Creation and Discovery: Alvarez challenges scholars to
study, debate alternative theory to entrepreneurship

Business researchers need to focus more on entrepreneurs who “create” new businesses rather than those who “discover” them, according to two management professors.

Discovery-type entrepreneurs find and exploit business opportunities that already exist, and they get the most attention by researchers, according to Sharon Alvarez, an associate professor, and Jay B. Barney, the Chase Chair for Excellence in Corporate Strategy at the Fisher College of Business. These discovery-type entrepreneurs might be viewed as “mountain climbers,” they said.

But researchers have virtually ignored the business creators, who develop markets that didn’t exist before. These entrepreneurs can be seen as “mountain builders.”

The Fisher professors offer a strong case for studying the mountain builders in the business world in an article released in the November 2007, “Strategic Entrepreneurship Journal,” a new research publication that accompanies the "Strategic Management Journal."

The article, “Discovery and Creation: Alternative Theories of Entrepreneurial Action,” explores the distinction between the two theories and their implications for business development. The co-authors contend that discovery theory has been the approach to research on entrepreneurial action.

“It is the easier of the two to study and teach in business schools,” Alvarez said.

“While discovery and creation theory have much in common, they often generate different predictions about when specific entrepreneurial actions will be more or less effective,” the co-authors wrote in the article.

Alvarez discussed with Knowledge Link the article and how entrepreneurship research and education can be greatly improved through more intense study of the role of creation theory.

KL: You and Professor Barney contend in your article that there has been little study of creation theory by business scholars.

Alvarez: Creation theory has been studied in sociology a little bit—this notion of creating opportunities. However, it just hasn’t been applied directly to entrepreneurship and applied directly in ways that is useful to entrepreneurship scholars. There has been some work done primarily by K.E. Weick, P.L Berger and T. Luckmann. But no one has said this is why creation theory is important to the entrepreneurial process and why it is relevant to the study of different types of opportunity emergence. Entrepreneur scholars act as if an opportunity to form the next Microsoft is the same as starting a local restaurant or dry cleaner.

Discovery theory is pretty much neo-classical economics. This work has been taken and applied very directly to entrepreneurship. What Jay and I have done is taken creation theory and have done the same thing that entrepreneurship scholars did for discovery. We took work that was already done on creation theory and asked, ‘how does it directly apply to entrepreneurship and what does it mean to the entrepreneurial process?’ And more specifically, we asked, ‘how does it form an alternative to discovery theory?”

KL: Because of the limited amount of studies on creation theory applied to entrepreneurship, how difficult was your research?

Alvarez: It was awful. Entrepreneurship is so dominated by discovery theory. It fits in with business school thinking. There are some entrepreneurship scholars who are out there who really believe that it’s all creation, not discovery. Unfortunately, they are not as active in entrepreneurial research like the discovery group. It was quite a battle. But we are feeling really good. People get that creation is different.

KL: Do you think scholars have ignored applying creation theory to entrepreneurship because it focuses more on “soft-skills” and not as data driven?

Alvarez: I think that would be accurate. Entrepreneurship scholars, for the most part, they get creation theory. Most of them are pretty open to it. For those who aren’t, it has opened a lively debate. That’s a good thing. You have to be open to the fact that it’s different approach and it’s a different set of skills and processes. If we are really serious about teaching and researching entrepreneurship, we should acknowledge that opportunity formation may need a broader set of skills than what are currently being offered in B-schools.

KL: How will this new research in creation theory influence entrepreneurship and business education?

Alvarez: Right now, we teach perfectly for discovery. We teach people how to do data analysis, we teach them how to analyze numbers and we teach them how to analyze the market. What we are teaching people to do is start the next incremental business.

In the exploitation process, discovery is different from creation. And we can teach those different processes. We know that business emergence requires a different way of making decisions and a different way of thinking about the world, depending on the type of opportunities. We need to show students how to use that to be successful.

KL: Can you identify some successful companies or entrepreneurs who you believe exemplify a creation theory approach?

Alvarez: Some of the biggest breakthrough innovations come from creation theory. The Ice Hotel (a hospitality resort built from ice located in the Arctic) is one of the best examples of creation theory.

Another example, I believe, is Starbucks. Starbucks is a great example of creation theory. If you look at all the information that (Starbucks CEO) Howard Schultz had on the coffee industry prior to launching, nothing at all indicated Starbucks would be successful or that we need a prior coffee. Coffee consumption was down in the United States; we were drinking weaker coffee not stronger coffee. Yet Howard got people nationwide to pay $3 a cup for something we were previously paying 25 cents for. That is creation theory. He had a solution and then convinced the world we had a problem.

KL: Were there surprises or unexpected findings you uncovered during the course of your research?

Alvarez: When we presented the paper at Cornell, we were shocked when the people at Cornell became excited about the implications of our work for developing countries. The implications for emerging economies are huge. Creation theory helps explain how people in emerging economies are going to have to go about doing entrepreneurship. They have to create opportunities because there are only a few to be discovered.

In emerging and developing economies, they have to look at their resources and figure out how to take what they have to make an opportunity. I’ll give you an example, in India, they do not have mass electricity the way we do here in the U.S. So refrigerators are not purchased in those households. One of the things (entrepreneurs in India) have done is come up with this small icebox. It’s about two-by-two in size. It is not a freezer, but it keeps things cold and keeps food from spoiling. Over time, modifications will be made to it and that little icebox may eventually displace refrigerators in the world. They may figure out how to refrigerate without electricity.

KL: Where do scholars go from here?

Alvarez: I think it is time for debate. Where do opportunities come from? That is a huge question. We currently know there are three sources: recognition—an arbitrage opportunity; discovery; and we know there is creation. Where do these opportunities come from, do they influence the organization that are going to be formed around them? There is a posse of information about how opportunities come and how they are exploited and developed that have huge implications for organizations that get formed around them. It’s all about trying to understand that.