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Why ‘New Beats Old’ Is Just A Fallacy

Large organisations can be as entrepreneurial as Silicon Valley darlings, says LBS expert Gary Hamel

Every organisation should feel like a little start-up in Silicon Valley, said Gary Hamel, Visiting Professor of Strategy and Entrepreneurship at London Business School (LBS).

Our economy’s productivity
depends on a quest for an entrepreneurial edge, he told an audience at an Institute of Innovation and Entrepreneurship event.

“I don’t believe that entrepreneurship and scale, discipline and creativity or control and freedom are incompatible.”

Too many people expect the old guard – large, traditional firms – to lose out to innovative upstarts, claimed Professor Hamel. But it does not always have to be the case that “new company beats old company”.

“Start-ups get the best from people. They tend to be bold and break new ground. Teams are small and roles are loosely defined.” Resource scarcity forces small firms to do more with less. Their flatter structures also mean that “people are known for their contribution” and not their title.

Professor Hamel questioned why larger organisations with “deep pockets, thousands of talented people and powerful brands” could not be more entrepreneurial.

“We need to stop worshipping unicorns [start-ups valued at more than a billion US dollars],” he said. Even start-ups are bound by bureaucracy as they scale. “I know of a software company that’s long been a darling Silicon Valley, but by the time it reached US$4 billion (£3.3 billion) in revenue it had 600 vice presidents. So we can celebrate start-ups, but for how long do they retain their youthful vigour?”

Jeff Bezos famously pledged to make Amazon “the world’s biggest laboratory” by infusing a big company with a Silicon-Valley ethos and Zhang Ruimin, chair and CEO of Haier, is doing the same. According to Professor Hamel, the China-based appliance maker is leading the charge in creating an entrepreneurial platform where everyone feels like they are working for a start-up.

Professor Hamel said he was struck by Ruimin’s beliefs when they first met. “At the time, Zhang said: ‘We encourage employees to become entrepreneurs because people are not a means to an end but an end to themselves. Our goal is to let everyone become their own CEO.’”

Today, Haier has divided itself into more than 4,000 microenterprises: small, autonomous businesses that select their own leaders. Professor Hamel shared seven elements that make Haier flourish:

1. Microenterprises (MEs) – each self-managing unit is small, with around 12 people. Teams have autonomy to set strategy and manage compensation. MEs come in two varieties – user MEs and node MEs. User MEs focus directly on customers, while node MEs provide services and products to the user MEs.

2. Leading targets – every ME is expected to grow at least three times as fast as their industry. No-one is content with average performance and targets contain both growth and transformational goals.

3. Market discipline – MEs contract with each other, and every contract has a compensation clause that ties pay to success in the marketplace. “Every employee at Haier is paid by the customer.”

4. Shared platforms – there are dedicated teams that help the MEs identify win-win opportunities for sharing resources.

5. Open innovation – the firm’s product innovation takes place transparently on its open-platform ecosystem. “Employees are expected to co-develop every single product or service.”

6. Venturing – Haier has partnered with a group of external venture capitalists who help fund new ventures.

7. Upside – if people do well they make more money. If an ME underperforms, however, the team can fire its leader.

“At Haier, you see an organisation that is building its entire philosophy on web-centric principles,” said Professor Hamel. “It’s a company that asked, ‘How do we build entrepreneurship into the fabric of our organisation?’ And, with these principles, it has succeeded.”

Source: London Business School

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