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It’s become an all-too-familiar theme of business articles and books: How dramatic increases in competitiveness, technological turbulence, deregulation, globalization and information intensity have created perpetual uncertainty in everyday managerial life. This is the kind of uncertainty that eats conventional companies–and traditional management strategies–for breakfast. But Wharton management professor
It’s become an all-too-familiar theme of business articles and books: How dramatic increases in competitiveness, technological turbulence, deregulation, globalization and information intensity have created perpetual uncertainty in everyday managerial life. This is the kind of uncertainty that eats conventional companies–and traditional management strategies–for breakfast. But Wharton management professorIan MacMillan has a no-nonsense message for executives: “Instead of continuing to whine about it, what are you going to do about it?”
MacMillan and co-author Rita McGrath offer managers some answers in their book, The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty (Harvard Business School Press). MacMillan, who is also director of Wharton’s Sol C. Snider Entrepreneurial Research Center, and McGrath, a management professor at Columbia University Graduate School of Business, set out a very specific plan of action for managers in established businesses, who they say can no longer fall back on traditional strategic management in the face of rapid, unexpected change.
“It used to be that only sectors affected by de-stabilizing events or new technologies needed to continuously re-invent themselves, but today no one is immune,” warns McGrath. Asserting that executives need to start thinking like entrepreneurs, the authors emphasize that uncertainty, looked at in the right way, can yield tremendous opportunity: “Once entrepreneurial thinking becomes second nature, you will be able to continuously identify uncertain yet high-potential business opportunities, and exploit these opportunities with speed and confidence. Uncertainty becomes your ally instead of your enemy.”
As a model for today’s managers, the authors identify people they call “habitual entrepreneurs.” Habitual entrepreneurs have made careers out of starting businesses either within existing firms or independently. McGrath and MacMillan define several key characteristics of this breed: They passionately seek new opportunities and pursue them with enormous discipline. Furthermore, they pursue only the best opportunities, and avoid exhausting themselves and their organizations by chasing every option. They focus on execution and change direction if necessary. And they engage the energies of everyone who works with them. While this may sound easier said than done, the authors present a detailed plan, based on these qualities, for managers to apply to their division or entire company. The basic outline is:
• Create the entrepreneurial frame – define in advance the criteria that would make a business opportunity worthwhile
• Stock the opportunity register – begin a list of ideas for improving or re-inventing your current business model
• Target the best opportunities – establish your strategy and structure an opportunity portfolio that supports it
• Employ adaptive execution – consider market strategy and competitors’ likely response; redirect and “learn your way” to the real opportunity; assess progress
• Lead with an entrepreneurial mindset – engage the energies of everyone in your domain.
These steps are accompanied in the book by examples from dozens of companies in widely different industries, from General Electric to Citibank to Visible Changes (a chain of hairdressing salons). Many of them are drawn from the authors’ own considerable experience as consultants to both new and established businesses, and as teachers of entrepreneurial skills. “What we’ve done,” says MacMillan, “is provide very simple, very powerful tools that managers can use to mobilize their entire workforce to look for inventories of opportunities. And then capitalize on those opportunities as they arise.” He and McGrath describe their book as “action-oriented”: Following each chapter are “Action Steps” that readers can take away and start using immediately.
How do the authors’ recommendations differ from traditional management strategies? MacMillan identifies two particularly revolutionary differences: One is “the mobilization of the entire workforce–that is, everybody plays. Everybody in your company who works for you, every customer you have, every supplier you have, can help you identify opportunities to reconfigure your business. The manager doesn’t need to do it alone any more.”
They point to Keizo Yamaji of Canon, who has been credited with transforming Canon from an average-performing photographic company into the printing, imaging and computer-based powerhouse it is today. Conceiving the idea of a personal copier, he essentially told his engineering staff to make him a copier, no bigger than a breadbox, retailing for under $1,200, that never needed servicing, and to make it in 18 months. Yamaji got his copier and the multibillion dollar business that it represented. The authors highlight how Yamaji framed the project for his engineers without micromanaging it, drawing them into the entrepreneurial effort.
The second major difference from conventional strategic management, says MacMillan, is discovery-driven planning. “In the face of great uncertainty, you ‘plan to learn,’ and systematically planning to learn and executing adaptively is critical in this kind of environment.” Discovery-driven planning–an approach that McGrath and MacMillan personally devised –is, according to the authors, now in active use by companies such as Intel, Hewlett-Packard, Fluor Daniel, Matsushita and Sonera.
The concept of real options reasoning (an approach to strategizing under conditions of uncertainty) that underlies the book is quite unconventional, McGrath adds. “Real options reasoning suggests totally different ways of thinking about many managerial challenges such as evaluating performance, allocating resources and estimating future returns.” The aggressively entrepreneurial Enron Corporation–which has grown from a natural gas provider into a leading player in the global energy industry–has made investments that are counterintuitive from a conventional perspective but make sense in terms of real options reasoning. For example, in 1999 Enron built three plants which generate energy costing 50 to 70% more than the industry standard. Why would any sane company do this? Because less efficient plants cost less to build, and–when sitting idle–less to maintain. When energy prices go up, the plants are rapidly brought on line, enabling Enron to meet demand at prices that more than compensate for their higher operating costs. When prices drop, the plants are shut down until the next spike. (The amounts involved are not trivial–Business Week reported that in June ‘99, prices for a megawatt-hour of electricity in the Midwest shot up from $40 to $7,000.) Real options reasoning, say the authors, offers flexibility compared with investments that incur fixed commitments to an uncertain future.
In the dot.com world, too, the entrepreneurial mindset is crucial. MacMillan and McGrath believe that for the most part, the dot.com people are just like any other entrepreneurs trying to get in on the ground floor of a new industry. However, they also highlight some differences. “The enabling technologies have created entirely new possibilities,” says McGrath. “Among them is the ability to start up with very low investment, become a global player instantly and create critical mass even in highly niche-oriented businesses, because interested customers from anywhere in the world can reach you. One of the key challenges is for leaders to learn to simplify–we see so many executives overwhelmed with inputs and concepts that they find it hard to implement anything effectively.”
MacMillan, pointing out that e-commerce has become more challenging now that “the bubble has burst,” emphasizes the importance of moving swiftly, which is also one of the principles discussed in the book. “The sort of multi-hundred-million-dollar deals that have been put together are only going to be available for the few very, very good e-commerce ventures. Those that get in first and get in fast can reach a dominant and unassailable position.”
One might wonder if there are aspects of the entrepreneurial personality that just can’t be learned. Charisma? Talent? Luck? Both authors admit that a crucial quality that might be called passion, or determination, is difficult if not impossible to instill. But what managers can be taught, says McGrath, is “to avoid dumb mistakes; figuring out basic things like how to tell your story to investors and analysts; to pick the right people; to get rid of projects that will cause you to become overcommitted–that sort of thing.” “I can teach a lot about what to do to minimize your probability of failure, particularly your cost of failure,” asserts MacMillan. “Face it. People will fail. Not every entrepreneurial idea will work. So it’s managing the cost of failure that’s critically important. Then you can afford to try many times.”
But why should established businesses encourage entrepreneurial thinking within their ranks? Doesn’t it invite disaster, as executives stimulated to come up with bright ideas decide to leave and start their own companies? McGrath sees this as a false issue: “This relates to one of those great myths of entrepreneurship–that entrepreneurs somehow spring fully grown from nowhere. In reality, most entrepreneurs in the U.S. come from established companies, either as new competitors or as suppliers, or as new entrants into a related business.” MacMillan believes that any company worth its salt shouldn’t squelch an executive’s innovative thinking, but rather, make sure it “takes a piece of that person’s action.” He also makes the argument that many firms today in fact give managers little incentive to stick around: “It’s ridiculous to expect loyalty [when] the next time you have a downturn in your profits you lay off everybody in the left wing of the building. Companies have to earn loyalty. They’re doing precious little to do so.”
But whether or not particular companies manage to hold on to, and reap the benefits from, their more independent-minded managers, it’s clear to McGrath and MacMillan that entrepreneurially-oriented businesses represent the coming wave in all industries. “The successful future strategists will exploit an entrepreneurial mindset, melding the best of what the older models have to tell us with the ability to rapidly sense, act, and mobilize, even under highly uncertain conditions.”