Enterprise and Small Business Principles
The relationship between discovery and exploitation
Above it was noted that just because an idea originates with independent individual(s) it does not have to be exploited as an independent start-up, and just because an idea emerges in a corporate context it need not stay there forever, In this regard, then, the discovery and exploitation processes are separable. An examination of Table 7.1, however, suggests they are intricately entwined but if what is being referred to is the entire discovery and exploitation process then the latter process is the truer image in most cases. Importantly, it is usually not the case that ideas (or ‘opportunities’ as they are often called) are first discovered (i. e. conceptually completed) and then exploited (Bhave, 1994; de Koning, 2003; Van der Veen and Wakkee, 2004).
In an attempt to restore some order it has been suggested that the entrepreneurial process, while not linear, is at least directional: existence of opportunity is a precondition for discovery, which is a precondition for exploitation (Shane, 2003; Shane and Eckhardt, 2003). But not even that holds up empirically. People develop and hone ideas that do not reflect objectively existing, external opportunity, or ideas that become viable because of external events that occur after the idea was developed. In other cases they acquire and combine resources that de facto help exploit a business idea they have not yet conceived, or they successfully exploit a different opportunity from the one they thought they were pursuing, for example because it was a hit with completely different buyers and/or for other uses than the founders had imagined (Davidsson, 2003).
The interrelation of discovery and exploitation is what Figure 7.2 attempts to portray. For example, an entrepreneurial process may start with an individual perceiving what they think is an opportunity for a profitable business [discovery]. In the efforts to make this business happen, contacts with resource providers and prospective customers [exploitation] make it clear that the business as initially conceived will not be viable
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Figure 7.2 The interrelation between discovery and exploitation |
[feedback to discovery]. The individual changes the business concept accordingly [discovery] and continues efforts to marshal and coordinate the resources needed for the realisation of the revised business concept [exploitation] (Davidsson, 2004).
Importantly, considerable success is unlikely if either process is severely underemphasised. Regardless of the degree of temporal separation or integration of the two sub-processes it is important that both receive adequate attention. The perils of lack of balance can be described as follows:
■ Where there is too much emphasis on discovery no value will ever be created or appropriated. For example, certain kinds of engineer-led high-tech firms are notorious for being eternal playgrounds for the development of the ‘perfect’ product rather than one for which a significant number of customers are willing to pay an above production cost price. Also in this vein, Carter et al. (1996) obtained results suggesting that those who did not do enough tangible exploitation activities were less likely to get the business up and running. Further, as observed by Singh (2001), failure is not evidence that the idea is wrong. It may have been the case that a faulty exploitation effort ruined a basically sound idea.
■ Where there is too much emphasis on exploitation there is the risk that not enough value is being created because the founders have not tuned in carefully enough to the customers’ real needs and preferences.
■ Another type of overly strong emphasis on exploitation is when the founders try to appropriate (close to) all the value created by their product or service (or more), rather than sharing the benefits with the customers. The customers will then have incentives to look for other solutions instead. When the founders are unwilling to share the value created with external investors they may end up being sole owners of a very insignificant operation rather than substantial part owners of a multimillion pound business.
■ Finally, when entrepreneurs try to appropriate value without creating value on the societal level their activities are socially destructive rather than constructive (Baumol,
1990) and will be looked down upon and/or be subjected to legal counteraction. Examples here might include business activities that are typical for mafia organisations, but there are other examples as well. One real example is a graffiti removal business whose founder-owners used night time (and spray paint) to generate demand for their daytime business activity! While such activities can be short-term profitable they are often detrimental in the longer term and/or for entrepreneurs collectively.
