Reinventing the intrapreneur
Mr. Pinchot invented the word, not the concept. For decades, forward-thinking corporations relied on internal entrepreneurial efforts to alter an organization's status quo, harness the energies of talented renegades, and give sponsorship to promising businesses that were unrelated to the company's cash cow. The trouble is that few companies were able to get it right. The biggest impediment was the nagging fact that even the most profitable corporations couldn't hope to compete with the riches available to employees who left to found -- and eventually take public -- their own company. And then there was the problem of figuring out how to manage a spinoff unit. Or manage the jealousy among employees who were stuck in the corporation while witnessing their intrapreneurial counterparts enjoying what passed for corporate freedom.
Now companies are figuring out how to get it right. Spurred by a desire to participate in the IPO boom and keep smart employees from running into the arms of venture capitalists, companies are devising ways to help them incubate potentially lucrative products and prevent them from becoming competitors. The corporate seed fund, while far from being an exclusive slush fund for intrapreneurs, has become the preferred method for creating the startup equity rewards available to venture-backed company founders. Mr. Pinchot finds that 30 percent of large companies now provide seed funds that finance in-house entrepreneurial efforts. He says such programs often pay back a 10-to-1 return. Another idea: to head off any jealousy on the part of nonintrapreneurs, video game publisher Electronic Arts offers stock options in its dot-com spin-off, EA.com, to all corporate employees.
While big companies can't pay as much in stock options, the giants can shorten the search for funding, offer a stable paycheck as an idea gestates, and find creative ways to reward their employees. And they are also not as anxious as venture capitalists to see a quick return. Outside of the biotechnology industry, venture capitalists routinely dismiss investments in companies that won't promise a six-year close. But corporations are more likely to view an intrapreneurial project as akin to research and development. This is a major incentive for entrepreneurs who prefer a slower route to success than most venture capitalists permit. Given the new market volatility, intrapreneurs combine the best of entrepreneurialism and corporate risk aversion.
Those who ignore intrapreneuring may find themselves in the shoes of Xerox . In the '70s and '80s, the Xerox Palo Alto Research Center was notorious for inventing some of the best technologies of the era, from the graphical user interface to the Ethernet, and then failing to commercialize the products under the Xerox banner. More recently, Microsoft , one of the companies that poached great Xerox technology, has suffered from a brain drain that may pose a bigger threat than any U.S. Supreme Court decision, as veteran executives use their own millions to start their own firms. That's why both of these companies are now emphasizing internal entrepreneurial efforts. They are among the following ten corporations that have made intrapreneurship a keystone of their business.
Intel established an in-house "new business initiative" in 1998 to bootstrap new businesses that employees propose, regardless of whether the concepts had anything to do with Intel's core chip-making business. In contrast to a venture capital program that Intel has had in place for a decade, the new business initiative provides financing for businesses that the company's own employees start.
"The idea for the whole thing came from our employees, who kept telling us they wanted to do entrepreneurial things," said Craig Barrett, president and chief executive officer of Intel. "They saw that we were putting a lot of investments into external companies and said that we should be investing in our own ideas."
Unlike its efforts in the past, Intel's new business fund, started by executive vice president Gerhard Parker, was earmarked for non-microprocessor businesses. Gone was the day, said Mr. Barrett, when the company's microprocessors were the "creosote bush," a reference to the desert plant that sucks in all water around it and kills off any nearby saplings. Regardless, last year employees pitched more than 400 ideas, and Intel provided funding for about two dozen of them. In contrast, Intel reviewed 5,000 ideas from outside entrepreneurs in the same period and made investments in about 250 of them.
One Intel engineer who took the plunge was Paul Scagnetti, who had worked for a couple of years developing chip-making processes. Tinkering at home after working 12-hour days, he came up with a concept for a handheld computer aimed at helping people do just one thing: record and plan their fitness and nutrition data. Mr. Scagnetti's idea passed muster with Intel's finance people and he got approval to work on the project with a partner for nine months. Intel then gave him funding to hire 15 people and launch the product, the Vivonic Fitness Planner, in sporting goods stores on the West Coast.
There were a few hiccups, like trying to recruit from within Intel and running into managers who didn't want their employees to transfer. But the project met expectations and currently Mr. Scagnetti is planning how to expand it, either by spinning off or otherwise growing within Intel.
Mr. Scagnetti had an easy time of it compared to Bernie Meyerson. For a long time, Mr. Meyerson inhabited a world of two junctions where other engineers wanted just one. Silicon chips have dominated the semiconductor industry for decades. But in 1982, the IBM researcher with a thick New York accent began exploring a new hybrid chip that combined two materials, silicon and germanium. The resulting "hetero-junction" chip could speed electrons through the junction of a transistor much faster than the "homo-junction" chip.
But it took years for Mr. Meyerson to prove that silicon germanium could be made on exactly the same manufacturing line as a typical silicon chip, thereby resulting in much lower manufacturing costs than the highly specialized and difficult manufacturing of gallium arsenide, a chemical compound that produces about five times the chip speed of silicon. At gallium arsenide conferences, Mr. Meyerson was the lone silicon germanium advocate, and his rivals "stared daggers" whenever he made his pitch.
Over time, Mr. Meyerson's hybrid materials found an application. As wireless chip technologies reach ever-higher frequencies, only silicon germanium can double the speed of silicon and not melt down from the excess heat. Mr. Meyerson has moved from the lab to managing IBM's silicon germanium business, which is now churning out hundreds of millions of chips for cellular phones and other high-speed communications gear. A half-dozen companies have licensed the technology from IBM, and many of the deals were negotiated by Mr. Meyerson himself. This willingness to shift gears, without handing the project off to someone else, kept it alive.
IBM sources estimate that silicon germanium could account for 10 percent of its chip revenue in 2001. John Kelly, president of the microelectronics division, says that Mr. Meyerson had a lonely struggle to the top, but the company is trying to make it easier to move ideas from research to the real world.
"When someone gives you the answer 'No,' you take it as a suggestion or a test of your belief in your idea," says Mr. Meyerson, who is now vice president of communications research at IBM in Yorktown Heights, New York. "You also have to move from inventor to technical champion to fund-raiser to business manager. You have to get your hands dirty in all of it."
X MARKS THE BOX
An intrapreneur doesn't need to struggle for more than a decade like Mr. Meyerson. Seamus Blackley, a game designer, joined Microsoft in early 1999. His last big project, "Trespasser," a dinosaur-shooting game based on Michael Crichton's The Lost World (Knopf, 1997), bombed in the market. He figured he'd keep a low profile as a graphics programmer, but then he dreamed up a new idea on an airplane flight and quickly banded with three other engineers to create a video game console using personal computer technology.
He compared the process of recruiting project supporters to the Japanese custom of "ringi," in which someone passes around a memo in hopes of gaining a consensus. Sony had just announced its PlayStation 2 console, which everyone at Microsoft, including Bill Gates, perceived as a threat to Microsoft's entertainment technology for the living room.
Mr. Blackley and his renegades cooked up the Xbox, which hooked up to a TV set but used the best available graphics and microprocessor technologies from the PC. They all worked in separate groups, but got approval early on to continue their project when they demonstrated how such a machine would be easier to use than a PC. Unbeknownst to them, Bill Gates decided at a strategic retreat in March 1999 to enter the game console business.
By July, the Xbox team had blossomed into a project headed by hardware chief Rick Thompson, a veteran who knew how to get things done at Microsoft. Mr. Blackley said he "let go of my baby" and stayed with the technical team, because he knew he didn't have the skills to run the entire business.
But even then, internal debates threatened to derail the project. The team had to resolve disagreements about whether to wait until after Sony's launch, to include components like a hard disk drive, and to have PC makers build the machines instead of Microsoft. Mr. Blackley said he had to deal with intimidating situations like then-president Steve Ballmer yelling, "You're going to lose the company a lot of money!"
But Mr. Blackley said Microsoft's culture allowed him to speak his mind and then, if he had the best evidence and most reasonable argument, proceed with his plan. If Mr. Blackley could get everyone else to drink the Kool-Aid, then he could go to the next step. He eventually got the go-ahead, and Microsoft plans to launch the Xbox in the fall of 2001. "I think I scored a record for the most Bill-and-Steve meetings for a first-year employee," says Mr. Blackley. "I think I succeeded because I had nothing to lose. I had no baggage."
But of course, Mr. Blackley has to face off with one of the all-time big kahuna intrapreneurs.
When Ken Kutaragi began dreaming about a game machine in the '80s, he had to deal with a management team at Sony that considered games to be mere toys, not serious consumer electronics devices. But he persevered and then-CEO Norio Ohga took a chance on the project, and Mr. Kutaragi led the team that developed the PlayStation. Since its launch in 1994, the machine has swept aside Sega Enterprises (OTC: SEGNY) and Nintendo (OTC: NTDOY), taking the No. 1 market share in consoles with sales of more than 70 million units. In the United States, one in four households has a PlayStation. By 1998, the PlayStation was providing 40 percent of Sony's operating profits (see "In an Intrapreneur's Shadow").
Now Mr. Kutaragi is president of Sony's computer entertainment unit, sits on the board of directors, and is spearheading the launch of the PlayStation 2, which has sold about 3 million units in Japan and is expected to hit the U.S. market in October. Mr. Kutaragi's goal: to run games on the PlayStation 2 that deliver the same kind of eye-popping special effects as the film The Matrix. And, by the way, since the machine doubles as a DVD player, you can also use it to watch The Matrix.
Intrapreneurs don't have to create an innovation as huge as the PlayStation to have an impact. At smaller companies, a good intrapreneurial effort can simply revive morale.
Autodesk is viewed as a kind of antediluvian software company, founded well before the rise of the Internet. It was a humble creator of design tools for architects, with sales of more than 4 million units to date. But the company hopped on the Internet bandwagon last year, when it created Autodesk Ventures, an in-house effort aimed at incubating new businesses in-house and investing in startups.
In June 1999, Autodesk employees created Buzzsaw.com , a Web site that serves as an electronic market and collaborative design tool for the construction industry. At first, CEO Carl Bass and others wanted to keep the unit in-house. Some employees were jealous that the Buzzsaw employees might become rich from an IPO. But, says Jon Pittman, vice president of Autodesk , the company realized it could not afford the impact of the startup on its earnings per share.
Therefore, Autodesk retained a minority ownership and incubated the idea for six months. Then the company spun off Buzzsaw.com, which has raised $90 million in venture capital. The venture created enough buzz for Autodesk that it won some recognition for joining the Internet era and its stock price got a hefty boost. And now, says Mr. Pittman, the environment has improved for both spin-offs and in-house entrepreneurship. A second spin-off, RedSpark, an Internet hub for manufacturing services, is already out the door. And more are on the horizon.
"Autodesk Ventures is now the starting point for a lot of ideas, and we determine whether to spin off, incubate, or direct them to outside venture capitalists," Mr. Pittman says. "We created a catalytic environment, and the impact on morale is big."
In a society that values consensus over individual initiative, Kouji Ohboshi made a lot of enemies before he transformed Japan's staid state-run telecom operator, Nippon Telegraph and Telephone , into a global wireless powerhouse.
Now chairman of NTT Mobile Communications Network (Tokyo: Nikkei 225) -- known by its choppy brand name DoCoMo -- Mr. Ohboshi's rise to acclaim was not only pocked by continual battles with his colleagues inside NTT, it was the result of those very conflicts. The tensions were so acute that when he was a senior manager at DoCoMo's parent company, he was shipped off to run one of its dusty divisions -- wireless communications.
That was in 1992, before the mobile boom. Faced with NTT's trenchant conservatism, Mr. Ohboshi considered resigning. He completely changed the division instead.
First, he budgeted more than $5 billion to build a fully digital cellular network. Then, in the mid '90s, he unleashed a price war against rival wireless operators. Uncharacteristic for a Japanese executive, he fostered a racy corporate culture that emphasized marketing over engineering. He even hosted office parties and socialized with coworkers. And he helped build an entrepreneurial culture by replacing key managers with outsiders, many that sport American business degrees. In 1998 he laid plans for NTT's most radical and ambitious project: an Internet-enabled wireless service called I-mode.
DoCoMo is currently Japan's largest wireless provider, counting more than half the market share of the country's 58 million subscribers. And with the runaway success of I-mode, which is Japan's largest internet service provider, the 67-year-old former lawyer has become something of a celebrity among the country's managerial classes. His story serves as evidence that an entrepreneurial executive can actually change Japan's sleepy corporate climate, even in as stodgy a place as NTT.
As Mr. Ohboshi shows, sometimes the CEO can have the biggest impact as an intrapreneur.
In the late '80s, the fabled biotech pioneer, Genentech , lost its mojo. By 1990 Swiss drug giant F. Hoffman-LaRoche came to the rescue with a $2 billion investment in exchange for a majority ownership stake. But it wasn't until 1995, when Arthur Levinson -- then head of research -- was made chairman and CEO that Genentech started to hum again.
Skeptics said a scientist couldn't manage. Today the firm's $36 billion market value is second only to Amgen . It has nine approved drugs on the market, an astonishing three of which were launched under the plucky 50-year-old biochemist who once, as a young post-doctoral student, showed up in a professor's office wearing a pith helmet and safari garb.
Mr. Levinson runs Genentech like a loose confederation of labs, each part of a mission to change the world, by curing cancer in particular. He revived risky, yet solid, research programs that the bean counters had buried. From one of those programs, the breakthrough breast cancer drug Herceptin was born. It was launched last year and grossed more than $100 million its first year.
Mr. Levinson managed all of this under the yoke of a bureaucratic distant majority owner, who eventually let him rebuild the board. "Levinson proves that the great biotech firms are the ones that find a way to keep that driving scientific and entrepreneurial spirit alive," says Jonas Alsenas, a biotech analyst with ING Barings, an investment banking firm.
Few companies have been more affected by a single intrapreneurial innovation than Texas Instruments. For most of its history, the Dallas-based company was a conglomeration of defense, geological, chemical, computer, and electronics products. Now about 58 percent of its revenue comes from a type of semiconductor chip known as the digital signal processor (DSP). Used in everything from cell phones to MP3 players, DSPs are programmable microprocessors that can instantly crunch vast quantities of numbers.
The company first created its DSP chips in the late '70s. A team of engineers including Gene Frantz toiled in Houston, away from the prying eyes of Dallas headquarters. They conceived of the DSP as an ideal way to process speech in an educational toy, dubbed Speak & Spell, and further refined the chip in subsequent generations.
Driven by early success, the team was allowed to expand its charter. It kept finding new uses for DSPs and seeded universities with software tools so that engineering graduates would know how to program the DSPs and find more and more applications, says John Scarisbrick, a TI senior vice president, who began managing the business in 1984.
"Our people had both autonomy and accountability," says Mr. Scarisbrick. "They were empowered to innovate more as they produced better and better results." As customers found more use for DSPs in digital cell phones, the business grew 30 percent a year. By 1996, after the sudden death of then-CEO Jerry Junkins, new CEO Thomas Engibous saw DSPs as the product to focus on for the future. He divested TI's non-chip businesses and poured all of the proceeds into development of semiconductor factories and DSPs. He even sold off TI's mainstay memory chip business in 1998, and created a $100 million venture capital fund to seed new DSP-related businesses.
Last year, TI held 48 percent of the $4.5 billion market for DSPs, according to Forward Concepts, a market research firm. But Mr. Scarisbrick isn't satisfied. His troops found a fresh market for DSPs when they cooked up MP3 players. Now TI has more than three dozen customers among MP3 player manufacturers, and continues to anchor its fate to the homegrown DSP. This year, TI expects to produce 1 million DSP chips a day.
"The DSP could have been eclipsed by any number of other TI businesses," says Mr. Scarisbrick. "But persistence and focus paid off."
Just as TI's top executive forced the company to change, so did Eastman Kodak 's CEO, ordering the firm to march into a new business.
Executives knew that digital pictures would one day eat away at the silver halide film business. The company's researchers created their first digital camera more than two decades ago. But shifting from a dependence on film has required continuous intrapreneuring.
When Motorola chief George Fisher moved to Kodak as CEO in 1993, he jump-started the digital-imaging efforts and provided the much-needed encouragement for employees to take risks without fear of reprisal, says Phil Gerskovich, vice president and CEO of the digital and applied imaging division.
By 1996, engineers had found a source of cheap imaging sensors and produced a breakthrough camera, the DC50, which offered high-resolution photos at a price of $999. Hordes of competitors followed, driving the price to $299, but Kodak still ranks in the top three makers of digital cameras. The market is taking off thanks to the low camera prices and the availability of high-resolution photo printers.
The emphasis on digital imaging has sprouted other ventures. Alvin Hulsebus, an information management executive in the digital unit, brainstormed with a couple of other Kodak employees to create the "project gold mine" marketing campaign. Mr. Hulsebus figured out how to take all of the customer contact information coming in from the Web and other sources and target those customers with personalized marketing pitches. If the customer buys a digital camera, Kodak can hit them with pitches for printers that produce the photos independent of a PC. "We figured out a way to have a personal relationship with the customer," Mr. Hulsebus says.
A few engineers in another division were tooling around with Palm Pilots, and in their off-hours they came up with the PalmPix, a digital camera that attaches to the popular handhelds. It has been a big success.
Digital imaging has had a huge impact on Kodak. CEO Daniel Carp said that digital imaging will account for 45 percent of the company's expected $24 billion in revenues and 27 percent of its earnings by 2005.
Xerox never lived down its failure to capitalize on the PC technologies it invented at its Palo Alto Research Center (PARC). But it's worth revisiting the company to find out what it learned about intrapreneuring in the process.
John Seely Brown, Xerox's chief scientist, vice president, and for many years director of the world-renowned PARC, is determined not to let history repeat. He believes that PARC-bred technologies like networking saved Xerox's core copier business from the Japanese onslaught in the '80s. And PARC has now formalized the process for moving an idea from research to product.
The company has a corporate innovation council that reviews about a dozen new business proposals a year. Cooperation with its Stamford, Connecticut-based parent company has been facilitated by bringing in Harvard University educators to train the researchers, so they can invent not only new products but new ways to bring them to market, Mr. Brown says. "It reduces the friction between the East and West Coast when we speak the same language," Mr. Brown says.
And researchers with great ideas have a chance to get rich, whether their ideas are spun off into employee-owned businesses or spun in as a new division of Xerox, Mr. Brown says. Xerox has also created a unit called Xerox Venture Labs, which incubates new businesses and acts as a kind of broker with outside venture capitalists.
Over time, Xerox's PARC technologies have led to more than a dozen spin-offs, including SDL, which makes laser-based electronics and, at press time, had a market capitalization well above $22 billion.
Other hits: a joint venture with 3M to create "electric paper" that can be written on over and over again. And Xerox PARC researcher Ramana Rao turned his idea for "hyperbolic trees," a way to view and organize documents in three dimensions, into a new venture called Inxight Software. Mr. Brown expects the spin-off to eventually go public.
"The key is understanding the right balance between structure and spontaneity," Mr. Brown says.
Mark Rice, director of the Severino Center for Technological Entrepreneurship in Troy, New York, says he respects Xerox's efforts to create a system for fostering intrapreneurship. "They had such a mind-boggling failure," he says. "Xerox has been learning from its mistakes for a very long time."
Mr. Rice has studied nearly 300 examples of intrapreneurs, and finds that the conditions that lead to successes are pretty much random. There is no one formula for intrapreneurship, but intrapreneurs can emerge as long as they have the right environment in which to thrive.
But he firmly believes that the organizational challenges of setting up new businesses, dedicating the proper resources, and learning to live with the chaos are as key to business survival as invention itself. Big companies can afford to have patience with intrapreneurs. "They just need the attention span to build a capability and sustain it," Mr. Rice says.
Additional reporting by Kenneth Neil Cukier and Stephan Herrera. Write to [email protected]
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