Academic journal article Entrepreneurship: Theory and Practice

Prior Knowledge, Potential Financial Reward, and Opportunity Identification

Academic journal article Entrepreneurship: Theory and Practice

Prior Knowledge, Potential Financial Reward, and Opportunity Identification

Article excerpt

This article simultaneously explores the constructs of potential financial reward and prior knowledge of customer problems to provide a deeper understanding of the identification of opportunities. Results suggest that while prior knowledge of customer problems leads to the identification of more opportunities and opportunities that are more innovative, it also moderates the relationship between potential financial reward and opportunity identification. We found that the less knowledgeable an individual was about customer problems, the more positive the effect that potential financial reward had on the number of opportunities identified and the innovativeness of those opportunities.


In a rapidly changing world, organizations need to continually identify new opportunities beyond existing competencies if they are to survive and prosper (Hamel & Prahalad, 1989; McGrath, Tsai, Venkataraman, & MacMillan, 1996). The identification of opportunities has been recognized as one of the most important abilities of successful entrepreneurs (Ardichvili, Cardozo, & Ray, 2003) and consequently has become an important element of the scholarly study of entrepreneurship. Gaglio and Katz (2001, p. 95) contend that "understanding the opportunity identification process represents one of the core intellectual questions for the domain of entrepreneurship." Recent research into resource-based theory has extended its boundaries to include identification of opportunities as a resource that, through the process of exploitation, can lead to competitive advantage (Alvarez & Busenitz, 2001). Not surprisingly there has been considerable interest in why, when, and how some people are able to identify opportunities, while others cannot or do not (Shane & Venkataraman, 2000).

Researchers have suggested that opportunity identification may be related to, among other factors, entrepreneurial alertness (Kirzner, 1973), prior knowledge (Shane, 2000), social networks (Singh, Hills, Hybels, & Lumpkin, 1999), entrepreneurial cognition (Baron, 1998), and potential financial reward (Schumpeter, 1976). For a more complete review see Appendix 1. Although each of these areas of study has made a contribution to our understanding of opportunity identification, prior knowledge and potential financial reward have been central to many recent investigations. For example, social networks are particularly important for accessing and reducing the costs of resources necessary for entrepreneurial activity (Cromie, Birley, & Callaghan, 1994; Portes, 1998; Lin, Ensel, & Vaughn, 1981); they are a source of information about new opportunities (enhance knowledge) and make entrepreneurial action more financially rewarding (Birley, 1985; Burt, 1997; Johannisson, 2000).

Prior knowledge refers to an individual's distinctive information about a particular subject matter and provides him or her with the capacity to identify certain opportunities (Venkataraman, 1997; Shane, 2000). Potential financial reward is the possibility of financial gain that motivates individuals to identify opportunities (Venkataraman, 1997).

Despite the fact that investigating potential financial reward and prior knowledge have added significant insights into the identification of opportunities, relatively little research has empirically explored the inter-relationship between these constructs in the identification of opportunities. McMullen and Shepherd (forthcoming) propose that opportunity identification requires the concomitant consideration of an individual's knowledge and his or her motivation (including potential financial reward). In this study we explore the inter-relationship between prior knowledge and financial reward to gain a deeper understanding of opportunity identification.

Another issue central to the study of opportunity identification is how opportunities are measured and therefore empirically tested. …

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