Getting the Balance Right
For corporate entrepreneurship to be effective, all the elements have to fit together. Enron’s demise was ultimately a failure of control and governance, but the seeds of that failure lay in a system that ratcheted up the risk–reward payoffs for individuals to such an extent that people were prepared to lie, steal, and cheat rather than miss their performance targets. Using the framework in this article, we can identify the elements that led to failure: a lack of strategic focus, employees with far too much space, boundaries that were not carefully managed, and a lack of support systems.
Seeing these elements as part of an integrated system is even more important than examining them individually. For example, too little direction and too much space can result in a lack of focused effort, but as long as boundaries are carefully managed, the downside risk can be controlled. Equally, boundary management can be relatively relaxed if individuals have limited space in which to act and support systems that encourage cooperation and social integration. Enron failed primarily because it took all four of these dimensions to the limit. Other companies with more enduring entrepreneurial models have been more careful. 3M, for example, is famous for providing personal space and defining its direction in very broad terms, but it does so within a system that provides a great deal of lateral support and with strong normative values of integrity and collegiality.
Interestingly, most companies lie close to the area of “constraint” shown in Exhibit 2, where direction is defined too tightly, there’s too little space for initiative, the boundaries are tight, and there are overly complex support structures. So although it is clearly not good to encourage entrepreneurialism to the extent that Enron did, it is equally important not to get sucked into a model of constraint and complexity. Much of what Enron did was commendable and worthy of emulation. As recently as 1996, Enron was an exemplary, innovative high-growth company, with the right balance between entrepreneurship and control. But over the next five years the company’s innovative management model was taken to its limit, and beyond. The whole system spiraled out of control, and in the words of one former executive, “people just got greedy.”
One additional insight emerges from this discussion. Enron was, in the words of a former employee, “the embodiment of the free market” within a corporate setting. Free markets work through creative destruction, by allowing unproductive activities to be killed off and replaced with others that are more productive. This works well in true markets like Silicon Valley because creative destruction selects the winners and the losers. But letting the market system run riot inside Enron meant that trouble, when it became a threat to the organization, simply could not be contained. As a public company, Enron as a whole was held responsible for any and all liabilities that were accrued in subsidiary units. Insolvency in one part quickly caused the whole house to fall down, despite the fact that plenty of viable businesses still existed within the Enron empire.
There is an important moral here. You can’t just bring the freewheeling character of an open market inside the firm without imposing some regulation. As with the external marketplace, the value that is created inside corporations depends on linkages and interdependencies that must be controlled to some extent. Certainly, marketlike systems create benefits up to a point, but there is also a need and an obligation to take internal controls seriously.
Reprint No. 03105
The Four Schools of Thought on Corporate Entrepreneurship
Although a large and growing literature on corporate entrepreneurship exists, there is no consensus on what it means, or at what level of analysis it should be studied. Four basic schools of thought can be identified.
1. Corporate Venturing. This body of thinking argues that new business ventures need to be managed separately from the mainstream business, or they will not survive long enough to deliver benefit to the sponsoring company. It examines the organizational arrangements that new ventures need and the processes of aligning them with the company’s existing activities. This line of thinking includes work by Galbraith (1982), Burgelman (1983), and Drucker (1985). In recent years, it has gained prominence through studies of the different forms of corporate venturing units (Chesbrough, 2002) and through Christensen’s (1997) insights into how companies should manage disruptive technologies.
2. Intrapreneurship. This approach focuses on the individual employee and his or her propensity to act in an entrepreneurial way. It works on the basic assumption that all large firms put in place systems and structures that inhibit initiative, so individuals have to be prepared to actively challenge those systems. It examines the often subversive tactics these corporate entrepreneurs adopt, and the things executives can do to make their lives easier or harder. It also considers the personalities and styles of individuals who make good corporate entrepreneurs. The term intrapreneurship was introduced by Pinchot (1985), but this line of thinking has also been discussed by Kanter (1982) and Birkinshaw (1997).
3. Entrepreneurial Transformation. Premised on the assumption that large firms can and should adapt to an ever-changing environment, entrepreneurial transformation suggests that such adaptation can best be achieved by manipulating the firm’s culture and organization systems, thereby inducing individuals to act in a more entrepreneurial way. This line of thinking includes studies by Peters and Waterman (1982), Ghoshal and Bartlett (1997), Kanter (1989), and Tushman and O’Reilly (1996).
4. Bringing the Market Inside. This school of thought also operates at the firm level, but it focuses more on the structural changes that can be made to encourage entrepreneurial behavior. It uses the metaphor of the marketplace to suggest how large firms should manage their resource allocation and people management systems, and it argues for greater use of such market techniques as spin-offs and corporate venture capital operations. Inspired by the seminal ideas of Joseph Schumpeter, its recent adherents include Hamel (1999) and Foster and Kaplan (2001).