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How a mature firm fosters intrapreneurs
ABSTRACTS
cannot be found in an employment interview. They usually have been in several positions (to gain political astuteness), and, once identified, they need to be rewarded substantially and quickly. They are often unpopular, renegade, or maverick people, previously rejected by their organizations, hardly the type suited to big rewards. They also seek visibility, which can be provided at low cost. A few other findings are: Top managers (e.g., the classic case of Sony's chairman and the Walkman he created) cannot really be champions. There is little resistance to fight, inhibiting discussion. Every champion needs a project manager to make the champion do the job right and to prepare the proposal for top management's review. The attributes of a successful product champion closely match those of the general manager. The second-time champions do not fare particularly well. Product champions are neither as widespread, unambiguous, or desirable as the business press would have one believe (and the group included three current champions).
How a Mature Firm Fosters Intrapreneurs, Robert J. Schaffhauser. P l a n n i n g R e v i e w (March 1986), pp. 6 - 1 1 . (CMC)
In this article, the Executive Vice President and Chief Technical Officer of Signode Industries tells how his firm developed a new ventures program. The program has been highly successful. The author insists that top management has to adopt a culture favorable to venturing: move fast, modify decisions already made, be tolerant of error, and want change. Getting managers down the line to believe such a culture exists is difficult for large firms. However, big businesses also have advantages when it comes to entrepreneuring. They can fund whatever they want, they
J PROD INNOV MANAG 1986;3:204-217
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can reward the participants, and they have names and reputations which are of great help in the marketplace. Here is Signode's nine-step program. 1. Define strengths and weaknesses. This is fairly standard, but one must be creative. People at Signode found that the firm was the world's largest producer of plastic sheet, and that their sheet was twice as strong as any other. This strength was made the basis for their first venture team. 2. Define likes and dislikes. Want to avoid selling to the consumer? Avoid regulated industry? Conversely, does your firm want to get into services? 3. Select the venture topic. This puts together the findings from the first two steps. For example, for Signode, one venture might be plastic nonpackaging. Another would be to reduce theft in distribution. 4. Form the venture team. Signode likes about six fulltime people on a team. The best available, not rejects. Mix the disciplines. Take the basic four (technical, manufacturing, finance, and marketing) and add two other people from departments relevant to the team's assignment. Get a blend of personalities. 5. Launch the team. The team is given 2 weeks of intensive preparation (partly on the topic and partly on group dynamics). No leaders are selected, but every person on the team is committed; no one "waits for the leader to tell us what to d o . " Informal leaders will emerge when the team topic begins to take shape. The team is given space away from the home office, is given the financial limits (e.g., on investment and on level or return expected), and is then given 6 months to prepare a proposal for management. 6. Send the team to the marketplace. Have them immerse themselves in the business. Some teams have completed 2000 interviews at this stage. The purpose is to refine the problem statement, to gather ideas, and in general to prepare to be in that business. 7. Funnel the ideas. This is the stage of concept evaluation and refinement. There usually is a creative break-out also. The end point is satisfaction that the idea is good and that it can be exploited. 8. Presentation to management. This embodies a preliminary business plan, including financial hurdles. 9. Launce the venture. Give formal organization to the venture, fund it, and prepare compensation packages that will keep the group well motivated. Signode has eight launched ventures. As examples, one team has double-ovenable plastic trays to
214
J PROD INNOV MANAG 1986;3:204-217
replace other materials for TV dinners and other frozen foods. Another involves tough plastic grids that are laid on top of road subgrades in Alaska.
The Strategic Discount--Protecting New Business Projects Against DCF, Gordon Pearson, Long Range Planning, (February, 1986), pp. 1 8 24. ( C M C )
The author holds that many top managements have an antiinvestment bias, built around formal financial appraisal techniques involving such devices as discounted cash flow (DCF). Such firms fail to give full credence to innovation; instead, they should be factoring into their decisions what he calls the Strategic Discount. There are three specific objections to DCF. First, accounting principles dictate that the most conservative rate and pattern of growth will be projected. Second, they also work to raise the hurdle rate, because of the very high risk premiums that must be added to the firm's cost of capital. Third, accounting principles omit consideration of the need for continuing corporate renewal, which new products can bring; when firms don't routinely reinvest (often by losing money), they lose part of themselves. Here is how the strategic discount works. Starting with the cost of capital (say 15%), add a risk premium (say 10%), and then deduct a strategic discount for renewal according to how much this new product renews part of the business (say 15% on a critical one). This would fix it so the project needed only a 10% return to be approved. An alternative way to handle it is to calculate first the expected internal rate of return, subtract the combined cost-of-capital and risk-premium percentage, and then ask whether the project makes a contribution to renewal at least equal to the remainder. To determine the amount of strategic discount needed at any particular time (the need for renewal), one should conduct a continuing evaluation of the firm's overall business situation. The four cornerstones of this evaluation are: 1. Does the current business satisfy a market need? If not, it is shaky. One should review recent movements in the marketplace, question the customer
ABSTRACTS
intensively, and confirm the company's continuing right to be in this business. 2. Does the business have a unique specialism, sufficient to defend its economic price differential in the marketplace? All firms should have a specialism, be it cost, market share, product superiority, seasoned management, or whatever. 3. Is there ample concentration? That is, are resources focused on one operation, or have they been drifting across a broad spectrum of activities. It is the natural process in business to drift away from concentration, since most decisions involve some compromise. The consequence is the proverbial 80/20 misallocation of resources (80% of the effort goes to products that produce only 20% of the revenue). 4. Has the business strategy been effectively communicated and are all managers properly motivated by it? If the degree and nature of concentration are not communicated, the strategy will not be effectively implemented. The conclusion: if a product innovation proposal strengthens the firm's overall competitive capacity, it should be given extra credit in the financial analysis. This requires a new factor in the discounted cash flow and net present value analysis.
Strategic Issues in New-Product Introductions, Charles Jones, Journal of Advertising Research (April 1985), pp. RC 1 1 - R C 13. ( C M C )
This is a distillation from the experiences of McKinsey consultants dealing in the new product area. The conclusion is that new product timing and situation analysis are more difficult and critical than is believed by many managements. There are two often overlooked factors that significantly affect the product innovation situation. They are the opportunity cost (the cost/risk of not going ahead fast enough to become a market leader) and the development risks (whether there are technical situations where the nature of the product that should be developed is uncertain). These two factors can be put into a matrix. Across the top are two columns, Low opportunity cost and High opportunity cost. Down the left side are Low
cannot be found in an employment interview. They usually have been in several positions (to gain political astuteness), and, once identified, they need to be rewarded substantially and quickly. They are often unpopular, renegade, or maverick people, previously rejected by their organizations, hardly the type suited to big rewards. They also seek visibility, which can be provided at low cost. A few other findings are: Top managers (e.g., the classic case of Sony's chairman and the Walkman he created) cannot really be champions. There is little resistance to fight, inhibiting discussion. Every champion needs a project manager to make the champion do the job right and to prepare the proposal for top management's review. The attributes of a successful product champion closely match those of the general manager. The second-time champions do not fare particularly well. Product champions are neither as widespread, unambiguous, or desirable as the business press would have one believe (and the group included three current champions).
How a Mature Firm Fosters Intrapreneurs, Robert J. Schaffhauser. P l a n n i n g R e v i e w (March 1986), pp. 6 - 1 1 . (CMC)
In this article, the Executive Vice President and Chief Technical Officer of Signode Industries tells how his firm developed a new ventures program. The program has been highly successful. The author insists that top management has to adopt a culture favorable to venturing: move fast, modify decisions already made, be tolerant of error, and want change. Getting managers down the line to believe such a culture exists is difficult for large firms. However, big businesses also have advantages when it comes to entrepreneuring. They can fund whatever they want, they
J PROD INNOV MANAG 1986;3:204-217
213
can reward the participants, and they have names and reputations which are of great help in the marketplace. Here is Signode's nine-step program. 1. Define strengths and weaknesses. This is fairly standard, but one must be creative. People at Signode found that the firm was the world's largest producer of plastic sheet, and that their sheet was twice as strong as any other. This strength was made the basis for their first venture team. 2. Define likes and dislikes. Want to avoid selling to the consumer? Avoid regulated industry? Conversely, does your firm want to get into services? 3. Select the venture topic. This puts together the findings from the first two steps. For example, for Signode, one venture might be plastic nonpackaging. Another would be to reduce theft in distribution. 4. Form the venture team. Signode likes about six fulltime people on a team. The best available, not rejects. Mix the disciplines. Take the basic four (technical, manufacturing, finance, and marketing) and add two other people from departments relevant to the team's assignment. Get a blend of personalities. 5. Launch the team. The team is given 2 weeks of intensive preparation (partly on the topic and partly on group dynamics). No leaders are selected, but every person on the team is committed; no one "waits for the leader to tell us what to d o . " Informal leaders will emerge when the team topic begins to take shape. The team is given space away from the home office, is given the financial limits (e.g., on investment and on level or return expected), and is then given 6 months to prepare a proposal for management. 6. Send the team to the marketplace. Have them immerse themselves in the business. Some teams have completed 2000 interviews at this stage. The purpose is to refine the problem statement, to gather ideas, and in general to prepare to be in that business. 7. Funnel the ideas. This is the stage of concept evaluation and refinement. There usually is a creative break-out also. The end point is satisfaction that the idea is good and that it can be exploited. 8. Presentation to management. This embodies a preliminary business plan, including financial hurdles. 9. Launce the venture. Give formal organization to the venture, fund it, and prepare compensation packages that will keep the group well motivated. Signode has eight launched ventures. As examples, one team has double-ovenable plastic trays to
214
J PROD INNOV MANAG 1986;3:204-217
replace other materials for TV dinners and other frozen foods. Another involves tough plastic grids that are laid on top of road subgrades in Alaska.
The Strategic Discount--Protecting New Business Projects Against DCF, Gordon Pearson, Long Range Planning, (February, 1986), pp. 1 8 24. ( C M C )
The author holds that many top managements have an antiinvestment bias, built around formal financial appraisal techniques involving such devices as discounted cash flow (DCF). Such firms fail to give full credence to innovation; instead, they should be factoring into their decisions what he calls the Strategic Discount. There are three specific objections to DCF. First, accounting principles dictate that the most conservative rate and pattern of growth will be projected. Second, they also work to raise the hurdle rate, because of the very high risk premiums that must be added to the firm's cost of capital. Third, accounting principles omit consideration of the need for continuing corporate renewal, which new products can bring; when firms don't routinely reinvest (often by losing money), they lose part of themselves. Here is how the strategic discount works. Starting with the cost of capital (say 15%), add a risk premium (say 10%), and then deduct a strategic discount for renewal according to how much this new product renews part of the business (say 15% on a critical one). This would fix it so the project needed only a 10% return to be approved. An alternative way to handle it is to calculate first the expected internal rate of return, subtract the combined cost-of-capital and risk-premium percentage, and then ask whether the project makes a contribution to renewal at least equal to the remainder. To determine the amount of strategic discount needed at any particular time (the need for renewal), one should conduct a continuing evaluation of the firm's overall business situation. The four cornerstones of this evaluation are: 1. Does the current business satisfy a market need? If not, it is shaky. One should review recent movements in the marketplace, question the customer
ABSTRACTS
intensively, and confirm the company's continuing right to be in this business. 2. Does the business have a unique specialism, sufficient to defend its economic price differential in the marketplace? All firms should have a specialism, be it cost, market share, product superiority, seasoned management, or whatever. 3. Is there ample concentration? That is, are resources focused on one operation, or have they been drifting across a broad spectrum of activities. It is the natural process in business to drift away from concentration, since most decisions involve some compromise. The consequence is the proverbial 80/20 misallocation of resources (80% of the effort goes to products that produce only 20% of the revenue). 4. Has the business strategy been effectively communicated and are all managers properly motivated by it? If the degree and nature of concentration are not communicated, the strategy will not be effectively implemented. The conclusion: if a product innovation proposal strengthens the firm's overall competitive capacity, it should be given extra credit in the financial analysis. This requires a new factor in the discounted cash flow and net present value analysis.
Strategic Issues in New-Product Introductions, Charles Jones, Journal of Advertising Research (April 1985), pp. RC 1 1 - R C 13. ( C M C )
This is a distillation from the experiences of McKinsey consultants dealing in the new product area. The conclusion is that new product timing and situation analysis are more difficult and critical than is believed by many managements. There are two often overlooked factors that significantly affect the product innovation situation. They are the opportunity cost (the cost/risk of not going ahead fast enough to become a market leader) and the development risks (whether there are technical situations where the nature of the product that should be developed is uncertain). These two factors can be put into a matrix. Across the top are two columns, Low opportunity cost and High opportunity cost. Down the left side are Low