Don Sull's blog

In 1964, the Metropolitan-Dade county government completed construction of a new Miami port that accelerated the growth of the nascent Caribbean cruise industry. Throughout the next fifteen years, dozens of start-ups, including Royal Caribbean and Carnival, retrofitted existing ships to offer pleasure cruises. Established transatlantic cruise companies, such as Hamburg America Line and the White Star Line, which transported tens of millions of immigrants from Europe to the United States in the late 19th century, failed to seize the opportunity.

Incumbent cruise lines had every incentive to exploit the new market. The rise of non-stop commercial flights between Europe and North America decimated demand for transatlantic passenger cruises, produced massive overcapacity, and wiped out industry profits. They also knew about the market. For decades, European passenger lines had sailed overnight cruises to Caribbean ports with departures from Miami as a way to utilize their ships during the Winter, when rough waters limited Atlantic crossings.

Managers and entrepreneurs walk past lucrative opportunities all the time, and later kick themselves when someone else exploits the chance. Why do companies miss opportunities when they have every incentive in the world to exploit them? Managers miss potential opportunities not because they are stupid, inattentive, or uninterested in novelty. Rather, the mental maps they use to navigate an uncertain future channel their attention and dull their sensitivity to new ways of doing things.

The human mind is hard-wired to reinforce existing maps, even in the face of dis-confirming evidence. Psychologists have documented a depressingly long list of cognitive biases that distort how people process new information and prevent them from noticing when established mental models break down. The “confirmation bias” refers to our tendency to notice data that confirms existing assumptions, and while ignoring or discrediting information which challenges our assumptions. When faced with data that doesn’t jibe with existing assumptions, people typically ignore it, discredit it, or force it to fit their model.

It is difficult to notice opportunities, but not impossible. Managers can increase their odds of spotting opportunities by exploring anomalies, or surprising outcomes that deviate from what they expect to happen. Anomalies may signal an external shift, such as the rise of transatlantic air travel, that renders an existing map outmoded, or show where initial assumptions, such as a start-up’s business plan, are wrong. Common anomalies include initiatives that should work but don’t, things that shouldn’t work but do, a surprising connection among unrelated events, an inexplicable competitive move, demand for a product never expected to sell, or events deemed unlikely or impossible.

People rarely discover anomalies through deliberate search, but rather stumble upon them. Entrepreneurs, for example, often identify an opportunity by noticing a gap between prevailing maps in an industry, and how things could be done.  One study analyzed entrepreneurs who adopted a technology developed by MIT scientists to print in three dimensions, for products ranging from architectural models to artificial bones. None of the entrepreneurs actively sought out the novel technology, but rather stumbled upon it by accident.

In another study, professor Amar Bhide surveyed founders of a subset of Inc. 500 companies, for example, discovered that only 4% identified a gap in the market through deliberate search. Another 71% encountered them in their previous jobs, while a further 20% discovered them through serendipity-building a hobby into a business, developing a family member’s idea, or in the case of one entrepreneur noticing an opportunity while on honeymoon.

My next few posts will identify common anomalies and obstacles to spotting opportunities.