Opportunity Evaluation in Entrepreneurship

by February 7, 2009

Ask a successful entrepreneur what question they are most often asked at a dinner party, and they’ll most likely tell you that people want to know how to decide if their business idea is one that can be successful?

How do entrepreneurs evaluate opportunities to produce future good and services? What influences are brought to bear on those evaluations? To date, such questions remained largely unanswered by entrepreneurship research. However a new study by J. Michael Haynie, assistant professor of entrepreneurship, takes an important step toward opening the ‘black box’ inside the heads of successful entrepreneurs to understand how they evaluate future opportunities. Haynie suggests that opportunity evaluation in an entrepreneurial environment is about envisioning the future – specifically the wealth generating resources that would be under the control of the entrepreneur if he or she was to act to exploit the opportunity under consideration.

Haynie tests this notion by looking at more than 2,300 opportunity evaluation decisions from a large sample of entrepreneurs, and finds that opportunity evaluation is future-focused. “This means that the entrepreneur evaluates the opportunity almost as if it was a resource, and considers the wealth that resource could generate if it were exploited,” explains Haynie.

Further, Haynie finds that opportunity evaluation represents a first-person assessment. Haynie explains: “The entrepreneur’s evaluations of whether or not to act on a potential opportunity are not focused on whether the opportunity is attractive to ‘someone’, but whether the opportunity is attractive to ‘me’.”

It appears that entrepreneurs assess opportunities as more attractive when those opportunities relate to their existing knowledge, skills, and abilities. “However, there are certain conditions under which entrepreneurs might be attracted to opportunities inconsistent with their existing human capital,” says Haynie. “These include the rarity of the opportunity, limits on competition, and the age of the firm when considering the value of an opportunity.”

Haynie explains that when these conditions are encountered, entrepreneurs become more willing to try something new and step beyond their existing competencies. Because entrepreneurs have often been characterized as having unique mindsets, Haynie’s article further examines the complex decision-making processes of an entrepreneur, finding that some entrepreneurs seek not the perfect opportunity but the imperfect opportunity that is more perfect for them.

“Opportunity evaluation is about envisioning the future,” says Haynie. “Specifically, the wealth generating resource combinations to be controlled by the entrepreneur post-exploitation. This indicates that the processes associated with discovery, evaluation, and exploitation can and should be framed by considerations of existing and future resources.”

Ultimately, these insights reveal that opportunity evaluation is founded on future-oriented cognitive representations of ‘what will be’. The results are published in a 2009 edition of Journal of Management Studies, and the article is co-authored by Dean A. Shepherd and Jeffry S. McMullen from Indiana University

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