Some of America's biggest corporations are discovering that their future may depend on thinking small.
Some of America's biggest corporations are discovering that their future may depend on thinking small.
Not too long ago, fortune 500 companies looked at small-scale entrepreneurial companies as fodder for acquisition -- if they were big enough to make the effort worthwhile -- and little more. The executive who dared to suggest that Goliath might learn from David was likely to be trampled by a herd of MBAs waving printouts on the economies of scale that flowed from a centralized and rationally managed organization. Talk about innovation, and you might hear John Kenneth Galbraith quoted: "There is no more pleasant fiction than that technical change is the product of the matchless ingenuity of the small man forced to employ his wits to better his neighbor. Unhappily, it is a fiction. . . . A benign providence . . . has made the industry of a few large firms an almost perfect instrument for inducing technical change."
Then something happened. IBM Corp. missed the minicomputer market and allowed Digital Equipment Corp. to become a giant in its own right. The micromillenium was born in a Cupertino, Calif., garage, and IBM executives could imagine the DEC scenario all over again. At NCR Corp., where management had a history of having to play catch-up in areas they should have dominated, the company missed the shift from electromechanical point-of-sale terminals to purely electronic machines. And a host of other entrenched companies suddenly saw competitors spring up where they had none earlier, or saw the Japanese enter their markets with better and cheaper equipment. This latest shake-up of American industry centered on the high-technology side of the market, but its reverberations rippled through American industry. An American corporate orthodoxy that was suited to mature, stable markets turned out to be ill-suited to a dynamic marketplace characterized by a tremendous pace of innovation and change. And big companies began to wonder whether their very structures inhibited their ability to adapt in a dynamic marketplace.
And so the way Fortune 500 companies do business began to change. In changing, big companies acknowledged an idea that, until recently, they had given short shrift -- entrepreneurism. Giants like IBM started to tap inventiveness outside the company and to restructure their own divisions to make them more like the entrepreneurial companies with which they were competing. NCR radically reorganized the entire company in hopes of tapping some of the virtues of smallness. Memorex Corp. entered into alliances with a host of small, entrepreneurial start-ups, and a number of other large corporations, such as Control Data, Monsanto, Lubrizol, Ing. C. Olivetti, and Xerox, have done the same, structuring the relationships so as to preserve the independence of the little company rather than incubate it as a candidate for acquisition.
This is not the first time that major companies have attempted to factor themselves into smaller units (although this is a novelty for computer companies). In the past, however, such reorganizations have served the needs of accounting and strategic planning. This time, the interest in smaller units seems to be directed toward the entrepreneurial nature of small-scale operations.
By now, the ripples of these alliances and reorganizations have perfused American industry far beyond their high-tech origins. Forecast '84, an annual symposium at the University of Tampa, devoted in previous years to economic predictions, focused on the lessons of Thomas J. Peters and Robert H. Waterman Jr.'s book, In Search of Excellence. The gathering had the flavor of a revival meeting, as speakers confessed their earlaer sins of centralized entrepreneurism and big business. As Philip "Don" Estridge, president of Entry Systems Division of IBM put it, "the pendulum has swung in the direction of the entrepreneur."
What we have is a full-fledged trend, complete with apologists in academia, monumental best-sellers, a host of newly converted chief executive officers, and predictions that these alliances and restructurings will characterize American industry through the end of the century. One observer described this movement as "the breaking of a great wave that had its origins at the dawn of the Industrial Revolution."
In the midst of this celebratory din, it is possible to overlook the extraordinary nature of these events. After all, big business and small entrepreneurial companies are not natural allies, they are more like natural enemies, and 80 years of distrust and misunderstanding cannot be easily erased. Moreover, not everyone is an entrepreneur, nor is every giant company easily rendered into small, autonomous sub-units. There is, indeed, some question about whether a major company can ever become truly entrepreneurial.
All of this argues for caution before accepting that the lion has finally lain with the lamb. Nevertheless, it seems clear that -- for the time being, at least -- American business has decided that small is beautiful.
THE CHANGE OF HEART
The reasons for the swing toward entrepeneurism can be traced to a number of factors, which began to manifest themselves in the 1970s. Against the backdrop of a steady 25-year deterioration of consumer confidence in the motives and abilities of major corporations, big business found itself under assault on several fronts:
* Owners (that is shareholders) began to discover that managers did not manage companies for the shareholders, but rather for themselves. Major shareholders began to take a hard look at the raison d'etre of conglomerates -- the sum of whose parts tended to be undervalued in the stock market, while management's control and perquisites were enhanced. This reexamination has inaugurated a period of deconglomeratization, characterized by strategic "de-accessinn" (in which unwanted businesses are sold off) equity carve-outs (in which shares of a wholly owned subsidiary are put back into the marketplace), and leveraged buyouts.
* All too often, the strategy of engulf and devour turned out to be counterproductive anyway, as the acquired company would lose its incentive and competitive edge under a new layer of management and would see its key peopIe leave for less-confining climes.
* The large integrated companies were no better off, as highly centralized management structures too often left companies out of touch with customers and technological change.
* Managers of large American businesses found themselves on the defensive regarding the issue of quality in the face of competition and new technologies.
* Big businesses, particularly those in high technology, found themselves losing droves of key people as the venture capital and new-issues markets began to heat up.
Meanwhile, small entrepreneurial startups in all areas were stealing markets away from the big boys, capturing the soul of technological innovation, the affections of consumers and the stock market, and the imagination of academia. IBM saw Apple Computer Inc. create a market that hadn't existed, and then grow to the point at which $1 million invested in the company in 1978 swelled to $350 million this past summer. Not that IBM was alone Every other major computer manufacturer missed that opportunity, and countless others,as well.
Small wonder, then, that a number of major corporations began to look at themselves and at their relationship to small companies. Few took this reexamination more seriously than NCR.
NCR: SMALLNESS WITH BIGNESS
NCR (formerly National Cash Register Co.) is a Dayton based multinational electronics and computer manufacturing corporation, with 1983 revenues of about $3.7 billion. The 100-year-old company was the dominant concern in office equipment and cash registers during the 1920s. Thomas J. Watson Sr. was NCR's star salesman before he joined Computing-Tabulating-Recording Co., which was to become IBM, and which ultimately wrested dominance in office machinery from NCR. (It is reputed that when Watson went to CTR he was offered a salary of $50,000 a year plus 6% of the profits over $1 million a year. Incentive packages are not a new invention.)
Back in 1979, NCR was a troubled company. Examining its recent problems, management began to wonder whether its very structure was inhibiting its ability tn innovate and adapt. "The first step was to realize that the product-development process was not yielding products that hit the market as squarely as desired or as timely as the market required," recalls William F. Buster, one of NCR's executive vice-presidents and a member of the office of the chief executive.
As part of this reevaluation process, NCR commissioned the McKinsey & Co. consulting group to study the attributes of a number of highly successful companies. The researchers looked at such corporations as Sperry, IBM, and Hewlett-Packard, to determine what they had done that might be applied to NCR. (The study was similar to the type Peters and Waterman used as the foundation of In Search of Excellence, the book that has helped spread the gospel of large company entrepreneurism through corporate America.)
Using this study as background, NCR developed a plan for restructuring itself. Analyzing the path of a product from idea to implementation, it discovered some obvious impediments. The development, production, and marketing of a new product involved three separate divisions. This cumbersome system "created opportunities for false starts and misinterpreting what the market really was . . .," says Buster. "It took a long time to get a product through this entire process, and sometimes products got lost in translation." In a nutshell, NCR discovered that you cannot manage innovation. Or, as Peters puts it, "Most invention comes from the 'wrong' person in the 'wrong' place in the wrong industry at the 'wrong' time, in conjunction with the 'wrong' user." A far cry from Galbraith's "perfect instrument for inducing technical change. "
So NCR proceeded to break up its product-management organization and move the parts to units that would develop, manufacture, and market products. In consulting jargon, this is called shifting from a "functional" to a "divisional" organization, and it has been done many times before in other industries.
NCR adapted the concept to its own needs, retaining functional organization in some divisions, while pushing the entrepreneurial aspects considerably further in others. Responsibility for planning was turned over to those most in touch with the customer, thereby weakening the hold on operations from the top.
These changes transformed NCR Corp. from a highly centralized operation into a series of stand-alone units. Today there is no requirement that one unit buy components from another NCR unit if it can find better or cheaper products outside the company. Moreover, based upon the nature of their products, the different divisions make their own decisions about how they want to structure themselves with regard to such activities as marketing.
The change was a wrenching intellectual experience for many NCR managers, and they didn't all adapt well to their heady new freedoms and frightening responsibilities. During the 18-month transition period, a number of them could not believe that it was real. They continually double-checked decisions with senior management, and waited for business-as-usual to return. Others, however, including Donald E. Coleman, NCR's vice-presdent in charge of the Data Entry Systems Division, thrived in the new environment. A tall, energetic, straight-talking mid-westerner, Coleman has been at NCR his entire career. Starting out as a computer operator, he worked his way up to general manager of a plant before being tapped to head the restructured division. Coleman is almost evangelical on the benefits of the restructuring. When asked whether, in the past two years, he had discovered anyone with hidden entrepreneurial talents, he responded without hesitation "Me!"
In the old days, he says, "I was doing what the collective wisdom judged to be right. . . I didn't put ideas forward as an individual. I did think things could be improved, though, and now I find myself in a position where I have been told to put up or shut up. Now nobody is going to help me make decisions. Now if you screw up, they know it's you, and if you win, they know it's you."
Coleman's division of about 3,000 people is responsible for, among other things, NCR's entry into the intensely competitive personaI computer market. Within the division, he has replicated the business-unit concept, gradually breaking the institution into the smallest feasible units. Aside from the small division office of about 20 people, he set up five independent units ranging from 500 to a little over 1,000 people. Each of these units has its own general manager, finance department, personnel department, research and development budget, and manufacturing division. They are fully operational, stand-alone businesses. In 1982, Coleman pushed the automony concept further, breaking down these five units into relatively autonomous subunits, so that his division now consists of 13 elements, each with its own plan and balance sheet. These units range in size from $10 million to $100 million in annual sales. Within limits, the different units can also set up their own internal incentives, financial and otherwise, to reward initiative.
Three years ago, Coleman would have studied each of these units from the point of view of line expenses, and he would have closely controlled their planning. Now Coleman has forced planning decisions right down the line to the level closest to user needs, and this reorganization, in turn, has freed enormous innovative energy in his employees. " I've got a whole array of self-service terminals that we introduced [because of this system] " for gas stations, hotels, ski lifts, airlines.
Coleman cites the self-service terminals for gas stations as a good example of this freed innovative energy. The idea was to devise a charge-card slot for gas stations so that customers could easily charge their purchases. (The system also tracks inventory levels.) A feIlow in one of the self-service-business units came up with the concept, which the unit developed into an installed product within five months -- something that would have been impossible under the old system. Subsequently, the unit extended the concept to other markets. Within a single ski season, for example, it managed to design and install a self-service ski-lift terminal at Mammoth Mountain Ski Area in Mammoth Lakes, Calif. One consequence of all this -- and a measure of the reorganization's success -- is that 50% of the division's revenues last year came from products it did not sell the year before.
Coleman, for his part, has had to develop new management skills. He concedes that he has not turned risk-averse people into risk-takers, but he has discovered an awful lot of risk-takers who were hidden under the old system. Coleman now says he spends most of his time looking for product champions -- "people with a twinkle in their eye." In fact, he is more disposed to encourage a strong product champion with a weaker technology than a weaker champion with a stronger technology. "If I have a criticism of In Search of Excellence," he says, "it is that I would have pushed the concept of the 'product champion' even more strongly."
Admittedly, all this makes for a certain amount of chaos, redundancy, and contradiction in terms of NCR's overall product mix, but virtually everyone else at NCR seems to feel that the returns have well justified the risks. How long the honeymoon will continue is another question. True entrepreneurs are not really team players, after all, and managers may yet find that they are most often "a royal pain in the ass," as an executive of Johnson & Johnson put it. But for the moment, at least, you are not going to hear a negative word about entrepreneurs in the corridors of NCR.
IBM: THE ELEPHAHT TRIES TO DANCE
While NCR has undergone a particularly radical reorganization, it is by no means the only large company to have discovered the virtues of entrepreneurism. More modest, although equally noteworthy, are the gestures made by the colossus of the industry, IBM. Indeed, IBM's efforts are in some ways even more remarkable, if only because of the company's size.
To put things in perspective, IBM's profits last year were $1.8 billion more than NCR's total revenues. It is, quite simply, the most profitable industrial company on earth. With success like that, changes are not made lightly. The changes at IBM -- and the company's ambivalence about discussing them -- point up some of the problems a big organization encounters when it tries to push responsibility and incentives down the line.
The background is that in 1980, IBM organized a number of relatively autonomous business groups. Some of these groups came to be called independent business units (IBUs). The IBM Personal Computer, one of the great success stories in modern corporate history, came out of one of these groups (although the PC group was never officially called an IBU). You might think that Big Blue would be eager to crow about the experience, but IBM is a company that could give the Kremlin lessons on what it means to play things close to the vest. In fact, the official spokespeople decline to attach any great significance to the IBUs at all.
In response to a recent query, for example, Stephen Quigley, whose title is senior information representative in corporate information, insisted that the IBUs were not even an innovation, that at least one had been around for two decades (although he admitted that in the past 18 months the number of IBUs had expanded considerably). Granted, the IBUs have their own committee of directors and enjoy independence in decision-making. Granted, the company expanded the number of IBUs to address fast-changing and fast-growing market sectors. But, he hastened to add, "it is important not to overstress the entrepreneurial aspects of [the IBU] " In particular, the IBU is not a means of rewarding budding talent, he said. Rather it represents a normal business response to market conditions. IBM is "not concerned with entrepreneurs within the company not getting their share of opportunity," and there are no incentives within the IBUs that are any different from those provided elsewhere in the corporation.
The official line notwithstanding, there is strong evidence that IBM has, in fact, been very concerned about fostering entrepreneurism in its ranks. SPD Management, an internal magazine published by the IBM System Products Division, recently ran an interview with IBM vice-president Mike Armstrong. In the article, Armstrong stressed the ways in which the company is trying to push more responsibility down to line managers and lessen the hold of top-level managers. "Armstrong is working to permit managers to take more business risks without wading through several layers of upper-management approvals," the article observed.
Don Estridge struck a similar note in his speech at Forecast '84 in Tampa. He was talking about his experiences as head of the unit formed to produce the IBM PC. Estridge, a tall, modest, soft-spoken man, observed that the PC was successful in some measure because of luck. When IBM embarked on the project, he said, the company was "not doing well." There was a perception that IBM was getting too big to be totally managed out of its headquarters in Armonk, N.Y. The decision was made to "turn more responsibility over to lower managers than ever in the previous years," and out of this process came the decision to expand the IBUs.
In August 1980, the PC unit was set up. According to Estridge, it was the first such group insulated from Armonk's control. It group insulated from Armonk's control. It started with 12 people, and it started from zero. The only person with retailing experience was a man who had been a bagger in a supermarket.
In contrast to Quigley, Estridge placed a great deal of emphasis on the entrepreneurial aspects of his operation. Indeed, he said that he deliberately set out to mimic the culture of the small entrepreneurial companies IBM was up against. "If you're competing against people who started in a garage," he said, "you have to start in a garage." Among other things, this meant establishing a system that was not going to be confounded by the bureaucracy, that was not going to have checks and balances -- "people watching people." Moreover, since they were competing with hungry people, they would have to be staffed by hungry people. He noted that the biggest advantage of his operation was that "people felt it was theirs," and that "the hardest thing we've had to do is let people make mistakes. If they can't make mistakes, it isn't theirs. . .," he went on, adding, without elaboration, "You can't forget rewards either."
Like any trend or fad, the new embrace of entrepreneurism has produced its buzzwords and catchphrases. To attend a gathering of top corporate executives these days is to enter a giant echo chamber in which snatches of In Search of Excellence drift through the air. At Forecast '84, everybody was talking about "control." Estridge spoke of the challenge within a large corporation to find "a way to have people be owners of their own destiny."
In closing, Estridge noted that his group grew with the success of the PC: By August of 1983, with its expanded responsibilities, it employed 8,000 people. At this point, the challenge was to preserve the entrepreneurial flavor that had so contributed to its success. His solution was to create units within the unit. "We think of ourselves within the IBU as venture capitalists," he said. "The idea of bringing entrepreneurs within a company is an idea that is catching on. It gives you a feeling of the degree to which we are trying to experiment that we have formed 15 of these things. . . . The idea of entrepreneurship in large companies really works."
All of which raises an obvious question as to why Quigley, the official spokesman, would want to downplay the idea of entrepreneurism. The answer has to do with a problem confronting any major corporation that experiments with entrepreneurism -- what might be called toxic envy.
IBM, after all, does a lot more than make PCs. Indeed, the PC accounts for only 5% of the company's revenues. "What about the 800 programmers who update mainframe software in Santa Teresa, California?" asks Tom Peters. "How would they feel about the idea that the incentives and glory are going to those in IBUS?" His co-author, Bob Waterman, goes even further, contending that the issue of fairness is the shoal on which corporate entrepreneurship most often founders. He notes, moreover, that the envy is not only directed at fellow employees in IBU-type divisions, it extends also to relationships with outside entrepreneurs. IBM employees are well aware that a lot of nonemployees got rich off the PC because of the company's decision to go outside for much of the PC's software and components.
L. J. Sevin, a venture capitalist who has been an entrepreneur within and without large corporations, agrees that envy is the central problem of the corporate entrepreneurial relationship. He notes that every operation involves people who do not reap the rewards of the entrepreneur. "Why don't we have stock options?" they ask, and then, "Why should we support these guys?" "Either you become a practiced diplomat, or you've got a disaster on your hands," says Sevin. "Briefly, a part of IBM was entrepreneurial," says Sevin, "and it was breathtaking to behold. But it looks like it was a temporary phenomenon."
Indeed, the PC group has been integrated into the company as the Entry Systems Division, although it still retains some of its independence. The prevailing wisdom among IBM analysts, moreover, seems to be that IBM's long-term objective has always been to capture and bring in-house as much of the micro market as possible. But even it they are right, it does not alter the fact that Big Blue has been forced, however briefly, to inaugurate "breathtaking" changes in the way it does business.
THE NEW ALLIANCES
Then again, a lot of big businesses have resisted making such changes, but not because of inertia. Although enchanted with the entrepreneurial spirit, they believe a big company can never duplicate the environment of a start-up. The solution for them: Enter into special relationships with start-ups.
Such relationships abound these days, and they provide perhaps the most vivid indication of big business's new love affair with smallness. Granted, the idea itself is not new. Corporate venturing has a long history. What is new about the current round of alliances is the apparent appreciation of the need to preserve the independence and entrepreneurial flavor of the smaller company.
This appreciation grows out of a number of considerations:
* A small tightly focused operation is better able to find and service niches in a dynamic market than a large, diversified company.
* The relationship is likely to be more productive if it preserves the small company's independence.
* In the face of $2 billion in available venture capital and a strong new-issues market, such relationships may be the only way for a large company to maintain some hold on the most innovative minds in high technology.
* Such relationships give the large company a "window on technology," allowing it to leverage its R&D money and expand its array of products.
* A large company can use an alliance as a hedge against institutional blindness, which might otherwise bind it to once successful, but now obsolete, technologies.
* A relationship with a very successful small company gives the big brother an opportunity to reap far more substantial rewards than a comparable in-house investment would offer, thanks to the premiums placed by the stock market on high-tech stocks.
* A favorable antitrust climate frees corporations from fears that have acted as a brake on such relationships in the past. To be sure, different companies weigh these factors differently, but it is not unusual for a company to take all of them into account. And there may be other considerations as well -- the desire to protect a critical supplier, for example, or to protect a market by guaranteeing the survival of a "second source" of a particular product. It is clear, moreover, that a number of these factors are interrelated. Should, say, the economy turn bad, venture capital dry up, and the new-issues market go cold, fewer employees might be tempted to jump ship and go it alone, and there might be fewer alliances.
It could be argued, therefore, that large companies are making a virtue of a necessity caused by temporary market conditions. But does it matter? There is a reason that the marketplace is rewarding start-ups and small companies. The reason is that they are making money. A more serious question is whether these new alliances can last long, given the fundamentally different motivations of the corporation and the entrepreneur.
In any case, the new relationships are, indeed, blossoming, especially in high-technology industries, where the pace of change is the greatest and where it is easiest to translate mental capital into corporate capital. Among the large companies involved are Control Data, Olivetti, Lubrizol, Monsanto, Tektronix, General Instruments, Standard Oil (Indiana), NCR, and IBM. Even such a stodgy giant as American Telephone and Telegraph Co. has gotten into the act indirectly, buying a substantial stake in Olivetti, one of the most aggressive participants in the trend. More typical however is the relationship between Memorex and a California start-up called DMA Systems Inc.
MEMOREX: A STRATEGY BUILT ON ALLIANCES
Memorex has long been an innovator and leader in memory storage and disk-drive technology. With 33 buildings located within a few miles of one another, the company is a major presence in Silicon Valley. Nevertheless, a few years back, Memorex was foundering, buffeted by the moves of IBM. At great expense, the company had developed a central processing unit for a medium-scale mainframe computer, only to find that it couldn't market the product against Big Blue. Meanwhile, it had neglected its other businesses.
Weakened by the crisis, Memorex was acquired by Burroughs Corp. It sold its audio/video consumer businesses, transferred word processing to Burroughs, and decided to concentrate on computer display terminals, memory storage media, and disk drives -- its core businesses. The company also brought in a lot of new people, including Michael Haltom from Burroughs, as vice-president for finance and business development; Ray Gould from Honeywell Information Systems, as director of product management; and Stephen Manning from Rockwell International, as director of business development and strategic planning. They believed that Memorex had to go outside the company in order to achieve its strategic goal of dominating the memory-storage industry.
This represented a radical departure for the company. Until two years ago, Memorex relied exclusively on in-house product development. But that process was slow and inefficient, and the alliance concept was in the air. Burroughs, for one, had already established an alliance with Convergent Technologies Inc., a maker of small computer systems. In addition, the peculiar chemistry of Silicon Valley played a role. As Manning puts it, "[the alliance strategy] is a case of management looking at its geographical location, and its industry, and deciding that a focused group of individuals can get the job done very efficiently."
In looking at its own industry, Memorex noted that the single most expensive component of a computer today is the equipment related to the storage and retrieval of data. So the company was very interested to learn about DMA Systems, which was developing a device that might significantly reduce those costs.
The device is a small, removable hard disk drive that is used for memory storage in mini- and microcomputers. Currently, most micro users rely on floppy disks for this purpose. Floppies hold about 300 kilobytes of information, are unreliable media, and tend to be rather slow. The alternative to the floppy is the hard disk, which stores from 20 to 100 times as much information and coughs it up 6 times faster. The problem is that standard hard disks are expensive, bulky, vulnerable to catastrophic breakdowns, and nonremovable.
Enter DMA Systems.
DMA is based in Goleta, Calif., a sleepy little town just outside of Santa Barbara, and a center for magnetic-head technology -- the devices that fly above disks and read and write data. The company's president and one of its founders, Dick Troutte, had previously worked at Information Magnetics Corp. a pioneer in the diskhead industry. Information Magnetics had been successful, but Troutte had grown discouraged and left the industry in 1978 -- mainly, he says, because of IBM. "Everything IBM did, we followed suit. . . . IBM would announce big products or reduce their prices and cause major layoffs in half the industry. It was a real tough time to go through, and I felt I needed a breather."
With the explosion of the microcomputer market in 1980, however, Troutte had a change of heart. He realized that he and a few other associates "had participated in every development program of disk drives known to mankind at that time . . . so we felt that we could make a [hard] disk drive that other people hadn't yet been able to make -- a removable one." Moreover, Troutte believed that, in the new environment, he would be somewhat insulated from IBM.
Troutte and his partners did the initial financing themselves, using money they had made from their equity in Information Magnetics. They incorporated in October 1980, and spent the next six months developing a business and engineering plan, whereupon they began hiring. At the same time, they went to the venture capital community for additional financing. A package was arranged by Brentwood Associates of Los Angeles and Southwest Venture Partners of Dallas. Before long, DMA found itself being courted by companies looking for an alliance.
Troutte was intrigued by the possibilities of such a relationship. "Any time a large company gives a stamp of approval to your products and your company and your management team, that always gives you a leg up in this industry. You've got somebody that has taken your products and gone through a lot of evaluation on them, and is willing to put their company's name on the product and back it -- then it is really a good sign."
This product relationship lies at the core of the alliance between DMA and Memorex. Memorex bought 4% of DMA, and the two companies entered into a manufacturing and licensing agreement. Memorex will market DMA products and pay DMA a royalty fee for disk drives manufactured under the Memorex label. Beyond that, Memorex gets to look at new technologies developed by DMA's engineers.
According to Memorex's Ray Gould, both companies will benefit, even though they are competitors. "In these relationships, both companies are reaching out for something that the other has. This was not the case in the era of the conglomerates, and so perhaps we have gone from the era of the conglomerate to the era of the strategic relationship."
Nor is DMA worried about "getting in bed with a hungry alligator," as one entrepreneur characterizes such relationships. Troutte notes that big companies have lost billions of dollars" by ignoring the advantages of independent, finely focused companies, and now they are looking for a piece of the action. According to Troutte, Memorex realizes that it can never take over DMA without losing precisely what it has tried to gain.
On that point, Manning and Gould agree. "Dick Troutte can decide over lunch to change direction, where a big institution might take ages," says Gould. He also believes that Memorex will benefit indirectly from DMA's high energy. "No one is going to be a sluggard at a start-up."
Says Manning, "I'm duly impressed and excited by those environments, but we just aren't going to be able to replicate those environments at Memorex." Instead, Memorex plans to go right on establishing alliances. As of January 1984, Memorex had four of them, and it has hopes of setting up several more by the end of the year.
But, despite the picture of harmony presented by DMA and Memorex, some observers remain skeptical that such alliances can work in the long run. They point to the checkered history of corporate venturing, going back 20 years or more, and note that, in the past, even the most promising relationships have succumbed to a variety of factors -- envy, shifting market conditions, changes in strategic direction or in top management, and so on.
Then there are those like L. J. Sevin, who argue that big and small companies are fundamentally incompatible. As evidence, he cites his own experience at Mostek Corp., a semiconductor company he co-founded in the late 1960s, which became involved in an ill-fated alliance with Sprague Electric Co.
According to Sevin, Mostek had problems with Sprague's sales force and with the presence of Sprague's people on its board. (On this point, one consultant noted that Exxon Corp.'s early corporate venturing gave rise to the phrase "Put a tiger in your tank and a turkey on your board.") To make matters worse, Sprague was bought in mid-relationship by GK Technologies Inc., which was then acquired by The Penn Central Corp. Ultimately, Mostek wound up as part of United Technologies Corp.
"When I hear the words 'window on technology,' I run for cover," Sevin says. The central problem is that "you want your technology and they want your technology." The large company enters the relationship in order to solve a problem, and "it is only human nature that they are going to want to get hold of a solution for themselves. Altruism is not part of the equation."
Sevin's current partner, Ben Rosen, agrees. "We have tended to minimize our involvement with majors in our start-ups," which include Compaq Computer Corp. and Lotus Development Corp. "The problem is that the investing company's principal interest is not the entrepreneur, but itself."
Of course, the very same argument could be applied to venture capitalists, whose interests may not always coincide with those of the entrepreneurs they back. Then, too, Sevin and Rosen are venture capitalists and, as such, are hardly disinterested observers of the trend to form alliances, with which they find themselves in competition.
But perhaps this debate misses the point. After all, planners at large corporations are well aware of the dismal history of corporate venturing and of the potential conflicts between the participants in an alliance. The fact is, despite the pitfalls, they continue to seek such alliances at an ever-quickening pace.
TREND OR FAD
So what finally does all this add up to? Is the new spirit of entrepreneurism simply the current corporate fad, or do its roots go deeper? Has there been a fundamental shift, a change in the fabric and structure of American capitalism?
Allan Kennedy, co-author of Corporate Cultures, a book that anticipated the trend sees it as part of an historical movement. "My perspective is that we are looking at an historical wave crashing on a beach that formed in the early days of the Industrial Revolution."
Until the 1920s, says Kennedy, workers were generally viewed as cogs in a machine. Then came the first attempts at decentralization, which have since recurred periodically, each time taking the process of fractionalization a bit farther. Now, he says, both academic research and empirical evidence are leading to the same conclusion: The smaller the business unit, the better the results. In other words, entrepreneurism has taken hold in large par because people have noticed that it works.
At the same time, says Kennedy, big corporations have been feeling internal pressure to create entrepreneurial work settings. Some of that pressure comes from an increasingly wealthy work force. As Kennedy points out, two-income families can be choosier about things like work environment. A company that does not pro vide the right atmosphere and incentives is liable to start losing key employees.
Kennedy disagrees; moreover, that envy is a necessary consequence of attempts to promote the entrepreneurial spirit in large corporations. About 20 years ago, he notes, James J. Ling spun off parts of LTV Corp. as a financing ploy, and the effect was not to generate envy, but rather to create incentives for managers. A similar phenomenon can be seen today in the leveraged-buyout trend and the attempts of various large companies to spin off "overhead" departments into freestanding economic entities. Kennedy notes that a recently formed group at Control Data Corp., Control Data Business Advisers Inc., now has a mandate to generate a progressively increasing portion of its revenues -- ultimately, 50% or more -- from outside sources. He expects that major corporations will even begin to spin off their personnel departments, and that, in general, operations traditionally viewed in terms of cost will increasingly be seen as potential profit centers.
If Kennedy sees corporate entrepreneurism as the crest of a wave, other observers view it more as the arc of a pendulum. James Brian Quinn at the Amos Tuck School of Business Administration at Dartmouth College, an expert on American industrial innovation, notes that management strategy tends to swing between centralization and decentralization. "If you are in an expanding market, as we were until the late 1970s," he says, "you tend to experiment on lowering costs of products you already have." This means looking for economies of scale, which may, in turn, demand a rational analytic model of management. On the other hand, says Quinn, when the market starts to turn down, as it did in 1981 and '82, two things happen: You turn back from economies of scale because you don't expect the markets to grow rapidly, and you look for more radical solutions. And "you can't get that with large units."
Market conditions aside, Quinn also notes that some businesses never lend themselves to entrepreneurial structures and strategies. "To put it bluntly, the strategy of Bell Labs has to be different from the strategy of Hewlett-Packard. Bell's products are supposed to be in place and competitive for 50 years. Similarly, a pharmaceutical company has to put a product in the market that is very safe and very effective, and so you have to centralize testing and the like. Therefore it's partly in the nature of the strategy and the product itself that centralization is appropriate or inappropriate."
In a similar vein, Bill Buster of NCR observes that "most companies in the U.S. and around the world were in a more centralized way of doing their business two years ago . . . because that was perceived to be the most logical and most effective business management process you could come up with. I have no doubt that that will happen again sometimes. . . . I don't think that there is any structure that is appropriate to all times."
But for now, at least, big business has discovered the tremendous liberation of human energy that flows from an entrepreneurial setting. The pendulum has not yet reached the apex of its swing.
It is worth remembering, moreover, that a pendulum does not just swing; it also proceeds. With each swing of the management pendulum, the model of decentralization has become more and more entrepreneurial. Experience with the productivity and inventiveness of people working in small, highly motivated operations seems to have had lasting effects in corporate America. Perhaps this is what the entrepreneurs have given large corporations -- proof of what people can accomplish when treated as "individuals rather than imbeciles," in the words of Allan Kennedy. And this raises a question as to whether we will ever totally return to large-scale, highly centralized, rationally managed corporate paradigms.