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The Entrepreneurial Imperative

Deep downturns create huge opportunities—but how do businesses access them?

At a time when entire economies and industries continue to grapple with the aftermath of the financial crisis, there’s a tendency to hunker down, cut costs and play it safe. Yet the need to innovate and find new sources of long-term growth is more crucial than ever.

History has shown that deep downturns can offer fertile ground for entrepreneurial thinking. Hewlett-Packard and Polaroid were just two of the many companies founded in the Depression era, and the millennium slowdown produced the likes of Starbucks, PetSmart and Intuit. In fact, more than half the companies on the 2009 Fortune 500 list, and just under half those on the 2008 Inc. list, were founded during a recession or bear market, according to a study by the Ewing Marion Kauffman Foundation.

Over time, upstarts tend to displace mature, established companies who fail to innovate effectively. Research by Ernst & Young shows that major global market indices have already undergone dramatic changes in the past five years, with the Global Forbes 2000 experiencing a 51 percent turnover and turnover of Britain’s FTSE 350 at 50 percent. “Markets are turning over,” Herb Engert, partner and East Central strategic growth markets leader at Ernst & Young LLP, told CEOs gathered for a recent discussion on the entrepreneurial imperative faced by today’s businesses. “The market leaders of today won’t be the market leaders of tomorrow, unless they continue to innovate.”

CEO participants in the roundtable, held by Chief Executive in partnership with Ernst & Young, acknowledged that thrown gauntlet, but noted that gaining an entrepreneurial edge is easier to pursue than to achieve. “Innovation and entrepreneurship is probably one of the most important things we can do in a business—and the most challenging,” said Robert Nardelli, CEO of Cerebus Capital, former Chrysler and Home Depot CEO and a veteran GE executive. “In a lot of businesses, the perception is that entrepreneurs are something out there, and not in here, mystical individuals who have cornered the market on creative thinking.”

Size Does Matter

That perception becomes more prevalent the larger a company gets, said several CEOs. “In a mature business, I really don’t know how you have controls and balances and avoiding risk as objectives—which they must be— while still maintaining creative energy and innovative risk-taking,” says Monty Sharma, CEO of Atkins Nutritionals. “My experience has been that big companies don’t do that well.”

In fact, the very processes that enable large companies to run smoothly often stifle innovative thinking. When Robert Darbee, CEO of Omni Capital, sought to round out the team at his growing firm with talent from large institutions like Chase and Merrill Lynch, he quickly discovered a troubling cultural divide. “They didn’t even know how to make a hotel reservation because that sort of stuff had always been done for them,” he said. “They couldn’t operate in an unstructured environment. And they had no initiative.”

Leonard Tannenbaum, CEO of Fifth Street Finance, reported similar experience in recruiting for the company he founded, which now has a market cap of more than $500 million. “The entrepreneurial spirit is easy when you’re just one person, or 10 people,” he said. “Now as we institutionalize and hire guys with 20 years’ experience who check all the right boxes, it’s a matter of how do you keep that excitement?”

Killing the Fields

Howard Brodsky, founder and CEO of CCA Global Partners, sees the challenge as one of balance. “Too much process, and you’re going to kill innovation,” he noted. “Too much innovation without process, and you’re out of control. It can easily tip one way or the other and it’s a fine balance not to kill either one.”

So how can mature companies embrace entrepreneurial thinking? At Home Depot, Nardelli sought to overcome big company innovation inertia by appointing an elite cadre of opportunistic executives. The company would identify bolt-on opportunities in a given market and charge the young executives with finding potential acquisitions, buying or developing them and then running the subsequent business division. “The ability to leapfrog—to run a business far sooner than your tenure would have allowed—is a huge incentive,” he said.

Empowerment is also a cornerstone of promoting entrepreneurial thinking at Pelican Products. “It’s about allowing people their rope, and probably about not hanging them sometimes when it doesn’t succeed,” says Lyndon Faulkner, CEO of PELI Products. “People have to have the confidence that they can be out there on the edge and won’t get reprimanded if something isn’t 100 percent right.”

At the same time, established companies have to manage risk even as they encourage risk-taking, notes Tannenbaum. “We had to set up a system of new thought called constructive failure, where we let people keep taking leaps but have a safety net,” he said. “They fail—we have failures every week. And maybe the shareholders lost a little bit on the failures but they get so much more in letting the talent run with things. And as long as you have the safety net below and you know what the worst case is you’re okay.”

Nicolas T. Pinchuk, CEO of Snap-on, looks to ease into innovations by giving people on the front lines at his tool-making company the flexibility to try things and prove their merit at a micro level before the company backs them. “You drive down decision making as far as possible,” he explained, “then scan operations all the time for off-center things that actually seem to be working pretty well for people and say, ‘Hey, let’s put some money behind that.’ “

Ultimately, CEOs agreed, nurturing and maintaining a spirit of innovation falls to the CEO. “Companies get stuck in ruts,” says Fred Tomczyk, CEO of TD Ameritrade. “But the definition of insanity is doing the same thing and expecting a different result. You have to get to that environment where you’re open to change and new ideas and you back them—and that has to start with the CEO.”

“Innovation really reflects the CEO more than anything else,” agreed Brodsky. “Whether you’re willing to take risks and reward failure becomes clear very quickly and that trickles down to everybody else in the company,” he noted. “I always tell our people that the greatest risk it not to risk.”


ROUNDTABLE PARTICIPANTS
SARDAR BIGLARI is chairman of Biglari Holdings.

HOWARD BRODSKY is CEO of CCA Global.

WAYNE COOPER is chairman and president of Chief Executive Group.

ROBERT DARBEE is managing director and CEO of Omni Capital.

J.P. DONLON is editor-in-chief of Chief Executive Magazine.BOB DONNELLY is CEO ofVAAS Americas.

HERB ENGERT is a partner at Ernst & Young LLP.

LYNDON FAULKNER is president and CEO of Pelican Products.

LAURENCE JONES is CEO and president of StarTek.

DREW MORRIS is founder and CEO of Great Numbers!

ROBERT NARDELLI is CEO of Cerebus Capital.

NICHOLAS T. PINCHUK is CEO of Snap-on.

MONTY SHARMA is CEO of Atkins Nutritionals.

JEFFREY SONNENFELD is CEO and president of Yale School of Management.

LEONARD TANNENBAUM is CEO of Fifth Street Finance.

FRED TOMCZYK is president and CEO of TDAmeritrade.

About Jennifer Pellet

As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.