12
Intrapreneurship
Introduction
Joseph Alois Schumpeter, an Austrian-trained economist who taught at Harvard, is considered the chief proponent and popularizer of the word entrepreneur in 1911. During the next decade, he made the following statement in support of the idea that entrepreneurship was not limited to small start-up firms, but could also occur within big established firms: “Innovation within the shell of existing corporations offers a much more convenient access to the entrepreneurial functions than existed in the world of owner-managed firms. Many a would-be entrepreneur of today does not found a firm, not because he could not do so, but simply because he prefers the other method.”1
Thus, the idea of corporate entrepreneurship was born almost 100 years ago. This activity is now commonly referred to as intrapreneurship. While I introduced intrapreneurship in Chapter 2 when I discussed the entrepreneurial spectrum, I chose not to discuss it in greater detail at that time because I believe that an entire chapter should be devoted to the subject. I also believe that to really understand intrapreneurship, one must thoroughly understand entrepreneurship, and therefore I wanted the reader to have fully digested all the lessons about entrepreneurship in the previous chapters before tackling this subject.
Intrapreneurship is the spirit and act of entrepreneurship in a corporate setting. I have done training sessions on the topic of intrapreneurship at Nike, Hearst Management Institute, S. C. Johnson, Allstate Insurance Company, the National Association of Broadcasters, and the American Press Institute. These are companies and organizations that know that we live in a world in which time is not what it used to be. This is the age of “Internet time,” where compared to a decade ago, a year is six months, a month is a week, and a week is a day. That is why Amazon Prime is so successful—speed of delivery. Therefore, corporations must know that they cannot rest on yesterday’s successes. They must also realize that growth can no longer come simply from increasing prices. Today, more than ever before, we live in a global world. Instead of accepting price increases on products or services, customers will go to the Internet to find the same products or services at a lower price. As a result, corporations must continue to remain hungry, with a sense of urgency, creativity, and, most important, vision.
Bob Morrison, the former CEO of Quaker Oats, which was purchased by Pepsi in a multibillion-dollar deal, is a great example of corporate leadership embracing the intrapreneurial spirit. At a company meeting, he announced to his employees, “We must change the mind-set and culture at Quaker. We must think and act like a small, entrepreneurial company.”
The Intrapreneurship Spectrum
To give greater clarity to the subject of intrapreneurship, I have created the intrapreneurship spectrum in Figure 12-1.
FIGURE 12-1 Intrapreneurship Spectrum
Caretaker
While the caretaker is not an intrapreneur, this category is included on the spectrum simply as a point of reference. This is a corporate employee who is the antithesis of the intrapreneur. All things entrepreneurial are anathema to him. He is most satisfied by inheriting an established product line that has a solid customer and employee base with moderate growth.
Developer
This is the intrapreneur who takes a company’s existing products or services and pursues high growth by targeting new customers and markets. While the products or services are not new, they have no brand equity with the new targeted markets. For example, Altoids was a 200-year-old British product that was originally used to calm upset stomachs. It was owned by Kraft Foods, then by William Wrigley Jr. Company (now owned by Mars Corporation), and today it is one of the most popular breath mints, with more than $116 million of the $815 million US breath mint category.
Another great example is Pfizer’s introduction of sildenafil, a drug that was initially studied for hypertension. It was patented in 1996. The story goes that when male patients used the drug, their wives complained to the doctors that their husbands were now chasing them around the house like they had done during their honeymoon decades earlier. With these data, in 1998, Pfizer decided to target a new market for the same drug, which we all know as Viagra. In 2016, Viagra generated $1.6 billion in annual revenues.
Innovator
This is the intrapreneur who pursues high growth for her company through new products, services, and/or business models. The innovator is not a member of the company’s R&D department, and therefore creating new products, services, or business models is not her official responsibility.
A great example of an intrapreneur in this category is Sam Johnson, the former CEO of S. C. Johnson. Several decades ago, Sam, the grandson of the company’s founder, decided to pursue the development of a new product without the approval of his father, who was the CEO. The company, which now manufactures an entire spectrum of consumer products, including Glade air fresheners, Windex, Scrubbing Bubbles bathroom cleaners, and Oust air sanitizer, was primarily a manufacturer of wax cleaners. Sam came to his father and informed him that he had developed a new product, outside of the research and development department. His father’s reply was, “That’s fine as long as it has wax in it.” Sam responded, “No, it does not have wax among its ingredients, and if you included it, the product would be less effective.” Sam’s new product was a pesticide that we all know today as Raid.
Intrapreneurship Models
Intrapreneurs, whether they are developers or innovators, use different formal or informal models to bring their innovative ideas to fruition. The best descriptions of these models were published in a research paper by corporate entrepreneurship expert Robert C. Wolcott, an outstanding scholar and adjunct professor in the Center for Research in Technology and Innovation at the Kellogg School of Management, and Michael Lippitz, a research fellow at Northwestern. These models are the Opportunist, the Enabler, and the Producer.2
The Opportunist
This model basically says to employees, “Do whatever you want to do, because the company does not have any formal systems related to corporate entrepreneurship.” This is a model in which new services or products, like Raid, come from individual champions, not through systems. Ironically, being successful with this model typically leads an organization to implement a more formal model, such as the Producer or the Enabler.
The Enabler
This model says to employees, “Anybody in the company can come up with a new service or product, but here is the process for developing it.” With this model, the company explicitly communicates to its employees the procedures for requesting development capital and the criteria that will be used to determine which projects receive funding. Google is a company that has had major success with this model. For example, its service Google Talk (a.k.a. “GChat”), which was a free system for instant and voice messaging, came from an employee as part of the company’s 10% program. This innovative program allows all employees to devote 10% of their daily working hours to the development of their own ideas. As one Google employee stated, “We’re an internal ecosystem for entrepreneurs . . . sort of like the Silicon Valley ecosystem, but inside one company.”
The Producer
This model openly recognizes and proactively supports the importance of entrepreneurship in a corporate setting. The company creates a separate entity that has the specific task of creating new products or services outside of the present business. Several companies have embraced this model, including Xerox, with its New Enterprises Division; Coca-Cola’s Innovation centers in five different locations throughout the world; and Cargill’s Emerging Business Accelerator division.
Traits of the High-Growth Intrapreneur
Successful high-growth entrepreneurs and intrapreneurs share some but not all of the same traits. A few unique attributes of the intrapreneur include:
• Risk taker
• Hard worker
• Has a plan
• Good manager
• Visionary
• Profit focused
• Innovator
• Accepts being managed
Some of these traits are worth discussing in more detail.
Risk Taker
The successful intrapreneur is not a blind risk taker. He has a plan, especially if he works for a company that uses the developer or innovator model, and he executes that plan according to a defined timeline. This is called “planning the work and working the plan.” Unlike the entrepreneur, who typically risks her personal assets, the intrapreneur’s risk is much less. At worst, he could lose his job if his new ideas or innovations are not commercially successful. However, while the intrapreneur’s risk may be less than the entrepreneur’s, he certainly assumes greater risk than the average corporate employee.
Accepts Being Managed
One of the reasons why some people become entrepreneurs is that they want to be as independent as possible. Specifically, they loathe the idea of having a boss. In contrast, the intrapreneur, given her status as an employee, accepts the fact that she answers to a manager above her. She does not have carte blanche to do anything that she wants to do. She must usually seek and receive approval from a higher authority in the company’s organization chart. The intrapreneur generally accepts being managed by others as a standard way of doing business.
Acts of Intrapreneurship
Intrapreneurial activities include acquisitions of other companies and product lines, the introduction of new products outside of the traditional research and development process, the creation of new strategic partners, and changes in a company’s business model. Let’s review, through anecdotes, each of these activities in greater detail.
Acquisitions of Other Companies and Product Lines
In 1998, McDonald’s purchased 90% of Chipotle Mexican Grill, a chain of 14 restaurants that was founded in 1993 by Steve Ells, a professional chef trained at the Culinary Institute of America. This acquisition was truly an intrapreneurial act of innovation on McDonald’s part. Prior to this acquisition, the company had seemingly viewed innovation as simply putting the letters “Mc” on the beginning of any idea. For example, it unsuccessfully experimented with the McDiner, a restaurant serving traditional food, such as meat loaf and mashed potatoes, in a diner. It is the norm for technology-related corporations to buy entrepreneurial firms. For example, Facebook purchased Instagram for $1 billion, and in 2018, Oracle purchased DataFox, a start-up that raised $19 million in 2017 at a $33 million valuation.
Introduction of New Products Outside of the Traditional R&D Process
A great example of the intrapreneurship model in which “products emerged from champions rather than systems,” a phrase created by Bill Perez, occurred at S. C. Johnson with the development of its storage bag product line, which generates in excess of $150 million of annual revenues. The original idea and the development of the prototypes came not from the company’s R&D department, but from two marketing department employees. The company had no plans to enter the storage bag category until these two intrapreneurs persuaded management that it was a business that could be grown fast. As Bill Perez, the former CEO of S. C. Johnson, said about the two employees, “Nobody asked them to do it.”
Creation of New Strategic Partners
In 1994, Viacom, a $10 billion entertainment conglomerate that owned Madison Square Garden, MTV Networks, Showtime Networks, numerous theme parks, and dozens of television stations, purchased the 6,000-store Blockbuster video chain for $8 billion. Two years later, Blockbuster’s cash flow had dropped 42%. Sumner Redstone, the 75-year-old chairman and founder of Viacom, knew that he had to make changes. Rather than simply cutting overhead, he got intrapreneurial.
Redstone knew that videos shown at home provided movie studios with nearly three times the revenue of showings in movie theaters. The studios charged Blockbuster a flat fee of $80 per video. In contrast, movie theaters usually did not pay a fixed price; instead, they split the revenues with the studios. Redstone decided that this partnership model between movie studios and theaters should also be applied to Blockbuster. The first studio that he approached with this partnership proposal was Warner Brothers, which rejected it. His next target was Disney, which he successfully convinced that it could make money if it treated Blockbuster as a partner, instead of as a customer. The agreement was that Blockbuster’s fixed cost of $80 per video would be reduced to $8 and that Disney would receive 40% of the video’s rental revenues for up to 26 weeks, at which time Blockbuster could sell the video, thereby recouping its original $8 investment.
The financial results were enormously positive for both parties because they reduced Blockbuster’s outlay of capital while allowing it to increase its stock of the most popular videos. Six other studios followed Disney with a similar strategic partnership with Blockbuster, including Warner Brothers. But this success by Blockbuster was short lived, as it eventually declared bankruptcy.
Changes in Business Model
Three of America’s blue-chip companies, IBM, Best Buy, and Nike have been wonderfully intrapreneurial by changing their business models. IBM, a company that was seemingly an antiquated, lumbering old has-been by the 1990s, was turned around by a great intrapreneur, Lou Gerstner, the CEO, who did not have a technology background when he came from RJR Nabisco. Gerstner successfully changed IBM from an equipment supplier, as it had been for its entire life, to a solution provider/consultant.
Another example of intrapreneurial success is the retailer Best Buy. It changed its model from being exclusively a retailer to being a solution provider, like IBM, by adding installation services and trained salespeople, which enabled it to be different from its major competitor, Walmart. Best Buy’s revenues increased 16%, and has continued to be successful by continuing to make changes, despite predictions in 2018 that it would go bankrupt.
Phil Knight, the great entrepreneur who founded Nike in 1974 as an importer of running shoes, later changed its model to an athletic shoe and apparel manufacturer. Today it is also a successful retailer.
Signs of Intrapreneurial Success
A company has successfully created an intrapreneurial spirit and program when it is unequivocally clear that it agrees to manage intrapreneurs differently from other employees by encouraging them and giving them the space and freedom to innovate.
Further evidence of intrapreneurship includes the company’s acceptance of failure. Google is a great example. In response to an unsuccessful innovation that cost the company several million dollars, Larry Page, one of Google’s founders, told the employee who had been in charge of the idea, “I’m so glad you made this mistake, because I want to run a company where we are moving too quickly and doing too much, not being too cautious and doing too little. If we don’t have any of these mistakes, we’re just not taking enough risk.”3
The final sign of successful intrapreneurship is the company’s proactively encouraging employees with creative ideas to step forward. An extreme example is Sealed Air Corporation, which has 15,000 employees. Its employees are encouraged to bring entrepreneurial ideas directly to its CEO.
Standard Operating Procedures
The ideal intrapreneurship system should be made up of the following processes:
1. The system should be simple and user-friendly. The US Forest Service Eastern Region changed its innovation suggestion process from a four-page form to telling its employees, “If you have an idea, tell your supervisor or send an e-mail. If you do not get a response in 2 weeks, as long as the idea is not illegal, go ahead and implement it.” Before the change, the 2,500 employees submitted, on average, 60 ideas annually. A year after the new procedures were implemented, 6,000 new ideas were submitted!
2. Reward employees for successful ideas. Share the wealth. Northwestern University has a results-oriented system that rewards anyone who develops an idea that gets commercialized. In 2007, chemistry professor Richard Silverman received his portion of the royalties that the university received from a pharmaceutical firm, Pfizer, which purchased Lyrica, a chronic pain relief drug that Silverman had created. The university received more than $700 million. Silverman’s portion was not publicly disclosed, but it must have been many millions of dollars, given the fact that the Richard and Barbara Silverman Hall for Molecular Therapeutics and Diagnostics, a $100 million Northwestern University building that “brings together engineering, biology and chemistry for interdisciplinary research,” was named for him and his wife.
3. All ideas should be reviewed, and the submitters should be informed of the decision as soon as possible.
4. Every step in the review process should be transparent and well publicized, as should the criteria used to approve ideas.
5. The review and approval process should be managed by more than one person.
6. All intrapreneurial success stories should be publicized to all employees throughout the company.
7. Employee expectations should be proactively managed.
Employees should be told that in the entrepreneurship world, most new companies do not succeed. And the same applies in the corporate intrapreneurship world, where most ideas will be rejected.
Intrapreneurship Blunder
The implementation of the procedures just listed will almost guarantee that a company does not duplicate one of the greatest intrapreneurial blunders in corporate history. In the mid-1970s, Steve Wozniak, a college dropout and self-taught electronics engineer, worked at Hewlett-Packard (HP). He offered his employer the chance to develop the idea that he had for a user-friendly personal computer. Hewlett-Packard said no thank you. So, with $1,300 derived from selling his van and other assets, Wozniak left HP at the age of 26 and, with the help of his friend Steven Jobs, developed the Apple I computer for their new entrepreneurial start-up, Apple Computer, Inc.
Kodak is another former great fortune 500 company that almost died because of its refusal to take advantage of intrapreneurs. Before it went bankrupt in 2012, it was 125 years old and at its height employed 120,000 people worldwide. Today, it employs 3,500 after Chapter 11 bankruptcy.
With 80% of the camera film industry, Kodak refused to embrace digital cameras. The primary reason was because film revenue generated obscenely high gross margins of 85%.
This story is even sadder because a Kodak employee, Ron Silverman, invented the first digital camera in 1975. He was the quintessential innovator. He was not assigned to work on this new product. In fact, he worked on it in secret when he was working away from the Rochester, NY, headquarters in Japan. The project was killed by Kodak’s management when they discovered Ron’s work. They refused to produce digital cameras! They also rejected the idea proposed by a Kodak engineer, in 2000, to approach Apple about putting a camera in the iPhone.
Instead, over the next decade, they invested over $25 billion in new international markets and unsuccessful products. Thus, this is one of the greatest intrapreneurial blunders!