The Four Models of Corporate Entrepreneurship

Companies have four ways of building businesses from within their organizations. Each approach provides certain benefits — and raises specific challenges.

CEOs talk about growth; markets demand it.1 But profitable organic growth is difficult. When core businesses begin to flag, research suggests that fewer than 5% of companies regain growth rates of at least 1% above gross domestic product.2 Creating new businesses, or corporate entrepreneurship, offers one increasingly potent solution. According to a recent survey, companies that put greater emphasis on creating new business models grew their operating margins faster than the competition.3

But how can established organizations build successful new businesses on an ongoing basis? Certainly, the road is littered with failures. The iPod should have been a Sony Corp. product. The Japanese corporation had the heritage, brand, technology, channels — everything. But it was Apple Inc.’s Steve Jobs who recognized that the potential of portable digital music could be unlocked only through the creation of a new business, not just a better MP3 player.

To investigate how organizations succeed at corporate entrepreneurship, we conducted a study at nearly 30 global companies (see “About the Research.”). Through that research, we were able to define four fundamental models of corporate entrepreneurship and identify factors guiding when each model should be applied. This framework of corporate entrepreneurship should help companies avoid costly trial-and-error mistakes in selecting and constructing the best program for their objectives.

About the Research »

What is Corporate Entrepreneurship?

First, though, what exactly is corporate entrepreneurship? We define the term as the process by which teams within an established company conceive, foster, launch and manage a new business that is distinct from the parent company but leverages the parent’s assets, market position, capabilities or other resources.

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References

1. See, for instance, R. Gulati (introduction), “How CEOs Manage Growth Agendas,” Harvard Business Review 82 (JulyAugust, 2004): 124–132.

2. Corporate Strategy Board, “Stall Points: Barriers to Growth for the Large Corporate Enterprise” (Washington, D.C.: Corporate Strategy Board, 1998).

3. G. Pohle and M. Chapman, “IBM Global CEO Study 2006: Business Model Innovation Matters,” Strategy and Leadership 34, no. 5 (2006): 34–40.

4. M. Sawhney, R.C. Wolcott and I. Arroniz, “The 12 Different Ways for Companies to Innovate,” MIT Sloan Management Review 47, no.3 (spring 2006): 75–81. Innovation in technologies or products might actually be just a small part of creating business value; Starbucks Corp., for example, generates innovations in customer experience. Companies can innovate on any aspect of how they do business, but it all has to fit together as a coherent system.

5. See, in particular, M.L. Tushman and C.A. O’Reilly III, “The Ambidextrous Organization: Managing Evolutionary and Revolutionary Change,” California Management Review 38, no. 4 (summer 1996): 8–30.

6. Ibid.

7. Founded in 1927, Zimmer has 6,700 employees, operations in more than 24 countries and sales of approximately $3.5 billion in 2006. It was spun off from Bristol-Myers Squibb Co. in August 2001, becoming independent again for the first time in 30 years.

8. With nearly 150,000 employees, Cargill operates in more than 60 countries and generated income of $1.5 billion on revenues of $75 billion in fiscal 2006 (ending May 31).

9. C.M. Christensen and M.E. Raynor, “The Innovator’s Solution: Creating and Sustaining Successful Growth” (Boston: Harvard Business School Press, 2003).

10. Internal (nonconfidential) IBM presentation, February 2006, Armonk, New York.

Acknowledgments

The authors thank Mohanbir Sawhney for his recommendations in the preparation of this article, and they are grateful to Henry Pak and Geof-frey Nudd for their efforts on behalf of this research.