The Guest Blog

Cohan: Corporations Need to Think Like a Start-Up

Peter S. Cohan |Author and Professor, Babson College

Entrepreneurs seem to win against the odds.

Whether the story is about Bill Gates, Richard Bransonor any other legendary entrepreneur, that story usually ends with the word “success.”

But how do the best entrepreneurs manage to succeed so often and so convincingly?

Here are examples of how the entrepreneurial mind employs the following four principles of strategic decision-making:

Exploiting confirmation bias. If you’ve ever down-played information that you don’t want to hear, you’ve experienced confirmation bias. When he was a business pipsqueak in the early 1980s, Bill Gates exploited IBM’s confirmation bias, cutting a deal that made him the world’s richest man. IBM was getting into the PC business and wanted to license a PC operating system. IBM believed that its marketing excellence would make it the PC leader overnight, and was happy to give Gates the license to sell his operating system to so-called PC clones. Since it assumed no clones would exist once it entered the market, IBM figured it was giving Gates something worthless. Gates thought otherwise, and as Dell and Compaq took over the PC market, he got the better of IBM’s confirmation bias.

Letting a thousand flowers bloom. Google doesn’t know where it’s next big thing will sprout so it lets its people spend 25% of their time working on projects that interest them. The story of Google Earth suggests that unexpected outcomes can generate new revenues. Google co-founder Sergey Brin was testing US satellite-imaging software from Keyhole before acquiring the company in 2004. At a staff meeting, Brin put Keyhole on a projector and began to show people their houses. Brin soon asked, “Why can’t you look at the whole world at once?” By 2006, Google Earth had integrated advertisements – such as searching for pizza while visiting a neighborhood. And by requesting that users who download Google Earth also download a search toolbar, odds have increased that more people will click on an advertiser’s ads, further boosting Google’s top line. As of October 2011, Google Earth had been downloaded a billion times.

Expanding through beachhead acquisitions. Although Cisco Systems is a huge company, its growth during the 1990s came from a David-and-Goliath mindset that if it didn’t grow, it would die. Cisco quickly recognized that acquisitions of small companies with a foothold in an emerging market could generate attractive returns, provided that the target made a product in a new category that corporate customers were eagerly purchasing; and it was to be weak in selling and marketing to large corporations – an activity at which Cisco excelled. This was the case with Cisco’s 1993 acquisition of Crescendo Communications from which one of Cisco’s largest customers, Boeing , intended to purchase switches. Cisco was concerned at the time that Crescendo’s switches could cannibalize Cisco’score technology, the router. But Cisco overcame this concern and acquired Crescendo for $95 million. It was a smart decision: by 1999 switches accounted for $4 billion in Cisco sales.

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Selective stealing. Successful entrepreneurs are shameless in stealing ideas from others if it serves their purpose. A good example is how Sam Walton operationally benchmarked his stores against rivals’ stores and was willing to improve upon them if it suited his purpose. Walton spent a significant amount of his time investigating competitors, and copied their best ideas. For example, Walton knew Sol Price, who created Price Club, and opened Wal-Mart’s version, Sam’s Club, in 1983. Walton’s idea stealing paid off: in fiscal 2011, Sam’s Club accounted for $49 billion in Wal-Mart’s revenues. The Sam Waltons of the world also recognize that they don’t have to invent all their ideas. Instead, they’re happy to realize their vision by expropriating ideas that competitors have proven will work.

The strategic principles enumerated above are not just for entrepreneurs. They are also applicable in existing businesses and even in large corporations. But unless the traditional corporate world starts to maneuver like the entrepreneurs cited here, it will be hard, if not impossible, for today’s large organizations to join the emerging entrepreneurial economy.

Peter Cohan teaches business strategy at Babson College. His management consulting business has conducted over 150 engagements for companies and governments. His venture capital investments have helped three start-ups that were sold for $2 billion. His tenth book, published by Wiley in September 2011, is Export Now.