eagleentrepreneur.files.wordpress.com · Web viewBarney, J. B. (1991). Firm Resources and Sustained...

Center for Entrepreneurial Learning and Leadership: Working Paper Series

The State of Opportunities: Clarifying Discovery and Creation

Chris Welter, Assistant Professor of Business Management

College of Business Administration, Georgia Southern UniversityP.O. Box 8151

Statesboro, GA, 30460

Tel: 912 478 6625 Email: [email protected]

AbstractOpportunities have been a phenomenon of interest in entrepreneurship research for more than a decade. This interest has spawned debate about the existence of different types of opportunities. Investigation into opportunity types, however, has proven difficult due to the multitude of perspectives on opportunity types. Drawing on Dubin’s (1978) methodology for theory building, this paper extends work by Alvarez and Barney (2007) by applying Dubin’s concept of system states. System state logic clarifies the differences between opportunity types and the transitions between them. Lastly, system states provide a foundation for empirical investigation of opportunity types.

IntroductionOpportunities exist. Or maybe they don’t? They are discovered, but sometimes they are created. Entrepreneurs find opportunities. No, they make them. In the end it doesn’t matter... or does it? The entrepreneurship literature has heavily investigated entrepreneurial opportunities for more than a decade (Shane & Venkataraman, 2000). Good empirical work has provided insight into entrepreneurs as they pursue opportunities, doing well to answer Shane & Venkataraman’s (2000) question of who identifies opportunities. For example, greater knowledge and potential financial reward increase the number and innovativeness of opportunities identified (D. A. Shepherd & DeTienne, 2005) while gender does not affect the innovativeness of the opportunities identified (DeTienne & Chandler, 2007). Still, the large number of conceptual articles regarding opportunities (see Short, Ketchen, Shook, & Ireland, 2010 for a review) without sufficient empirical work suggests that opportunities have not yet been understood sufficiently enough to enable rigorous testing (Dimov, 2011; Kuhn, 1996). Nonetheless, opportunities remain a phenomenon of interest as they hold promise for both the academic field of entrepreneurship and the practical pursuit of entrepreneurship by entrepreneurs.

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Research on opportunities has largely ignored the potential impact of opportunity types. When research has addressed the potential for different types of opportunities, a variety of views have been suggested. Opportunity types may be a virtuous cycle(Zahra, 2008), there may be only one type of opportunity (Shane, 2003; 2011), there may be no practical implications of opportunity types(Baron, 2004), or there may be an intractable philosophical divide (Alvarez & Barney, 2010; McMullen & Shepherd, 2006). The lack of understanding has led to studies that do not emphasize the differences between opportunity types. Rather, opportunities are addressed as a whole. Different types of opportunities have not been addressed in part because there is a lingering question of whether opportunity types have value in practice (or even in academia beyond just a philosophical debate), and in part because distinguishing opportunity types is empirically challenging (Dimov, 2011). This paper addresses both of those issues.

The purpose of this paper justify the theoretical and practical value of opportunity types and clarify the differences of those opportunity types using Dubin’s (1978) theory building framework, in particular his concept of system states. These two directives reinforce one another in that justifying the value of opportunity types partially requires a clearer distinction between discovery and creation opportunities. Alternatively, a clearer understanding of opportunity types will elucidate the value of dividing the concept of opportunities into multiple types.

Examining opportunity types from an evolutionary realist perspective allows for multiple types of opportunities without the philosophical conflict of different epistemological viewpoints. Furthermore, by incorporating opportunity types, prior research findings that have been equivocal or contradictory may be better understood. Opportunity types may provide a clear picture of the highly contextualized factors affecting entrepreneurial processes such as planning (Brinckmann, Grichnik, & Kapsa, 2010). This aids in practical application in that these opportunity types suggest different exploitation processes. If the processes differ between discovery and creation opportunities then the practical implications for entrepreneurs become more straightforward.

Understanding these differences has proven difficult as scholars have taken several different perspectives on opportunity types. Dubin’s (1978) theory building framework provides greater clarity in understanding opportunity types. By specifically focusing on opportunity types as system states, this paper will more clearly define the differences between discovery and creation opportunities. Furthermore, this paper will explain how discovery and creation opportunities relate to each other and how they evolve over time guiding the selection of empirical indicators to distinguish opportunity types.

The paper proceeds with a brief review of opportunity literature and makes the case for further clarification of boundary conditions between types of opportunities. The next section describes three specific boundary conditions between discovery and creation opportunities. From there we describe how system states give further clarity to opportunity types. The following section describes the empirical directions for testing opportunity types by suggesting some possible metrics for testing before concluding the paper.

OpportunitiesOpportunities have been defined in many different ways (see Short et al., 2010 for a review). Many of those definitions draw on the assumption that the typical economic state is one of disequilibrium (Dimov, 2011; Eckhardt & Shane, 2003; Shane & Venkataraman, 2000). With that in mind, we define opportunities from an economic perspective. For the purposes of this paper, opportunities are defined as competitive imperfections in a factor or product market (Alvarez & Barney, 2010). Recent research on opportunities has described different types of opportunities as creation and discovery1 (Alvarez & Barney, 2007; McMullen & Shepherd, 2006; Sarasvathy, 2001).

1 There have been other descriptions of these opportunity types such as made and found or constructivist and objectivist. While there may be minor differences between these terms, we will use creation to include made and

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Understanding opportunities from an economic perspective aids in clarifying the level of analysis. While an opportunity can be analyzed at many levels, the opportunity itself can be considered an industry level phenomenon. Since individuals or firms pursue opportunities, there are specific constructs that may be applicable at those levels of analysis. However, the opportunity may be pursued by multiple individuals or multiple firms. As such, the opportunity should be considered at the industry level.

There are three potential viewpoints on the reality and relevancy of different opportunity types. First, some research contends that while there may be different opportunity types - or differences in the ways opportunities come into existence - there are little to no relevant differences in entrepreneurial processes so the conversation is merely academic and philosophical (Baron, 2004). Second, some research contends that one view of opportunities supersedes other views and understanding opportunity types from that perspective more appropriately describes the phenomenon in question (Baker & Nelson, 2005; Eckhardt & Shane, 2003). Third, some research argues that at least two (if not more)2 types of opportunities have been described and these opportunities give way to different entrepreneurial processes (Alvarez & Barney, 2007; Wood & McKinley, 2010). We reject the first two perspectives in favor of the third.

While there are philosophical differences between discovery and creation opportunities, these are not irreconcilable. Discovery opportunity research has drawn on a critical realist epistemology where the opportunities are considered objectively real (Alvarez & Barney, 2010; McMullen & Shepherd, 2006). Creation opportunity research has drawn on an evolutionary realist epistemology and subjectivism(Alvarez & Barney, 2010; Berger & Luckmann, 1967; Wood & McKinley, 2010). McMullen and Shepherd (2006) claim that these two philosophically intractable positions bookend an empirically tractable center of entrepreneurship research. Focusing on entrepreneurial processes enables researchers to avoid the philosophical difficulties, but may obscure potential gains from the different viewpoints. The different assumptions of these epistemological viewpoints are useful for understanding the differences between opportunities (Alvarez & Barney, 2010), but the differing viewpoints are not required to have differing opportunity types. An evolutionary realist perspective allows for both discovery and creation opportunities.

The underlying philosophical differences highlight differences in opportunity types, but reconciling the philosophical viewpoints enables research to examine how opportunity types affect entrepreneurial processes. Assuming a critical realist viewpoint leaves no room for creation opportunities - only discovery opportunities. Alternatively, assuming a strict constructionist viewpoint allows no room for discovery opportunities. An evolutionary realist perspective, however, allows for both discovery and creation opportunities. Alvarez and Barney (2010) argue that evolutionary realism is distinct to creation opportunities offering insights into the differences between discovery and creation opportunities. However, the fact that evolutionary realism incorporates both socially constructed aspects of reality and objectively real phenomena allows this perspective to allow for both constructed creation opportunities and objectively real discovery opportunities.constructivist opportunities, while discovery will include both found and objectivist opportunities.2 Some may consider discovery and creation opportunities to be a false dichotomy. We contend that there may, in fact, be other types of opportunities that have not been sufficiently described at this point. However, we do not believe that discovery and creation opportunities exist on opposite ends of a continuum. For further description see the discussion on system states.



With an evolutionary realist perspective in mind, the question turns to the entrepreneurial processes. As Alvarez and Barney (2007; 2010)have described, the assumptions regarding creation and discovery opportunities suggest different process with regard to human resources, leadership, financing, and other areas. To be clear, not all processes differ between opportunity types. While the above processes have been hypothesized as differing between creation and discovery, there are other processes that may be the same in discovery and creation. For example, while the means of financing typically differs between creation and discovery, the legal form of organization may be the same. The processes that differ between creation and discovery still persist even when the epistemology is strictly an evolutionary realist perspective. However, these are hypothesized differences that currently lack an empirical backing. Thus, the question of the usefulness of discovery and creation opportunities is an empirical one.

Extant empirical research has examined many of the entrepreneurial processes as they relate to opportunities: from firm leadership (Dencker, Gruber, & Shah, 2009; Randøy & Goel, 2003) to financing (Bhide, 1992; Gompers & Lerner, 2001) to business models (Fiet & Patel, 2008) to marketing (Read, Dew, Sarasvathy, Song, & Wiltbank, 2009a) to planning (Brinckmann et al., 2010; Wiltbank, Dew, Read, & Sarasvathy, 2006) and other areas. In some areas, empirical results have been equivocal or highly contextualized (e.g. Brinckmann et al., 2010). Other research has developed from assuming (often implicitly) one view of opportunities. These underlying assumptions can lead to an appropriate research design given the view of the authors, but give biased results if multiple opportunity types are considered. For example, Shepherd and DeTienne (2005) find a relationship between prior knowledge and the number of opportunities identified. However, as we will describe later, this opportunity identification task requires preexisting opportunities - a difference between creation and discovery opportunities.

While conceptual work has grown discussing each of the perspectives described above, little empirical work has examined entrepreneurial processes considering the possibility of multiple opportunity types (Edelman & Yli-Renko, 2010; Hmieleski & Baron, 2008; R. Mitchell, Mitchell, & Smith, 2008). There may be several reasons for the dearth of empirical investigation, but one issue is the lack of clearly defined and understood differences between these types of opportunities. The next section describes Dubin’s (1978) theory building framework and applies to opportunity types.

Dubin’s Theory Building MethodologyDubin’s (1978) methodology consists of several components, which can be divided into two

general categories: theory building and theory testing. This paper focuses on the theory building aspects of the methodology. Specifically, the first five components of Dubin’s methodology are units, laws of interaction, boundaries, system states and propositions. Ardichvili, Cardoza & Ray (2003) draw on this methodology to examine opportunity recognition. Similar to most prior research Ardichvili et al. (2003) do not treat discovery and creation opportunities as distinct concepts. As such, little attention is paid to the system states within the theory. While the units, laws of interaction, and boundary conditions are important aspects of the theory, this paper addresses the system states in greater depth since they provide insight into the differences between opportunity types.

UnitsUnits are the “things” of a theory that are of particular interest to the researcher (Dubin, 1978). For the sake of parsimony, the units here will be limited to only those that are most relevant based on prior descriptions of both discovery and creation opportunities. The units of interest here are the nature of the opportunity, the nature of the entrepreneur, and the nature of the decision-making context (Alvarez & Barney, 2007). Furthermore, the following entrepreneurial processes are units in the theory: planning, leadership, strategy, path to competitive advantage, human resource acquisition, and financing. These entrepreneurial processes have been of particular interest to

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entrepreneurship researchers and have been theorized to differ between opportunity types3. Lastly, firm performance is a unit of the theory. These will be described in more detail as they inform the other aspects of Dubin’s methodology.

Laws of InteractionThe relationships between the units in a theory are the laws of interaction (Dubin, 1978). These laws show how changes in one or more units affect the other units in the theory. Figure 1 summarizes the laws of interaction for this theory of opportunity types.

The goal or outcome of interest here is firm performance. Not all opportunities will result in firm creation, but those opportunities lie outside the scope of this theory. Working backwards from the performance of firms founded to exploit an opportunity, we posit that the firm’s performance will be dependent upon the entrepreneurial processes employed by the entrepreneur or founding team. These processes are in turn dependent upon the nature of the opportunity, the nature of the entrepreneur and the decision-making context. Many of these relationships have been outlined by Alvarez & Barney (2007), and they will be formalized in the proposition section.

Boundary conditionsAccording to Dubin (1978), boundary conditions can be specified by describing the values that units within a theory can have. Previously, the units of opportunity types have been described as the nature of the opportunity, the nature of the entrepreneur, and the decision-making context (Alvarez & Barney, 2007; 2010; Sarasvathy, 2001), as well as the entrepreneurial processes listed above. For each of these units we will describe the values that those units may take.

The nature of the opportunityOpportunities, in a discovery context, exist in the environment awaiting an alert entrepreneur to find them (Eckhardt & Shane, 2003). They arise from some exogenous shock to the environment and have some unchangeable properties (Eckhardt & Ciuchta, 2008). Shane and Venkataraman describe them as “objective phenomena that are not known to all parties at all times” (Shane & Venkataraman, 2000). Entrepreneurs may discover several opportunities (DeTienne & Chandler, 2007; D. A. Shepherd & DeTienne, 2005) and the selection process then becomes important (Eckhardt, Shane, & Delmar, 2006). The nexus of opportunities and entrepreneurs (Shane, 2003) suggests a type of fit between opportunity and entrepreneur. The opportunity’s unchangeable properties requires certain resources be brought to bear for exploitation. However, any entrepreneur with the fixed set of resources (or the ability to obtain those resources) may exploit the given opportunity. In essence, several entrepreneurs may discover the same opportunity and attempt to exploit it simultaneously.

Turning to creation, these opportunities are formed by the endogenous actions of entrepreneur who interacts with his or her environment to create a market imperfection (Alvarez & Barney, 2007; Sarasvathy, 2001). Construction of these opportunities follows from idea to objectification to enactment (Dimov, 2007; Wood & McKinley, 2010). According to this pattern there are no fixed properties to the opportunity, but rather entrepreneurial sensemaking (Weick, 1995) gives form to new information that is created throughout the enactment process. This evolutionary process is more likely to represent the actions of a single entrepreneurial team than any number of 3 Other processes may differ between opportunity types and could be integrated into this theory at a latter date. Processes that do not differ between opportunity types are excluded from this theory based on the scope of the theory and parsimony.



entrepreneurs pursuing the same discovered opportunity4 and may result in the creation of entirely new markets (Santos & Eisenhardt, 2009). Therefore, the nature of the opportunity may take a value of exogenous or endogenous.

The nature of the entrepreneur

Since discovery opportunities are objective phenomena in the environment, a natural question is who discovers them (Shane & Venkataraman, 2000)? The ability to discover an opportunity is often referred to as alertness (Gaglio & Katz, 2001; Kirzner, 1997; Shane, 2003; Tang, Kacmar, & Busenitz, 2012). Shane (2003) describes alertness as a combination of prior knowledge, expertise, and absorptive capacity. Existing empirical work supports the role of prior knowledge in the identification of opportunities (Shane, 2000; D. A. Shepherd & DeTienne, 2005). This suggests that entrepreneurs in discovery opportunities will typically have a relationship between their existing knowledge base and the relevant knowledge required for opportunity discovery and exploitation.

Creation opportunities, on the other hand, do not exist as objective phenomena so the entrepreneurs need not demonstrate any specific expertise ex ante (Alvarez & Barney, 2007). These opportunities are often initially described as imagined or as future perceptions (Dimov, 2007; Wood & McKinley, 2010). The entrepreneurs in creation opportunities shape and are shaped by their environment following a process of path creation (Garud, Kumaraswamy, & Karnøe, 2010). Furthermore, specific knowledge about an opportunity in a creation context is not a requirement but rather a byproduct. New knowledge is created during exploitation, and that knowledge accrues disproportionately to the entrepreneur enacting the opportunity (Alvarez & Parker, 2009). There are no predictive differences in entrepreneurs ex ante. That is to say, unlike discovery opportunities, nothing can be pointed to as a necessary condition or characteristic of a creation entrepreneur. However, the process of creating a new venture may affect entrepreneurs in such a way as to result in differences ex post (Alvarez & Barney, 2010).

Regarding the nature of the entrepreneur, the boundary condition between discovery and creation can be thought of as the presence or lack of alertness. Alertness acts as a necessary condition for opportunity discovery, whereas there are no necessary conditions on the nature of the entrepreneur in opportunity creation. Empirical research has demonstrated the relationship between prior knowledge and opportunity identification and recent research has created a measure of alertness (Tang et al., 2012), which can be used to assess the nature of the entrepreneur.

Decision-making context

The final boundary condition between discovery and creation opportunities is the decision-making context. Discovery opportunities are exploited in a risk-based decision making context where the probabilities and possible outcomes can be estimated ex ante (Alvarez & Barney, 2007; Knight, 1921). This context has also been described as causation where the entrepreneur plans with a specific end in mind attempting to predict a probabilistic future (Sarasvathy, 2008).

Alternatively, in creation opportunities the decision-making context can be considered uncertain where neither the outcomes nor the probabilities can be estimated ex ante (Alvarez & Barney, 2007; Knight, 1921). Effectuation has been used to describe this context where the focus is on the means rather than the ends (Sarasvathy, 2001). The focus is not on the prediction of the future through accurate estimation, but rather the exploitation of contingencies based on the emergent uncertain future. Therefore, the decision-making context can take the values of risk or uncertainty.

4 One could imagine a scenario where multiple entrepreneurial teams are enacting similar opportunities simultaneously, but this possibility is theoretically less probable. Nonetheless, it is an empirical question that has not yet been addressed.

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Entrepreneurial processesThe last set of units fall under the heading of entrepreneurial processes. Unlike the previous units, these units are not fully specified by the model and therefore do not act as boundary conditions. The processes of interest here are planning, leadership, strategy, path to competitive advantage, human resource acquisition, and financing. Each of these processes is an area of inquiry for entrepreneurship research in its own right, and as such their treatment in this theoretical frame will be a bit simplistic. Nonetheless, this framework will provide a clear foundation for future research to demonstrate the nuance involved in the described processes. Since the entrepreneurial processes are predicated on the nature of the opportunity, the nature of the entrepreneur and the decision-making context, the values of the entrepreneurial processes will be described in more detail in the propositions section.

System statesDubin (1978) describes a theoretical model as a system of units each of which can take a specific value at a given point in time. When all the units of in a theoretical model take on specific values for some period of time the model is referred to as being in a system state. System states are important because they are conditions when the system as a whole presents distinctive features. For example, while a lump of coal and a diamond have the same atomic makeup, the structure and arrangement of those molecules determine the state of that system. The system of carbon atoms may have two states: diamond and coal. The main unit of this system would be the arrangement of the atoms. When the unit “arrangement” takes the value of amorphous then the system is in a state of coal. When the unit “arrangement” takes the value of cubic crystals then the system is in a state of diamond. The system states of coal and diamond present significantly distinct features with different properties. Clearly, the arrangement of carbon and how it changes from coal to diamonds is important; similarly, the system states of opportunities and how they change are an important aspect of entrepreneurial research (Fry & Smith, 1987).

The system states of creation and discovery are represented by the boundary conditions of the decision-making context, the entrepreneur and the nature of the opportunity. In other words, a discovery system state presents a risky environment where an alert entrepreneur finds an exogenous (or preexisting) opportunity. Similarly, a creation system state presents an uncertain environment where an entrepreneur (with no specific predictive characteristics ex ante) forms an endogenous (or previously nonexistent) opportunity. The values for all of the units are summarized in Table 1. When all the units of an opportunity take the values of a particular system state, the opportunity can be said to be a discovery opportunity or a creation opportunity.

Analyzing opportunities as system states can advance the discussion of opportunity types. Discovery and creation opportunities have been criticized as a false dichotomy (Murphy, 2011). Some of this criticism may stem from a lack of clarity in boundary conditions, but there is also confusion in the transition between discovery and creation. The transition from one state to another can help resolve the apparent false dichotomy. Some opportunities may appear “more creation-like” or “more discovery-like” during the transition between states. Understanding the transitions between system states provides a more thorough picture of opportunities.System states may transition from one system state to another and the pattern of that succession is important for understanding the system (Dubin, 1978). Zahra (2008) suggests that creation and discovery operate in a virtuous cycle where an opportunity may transfer back and forth between the two states multiple times throughout the exploitation process. These transitions may be the



cause of some confusion between discovery and creation states. During a transition from one state to the next, the opportunity may exhibit processes common to both discovery and creation. For this reason, it is all the more important to understand the transition process. There may be some empirical support for the transition from creation to discovery (Alvarez, Young, & Wooley, working paper), but the transition from discovery to creation is less supported. The empirical work on the transitions between discovery and creation is not yet conclusive. So, it is worthwhile to examine the processes of discovery and creation system states and how those processes would logically progress during entrepreneurial exploitation.

Examining the entrepreneurial processes reveals that the transition between system states is more likely to flow from creation processes to discovery processes. In planning processes, many firms may begin without any formal plan. Once any type of planning is in place, however, it would seem unlikely that a firm would then scrap all planning. In leadership, creation states are typically led by more charismatic leaders whereas discovery states are likely led by expert leaders (Alvarez & Barney, 2007). There are leaders with both expertise and charisma, but here the issue is the transition between those types. While firms may begin without specific expertise, they are unlikely to depart from expert leadership in favor of a charismatic leader that lacks expertise. There is evidence from venture capital literature that entrepreneurs are often replaced by expert managers as a contingency of venture capital involvement (Wasserman, 2003). It is more likely that charismatic leadership be replaced by expert leadership than the alternative.

The strategy processes involved in entrepreneurial opportunities follow a similar logic to the planning processes. Discovery states typically have a more well-defined strategy earlier in exploitation; creation states are more likely to follow an emergent strategy (Alvarez & Barney, 2007; Weick, 1979). Once in place, an emergent strategy may appear to have been well-defined due to retroactive sense-making, making the distinction quite difficult in practice. This lends support, however, to the idea that strategy will likely move from a emergent process to a more planned process. It would be less likely to move from a pre-planned strategic process to an emergent one.

The path to competitive advantage is less straightforward. Neither opportunity type is guaranteed a competitive advantage. Opportunities in discovery states rely on speed, secrecy and erecting entry barriers; in creation states, opportunities rely on advantage developing from their path of exploitation (Alvarez & Barney, 2007). The transitioning from speed and the erection of entry barriers to a reliance on the tacit knowledge gained from the exploitation process does not seem logical. If tacit knowledge can defend a competitive position, then why would a firm erect entry barriers in the first place? Alternatively, if a firm has tacit knowledge that protects their competitive advantage for a time, but that knowledge becomes more codified or less relevant to the advantage, then a firm may need to move more quickly or erect some form of entry barriers. Thus, it seems implausible to move from speed, secrecy and entry barriers as a means of defending a competitive advantage to tacit knowledge as a means of defending competitive advantage. However, it may be possible to move in the opposite direction.

Human resource practices in a discovery state allow an entrepreneur to hire broadly for expertise whereas in creation states they are typically limited to the entrepreneur’s social network (Alvarez & Barney, 2007). It is unlikely that an organization would initially recruit broadly for expertise in a discovery state and then transition to hiring from within the entrepreneur’s social network as in a creation state. Lastly, entrepreneurs in creation states are typically limited to friends and family or bootstrapping (Bhide, 1992), whereas entrepreneurs in discovery states are typically able to obtain external sources of capital such as banks or outside investors (Alvarez & Barney, 2007). It would be unlikely for the discovery entrepreneur to initially obtain external financing and then transition to raising additional capital from friends and family or bootstrapping.

In each of the transitions above, it is more likely to see an opportunity move from a creation state to discovery state than the reverse. Therefore, contrary to Zahra (Zahra, 2008), we expect that the

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creation state transitions to a discovery state, but that a discovery state will not transition to a creation state. This transition is not immediate and simultaneous, which causes confusion between the system states. At any given point, a few of the processes may have transitioned from a creation state to a discovery state making the distinction between states difficult. Knowing the direction of transition, however, enables entrepreneurial action. Exploiting an opportunity in a creation state suggests one bundle of processes, whereas in a discovery state a different bundle of processes are related to more positive performance. If an opportunity is transitioning between states, then discovery processes will eventually become the appropriate means of exploitation.

Understanding both opportunities and system states as market level phenomena, clarifies one other point regarding these market imperfections. Entrepreneurs in creation states interact with the environment forming the market imperfection. This market imperfection may generate demand greater than entrepreneur (and his or her firm) in the creation state is capable of fulfilling by themselves. In this regard, the creation state transitions to the discovery state and acts as the exogenous shock giving rise to the discovery opportunity. There may be some cases in which creation states satisfy the entirety of the demand they create, and thus not transition to a discovery state. However, we expect that more often creation states will give rise to future discovery states (although this is an empirical question beyond the scope of this paper).

A Case Study of System StatesThis discussion of the transition between system states may be best described by way of case study. Descriptions of the founding of two national coffee chains will serve as examples of this transition from creation state to discovery state. The formation of Starbucks exemplifies a creation system state in the gourmet coffee industry, whereas the formation of Caribou Coffee demonstrates how the opportunity had transitioned to a discovery state.

The company we know as Starbucks was originally formed as Il Giornale by Howard Schultz in 1985 (Koehn, 2005). Schultz, who had a background in sales for Hammerplast, worked for a few years with a coffee sales company by the name of Starbucks before forming his own company. He had a vision for an Italian-style espresso bar in the United States, but the owners of Starbucks rejected the idea of entering the restaurant business (Koehn, 2005). To open Il Giornale, Schultz borrowed money from friends and co-workers. He hired people from within his social circle who worked every different job in the company from hiring to purchasing to pouring coffee. The original shop was nearly a copy of an Italian espresso bar featuring workers in bow-ties and a stand up coffee bar (Garthwaite, Busse, & Brown, 2012).

To expand the business, Schultz sought outside capital. He eventually raised the money required, but not before he was turned down by over 200 investors. Shortly, thereafter he purchased the assets of Starbucks, including its name, and rebranded Il Giornale as Starbucks. Under the new moniker, Schultz and colleagues began to plan the expansion (Koehn, 2005). This included changing the look and feel of the original Il Giornale. The expansion of the Starbucks brand made it synonymous with gourmet coffee even to the point of permeating new language (eg. venti, latte) throughout the country. What was a shrinking coffee market with little to no demand for gourmet coffee let alone a restaurant specializing in coffee (Koehn, 2005), became a growing nationwide market.

As this market grew, Kim and John Puckett, the founders of Caribou Coffee, took notice (Pederson, 1999). Between the two of them, the founders had experience with Dunkin Donuts, one of the



country’s largest coffee sellers, and with investment banking. The pair spent roughly a year researching the coffeehouse concept (Pederson, 1999) this included six months of scouting potential locations for the first Caribou Coffee. Early-stage financing of $600,000 allowed them to open their first shop in Minneapolis. Kim managed personnel, while John worked on further financing drawing on their prior human capital. As the firm grew, they would hire experts to serve specific functions within the company.

Within a year, the Pucketts sought additional financing to fund expansion and growth. They had no trouble raising the additional capital bringing in more than double the $1.2 million they were seeking (Pederson, 1999). Caribou Coffee quickly expanded following their initial strategy of selecting promising locations with a local feel. Some local competition even cited Caribou’s preemption of both locations and funds as a reason for exiting the business. Within less than a decade, Caribou Coffee was the second largest company-owned coffeehouse chain (Pederson, 1999).

Starbucks demonstrates a firm exploiting an opportunity in a creation system state, whereas Caribou Coffee demonstrates a firm exploiting an opportunity in a discovery system state. The processes in each firm for their respective system states are summarized in Table 2. While there certainly was some planning for the opening of Starbucks, the extent of that planning and the research behind it paled in comparison to that of Caribou Coffee. The leadership of Starbucks was not based on expertise, but rather the ability to bring together a group of people around a vision. Schultz lacked experience in both the coffee industry as a whole, as well as, the particular experience that he was trying to create in modeling the Italian coffee bars. The Pucketts had experience both in one of the largest coffee vendors outside the home, Dunkin Donuts, as well as experience in working with external capital markets.

Turning to strategy and competitive advantage, Starbucks initially copied the look and feel of Italian coffee houses, but evolved over time to a more cozy environment. From the initial strategy of bringing espresso drinks to the United States, Starbucks emergent strategy focused on creating a “third place” for individuals to congregate outside of home and work. They educated customers on both their products and their brand building a competitive advantage around that brand and the socially constructed language of Starbucks coffee. Caribou Coffee initially planned to focus on location selection, spending nearly a year selecting their first location, and brought in elements of the local community. Throughout the growth of the company Caribou continued to hold on to that initial strategic focus. Caribou moved quickly to preempt competitors in both capital and real estate markets.

The human resources involved in the founding of Starbucks could be described as those individuals that Schultz could convince that his vision was viable. Friends and co-workers joined him doing any job that needed to be done from corporate strategizing to taking out the trash. The initial hires were almost exclusively from within his social network. Caribou Coffee brought more of the appropriate expertise to the HR practices mostly by way of their founders. When additional staff were needed, hiring was based on expertise rather than relationship.

Lastly, financing Starbucks was an arduous process. Schultz did eventually obtain the money required to expand, but it took rejections by over 200 people to find the few investors who would be willing to support the venture. In stark contrast, Caribou raised more than double the funding they sought for expansion, bringing in $3 million from a number of formal investors. These cases illustrate the opportunity for gourmet coffee in the United States and how that opportunity moved between system states. The nature of the opportunity for Starbucks was endogenous in that Schutlz’s actions formed the market imperfection in what was an otherwise dying or non-existant industry. Caribou, on the other hand, was responding to the growing demand for gourmet coffee houses in the United States as the formation of Starbucks’ acted as the exogenous shock for Caribou. The nature of the entrepreneur in Starbucks’ is non-predictive. That is to say, Schulz was not specially able to see or discover the opportunity as it did not yet exist. The

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Pucketts, however, had backgrounds and training that enabled them to discover the opportunity for Caribou Coffee. Lastly, Starbucks operated in an uncertain environment. There were no estimates that could be made for the return on Starbucks. Even those involved in the industry did not see the venture as being worthwhile. Meanwhile, Caribou Coffee entered a market with growing demand and plenty of data with which to estimate demand indicating a risk-based decision context.

System states enable a clearer understanding of opportunity types. This framework is only worthwhile, however, if it can be tested empirically. Unobservable aspects of these system states present problems to empirical testing. To that end, the last section offers some potential empirical indicators to test these different opportunity types.

Empirically testing opportunity types

A focus on entrepreneurial processes as indicators of the system states will enable the testing of opportunity types as system states. Understanding the relationships between the underlying assumptions and the entrepreneurial processes provides guidance toward markers of unobservable phenomena that represent system states.

Research on theories involving unobservable phenomena has been vital in other fields, particularly in strategic management research (Godfrey & Hill, 1995). Godfrey and Hill (1995) describe how transaction cost economics, agency theory and the resource-based view of the firm all theorize about unobservable phenomena. Unobservables are phenomena that may be relevant to theory building, but are unable to be measured because of inadequate measurement instruments or because the act of measuring the phenomenon alters the phenomenon itself. Strategic management research has advanced through empirical research that found solutions to these problems of unobservables. In transaction cost economics, transaction costs are unobservable, but creative empirical studies (e.g. Walker & Weber, 1987) have been able to estimate unobservable transaction costs. In agency theory, proxies have been used to infer the unobservable agency costs by looking at observable phenomena such as abnormal returns (e.g. Kaufman & Englander, 1993). In the resource-based view, again suitable proxies have been used to support the assertions regarding unobservables (e.g. Henderson & Cockburn, 1994). In each of these theories, Godfrey and Hill (1995) take into account what is assumed and what is theorized about to describe a means of empirical testing. Similar steps can be taken to test opportunity types.

To test opportunity types the underlying assumptions must be considered. While sampling on a boundary condition may provide a sample that reflects only discovery states or only creation states, verifying the existence of multiple opportunity types requires testing both system states simultaneously. If a sample disproportionately focuses on one state, any generalizations from the study should be limited to that state. To overcome this issue, metrics must be developed for each of the boundary conditions to ensure the existence of one system state or the other. In some cases, the metrics will need to be proxies for the unobservable aspects of the theory. The opportunity itself is an unobservable phenomenon (Godfrey & Hill, 1995). While creative empirical settings may aid in identifying an appropriate proxy for whether an opportunity is exogenous or endogenous, more general proxies may be derived from the processes that are expected to depend most directly on the nature of the opportunity. In discovery states, the nature of the opportunity is exogenously given. The opportunity exists within a given industry with established practices and technologies. As such the entrepreneur capitalizes on information asymmetry in exploiting the opportunity. During exploitation the information asymmetry is diffused



to the market. Therefore, a firm pursuing an opportunity in a discovery state typically relies on speed, secrecy, and the erection of entry barriers as means of defending a competitive advantage (Alvarez & Barney, 2007).

The nature opportunities in creation states, on the other hand, are endogenous. They are formed by the iterative path-dependent actions of the entrepreneur. Speed, secrecy, and entry barriers are not typically a means of defending competitive advantage, but rather in this view it is the creation of new information and new social constructions (Alvarez & Barney, 2010). This new information may create a new path5 in the creation system state. The ensuing path-dependency may serve as a barrier to imitation that could provide sustainable competitive advantage (Barney, 1991). Thus, a suitable proxy for the nature of the opportunity may be found in the means of defending a competitive advantage. Specifically, if a firm is focused on speed, secrecy or the erection of entry barriers then it is more likely exploiting a discovery state. This is but one example of what could be a suitable proxy for the nature of the opportunity in a given empirical setting.

The nature of the entrepreneur, on the other hand, is observable. Although there has been some debate on the usefulness of the alertness construct (Gaglio, 2004; Gaglio & Katz, 2001), recent work has described varying measures that can be used to determine the presence of alertness in an entrepreneur. More simple measures may include quantifying the relevant experience or expertise an entrepreneur may possess (Shane, 2003), whereas more complex measures could include the tool developed by Tang and colleagues(Tang et al., 2012) who have created and validated a survey instrument that measures the level of alertness in an entrepreneur. As these are measurable attributes, they are more straightforward in empirical work.

The boundary condition relating to the decision-context is again unobservable. The question here is if demand was estimable ex ante. However, it is difficult to verify whether a decision-making context was risky or uncertain ex post as the tendency is to assume that sales indicate ex ante demand. The emergence of demand does not mean that demand for that product or service would have existed without the actions of the entrepreneur. Therefore, it is important to look for proxies of the decision context at the time of exploitation. While the decision-making context itself may be unobservable, both strategy and entrepreneurship literature have shown that firms and individuals often use alliances as a means of overcoming uncertainty (Dickson & Weaver, 1997; Sarasvathy, 2001). The greater use of alliances would suggest an uncertain decision-context and thus a creation state. Furthermore, research on effectuation has described a variety of processes that are present in decision-making under uncertainty (Read, Song, & Smit, 2009b; Sarasvathy, 2001). These indicators could be used separately or in combination to create an observable measure for the presence of decision-making under uncertainty.

It is important to note that these measures collectively separate creation and discovery states. Simply segregating system states based on one of the criteria above may seem expedient, but that would not reflect the entire nature of a discovery or creation state. Therefore, it is important to gather as much relevant information to indicate the type of opportunity being pursued. A combination of the measures suggested above should be used for empirical testing. Factors could be created and future research could draw on these factors of discovery or creation states to test the reality of the opportunity states, their implications for entrepreneurial processes, and the progression from one state of the opportunity to another. While prior research has used singular measures for the difference between discovery and creation (Hmieleski & Baron, 2008), future research should work to examine discovery and creation as system states with specific implications for the entrepreneurial process as a whole.

5 See Garud and Kanoe’s (2010) work for a discussion about the differences between path-dependency and path creation. The understanding of path creation here is that in creation system states, the entrepreneur is not initially locked-in to a given path, but instead interacts with the environment. This interaction may create a new path. Subsequent entrepreneurs may need to follow a similar path to imitate the focal entrepreneur, and find themselves at a disadvantage.

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Furthermore, the transition between system states should be addressed. The transition from creation to discovery seems logically straightforward but the means and markers of this transition are not well defined. Research can address whether creation states typically transition into discovery states or if they more often transition into organizations pursuing efficiency rents. Some existing research has examined the formation and initial evolution of industries without a specific view of opportunities (Santos & Eisenhardt, 2009). Additional research at the industry level should address if and how creation states become the exogenous shocks for future discovery states. Discovery opportunities may represent entrepreneurship that moves economic processes closer to equilibrium while creation opportunities may represent entrepreneurship that moves economic processes further from equilibrium. Opportunity types may then give indications for policy regarding economic growth and entrepreneurship.

Understanding these opportunity types, their boundaries, and their transitions offers promise for understanding highly contextualized aspects of entrepreneurship. Planning, for example, has been widely studied in entrepreneurship (see Brinckmann et al., 2010 for a meta-analysis) resulting in many different contextual factors that explain when planning is effective (Shane & Delmar, 2004; Wiltbank et al., 2006) and how often planning is used (Honig, 2004) among other questions. These contextual factors may align with discovery and creation states such that the context of these areas really lies in the state of the opportunity and the related entrepreneurial processes. Thus, opportunity system states may further serve to galvanize prior research in specific aspects of entrepreneurship by incorporating opportunity type as a possible explanation.

ConclusionRecently, Shane (2011) has suggested that there are not yet any distinctive theories or assumptions in entrepreneurship research. To some extent, this paper has attempted to answer that critique by detailing the system states of opportunities and furthering the theoretical development of opportunity types. Drawing on Dubin’s (1978) guide to theory building we have used the concept of system states to clarify and extend existing theory work in entrepreneurship about opportunity types. While strategic management research may explain some of the phenomena that entrepreneurship has claimed to be distinct, this theory aids in explaining issues that are assumptions of strategic management. For example, the system state of the opportunity helps to explain where the firm’s heterogenous resources may come from - an assumption of the resource-based view in strategy (Barney, 1986).

There is still controversy over the value of opportunity types in entrepreneurship research. However, this is common in theory development as can easily be seen in questions regarding the RBV in strategy. Conner (1991) questioned whether the RBV was significantly different from other existing theories in other fields. Ten years later Priem and Butler (2001) described the RBV as a potential theory and questioned it’s usefulness for strategic management. Nonetheless, a recent Journal of Management special issue described the resource-based theory as a mature theory in strategic management (Barney, Ketchen, & Wright, 2011). While opportunity types and their underlying theory may still be in their infancy, the concept of discovery and creation opportunities has the potential to be a distinctive theory of entrepreneurship.

The concept of opportunity types is simultaneously alluring and frustrating. Classifying different types of opportunities for more fine-grained analysis seems to be a logical step for entrepreneurship research. Yet it has proved difficult to test or even verify multiple opportunity types. Still, a theory of opportunity types holds promise for entrepreneurship research. Moving the



conversation from purely theoretical to empirical requires a clear understanding of the boundary conditions between creation and discovery system states. By analyzing opportunity types as system states and creating metrics based on their boundary conditions, future research can demonstrate how different processes are more appropriate for one state of opportunity or another and how the origins of the opportunity are, in fact, both important and within reach.

Table 1. System states

Unit Value in Discovery System State

Value in Creation System State

Nature of the Opportunity Exogenous Endogenous

Nature of the Entrepreneur Alert No Ex Ante Differences

Decision-making Context Risk Uncertain

Planning Formal Business Plan Little to None

Leadership Expertise Charismatic

Strategy Pre-planned Emergent

Path to Competitive Advantage

Speed, Secrecy, Entry Barriers

Path-creation processes

HR Acquisition Broad Hiring for Expertise Hiring within social network

Financing Formal financing Informal financing

Table 2. Starbucks and Caribou Coffee as examples of system states

Creation Discovery

Company Starbucks Caribou Coffee

Planning Opened a location near his current employment to test the market

Spent a year researching coffee houses and locations

Leadership Background in sales but a vision for a future coffee revolution

Experience with Dunkin Donuts and a background in investment banking

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Creation Discovery

Strategy Began as a copy of Italian coffee houses but emerged as more cozy place

Gourmet coffee shop with a local neighborhood feel

Path to Competitive Advantage

Strong branding complete with a growing new vocabulary

Quickly expanding into new markets, preempting rivals

HR Acquisition

Hired friends who did anything required early on

Founder experience served functional roles within the company and later hires were based on industry experience

Financing Turned down by over 200 investors

External investment greater than the amount initially sought

Figure 1 - Model of units and laws of interaction

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Nature of the OpportunityFirm Performance

Firm Performance

Nature of the Entrepreneur

Decision Making Context

Entrepreneurial Processes

PlanningLeadership

StrategyPath to Competitive Advantage

HR AcquisitionFinancing

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