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It’s hardly surprising that more people want to work for start-ups. Where else do they get the chance to stretch themselves, build something new and hustle for a big payout?
According to an EY and Economic Innovation Group survey, 78% of millennials call entrepreneurs successful and 62% have considered launching their own business. But are start-ups the only way to inspire ingenuity?
Over the years, Gary Hamel, Visiting Professor of Strategy and Entrepreneurship at London Business School, has watched global CEOs along with finance and economic ministers pay tribute to Silicon Valley. They trek to California in the hope that they’ll find answers, demanding to know how to incentivise risk-taking and foster creativity.
But in their quest for an entrepreneurial edge, they’re asking the wrong questions and looking in the wrong places, according to Professor Hamel.
“Start-ups get the best from people. They tend to be bold and break new ground. Teams are small and roles are loosely defined,” says Professor Hamel. Resource scarcity forces small firms to do more with less. Their flatter structures also mean that “people are judged on their contribution” and not their title.
In 2002, Professor Hamel argued in his book, Leading the Revolution, that companies needed to adopt a radical new innovation agenda to thrive. He wrote then about the need for firms to harness the imagination of every employee and create vibrant internal markets for ideas, capital and talent. Some did, most didn’t.
Now, as then, the old guard – large, traditional firms – lose out to innovative upstarts.
Established giants have the right ingredients to be entrepreneurial, but few are
“New company beats old company” is an outdated fallacy, says Professor Hamel.
“Why shouldn’t large companies have an advantage? They have deep pockets and employ thousands of talented people. They have entrenched customer relationships, business partnerships and powerful brands,” he says.
Established giants have the right ingredients to be entrepreneurial, but few are.
Rather than being overawed by the unicorns, big companies need to take a much more radical approach to building their own entrepreneurial edge, says Professor Hamel.
At the moment, there are 214 unicorns according to a CBInsights report. More than half are based in the US, many a stone’s throw from Silicon Valley. Nearly one quarter are based in China. Collectively, unicorns are valued at US$745 billion (£569 billion), an increase from US$663 billion (£506 billion) at the beginning of 2017.
“The media fall all over themselves celebrating the supposedly prescient leaders who create these unicorns,” says Professor Hamel, “but consistently overestimate their impact on the economy.”
“In the US,” Hamel notes, “unicorns are worth about US$403 billion (£307 billion). While that’s a big number, it’s less than 2% of the market value of the companies that make up the S&P 500. That’s a tiny share of the economy.” Their value in the UK is smaller still: the combined value of unicorns is just 1% of the value of the FTSE 100.
Another issue is that as young companies grow, they lose their entrepreneurial spirit. Start-ups “bureaucratise” and layer by layer, rule by rule, creativity is wiped out. “I know of a software company that’s long been a darling Silicon Valley,” says Professor Hamel. “Yet by the time it reached US$4 billion (£3.3 billion) in revenue it had 600 vice presidents. Start-ups are great, but few retain their youthful vigour as they grow.”
Too often, Hamel argues, the first impulse of a big company when challenged by insurgents is to buy a large competitor. “Rather than raising their sales when facing the winds of creative destruction, incumbents lash themselves up to another wallowing supertanker.”
Nearly 20 years ago, Professor Hamel wrote:
“Ideas, capital and talent whirl through Silicon Valley in a frenetic entrepreneurial dance. In most large companies, by contrast, ideas, capital and talent are indolent. They don’t move unless someone orders them to move. Where Silicon Valley is a vibrant market, the average big company is a smothering bureaucracy.”
Entrepreneurial hotspots create more wealth per capita than elsewhere because they are markets, says Professor Hamel. “There is no CEO of Silicon Valley.” Decisions such as where and how to invest are made by tens of thousands of investors. Collectively, they outperform lone-ranger leaders and CEOs and their high-paid advisors.
A large corporate circulated a list of behaviours – ranging from ‘establishes direction’ to ‘open to learning’ – to around 70,000 employees. Only, ‘establishes direction’ and ‘thinks strategically’ were reserved exclusively for top executives. Managers and employees received their own set of behavioural values. Professor Hamel says: “When the firm emailed this list, it effectively said: ‘If you’re not a senior executive, you don’t have to worry about the future. Just carry on doing your job while those of us at the top plot strategy.’” Problem is, Hamel notes, CEOs have a pretty poor track record of getting in front of the change curve.
Take Steve Balmer’s reaction to the launch of the iPhone in 2007. Steve Ballmer, who then led Microsoft, told reporters at USA Today: “There’s no chance that the iPhone is going to get any significant market share. No chance.”
Professor Hamel says: “In a way you have to forgive Ballmer. He was selling software to IT leaders who viewed the personal computer as a commodity. He had no frame of reference that would allow him to imagine how Apple could pack hundreds of dollars-worth of differentiation into a handheld device. It was simply inconceivable.”
Hamel argues that when the power to set strategy and direction is vested in a few senior people, their capacity to learn becomes the gating factor on the pace of organisational change. “Organisations fail, or start to go sideways, when leaders fail to write off their depreciating intellectual – when the world is changing more rapidly than their mental models.”
We encourage employees to become entrepreneurs because people are not a means to an end but an end to themselves. Our goal is to let everyone become their own CEO
“For thousands of years we’ve had only two choices when it comes to organising human beings – hierarchies or markets,” says Professor Hamel.
As economists Ronald Coase and Oliver Williamson noted long ago, markets work well when the needs of each party are simple and stable. But markets fail when tasks require complex coordination. For instance, in 2011, Boeing set out to transform its aircraft business with the Dreamliner. In doing so, it built a network of thousands of third-party suppliers. Unfortunately, the US firm took outsourcing too far and the design was plagued by production setbacks. It turned out that a market couldn’t build a Dreamliner.
Managers do what markets can’t, says Professor Hamel. They channel thousands of disparate contributions into a unified product or service – something economic historian Alfred D Chandler Jr called the visible hand. “But the visible hand is often ham-fisted,” he notes. Top-down power structures are notoriously insular and inertial.
So, if hierarchies and markets were the prescribed choices of the past, what are the future alternatives? A hybrid, Professor Hamel argues. He maintains that “there’s increasing evidence that it’s possible to blend the flexibility advantages of markets with the coordination advantages of hierarchies.
“I don't believe,” he says, “that entrepreneurship and scale, discipline and creativity or control and freedom must forever be incompatible.”
How so? Look at Haier.
According to Professor Hamel, the China-based appliance maker is leading the charge in creating an entrepreneurial platform where everyone feels like they are working in a start-up.
Professor Hamel was struck by the bold vision of Zhang Ruimin, Haier’s CEO, when they first met. At the time, Zhang said: “We encourage employees to become entrepreneurs because people are not a means to an end but an end to themselves. Our goal is to let everyone become their own CEO.”
Professor Hamel shares seven elements that make Haier an entrepreneurial powerhouse:
1. Microenterprises (MEs) – Haier has divided itself into more than 4,000 microenterprises: small, autonomous businesses that select their own leaders. Each self-managing unit is small, with around 12 people. Teams have autonomy to set strategy and manage compensation. MEs come in two varieties – user MEs and node MEs. User MEs focus directly on customers, while node MEs provide services and products to the user MEs.
2. Leading targets – every ME is expected to grow at least three times as fast as its industry. No-one is content with average performance and targets contain both growth and transformational goals.
3. Market discipline – MEs contract with each other, and every contract has a compensation clause that ties pay to success in the marketplace. “Every employee at Haier is paid by the customer.”
4. Cross-business platforms – there are dedicated teams that help MEs identify win-win opportunities for sharing resources.
5. Open innovation – the firm’s product innovation takes place transparently on the Haier Open Platform Ecosystem. “There’s an expectation that every product or service will be co-developed with customers.”
6. Venturing – Haier has partnered with a group of external venture capitalists who help fund new ventures. There’s also an internal unit that stands ready to help employees launch new businesses, in which Haier frequently takes a financial stake.
7. Upside – compensation is highly variable. If people meet their leading targets, they are very well paid. If not, they make little more than the minimum wage. When an ME is underperforming, it’s not unusual for the team to fire its leader.
“At Haier, you see a company that is doing more than building a so-called ‘digital strategy’. Instead, it’s infusing web-centric values such as experimentation, disaggregation and openness into every organisational system and process. Any business that wants to stay relevant in a world of head-snapping change is going to have to follow suit.”
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