Four Paths to Opportunity Identification

In our work teaching innovation and entrepreneurship to students at the University of Sydney Business School and the California College of the Arts, we focus on four cognitive acts that comprise ‘design cognition’ — the type of thinking that fuels opportunity identification and formation. Understanding and embracing them can help to demystify the genius of the entrepreneur and bring more innovation to organizations.

1. Framing. In entrepreneurship as in design, every situation has a ‘problem frame’ and a ‘solution frame’. Each frame explains your point of view on the situation. For example, is the situation of single-passenger vehicles on congested freeways one of productivity or personal safety? Framing and re-framing aim to establish alternative ways of interpreting situations in accordance with differing perspectives on its various dimensions. In our experience, this can best be achieved by observing situations involving user behaviour or user-generated problem statements.

One exercise that we find effective was inspired by the approach of the Austin Centre for Design. Instructors use a toothbrush as the object of design and ask students to consider three new scenarios. First, they ask them to re-frame the toothbrush as it might be used in an atypical environment (e.g., in the kitchen, in an airplane, at a conference). Second, students are asked to re-frame the toothbrush from a different perspective (e.g., for use by a dentist, a hotel housekeeper or on a blind date). And third, students must re-frame the toothbrush as a different type of object entirely. For instance, what if it were a plant, a spray, or a service? These framing exercises prime students to come up with novel frames for their own entrepreneurial aspirations.

2. Analogical Reasoning. Research shows that new opportunities can emerge from making novel associations between existing things, and as a result, analogies have figured prominently as inspirations for design. Scholars have identified two types of analogies: within-domain (‘near field’) and between-domain (‘far field’). As an example of between-domain analogies, when you are trying to develop a new business model for your mobility venture, you might want to refer to other platform business models such as those used by ebay or Gillette. A within-domain analogy occurs when you apply examples from a similar industry or market in order to detail the provision of a new solution.

An intriguing application of analogical reasoning lies in thinking about a new product, service or business model using the ‘analogs and antilogs’ technique discussed by Mullins and

Komisar in their book, Getting to Plan B. Business ideas do not have to be revolutionary; rather, they can be developed by looking at ‘analogs’ — what has worked in the past — and imitating or building on these exemplars. Ideas can also be developed by looking at ‘antilogs’ — businesses that have been unsuccessful — and avoiding past mistakes. Apple’s ipod helps to explain this concept. In a reverse-engineering exercise, we could say that the Sony Walkman is the analog that inspired Apple. Because the Walkman proved that millions of people were willing to pay for a device that allows them to listen to music on the go, Apple did not need to validate this hypothesis. The Walkman is only part of the story. We can also obtain insights from looking at antilogs such as

Napster which led to the development of a legitimate platform for downloading music: the itunes store. The popularity of Napster as a peer-to-peer music-sharing site signified a growing trend toward downloading music. After piracy and illegal downloading led

to Napster’s ultimate failure, Apple created an online store where people could download and save music after paying a small fee to avoid such legal issues.

3. Abductive Reasoning. Unlike deductive and inductive reasoning — which seek to produce logically or empirically-true conclusions — abductive reasoning introduces a hypothesis aimed at explaining observations or data. While the hypothesis is plausible, it may or may not be true. This uncertainty generates an experiment, and it is often the experiment itself that leads to the innovation.

Researchers have described two types of abduction: explanatory abduction and innovative abduction. Explanatory abductions introduce hypotheses to explain surprising observations. The aim is to avoid pattern-recognition bias by explaining observations through recourse to alternative causes and effects. In a typical instance, we ask students to explicitly search for surprising facts and observations that suggest value to users and then propose a testable causeeffect relationship that explains the observation of the value.

Innovative abduction is a form of reasoning in which we hypothesize about what to create and the principle underpinning a class of solutions. In this case, the challenge is not only to understand ‘what needs to be true’ to support the new value for the user, but also to come up with a new rule that makes the new value come alive, such as a new revenue model.

4. Mental Simulation. Mental simulation involves reassessing past events and imagining future scenarios to evaluate and compare their likelihood and profitability.

Once our students identify a new opportunity, we ask them to mentally simulate in three areas. First, how to make the opportunity work in the marketplace from a business model perspective. Next, we ask them to simulate scaling-up the business, which might include expanding into new occasions of consumption or new geographies. Third, we ask them to mentally simulate competitors’ reactions, identifying which competitors are capable of thwarting the new venture to stress-test the opportunity.

We encourage students to consider the following questions: Are these customer needs scalable to other customer segments? Who are we displacing in the value chain? Do we have the capabilities needed to produce the new offering? Do we need partners? In sum, mental simulation helps them identify deficiencies and contradictions within the structure of the ‘solution’—and fundamentally improve it.

As indicated, opportunity identification does not arise solely from the application of a defined set of activities, but rather through the application of particular ways of thinking. Through the continuous acts of framing, making analogies, thinking abductively and doing mental simulations, entrepreneurs — and all innovators — can learn to recognize evolving needs and adapt their offerings accordingly.

Massimo Garbuio, PHD, is a Senior Lecturer in Entrepreneurship at the University of Sydney Business School. Andy Dong, PHD, is the Chair of the MBA in Design Strategy Program at the California College for the Arts.

This is an adapted excerpt from their paper “Demystifying the Genius of Entrepreneurship: How Design Cognition Can Help Create the Next Generation of Entrepreneurs,” co-written with N. Lin, T. Tschang and D. Lovallo, which appeared in the Academy of Management Journal.