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The Four Forces of Entrepreneurial Opportunities

The Four Forces of Entrepreneurial Opportunities

Mar 28, 2010

Where should one look for promising business ideas? Michael Porter famously argued that industries sustain different levels of profitability for firms depending on the supplier power, barriers to entry, buyer power, and threat of substitute1. This approach has been criticized, however, on the basis that firms are generally too inert to be able to establish their strategies purely based on the profitability of a particular industry. Such criticism is far less true for entrepreneurs, who generally have considerable flexibility – at least at first – about the general area in which they look for business ideas. Porter’s “Four Forces” are not quite appropriate for new ventures, since entrepreneurs generally start with a very ill-defined idea of their eventual business model and of the relative power of their eventual suppliers, buyers, or competitors.

What, then, are the forces generating entrepreneurial opportunities? This article proposes a theoretical model explaining the variation in entrepreneurial opportunities across industries. A subsequent article will show how this model can be used to predict the emergence of new business opportunities.

1. Technological Evolution

A number of researchers have argued that the level of technological maturity greatly impacts the number of entrepreneurial opportunities. For many years, MIT Sloan Professor Jim Utterback has shown that young industries, in which needs are not well-defined, present many more opportunities than more established markets2. Once a “dominant product design” appears in a market, incumbents often develop economies of scale, and improve their processes in a way that creates large entry barriers for potential newcomers. For instance, the car industry presented major entrepreneurial opportunities at the end of the 19th century and at the beginning of the 20th century. However, by the middle of the century, in most advanced economies, the bracket of entrepreneurial opportunities in the car industry seems to have closed: not only did the number of entrepreneurial ventures decrease dramatically, but many existing companies even went bankrupt. Other researchers have shown that technological areas present more opportunities when they include a well-respected organization, but that this advantage decreases as the level of competition grows3. For instance, the fact that IBM entered the PC market increased the credibility of the technology and consequently also increased the amount of entrepreneurial opportunities for potential hardware and software developers.

2. Organizational Environment

A quite distinct stream of literature has shown that the characteristics of the population of existing organizations in an industry impacts entry opportunities. A central theme in this literature is that the number of opportunities in a particular industry depends on how crowded the industry already is. Being the very first to offer a product (or service) might be risky because consumers and investors might not yet perceive the need for such product. On the other hand, a crowded market generally presents fewer opportunities. In general, new business opportunities depend on the presence of overlapping suppliers (competitors) and the presence of complementary organizations. For instance, new daycare centers tend to be more successful when they complement existing centers covering a different age range4. Similarly, the local development of an industry can be an important source of entrepreneurial opportunities because it facilitates the acquisition of tacit knowledge, relevant social relationships, and opportunities to build self-confidence5.

3. Demand Characteristics

One core insight of the literature focusing on demand in general and fashions in particular is that it generally involves two opposite forces: one pushing toward conformity and the other toward distinction6. Demand is therefore not only unstable, but also never quite homogeneous: customer preferences are generally diverse enough that parts of the market are always underserved. This is especially the case when the supply is composed of a few large generalists providing highly standardized products or services7. Tastes also evolve over time in a predictable manner8. For instance, customers might consider that technical performance is most important for some time, and suddenly switch their value ordering (for instance toward design or cost rather than performance) once they are “technologically satisfied”9.

4. Institutional Context

Entrepreneurial opportunities also depend on the institutional context. For instance, researchers have documented that changes in policy regime and changes in the law can have a dramatic impact on entrepreneurial opportunities. In their famous study of railroads in Massachusetts, Dobbin and Dowd showed that entrepreneurial activity increased when the state actively encouraged it financially, that it also increased when the state allowed cartels (which decreased competitive pressure), and that entrepreneurship in the sector decreased when the state imposed anti-trust laws (which increase competition)10. In addition, intellectual property regulation can significantly alter entrepreneurial opportunities: countries’ innovation patterns and entrepreneurial activities are systematically influenced by what can or cannot be patented11,12. Some researchers have gone as far as suggesting that entrepreneurs simply choose to allocate their efforts toward productive ends (like innovation) or destructive ones (like organized crime), depending on the relative pay-offs offered by the society13. Technological evolution, organizational environment, demand characteristics, and institutional context are four paramount drivers of entrepreneurial opportunities. Entrepreneurs and investors might find the proposed framework useful in guiding them in their search for their next successful business idea(s). After all, as Louis Pasteur famously said, “Chance favors the prepared mind.”


References

  1. Porter, M. E. 1979. How competitive forces shape strategy. Harvard Business Review, Boston 57, no. 2.
  2. Utterback, J. M. 1996. Mastering the dynamics of innovation. Harvard Business School Press.
  3. Podolny, J. M., T. E. Stuart, and M. T. Hannan. 1996. Networks, knowledge, and niches: Competition in the worldwide semiconductor industry, 1984-1991. American Journal of Sociology: 659-689.
  4. Baum, J. A. C., and J. V. Singh. 1994. Organizational Niches and the Dynamics of Organizational Mortality. American Journal of Sociology 100, no. 2: 346.
  5. Sorenson, Olav, and Pino G. Audia. 2000. The Social Structure of Entrepreneurial Activity: Geographic Concentration of Footwear Production in the United States, 1940-1989. The American Journal of Sociology 106, no. 2 (September): 424-461. doi:10.2307/3081182.
  6. Simmel, Georg. 1957. Fashion. The American Journal of Sociology 62, no. 6 (May): 541-558. doi:10.2307/2773129.
  7. Carroll, GR, and A Swaminathan. 2000. Why the Microbrewery Movement? Organizational Dynamics of Resource Partitioning in the US Brewing Industry 1. The American journal of sociology 106, no. 3: 715.
  8. Lieberson, S., and FB Lynn. 2003. Popularity as Taste. Onoma 38: 235-276.
  9. Adner, Ron, and Daniel Levinthal. 2001. Demand Heterogeneity and Technology Evolution: Implications for Product and Process Innovation. Management Science 47, no. 5 (May): 611-628. doi:10.2307/822644.
  10. Dobbin, Frank, and Timothy J. Dowd. 1997. How Policy Shapes Competition: Early Railroad Foundings in Massachusetts. Administrative Science Quarterly 42, no. 3 (September): 501-529. doi:10.2307/2393736.
  11. Murmann, J. P. 2003. Knowledge and competitive advantage: the coevolution of firms, technology, and national institutions. Cambridge University Press.
  12. Moser, Petra. 2005. How Do Patent Laws Influence Innovation? Evidence from Nineteenth-Century World’s Fairs. American Economic Review 95, no. 4 (9): 1214-1236. doi:10.1257/0002828054825501.
  13. Baumöl, W. J. 1990. Entrepreneurship: Productive, Unproductive, and Destructive. The Journal of Political Economy 98, no. 5  Part 1: 893-921.

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