Leading entrepreneurial ventures in established companies

October 1, 2002

Business InnovationBusiness Innovation

© William J. Brown

� Managers of entrepreneurial ventures launched from within established companies face a special set of challenges.

� Key among these is that, as the corporate venture takes shape, the manager needs to assume leadership responsibilities to succeed - and this includes managing failure. � No one else can.

� Tonight�s presentation maps out the critical activities and the most important responsibilities for the venture manager.

A Tight PropositionA Tight Proposition

� The venture manager's first challenge is to convert each idea into a powerful, practical, business proposition that can be understood easily by the people responsible for executing it.

� The business proposition for a corporate venture needs to have three properties: � it must be simple; � it must be actionable; � it must resonate with people.

Keeping It SimpleKeeping It Simple� When it comes to simplicity, managers should

ask themselves whether they can write it on a business card and still convey its purpose.

� This makes the business proposition easy to comprehend and communicate.

� The proposition for Canon's personal copier exemplifies this principle: � "Take to market a copier that is small, inexpensive and

reliable enough for personal use on a secretary's desk."

� And the Japanese music equipment manufacturer Yamaha replaced the idea of being a company that only manufactured pianofortes with the terse proposition: "Sell keyboards".

� The phrasing of the business proposition is all-important.

� It is good to start by finding a direct link with the market and the customer and simpler propositions are more powerful.

� Consider this statement from Priceline.com: � "Customer: name your own price, any time, anywhere."

� Employees can mobilize around it, focus on it and talk about it.

� Such images can be phrases, like those of Yamaha and Priceline.com.

� They can be pictures or symbols, metaphors or analogies - anything that makes it easy for people to understand the basic challenges of execution.

Absorb UncertaintyAbsorb Uncertainty� It is important for managers to help those involved in

the project cope with uncertainty or they will find it hard to be decisive.

� Unfortunately, it can be much more expensive for companies to be slow than it is for them to be wrong.

� The project leader's must make uncertainty less daunting and create among colleagues the self-confidence that allows them to act without seeking detailed managerial permission.

� In particular, the project manager should prevent employees from being overwhelmed by the complexities of the project.

� How?� By setting a clear framework in which they can take action.

� In other words, the venture manager might say to the team members: � "Assume X is going to happen. If you work on this

assumption and I'm wrong, it's not your problem, but mine. I may come to you later and say I was wrong and we now have to assume Y is going to happen, but for now, you should assume I am right."

� The importance of this practice is that it liberates team members from the paralysis caused by uncertainty and frees their creativity.

� The manager is left to cope with the uncertainty, of course, but then the business of thinking as an entrepreneur is all about coping with uncertain situations.

� In fact, a manager seldom has to be right all the time, just right enough often enough.

� Further, a competent, confident and resilient team can usually cope with the differences between the framework set by a manager and events as they unfold.

� Crucially, leaders must recognize when there is a need to absorb uncertainty so that others can get on with implementation.

� Furthermore, they need to accept that the leader is the one who can most afford to be wrong!

� What does absorbing uncertainty mean? � Leaders should ensure that team members

have enough guidelines and latitude for setting their own priorities - what is important and what can wait.

� They should make sure people know what they are expected to prepare for - how soon, how big, with what level of aggressiveness.

� A manager's best-guess directions can help considerably until more information becomes available.

Frame the ChallengeFrame the Challenge

� Managers must frame the venture in such a way that others can implement it.

� They must use their knowledge of the capabilities of their team members and know how far those capabilities can be stretched to make the venture happen.

� The Japanese company Canon provides a good illustration.

� In the early 1970s, one of Canon's executives, Dr Keizo Yamaji, noticed a set of needs for photocopying that were not being addressed by the incumbent Xerox - the market for just a few copies of short documents.

� Xerox offered machines designed to produce hundreds of copies of long documents.

� Carefully assessing the skills of his engineering staff, Dr Yamaji stacked up their talents against what he thought was required to produce a so-called �personal copier�.

� He was then able to give them this framework for action: � �I want you to make me a copier.�� �It can be no bigger than a large breadbox.�� �It can't retail for more than $1,000 in the US.�� �It must never need servicing and it must be ready in 18

months.�

� Dr Yamaji framed the project, but he didn't micromanage it.

� He regarded his biggest challenge as setting a task for his technical people that would push them to the limits of their capabilities, without pushing them beyond their limits.

� His personal judgment was crucial in matching the difficulty of the project to the skills of the employees.

� Dr Yamaji described the results: � "At first the engineers did what engineers

always do - they whined! But then, guess what happened - they went out and did it. It was a little bigger, it cost a little more. While it did need servicing, it very seldom needed servicing and it took just under two years instead of 18 months. But I got my copier and the multi-billion dollar business that it represented."

� Dr Yamaji realized that his obligation as a manager launching an entrepreneurial venture was to frame the challenge to match his people's capabilities - and then get out of their way so they could get on with it.

Check Market AcceptanceCheck Market Acceptance

� The lowest-cost route to successful implementation is to probe constantly for evidence that the market you have envisaged accepts the business case for the venture.

� One successful entrepreneur will not launch a new industrial effort until he has a preliminary order from at least one customer.

� He argues that if not even one potential customer wants it enough to risk a conditional order then there must be better opportunities elsewhere.

� This may be difficult to pull off, but if you can't get orders, can you get letters of intent?

� If you can't get letters of intent, can you get letters expressing interest?

� If you can't even get someone to write a letter expressing interest, then the business proposition should be viewed with suspicion.

Secure Secure ��Killer' DealsKiller' Deals

� Success for most ventures depends on being able to make three to five deals with stakeholders whose commitment is crucial, such as suppliers, distributors, funding sources, employees, customers and sometimes key supporters in the corporation.

� Managers should ensure they have identified the deals that will make or break the venture and that they are progressing well with these deals ahead of major investment commitments.

� Failure to do so can threaten the survival of the enterprise.

� Iridium, for example, spent billions of dollars before finding out that major companies would not sign up for its expensive, bulky satellite phones.

� Importantly, managers should have a clear idea of when to walk away.

� If the right deal can't be found, why fatally burden the venture by being forced to underprice or overpay for supplies?

� Other ventures will surface in future.

Use Imagination, Not MoneyUse Imagination, Not Money� Entrepreneurial managers must recognize

that they should minimize expenditure on assets and fixed costs until they have revenue streams to justify them.

� They should reduce initial investment as near to zero as possible.

� If possible, the initial assets should be bought second-hand, or better still leased.

� If the venture is launched and operated with parsimony, the project managers can afford to make some learning-rich mistakes as they figure out what the true opportunity is.

� They should also try to initiate revenues ahead of cost flows.

� For instance, one entrepreneur succeeded in persuading a consortium of future customers to fund the development of a prototype.

� Whenever possible, costs should be incurred depending on use, which avoids commitment to a fixed cost.

� Another entrepreneur, for example, remunerates her sales force with a big percentage of profits on orders once customers have paid - she gets money in before paying out.

� Such tactics reduce the initial investment burden on which the venture must eventually generate returns.

Identify Skill DeficienciesIdentify Skill Deficiencies

� The success of the venture may rely heavily on new and unfamiliar skills and it is easy to underestimate the difficulty of securing and deploying them, or developing them.

� Witness the many dotcom start-ups that cannot find programmers to develop and operate their systems.

� If the first recruits are deficient in critical skills, the quality of the products launched will be inadequate and the first brave souls who order will be disappointed.

� Venture leaders cannot allow this to happen -they must ensure the right skills are developed and reliably in use before inflicting the offering on unsuspecting consumers.

Keep the focus on learning.Keep the focus on learning.

� Venture managers should carefully document and test assumptions ahead of investment and then systematically redirect the venture as these assumptions are tested against experience.

� The spirit of planning is to aim to learn by converting assumptions to knowledge ahead of investment.

� There is no point in trying to stick to a plan based on assumptions that prove invalid.

� Consider, for example, the prospects of the carbon-fiber products industry if the innovators had stuck to their original assumptions, applications in space satellite housings, instead of redeploying the technology to sports equipment.

� In particular, the first customers should be checked against those predicted in the business plan.

� This can reveal a lot about where the real market lies.

Early Warning SystemsEarly Warning Systems

� Small changes in key assumptions or market variables can presage large disruptions in performance.

� As venture managers get wrapped up in day-to-day issues, they need to give someone responsibility for monitoring the most sensitive variables for early warning signals.

Manage DisappointmentManage Disappointment

� Every venture runs a real risk of failure, so the greatest challenge for the manager lies in managing disappointments.

� When failure occurs, the entire workforce stops and waits to see what managers are going to do.

� This is a testing time and managers' reaction to disappointment will greatly influence the commitment of the workforce to future entrepreneurial developments.

� How can the venture be redirected to areas of greater opportunity?

� Two practices characterize the successful venture manager when dealing with failure. � The first is constructive postmortems. � No one should be rewarded for making bad decisions

and entrepreneurial leaders of successful venture programs should not forgive foolish failure.

� On the other hand, ventures in which the team has consistently made good decisions, but which failed as a result of circumstances beyond their control, deserve recognition and reward.

� Managers should hold constructive postmortems to distinguish between ventures that failed because of bad luck and those that failed because of bad decisions.

� They must publicly recognize good work concealed by overall failure.

� The second practice is recouping some value from the exercise.

� Failed ventures can be analyzed for information, which can be profitably deployed elsewhere.

� In a failed foray by a financial services company into capturing consumer data, the company had developed powerful data compression technology.

� This asset could have been used by the parent company, but the potential was lost in the recriminations that followed the shut-down.

� Recouping value helps convey to project workers that it was the venture that failed, not them.

Conclusion Conclusion

� Let�s conclude tonight by suggesting some key questions that venture managers should ask themselves during the course of a project.

1. Has sufficient attention been paid to reducing uncertainty for the team?

2. Has the venture been framed adequately? 3. Is there a system to monitor market

acceptance? 4. Is there a process to secure the deals that

make or break the venture? 5. Are team members driving down fixed

costs? 6. Have skill requirements been thoroughly

assessed? 7. Is there a plan to keep the focus on

learning? 8. How can postmortems be constructive? 9. What are the plans for recouping failure?

Further ReadingFurther Reading

� Collins, J.C. and Pores, J.I. (1994) Built to Last, New York: HarperBusiness.

� McGrath, R.G. and MacMillan, I.C. (2000) The Entrepreneurial Mindset, Cambridge, MA: Harvard Business School Press.

� MacMillan, I.C. and McGrath, R.G. (1995) "Discovery Driven Planning" in Harvard Business Review, July-August, 44-54.

Next ClassNext Class

� Guest speaker� Lots more on entrepreneurship and

managing innovation