Business Planning and Enterprising Management

Individual assignment

Word account: 1940
Student name: Chen Yang ( Clarence)
Student number: 22039659
Module leaders: Mike Cudzich-Madry, Dr Andrew Hird
Submit date: 14 November

The recognition of new opportunity is the significant unique behavior for entrepreneurs or managers to ascertain a new business. More especially, Haugh’s (2005) points out that “opportunity recognition is at the very heart of venture creation; some scholars regard opportunity recognition as the basis of entrepreneurship.” It means opportunity recognition is one of the ability to evaluate how entrepreneurs successful in venture creation. Also, opportunity recognition means the perceiving possibility of starting a new business and leading to considerable profit. There are two types opportunity recognition ‘internal perspective’ and ‘external perspective’. Internal perspective means entrepreneurs should make sure that problems and needs identified before make a decision which is risky, but external perspective denotes they should make the decision to start a venture precedes opportunity recognition. Most of entrepreneurs looked at three methods of discovery opportunity recognition ‘active searching’, fortuitous discovery’ and ‘opportunity creation’. However, social capital and human capital might be affected on opportunity recognition when entrepreneur creates a new business. This paper is going to discuss how human capital and social capital influence on each method of discovery opportunity and how those three methods help entrepreneurs to recognize valuable opportunities.

The first significant theoretical model of opportunity identification is an active search, and those people who are advocating the active search method propose that individuals recognize opportunity through purposeful, deliberate, conscious search. For instance, Drucker (1998:96) illustrates that “innovation is the specific function of entrepreneurship, like in an existing business, public service institution, or a new venture started by a lone individual in the family kitchen and most innovations result from a conscious, purposeful search for innovation opportunity.” Most companies stress that the best positioned for identifying new opportunities or ideas is innovation and make quicker response. In the study of recognizing new opportunity and innovations, Jill Kickul and Joanna Walters (2002) claim that “recognizing new opportunities can be significant in initiating innovation and change associated with improvements in products or services, technological capabilities, and seeking optional markets and opportunities” which means the entrepreneurs with superior skills will identify the potential opportunities. According to (Chihmao Hsieh, Jack A. Nickerson, Todd R. ZengerWith), with a decomposable solution space, those who are possessed of superior learning ability or skills would be better able to memory successful paths of search therefore keeping away from intermediate steps of trial-and-error.” In other words, those with superior skills or resources will recognize opportunities which have more potential profit. In addition, like learning more about neoclassical economics, focus on active search processes in the form of scanning (Drucker, 1985) or Bayesian learning where entrepreneurs always systematically update their knowledge about the environment in parcel of pre-existing opportunities (Fiet, 1996). It means entrepreneurs expand their knowledge will identify the opportunity with new superior skills or knowledge, also different entrepreneurs has different degree of active search.

Fortuitous discovery is the second theoretical method of opportunity recognition. Kirzner (1979: 48) is the person who in the leader of the proponent of the fortuitous discovery model and contends that opportunities are discovered fortuitously by those individuals that are alert to changes in the environment and have “the ability to notice without search” which means those who have the capacity to faster speed that causes and effects are better realize that opportunity. This is what is exactly meant the environment is really important for entrepreneurs to discover the new business opportunity. According to Kirzner (1979), alertness is one of the specific and the essential characteristics of the entrepreneur activities, it will assist entrepreneurs to perceive undiscovered profit-making opportunities. It is clear that he alerts to the market environment and use it to dig out the potential profit. Moreover, Kirzner (1973, 1997) believed that “entrepreneurs have a natural alertness to signals about possible opportunities”; Kirzner (1979) described that “entrepreneurs as being at all times spontaneously on the lookout for unheeded features so far on the environment which might give new inspiration for activity – at all times scanning the horizon” and Gaglio and Katz (2001) conceptualized entrepreneurial alertness as a chronic cognitive schema that triggers automatic cognitive processing which is consistent with Kaish and Gilad's (1991) logic that “a person encountering new facts must be ready and able to form a judgment about the existence of an opportunity.” Thus, it is evident that the heightened alertness to information will increase the possibility of opportunity recognition.

Thirdly, opportunity creation plays an equally important role with active search and fortuitous discovery. The obvious example of opportunity creation is that Shackle (1961) proposes that “opportunities are created in the mind of the entrepreneur almost from nothing”. It definitely means human mind has the significant effect on the opportunity identification. Also, human capability and creativity play a central role, it determines the opportunity how easy or difficult to recognize. More important view is the “opportunities are created by entrepreneur or the entrepreneurial firm and the consumer is then “educated” to desire the particular product” (Schumpeter 1934:65). He claimed that the opportunities created by the entrepreneur with their personal experiences. Also. Innovations in the economic system should not become a rule occur in a way that first new wants arise spontaneously in consumers which means when entrepreneurs use opportunity creation to recognize the opportunity, they should not have the expectation arise spontaneously with consumers.
Although, active search, fortuitous discovery and opportunity creation are theoretical methods to identify opportunities, but there are so many people who begin with the process of starting a new business fail to achieve their goal, while other entrepreneurs are quite successful. It means that human capital and social capital play the most significant role and effect on the opportunity recognition process.

Human capital theory maintains that knowledge provides individuals with increases in their cognitive abilities, leading to more productive and efficient potential activity (Schultz, 1959), (Becker, 1964) and (Mincer, 1974). Thus, if there is a profitable opportunity existing in the new business activity, those with more or higher level and quality human capital should be better than others to recognize it. When they processed in create enterprise, such individuals should also have superior skills in successfully seeking opportunities. More especially, human capital not only means knowledge, skills, problem-solving and self confidence but also age experience and gender. Also, previous knowledge plays a critical role when individual recognize the potential opportunities. It assists in the integration and accumulation of new knowledge, as well as integrating and adapting to new situations (Weick, 1996). The previous knowledge which related to entrepreneurs career might be useful when they engaged in the entrepreneurial process. Knowledge means people can ascertain them from the formal written documents and educational institutions. Thus, individuals may be able to increase their knowledge as a result of formal education, for example, university education, work experience or adult education. Formal education is a factor of human capital that provides skills useful to entrepreneurs and it may assist in the accumulation of knowledge. Per Davidsson Benson Honig describes that “Human capital is not only the result of formal education, but includes experience and practical learning that takes place on the job, as well as nonformal education, such as specific training courses that are not a part of traditional formal educational structures.” It means work experience and training lessons are the typical ways to assist entrepreneurs gain the more higher quality human capital which relevant to the study of (Becker, 19964), he claims that “broad labor market experience, as well as specific vocationally oriented experience, is theoretically predicted to increase human capital”. Thus, market or management experience and previous entrepreneurial experience are significantly related to entrepreneurial activity. In addition, Becker (1964) argued that “human capital is comprised of attributes which can be associated with individuals’ behavior and success” and Cohen and Levinthal (1990) describe that “individuals’ educational level will positively affect the likelihood to perceive opportunities because highly-educated individuals have a broader knowledge base to draw from and thus a higher likelihood that they can relate this knowledge to potential entrepreneurial opportunities which means the higher human capital entrepreneurs get, the more valuable opportunities”. It's clear to see that the human individual has different cognitive of opportunity based on the different education level and broader knowledge or resources, these will absolutely help entrepreneurs to identify the opportunity. Venkataraman (2000) already emphasized “the importance of one’s knowledge base in the opportunity recognition process” which means an individual's prior knowledge or skill strongly provides for their capability to recognize opportunities in that such knowledge creates mental schemas from new information can be recognize the potential of opportunities. Thus, entrepreneurs do not possess the same knowledge or skill, they will differ to opportunity recognition.

Social capital is another factor to affect entrepreneurs to recognize the potential opportunity, (Lin et al, 1981) and (Portes, 1998) describe that “social capital theory refers to ability of actors to extract benefits from their social structures, networks and memberships.” Social capital provided by family, community and organizations' relationships theorized to supplement the effects of education, experience. Strong social capital is very necessary for entrepreneurship to recognize opportunities. (Adler, Kwon 2002) and ( Putnam, 2000) states that “ social capital can be a useful resource both by enhancing internal organizational trust through the bonding of actors, as well as by bridging external networks in order to provide resources.” It means making internal organizational trust stronger with the bonding of actors and connect to the external networks, then entrepreneurs will have more possibility of opportunity identification which might make them successful in their career. If the entrepreneurs which have stronger social capital than others which means they will have a head start for the opportunity recognition. More especially, according to (Coleman, 1988) and (Granovetter, 1985), the strength of social capital can be enhanced by trust because it was a main factor in social capital and often result of obligations, threat of censure and exchange. Those who have strong trust based on the social networks, it might be an advantage for entrepreneurs get opportunity more impressive than others. In other words, in other words, social capital is an asset and influences decisions and outcomes, like most capital “the more the better. As we know, social capital provided by family, community and organizations which means some of the entrepreneurs have strong ties or weak ties with it. Weak ties are loose relationships, for example, nascent firms might rely on weak ties, for example membership in the technology firm in order to learn about the latest technological innovations. Conversely, there is an example of strong ties would be families helping out for free in some aspect of creating activities. Therefore, those have strong ties on family, community or organization will quicker than others get the opportunity to start their business. Social capital assists entrepreneurs to find out new ideas when they are processed in the opportunity discovery and provides networks that facilitate the discovery or opportunities, as well as the identification, collection and allocation of scarce resources.

In conclusion, human capital and social capital play a critical role during the opportunity recognition and effect the entrepreneurs by using three theoretical methods, active search, fortuitous discovery and opportunity creation. Human capital means that knowledge provides individuals increases in their cognitive abilities and social capital means the ability to extract benefits from social structures and network membership, this might be the significant issues for entrepreneurs to use those three methods. Therefore, the level or quality of human capital and social capital might be a significant factor for entrepreneurs how sensitive to recognize the opportunities. Those three theoretical models will help entrepreneurs ascertain the opportunities, make their business easier than before, but social and human capital will influence them during the opportunity discovery.

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