One possible corporate innovation pathway is intrapreneurship, entrepreneurial activity that is carried out within a firm. As an innovation catalyst, intrapreneurship has many potential advantages, including accelerating firm innovation cycles, reducing entrepreneurial risk and building a firm culture that can generate many positive organizational changes. This article analyzes the potential of intrapreneurship to create shareholder value, considers intrapreneurial risk and discusses how those risks can be mitigated.
Models of Intrapreneurship
There are many ways that firms can identify, test and put into practice new ideas. These approaches include carrying out research and development activities, working with third parties on new projects, buying new technology or even acquiring or merging with firms that have new products, services or processes that can help a firm become stronger and more competitive.
One way firms can institutionalize innovation is through intrapreneurship, a broad concept which refers to entrepreneurial activity that is carried out within rather than outside a firm. Rather than constituting a formally designated firm department, such as a business development or research department, an intrapreneur is a company employee who, with the company’s support, has the freedom to design, launch and try to sustain a new project or business activity within the larger firm organizational and operational ecosystem.
An intrapreneur is a company employee who designs, launches and tries to sustain a new project business activity within the larger firm organizational and operational ecosystem.
Intrapreneurship programs can take different forms defined by their degree of formality, intrapreneurial scope, budgets and levels of management and employee engagement. At one end of the spectrum are companies that have defined intrapreneurship programs that allow employees to propose new ideas and then provide them with budgets and other firm resources so that they can try to turn those ideas into profitable firm activities or businesses. At the other end of the spectrum, some companies may not have formal intrapreneurship programs but give employees significant amounts of leeway to propose new ideas and projects while executing their particular corporate roles.
The MIT Management Sloan School points out that intrapreneurship programs can include idea fairs, hackathons, sandbox funds and innovation time. https://mitsloan.mit.edu/ideas-made-to-matter/intrapreneurship-explained
Advantages of Intrapreneurship
As a model of innovation, intrapreneurship has several potential advantages.
Creating innovation breakthroughs. Most importantly, intrapreneurship can lead to innovation breakthroughs and these breakthroughs can lead to dramatic improvements in company performance. Given that markets constantly change and are impacted by many internal and external disruptive forces, all firms must innovate or defend themselves from the innovation of competitors. Intrapreneurship is a powerful complement to more traditional innovation pathways.
Extending Innovation Runways. Many ideas with great commercial potential never make it to market because entrepreneurs often run out of resources before they can put their ideas into practice, scale them up and make them profitable. Given that many firms have resources that starting entrepreneurs often do not, such as physical infrastructure, human resources and capital, intrapreneurship programs can effectively significantly extend innovation runways or the time entrepreneurial projects have to get off the ground. This additional time can significantly improve innovation success probabilities.
Accelerating Innovation Cycles. Intrapreneurship can accelerate corporate innovation cycles, meaning the time it takes to convert a business challenge or opportunity into an idea and an idea into a working solution. One reason for this is that firm employees are often unavoidably immersed in operational obstacles and bottlenecks and proximity with firm realities can allow intrapreneurs to design new projects that are more in line with firm needs. Innovation models that heavily rely on external firm resources that are far removed from firm realities can result in mismatches between what is really needed and what is provided which at best can result in innovation resource burn and at worst leading the firm in the wrong direction.
The innovation cycle is the time it takes to convert a business challenge or opportunity into a new idea and a new idea into a working solution.
Offsetting and Creating Risks. Intrapreneurship programs can positively impact innovation risk levels. For entrepreneurs who often must operate with very few resources, the support of firm resources can increase the chances that the innovation process will be successful. These resources, moreover, extend beyond areas of traditional entrepreneurial resource shortfall such as capital. Many firms by their very nature are storehouses of business knowledge and experience and this knowledge and experience can help intrapreneurs sidestep technical, operational and market risks and very significantly improve innovation outcomes.
On the other hand, intrapreneurship can push firms to take on additional risk, which of course is one of the most important components of innovation. While many firms may avoid taking on significant additional degrees of enterprise risk because of uncertainty about the impact of the risk on their businesses, intrapreneurship programs can allow them to generally maintain their enterprise level of risk while simultaneously assuming higher degrees of risk in specific areas. This can allow firms to innovate but at the same limit the downside of innovation process uncertainty.
Creating an Innovation Culture. Intrapreneurship programs that create environments that encourage employees to take on risks and go through the entrepreneurial process have many positive benefits even if particular intrapreneurial projects turn out not to be successful. The many skills that employees can learn as intrapreneurs, including articulating a business vision, creating a business plan, creating a roadmap for trying to implement the plan, working in between and across firm operational boundaries and confronting different types of obstacles along the way will more often than not allow employees to have a deeper understanding of the possibilities and limits of corporate change, to be more effective in their jobs and have higher overall levels of job satisfaction.
Intrapreneurship and Shareholder Value
Shareholder value is created when the benefits of any corporate change outweigh the costs of creating those benefits. Viewed from this perspective, there are several ways that intrapreneurship can lead to the creation of shareholder value.
Value Creation. Intrapreneurship can lead to the creation of many types of value, including increased revenues, better operational performance, more productive employees, more efficient revenue and cost cycles or improved competitive position. If the benefits of these changes are greater than their costs, shareholder value is created.
Risk Reduction. Intrapreneurship can also create shareholder value by through lowering firm risk. Let us assume that, due to market changes, a firm product that generates revenues in the amount of US $100,000 a year will soon become obsolete. Through an intrapreneurship program, a firm may develop a new product which produces also produces US $100,000 a year in revenues. While the net impact of the innovation on firm revenues is 0 (the firm lost US $100,000 in revenues from one business line and gained US $100,000 from another) from the perspective of shareholder value it prevented firm value from being lost.
Innovation can allow firms to offset the negative impact of product and service obsolescence.
Firm Resilience. As discussed in a previous article, firm resilience can be thought of as a combination of its perseverance as well as its agility (R = P x A). Measuring Adaptability: Valuation and Corporate Resilience As intrapreneurship can allow firm employees to both identify firm weak points as well as propose solutions to those weak points, it can increase the firm’s problem identification and solving field of vision. Moreover, having a laboratory for corporate change can allow firms to see and improve solution implementation sticking points. This increased agility builds firm resilience which in turn creates shareholder value.
Capital Costs. Intrapreneurship programs have the potential ability to improve capital costs for several reasons. To begin with, the creation of shareholder value should increase demand for a company’s equity which should lower firm risk. Intrapreneurship can also lower firm risk which also improves capital costs.
Further, an investment in firm innovation potential effectively represents an option on potential value growth or risk management benefits (because of the relationship between the cost of the potential innovation initiative vs. the potential gains and the ability to abandon, stall or proceed with an intrapreneurial project) and the existence of this option should have a positive impact on a company’s cost of capital.
Intrapreneurship can be thought of as an option on innovation-driven value creation or risk management benefits.
Intrapreneurship Risks and Mitigation Strategies
Intrapreneurship presents firm risks as well as potential benefits. Intrapreneurship programs represent the use of scarce firm resources and if the cost of using that resource is less than its benefits the firm is losing shareholder value. If a firm knows with a high degree of certainty that a particular use of firm capital will lead to a certain benefit but is uncertain as to whether an intrapreneurial program will lead to any benefit at all, it could come to the not unreasonable economic conclusion that the higher probability use of its capital is the wiser choice.
360-Degree Buy-In. Yet as with any firm initiative there are ways to bring intrapreneurial program risk levels down. To begin with, to be successful any intrapreneurial program needs strong support and commitment from the firm as well as participating employees. Accordingly, firms should make sure that committed resources will actually be provided and work with employees who are motivated to do the hard work necessary to bring projects to life.
Project Selection. A second key risk mitigation strategy is to try to encourage intrapreneurial projects that: (i) have a good chance of creating shareholder value; (ii) are appropriate given the firm’s situation and business trajectory; and (iii) mesh well with firm organizational dynamics. Intrapreneurial projects that are designed and carried out within the Venn Diagram of these variables have much higher chances of success than those that are not.
Project Skill Audits and Support. A third risk mitigation strategy is to make sure that the employees have the necessary skills to design and carry out proposed innovation initiatives. Some innovation projects may require specific skills that an employee may not have or may not be able to deploy in the most cost-efficient manner. Rather than excluding these employees from a particular intrapreneurial project, an alternative approach could be to allow employees to use if necessary external resources to ensure project success.
Conclusion
Intrapreneurship is very powerful potential component of firm innovation strategy. Like any strategy, it has the possibility to create shareholder value in many ways, including increasing revenues, creating operational efficiencies and reducing risk. To maximize potential shareholder value creation, firms should be aware of potential challenges associated with intrapreneurship programs and take steps to mitigate them. This can generate positive benefits for employees, firms, sectors and even economies.
For those that are interested in this topic, I share a TED Talk on intrapreneurship. https://www.youtube.com/watch?v=raW5UG_N4TY