What does it take to come up with a great business idea? A flash of inspiration? A spark of genius? An innate sense of business strategy? Cutting edge research is uncovering a central theme: It doesn’t take “magic” to discover a golden opportunity.

What it does take is the ability to watch, listen, and learn to utilize background experience and prior education in order to identify potentially successful ventures.

This is good news for Utah State University business students who benefit from this research first-hand as they learn what it takes to be successful entrepreneurs.

As head of the Department of Management and Human Resources at Utah State, and as an entrepreneur himself, Gaylen Chandler has always been fascinated by how individuals make the decision to start their own businesses. Chandler’s extensive research on entrepreneurial competencies and opportunity identification is now furthering knowledge for entrepreneurs across the nation. It is also especially benefiting students at Utah State University.

“Opportunity recognition is a central question in business research because it is one of the most crucial abilities for success as an entrepreneur,” says Chandler. “If we can teach students how to identify successful business ventures, the outcome will be more successful entrepreneurs and ultimately more successful organizations.”

With colleagues Dawn DeTienne, assistant professor of entrepreneurship at Utah State, and Douglas Lyon, formerly an assistant professor of strategy and entrepreneurship at Utah State (currently at Fort Lewis College in Colorado), Chandler has taken the concept of opportunity recognition a step beyond the current research and has outlined a learning model of entrepreneurial opportunity.

Unlike other research on the topic, Chandler’s opportunity model considers a person’s human capital, or prior work experience and educational background that could be relevant to new business opportunities. General human capital includes a person’s formal education, age, and previous entrepreneurial experience. Industry specific human capital refers to a person’s knowledge and skills that are primarily useful in a single organization.

Chandler found that anybody who is searching for a business opportunity uses their human capital to identify a feasible, profitable venture. They either improve an existing product or service, innovate a new one, or imitate one that is in an under-saturated market, says Chandler.

To develop and test his improve/innovate/imitate model, Chandler and his colleagues conducted 35 in-depth interviews with entrepreneurs in the electrical measurements and medical instruments industry. They then expanded the study with a survey of almost 1,000 companies started in these industry sectors within the past five years.

Previous models of opportunity recognition did not fit Chandler’s empirical observations. In response to his findings, Chandler created a new learning model of entrepreneurial identification that acknowledges entrepreneurs’ knowledge, prior experience, and human capital. Chandler’s model has four different methods, or sequences: Learn/Replicate, Learn/Innovate, Learn/Acquire, and Innovate/Educate.

“Overwhelmingly it was identified throughout this study that there is no magic in opportunity identification,” Chandler said. “The most repeated process we found in entrepreneurs is they get involved in an industry and identify opportunities from there; they watch, listen, and learn.”

Chandler’s research provides evidence that entrepreneurs’ knowledge and human capital are significant predictors of which of the four sequences they will use. For example, entrepreneurs with business education were more likely to learn about an industry first and then acquire an income stream (Learn/Acquire). These entrepreneurs said that both formal education and previous entrepreneurial experience influenced the way in which they identified business opportunities.

Chandler’s opportunity sequences are especially important because an entrepreneur’s initial opportunity sequence in part determines which additional products and markets will be developed, and the outcomes and financial performance of those new ventures.

An example of this is the Learn/Acquire sequence. Learn/Aquire requires a shorter time to profitability. People who start these spin-off businesses already have products and markets developed, and are able to generate cash-flow and profitability in a shorter period of time. This sequence, however, also creates a lower Return on Assets (ROA), most likely because a larger initial investment is required. In the specific industries that Chandler studied, this often occurred when a larger company developed a product or service and got it to market, but later decided that it was not a part of their core business.

Another example, says Chandler, is that people with the highest levels of education tend to follow the Learn/Educate sequence. M.D.s or advanced engineers sometimes will develop a product prior to identifying a market, which can create business challenges.

One entrepreneur using the Learn/Educate sequence developed surgical instruments that did not stick to body tissue. Although he wanted to create a comprehensive line of instruments, he soon discovered that surgeons only cared about using non-stick instruments for some specific applications. Thus, his product’s success required educating doctors about the new non-stick technology and educating the company founders about the market’s limitations. Because of the reciprocal learning process, it took much longer for those products to reach market and achieve profitability.

“The objective of our study was to gain better insights as to how an understanding of the opportunity identification process would enhance our overall understanding of the entrepreneurial process,” stated Chandler. “Our hope is to be able to better teach future entrepreneurs how to successfully use their own human capital to identify potential ventures.”

Chandler’s research into opportunity identification will influence what students are being taught in entrepreneurial classrooms around the country. An additional study conducted by DeTienne and Chandler proposed that opportunity identification is a skill that can be developed in the entrepreneurial classroom.

Chandler found that when students are taught an opportunity identification process that includes securing, expanding, exposing, and challenging (SEEC), students can generate more innovative ideas for business opportunities. The SEEC model is aiding students in honing their creativity in order to identify potential business ventures.

- Rachel von Niederhausern