SDA Professor of Strategic and Entrepreneurial Management
In 1982, Dietrich Mateschitz was marketing director for a toothpaste company. Like many other people in Thaliand, especially workers, he bought and drank Krating Daeng ("Red Bull") to give him a boost of energy and to fight jet-lag.
Observing that there was a strong domestic demand for the drink, Mateschitz hooked up with Chaleo Yoovidhya, founder of TC Pharmaceuticals that had launched Krating Daeng in Thaliand back in 1976 on a project aimed at introducing the product in Europe. Mateschitz invested all his savings and the European version of Redbull (a carbonated energy drink with an adapted taste) was launched in Austria in 1987 and is now the world's leading brand in the energy drink category.
In 2008 CocaCola decided to launch their own energy drink (Monster) and in 2009 Pepsi followed with signing a distribution deal with Rockstar Energy.
There might be several reasons for why CocaCola and Pepsi, with their existing brand, production facilities, market intelligence units, marketing research and customer monitoring, did not pick up and experimented with this new category before 10 years after Mateschitz “couped” the market, but the situation is not atypical. In spite of being present on the market, having money to pay consultants and marketing people to follow market developments and trends and in spite of having existing distribution networks and therefore easy access to market data, many large companies are struggling to be pro-active, fast, entrepreneurial and innovative.
One statistical indicator that moves this view out of the speculative territory is the Fortune 500 turnover “curse”. This “curse”, or simply statistical fact, tells us that of the largest 500 public companies in the US that every year figure on Fortune Magazines top 500 list, only 60% will be on the list 10 years from now. Of the original 500 that was on the list when it was launched in 1955, only 89 are still on it. Some of the exits on the list are of course “technical”, such as de-listings, M&As etc, but often these “technical” exits have a lack of innovation background, like for example Microsofts acquisition of Nokia, Googles acquisition of Motorola or Research in Motions name change.
So why is it that large existing companies tend to have difficulties with being entrepreneurial ?
Entrepreneurship is the process of creating value through the pursuit of opportunities. There are 3 basic conditions that need to be in place for companies and individuals to do that:
- Opportunities needs to be identified, shared, defined and refined.
- Resources needs to be acquired and pooled to set up an organization capable of appropriating value from the opportunity
- The initiative needs to be managed in a way that the risk and uncertainty associated with launching the new venture is reduced
Start-up entrepreneurs (like Mateschitz) have a well documented ability to manage these 3 steps, but larger firms struggle in all areas.
Barriers to opportunity identification and idea sharing in large firms
Many established firms struggle with spotting new market opportunities because the people responsible for spotting them are few. In a traditionally organized firm, employees and managers who has responsibility for some kind of development are working in R&D, Corporate Strategy or Business Development, and are less than 1% of the workforce. Having delegated the responsibility to be creative to a few, large firms find themselves up against it, because they are competing against “many” on the idea front.
In addition, and this is true also for firms that has spread out the responsibility to be creative to a more diffused employee and manager population, most employees being that are being involved in generating ideas, have been in the business for some time (5-30 years) which make them very likely to suffer from “lazy brain” syndrome, namely the phenomenon that it is objectively very difficult to see the world in a new light or not to re-interpret reality using existing cognitive frameworks and interpretation models. not having pre-conceived ideas of what works and what doesn’t in an idea generation phase is actually an advantage
Thirdly there are barriers to sharing. Employees and managers in large firms are busy. They have their own problems. And since ideas generated and opportunities identified are often not in one owns area, the incentive and likelihood to share the idea with someone to start the process of definition and refinement is actually very low.
Barriers to effective selection and funding of entrepreneurial ideas in large firms
Even if large firms can overcome the problems of identifying, sharing and defining new opportunities, firms cannot fund and do everything employees and managers come up with. Since not all ideas are “strategic” (market is too small, too far away from core competencies, not in line with the political center of gravity etc), companies need systems to select, fund, incubate and grow new businesses.
But the way many large firms do that is wrong. Take selection for starters. Where Venture Capitalists invest in new businesses based on a description of pain point / problem addressed, solution, potential market size, team, validated results, business model and EBIT margins, most corporations evaluate new business proposals mainly in terms of whether the forecasted IRR exceeds the company standard hurdle rate (i.e. 25%). Often the documentation presented are technical drawings and/or an excel sheet. Not what we normally call a business plan in a start-up context.
Evaluating a new business idea almost exclusively on projected financials is risky, because the projections are often wrong. And by not looking at the underlying drivers, we run the risk of turning selection and funding into an “excel sheet” exercise and competition.
But that’s not the only problem. Once a project has been selected and given funding (a three year budget for example), stage gates stop being gates. Very rarely do large firms “kill” funded projects if they don’t meet their milestones or validate their value hypotheses. They simply get delayed.
This is in sharp contrast to entrepreneurial finance techniques where start-up firms only receive small amounts at a time, and if the investor loose trust in the project they will rather close it down fast than continue to finance a dying project. This fail fast and cheap drip financing has been proven a much more efficient financing and development management tool than large corporate budgets and administrative resource allocation.
Barriers to successfully manage projects under high level of uncertainty
Start-ups and corporate development projects are risky. Often we are using new technologies, addressing new customer segments, and experimenting with new partnerships and business models.
The management approach preferred by expert entrepreneurs to manage uncertainty is referred to as “effectual”. This approach is experimental, fast and flexible. Corporations on the other hand manage by plans and predictions. Because plans are difficult to make precise under high levels of uncertainty, the planning approach often fails.
Where to go from here: building corporate entrepreneurship practices
In a follow-up blog post I will provide an overview of some of the things firms can do to overcome some of the identified barriers, by employing a structured framework for corporate entrepreneurship practices. In the mean time have a look at this video we made about what large firms can learn from start-ups.Clicca qui per la versione stampabile