The new wave of organizational innovations involves new types of arrangements between individuals and corporations. It is likely to continue to produce new organizational forms, spanning the entire range of combinations of markets and hierarchies and involving complex, sometimes protracted negotiation processes between individuals and corporate entities. Such negotiation processes, we believe, will be an increasingly pervasive aspect of corporate life and an important mechanism for facilitating the new integration of individualism and big business through corporate entrepreneurship.
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Robert A. Burgelman is Associate Professor of Management at the Stanford University Graduate School of Business. He is coauthor of Strategic Management of Technology and Innovation.Excerpt. © Reprinted by permission. All rights reserved.:
Internal Corporate Venturing
Innovation and Entrepreneurship in Established Firms
Major changes have taken place in American business during the last 20 years. Self-confidence based on a position of great prestige in the world economy, a sense of being the "best and the brightest," has given way to a position characterized by self-doubt and defensiveness. After World War II, and throughout the 1950s and 1960s, European and Japanese managers trooped dutifully to the United States to visit its corporations and business schools, in order to learn the secrets of success of American business. Many American corporations were seen as invincible leaders in technology, marketing, and organization. For some European observers, the "American challenge" represented a crucial event, requiring fundamental changes in the ways of doing business on the part of the Europeans in order to be able to respond. For other observers, the preeminence of American business was simply viewed as threatening the autonomy and economic welfare of Western Europe if not the rest of the world.
During the 1970s, the tables turned dramatically, and during the first half of the 1980s, the theme of "Managing Our Way to Economic Decline" has dominated the headlines in the American business press. American management has been seeking to catch up and learn new skills and new approaches to both new and traditional problems related to managing large, complex business organizations. Among the criticisms that have stung American executives are accusations that their organizations are bureaucratic, inadequately innovative, too slow to adapt, and inflexible. At the same time, critics have argued that the capacity of these organizations to efficiently manufacture high-quality goods has also greatly diminished.
The New Industrial Context
It would, of course, be naive to propose that the relative decline of some parts of American business is solely due to ineptitude on the part of managers of established firms. At least three other major sets of forces should be considered when attempting to diagnose the relative decline.
First, and perhaps most important, major shifts in relative comparative advantage in factors of production may underlay a good deal of the problems encountered by basic American industries. Reich, for instance, has cogently argued that American comparative advantage may lie in more quick-changing, customized product and technology development, rather than in the highly routinized, mature industries where relative labor cost disadvantages can no longer be overcome by capital improvements. The fact that Japan currently experiences similar pressures as a result of Korean and Taiwanese competition in certain areas may underscore this point.
Second, as the research of Abernathy and Utterback has suggested, some of the setbacks of organizations may be the result of the very logic of technological development: The forces driving the exploitation of existing technological opportunities structurally impede the development of new ones. The classic example is, of course, the American automobile industry. Hence, the large aggregations of people and capital represented by the traditional large firms may do well enough, even superbly, when mass production, strict routines, and tightly controlled procedures can be used to attack relatively stable and very large markets. The emphasis of such organizations is, most naturally, on process innovation and improved manufacturing capabilities, not on new-product development.
Third, many observers agree that the technological foundations for many of the high-flying industries of the 1950s and 1960s are now being replaced by new ones -- electronics and biotechnology being the most salient examples -- and that fresh and different approaches are required to develop the new entrepreneurial opportunities offered by these new technologies. Emphasis on new-product development and fast-moving strategic positioning and repositioning is essential here. Not surprisingly, new firms have been more adept at performing the entrepreneurial function than established ones. As a result of the "Silicon Valley" effect, entirely new geographic areas are emerging as loci of industrial development.
American industry shows great vigor in these new areas of technology. New-firm formation has been rather spectacular, stimulated in part by the enormous influx of venture capital that occurred after the capital gains tax changes of 1978. Established firms, however, continue to struggle to find management approaches for returning to real growth derived from internal development rather than from acquisitions.
Some Proposed Solutions
Corresponding to these major shifts in the industrial and organizational environments and the recognition of significant managerial shortcomings, various solutions and approaches have recently been proposed.
Some scholars have focused on the problems of industry maturity and the competitiveness of manufacturers. Abernathy and associates have made a useful study of the concept of "de-maturity," or the possibility of changing industry dynamics to a point where product technology and innovation can again become tools for creating a competitive advantage. Some recent changes in the automobile industry, for instance, seem to provide a basis for believing that such an "industrial renaissance" is possible. Recognizing the difficulties of bringing about massive change in established organizations, General Motors has proposed utilizing a newly created, completely autonomous division to produce its new "Saturn" subcompact. By so doing it hopes to protect the required new technologies and work methods from being diluted by existing management routines and procedures. A major element in "de-maturity" concerns improving competitiveness in the area of operations and manufacturing management. As Hayes and Wheelwright have recently suggested, this will require in many cases the full integration of considerations related to operations and manufacturing at the highest levels of firms' strategic management.
Other scholars have focused on the broader learning and adaptation capacities of established organizations. Lawrence and Dyer, for instance, present an elaborate discussion of organizational renewal, including recommendations for management-union and management-government relations, geared toward making organizations both efficient and innovative. Ouchi has made a strong plea for enlightened teamwork at the interorganizational level, drawing on some lessons from Japanese as well as American firms (e.g., Hewlett-Packard) that have effectively combined hierarchical, market, and clan-type elements in their management process (clan-type arrangements being based on long-term relationships of mutual aid and sharing and the expectation that all will share equitably in any gain -- in contrast to short-term, individualized incentives).
Peters and Waterman have documented some of the approaches used by consistently high-performing U.S. companies. Some of these authors' recommendations center around the importance of encouraging individuals to experiment, the utilization of "skunk works" (i.e., small groups of zealots working "under the table"), and the capacity of the organization to operate while involved in a continuous learning process. Kanter documents the important role played by middle managers who can initiate both laterally and upward to create change in spite of bureaucratic impediments. Kanter describes the individuals who effectively create change within firms as hard-driving persons who possess an astute awareness of organizational politics, while Peters and Waterman urge top management personnel to effect change by "hanging loose." These two views are in sensible opposition to the now-dated picture of a small number of wise top managers controlling, with some precision, the activities of docile and less-able followers, and thus imposing change from above.
The Lure of the "Quick Fix"
The natural reaction of companies faced with a new challenge is to seek one-step, well-packaged solutions or "fixes" that look most attractive (and have received wide publicity) and that can be grafted onto the organization with the least trouble, or so it seems. In earlier days, corporations sought to train their staff to be more creative and to manage their research and development (R&D) efforts better (which usually meant making them more cost-efficient). During the 1960s and early 1970s, the creation of separate new-venture groups seemed to be the answer to the problem of creating truly new businesses in the corporate context. This had become almost faddish, and when a recession struck in the mid-1970s, many such groups were abandoned. Today the "eight lessons" of In Search of Excellence are sometimes naively embraced as the new "quick fix." [Excellent companies presumably distinguish themselves by]
1. Having a bias for action
2. Being close to the customer
3. Fostering autonomy and entrepreneurship
4. Seeking productivity through people
5. Being hands-on, value-driven
6. Sticking to their knitting
7. Having a simple form, a lean staff
8. Having simultaneously loose-tight properties
As an article in Business Week recently observed, however, "excellence" is a transient phenomenon in many cases. Some companies that are no longer excellent didn't continue to adhere, it seems, to the eight lessons. More disturbing is the fact that some firms are no longer excellent even though they did adhere to them.
What this suggests, we believe, is that even though "quick fixes" may often contain significant elements of truth, they usually fail because they are not based on an understanding of how organizations work and the processes of change. Since sensible business leadership often seems so easy and the stories told to demonstrate how effective leaders function seem so convincing, it is important to ask why so many companies fail to be well managed, to be both innovative and productive. Obviously the answer must be that there is much more to rejuvenating an organization and obtaining a fresh flow of new-business development than, for instance, simply utilizing a "skunk works" or a new-venture group.
These conditions motivated us to undertake the more onerous task of trying to observe and document the actions and motives of the key players in a management system and seeking to understand the process by which forces leading to change work their way through a whole series of organizational barriers before they become realized. We also perceived the need to develop a theoretical framework showing the complex (but manageable) set of managerial choices and processes that must be meticulously maneuvered and manipulated if innovations are to be created in the laboratory and moved through the many required stages of elaboration that can result in the creation of a commercially successful new product and, eventually, in the existence of a free-standing new-business division for the corporation.
A Study of the Internal Corporate Venturing Process
The scholars whose work we have discussed in the preceding section have attempted to develop theoretical frameworks derived from careful interpretation of data. What we feel has been lacking, however, and where we hope to make a contribution with this book, is to develop an all-encompassing view of how a total organization works when it is seeking to develop major new business activities based on new technologies.
Thus, several years ago we began a research project to examine what we thought were some of the most critical questions regarding the management process involved in the efforts of large, established firms to be innovative. In the Appendix to this book, entitled "Methodology and Research Design," we have explained in some detail how we went about doing the study, but here we want to sketch briefly the essence of what we have tried to do.
We were, of course, aware that many U.S. corporations, like AT&T, 3M, and DuPont, had learned to nurture and commercialize major innovations, and we sought to review what was known about their successes. However, our major efforts were concentrated on a longitudinal study of one major corporation in the multi-billion-dollar class with a major commitment to R&D.
We had the opportunity to look at what could be called a "most difficult case" situation. The term does not mean that we were looking at a near-bankrupt or inept company, but rather that we could examine how a very large, truly massive corporation with major commitments and most of its experience in more routinized, large-scale production and commodities marketing used its enormous capabilities and resources to branch out into really new areas of technology and markets.
We called these "radical innovations" -- from the perspective of the corporation -- because they were not the usual modifications and improvements of existing product lines, but rather represented efforts to move into new industries, to try out new technologies, and to market entirely new products. These efforts could not draw much on the existing corporate know-how and culture, even though the origins of these efforts emerged from internal development efforts. They also required that new administrative units be created to oversee these activities, and these new units would have to be integrated into the overall corporate structure when they reached sufficient maturity.
It was this situation, we felt, that represented the most difficult test of managerial skills and processes and would allow us to examine how such efforts interact with existing corporate strategy and structure. Furthermore, we considered that such radical innovation was not oddball or trivial, precisely because many established firms are now being faced with increasing their capacity to engage in such strategic renewal.
Our objective was to "tease out" the underlying and often hidden organizational events and managerial behaviors that are associated with successful new-business development, as well as to highlight the pitfalls awaiting the unwary or naive. In so doing, we have recognized that the large modern corporation has many features potentially advantageous to innovation, which we will highlight in this book.
As might be expected, the great challenge of successful innovation could not simply be met by a single organizational solution (such as establishment of a new-venture group) or by calling for more "entrepreneurship" on the part of employees. Rather, as we looked systematically and over time at how new ideas jelled in R&D and began to grow into fledgling new ventures, we observed how truly complex were the organizational and leadership requirements for this process to take place. There were countless ways in which new ideas could get distorted, bottled up, or fail to be property elaborated and integrated with marketing and manufacturing requirements (among others). Not surprisingly, failure is more probable than success in initiating new-business ventures. There were literall...
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