SDA Professor of Strategic and Entrepreneurial Management
You do not frequently run into entrepreneurs in large, complex organizations. They are not attracted by all these rules, procedures and hierarchies. They prefer to work in small, agile firms or start their own venture.
If they end up in big firms, it is usually due to a recruiting mistake or the young entrepreneur’s belief that it is less costly to make the big mistakes somewhere else and after she gained some experience start her own venture. But soon salaries become better, risk-tolerance lower and the motivation to leave the safe corporate world is getting lower and lower.
And then hey, you can still be an entrepreneur in a large firm, can’t you?
Corporate Entrepreneurship as a catalyst for innovation
Corporate entrepreneurship has become a hot topic in most industries as digital transformation is impacting their businesses and established firms struggle to keep up with smaller firms.
Take the example of a conservative industry such as banking, in which firms have started to worry about how to boost their capability to innovate. Industry reports estimate that more than 4.000 fintech start-ups are ready to be launched worldwide. Their goal is to revolutionize this conservative industry and gain significant market shares. TransferWise, for example, is helping consumers to exchange money safely and transparently, through their peer-to-peer model. Clinkle is introducing a mobile wallet for day-to-day transactions. Indiegogo is empowering anyone to raise funds for cause-related ideas using its online platform.
The consequences of these developments could be devastating for financial services firms that do not change their business model: 20-40% of profits in their private customer segment are expected to be lost by 2020. Hence, the financial industry is under immense pressure and has to act as soon as possible. Financial services firms need to enhance their capabilities to monitor digital trends and key players in this market, understand the impact of these trends on their business models, and innovate to generate robust business models.
But the financial services sector is not generally noted for its willingness to embrace innovation. Forbes did not list any banks among the world’s 100 most innovative companies in 2013. Paul Volcker, former chairmen of the Federal Reserve, even claimed that the financial innovation had been worthless and that it had reached its peak with the introduction of the ATM.
So how do banks boost their innovation capability?
Most of them have recognized that it is not easy to change the corporate culture and establish processes that help managers to become more entrepreneurial. Therefore, they have outsourced innovation and created accelerators that invest in successful start-ups to later integrate some of them into their processes. While this is a good start and provides immediate relief, it cannot be a long-term measure that ensures banks to stay competitive because this process is too slow, and too costly. Accelerators need to be complemented by more diffused corporate entrepreneurship that supports organic growth initiatives.
The Corporate Entrepreneurship Equation
Companies have to figure out how to enhance their capability to innovate. For a start, the figure below may help:
A key characteristic of entrepreneurs is that they act even if the outcomes are uncertain, but they are often not very well organized. Bureaucrats on the other hand are good at organizing a large amount of people that need to work together but hate uncertainty. The challenge large firms have is to develop administrative processes that reduce uncertainties to the extent that the energy bureaucratic entrepreneurs have to follow-up on their ideas is high enough. If the market uncertainty (i.e., how will clients react to this?) and firm uncertainty (i.e., how will my colleagues react to this?) is low, managers are more likely to act.
This is depicted in the diagram above: corporate entrepreneurship does not develop because the entrepreneurial energy of a single manager or a team is lower than the market- and firm-related uncertainty the team faces.
Reducing the Entrepreneurial Energy Gap
To change this situation and eliminate the energy gap, a firm has several levers:
- Increase entrepreneurial energy by selecting employees with entrepreneurial drive and by creating a culture that supports the creation and implementation of innovative ideas.
- Reduce market-related uncertainty (i.e., it is unclear if the entrepreneurial idea finds acceptance in the market) by investing in capabilities to segment the market, forecast trends and understand customer needs. Obviously, the higher the market turbulence the higher is the market-related uncertainty.
Reduce firm-related uncertainty (i.e., it is unclear how good ideas are supported by the firm) by reducing:
- Communicative uncertainty: Managers need to make sure their ideas are recognized as opportunities. They need to package their ideas and convince others. But often it is not clear what types of innovative ideas are legitimized as entrepreneurial opportunity. And how should ideas be presented? What is the right format? When can I submit the ideas? Who should I send then to? If these and related issues are unclear, individuals will eventually give up, unless they have a lot of entrepreneurial energy;
- Behavioural uncertainty: Resources need to be allocated to good ideas. The key question now is: does the selection process identify valuable opportunities and allocate sufficient resources to them? Behavioral uncertainty arises when the actions of managers involved in that process do not fully reveal their true intent. For example, as entrepreneurs seek to get approval for and legitimize entrepreneurial opportunities, they might fear losing control and ownership of their ideas if they share them with others. Intrapreneurs might withhold information about the ideas they are exploring. Another example of behavioural uncertainty is when HQ managers fear that opportunities are presented in an ‘overconfident’ manner to get managers’ attention and support and thus win the race against competing internal proposals from other subsidiaries. Frequently, it is difficult to determine the true value of an idea at this early stage of the analysis and the HQ managers might hedge against intrapreneurs’ purposeful distortion of data to increase the attractiveness of the proposal.
- Value uncertainty: How are the benefits of entrepreneurial ideas shared? Issue of value appropriation, international commercialization, transfer pricing, and the application of incentive schemes get important on the individual and unit-level. Will the innovation yield entrepreneurial rents? And if yes, how do we solve credit assignment problems in the process? Entrepreneurs need to know what rewards they can expect if they engage in innovation processes.
Thinking about each element that is present in the equation:
“corporate entrepreneurship = entrepreneurial energy – market uncertainty – firm uncertainty”
will help firms to become more innovative.