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Fostering entrepreneurship in the large, diversified firm
Lf entrepreneurship is to flourish in a huge organization, lower-Ied managers need to be free to identify and pursue what they believe are promising opportum%ies.
FosteringEntrepreneurship in The Large,DiversifiedFirm VIJAY SATHE
T
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he essence of entrepreneurship lies in the recognition and exploitation of new business opportunities involving new products, markets, and technologies. The large, diversified firm needs to pursue myriad opportunities on many product, market, and technology fronts simultaneously. Moreover, in today’s highly interdependent, global economy, entrepreneurial opportunities arise in unexpected ways, and the organization that wishes to compete effectively needs to seize these opportunities quickly. In response to the heightened demands of this economy, top management at many diversified companies is working to promote multiple centers of entrepreneurial initiative, typically at the business unit or division level. There are several well-known examples of companies that have long successfully promoted such entrepreneurship, including 3M, Johnson & Johnson, and Hewlett-Packard. AT&T, General Electric, Kodak, and many others are reportedly following these pioneers’ lead. This article is based on a detailed study of management’s efforts to promote entre-
preneurship within the business units or divisions of large, diversified firms. We conducted in-depth interviews and made careful observations at eight large companies in the United States and Europe; we also studied the histories of 35 specific entrepreneurial ventures. In the following discussion, the term “entrepreneur” refers to the person championing the venture. This person was the business unit or division head, or some other manager at the business unit or division level. The names of the companies and of the ventures have been disguised for reasons of confidentiality; additional details concerning this research are provided in the box on page 25. The results of this study strongly indicate that in order to promote entrepreneurship successfully at the business unit or division level in a large, diversified firm, top management needs to make a sustained commitment to policies and practices that may fly in the face of conventional wisdom. Unfortunately, many senior managers have not made such a commitment and thus have promoted the form but not the substance of entrepreneurship. These managers push ahead
with methods to promote entrepreneurship that are easy to understand, explain, and implement-but that are often ineffective or even counterproductive.
THE FAILURE OF CONVENTIONAL METHODS When companies try to promote entrepreneurship through conventional management methods-that is, by setting objectives, motivating people to accomplish them, and monitoring and controlling accomplishments - problems frequently arise. The following are common methods of encouraging entrepreneurship-and the difficulties that they often create. 1. Mandating entrepreneurship (including it as a management objective, for example) or appointing company managers as inhouse entrepreneurs often translates into forcing people into roles for which they are unsuited. A mechanical or superficial search and pursuit of presumed opportunities frequently follow; these may lead to what may be called “fake entrepreneurship.” Because there is no true entrepreneurial spirit of commitment behind these efforts, the new ventures usually fail or fizzle before they are fully developed. On the other hand, hiring “proven” independent entrepreneurs to “inject” entrepreneurship into existing company business units or divisions creates other kinds of problems. These individuals rarely have either the patience or the experience that are needed in order to navigate within the cultural and political realities of a large firm. 2. Using large financial incentives, presumably to match the potential rewards of independent entrepreneurship, can create perceptions of internal inequity thal &ad to factionalization, jealousy, and even sabotage
in the pursuit of the entrepreneurial venture. (Problems like these rarely arise for independent entrepreneurs who head up the companies they have founded, because their right to reap substantial benefits in return for having created the company’s wealth and jobs is readily acknowledged by the company’s employees.) 3. Using existing financial control systems to monitor entrepreneurial initiatives, and relying on traditional management approaches to control these initiatives, can lead to overly frequent intervention and misguided direction during the crucial development phase of the ventures.
GOING
AGAINST THE GRAIN
The root cause of all these difficulties is the fact that traditional management methods work only for those activities for which management knows reasonably well what the expected results are and how they can be achieved. By its very nature, entrepreneurial activity seldom fits this mold. Here is a typical example from this study: Buddy March was a division general manager who was noted for his entrepreneurial achievements at McKenzie-Higgins, a highlyregarded, multibillion dollar U.S. manufacturing company with a long record of successfully promoting entrepreneurship. Buddy was championing Tanaka, a joint venture with the Japanese that was at a critical juncture. After McKenzie-Higgins had invested four million dollars in its development, testing, and introduction, the new product had to be withdrawn from the market after only three months in the field because of technical difficulties. One year of work by both the venture partners failed to solve these problems. Buddy’s boss and the corporate financial
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Vyay Sathe is professor of organizational behavior in The Peter F. Drucker Graduate Management Center at The Claremont Graduate School in Claremont, California. He was visiting professor at IMEDE, the International Management Development Institute in Lausanne, Switzerland during 198586. From 1976 to 1985, Sathe was a member of the faculty of the Harvard Business School. Before that, he was on the faculty of industrial management at Georgia Institute of Technology. Sathe has also taught in a number of M.B.A. and executive education programs in the United States and Europe. Sathe received a B.S. from the University of Poona, India; an M.S. from the University of Wisconsin; and an M.B.A. and a Ph.D. in business administration from Ohio State University. Sathe is currently researching, teaching, and consulting in the areas of organization design and change, improvement of staff effectiveness, corporate entrepreneurship, and corporate culture. He has written three books: Culture and Related Corporate Realities (Richard D. Irwin, 1985); Controller Involvement in Management (Prentice-Hall, 1982); and, with John Kotter and Leonard Schlesinger, Organization (Richard D. Irwin, 1979; second edition, 1985). Sathe has also had numerous articles published in professional and academic journals. His present and former consulting clients include many Fortune 500 companies.
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managers had little confidence in either the product itself or its market potential. They felt strongly that the time had come to pull the plug on this venture: It was draining time and resources and was putting the McKenzieHiggins name at risk in the marketplace. These corporate executives also had grave doubts about the integrity and competence of the Japanese partner. Buddy, on the other hand, was supremely confident about the venture and the partner, as well as about their ability to solve the technical problems. Because it fit within the “betting rules” used by the company, Buddy was allowed to proceed with the Tanaka program. (The concept of betting rules is used by many successful entrepreneurial corporations. This concept will be described irr detail later in this article.) A year later, the technical problems had been fixed. Two years later, Tanaka met all the market and financial targets, and was declared a success. And then the real fun began. . . Over the next several years McKenzieHiggins drove the production costs of Tanaka down much further than anyone had anticipated. As a result, new applications and market segments that nobody had imagined opened up for the product. The total market for this product family ultimately turned out to be far greater than anyone had dreamed possible - 50 times greater than the original market forecast! This case is by no means unique, for the story of entrepreneurship is frequently the story of the “expert” and the “obvious” proved wrong. Well-known examples of this phenomenon include Polaroid (original marketing studies concluded there was no market for an instant camera, so venture capitalists turned down inventor Edwin Land) and Xerox (several highly regarded firms, including GE and 3M, turned down the opportunity to buy the plain paper copying technology be-
cause they did not believe it could be perfected; Haloid purchased the patents and eventually became Xerox). The point of these illustrations is not that all entrepreneurial ventures ultimately succeed. In fact, this study found that even those companies with the most successful track records of entrepreneurship experienced a failure rate of 60% : For every 10 ventures that were introduced to the market, only four eventually succeeded. The point is that companies with an interest in promoting entrepreneurship should come to grips with a fundamental question: How shall we manage this activity, given the great difficulty of predicting whether it will succeed or fail?
MANAGE THE ENTREPRENEURIAL PROCESS, NOT SPECIFIC INITWWES
Our study found that the companies with the most enviable track records of entrepreneurial success in their business units and divisions manage entrepreneurial activity in a unique way. Their methods, which are substantially different from those of other organizations, rest on a basic premise that is easy to state but difficult to put into practice: If they are to be able to promote entrepreneurship successfully in a company’s business units
and divisions, the managers of these operations must have the freedom to proceed on the basis of their personal convictions about the potential success of their ventures. If top management’s convictions ultimately determine which ventures the company will pursue, then top management are de facto appointing themselves the company’s only entrepreneurs.
Top managers of the companies with the best track records of promoting entrepreneurship have also learned to meet the major challenge of their approach: ensuring that mana-
gers at the lower levels do not misuse the freedom they are given to identify and pursue opportunities as they see fit. Two specific concerns are avoiding irresponsible behavior (e.g., illegal or unethical pursuit of presumed opportunities) and containing the risks that are inherent in entrepreneurial activity. The secret of these top managers’ success lies in the skill with which they avoid the temptation of trying to manage specific entrepreneurial initiatives in their business units and divisions. Their top management philosophy is: ‘We cannot predict the outcomes of specific initiatives, but if the process is right, a certain percentage of successeswill follow.” It is not quite like playing the slot machines in Las Vegas: Top management can improve the odds of successby learning to manage the entrepreneurial process better.
RECOMMENDATIONS
Following is a set of recommendations for top executives who are committed to promoting entrepreneurship in their business units or divisions. A significant change in the management outlook and culture may be called for, in which case following these recommendations will not bring immediate results. Piecemeal implementation will be ineffective, because these recommendations are interrelated. The bottom line is this: Not only the managers of the business unit or the division but also the top managers themselves must be willing to learn to manage entrepreneurship in new ways.
SELF-SELECTION
Even companies with long track records of successfully promoting entrepreneurship have been unsuccessful in predicting who
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their future entrepreneurs will be. McKenzieHiggins has systematically analyzed its extensive database in an effort to gain some understanding of the personal characteristics of its successful entrepreneurs -yet reams of sophisticated statistical analyses by their industrial psychologists have revealed no magic personality profiles. Contrary to the folklore, it appears that, under the right circumstances, many can play the entrepreneurial game. Rather than cling to the myth of the “entrepreneurial personality, “ it may be more useful to view entrepreneurship as a result of the interaction between the individual, the organization, and the external environment. An entrepreneurial venture succeeds when an individual perceives an opportunity in the environment and develops some personal conviction about it, and when that individual is in an organization that provides the encouragement and support needed to pursue the venture. In addition, of course, the entrepreneur needs competence and skill to be able to bring the idea to fruition. Since its development and outcome cannot be anticipated with any certainty, there is a real danger that mandating entrepreneurship, or appointing managers to become entrepreneurs, will produce the form and not the substance of entrepreneurship. Lists of ideas and opportunities may be generated, venture teams may be formed, and resource commitments may be made-all without any deep conviction about the opportunities being pursued or the company’s ability to pursue them. Companies that are interested in promoting entrepreneurship should strive to create a corporate environment in which those who believe in the attractiveness of an opportunity feel encouraged and able to pursue it; in such an environment a process of self-selection takes place, whereby entrepreneurs ‘bubble
up” to the surface. Following the guidelines that I will now present can facilitate this processby stirring up the company’s pot of talent.
1. Consider “knowledge of territory” and “benefit of contrast” when moving managers around. Managers should have a sufficiently deep knowledge of their “territory” (e.g., products, markets, and technologies) to be able to identify really promising entrepreneurial opportunities. Once again, the case of Buddy March at McKenzie-Higgins is illustrative: Buddy had been a division head for more than 10 years and knew his industry extremely well. He spent about a third of his time with his external contacts, devoting about half of this to suppliers and customers alone. As the head of his research and development department noted, “Buddy is bubbling with ideas and enthusiasm when he returns from one of his frequent trips. He talks about how customers are doing their work now, what new technology they could use, etc. And he encourages people in his division who are working on new ventures with comments like, ‘I visited customer X, and they said that new product you’re working on is just what they need. I’m looking forward to seeing it.’ Buddy’s understanding of technology is not deep in a scientific sense, but it is pragmatic.” It was his many industry contacts and extensive knowledge that allowed Buddy to spot the new product opportunity that eventually led to the hugely successful Tanaka joint venture with the Japanese. As Buddy explained, ‘When I first saw an early prototype of the new product at a trade show in the Far East, several items-including the screen refractor that later gave us such a long headache- were not functioning perfectly. But I knew it was time to make a move, because I knew these problems could be fixed, and I was certain the market was there. If we
had waited we wouldn’t have gotten as good a deal as we did (price and manufacturing rights), or we might have missed the deal altogether.” Managers need to be allowed to remain in their positions long enough (at least five years for division managers) to have the opportunity to acquire in-depth knowledge of their territory and to develop the relevant external contacts. Playing musical chairs with managers does not foster entrepreneurial development . On the other hand, careful rotation that provides managers with exposure to a related but different business territory (for instance, same basic product family but different geographical market) can provide the contrast that can stimulate the perception of new possibilities. 2. Selecrively hire new managers from the outside who know a product, market, or technological territory of interest. These managers have the benefit of previous experience, which they can use to set up a contrast with the current environment. Further, they are likely to perceive less personal risk than other managers do in striking out in new directions. They have less time and energy invested in the company (less “equity”) and thus have more to gain than to lose by trying something different. To be successful, however, these new managers need to be savvy enough to understand the importance of gaining sufficient credibility and acceptance within the corporation before going out too far on a limb. Here is one such success story: A new division head who had joined the company several years earlier as a senior-level hire perceived two entrepreneurial opportunities that violated one of the company’s sacred cows: ‘We do not undertake government contracts.” (This dictum was in effect because an earlier generation of senior managers had been badly burned by cost overruns on such
contracts). He also saw a third opportunity that was considered a poor risk by top management. The manager’s supervisor and his direct reports opposed pursuing these opportunities in the face of such resistance. But he felt strongly that these were highly attractive opportunities, based on both his prior work in another company and on a marketing study he had conducted while initially assigned to corporate headquarters. Thus he went to bat for them and persuaded his supervisor and direct reports to go along. “No one is going to stop us from doing what is right,” he told them. “We just need to make our argument convincing. V The manager ultimately prevailed. His effort was helped by his deep industry knowledge, the credibility he had earned while at
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corporate headquarters, and the general perception that he was a company loyalist. (This perception was the result of the contributions he made at a ‘backwater division” where he stayed longer than was the norm for his position.) All three ventures succeeded-and one eventually became a big winner. One particular type of outsider may be a poor choice when the company is looking for new managers: the independent entrepreneur. There is evidence that an independent entrepreneur who continues to head up his or her company after it is acquired can be successful. However, the evidence from the present study indicates that it is unwise to move such an entrepreneur to an established company business unit or division in order to “inject” entrepreneurship into it - and for a very good reason. Such an individual tends to have neither the experience nor the patience needed to ride the cultural and political rapids of a large firm; these deficiencies can be fatal when he or she is in unfamiliar waters.
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INTRINSIC
MOllWI’ION
It is important not to promote entrepreneurship through strong inducements (in the form of edicts or steep incentives). If you do there is a danger that extrinsic motivation, rather than intrinsic motivation arising out of real conviction about the attractiveness of an opportunity, will drive the search for and the commitment to new opportunities. This is the beginning of fake entrepreneurship. Self-selection and the skillful use of controls (which will be discussed later) can help ensure that real personal conviction and intrinsic motivation are present. Acting on the following recommendations can also help. 3. Play up and promote the company’s own success stories and champions. Even in
the absence of an entrepreneurial culture, virtually every company has experienced some entrepreneurial success. It pays to play up these accomplishments and encourage more of them with mild financial incentives and strong company recognition.
One company acknowledges managers whose new ventures have crossed the one million sales mark with awards at its key, semi-annual senior management meetings. Another firm prominently features its entrepreneurial success stories in the annual report. The following vignette from yet another company illustrates the entrepreneurial encouragement that such promotion and “playup” can provide: In their dealings with division managers, top managers in this company always inquired about new business opportunities, and they showed genuine enthusiasm in learning about a promising new initiative. For instance, it was common practice for division managers to take samples of their latest new products to the bi-annual planning meetings at which top managers reviewed divisional performance and plans. What was noteworthy was the fondness with which the top brass handled the new products, and the amount of time they spent on this seemingly unproductive activity. At one such meeting, which became part of the company folklore, the top managers played gleefully, like small children, on the boardrooms mahogany table with a new mobile toy product. The development of the toy was made possible by an exciting new product that the responsible division manager had brought along to show off at a previous meeting. 4. Don’t penalize for failure. Since the majority of entrepreneurial initiatives do not succeed, failure should be regarded as normal and as an invitation to learning. Failure should not be treated as an occasion for finding fault or apportioning blame, or for what managers in one company referred to as “management by gotchal” As a seasoned executive in a successful entrepreneurial company put it, “If we succeeded at every venture we tried, we would be the worlds biggest
company by now! Failure is normal. What is important is what we learn from it.” Managerial punishment should be reserved only for irresponsible behavior. The “inviolable principles” and “no-exception” rules should be clearly communicated and rigorously enforced. At McKenzie-Higgins, for instance, the unpardonable sins are well understood; most concern illegal, unethical, and immoral behavior. As far as anyone at the company can recall, only two executives at the division level or above have ever been fired. One was using the company jet and other facilities to carry on a love affair with his secretary. The other was engaging in wildly inappropriate public conduct, including drunkenness and violence. On more than one occasion he knocked down motel doors at night after eavesdropping on the people in the rooms. He was severely reprimanded the first time top management learned about his behavior, and was told that he would be fired if it happened again. It did- and he was.
CONTROLS ‘IO TEST CONVICTION AND CONTAIN RISK Control is widely considered the bane of entrepreneurship. Yet the experiences of successful entrepreneurial companies demonstrate the opposite is true: Good control is essential if entrepreneurship is to be promoted. If managers at lower levels are to be given the freedom to identify and pursue opportunities as they see fit, the corporation must ensure that this freedom is not misused. The company can contain risk in several ways: It needs to prevent irresponsible behavior and to implement policies that will ensure that only those people with sufficient personal conviction about the attractiveness of an opportunity are given encouragement and the ability
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tures-especially those that are in trouble. The successful entrepreneurial compa-
aka joint venture with the Japanese is a case in point. Virtually all well-managed companies use state-of-the-art analytical techniques to try to resolve such differences in perceptions and judgments. But at the frontiers of rmcertainty - which is where entrepreneurship often takes place - there is no “objective” way to determine the right course of action. Thus although the company should analyze each op-
nies in the study
portunity
to pursue it. Following the recommendations below can help the company reduce its risk. 5. Heighten visibility of results and keep
top management well informed. Top management needs to trust its entrepreneurs. Trust is built and maintained with openness, not secrecy. Thus top management needs to be kept well informed about entrepreneurial ven-
had excellent
information
and
should
present
differing points of view to the entrepreneur, these analyses and opinions should not be
tures that were significantly
imposed
below
budget
or
behind schedule. There is a much publicized belief that “bootlegging” is prevalent in these companies. Yet at the business unit level and higher,
great
emphasis
was placed
on the
quality and integrity of the information supplied. As a senior manager at a successful firm put it, Bootlegging is fine at low levels where you are talking about a few thousand dollars, but not at the division level, where we are talking about managers responsible for millions of dollars. Trust requires openness and awareness; hiding the facts doesn’t help.
Trust, moreover, is a two-way street. Top managers need to resist the temptation to use the available information to issue edicts or
make decisions about specific ventures. So how is top management to maintain involvement with and control over entrepreneurial activity?
6. Bet on people who know their tern’tory, rather than on formal analysis or your own judgment of the attractiveness of the opportunity. Since entrepreneurial activity by
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thoroughly
systems, including special procedures - called “selected opportunity reviews”- to track ven-
its very nature involves great uncertainty, knowledgeable people may differ on such basic issues as the attractiveness of an opportunity, how much to invest in it, and how long to pursue it. The disagreement between Buddy March and his boss regarding the Tan-
on the entrepreneur.
The CEO
of a
highly successful entrepreneurial company described his company’s philosophy as follows:
The purpose of our reviews is to give the division head some exposure, give him a chance to tell us all the great things his division is doing. It gives us a chance to become more knowledgeable about him and his business. We ask questions to help the division manager. Sometimes we have a piece of information or prior experience that might help the division. Other times our questions may help the division gain some perspective, some objectivity. But we don’t tell the division head what to do because it is his show. Our philosophy is that we are betting on the manager, not on our own analysis of his business. In some cases we don’t know enough to sit in judgment on the specifics of a particular program. Where we do have some opinions, our inclination still is to allow the division head to exercise his own judgment. I can recall only two instances where we told a division to drop a particular program. In both cases we had several special reviews before we finally told the division head we were getting out. But even here, it was not the specific programs that were at issue. We just wanted to get out of that particular industry segment because the company’s product liability exposure there was higher than we were willing to risk.
7. Use supportive challenge in order to test the entrepreneur’s conviction and to help uncover his or her blind spots. Top management’s aim should be to provide a second opinion, not to second-guess the entrepreneur. This is best accomplished by questioning the entrepreneur’s assumptions and reasoning with empathy and understanding, and without dictating what the entrepreneur should do about specific ventures. Statements like “I think you are wrong for these reasons, but I hope you can do it” and “I remember the time I was in the same kind of soup, and the thing I discovered was . . . but maybe your case is different” are often quite helpful. A supportive challenge is most effective when it comes from a boss who has been an entrepreneur and who is respected by the entrepreneur in question. Supportive challenge can help uncover the entrepreneur’s blind spots, test the basis of his or her convictions, and provide an effective antidote to the intense emotional attachment that can sometimes energize-but can also derail - entrepreneurial activity. Here are the kinds of questions top managers in one successful company ask their entrepreneurs when reviewing their ventures: ‘You said last time that the volume would be -. What happened?”
this year
“Please tell us one more time why you think this is a viable business for us, long term. Do you really feel we should be in this business?” “Shouldn’t manufacturing costs be going down if you made the changes you did? Why are they going up?”
The tone of such questioning indicates that top management wants the venture manager to consider all the evidence as objectively as possible and to remain committed to the venture for business reasons only: The wish to feed one’s ego or a sense of loyalty to those who have invested their time and effort
in the venture should not lead the manager to continue pursuing a failing project. 8. Use betting rules to contain entrepreneurial risk. Entrepreneurial activity is inherently risky. This study found that the successful entrepreneurial companies were no better than the less successful firms when it came to predicting the outcome of a specific venture. For example, all the companies missed their annual sales and profit forecasts on new ventures by very wide margins; those margins frequently exceeded 100%. Top management needs to find ways to contain entrepreneurial risk without stifling the entrepreneurial spirit. Successful entrepreneurial companies allow the entrepreneur the discretion to pursue his or her own convictions about a particular venture. At the same time, these firms contain the overall risk to the company by placing limits on the total venture portfolio of each entrepreneur. Such limits may be specified in the form of betting rules that allow the entrepreneur to call the shots on his or her specific ventures but that limit the company’s total exposure. Betting rules allow parts of the company to make aggregate investments up to a certain amount. For example, a business unit or division may invest a certain percentage of its revenues, depending on corporate expectations of the unit,
its industry
and competitive
environment, its track record, and the credibility of its manager. The better the group’s track record and the higher the credibility of the manager, the greater the latitude the manager is given. The case of Buddy March and Tanaka serves as an illustration of the betting rules system. McKenzie-Higgins expected all of its divisions to be leaders in their respective fields. The question
senior
management
asked about
each division was: What is the approximate level of investment needed in order for this division to attain and maintain a position of
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leadership? The estimate that they arrived at was used as the ballpark figure within which the division had discretion on investments tempered, of course, according to the track record of the division and the credibility of its manager. Buddy’s division had annual revenues of approximately $120 million, and Buddy himself had already fathered three successful ventures by the time that he became interested in the Tanaka program. Given the size of his division, its successful track record, and his personal credibility, Buddy knew he could call the final shot on all his ventures as long as the aggregate annual losses kept the division’s annual investment in the $10 to $15 million range (around 10% of revenue). Buddy had already put several new ventures in motion, but the loss of $4 million on the Tanaka venture did not put him out of this ballpark. In fact, one of his ventures accumulated losses exceeding $18 million over a number of years before Buddy decided to scrap it. The same basic approach - controlling aggregate resources but allowing managers at lower levels the discretion to pursue their convictions on specific ventures - is effective in situations where senior management finds it necessary to ask some of its units for profit contributions that are over and above those to which they committed themselves in the approved budget. 9. Ask for additional contributions and budget cuts without calling the shots on specific ventures. Just about every quarter, top executives in all of the American firms we studied asked selected business units for profit contributions over and above the budgeted amounts. (The managers in one of these companies dubbed the procedure “quarterly giving.“) This was done to compensate for anticipated shortfalls in the budgeted contributions of other units; it was part of top management’s effort to hit the company’s over-
all profit target. The executives sought predictability in the company’s reported quarterly performance because they believed that those in the financial markets valued it. Top management was convinced that unpredictable performance would adversely affect the company’s stock price. It is a popular practice to bemoan the often intense pressure for high short-term financial performance that American companies face. What is instructive to note is the way in which the successful firms managed to promote entrepreneurship despite such pressure to achieve outstanding short-term financial results. We found that most division and business unit managers in the successful entrepreneurial companies had learned to anticipate and accept these pressures as a fact of corporate life. They undertook a careful review of all activity in order to decide if any new ventures should be delayed or cut. For example, Buddy March of Tanaka fame blocked out a whole week on his calendar prior to the expected call for “quarterly giving” so that he could devote sufficient time to planning how cuts should be made. Managers in the less successful companies tended to be more superficial or mechanical in making these cuts. For example, one division manager asked all of his department heads for equal contributions. Experience had taught managers in the successful entrepreneurial firms not to be pessimistic about the consequences of cuts and delays in their ventures. They had learned that the presence of too much money and other resources can hurt entrepreneurial initiatives just as severely as too little can. This study uncovered several cases in which management was so eager for success that it bathed the venture in excess resources. A lot of activity took place-but most of it was of little use. As a result, the necessary energy
and focus dissipated. The need to work with fewer resources would have imposed needed discipline and would have helped everyone involved to achieve greater focus and a stronger sense of urgency. By the same token, program delays that are caused by budget cuts can sometimes help by opening up promising technology, product, or market options that would have been unavailable had the venture proceeded on schedule. For example, one delayed venture benefited from unexpected technological breakthroughs and regulatory changes that gave the eventual new product a better position in a bigger new market than it would have had access to otherwise. The experience of the successful firms illustrates the wisdom of approaching the distasteful task of cutting and delaying ventures with a constructive attitude: one that says, ‘This may hurt, but it may also help. Let us do it carefully and hope for the best.” Top managers can try to instill such an attitude in people at all levels of their organizations. They can also help by letting their venture managers decide which ventures to delay and cut in order to come up with the needed contributions.
THE IMFOETANCE OF ENTEEPEENEUlUAL MOMENTUM Companies attempting for the first time to foster entrepreneurship lack the benefits that their more successful cousins have derived from the entrepreneurial momentum they have acquired over the years. Two key advantages to the company are people at the top with entrepreneurial experience, who can serve as role models and teachers for the company‘s budding young entrepreneurs; and a management culture in which entrepreneurship is so deeply valued that it drives man-
agerial behavior in many conscious and subconscious ways. It is not possible to derive these benefits overnight. Following the recommendations made in this article can help companies to gain entrepreneurial momentum over time- but a sustained commitment from the top is needed. It is hard to create real entrepreneurship with the “on again, off again” campaigns that characterize many corporate programs. Sporadic emphasis is ineffective as far as entrepreneurship is concerned; ongoing commitment is needed in order for managers to learn from the failures that inevitably occur. Such leaming allows for the launching of second generation or offshoot initiatives that grow out of the failed first attempts; it can increase the entrepreneurial competence of managers throughout the organization; and it paves the way for future entrepreneurial success.
SELECTED
BIBLIOGRAPHY
In recent years a growing number of books and articles in the trade and business press have dealt with the subject of corporate entrepreneurship. Systematic studies and a few research publications have also appeared. Most popular, perhaps, is the book by Gifford Pinochet III, who coined the term “intrapreneur” to designate the intra-corporate entrepreneur: Intrapreneuring (Harper & Row, 1985). Citing successstories from companies such as 3M and Hewlett-Packard, the book offers advice to wouldbe intrapreneurs, summarized in “ten commandments.” Edward Lawler and John Drexler examined the organizational conditions in six large, diversified firms; they identify five major barriers to entrepreneurship in their article “Entrepreneurship in the Large Corporation: Is It Possible?” (Management Review, February 1981.) They also provide
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recommendations for encouraging entrepreneurship in the large firm. Drawing on his many years of experience studying large entrepreneurial companies, Peter Drucker suggests in his book Znnovation and Entrepreneurship (Harper & Row, 1985) that success comes from the careful implementation of an unspectacular but systematic management discipline. At the heart of this discipline, Drucker explains, lies the knowledge of where to look for entrepreneurial opportunities and how to identify them. James Brian Quinn studied several large, innovative firms in Europe, Japan, and the United States (including Pilkinton Brothers, Ltd.; Honda; and Intel Corporation); he found that the big firms stayed innovative by behaving like small entrepreneurial ventures. He presents his findings in “Managing Innovation: Controlled Chaos” (Hurvard Buiness Review, May-June 1985). In a wide-ranging review of the literature, Richard Peterson challenges the “supply side” view of entrepreneurship (that it can be promoted by increasing the supply of entrepreneurial individuals) and argues instead that the occurrence of entrepreneurship is a function of the demand and opportunity for it. In other words, the significant blocks to entrepreneurship are legal, administrative, political, economic, and social-and not a shortage of individuals with an entrepreneurial orientation. This view is presented in “Entrepreneurship and Organization,“ in William Starbucks (editor) Handbook of Organization, Volume 2 (Oxford University Press, 1977). On the basis of an in-depth study that he conducted in one big corporation, Joseph Bower demonstrated the powerful influence of the structural context (i.e., the corporate structure, measurement and control system, reward system, and other contextual factors) on the thinking and actions of the company’s managers. He discusseshis findings in Managing the Resource Allocation Process(Harvard BusinessSchool, 1970). Robert Burgleman adopted and extended Bower’s model in a detailed study of internal corporate venturing in one large organization. Burgleman found that successful venturing requires entrepreneurial initiatives by individuals at the operational levels, the
ability of middle managers to conceptualize the strategic implications of these initiatives, and the capacity of top management to allow viable entrepreneurial initiatives to change corporate strategy. These findings appear in “A ProcessModel of Internal Corporate Venturing in the Diversified Major Firm” (Administrutive Science Quarterly, Volume 28, 1983).
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A Message for Managers
I
f you are a manager who has experienced downsizing, takeovers, mergers, acquisitions, or significant internal restructuring, we’d like to talk to you. AMA President Tom Horton and I are writing a book about the eroding relationship between managers and their employers-and ways in which this relationship can be rebuilt on terms that recogniie the new realities of today’s volatile business environment and changing work values. We want to talk to both those who have lost their jobs through downsizings and other restructurings and those who have survived these events. If you would like to contribute your experiences, thoughts, and opinions, please let us know. You may have complete anonymity, if you prefer. Write to Peter C. Reid, Dept. 286, 163 Amsterdam Avenue, New York, NY 10023, fax to (212) 721-2539, or call (212) 799-0843.
FosteringEntrepreneurship in The Large,DiversifiedFirm VIJAY SATHE
T
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he essence of entrepreneurship lies in the recognition and exploitation of new business opportunities involving new products, markets, and technologies. The large, diversified firm needs to pursue myriad opportunities on many product, market, and technology fronts simultaneously. Moreover, in today’s highly interdependent, global economy, entrepreneurial opportunities arise in unexpected ways, and the organization that wishes to compete effectively needs to seize these opportunities quickly. In response to the heightened demands of this economy, top management at many diversified companies is working to promote multiple centers of entrepreneurial initiative, typically at the business unit or division level. There are several well-known examples of companies that have long successfully promoted such entrepreneurship, including 3M, Johnson & Johnson, and Hewlett-Packard. AT&T, General Electric, Kodak, and many others are reportedly following these pioneers’ lead. This article is based on a detailed study of management’s efforts to promote entre-
preneurship within the business units or divisions of large, diversified firms. We conducted in-depth interviews and made careful observations at eight large companies in the United States and Europe; we also studied the histories of 35 specific entrepreneurial ventures. In the following discussion, the term “entrepreneur” refers to the person championing the venture. This person was the business unit or division head, or some other manager at the business unit or division level. The names of the companies and of the ventures have been disguised for reasons of confidentiality; additional details concerning this research are provided in the box on page 25. The results of this study strongly indicate that in order to promote entrepreneurship successfully at the business unit or division level in a large, diversified firm, top management needs to make a sustained commitment to policies and practices that may fly in the face of conventional wisdom. Unfortunately, many senior managers have not made such a commitment and thus have promoted the form but not the substance of entrepreneurship. These managers push ahead
with methods to promote entrepreneurship that are easy to understand, explain, and implement-but that are often ineffective or even counterproductive.
THE FAILURE OF CONVENTIONAL METHODS When companies try to promote entrepreneurship through conventional management methods-that is, by setting objectives, motivating people to accomplish them, and monitoring and controlling accomplishments - problems frequently arise. The following are common methods of encouraging entrepreneurship-and the difficulties that they often create. 1. Mandating entrepreneurship (including it as a management objective, for example) or appointing company managers as inhouse entrepreneurs often translates into forcing people into roles for which they are unsuited. A mechanical or superficial search and pursuit of presumed opportunities frequently follow; these may lead to what may be called “fake entrepreneurship.” Because there is no true entrepreneurial spirit of commitment behind these efforts, the new ventures usually fail or fizzle before they are fully developed. On the other hand, hiring “proven” independent entrepreneurs to “inject” entrepreneurship into existing company business units or divisions creates other kinds of problems. These individuals rarely have either the patience or the experience that are needed in order to navigate within the cultural and political realities of a large firm. 2. Using large financial incentives, presumably to match the potential rewards of independent entrepreneurship, can create perceptions of internal inequity thal &ad to factionalization, jealousy, and even sabotage
in the pursuit of the entrepreneurial venture. (Problems like these rarely arise for independent entrepreneurs who head up the companies they have founded, because their right to reap substantial benefits in return for having created the company’s wealth and jobs is readily acknowledged by the company’s employees.) 3. Using existing financial control systems to monitor entrepreneurial initiatives, and relying on traditional management approaches to control these initiatives, can lead to overly frequent intervention and misguided direction during the crucial development phase of the ventures.
GOING
AGAINST THE GRAIN
The root cause of all these difficulties is the fact that traditional management methods work only for those activities for which management knows reasonably well what the expected results are and how they can be achieved. By its very nature, entrepreneurial activity seldom fits this mold. Here is a typical example from this study: Buddy March was a division general manager who was noted for his entrepreneurial achievements at McKenzie-Higgins, a highlyregarded, multibillion dollar U.S. manufacturing company with a long record of successfully promoting entrepreneurship. Buddy was championing Tanaka, a joint venture with the Japanese that was at a critical juncture. After McKenzie-Higgins had invested four million dollars in its development, testing, and introduction, the new product had to be withdrawn from the market after only three months in the field because of technical difficulties. One year of work by both the venture partners failed to solve these problems. Buddy’s boss and the corporate financial
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Vyay Sathe is professor of organizational behavior in The Peter F. Drucker Graduate Management Center at The Claremont Graduate School in Claremont, California. He was visiting professor at IMEDE, the International Management Development Institute in Lausanne, Switzerland during 198586. From 1976 to 1985, Sathe was a member of the faculty of the Harvard Business School. Before that, he was on the faculty of industrial management at Georgia Institute of Technology. Sathe has also taught in a number of M.B.A. and executive education programs in the United States and Europe. Sathe received a B.S. from the University of Poona, India; an M.S. from the University of Wisconsin; and an M.B.A. and a Ph.D. in business administration from Ohio State University. Sathe is currently researching, teaching, and consulting in the areas of organization design and change, improvement of staff effectiveness, corporate entrepreneurship, and corporate culture. He has written three books: Culture and Related Corporate Realities (Richard D. Irwin, 1985); Controller Involvement in Management (Prentice-Hall, 1982); and, with John Kotter and Leonard Schlesinger, Organization (Richard D. Irwin, 1979; second edition, 1985). Sathe has also had numerous articles published in professional and academic journals. His present and former consulting clients include many Fortune 500 companies.
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managers had little confidence in either the product itself or its market potential. They felt strongly that the time had come to pull the plug on this venture: It was draining time and resources and was putting the McKenzieHiggins name at risk in the marketplace. These corporate executives also had grave doubts about the integrity and competence of the Japanese partner. Buddy, on the other hand, was supremely confident about the venture and the partner, as well as about their ability to solve the technical problems. Because it fit within the “betting rules” used by the company, Buddy was allowed to proceed with the Tanaka program. (The concept of betting rules is used by many successful entrepreneurial corporations. This concept will be described irr detail later in this article.) A year later, the technical problems had been fixed. Two years later, Tanaka met all the market and financial targets, and was declared a success. And then the real fun began. . . Over the next several years McKenzieHiggins drove the production costs of Tanaka down much further than anyone had anticipated. As a result, new applications and market segments that nobody had imagined opened up for the product. The total market for this product family ultimately turned out to be far greater than anyone had dreamed possible - 50 times greater than the original market forecast! This case is by no means unique, for the story of entrepreneurship is frequently the story of the “expert” and the “obvious” proved wrong. Well-known examples of this phenomenon include Polaroid (original marketing studies concluded there was no market for an instant camera, so venture capitalists turned down inventor Edwin Land) and Xerox (several highly regarded firms, including GE and 3M, turned down the opportunity to buy the plain paper copying technology be-
cause they did not believe it could be perfected; Haloid purchased the patents and eventually became Xerox). The point of these illustrations is not that all entrepreneurial ventures ultimately succeed. In fact, this study found that even those companies with the most successful track records of entrepreneurship experienced a failure rate of 60% : For every 10 ventures that were introduced to the market, only four eventually succeeded. The point is that companies with an interest in promoting entrepreneurship should come to grips with a fundamental question: How shall we manage this activity, given the great difficulty of predicting whether it will succeed or fail?
MANAGE THE ENTREPRENEURIAL PROCESS, NOT SPECIFIC INITWWES
Our study found that the companies with the most enviable track records of entrepreneurial success in their business units and divisions manage entrepreneurial activity in a unique way. Their methods, which are substantially different from those of other organizations, rest on a basic premise that is easy to state but difficult to put into practice: If they are to be able to promote entrepreneurship successfully in a company’s business units
and divisions, the managers of these operations must have the freedom to proceed on the basis of their personal convictions about the potential success of their ventures. If top management’s convictions ultimately determine which ventures the company will pursue, then top management are de facto appointing themselves the company’s only entrepreneurs.
Top managers of the companies with the best track records of promoting entrepreneurship have also learned to meet the major challenge of their approach: ensuring that mana-
gers at the lower levels do not misuse the freedom they are given to identify and pursue opportunities as they see fit. Two specific concerns are avoiding irresponsible behavior (e.g., illegal or unethical pursuit of presumed opportunities) and containing the risks that are inherent in entrepreneurial activity. The secret of these top managers’ success lies in the skill with which they avoid the temptation of trying to manage specific entrepreneurial initiatives in their business units and divisions. Their top management philosophy is: ‘We cannot predict the outcomes of specific initiatives, but if the process is right, a certain percentage of successeswill follow.” It is not quite like playing the slot machines in Las Vegas: Top management can improve the odds of successby learning to manage the entrepreneurial process better.
RECOMMENDATIONS
Following is a set of recommendations for top executives who are committed to promoting entrepreneurship in their business units or divisions. A significant change in the management outlook and culture may be called for, in which case following these recommendations will not bring immediate results. Piecemeal implementation will be ineffective, because these recommendations are interrelated. The bottom line is this: Not only the managers of the business unit or the division but also the top managers themselves must be willing to learn to manage entrepreneurship in new ways.
SELF-SELECTION
Even companies with long track records of successfully promoting entrepreneurship have been unsuccessful in predicting who
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their future entrepreneurs will be. McKenzieHiggins has systematically analyzed its extensive database in an effort to gain some understanding of the personal characteristics of its successful entrepreneurs -yet reams of sophisticated statistical analyses by their industrial psychologists have revealed no magic personality profiles. Contrary to the folklore, it appears that, under the right circumstances, many can play the entrepreneurial game. Rather than cling to the myth of the “entrepreneurial personality, “ it may be more useful to view entrepreneurship as a result of the interaction between the individual, the organization, and the external environment. An entrepreneurial venture succeeds when an individual perceives an opportunity in the environment and develops some personal conviction about it, and when that individual is in an organization that provides the encouragement and support needed to pursue the venture. In addition, of course, the entrepreneur needs competence and skill to be able to bring the idea to fruition. Since its development and outcome cannot be anticipated with any certainty, there is a real danger that mandating entrepreneurship, or appointing managers to become entrepreneurs, will produce the form and not the substance of entrepreneurship. Lists of ideas and opportunities may be generated, venture teams may be formed, and resource commitments may be made-all without any deep conviction about the opportunities being pursued or the company’s ability to pursue them. Companies that are interested in promoting entrepreneurship should strive to create a corporate environment in which those who believe in the attractiveness of an opportunity feel encouraged and able to pursue it; in such an environment a process of self-selection takes place, whereby entrepreneurs ‘bubble
up” to the surface. Following the guidelines that I will now present can facilitate this processby stirring up the company’s pot of talent.
1. Consider “knowledge of territory” and “benefit of contrast” when moving managers around. Managers should have a sufficiently deep knowledge of their “territory” (e.g., products, markets, and technologies) to be able to identify really promising entrepreneurial opportunities. Once again, the case of Buddy March at McKenzie-Higgins is illustrative: Buddy had been a division head for more than 10 years and knew his industry extremely well. He spent about a third of his time with his external contacts, devoting about half of this to suppliers and customers alone. As the head of his research and development department noted, “Buddy is bubbling with ideas and enthusiasm when he returns from one of his frequent trips. He talks about how customers are doing their work now, what new technology they could use, etc. And he encourages people in his division who are working on new ventures with comments like, ‘I visited customer X, and they said that new product you’re working on is just what they need. I’m looking forward to seeing it.’ Buddy’s understanding of technology is not deep in a scientific sense, but it is pragmatic.” It was his many industry contacts and extensive knowledge that allowed Buddy to spot the new product opportunity that eventually led to the hugely successful Tanaka joint venture with the Japanese. As Buddy explained, ‘When I first saw an early prototype of the new product at a trade show in the Far East, several items-including the screen refractor that later gave us such a long headache- were not functioning perfectly. But I knew it was time to make a move, because I knew these problems could be fixed, and I was certain the market was there. If we
had waited we wouldn’t have gotten as good a deal as we did (price and manufacturing rights), or we might have missed the deal altogether.” Managers need to be allowed to remain in their positions long enough (at least five years for division managers) to have the opportunity to acquire in-depth knowledge of their territory and to develop the relevant external contacts. Playing musical chairs with managers does not foster entrepreneurial development . On the other hand, careful rotation that provides managers with exposure to a related but different business territory (for instance, same basic product family but different geographical market) can provide the contrast that can stimulate the perception of new possibilities. 2. Selecrively hire new managers from the outside who know a product, market, or technological territory of interest. These managers have the benefit of previous experience, which they can use to set up a contrast with the current environment. Further, they are likely to perceive less personal risk than other managers do in striking out in new directions. They have less time and energy invested in the company (less “equity”) and thus have more to gain than to lose by trying something different. To be successful, however, these new managers need to be savvy enough to understand the importance of gaining sufficient credibility and acceptance within the corporation before going out too far on a limb. Here is one such success story: A new division head who had joined the company several years earlier as a senior-level hire perceived two entrepreneurial opportunities that violated one of the company’s sacred cows: ‘We do not undertake government contracts.” (This dictum was in effect because an earlier generation of senior managers had been badly burned by cost overruns on such
contracts). He also saw a third opportunity that was considered a poor risk by top management. The manager’s supervisor and his direct reports opposed pursuing these opportunities in the face of such resistance. But he felt strongly that these were highly attractive opportunities, based on both his prior work in another company and on a marketing study he had conducted while initially assigned to corporate headquarters. Thus he went to bat for them and persuaded his supervisor and direct reports to go along. “No one is going to stop us from doing what is right,” he told them. “We just need to make our argument convincing. V The manager ultimately prevailed. His effort was helped by his deep industry knowledge, the credibility he had earned while at
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corporate headquarters, and the general perception that he was a company loyalist. (This perception was the result of the contributions he made at a ‘backwater division” where he stayed longer than was the norm for his position.) All three ventures succeeded-and one eventually became a big winner. One particular type of outsider may be a poor choice when the company is looking for new managers: the independent entrepreneur. There is evidence that an independent entrepreneur who continues to head up his or her company after it is acquired can be successful. However, the evidence from the present study indicates that it is unwise to move such an entrepreneur to an established company business unit or division in order to “inject” entrepreneurship into it - and for a very good reason. Such an individual tends to have neither the experience nor the patience needed to ride the cultural and political rapids of a large firm; these deficiencies can be fatal when he or she is in unfamiliar waters.
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INTRINSIC
MOllWI’ION
It is important not to promote entrepreneurship through strong inducements (in the form of edicts or steep incentives). If you do there is a danger that extrinsic motivation, rather than intrinsic motivation arising out of real conviction about the attractiveness of an opportunity, will drive the search for and the commitment to new opportunities. This is the beginning of fake entrepreneurship. Self-selection and the skillful use of controls (which will be discussed later) can help ensure that real personal conviction and intrinsic motivation are present. Acting on the following recommendations can also help. 3. Play up and promote the company’s own success stories and champions. Even in
the absence of an entrepreneurial culture, virtually every company has experienced some entrepreneurial success. It pays to play up these accomplishments and encourage more of them with mild financial incentives and strong company recognition.
One company acknowledges managers whose new ventures have crossed the one million sales mark with awards at its key, semi-annual senior management meetings. Another firm prominently features its entrepreneurial success stories in the annual report. The following vignette from yet another company illustrates the entrepreneurial encouragement that such promotion and “playup” can provide: In their dealings with division managers, top managers in this company always inquired about new business opportunities, and they showed genuine enthusiasm in learning about a promising new initiative. For instance, it was common practice for division managers to take samples of their latest new products to the bi-annual planning meetings at which top managers reviewed divisional performance and plans. What was noteworthy was the fondness with which the top brass handled the new products, and the amount of time they spent on this seemingly unproductive activity. At one such meeting, which became part of the company folklore, the top managers played gleefully, like small children, on the boardrooms mahogany table with a new mobile toy product. The development of the toy was made possible by an exciting new product that the responsible division manager had brought along to show off at a previous meeting. 4. Don’t penalize for failure. Since the majority of entrepreneurial initiatives do not succeed, failure should be regarded as normal and as an invitation to learning. Failure should not be treated as an occasion for finding fault or apportioning blame, or for what managers in one company referred to as “management by gotchal” As a seasoned executive in a successful entrepreneurial company put it, “If we succeeded at every venture we tried, we would be the worlds biggest
company by now! Failure is normal. What is important is what we learn from it.” Managerial punishment should be reserved only for irresponsible behavior. The “inviolable principles” and “no-exception” rules should be clearly communicated and rigorously enforced. At McKenzie-Higgins, for instance, the unpardonable sins are well understood; most concern illegal, unethical, and immoral behavior. As far as anyone at the company can recall, only two executives at the division level or above have ever been fired. One was using the company jet and other facilities to carry on a love affair with his secretary. The other was engaging in wildly inappropriate public conduct, including drunkenness and violence. On more than one occasion he knocked down motel doors at night after eavesdropping on the people in the rooms. He was severely reprimanded the first time top management learned about his behavior, and was told that he would be fired if it happened again. It did- and he was.
CONTROLS ‘IO TEST CONVICTION AND CONTAIN RISK Control is widely considered the bane of entrepreneurship. Yet the experiences of successful entrepreneurial companies demonstrate the opposite is true: Good control is essential if entrepreneurship is to be promoted. If managers at lower levels are to be given the freedom to identify and pursue opportunities as they see fit, the corporation must ensure that this freedom is not misused. The company can contain risk in several ways: It needs to prevent irresponsible behavior and to implement policies that will ensure that only those people with sufficient personal conviction about the attractiveness of an opportunity are given encouragement and the ability
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tures-especially those that are in trouble. The successful entrepreneurial compa-
aka joint venture with the Japanese is a case in point. Virtually all well-managed companies use state-of-the-art analytical techniques to try to resolve such differences in perceptions and judgments. But at the frontiers of rmcertainty - which is where entrepreneurship often takes place - there is no “objective” way to determine the right course of action. Thus although the company should analyze each op-
nies in the study
portunity
to pursue it. Following the recommendations below can help the company reduce its risk. 5. Heighten visibility of results and keep
top management well informed. Top management needs to trust its entrepreneurs. Trust is built and maintained with openness, not secrecy. Thus top management needs to be kept well informed about entrepreneurial ven-
had excellent
information
and
should
present
differing points of view to the entrepreneur, these analyses and opinions should not be
tures that were significantly
imposed
below
budget
or
behind schedule. There is a much publicized belief that “bootlegging” is prevalent in these companies. Yet at the business unit level and higher,
great
emphasis
was placed
on the
quality and integrity of the information supplied. As a senior manager at a successful firm put it, Bootlegging is fine at low levels where you are talking about a few thousand dollars, but not at the division level, where we are talking about managers responsible for millions of dollars. Trust requires openness and awareness; hiding the facts doesn’t help.
Trust, moreover, is a two-way street. Top managers need to resist the temptation to use the available information to issue edicts or
make decisions about specific ventures. So how is top management to maintain involvement with and control over entrepreneurial activity?
6. Bet on people who know their tern’tory, rather than on formal analysis or your own judgment of the attractiveness of the opportunity. Since entrepreneurial activity by
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thoroughly
systems, including special procedures - called “selected opportunity reviews”- to track ven-
its very nature involves great uncertainty, knowledgeable people may differ on such basic issues as the attractiveness of an opportunity, how much to invest in it, and how long to pursue it. The disagreement between Buddy March and his boss regarding the Tan-
on the entrepreneur.
The CEO
of a
highly successful entrepreneurial company described his company’s philosophy as follows:
The purpose of our reviews is to give the division head some exposure, give him a chance to tell us all the great things his division is doing. It gives us a chance to become more knowledgeable about him and his business. We ask questions to help the division manager. Sometimes we have a piece of information or prior experience that might help the division. Other times our questions may help the division gain some perspective, some objectivity. But we don’t tell the division head what to do because it is his show. Our philosophy is that we are betting on the manager, not on our own analysis of his business. In some cases we don’t know enough to sit in judgment on the specifics of a particular program. Where we do have some opinions, our inclination still is to allow the division head to exercise his own judgment. I can recall only two instances where we told a division to drop a particular program. In both cases we had several special reviews before we finally told the division head we were getting out. But even here, it was not the specific programs that were at issue. We just wanted to get out of that particular industry segment because the company’s product liability exposure there was higher than we were willing to risk.
7. Use supportive challenge in order to test the entrepreneur’s conviction and to help uncover his or her blind spots. Top management’s aim should be to provide a second opinion, not to second-guess the entrepreneur. This is best accomplished by questioning the entrepreneur’s assumptions and reasoning with empathy and understanding, and without dictating what the entrepreneur should do about specific ventures. Statements like “I think you are wrong for these reasons, but I hope you can do it” and “I remember the time I was in the same kind of soup, and the thing I discovered was . . . but maybe your case is different” are often quite helpful. A supportive challenge is most effective when it comes from a boss who has been an entrepreneur and who is respected by the entrepreneur in question. Supportive challenge can help uncover the entrepreneur’s blind spots, test the basis of his or her convictions, and provide an effective antidote to the intense emotional attachment that can sometimes energize-but can also derail - entrepreneurial activity. Here are the kinds of questions top managers in one successful company ask their entrepreneurs when reviewing their ventures: ‘You said last time that the volume would be -. What happened?”
this year
“Please tell us one more time why you think this is a viable business for us, long term. Do you really feel we should be in this business?” “Shouldn’t manufacturing costs be going down if you made the changes you did? Why are they going up?”
The tone of such questioning indicates that top management wants the venture manager to consider all the evidence as objectively as possible and to remain committed to the venture for business reasons only: The wish to feed one’s ego or a sense of loyalty to those who have invested their time and effort
in the venture should not lead the manager to continue pursuing a failing project. 8. Use betting rules to contain entrepreneurial risk. Entrepreneurial activity is inherently risky. This study found that the successful entrepreneurial companies were no better than the less successful firms when it came to predicting the outcome of a specific venture. For example, all the companies missed their annual sales and profit forecasts on new ventures by very wide margins; those margins frequently exceeded 100%. Top management needs to find ways to contain entrepreneurial risk without stifling the entrepreneurial spirit. Successful entrepreneurial companies allow the entrepreneur the discretion to pursue his or her own convictions about a particular venture. At the same time, these firms contain the overall risk to the company by placing limits on the total venture portfolio of each entrepreneur. Such limits may be specified in the form of betting rules that allow the entrepreneur to call the shots on his or her specific ventures but that limit the company’s total exposure. Betting rules allow parts of the company to make aggregate investments up to a certain amount. For example, a business unit or division may invest a certain percentage of its revenues, depending on corporate expectations of the unit,
its industry
and competitive
environment, its track record, and the credibility of its manager. The better the group’s track record and the higher the credibility of the manager, the greater the latitude the manager is given. The case of Buddy March and Tanaka serves as an illustration of the betting rules system. McKenzie-Higgins expected all of its divisions to be leaders in their respective fields. The question
senior
management
asked about
each division was: What is the approximate level of investment needed in order for this division to attain and maintain a position of
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leadership? The estimate that they arrived at was used as the ballpark figure within which the division had discretion on investments tempered, of course, according to the track record of the division and the credibility of its manager. Buddy’s division had annual revenues of approximately $120 million, and Buddy himself had already fathered three successful ventures by the time that he became interested in the Tanaka program. Given the size of his division, its successful track record, and his personal credibility, Buddy knew he could call the final shot on all his ventures as long as the aggregate annual losses kept the division’s annual investment in the $10 to $15 million range (around 10% of revenue). Buddy had already put several new ventures in motion, but the loss of $4 million on the Tanaka venture did not put him out of this ballpark. In fact, one of his ventures accumulated losses exceeding $18 million over a number of years before Buddy decided to scrap it. The same basic approach - controlling aggregate resources but allowing managers at lower levels the discretion to pursue their convictions on specific ventures - is effective in situations where senior management finds it necessary to ask some of its units for profit contributions that are over and above those to which they committed themselves in the approved budget. 9. Ask for additional contributions and budget cuts without calling the shots on specific ventures. Just about every quarter, top executives in all of the American firms we studied asked selected business units for profit contributions over and above the budgeted amounts. (The managers in one of these companies dubbed the procedure “quarterly giving.“) This was done to compensate for anticipated shortfalls in the budgeted contributions of other units; it was part of top management’s effort to hit the company’s over-
all profit target. The executives sought predictability in the company’s reported quarterly performance because they believed that those in the financial markets valued it. Top management was convinced that unpredictable performance would adversely affect the company’s stock price. It is a popular practice to bemoan the often intense pressure for high short-term financial performance that American companies face. What is instructive to note is the way in which the successful firms managed to promote entrepreneurship despite such pressure to achieve outstanding short-term financial results. We found that most division and business unit managers in the successful entrepreneurial companies had learned to anticipate and accept these pressures as a fact of corporate life. They undertook a careful review of all activity in order to decide if any new ventures should be delayed or cut. For example, Buddy March of Tanaka fame blocked out a whole week on his calendar prior to the expected call for “quarterly giving” so that he could devote sufficient time to planning how cuts should be made. Managers in the less successful companies tended to be more superficial or mechanical in making these cuts. For example, one division manager asked all of his department heads for equal contributions. Experience had taught managers in the successful entrepreneurial firms not to be pessimistic about the consequences of cuts and delays in their ventures. They had learned that the presence of too much money and other resources can hurt entrepreneurial initiatives just as severely as too little can. This study uncovered several cases in which management was so eager for success that it bathed the venture in excess resources. A lot of activity took place-but most of it was of little use. As a result, the necessary energy
and focus dissipated. The need to work with fewer resources would have imposed needed discipline and would have helped everyone involved to achieve greater focus and a stronger sense of urgency. By the same token, program delays that are caused by budget cuts can sometimes help by opening up promising technology, product, or market options that would have been unavailable had the venture proceeded on schedule. For example, one delayed venture benefited from unexpected technological breakthroughs and regulatory changes that gave the eventual new product a better position in a bigger new market than it would have had access to otherwise. The experience of the successful firms illustrates the wisdom of approaching the distasteful task of cutting and delaying ventures with a constructive attitude: one that says, ‘This may hurt, but it may also help. Let us do it carefully and hope for the best.” Top managers can try to instill such an attitude in people at all levels of their organizations. They can also help by letting their venture managers decide which ventures to delay and cut in order to come up with the needed contributions.
THE IMFOETANCE OF ENTEEPEENEUlUAL MOMENTUM Companies attempting for the first time to foster entrepreneurship lack the benefits that their more successful cousins have derived from the entrepreneurial momentum they have acquired over the years. Two key advantages to the company are people at the top with entrepreneurial experience, who can serve as role models and teachers for the company‘s budding young entrepreneurs; and a management culture in which entrepreneurship is so deeply valued that it drives man-
agerial behavior in many conscious and subconscious ways. It is not possible to derive these benefits overnight. Following the recommendations made in this article can help companies to gain entrepreneurial momentum over time- but a sustained commitment from the top is needed. It is hard to create real entrepreneurship with the “on again, off again” campaigns that characterize many corporate programs. Sporadic emphasis is ineffective as far as entrepreneurship is concerned; ongoing commitment is needed in order for managers to learn from the failures that inevitably occur. Such leaming allows for the launching of second generation or offshoot initiatives that grow out of the failed first attempts; it can increase the entrepreneurial competence of managers throughout the organization; and it paves the way for future entrepreneurial success.
SELECTED
BIBLIOGRAPHY
In recent years a growing number of books and articles in the trade and business press have dealt with the subject of corporate entrepreneurship. Systematic studies and a few research publications have also appeared. Most popular, perhaps, is the book by Gifford Pinochet III, who coined the term “intrapreneur” to designate the intra-corporate entrepreneur: Intrapreneuring (Harper & Row, 1985). Citing successstories from companies such as 3M and Hewlett-Packard, the book offers advice to wouldbe intrapreneurs, summarized in “ten commandments.” Edward Lawler and John Drexler examined the organizational conditions in six large, diversified firms; they identify five major barriers to entrepreneurship in their article “Entrepreneurship in the Large Corporation: Is It Possible?” (Management Review, February 1981.) They also provide
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recommendations for encouraging entrepreneurship in the large firm. Drawing on his many years of experience studying large entrepreneurial companies, Peter Drucker suggests in his book Znnovation and Entrepreneurship (Harper & Row, 1985) that success comes from the careful implementation of an unspectacular but systematic management discipline. At the heart of this discipline, Drucker explains, lies the knowledge of where to look for entrepreneurial opportunities and how to identify them. James Brian Quinn studied several large, innovative firms in Europe, Japan, and the United States (including Pilkinton Brothers, Ltd.; Honda; and Intel Corporation); he found that the big firms stayed innovative by behaving like small entrepreneurial ventures. He presents his findings in “Managing Innovation: Controlled Chaos” (Hurvard Buiness Review, May-June 1985). In a wide-ranging review of the literature, Richard Peterson challenges the “supply side” view of entrepreneurship (that it can be promoted by increasing the supply of entrepreneurial individuals) and argues instead that the occurrence of entrepreneurship is a function of the demand and opportunity for it. In other words, the significant blocks to entrepreneurship are legal, administrative, political, economic, and social-and not a shortage of individuals with an entrepreneurial orientation. This view is presented in “Entrepreneurship and Organization,“ in William Starbucks (editor) Handbook of Organization, Volume 2 (Oxford University Press, 1977). On the basis of an in-depth study that he conducted in one big corporation, Joseph Bower demonstrated the powerful influence of the structural context (i.e., the corporate structure, measurement and control system, reward system, and other contextual factors) on the thinking and actions of the company’s managers. He discusseshis findings in Managing the Resource Allocation Process(Harvard BusinessSchool, 1970). Robert Burgleman adopted and extended Bower’s model in a detailed study of internal corporate venturing in one large organization. Burgleman found that successful venturing requires entrepreneurial initiatives by individuals at the operational levels, the
ability of middle managers to conceptualize the strategic implications of these initiatives, and the capacity of top management to allow viable entrepreneurial initiatives to change corporate strategy. These findings appear in “A ProcessModel of Internal Corporate Venturing in the Diversified Major Firm” (Administrutive Science Quarterly, Volume 28, 1983).
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A Message for Managers
I
f you are a manager who has experienced downsizing, takeovers, mergers, acquisitions, or significant internal restructuring, we’d like to talk to you. AMA President Tom Horton and I are writing a book about the eroding relationship between managers and their employers-and ways in which this relationship can be rebuilt on terms that recogniie the new realities of today’s volatile business environment and changing work values. We want to talk to both those who have lost their jobs through downsizings and other restructurings and those who have survived these events. If you would like to contribute your experiences, thoughts, and opinions, please let us know. You may have complete anonymity, if you prefer. Write to Peter C. Reid, Dept. 286, 163 Amsterdam Avenue, New York, NY 10023, fax to (212) 721-2539, or call (212) 799-0843.