A. Blue Star Start-up Strategy for Intrapreneurship in Corporations - Lessons from Big Blue (IBM)

    Does your corporation have what it takes for intrapreneurship?

    How can one foster a climate of entrepreneurship to grow new businesses in the context of a large company, let alone in a huge (bureaucratic) multinational? This question has led to a term to describe this phenomenon, “intrapreneurship.” Twice the answer to the opening question has come, surprisingly, from that icon of traditional big business values, big blue itself, IBM. Two comments made about IBM in Silicon Valley are "Elephants can't dance." But, and this is a very big but, "Be careful of how you play the new ball(game). You never know when and where the Elephant will put his foot down." The IBM Strategy Elephant is indeed to be accorded respect. Some significant lessons can be learned from him. 

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    IBM has astonished the world several times, or, as Louis Gerstner, Jr., IBM's CEO phrased it in his book (2002) about his tenure there, Who Says Elephants Can't Dance? The first time IBM really amazed its own workforce was with the Boca Raton Skunk Works, which led to the introduction of PCs to the business world. For those interested in Economic History, a brief summary of that event is given in Appendix I. 

    The second time was with the EBO (Emerging Business Opportunities) drive established at IBM in 2000 to deliver sustained growth. This initiative is the subject of an excellent series of Harvard Business School cases. The twenty page “Emerging Business Opportunities at IBM (A)” by David A. Garvin and Lynne C. Levesque has two supplements, which they also wrote, a (B) of two pages, and a (C) about a specific EBO, Pervasive Computing, of six pages. (A), (B) and (C) were published March 2004 and revised Feb. 2005. 

    The series is strongly recommended to any CEO wanting to encourage intrapreneurship at a large corporation. It can be purchased for a modest fee of about $15 for all three as pdf downloads (cf. the preceding link). As an encouragement to order the 28 page series, a brief two-page summary of some key points is presented here.

Contents

    I.   IBM's initial status quo

    II.  Overcoming cultural inertia

    III. Three Horizons of Growth, H3, H2 and H1 Businesses

    IV.  Three critical questions for strategic clarity

    V.   Supporting the EBO ventures

    VI.  Progress Measures

    VII. Performance

I. IBM's initial status quo

    In 1999 IBM formed an internal consulting team to study how new businesses were started within the company.  The team concluded that there were six difficulties. Quote (with minor editing):

    1. Our management system rewards execution directed at short-term results at the cost of strategic business building.

    2. IBM focuses on listening intensely to current customers. As a result, it frequently misses new business models, new markets and new classes of decision makers.

    3. Expense/revenue ratios drive the planning process. New businesses are often burdened with unrealistic overhead allocations.

    4. IBM has a long history of relying almost exclusively on factual financial analysis when making investment decisions, even when a market is too immature or small to support it.

    5. Innovative business ideas often lack sponsorship and attention; when budgets become tight, they are often the first programs to be cut. IBM is funding its new businesses 180 degrees differently from the way venture capitalists are: starting big, then whittling away resources rather than ratcheting up commitments over time.

    6. Once selected, many IBM ventures fail for reasons (such as) inadequate entrepreneurial leadership and absence of sustained funding. End Quote.

II. Overcoming cultural inertia

    Gerstner (the first outside CEO in IBM´s history) stated: "Successful institutions almost always develop strong cultures that (become) an enormous impediment to the institution´s ability to adapt."* At IBM that impediment reflected a complicated organization with seven groups and 39 strategic business units (sbu´s). Achieving strategic clarity and getting consensus for its implementation (allocating resources) among many stakeholders was extremely difficult. Therefore Gerstner decided to appoint an "EBO czar. . . to shepherd these efforts. . . who knows the culture well enough to kick the system . . . someone with really big shoes." 

*Louis V. Gerstner, Jr., Who Says Elephants Can’t Dance? New York: Harper Business, 2002, p. 182.

III. Three Horizons of Growth: H1, H2 and H3 Businesses*

"Three, two, one, success!"

    (H3) start-up (seed) businesses, which need "entrepreneurial CEOs who create new strategies in the face of turbulence. They are best measured on project-based milestones."

    (H2) fast-growing potential "stars," which need significant resources, and CEOs who are willing to take risks.

    (H1) arrived and traditionally run "cash cows."    

*Mehrdad Baghai, Stephen Coley, and David White, The Alchemy of Growth, Reading, MA: Pereus Press, 1999.

IV. Three critical questions for strategic clarity Quote:

    1. What's the pain (or, we would add, passion) point for the customer?

    2. Who are we going to come up against in the marketplace?

    3. How can we deliver more value to our customers than our competitors? End quote.

V. Supporting the EBO ventures

Consulting

    A team of internal consultants would spend two to three months on analyzing strategic options. The analysis would include a thorough treatment of implementation.

Funding

    IBM created an internal venture capital pool of $100 million. These funds were available for EBOs that had unexpected requirements.

VI. Progress Measures

 "Corporate Strategy developed a simple red, yellow, and green scoring system. The system rated each EBO’s progress in three areas: developing a clear strategy, defining an executable model, and winning in the marketplace."  In the start-up phase, milestones were linked to forming a team, including advisors and sponsors, developing a strategy, and getting consensus and commitment (buy-in). After the start-up phase, performance milestones were more closely linked to sales goals.

VII. Performance

    In 2000 IBM pursued seven EBOs, which generated about $1 billion in revenues, almost 90% of that from the top three performers. Two years later it was pursuing 18 EBOs. These generated over $6 billion in revenues, two thirds from the top three performers. By 2004 revenues had doubled, about half due to the top three. These offered products in a) Life Sciences, b) Linux and c) Pervasive Computing.

    The CEO observed: "What really worried me was how exhausting it was to support 18 EBOs when I believed we needed 180 of them to really grow this company." 

Appendix I – Skunk Works

    Webster´s III defines Skunk Works as a small and isolated department or facility (as for R&D) that functions with minimal corporate supervision. The term was coined at Lockheed in 1943 for a secret (and successful) aerospace project. At Smart Computing® Encyclopedia¹ (2010) appeared the elaboration that: “Industry pundits have suggested that its derisive name came about because it referred to a group of dedicated people, working in isolation, who spend long hours on a project (and therefore might not have the time or patience for showers and soap).”

    IBM, founded in 1911, was for over a half-century the world´s dominant computer company, renowned for its mainframe computers. It was equally famous for its staid bureaucracy and conservative dress code. With your charcoal grey or dark blue business suit you should only wear white shirts. Blue shirts with button down colors were not tolerated. That culture was pretty much the direct opposite of the free-wheeling, jeans and T-shirt culture of the emerging young competitors in Silicon Valley, such as Apple.

    Apple did not invent the PC, but did introduce the first successful one. The impetus to introducing PCs to the business world came from IBM. Smart Computing® Encyclopedia had an excellent article about IBM´s role, entitled: "Boca Raton Skunk Works." The article explained how in 1981 Don Estridge and Bill Lowe led a "maverick group" in a skunk works in Boca Raton, Florida to develop a PC to compete against Apple. The group had thought that the cumulative sales of the IBM PC might reach 250,000. More than that was sold in its first year, and it was the driving force to the PC becoming ubiquitous. (As of 2009, the computer industry has sold more than 600 million units.)

1 The link for Smart Computing Encylopedia, www.smartcomputer.com, is no longer active (May, 2011).

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