Building an entrepreneurial culture
Gary Hamel has drawn attention to the fact that business success depends on the continual perception of future business opportunities and the continual exploitation of those opportunities. In a recent book, Hamel stresses a series of management behaviours that foster innovation and entrepreneurship within an organisation. [ 9] These were previewed in a Fortune magazine article [ 10] where he expounds ten rules for ˜re-inventing your company . In the following, under the headings of each of the ten rules suggested by Hamel, I have summarised his view and added editorial commentary .
Hamel s ten rules for re-inventing your business
1. Set unreasonable expectations
Traditionally, leadership of an organisation requires the establishment of a mission statement and the setting of goals to be achieved by the organisation. In larger organisations these will be stated formally , while in smaller organisations these might be stated informally. If these goals are easily achievable, neither management nor the employees are faced with any challenge to attain these goals. Hamel advocates setting unreasonable goals that are obtainable only if the organisation stretches beyond its current capabilities and becomes stronger, more flexible, more adaptive, more efficient, and so on. By expecting such extraordinary performance, management might induce employees to achieve higher outcomes than otherwise . If management can induce all employees to subscribe to an ˜unreasonable objective (for example, that sales will grow twice as fast next year as compared to last year) employees will do extraordinary things to achieve this goal. While they might fail to grow twice as fast, they probably will grow faster than they would have if a more realistic goal was set.
2. Stretch your business definition
Entrepreneurial managers must think beyond the present boundaries of their business to include related and unrelated business activities in which the firm might have the resources and capabilities to participate and compete successfully. Rather than define your organisation in terms of what products it makes, define it in terms of what skills and knowledge its employees possess, and what other resources it owns or controls.
The ˜resource-based theory of sustainable competitive advantage says that sustainable competitive advantage derives from the resources a firm controls that are valuable , rare, hard to copy, and non-substitutable. Thus, a bookseller like Amazon. com bought out Sotheby s auction house because it had developed capabilities, proficiency and knowledge in Internet retailing that were transferable to another marketplace .
3. Create a cause, not a business
Employees do not work simply for the wages or salary you pay them. People also work for the ˜perks (perquisites) that come with the job and tolerate the ˜irks (irksome features). Obviously, the psychic utility derived from the salary plus the perks must outweigh the psychic disutility of the work effort and irksome elements associated with the job, or the employee will quit and go elsewhere. But Hamel and others go beyond this to argue that people work harder and perform better when they are strongly and collectively motivated to achieve an objective that is not monetary , but rather is a psychic objective or a cause that all can rally to. For example, where the cause is to cure cancer, rather than to make lots of money selling drugs, the emotions of workers are involved, as well as their skills and knowledge. Similarly, where the cause is to eliminate poverty, to eradicate pollution or to win a race or competition of some kind, employees will act in ways that better serve the organisation s financial objectives. They will strive to innovate, to solve problems, to increase their productivity, and generally perform better than they would if it was just a job.
4. Listen to new voices
Where do new ideas and revolutionary technologies come from? Often they come from outside the industry or from new entrants to the industry who have thought of a better way. The top management of most companies are usually industry veterans , familiar with each other s opinions and prejudices and unlikely to contribute anything radically new to the boardroom discussion. Company hierarchies are based on industry experience and past performance, conformity with company policies and objectives, and so on. Top management is not the most likely place to find creative new business ideas.
Innovation comes from intellectual creativity, from people who have walked a different path or are not so imbued with the status quo that they cannot envision a new business model. Thus top management must listen to outsiders, new and younger employees, and to people from different cultures and lifestyles who bring a fresh perspective to the table. Virgin Atlantic, under Richard Branson s leadership, has started over 250 new businesses based on suggestions from employees. Other companies have weekly or monthly meetings where any employee may pitch their concept for a new business venture to the top brass. This is the ˜suggestion box concept taken to an extreme that encourages and rewards employees for contributing to the firm s process of innovation.
5. Create an open market for new ideas
A market for new ideas implies that people with new ideas can offer their creative thinking to this market and reap rewards for their creativity. Rather than have creative employees take their ideas elsewhere to another employer (or to start their own business) the organisation should encourage and reward the development of an in-house market for new ideas. For each of the new businesses that Virgin Atlantic develops, it typically gives the employee advocate of the new venture a substantial equity share, a top management role, and a capital injection to start the new company. Thus the employee becomes an entrepreneur within the company and will reap the rewards of their creativity if the new venture is successful. Hamel argues that organisations should learn from the ˜Silicon Valley model, where vibrant markets for ideas, for human talent and for venture capital interact to produce thousands of new businesses each year.
6. Offer an open market for capital
Existing business organisations usually have a chief financial officer (CFO) who is charged with maintaining the financial well-being of the organisation, ensuring that funds are not spent unwisely, and not invested in new projects that are prone to failure. Thus new business proposals emanating from within an existing company are usually subject to intense scrutiny, with devil s advocates emerging in every committee to prevent the company s funds being ˜unwisely invested in a new project that might lose money.
Meanwhile, the venture capital industry invests every day in new business ventures that might lose money. Venture capitalists know that for every five investments they make, two will fail (losing all the money), two will enter ˜the land of the living dead (not making any money) and one, hopefully, will return them 50 “100% on their money. They invest in all five because they cannot tell in advance which will fail and which will succeed, although all have some chance of success and some chance of failure. When the CFO (or the board of directors) of a company rejects the proposal because it might fail, or delays the decision while asking for more evidence of probable success or more concrete financial projections, the frustrated employee may be motivated to quit and take the new business concept to the external venture capital market where it is more likely to receive a favourable hearing.
Thus, the financial gatekeepers of existing firms must operate more like the venture capital market, taking a portfolio approach to investment in new business concepts, and accepting that some will fail. If they are as selective (and later as supportive) as the venture capitalists are, then hopefully their winners will compensate for their failures. This is not to say that companies should fund every wild-eyed idea that comes forward. They must have viability screening processes in place, but they must not be too cautious or too conservative. They must face the fact that all of the new business concepts they invest in might potentially lose money, and that some indeed will. Note that Virgin Atlantic has shut down approximately 100 of the 250 businesses that it has started ”this should be seen as a 60% success rate rather than a 40% failure rate!
7. Open up the market for talent
The ˜Silicon Valley model is based on the efficiency of the markets for ideas, human talent and venture capital. To emulate Silicon Valley, an organisation must permit and encourage talented individuals to move around the company and occupy the positions in which their talents will best serve the company s objectives.
In many organisations, the existence of a formal organisational structure restricts the mobility of talent within the organisation. For example, a person who has attained the position of Senior Manager will be reluctant to move sideways or take a less prestigious position in another part of the company. Often there will be political forces within the organisation that inhibit the creation of a similarly prestigious or high-ranking position in the division that is trying to create the new business venture. Similarly, supervising managers may refuse to release a valuable employee to work on a new project, arguing that the employee is needed in their present job.
Top management must create a system that allows such flexibility, that activates the transfer of talented individuals to the ˜hot spots in the organisation, and that does not allow other managers to hoard talent in their own self interest.
8. Lower the risks of experimentation
If employees are punished for failures, or if a failure damages the salary or promotion prospects of the employee, or has any other significant negative implications, it should not be surprising that few new business ideas will come forward from employees. Rather, employees need to be encouraged to experiment and develop their ideas without fear of sanctions if their new concept fails to work as expected.
The 3M company, famous for its encouragement of employee- sponsored new products, also honours and rewards employees who abandon development of a new product idea. The logic is that careful scrutiny of the new product s market potential is necessary, and that abandoning an infeasible new concept will save the company lots of money. To avoid egocentric employees stubbornly pushing forward with ˜hopeless projects, 3M provides an alternative source of ego gratification to induce them to abandon that project and look for a better new idea.
Learning from the venture capitalists, companies can reduce the risks of experimentation by providing a series of small capital injections rather than one large injection of funds, with subsequent funding dependent on the results achieved at a series of mileposts. Also like the venture capitalists, companies should distinguish between individual project risk and the portfolio risk associated with investment in a series of new business ideas, some of which will almost certainly fail while others will hopefully succeed.
9. Divide and conquer
New business units of established firms are less likely to succeed if they are forced to operate within the confines of the old business. Most likely the existing business will involve procedures and rules that will inhibit the new venture in its pursuit of success. Setting up a separate enclave or division for the new venture, with appropriate but not stifling oversight by senior management or the board, is likely to improve the new venture s chances of success. Without having to argue each decision past committees whose main interest lies elsewhere, the management of the new business entity can get on with their business, and concentrate on refining the product or service concept and achieving greater speed to market.
Further, as successful new business units grow they risk becoming inflexible and slow to react to changing market forces. To avoid this, Hamel argues that they should be subdivided into two or more separate (smaller) businesses. Each unit will then focus on specific markets to retain their capability to be nimble and responsive to changing market forces.
Dividing into cells like this facilitates the innovative process by allowing each business unit to adopt the most suitable business model rather than being tied to a ˜one size fits all business model. It also allows for independent thinking and consideration of the specific issues facing each separate market; keeps managers closer to their customers; and by dispersing power it removes the threat that managers of one product line might try to kill off competing product lines. Hamel cites the separation of Hewlett-Packard s inkjet printers and laser printers into different business units, with the result that HP became the leader in both market segments.
10. Reward the innovators
Innovation has value in markets. It follows that the creators of innovation have value that goes beyond their salary and perks ” their innovations may secure a profit stream that stretches out into the future. If an employee is an innovator and their innovation has market value, that employee will make the jump to entrepreneurial self-employment unless suitably recognised and rewarded by their present employer.
As stated before,Virgin Atlantic gives the innovator a substantial share of equity in the new venture, as well as the prestige and decision-making autonomy that goes with being the chief executive officer of the new business entity. Over one thousand Microsoft employees have become millionaires due to stock ownership. Although employee stock-ownership plans involve employees directly in a share of the future profitability of the business, Hamel argues that the innovative employee will respond more enthusiastically to a share in the profitability associated with their new idea rather than ownership of general stock. Thus, splitting off the new business venture into a separate entity and giving the innovator a significant share of the equity in that new business will be attractive to the innovator. In this way the company mimics the ˜Silicon Valley model, and will more likely keep the employee within the organisation rather than sending them away to become a competitor.
