Business

Radical innovations rarely come from large organisations: Prof. Mikkel Draebye

In this interview, Prof. Mikkel Draebye of SDA Bocconi, Italy, explains the importance of corporate entrepreneurship in the context of innovation and survival of large organisations.

It was an Austrian entrepreneur Dietrich Mateschitz who discovered the potential of Red Bull drink during his visit to Thailand in 1982, which resulted in the creation of a market for a new beverage category – energy drinks. None of the cola giants could spot the opportunity, in spite of being in Thailand for many years. So, what stopped the big beverage companies to explore the potential of energy drinks? The surprising answer is they were too big see the opportunity. Large organisations often fail to spot game-changing business ventures, as they are more focused on managing existing businesses more efficiently than adding value by venturing into new businesses, says Prof. Mikkel Draebye, Professor of Strategic and Entrepreneurial Management, SDA Bocconi, Italy.

Prof. Mikkel Draebye, an expert on entrepreneurship, innovation & corporate entrepreneurship and strategic management in sports organisations, believes that radical innovation comes from new entrants who have something to gain from taking risk. Indian Premier League (IPL) for cricket, which Prof. Draebye has been tracking since its inception, is another example of how one radical idea opened up commercial opportunity in a sport, which was imported into the country by the British.

In this freewheeling conversation with Rakesh Rao, Prof. Mikkel Draebye explains the importance of corporate entrepreneurship for innovation and survival of the large corporations.

What is corporate entrepreneurship and its relevance for today’s organisations?

Corporate entrepreneurship (CE) is a specific approach to innovation management. Pace of change in the external environment is increasing. To respond to this fast changing environment organisations have to be nimble, flexible, and aggressive. Normally, the need to change and adaptability is put under the umbrella of innovation.

CE, as an approach to innovation, is basically based on rediscovering the entrepreneur as the key player in innovation. In entrepreneurship, we often associate it with the actions of the person, but innovations do not enjoy the same status as the innovator or innovation management (which is about managing processes, and less about innovators).

Organisations comprise of individuals and if you desire to have more proactive organisations, you need to build an organisational structure that gives space to individual innovators or entrepreneurial employees and managers. CE is the study of organisations that become more entrepreneurial, the study itself being from the point of individual employees.

Are large organisations better at managing innovations?

Take any industry, and you will conclude that radical innovations or new business ideas have always come from start-up entrepreneurs with very few coming from large existing organisations.

Red Bull (The Energy drink maker) is a case in point. It was discovered more than 25 years ago by an Austrian entrepreneur, who went to Thailand. He was able to spot an opportunity in a new beverage category (energy drinks) which was not explored by any of the big beverages giants. Why was it that Coca Cola, being in Thailand for more than 40 years and having an army of well-established researchers and marketers could not spot this opportunity? One would find the answer in the entrepreneurial culture which has the ability to spot an opportunity and experiment with new business models. Large organisations tend to focus on managing existing businesses more efficiently as opposed to adding value by venturing into new business opportunities.

At present, my research interest is focusing on why it is difficult for large organisations to give space to employees so that they can act like an entrepreneur. Large organisations can learn a lot from start-ups in terms of how to manage uncertainty, handle risks, and motivate people, as these are important elements to bring into large organisations when they want to instil more entrepreneur spirit.

Entrepreneurs own the project, while managers/employees work for somebody else’s (company’s) project. By instilling higher degree of ownership in a project, large organisations can simulate entrepreneurial processes of start-ups. But this thinking requires new approaches and a move away from traditional HR practices.

In your view is shareholders’ pressure the reason why large organisations are more focused on margins and returns in comparison to on innovations?

I think it is the manifestation. But are these companies doing a favour on shareholders by focusing on quarterly results at the cost of long-term growth opportunities?

For example, it is quite difficult to stay in the Fortune 500 companies list. Every 10 years, more than 60 percent of firms go out of the Fortune 500 list in the US. And, one of the main reasons being that these companies were not future-oriented enough.

I know a lot of tech-companies avoid this trap of Fortune 500 list. They realise that innovation is the only way to survive and thrive in the competitive world, and for this they adopt entrepreneur culture in their organisations. The flipside to this is that it comes at a cost. But future-oriented companies are not afraid to invest in entrepreneurship and innovation to stay ahead of their competitors.

Companies need to be ambidextrous. They should be able to handle on one hand their existing businesses, and on the other they should explore new avenues of growth & opportunities.

How can organisations nurture corporate entrepreneurship culture within the organisation?

No change will happen without the commitment of the top management to a new idea. Most organisations talk about innovation, but a majority (around 80%) of them do just a lip service.

They are not putting their money, where their mouth is. Organisations, wherein the top management is serious about innovation, put corporate entrepreneurship on the leadership agenda. Innovation discourse should be part of top management’s agenda and decision making processes.

Second, organisations should have a strategy matrix to measure the level of innovation undertaken by the company. One of the companies which has been on the Fortune 500 list consistently is 3M since it has adopted innovation targets as a part of its growth strategy. There is a‘3:30 rule’ in 3M, which states that 30 percent of all divisional revenues should come from products and services which were not a part of the portfolio 3 years ago. This is a simple rule, yet it forces the company to develop a pipeline of products & services for the future.

Companies should have innovation targets, just like revenue and sales targets. Top management should embrace the concept of innovation not in words, but by integrating it in the organisational structure and in the strategy formulation process.

Another important aspect is how companies react to the failure of new ideas? One of the biggest barrier in large organisations (from a cultural perspective) is how will they be perceived if their new ideas fail. This results in a general resistance to recommend new ideas and maintain status quo.

Organisations need to understand that failure is an integral part of the innovation process. Failures should be handled in a way so that it does not deter employees from experimenting with new ideas. If an organisation is unable to remove the fear of failure from employees, it will fail to generate a pipeline of products & services that will drive its business in future.

What stops large organisations from empowering people to initiate innovation?

Large organisations fear losing control when they think of empowering employees for CE. Giving up power mistakenly is understood as giving up control. It is important to give up administrative and hierarchical control, but that does not mean companies should give up control on resources, investment, etc.

Why are organisations investing in start-ups? What can they learn from start-ups?

This is one more model to firm up the innovation pipeline. It shows commitment on the part of large organisations towards innovation and also signals that not all good things come from within the organisation. In addition to gaining access to IP, there is also a learning element to hanging around the start-ups. Smart firms should invest in start-ups to learn in terms of new business approaches, models, etc.

What can India offer to the world of sports?

I focus on sports management which is linked to the developing business of sports. It is amazing how India is actually on the forefront of a lot of development in the world of sports business and management in terms of innovations. Why was the IPL (Indian Premier League for cricket) not invented in England? Why did the ISL (Indian Super League for Football) not originate in Germany or Italy? Because radical innovations come from new entrants who have something to gain from taking risk.

I have been following IPL from the beginning – even before I set my foot in India both as a sports-fan, in general, and the professor of sports management, in particular. Innovation in terms of sports entertainment, tournament structure, franchise-type league format, TV production, etc is just amazing. From an entrepreneur point of view, you had somebody who spotted an opportunity to leverage on an interest that already existed by providing a completely new product. Through IPL, India has learnt a lot about the world of sports from a commercial perspective. It is a very interesting business. It is now being replicated in other sports such as football, badminton, tennis, etc.

Can commercial sport ventures (such as IPL, ISL, etc.) be financially sustainably for (a) the team sponsors and (b) the sports’ governing body?

It is obviously not sustainable in terms of owners subsidising the sports (in case of IPL). There has to be something to balance. I am in favour of financial fair-play. I think you should put a cap on budget, otherwise the richest promoter will end up having best team, which could make the league less competitive and, thus, losing people’s interest in the sports venture.

Benefits accrued to the sport depend on the status of the sport in the country. Cricket does not need the support as it is already a popular sport and has the infrastructure in place. It is different for ISL. The fact that the federation is a partner in the league is an important indicator. Leagues like these should have a sports development aspect to it. ISL has this in it. The intent to develop the sport at the grass root level is going to play a large role in the future development of ISL.

Should there be increased accountability for sports governing bodies?

There has been a long tradition of using sport governing bodies as a non-profit organisation and not running the organisation professionally. Non-profit organisations need to be as professionally managed as for-profit businesses.