Efforts in Entrepreneurship Often Meet With Failure

Despite the current vogue, consultants and academics who have studied corporate efforts in venturing and entrepreneurship say the record is disastrous.

Nearly every Fortune 500 company experimented with building small, risky businesses slightly off the company’s beaten path during the 1960s and early 1970s and “most failed,” says Zenas Block, associate director of New York University’s Center for Entrepreneurial Studies. What’s more, “the failures were large and expensive.”

Why they fail is a question that keeps an entire industry of consultants employed. But the reasons fall broadly into two categories. Some corporations, consultants say, plunge ahead half-cocked without fully understanding what they’re doing and why and what they can reasonably expect to achieve. Others, well-reasoned though their experiments, never strike a balance between too much and too little.

At either extreme, companies can fall victim to any number of traps: Insufficient commitment from the top, overly rigid financial controls, lax reviews, too many incentives to start a glamorous venture and too few to keeping it going, too few rewards for the added risks that an entrepreneur takes on, too little communication from the top about the company’s strategies and goals and, therefore, too many innovations that aren’t good fits, too many management changes, too few management changes.

“It’s scary,” says McKinsey & Co.’s Los Angeles managing director, Robert Paulson, of the many pitfalls to successful corporate entrepreneuring. “The only reason to do it is when you have no other choice.”

The right approach, says Yale management professor Rosabeth Moss Kanter, is to decentralize operations and broaden jobs to encourage employee initiative and creativity but to impose enough discipline to keep that initiative and creativity focused on the corporation’s priorities.

For Baxter Travenol Senior Vice President Steven Lazarus, striking the proper balance between marketing and new-product design is the biggest challenge to his efforts at lighting an entrepreneurial fire under the health-care company. “My nightmare,” he says, “is that we have two teams racing toward Grand Junction, Colo., to drive the Golden Spike--only one ends up in Durango.”

Companies that lack a clear vision, Kanter warns, are in danger of carrying entrepreneurship too far and learning the wrong lessons from their mistakes and successes.

She tells of one company whose new-technology staff had never brought anything in on time or on budget. So company executives set up a skunkworks--a small team that works on a single project, often in secret, and operates outside the corporation’s usual rules and red tape.

Customers Loved It

The group’s product came out on time and customers loved it. “So the lesson the company learned,” Kanter says, “was that you’ve got to start these kinds of things with a skunkworks, you have to end-run the system. They didn’t learn the right lesson--that it was the system that was wrong.”

Soup-maker Campbell is one that, having let the pendulum swing too far toward tight control, went too far in the opposite direction and now is trying to rein in its entrepreneurial excesses. Campbell for years squeezed every penny out of production costs and spent virtually nothing on marketing. It also was so concerned about being 100% right before it went forward with anything new that it almost never did. New products were a rarity.

By breaking up into 52 entrepreneurial units and refocusing on marketing and new-product development, Campbell pushed 392 new products into the market in five years. But in doing so, its cost controls and review system grew somewhat lax.

When it rushed one juice product into market without a careful enough review, it discovered too late that its pricing and packaging were wrong. The mistake cost Campbell three months and an estimated $40 million to $50 million in lost sales.

Lack of discipline also got Digital Equipment Corp. into trouble. Early in the company’s history, when it made fast, inexpensive computers, founder Kenneth H. Olsen broke up the company into small, autonomous units along product lines.

“It worked beautifully--entrepreneurial spirit in the traditional sense,” he says. But before long, the company was running off in 35 directions and it became clear to Olsen that “we couldn’t grow fast enough” to build all the products these units were producing. “We needed one strategy, one message. We had to be one company.” A big company, he now believes, “can’t act like 1,000 little companies.”

Other companies go overboard in the other direction, forcing new ventures to meet the same rigid financial goals as more mature operations. When they fail to come in on time or budget, top management typically disbands the venture or tightens the controls still further.

All Missed the Goals

And yet, a recent NYU study of 10 start-ups found that none met sales and earnings goals for the first five years and, in fact, all missed the goals by at least 70%. “And still there persists a widespread insistence on the need for new-venture plans” says NYU’s Block.

Some of the financial pressure comes from managers competing with the new ventures for the company’s resources.

“It is easy for other managers in the more traditional lines of business to go to top management and make the argument ‘you give us that cash and we’ll give you a guaranteed return,’ something the venture manager can’t claim,” says Mel Perel, senior management consultant at SRI International in Menlo Park, Calif. “That’s a very, very hard argument to overcome in most organizations.”

At one company where entrepreneurship is in vogue, the established businesses are tired of “being treated like step-children” and are now trying to reassert themselves, Kanter says. “That’s a power play that in my experience few ventures can survive.”

Throwing money at entrepreneurial ventures that don’t first reach certain financial objectives can be just as devastating. “Traditionally, big companies who want to foster venturing take the approach of loading the cannon with money and blowing the money out,” Block says.

That’s what happened to Exxon’s office-equipment venture. The oil giant had bank-rolled several high-tech start-ups in the early 1970s as protection against shrinking oil revenues and had promised them autonomy. But as the ventures’ appetite for cash grew, so did Exxon’s vision of building an information-systems empire. Exxon increased its control, threw money at the ventures, installed new managers thought better equipped to build the business and overwhelmed the unit with an overhead it couldn’t carry. The last of the unit’s assets were sold earlier this year.

“I used to think (big) corporations were unbeatable because they had so many resources,” says Edward E. Lawler III, director of the University of Southern California’s Center for Effective Organizations. “Instead, that’s the problem. It has too many resources. I now think a large company is a bigger anchor to a venture than it is a help.”

Decentralization Too Far

Other companies trip up by taking decentralization too far. “Some companies haven’t decentralized, they’ve abdicated,” says William Sommers, executive vice president at the management consulting firm Booz, Allen & Hamilton.

Kanter tells of a leading instrument manufacturer that reassigned to division managers practically all the jobs once handled by its staff, an approach gaining favor in America now. The divisions were ecstatic, but soon became so busy worrying about more immediate problems that no one was handling long-range planning and development of technology, both critical in the company’s line of work.

Hewlett-Packard, another long-time practitioner of decentralization, recently centralized its marketing functions. Hewlett is organized into small units, each of which handles its own design, development, marketing and the like.

But as the company’s products became more complex and interrelated, it became evident that there was too little coordination between divisions and products. Customers began to complain about “all of these different divisions and entities coming at us,” says Walter Pienkos, Hewlett-Packard’s personnel manager.

The company had a major decision to make: Reorganize into large entities focused on complete business segments or keep the small units but establish a new layer of bureaucracy--a group marketing department--to focus on the market more broadly. Hewlett chose the latter approach.

“From a customer standpoint . . . and probably from a management standpoint, it would have been easier (to reorganize into big groups) because you could concentrate and direct all those resources more easily,” Pienkos says. “On the other hand, we would have lost something that we find very valuable, and that is the entrepreneurial feeling of running your own business.”