This article was kindly provided by Professor Peter Vogel and was originally published by IMD Business School. Find part 2 of the article on the MERIT Summit blog here.
Being intrapreneurial – that is applying entrepreneurial skills and techniques inside an established organisation – is back on the agenda of top management teams. They need to anticipate change and disruption in an agile and entrepreneurial way in order to survive the storm.
While we’ve always lived in a VUCA world – Volatile, Uncertain, Complex and Ambiguous – these tendencies are a bit more pronounced than in the past, with the speed of disruption exceeding anything seen before. New entrants are pushing innovative products or services onto the market and leveraging novel business models to disrupt entire industries. Many of these new players no longer own assets, but instead leverage existing assets and capture value from data and from controlling the customer interface.
Despite their significant market dominance and availability of resources, established businesses are increasingly uncertain about the future and struggle to adjust to this new reality. As a result, many have missed out on new growth opportunities because of their inability to match the speed of execution of new entrants. They realise they need to anticipate disruption and understand emerging technologies that may impact their business before it is too late.
But how to do so? It requires VUCA leadership – Vision, Understanding, Clarity and Agility, all of which are essential for a novel and entrepreneurial organisation. The fundamental question is, how can established firms adopt entrepreneurial thinking and acting?
Watch out for cockroaches
Fast-moving start-ups can seem like an obvious threat to incumbents – the media is full of hype about unicorns, like Ant Financial and Uber, that have reached valuations of at least USD 1 billion in the space of a few years. But less well-known cockroach start-ups – often ignored by their competitors – may present an even greater hazard. A cockroach start-up is characterised by resourceful and resilient founders who survive no matter what. They are good at adapting to their environment and put the emphasis on revenues as well as profits, ensuring tight cost control to secure robust growth.
Thinking and acting like an entrepreneur
Are all entrepreneurs super heroes? Are entrepreneurs born or made? Is there such a thing as entrepreneurial DNA?
These are some of the questions asked when it comes to better understanding entrepreneurship and “the entrepreneur”. The current view of entrepreneurs is that there is no such thing as an entrepreneurial gene (this view might change in the future with the possibility to do large-scale genome studies), but there are certain personality and psychological traits that make them who they are. They have a strong desire for independence, a striking need for achievement and strongly believe that they have control over the outcome of events in their lives (so-called internal locus of control). They are disproportionately risk tolerant. Contrary to popular belief, entrepreneurs do not seek more risk, but they have a higher ability to deal with uncertainty.
Another critical aspect of entrepreneurs is that they see opportunities where others see problems. They are gifted at seeing potential commercial opportunities in everything they do (the analogy being that everything they touch turns to gold). Entrepreneurs can imagine possible new ends using a given set of means, and then follow unconventional paths to achieve their goals (so-called effectual thinking). Above all, they are persistent. So, can executives switch from their typical causal thinking to this type of effectual thinking?
Such a shift of perspective is easier said than done. Organisational adaptation requires a balance between respect for what has thus far been achieved and openness to change. Five principles of effectual thinking can help managers navigate this challenge effectively:
- Bird in the hand principle: Create opportunities and perform actions based on the resources available here and now.
- Affordable loss principle: You should only invest what you are willing to lose.
- Lemonade principle: Mistakes and surprises are inevitable and can be used to look for new opportunities.
- Crazy quilt principle: Entering into new partnerships can bring the project new funds and new directions.
- Pilot in the plane principle: Focus only on activities within your control.
Jumping the technology S-curve
The standard life cycle of innovations in most industries has been described as an S-shaped curve. The technology S-curve illustrates all cycles of an innovation – from its introduction to its growth and, finally, maturity. Managers can use this tool to map and understand how technologies evolve and displace each other, and what effect this might have on their company.
Large and well-established companies have considerable resources, but they also tend to have bureaucracy to match. This may slow down their innovative processes significantly. Furthermore, the innovative activities that companies need to undertake may differ at each stage of the technology S-curve. For example, technologies in their mature stage become increasingly vulnerable to substitute technologies. At this point, managers need to make seemingly irrational decisions and invest in a new technology with potentially lower performance, rather than in the technology with which they are already dominant.
Since the performance of a new technology improves rapidly, companies that invest early can avoid being left behind their competitors. But there is also the risk of failure. Hence, managers seeking to escape the point of diminishing returns of the technology S-curve should break their innovative projects into manageable chunks, splitting them by type of innovation: incremental versus radical. This can help them evaluate the various projects and predict how they might evolve over time. While creating iterations of innovative products, processes or services is fairly easy, pivoting to a radically new business model is a tougher challenge. So how can organisations win at disruptive innovation?
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