In a recent session in my CEO-2035 class, a student asked this question. Here’s how I answered it:
CEOs of established firms often hesitate to be entrepreneurial for several reasons:
- Risk Aversion: Established firms typically have significant resources, reputations, and shareholder expectations to consider. Entrepreneurial activities often involve high levels of uncertainty and risk, which could jeopardize the firm’s stability and profitability.
- Focus on Short-Term Performance: Publicly traded companies are often under pressure to deliver consistent, short-term results to satisfy shareholders and analysts. Entrepreneurial ventures can take time to generate returns, potentially affecting quarterly earnings and stock prices.
- Organizational Inertia: Large, established firms often have deeply ingrained processes, cultures, and structures that can be resistant to change. This inertia makes it difficult to pivot or take on new, innovative ventures that require flexibility and adaptability.
- Resource Allocation: Established firms often prioritize the allocation of resources to proven, profitable areas of their business. Investing in new, untested ideas may be seen as diverting resources away from these core areas, potentially diluting focus and performance.
- Complex Decision-Making Processes: In large organizations, decision-making tends to involve multiple layers of management and bureaucracy. This can slow down the ability to act quickly on new opportunities, which is often necessary in entrepreneurial ventures.
- Fear of Cannibalization: For companies with established product lines or services, there may be a fear that new, entrepreneurial products could cannibalize existing offerings, leading to internal competition and reduced profitability.
- Regulatory and Compliance Concerns: Established firms are often heavily regulated, and entrepreneurial ventures may involve navigating complex legal and regulatory environments. The potential for regulatory challenges can deter CEOs from pursuing innovative, but potentially risky, opportunities.
- Leadership Style and Experience: Many CEOs of established firms have built their careers on managing large organizations rather than on entrepreneurship. Their leadership style may be more suited to optimizing existing operations rather than fostering new, disruptive ideas.
These factors contribute to a more cautious approach, making CEOs of established firms less likely to engage in entrepreneurial activities compared to those leading smaller, more agile companies.