They are among the most pressing issues facing business executives today. With the rapid pace of innovation, how can we develop the new products and services we need to compete? With the explosion of venture capital, how can we keep our best talent inside the organization? Is there a way to tap the energy of the entrepreneur to fuel the growth of an established business?

The answers, says Gifford Pinchot III, lie in "intrapreneurship," a new concept of management that he has spent the past six years developing.

Intrapreneurship -- the word is Pinchot's trademarked shorthand for "intracorporate entrepreneurship" -- offers a radically different vision of how to encourage freedom and creativity in a comany. Already it has been hailed as "liberating" by The Christian Science Monitor and as "one of the great social inventions" by The Economist. And this month, when Harper & Row publishes Intrapreneuring: Why You Don't Have To Leave the Corporation to Become an Entrepreneur, Pinchot's concept may well enter the business mainstream, joining cexcellence" and "corporate culture" in the lexicon of the modern manager.

Like those terms, intrapreneurship is more a description than a discovery. Pinchot argues that innovation in corporate America has always come from intrapreneurs: people who fulfill the role of the entrepreneur inside a larger corporation. "But," he says, "that's generally despite the system." His book looks at cases in which the system has let intrapreneurship survive, and it sets down some basic rules and strategies for executives who want to nurture the intrapreneurial genius.

"I approached the problem from the point of view of the entrepreneur," Pinchot explains. "I said, OK, let's assume that the corporation is flexible. What would have to happen in order for it to work for the entrepreneur? The only constraint I put on the system was that it had to make sense for the corporation financially."

For a model, Pinchot turned to venture capitalists. Venture capitalists understand that the innovator is "a dreamer who does" -- a special kind of human being, with special needs for freedom and power. Most established companies find it hard to understand these needs and even harder to meet them. Venture capitalists do both: The capital they provide offers freedom and discipline, power and responsibility. Intrapreneurship, as Pinchot conceives of it, is a way for corporations to offer the same combination of opportunities and rewards.

Pinchot began developing the idea of intrapreneurship back in 1978. The owner of a small ironworking business in upstate New York, he enrolled in the School for Entrepreneurs, in Tarrytown, N.Y., not far from his home. There he heard Bob Schwartz, the school's founder and primary teacher, sketch out the opportunities of the future. One of the best, said Schwartz, would be to teach large businesses to harness the drive, determination, and imagination of the entrepreneurial revolution.

Seldom have seeds born fruit more quickly. Three weeks later, Pinchot sent a long letter to Schwartz outlining the basics of his concept, along with a plan for turning it into a cash-generating operation. "It seemed like an interesting challenge to hustle on during evenings when there was not much happening," Pinchot says wryly. "So I went to work."

In effect, Pinchot had come to the realization that he was an entrepreneur himself. The grandson and namesake of one of America's foremost conservationists and the son of a Yale University professor of biochemistry, he had always been restless. As a Harvard University undergraduate, he tried first physics then economics; as a graduate student at Johns Hopkins University, he shifted from sociology to behavioral physiology. After leaving school, he tried dairy farming before starting his ironworks. In 1978, when Schwartz described the personality of the entrepreneur -- the high achievement drive, the balance between intuition and reason, the general disregard for money -- Pinchot finally understood his own character.

Like most entrepreneurs, Pinchot didn't find it easy to get his fledgling venture off the ground. "Bob Schwartz had kind of tested it with some of his clients," Pinchot recalls, "and they said, 'Gosh, you've got to be bats.' We concluded that the world simply wasn't ready for intrapreneurship in 1978." So Pinchot went to Sweden, studied, and developed his concept. In 1982 he brought the idea back home.

Now, after three years, Pinchot has started two separate consulting firms, both thriving: The New Directions Group, founded in 1982, specializes in inventions for sale; and Pinchot & Co., founded in 1984, was created to push intrapreneurship. As a director of New Directions, Pinchot has more than 200 inventions to his credit. As president of Pinchot & Co., the 42-year-old ex-black-smith has consulted for such Fortune 500 clients as Tektronix, Exxon, Xerox, and American Telephone & Telegraph, has run intrapreneurship seminars across the country, and has started The School for Intrapreneurs at Tarrytown to teach would-be corporate innovators how to survive. He also teaches at his most recent alma mater, Schwartz's School for Entrepreneurs, where he is celebrated as its most famous alumnus.

While Pinchot can sound like a prophet when he talks about intrapreneurship, in person he is down to earth, a smiling Socrates in a wrinkled tan suit. Many of his examples come from his own six-year experience with the ironworks -- "my MBA," he calls it. And, kudos notwithstanding, he remains self-deprecating about his new role as consultant/author/guru: "I'd tried the agriculture age as a farmer and the iron age as a black-smith," he laughs. "So I thought it was time to enter the information age." INC. senior editor Curtis Hartman talked with Pinchot last fall.

INC.: Why is it that established American companies, once the world's most successful innovators, no longer seem able to keep up?

PINCHOT: American companies can and do innovate, even big American companies. But the pace of innovation is no longer fast enough, because the need has increased so much. The rest of the world is getting smarter; they're able to copy us faster than they used to. We're on an innovation treadmill that requires us to do new things faster and faster in order to stay ahead.

INC.: But why can't the American corporation keep pace?

PINCHOT: Partly it's because so-called scientific management gets in the way. Do you know the old game of paper, stone, and scissors?

INC.: Sure. But not as a business tool.

PINCHOT: In the old days there was stone -- the common sense of how to go about business, practical wisdom developed over centuries. Then along came the paper, all those abstract analytic techniques for centralizing decision making. One of the reasons we're not innovating as well as we used to is that we've become much better at analyzing. The paper made it possible for all decisions to be made upstairs, but it also covered the rock of common sense of ordinary people inside the corporation and killed off the idea of intrapreneurship. These analytic tools are very helpful in figuring out how to do the same things a little bit better, but they are not anywhere near as helpful in deciding what to do about something fundamentally new.

INC.: And an intrapreneur is the scissors to cut through the paper?

PINCHOT: Right. An intrapreneur sees a problem whole -- marketing, technology, finance, personnel, all aspects. This is crucial, because companies are divided up into such large functional slices that no one has control of all the pieces of what is necessary to do something new. Every change has to be negotiated across the divisional entities, and as a consequence you can have innovation about pieces of things, but not innovation about wholly new things.

INC.: But isn't there an unavoidable logic to this pattern? As a rational manager, how can I go wrong if I use my creative minds for research, my tinkerers to put together the prototype, my engineers to build the product, and my marketing mavens to bring it to the public?

PINCHOT: That pattern makes perfect sense. The only trouble is, it doesn't seem to work very well. When you study successful innovation, you find at the root of it passionate champions and small teams taking on the entrepreneurial function inside the organization and carrying things on beyond their assigned responsibilities.

INC.: Why can't the chief executive officer override those divisional barriers? Can't he say, "If someone has a great idea he or she can come to me and I'll take care of the problems"?

PINCHOT: That's fine. But how many mavericks can one CEO deal with at any one time? Almost every company has one or two intrapreneurs. But if your company is on the treadmill, is two enough?

INC.: It certainly worked when IBM wanted to develop its personal computer.

PINCHOT: That's a good example of a company where the chairman created a special environment. Or take Alfred Marzocci, of Owens-Corning Fiberglas. He was instrumental in developing the fiberglass belted tire. He had a direct line to the chairman, despite the fact that there were a large number of people between them. So of course Al could get things done. But how many people can the chairman spend his day with?The real issue here is how we can give intrapreneurs a little more freedom than we are giving them, not how we can take three guys and give them carte blanche. Most singling-out efforts are relatively short-lived, because once everybody finds out about them, the old soldiers will find a way to bring it all down.

INC.: Old soldiers, divisional barriers -- you speak in terms of large, established corporations.Does intrapreneurship have any relevance for the small business executive or the entrepreneur?

PINCHOT: The difficulty for the entrepreneur is letting go -- so that there can be intrapreneurs. The very things that make people good entrepreneurs make it difficult for them to let other entrepreneurs exist in their space. An entrepreneur tends to be a perfectionist. Others never meet his standards, so he is always tempted to undo their work and do it over. An entrepreneur succeeds in the beginning because he has the ability to make an incredible number of decisions with a relatively small amount of information. But that style runs out at about 100 employees. Then you need a different style; you need not only to delegate people to do things, but to empower them to go beyond what they've been delegated.

INC.: Which, given your definition of an entrepreneur, may well be better left to classically trained managers?

PINCHOT: It doesn't hurt to have somebody who knows the ropes, but it will ruin the company if that person doesn't understand the vision of the original entrepreneur. So it's a delicate situation. The entrepreneurs who are able to succeed become fascinated by how to empower their people to do as well as they did. They get to the point where they are more pleased when somebody else does something brilliant than when they do something brilliant themselves.

INC.: Why the interest in intra- and entrepreneurship now? Why wasn't American business responsive to your concept back in 1978?

PINCHOT: Part of it may be that I wasn't ready for America; maybe I wasn't as good at talking about it as I am now. But also, we hadn't yet fully realized how serious the Japanese challenge was. Then people began waking up to the fact that they were hurting at the bottom line. And then they thought that maybe some of these analytic techniques were driving people into short-run thinking, driving them into buying and selling whole businesses rather than making those businesses innovative. The second thing, I think, is the incredible explosion of venture capital since 1977. Last year, there was more than 100 times the amount of venture capital as there was in 1977.

INC.: Which means that frustrated intrapreneurs can more easily become entrepreneurs.

PINCHOT: And that executives say, "The market has spoken." What the market has said is that business imagination is more valuable than most companies thought it was. The person to whom the executives were willing to pay $50,000 a year, venture capitalists will give $10 million like that. So maybe the executives began to think, Maybe it would have been OK to pay him $60,000 or even $70,000 to keep him.

Look at the birth of Apple Computer from the point of view of Steven Jobs's and Stephen Wozniak's former employers. Don't we really regret the fact that we told Steve, "No, we don't want to do the personal computer," so he just had to go out and do it on his own? Wouldn't it have been a little better if we had just let him do it here at Hewlett-Packard or here at Atari, depending upon which Steve you're talking about?

INC.: Aren't you just talking about high-technology business? There may be plenty of examples of potential intrapreneurs getting frustrated and leaving large companies to start their own electronics businesses, but it's hard to imagine this happening with, say, breakfast cereal.

PINCHOT: If you look at how breakfast cereal companies are organized, they are intrapreneurial with their brand managers. You have a number of competing cereal brands, and they go at it, and may the winner take all. So each of those guys is like an entrepreneur running a business.

INC.: With all this venture capital available, why would anyone ever choose to be an intrapreneur rather than set out on his own?

PINCHOT: There are circumstances that make it good to stay and circumstances that make it good to leave; it depends on how open the environment is to intrapreneurs and what rewards are available. Perhaps you have an idea that for one reason or another is easier to do inside, given the structure of your company, than outside. Perhaps the idea depends upon some proprietary technology. Perhaps you have ethical concerns about ripping off the technology. But even if you don't, the ongoing research capabilities of that company to support your business may be very important. Or the company name may be very important. Could the IBM Personal Computer have taken the market share it did without the name IBM on it? Also, you have all kinds of proprietary secret information inside a large company, accumulated over the years by all the decisions and pieces of that company. And if you can bring it all to bear on starting a new business, you can get better information than you can get as an entrepreneur shopping around for information.

INC.: Let's flip the coin for a moment and look at it from the point of view of a CEO, who presumably has the clearest sense of the strategic direction in which the company is going. What, in concrete terms, can he do to foster innovation?

PINCHOT: Really new ideas don't necessarily occur through a rational process of figuring out where the company is going. New ideas don't seem like good ideas at first, they just seem different. But the people who have them often know whether they're good ideas or not, and when we look back on case histories of successful innovation, we see that people at the top of the organization often fought them for a considerable period of time. The innovation was done secretly and carried on despite actual orders to stop.

INC.: Such as?

PINCHOT: A classic exemple would be the invention of masking tape at 3M. Richard Drew, who was working on the project, was told by the chairman to stop, that it wasn't a good idea. But Dick kept on working on it on his own, convinced that it would work -- and went on to invent not only masking tape but Scotch tape and a number of other 3M products.

INC.: That's fine if I have Dick Drew in my company, but I can't run my business if I let every wacko out there who thinks he has an idea follow his own whimsy.

PINCHOT: Dick Drew was a banjo player who was hired into the company, and he was a wacko.

INC.: Fine, but that doesn't mean that everybody who has a new idea has a good idea.

PINCHOT: Absolutely. So you have to have a system in which there are controls. But to go back to your CEO: The CEO who has an idea is not without resources to get it pursued. He can post it any say he's looking for volunteers. Preferably, he would give the idea to somebody a few steps down in the organization and have him or her post it, because if the CEO posts it everybody will try out, just to look good in his eyes. The important thing is to state the idea in general terms so lots of people will volunteer, but with very different ideas.

INC.: Why do I have to post my idea and wait for volunteers? Why can't I just go to someone I trust inside the organization and ask that person to take a shot?

PINCHOT: Because self-selection is the first basic concept of intrapreneurship. You are asking people to become dedicated in the long term to doing something. In fact, you are asking them to bet a good portion of their careers on it. You can't tell people to do that -- if you do, they begin putting excuses in place for why, if they fail, it wasn't really their idea to begin with. But if you have people who are self-selected, they have no choice but to make the thing succeed.

INC.: Of course the obvious question is, How do I go about managing these self-selected, long-term intrapreneurs? Perhaps the most surprising suggestion you've made is that they be managed the way venture capitalists manage entrepreneurs, right down to offering them the chance to accumulate a substantial amount of corporate money -- intracapital, you call it -- to spend as they choose. What is it that venture capitalists do right?

PINCHOT: Venture capitalists tend to be very careful in selecting the people who are to be involved in a business. But having been very rigorous in the selection process, they are then in a position in which it makes a certain amount of sense to trust the entrepreneur to make the kind of lightning maneuvering decisions required in a start-up. So the venture capitalist asks the entrepreneur how much time and money he needs. The entrepreneur says he needs, for example, $1 million and two years. Almost invariably, the venture capitalist tells him he's crazy; he will need at least $2 million and four years. But he also tells him, "That's it. If you run over that limit, you are in real trouble and somebody else is going to be running this business." He has given a little bit more slack to the traditionally over-optimistic entrepreneur. But once the entrepreneur has the money, he has a great deal of freedom to spend it however he thinks is best.

INC.: As opposed to how a typical corporation handles the would-be intrapreneur?

PINCHOT: Corporations do just the reverse. You ask for two years and they give you a year and a half. "Couldn't you do it faster?" they ask. "Couldn't you do it with less money?" But if the intrapreneur is doing his job right, he has already pared his estimates to the bone. And companies tend to have people signing off on each request for a capital expenditure, with each one treated as a separate item. But that extra scrutiny doesn't produce a better investment; quite the reverse. It causes the would-be intrapreneur to pad his budgets and to spend it all right now. After all, if you can't take money out of an engineering budget and put it in marketing, then the intrapreneur has only one solution: Overinflate the hell out of every budget, and then, by God, spend it that year because you may need the slack next year.

INC.: If I were a CEO, I would find this whole concept threatening. What you are telling me is that I have to give up control of my dollars.

PINCHOT: You've already given up control of your dollars: "You're putting them into a system that is busy wasting them on unsuccessful innovation. What we're proposing is taking those dollars and putting them in a system that will be more responsive to corporate strategy and more productive. If you put money in the hands of proven innovators, the chances of getting a successful innovation are much higher than if you put the money in the hands of proven managers. You get a bigger bang for your buck if you constrain people and say, "Okay, that's the total amount of money you are getting." Then they stop playing games and start getting the job done for that amount of money.

INC.: Let's talk about intracapital -- discretionary resources awarded to the successful intrapreneur. Isn't that where your venture capitalist model breaks down? After all, a venture capitalist gives a successful entrepreneur serious cash.

PINCHOT: Entrepreneurs are not abnormally hungry for great wealth except insofar as it gives them a kind of freedom to do whatever they want to do. They earn that freedom because that's what capital means in our society: the right to invest some of society's resources. Intracapital is just money that buys the freedom to try new ideas.

INC.: Let's try to trace how the system might work. Does the would-be intrapreneur have to put anything at risk?

PINCHOT: He has an initial financial risk inherently, because in the real world failing at doing something new costs someone in terms of his future salary and his career. I think in many cases it's a good idea to make that explicit by asking the intrapreneur to take a small cut in salary or something of that kind -- earnest money. But you can't ask someone to sacrifice salary without some way to make it back many times over should the idea succeed.

INC.: Many times over -- let us say that I give this intrapreneur $15,000 and he turns it into a business that within three years is netting the corporation hundreds of thousands of dollars, which is not out the question.

PINCHOT: Let's say millions of dollars.

INC.: All right, millions of dollars. So what happens to that money?

PINCHOT: That should depend on the level of risk the person took, but I would suggest that if you decide that a person is entitled to a total of $400,000 in reward, maybe $300,000 of it would be in the form of intracapital to start something new for the corporation again, and $100,000 might be in the form of a bonus. The intrapreneur, for his part, might have given up $20,000 in salary over three years. The $100,000 reward is not an unreasonable return on that investment. In fact, it might not be enough.

INC.: With that kind of freedom, you assume that the movement of innovators out into the world of entrepreneurial start-ups will diminish?

PINCHOT: People leave not because the opportunities are better outside, but because something is going very wrong inside. They have been blocked in doing something. There is a threshold of pain necessary to get people to leave a company where they have lots of friends and lots of access to technology. And it's a tremendous amount of work to raise venture capital. Generally, people have to be annoyed before they leave. But intracapital is stored-up freedom inside the corporation. So the venture capitalist must at least match that amount as his opening offer.

INC.: Are there any companies currently using intracapital?

PINCHOT: Not under that name. But there are a great many companies that provide widespread discretionary resources to employees with proven records as innovators. Many companies give people 15% of their time to explore their own new ideas. Stephanie Kwoleck was able to develop Kevlar at Du Pont with discretionary funds. At Ore-Ida Foods, they've developed the Ore-Ida Fellows Program, in which each of five individuals are given $50,000 per year for two years to invest in product development, cost reduction, or new processes. That program has produced such successful new products as frozen potato skins.

INC.: Let me put this as tactfully as I can. You say that intracapital has never been used by that name, but there are companies that provide discretionary resources in the same way. You've trademarked "intrapreneurship," but you say that there have always been intracorporate entrepreneurs producing America's innovations. Aren't you just packaging what's already going on; aren't you just giving us a couple of names on which to hang reality?

PINCHOT: Well, first of all, giving you a couple of names to hang reality on may be a useful service to society. If we can learn new ways to explain more succinctly how innovation really works, then people will be able to do it better because they have a way of describing it. I think it's very useful to use the analogy of entrepreneurs inside large organizations because people have some kind of intuitive sense of how to manage entrepreneurs. And I think that when we see the development of intracapital systems, they will move beyond what you and I are talking about to developing much more flexible ways of interacting among people in the company. It will fundamentally redefine the relationship between employees and the company they work for.

INC.: Redefine it in what ways?

PINCHOT: I don't believe that we will have the kind of long-term thinking that domestic companies so desperately need in their competition with companies overseas until the ability to make long-term decisions is pushed further down into the organization. The notion that you can have a few long-term thinkers at the top of the organization, with everyone else a short-term thinker, is a fundamentally flawed idea. The only way you're going to get people to buy into the vision of building things the way they ought to be built is to let them feel that it is their responsibility to think in the long term.

We're all trying to decentralize, to find the equivalent of the federalization that took place in government.But we've missed a very simple point: There is no real economic freedom without the right to store past successes, without something akin to capital. Capitalism, far from being the most exploitative concept that society has ever come up with, is one of the most liberating. In the larger society, we have a lot of people who are pretty free within the system. Now we have to repeat that whole structure within corporations.