to point out which contribution the

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12 current research will have to the existing theory and to outline the connection between the concepts ‘opportunity identification’ of ‘startups’ and ‘business performance’.

2.1.1 Definition of startup and entrepreneurship

To begin with the notion of ‘startup’ some barriers are faced, since its meaning is not easy to define. There are many concepts around the term but no one is which all entrepreneurs would agree on. Due to the lack of academic literature aiming to clarify the startup conception, an exact definition is missing. There are many ambitions on online publications to phrase the term startup but they also vary more or less. Their common element is that startups are determined by their age, growth, profitability and stability, but neither is an absolute determinant. Though these parameters differ extremely per companies, industries and sectors, there are no strict regulations about startups. The turn to similar concepts allows grabbing a more sophisticated meaning of startups. Startup is a new business venture created “from scratch” by entrepreneurs, and it is called de novo entry (Longenecker et al., 2016; Kolvereid et al., 2006). The emphasis is on ‘entrepreneurs’ because establishing a new venture does not count as running a startup unconditionally. So, founding a startup embraces the notion of ‘entrepreneurship’, which is defined “as a scholarly field [which] seeks to understand how opportunities to bring into existence future goods and services are discovered, created, and

exploited, by whom, and with what consequences” (Venkataraman, 1997, p. 120). Meanwhile, entrepreneurship can be conceptualized as a new combination of already existing economic means (Schumpeter, 1934), wherein innovation generated by the entrepreneur breaks up an old economic order and establishes a new one with the achievement of profit (Knudsen & Swedberg, 2009). In line, entrepreneurship is a process through which new organizations and economic activities emerge (Gartner, 1989), wherein the role of opportunity and its identification are central and crucial (Davidsson, 2015; Shane & Venkataraman, 2000; Vaghely et al., 2010). Therefore, Cunningham et al. (1991) define entrepreneurship through a

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13 reiterative process with the steps of identifying opportunities, planning, acting and reassessing. According to the Classic School of Entrepreneurship, being an entrepreneur means “undertaking a venture which has an element of risk and requires some creativity or innovativeness” (Cunningham et al., 1991, p. 50). Correspondingly, Hebert et al (1988) and Knight (1921) highlight the role of risk-taking and uncertainty as well. Additionally, Gedeon (2010) sheds light on the entrepreneurial activities of profit- and opportunity-seeking, new and innovative value creation, moreover on the exploitation of identified business opportunities under the umbrella of entrepreneurship. Combining the above mentioned theories with the central role of opportunity leads up to the definition of startup according to the thesis: it is a new entrepreneurial venture in the early and risky stage of operating, which pursues new and innovative value creation and has the ability to grow. So, startups exploit, discover and create new business opportunities in the hope of profit (Eckhardt & Shane, 2013; Vaghely et al., 2010; Hechavarría et al., 2015; Alvarez & Barney, 2007).

2.1.2 Definition of opportunity and opportunity identification

As the opportunity plays a core and inherent role in the entrepreneurial activity (Shane & Venkataraman, 2000; Davidsson, 2015), it is critical to understand what types it has and what actions the entrepreneurial opportunity identification embraces. By doing so, the following sections purpose to define the terms ‘opportunity’ and ‘opportunity identification’, moreover to describe the ‘types of opportunity’.

2.1.2.1 Definition of opportunity

Broadly, an opportunity is the possibility to satisfy a market need or address a market failure problem through creative combination of resources and new or improved supply-demand combinations (Grégoire et al., 2010) in order to create and capture value (Schumpeter, 1934; Kirzner 1973; Casson, 1982). In line, an entrepreneurial opportunity embraces ideas, beliefs

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14 and actions that empowers the generation of prospective goods and services, whereas there is neither demand nor supply available on the current market for them (Venkataraman, 1997). Accordingly, Sarasvathy et al. (2010) define entrepreneurial opportunity as a new idea or invention that could invoke economic ends, a belief that could contribute to the achievement of possible valuable ends, moreover an action which induces these ends by new economic artifacts like goods, firms or markets and institutions. In short, opportunities can be considered as “perceived means of generating economic value (i.e.: profit) that previously has not been exploited and is not currently being exploited by others” (Baron, 2006, p. 107). So, opportunity is not tangible or explicitly measurable, but rather it is the context that enables entrepreneurs to change (Shane, 2012), and it has the potential for something new outcome which is currently absent (Dimov, 2011; Dahlqvist & Wiklund, 2012). Moreover, opportunities get unformed and developed over time (Ardichvili et al., 2003). From a different perspective, opportunities are seen as situations in which entrepreneurs create new means-ends framework for possible profitable resource recombination (Shane, 2003). Opportunities are new venture ideas which are imaginary combinations of offerings, markets and resources; therefore, they are targets of entrepreneurial opportunity identification (Davidsson, 2015). In alignment with the former, Eckhardt & Shane (2003), Shane & Venkataraman (2000) and Casson (1982) perceive entrepreneurial opportunity as situations in which new offerings, raw materials, markets and methods of organizing are promoted through the creation of novel means, ends and means-ends linkages. To fuse the different approaches, three central attributes of opportunities are to highlight (Baron, 2006; Martin & Wilson, 2014; Lee & Venkataraman, 2006): they have potential economic value, so they are able to produce profit; they have newness (Gaglio, 2004), so they are considered as innovative offerings that did not exist before; and they have perceived desirability based on market needs and acceptability in the society (Wood & McKinley, 2010).

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15 2.1.2.2 Types of opportunity

In the view of Ardichvili et al (2003), opportunities have value creation capability (Schroeder et al., 1996) and capability to react on a market need. So, there are four types of opportunities differentiated whether the value creation capability is defined or not and whether the market need is identified or not. In that sense, opportunities may emerge even in the form of imprecisely-defined market need or un- or under-employed resources or capabilities; and if both of them become more precisely defined, the opportunity is getting propelled to be a business concept. Eckhardt & Shane (2003) believe there are three ways to categorize opportunities; firstly by the locus of changes that trigger the opportunity, secondly by the source of opportunity and thirdly by the initiator of change. The locus of change can be classified into five distinctive groups (Schumpeter, 1934): those that are emerged from new products or services, from new markets; from new raw materials; from new production methods and finally from new ways of organizing. Exogenous shocks and information asymmetry (Kirzner, 1973; Schumpeter, 1934; Venkataraman, 1997; Shane & Venkataraman, 2000), moreover changes in the markets of supply and demand (Eckhardt & Shane, 2003; Schumpeter, 1934; Kirzner, 1997; Drucker, 1985) are considered as sources of opportunities. The initiators of change can be categorized into specialized knowledge creating agencies outside the industrial chain (i.e.: universities, research institutes) and firms within the industrial chain (customers, suppliers) (Klevorick et al., 1995; Von Hippel, 1988; Eckhardt & Shane, 2003). From a different perspective, Longenecker et al. (2016) claim, there are three types of startup ideas which serve as opportunities to exploit: new market ideas are startup conceptions which focus on offering existing products or services not available on the given market; new technology ideas are centered around novel technologies providing new products, services or new way of production; and thirdly, new benefit ideas are aiming to provide new or improved value to the customers in the form of new product, service or better

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16 performance. A further classification of opportunities is whether they can be considered as problem-solving or as disequilibrium opportunities (Kaish & Gilad, 1991): problem-solving opportunities are assembled from knowledge and information into a consistent and predicted system; and disequilibrium opportunities are linked to an associative search which refers to connecting seemingly unrelated information components in order to discover the opportunity as a whole (Vaghely et al., 2010).

2.1.2.3 Definition of opportunity identification

After clarifying the meaning and types of opportunities, it is manifest to switch to the concept of opportunity identification. The term of opportunity identification is usually used interchangeably with the domains of opportunity recognition, discovery and perception in the literature. To define the entrepreneurial activity of opportunity identification, a couple of quotations from different authors are hereby deployed:

“Entrepreneurial discovery is the perception of a new means-ends framework to incorporate information, incompletely or partially neglected by prices, that has the potential to be

incorporated in prices and thereby efficiently guide the resource allocation decisions of

others.” (Eckhardt & Shane, 2003, p. 338)

“In essence, it is a discovery of an idea to create new businesses and the search of information regarding market and technological possibilities.” (Lim & Xavier, 2015, p. 106) Opportunity identification is the activity in which entrepreneurs identify new solutions to market and customer needs in existing information, and visualize new offerings that are non-existent for that time (Busenitz, 1996; Baron, 2006). If opportunity is defined as a perceived resource of generating economic value and profit that previously has not been exploited by others, then “opportunity recognition can, in turn, be defined as the cognitive process (or processes) through which individuals conclude that they have identified an opportunity. It is

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17 important to note […] that opportunity recognition is only the initial step in a continuing process, and is distinct both from detailed evaluation of the feasibility and potential economic

value of identified opportunities and from active steps to develop them through new

ventures.” (Baron, 2006, p. 107)

So, opportunity identification is a fundamental domain in the field of entrepreneurship since it is the catalyst for the entrepreneurial process (Dyer et al., 2008; Shane, 2003; Kaish & Gilad, 1991). From the perspective of Dyer et al. (2008), the success of opportunity identification lies in the frequent questioning, experimenting, exploring and networking of innovative entrepreneurs with individuals from different background or perspective, moreover in engaging in active observation and associational thinking. The latter is described with the term ‘pattern recognition’ in the literature and it means essentially the identification of links between seemingly unrelated events, changes and trends, and the compilation of them to a pattern (Howard-Jones & Murray, 2003; Baron, 2006). Reflecting to entrepreneurs, they perceive apparently disconnected changes and trends, and connect these dots to a pattern (Matlin & Foley, 1997) by recognizing a possible linkage between them, which serve as fundament of their opportunity identification. This is possible because opportunities may exist for a long time before getting discovered (Kirzner, 1973) and deployed to a business concept. According to Baron (2006) and Solso (1999), opportunity identification does not happen in a single step, but in many repeated steps to dig out these patterns. This is because it is unlikely that entrepreneurs would perceive all concerns related to an opportunity at the first sight. But rather, they discover some of them and broaden their knowledge about this opportunity over time with repeated steps of experimentation and continuous development until it can be considered as a business concept.

Ardichvili et al. (2003) and Sanz-Velasco (2006) elaborate more precisely on the formation of business concept starting from a single opportunity. The process consists of three related

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18 concepts which in practice often overlap, interact and also confound with each other: opportunity development, opportunity recognition and opportunity evaluation (Bhave, 1994; de Koning, 1999; Ardichvili et al., 2003). The continuous and iterative notion of opportunity development denotes the idea that opportunities are simple concepts in their initial stage and they need to be more and more developed as a learning process by entrepreneurs in order to be exploited and to create value (Sanz-Velasco, 2006; Ardichvili et al., 2003). In line, the notion of opportunity evaluation indicates the entrepreneurial activity of re-evaluating opportunities at each stage of development based on their constraints and limitations until they turn into business models (Timmons et al., 1987; Ardichvili et al., 2003). Although on the one hand, an opportunity should be developed before it could be perceived, recognized or discovered, on the other hand it would be obvious that an opportunity can be developed only after being identified. These seem to be contradictory statements, but they lie in the fact, that some opportunities are discovered and some created (Alvarez & Barney, 2007; Hechavarría et al., 2015; Vaghely et al., 2010). Moreover, an opportunity is meaningless until the perceiver, discoverer or creator does not act upon the real context around it (Sarasvathy et al., 2010). Accordingly, Buenstorf (2007) and Sarasvathy et al (2010) claim that entrepreneurial opportunities may need to be created before entrepreneurs can discover or recognize them. Although it would be an extremely interesting research to investigate how opportunities are developed and evaluated in order to transform them into full-blown business models, the research focuses only on the identification process of entrepreneurs related to opportunities.

2.2 Factors of opportunity identification

There is a wide range of literature which highlights key factors influencing the process of opportunity identification. Different aspects from different authors exist, which in some cases overlap and in other cases they are conflicting. They embrace various components which are

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19 useful in the successful process of grabbing opportunities. Ardichvili et al (2003) believe that the most influencing factors of the opportunity identification are entrepreneurial alertness, information asymmetry and prior knowledge, discovery versus purposeful search, moreover social networks and personal traits of entrepreneurs. In line, Baron (2006) claims that the key factors would be engaging in an active search for opportunities, alertness to opportunities and prior knowledge of an industry or market. However, the author also puts an emphasis on pattern recognition and claims it as an important tool in connecting pertinent trends. Correspondingly, Sambasivan et al (2009) discuss the contribution of personal traits and skills, prior knowledge, alertness and active search to the successful identification of opportunities. These factors are also investigated by the framework of Lim & Xavier (2015) which examines the potential effect of them on the opportunity identification of entrepreneurs, though it highlights the importance of entrepreneurial alertness, social network and prior knowledge. On the other hand, Rauch et al (2009) and Wiklund & Shepherd (2005) declare that entrepreneurial orientation enables firms to find and discover opportunities that can lead up to competitive advantage and differentiation vis-à-vis competitors.

To understand the factors and their roles in the success of opportunity identification, the five major and most frequently used ones are discussed in the next sections in detail, and they are also integrated into the conceptual model of the thesis. These are ‘entrepreneurial alertness’, ‘prior knowledge’, ‘social network’, ‘active search’ for opportunities and ‘entrepreneurial orientation’.

2.2.1 Entrepreneurial alertness

‘Entrepreneurial alertness’ can be considered as a unique preparedness of entrepreneurs to identify opportunities without actively searching for them (Gilad et al., 1989; Kaish & Gilad, 1991; Baron, 2006). It is also defined as a combination of experience, expertise and

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20 absorptive capacity (Shane, 2000; Eckhardt & Shane, 2003). The notion of alertness was firstly introduced by Kirzner (1973) to describe the entrepreneurial opportunity identification process, and it was defined as the vigilantness to overlooked opportunities and changed conditions or circumstances (Kirzner, 1985). Similarly, Ray & Cardozo (1996) believe that enhanced alertness to information is the prerequisite of any opportunity recognition. The authors named it as entrepreneurial awareness and determined as “a propensity to notice and be sensitive to information about objects, incidents, and patterns of behavior in the

environment, with special sensitivity to maker and user problems, unmet needs and interests,

and novel combination of resources” (Ray & Cardozo, 1996; Ardichvili et al., 2003, p. 113). These definitions surmise that alert individuals can notice opportunities even without actively seeking them (Ucbasaran et al., 2008; Timmons, 1999); due to their alertness they are engaged in a so called informal and unsystematic passive search (Baron, 2006; Ardichvili et al., 2003). Correspondingly, Tang et al (2012) define alertness as embodying three particular components: scanning and searching for information (Alvarez & Busenitz, 2001), linking hitherto disconnected information (Kirzner, 1999) and evaluation on the existence of viable entrepreneurial opportunities (McMullen & Shepherd, 2006). In that sense, alertness can be also linked to the entrepreneurial pattern recognition, because alertness helps to recognize possible connections between seemingly disconnected trends and events, and so, it allows perceiving new business opportunities (Dyer et al., 2008; Howard-Jones & Murray, 2003; Baron, 2006). Creativity, intelligence and optimism are playing crucial roles in the alertness of entrepreneurs (Shane, 2003; Krueger & Brazeal, 1994; Baron, 2006; Sambasivan et al., 2009), and these abilities combined together allow entrepreneurs to perceive customer needs based on existing information, to develop solution to them and invent novel products or services (Baron, 2006). In addition to this, individuals with higher level of alertness are more

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21 able to think “out of the box” (Ozgen & Baron, 2007), and so, they are more likely to identify opportunities (Lim & Xavier, 2015; Park, 2005; Lehner & Kaniskas, 2012).

2.2.2 Prior knowledge

According to the Austrian School of entrepreneurship - which will be explained in more detail later - , not all opportunities are obvious to all individuals, because not all people are aware of the same information and knowledge simultaneously (Venkataraman, 1997; Kirzner, 1997). Therefore, some individuals have unique information which allows them to identify certain opportunities that other actors cannot see (Hayek, 1945; Shane, 2000). In that sense, ‘prior knowledge’ of individuals can provoke the discovery of opportunities, because it helps to discern the value of the new information and knowledge; moreover entrepreneurs tend to discover only those opportunities which are corresponding to their prior knowledge (Shane, 2000; Ardichvili et al., 2003). This is triggered by a “knowledge corridor” resulted by the prior knowledge of individuals which constrains their attention and impulsiveness to discover given opportunities but not others (Hayek, 1945; Ronstadt, 1988; Venkataraman, 1997; Shane, 2000). Correspondingly, the “knowledge corridor principle explains that once entrepreneurs found their companies, they set off on a journey down a corridor through

which windows of opportunities opens around them. If they had not entered the corridor they

would not be able to see the opportunity” (Lim & Xavier, 2015, p. 108). Prior knowledge can be accumulated during work experience, education, life experience and also related to special interests of an entrepreneur (Shane & Venkataraman, 2000; Lim & Xavier, 2015; Ardichvili et al., 2003); and it can occur in the form of tacit and explicit knowledge (Lim & Xavier, 2015). According to Shane (2000), prior knowledge embraces three major dimensions which are crucial in the successful discovery of opportunities. These are prior knowledge of markets, prior knowledge of how to serve a market and prior knowledge about customer needs and problems (Ardichvili et al., 2003; Sambasivan et al., 2009). Accordingly, Shane (2000)

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22 believes prior knowledge about customer needs raises the likelihood that entrepreneurs provide innovative solutions to these needs (Baron, 2006), namely that they identify valuable and potentially profitable business opportunities (Kaish & Gilad, 1991; McKelvie & Wiklund, 2004) to solve customer problems. In alignment with these notions, prior knowledge combined with entrepreneurial alertness enables to discover innovative ways to satisfy customer needs and to develop innovations even more effectively (Sambasivan et al., 2009). Lim & Xavier (2015) corroborate these statements: they claim that prior knowledge increases the likelihood of opportunity recognition by providing an absorptive capacity to the entrepreneurs that eases the acquisition of new information about markets, technologies and production methods, moreover by affecting the ability of entrepreneurs to perceive problems and solutions based on their existing knowledge (Yu, 2009).

2.2.3 Social network

Entrepreneurs do not act in vacuum, but rather their activities are embedded in a ‘social network’ which implies important resources and potential capital to identify opportunities, since they can obtain access to knowledge, assistance, information, encouragement and affirmation through their network (Lim & Xavier, 2015; Ozgen, 2003; Singh, 1998). Social network is often considered as the most important source of novel ideas and information, since the combination of social capital and networks enables efficient information exchange and additional knowledge generation (Nahapiet & Ghoshal, 1998; Lim & Xavier, 2015). Opportunities depend in many cases on the social networks which they are buried in; therefore, individuals with broad networks are more likely to identify business opportunities than others (Arenius & De Clercq, 2005). Social networks can be classified into two clusters among the dimension of strength and closeness related the network-relations: networks with strong and weak ties (Granovetter, 1973; Lim & Xavier, 2015). According to Granovetter, strong-tie networks assume strong and thorough interaction and relation between the network

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23 members like family members, friends or relatives. In the opposite, weak-tie networks assume casual acquaintance between the members like suppliers, customers, partners and vendors (Granovetter, 1973). It is claimed that the casual acquaintance within weak-tie networks serves in more cases as a distributor of unique and valuable information than in strong-tie networks (Arenius & De Clercq, 2005; Granovetter, 1973), since individuals possess more weak ties than strong ones (Ardichvili et al., 2003). Accordingly, weak-tie networks trigger information exchange more efficiently. Corresponding with the previous statements, Lim & Xavier (2015) declare that social network is with crucial importance in the process of entrepreneurial opportunity identification, because it contributes to the disclosure of innovative business ideas by expanding an individual’s access to information and insights about opportunities (Singh et al., 1999). Thus, entrepreneurs with wide social network can recognize more opportunities than disconnected ones (Baron, 2006; Ardichvili et al., 2003; Hills et al., 1997; Ozgen & Baron, 2007).

2.2.4 Active search for opportunities

In contrast to alertness which involves a passive and unsystematic search, the term of ‘active search’ refers to a much more explicit, formal, systematic, alive and dynamic pursuit of opportunities (Ardichvili et al., 2003; Baron, 2006). Some authors cast doubt on the efficiency of active search and claim that entrepreneurs do not look for opportunities but instead, they recognize them accidentally when opportunities emerge (Koller, 1988; Teach at al., 1989; Ardichvili et al., 2003). Even so, it is believed that active and systematic search for available opportunities foregoes the entrepreneurial opportunity identification, and so, it is important factor of it (Fiet et al., 2004; Baron, 2006; Sambasivan et al., 2009). According to Hills & Shrader (1998), active search for information based on personal networks and specific publications contributes more likely to successful identification of opportunities. In other words, entrepreneurs should constantly engage in active searching and deciphering

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24 information about opportunities in order to gain perpetual prosperity (Sambasivan et al., 2009). Baron (2006) declares that opportunity identification is strongly affected by the active search for opportunities, since active search is an organic part of pattern recognition from two perspectives: firstly, entrepreneurs identify key trends, events and changes in the market by actively engaging in scanning; and secondly, they can recognize connections between seemingly unrelated happenings. Sambasivan et al (2009) associated numerous personal traits with the opportunity identification of entrepreneurs, and they claim that people who are highly motivated to obtain achievements and success, are more likely to engage in active search for opportunities. In addition to this, entrepreneurs with comprehensive search and scanning ability can obtain more extensive information and knowledge base which will contribute to expert performance and to intensified alertness to identify opportunities (Ericsson et al., 1993; Tang et al., 2012). In that sense, active search, prior knowledge and alertness are interrelated, and they can amplify each other (Baron, 2006).

2.2.5 Entrepreneurial orientation

Entrepreneurial orientation (EO) is defined as “a firm-level predisposition to engage in behaviors that lead to change in the organization or marketplace” (Voss & Voss &

Moorman, 2005, p. 1134). From a different perspective, EO is considered as methods, processes and decision-making of firms which address entrepreneurial activities (Lumpkin & Dess, 1996), and as a form of strategic orientation (Wiklund & Shepherd, 2005). The literature often highlights only three core dimensions of EO, namely risk-taking, innovativeness and proactiveness (Covin & Slevin, 1989; Kreizer et al., 2002; Hughes & Morgan, 2007; Wiklund & Shepherd, 2005). However, in the view of Lumpkin & Dess (1996) two additional dimensions of EO need to be added in order to fully understand the term: these additional dimensions are autonomy and competitive aggressiveness. Risk-taking refers to the undertaking of risk and uncertainty which are embedded in the core operation of

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25 the business, and is reflected by the engagement in uncertain processes, ideas and ends for which the cost of defeat would be significant (Covin & Wales, 2012; Hughes & Morgan, 2007). Innovativeness reflects the firm’s proclivity to explore, experiment, use creativity and engage in R&D in order to develop new products, services, technologies, new methods of production and business strategies (Rauch et al., 2009; Hughes & Morgan, 2007; Covin & Wales, 2012; Lumpkin & Dess, 1996). Proactiveness means the tendency to forecast future circumstances and changes, to commit to forward-looking actions which aim to react on opportunities and to pre-empt the reaction of other actors (Covin & Wales, 2012; Lumpkin & Dess, 1996). On the other hand, competitive aggressiveness reflects the degree to which firms compete with their competitors or try to master their rivals (Rauch et al., 2009); and autonomy denominates the degree of sovereignty and independence given to individuals within the organization to identify and act on or implement business ideas (Hughes & Morgan, 2007). High level of innovativeness is useful for companies to identify and explore new and differentiated business possibilities (Cho & Pucik, 2005; Hughes & Morgan, 2007). Proactiveness helps to forecast the prospective needs of markets and customers, and so, it contributes to the creation of first-mover advantage and to the capitalization of occurring opportunities (Lumpkin & Dess, 1996). Besides, risk-taking enables entrepreneurs to engage in and allocate resources to projects whose outcome is uncertain (Miller & Friesen, 1982; Knight, 1921; Wiklund & Shepherd, 2005), what can lead up to the identification of valuable and novel business opportunities. So, EO does not only contribute to the successful opportunity recognition of ventures, but it has the potential to influence the overall business performance (Rauch et al., 2009; Hughes & Morgan, 2007; Zahra & Covin, 1995).

To recap, it can be stated that different authors have different perspectives about the importance of factors in the process of opportunity identification. Therefore, it is useful to

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26 have a bird’s eye view about the topic and examine a wide range of factors - instead of particular ones – to discover their actual contribution to the entrepreneurial process.

2.3 Types of opportunity identification

After reviewing the theory about the factors of opportunity identification, it is useful to articulate the different ways entrepreneurs grasp an opportunity. In the literature, there are distinctive approaches to perceive the opportunity identification of entrepreneurs; however, most of them elaborate only a particular perspective about the entrepreneurial activity. Since it seems that there is more than only one way for entrepreneurs to dig out the opportunities for their business concept, it is obvious to look at the process from a comprehensive view and highlight the distinct types of opportunity identification. Hereby, it is important to stress, that the terms of opportunity discovery, recognition and perception were used up to this point in the thesis as interchangeable definitions for ‘opportunity identification’ according to their original usage of authors; however, henceforward it will be significant and relevant which term will be used for the given entrepreneurial activities. To make it clear, the umbrella term of all activities aiming to discover, seize, perceive, create and recognize (etc.) entrepreneurial opportunities is the concept of ‘opportunity identification’.

To have a deeper understanding about the identification of opportunities, it is proposed to have a look at three different views about the nature of entrepreneurial process: the Neoclassical, the Psychological and Austrian theories (Casson, 1982; Baumol, 2005; Lowrey, 2003; McClelland, 1961; Kirzner, 1997; Hayek, 1945; Shane, 2000). The Neoclassical perspective of entrepreneurship proposes equilibrium theories which “assume that markets are composed of maximizing agents whose collective decisions about prices clear markets. In

the equilibrium framework, no one can discover a misalignment that would generate an

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27 and all transactions perfectly coordinated” (Shane, 2000, p. 449). The presence of equilibrium (Khilstrom & Laffont, 1979) does not allow people to have more information about opportunities than others, so no one is able to recognize opportunities more efficiently (Shane, 2000). Consequently, becoming an entrepreneur who aims to exploit opportunities does not depend on the information about opportunities - since everyone owns the information and so, is able to recognize the opportunities -, but on the attributes of people, namely who is able to tolerate uncertainty (Kihlstrom & Laffont, 1979; Shane, 2000). According to the Psychological theory, the basic nature of people (risk-taking, ambiguity-tolerance, need for achievement), rather than cognition about opportunities ascertains who will exploit an opportunity (Shane & Venkataraman, 2000; McClelland, 1961). Whereas, this process depends notably on the ability and willingness of people to act, for example search techniques and scanning behavior (Shane, 2000). Finally, the Austrian School of entrepreneurship claims by denying equilibrium in the market (Kirzner, 1997), that actors of the market may possess different and unique information - without engaging in active search for opportunities -, which allows them to identify certain opportunities that other actors cannot see (Hayek, 1945; Venkataraman, 1997; Shane, 2000). This leads up to potential profitable situations for those people who act and react on these changes and misalignments in the market. In contrast with the Neoclassical and Psychological approach of entrepreneurship, the Austrian view assumes that the possession of information depending on particular factors determines who will become an entrepreneur and not the personal characteristics of the individual (Casson, 1982; Shane, 2000).

The approach of Ardichvili et al (2003) is much more comprehensive than the concepts of the above mentioned particular theories about the entrepreneurial opportunity, since the authors believe the process of opportunity identification refers not only to a successful recognition of opportunities, but to perception, discovery and creation of them (De Koning, 1999; Singh et

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28 al., 1999). The separation of these processes sounds useful, since they embark the entrepreneurial activity of opportunity identification in different paths. The term ‘perception’ refers to sensing or perceiving market needs and/or underemployed resources, the term of ‘discovery’ means the exploration of a match between market needs and resources, and lastly, ‘creation’ embraces establishing a new fit between heretofore unlinked needs and resources in order to identify business ideas (Hills, 1995; De Koning, 1999; Ardichvili et al., 2003). Ardichvili et al (2003) claim that the heterogeneity of individuals related to their genetic makeup, background and experience is the reason for differences in the sensitivity to perceive opportunities, so the notion of perception is compatible with the Psychological theory of entrepreneurship (Shane & Venkataraman, 2000; McClelland, 1961; Shane, 2000). On the other hand, the concept of discovery can be aligned with the Austrian School of entrepreneurship, since the authors refer to Kirzner (1997)’s work which proposes that entrepreneurs are marketing not only products but also their knowledge and ability to combine resources, which unfolds the paths to the entrepreneurial discovery of opportunities. The creation of new fits between needs and resources, however, exceeds both perception and discovery, because it implies recombining means in the hope of new value capture and creation by often resulting radical and disruptive innovations (Ardichvili et al., 2003). This notion is underpinned by the work of Schumpeter (1934) as well.

Sarasvathy et al (2010) elaborated three clusters of opportunity identification similar to Ardichvili et al (2003), nevertheless they approached the opportunity identification from the perspective of market pull and technology push related to the demand and supply sides of markets. According to Sarasvathy et al. (2010), the three views of entrepreneurial opportunity are well separated types of opportunity identification; however, they overlap in some cases in practice. To clear the path for the three views of entrepreneurial opportunity, it is useful to distinguish the three types of uncertainty about the future (Knight, 1921). The first type of

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29 uncertainty implies a future whose distribution is already existing and generally known; all possible ends have the same calculable chance to be realized, so risk can be mitigated through diversification (Cohen & Winn, 2007; Hunter, 2013; Knight, 1921). The second type of uncertainty refers to a future which distribution already exists but it is hidden ex ante, so it needs to be unfolded through adaptation and experimentation over time (Hunter, 2013; Sarasvathy et al., 2010). The distribution of the third type of uncertainty is neither knowable nor existing (Keynes, 1936; Knight, 1921). The risk of this true uncertainty can be managed by focusing on controllable aspects of an unpredictable future and by choosing the best possible outcome that can be created with given resources (Knight, 1921; Sarasvathy et al., 2010; Sarasvathy, 2001; Hunter, 2013). Interdependent with the three types of uncertainty, Sarasvathy et al. (2010) and Miller (2007) by drawing from the antecedent works of Hayek (1945), Buchanan & Vanberg (1991) and Knight (1921) distinguished three views how entrepreneurs identify opportunities: ‘opportunity recognition’, ‘opportunity discovery’ and ‘opportunity creation’. ‘Recognition’ refers to the type of opportunity identification which approaches a market whose sources of demand and supply both exist, so the opportunity lies in “just” recognizing and linking those (Sarasvathy et al., 2010). In other words, “recognition involves matching known products with existing demand” (Miller, 2007, p. 60-61). In that

sense, recognition of opportunities targets the exploitation of existing markets. The term allocative view is used for the opportunity recognition and it grasps opportunity as the potential to utilize and redistribute resources more optimally (Cohen & Winn, 2007; Dantec, 2008; Sarasvathy et al., 2010). So, allocative opportunities occur when there are mismatches between supply and demand on the market (Hunter, 2013). Since the allocative view assumes perfectly competitive market, such an opportunity (e.g. arbitrage) resulted by market imperfection and inefficiency (Cohen & Winn, 2007) occurs only for a short time and it is available merely for short-term profit (Sarasvathy et al., 2010). The risk of opportunity

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30 recognition can be mitigated through diversification of resource-utilization and offerings, as it is linked to the first type of uncertainty (Knight, 1921; Sarasvathy et al., 2010; Hunter, 2013). On the other hand, ‘discovery’ type of identification is associated with the exploration of existing and latent markets, because in this concept only one side of the market exist, namely demand or supply. So, entrepreneurs need to explore and discover the non-existent side in order to disclose a fit between the two sides and create value (Sarasvathy et al., 2010). The discovery view of opportunities assumes that opportunities pre-exist and they are waiting to be discovered and exploited (Alvarez & Barney, 2007). Prior knowledge, social network and entrepreneurial alertness play crucial roles in the discovery view to obtain access to new information, to absorb and link them together in order to form expectations about the market and discover opportunities (Shane, 2000; Kirzner, 1997; Baron, 2006; Sarasvathy et al., 2010). In that sense, the discovery of opportunities is embedded in and explained by the Austrian School of entrepreneurship (Buenstorf, 2007). The discovery of opportunities includes a risk whose existence is already known but its distribution is unknown ex ante, so the uncertainty can be disclosed by trial, experimentation and searching for knowledge and information over time (Alvarez & Barney, 2010; Hechavarría & Welter, 2015; Knight, 1921, Hunter, 2013; Sarasvathy et al., 2010; Cohen & Winn, 2007). Accordingly, Sarasvathy et al (2010) illustrate the discovery of opportunities with the examples of cures of diseases, where the demand was existent and the supply had to be discovered; and vice versa with the examples of once new technologies, such as PC. As opposed to recognition which has an inherent static and allocative view about opportunities, the discovery process view depicts a much more active and dynamic character of opportunities. In contrast with ‘recognition’ and ‘discovery’, ‘opportunity creation’ launches from a completely non-existent market, since it is used when neither demand nor supply side of the market exists (Sarasvathy et al., 2010). So, both of them need to be created in order to invoke an opportunity for exploitation (Miller,

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31 2007). Therefore, the creative view of opportunity identification denotes establishing new markets and assumes that opportunities can only truly identified ex-post (Buchanan & Vanberg, 1991; Cohen & Winn, 2007). The essence of the creative view lies in the notion that a person’s purpose and intuitive thinking are results of the creativity, imagination and interactive human actions (Hunter, 2013) - instead of rational ones - with heterogeneous expectations and preferences aiming to figure and establish a better world (Sarasvathy et al., 2010). Accordingly, problems and solutions are not contingent upon a predetermined means-ends framework, but they are linked to options enabled by temporary contingencies and nondeterministic human choices (March, 1994; Miller, 2007). In that sense, the creative view of opportunity is in alignment with the entrepreneurial activity of effectuation (Miller, 2007; Hunter, 2013) which is used to bring new firms and markets into existence. Shortly, effectuation means the creation of something new without any pre-determined goal by utilizing the given means and choosing the best available possible effect among effects which can be achieved through that given means (Sarasvathy, 2001; Miller, 2007; Chandler et al., 2011). So, opportunities do not pre-exist to be recognized or discovered, but they are created to generate and capture value (Buenstorf, 2007; Schumpeter, 1934; Miller, 2007; Sarasvathy et al., 2010). The notion of effectuation assumes a dynamic, nonlinear and changing environment and interaction from the side of entrepreneurs who focus on controlling an unknowable, unpredictable and uncertain future instead of anticipating it (Sarasvathy, 2001; Chandler et al., 2011). Therefore, identifying an opportunity through the creative view means dealing with the third, true type of uncertainty whose existence and distribution are unknown (Knight, 1921; Alvarez & Barney, 2010; Cohen & Winn, 2007; Sarasvathy et al., 2010). As opposed to the above mentioned three views of entrepreneurial opportunity, Vaghely & Julien (2010), Alvarez & Barney (2007) and Hechavarría & Welter (2015) believe that there are only two ways to identify opportunities. According to Vaghely & Julien (2010), the first

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32 way is called cognitivist view and it integrates the opportunity recognition and discovery perspectives; the second one reflects the social constructivism with the embracement of opportunity creation. However, Alvarez & Barney (2007) and Hechavarría & Welter (2015) completely omit the allocative view of opportunity in their frameworks: they believe opportunities can be either discovered (found) or created (formed). In that sense, in the discovery view opportunities emerge from changes in the market, technology and customer needs independently from the actions of entrepreneurs (McKelvey, 1999; Alvarez & Barney, 2007; Hechavarría & Welter, 2015). On the contrary, created or formed opportunities do not exist independently from the entrepreneurs, but they are initiated by them: entrepreneurs are engaging in an iterative process by acting upon their beliefs, and examining the reactions and feedbacks of the market or environment (Aldrich & Kenworthy, 1999; Alvarez & Barney, 2007; Alvarez et al., 2010; Hechavarría & Welter, 2015; Wood & McKinley, 2010).

2.4 Opportunity identification and business performance

Due to the proposed integral nature and great importance of opportunity in the entrepreneurial activity (Venkataraman, 1997; Cunningham, 1991; Shane, 2003; Baron, 2006; Dyer et al., 2008), the process of opportunity identification has likely a significant effect on the efficiency of implementing and commercializing ideas. This notion is underpinned by Lim & Xavier (2015) with their research, wherein they elaborated a framework about the relationship between opportunity identification factors and business performance. “The field of entrepreneurship is about the importance of recognizing and acting upon opportunities and

hence is a key step in the entrepreneurial process” (Lim & Xavier, 2015, p. 109). Therefore, the authors believe that opportunity identification skills such as prior knowledge, social network and alertness of entrepreneurs are positively related to the performance of startups. Sambasivan et al (2009) confirm the idea that opportunity recognition skills influence the business performance, moreover Chandler & Jansen (1992) believe that effective performance

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33 requires entrepreneurs to be able to identify business opportunities. Accordingly, strong opportunity identification skills contribute to the development of innovative and value-added solutions tailored to customer needs and problems, which ultimately leads to increased customer satisfaction and so, to higher business performance reflected in enhanced sales volume, venture profit and growth (Lim & Xavier, 2015; Sambasivan et al., 2009). Ardichvili et al (2003) also corroborate the notion that prior knowledge of market and customers contributes to the success of opportunity identification and therefore, to the success of ventures as well. Rauch et al (2009) and Wiklund et al (2005) approach the topic by pointing out that companies with EO perform better regarding financial and non-financial measures, since high EO provides entrepreneurs to identify new opportunities that can result in differentiation and competitive advantage of ventures. However, it is stated that EO has a more positive effect on business performance, if firms are operating not in a benign, but rather in a hostile environment (Wiklund et al., 2005; Covin & Slevin, 1989). In alignment, Rauch et al (2009) believe that firms have to permanently look for new opportunities, because the profitability of existing operation is uncertain in an agile changing environment with shortened product and business model lifecycles. High level of innovation allows firms to pursue new business opportunities, proactiveness enables them to create first-mover advantage by anticipating market needs and capitalizing on emerging opportunities, and risk-taking shows that firms can deviate from known and proved concepts by thinking “out of the box” in order to capture and create new wealth (Wiklund et al., 2005; Lumpkin & Dess, 1996). Innovative opportunity identification enables companies to create and introduce new products, services, technologies, markets and ways of production, which can generate remarkable economic performance and profit (Schumpeter, 1934; Wiklund et al., 2005). In other words, firms with enhanced EO can target high-end markets with higher margins which contribute to the financial gain of ventures (Rauch et al., 2009).

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34 Therefore, it is quite obvious that the success of opportunity identification influences the business performance of entrepreneurs. Nevertheless, not all the relationships between opportunity identification and business performance are tested (Sambasivan et al., 2009). Accordingly, it is unclear and unexamined yet whether the type of opportunity identification (recognition, discovery and creation) has an effect on the business performance of startups, and which type seems to be the most efficient in today’s dynamic changing world which is overwhelmed with useful and also with abundant information. Dyer et al (2008) believe that innovative entrepreneurs are more likely to engage in the discovery and creation form of opportunity identification, because innovative entrepreneurs aim to bring unique and novel ideas or concepts to the market.

Therefore, Hypothesis 1 states:

Startups following the opportunity discovery or creation perform better than those which are

following the opportunity recognition.

Even so, the conceptual model insists on all the three views of entrepreneurial opportunity identification of Sarasvathy et al (2010), since the majority of startups do not consider their business idea as extraordinary or unusual, but rather they think their success originates from the extraordinary implementation of an usual idea (Bhide, 2000; Dyer et al., 2008). In that sense, startups are likely to use opportunity recognition as well to grab their business ideas. Additionally, by referring to the propositions of the above mentioned authors regarding the nexus between performance and opportunity identification, Hypothesis 2.a claims:

There is a positive relationship between the level of opportunity identification factors / skills

How entrepreneurs dig out the opportunities for their startups and what is the impact on their business performance

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Statement of originality

TABLE OF CONTENTS

Index of Tables and Figures

Abstract

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1. Introduction

2. Literature review

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