How to Produce Innovation: Creating the Entrepreneurial Equivalent of Smallness Within the Larger Organization

Editor’s note: It is suggested that this article be read concurrently with the article: The Inevitable Battle Between Required Change and Maintenance of the Status Quo.

The search for innovation needs to be organized, in many situations, outside the ongoing managerial business. Innovative organizations realize that one cannot simultaneously, as Drucker reminded us, create the new and take care of what one already has.

It also must be realized that maintenance of the present business is far too big a task for the people in it to have much time for creating the new, the different business of tomorrow.

Most organizations that assign a general manager to a "product business" and give that person responsibility for both the ongoing business and the innovative efforts for creating tomorrow’s new and different business sooner or later discover it doesn’t work.

Executives walk into the office in the morning, read their mail, rush off to a meeting and then to the dozen or more other activities that clamor for their attention. Rarely do they spend time thinking about what new and different things the organization should be doing.

Perhaps several new product or production innovations have been developed over the past decade. Or maybe a great new advertising campaign was created, and it sold millions of units. But in reality, these are not innovations in the sense that they provide new value to the customer. They are merely inmporvements upon what already exists.

Meanwhile, the competition has not stood still. Look at the number of new competitors—indirect and direct—that have surfaced. Not just annoyances anymore, are they? Look at the competitors everyone said would never make it. They are no longer the undercapitalized, little upstarts of several years ago.

Now look at your own organization. Your people perform the necessary complex-repetitive tasks very well. But every time they attempt something new, it either fizzles or flops.

The Accepted Procedure For Creating Newness

Allegiance to the daily task in established organizations remains the predominant and inevitable focus. Rules, procedures, and standards define what is to be done and how.

Said Harvard’s Ted Levitt: "Within this powerfully constraining context, to focus as well on trying to get powerful innovations—to do entirely new and therefore disruptive things—is an especially difficult and fragile undertaking."

So what’s to be done? That’s easy. Organize a separate business. A business that remains independent of the ongoing business.

Developing profitable new businesses that are consistent with the core purpose of the organization enhances the organization’s long-term growth potential.

Indeed—considering changes in the economy, in demographics, technology, cultural attitudes and public policy—survival is dependent upon the creation of new products, new services, new markets, and hence, new businesses.

Furthermore, as venture capital becomes less and less available through traditional channels, more entrepreneurs are seeking the supportive, protective environment attainable only within larger, established corporations.

The essential question remains. How can an established business create a new business that has a reasonable probability of success? Peter F. Drucker offers this concept:

"The entrepreneurial skill does not lie in ‘picking investments.’ It lies in knowing what to abandon because it fails to pan out and what to push and support with full force because it ‘looks right’ despite some initial setbacks."

The actual process, while difficult, is contained in proven methods:

Organize a team that is capable of creating effective change.

This means selecting people with strong entrepreneurial traits—intuition, ingenuity, ambition, energy, and above all, staying power. It also means giving these people rewards and incentives appropriate to their potential achievements.

Regardless of company policy, eventual and substantial stock ownership in a subsidiary corporation is the best inducement for entrepreneurs. It works. And it’s fair. Indeed, it provides incredible growth opportunities for those motivated to run their own business.

Assess the capital investment required.

Then be prepared to inject more capital later. It takes time to work out a saleable package and to create customers. As efforts proceed, judge the people involved—not the venture’s early results. If these people make sense, if they recognize their errors, and if they retain an objective enthusiasm, stay with them.

Once the new venture is generating revenues as quickly as costs and showing real promise for future gains, the established company must look up on its part as primarily a banking function. This is the time to provide the substantial funding necessary for the innovating unit to push to its fullest and quickly maximize those gains.

Divorce the innovating unit from the ongoing organization.

Rules and procedures may be applicable and appropriate for what already exists, but they are meaningless in the creation of a new business, where false starts and setbacks are bound to occur. In most cases, physical separation of the innovating unit from the ongoing organization is required.

Recognize that members of the ongoing businesses will not, in general, support the early efforts of the entrepreneurial team.

In fact, as experts have repeatedly pointed out, there is usually conflict between the experienced "caretaker managers," whose function is primarily doing better what already exists, and the new venture team, whose function represents the antithesis—to find and exploit new opportunities.

Every effort must be made by senior management to prevent a "them verses us" attitude and to develop a cooperative spirit among those who can help the fledgling organization. Many "shared services" must be made available to the new organization at fair and equitable chargeback prices.

For all too often, without a firm commitment of top management, the clash between the ongoing and entrepreneurial functions has meant condemning to the "scrap heap" excellent ideas that only needed more time, more money, more patience or more marketing or technical debugging to become operational.