Chapter 1

Internal Corporate Venturing

Innovation and Entrepreneurship in Established Firms

Major changes have taken place in American business during the last 20 years. Self-confidence based on a position of great prestige in the world economy, a sense of being the "best and the brightest," has given way to a position characterized by self-doubt and defensiveness. After World War II, and throughout the 1950s and 1960s, European and Japanese managers trooped dutifully to the United States to visit its corporations and business schools, in order to learn the secrets of success of American business. Many American corporations were seen as invincible leaders in technology, marketing, and organization. For some European observers, the "American challenge" represented a crucial event, requiring fundamental changes in the ways of doing business on the part of the Europeans in order to be able to respond. For other observers, the preeminence of American business was simply viewed as threatening the autonomy and economic welfare of Western Europe if not the rest of the world.

During the 1970s, the tables turned dramatically, and during the first half of the 1980s, the theme of "Managing Our Way to Economic Decline" has dominated the headlines in the American business press. American management has been seeking to catch up and learn new skills and new approaches to both new and traditional problems related to managing large, complex business organizations. Among the criticisms that have stung American executives are accusations that their organizations are bureaucratic, inadequately innovative, too slow to adapt, and inflexible. At the same time, critics have argued that the capacity of these organizations to efficiently manufacture high-quality goods has also greatly diminished.

The New Industrial Context

It would, of course, be naive to propose that the relative decline of some parts of American business is solely due to ineptitude on the part of managers of established firms. At least three other major sets of forces should be considered when attempting to diagnose the relative decline.

First, and perhaps most important, major shifts in relative comparative advantage in factors of production may underlay a good deal of the problems encountered by basic American industries. Reich, for instance, has cogently argued that American comparative advantage may lie in more quick-changing, customized product and technology development, rather than in the highly routinized, mature industries where relative labor cost disadvantages can no longer be overcome by capital improvements. The fact that Japan currently experiences similar pressures as a result of Korean and Taiwanese competition in certain areas may underscore this point.

Second, as the research of Abernathy and Utterback has suggested, some of the setbacks of organizations may be the result of the very logic of technological development: The forces driving the exploitation of existing technological opportunities structurally impede the development of new ones. The classic example is, of course, the American automobile industry. Hence, the large aggregations of people and capital represented by the traditional large firms may do well enough, even superbly, when mass production, strict routines, and tightly controlled procedures can be used to attack relatively stable and very large markets. The emphasis of such organizations is, most naturally, on process innovation and improved manufacturing capabilities, not on new-product development.

Third, many observers agree that the technological foundations for many of the high-flying industries of the 1950s and 1960s are now being replaced by new ones -- electronics and biotechnology being the most salient examples -- and that fresh and different approaches are required to develop the new entrepreneurial opportunities offered by these new technologies. Emphasis on new-product development and fast-moving strategic positioning and repositioning is essential here. Not surprisingly, new firms have been more adept at performing the entrepreneurial function than established ones. As a result of the "Silicon Valley" effect, entirely new geographic areas are emerging as loci of industrial development.

American industry shows great vigor in these new areas of technology. New-firm formation has been rather spectacular, stimulated in part by the enormous influx of venture capital that occurred after the capital gains tax changes of 1978. Established firms, however, continue to struggle to find management approaches for returning to real growth derived from internal development rather than from acquisitions.

Some Proposed Solutions

Corresponding to these major shifts in the industrial and organizational environments and the recognition of significant managerial shortcomings, various solutions and approaches have recently been proposed.

Some scholars have focused on the problems of industry maturity and the competitiveness of manufacturers. Abernathy and associates have made a useful study of the concept of "de-maturity," or the possibility of changing industry dynamics to a point where product technology and innovation can again become tools for creating a competitive advantage. Some recent changes in the automobile industry, for instance, seem to provide a basis for believing that such an "industrial renaissance" is possible. Recognizing the difficulties of bringing about massive change in established organizations, General Motors has proposed utilizing a newly created, completely autonomous division to produce its new "Saturn" subcompact. By so doing it hopes to protect the required new technologies and work methods from being diluted by existing management routines and procedures. A major element in "de-maturity" concerns improving competitiveness in the area of operations and manufacturing management. As Hayes and Wheelwright have recently suggested, this will require in many cases the full integration of considerations related to operations and manufacturing at the highest levels of firms' strategic management.

Other scholars have focused on the broader learning and adaptation capacities of established organizations. Lawrence and Dyer, for instance, present an elaborate discussion of organizational renewal, including recommendations for management-union and management-government relations, geared toward making organizations both efficient and innovative. Ouchi has made a strong plea for enlightened teamwork at the interorganizational level, drawing on some lessons from Japanese as well as American firms (e.g., Hewlett-Packard) that have effectively combined hierarchical, market, and clan-type elements in their management process (clan-type arrangements being based on long-term relationships of mutual aid and sharing and the expectation that all will share equitably in any gain -- in contrast to short-term, individualized incentives).

Peters and Waterman have documented some of the approaches used by consistently high-performing U.S. companies. Some of these authors' recommendations center around the importance of encouraging individuals to experiment, the utilization of "skunk works" (i.e., small groups of zealots working "under the table"), and the capacity of the organization to operate while involved in a continuous learning process. Kanter documents the important role played by middle managers who can initiate both laterally and upward to create change in spite of bureaucratic impediments. Kanter describes the individuals who effectively create change within firms as hard-driving persons who possess an astute awareness of organizational politics, while Peters and Waterman urge top management personnel to effect change by "hanging loose." These two views are in sensible opposition to the now-dated picture of a small number of wise top managers controlling, with some precision, the activities of docile and less-able followers, and thus imposing change from above.

The Lure of the "Quick Fix"

The natural reaction of companies faced with a new challenge is to seek one-step, well-packaged solutions or "fixes" that look most attractive (and have received wide publicity) and that can be grafted onto the organization with the least trouble, or so it seems. In earlier days, corporations sought to train their staff to be more creative and to manage their research and development (R&D) efforts better (which usually meant making them more cost-efficient). During the 1960s and early 1970s, the creation of separate new-venture groups seemed to be the answer to the problem of creating truly new businesses in the corporate context. This had become almost faddish, and when a recession struck in the mid-1970s, many such groups were abandoned. Today the "eight lessons" of In Search of Excellence are sometimes naively embraced as the new "quick fix." [Excellent companies presumably distinguish themselves by]

1. Having a bias for action

2. Being close to the customer

3. Fostering autonomy and entrepreneurship

4. Seeking productivity through people

5. Being hands-on, value-driven

6. Sticking to their knitting

7. Having a simple form, a lean staff

8. Having simultaneously loose-tight properties

As an article in Business Week recently observed, however, "excellence" is a transient phenomenon in many cases. Some companies that are no longer excellent didn't continue to adhere, it seems, to the eight lessons. More disturbing is the fact that some firms are no longer excellent even though they did adhere to them.

What this suggests, we believe, is that even though "quick fixes" may often contain significant elements of truth, they usually fail because they are not based on an understanding of how organizations work and the processes of change. Since sensible business leadership often seems so easy and the stories told to demonstrate how effective leaders function seem so convincing, it is important to ask why so many companies fail to be well managed, to be both innovative and productive. Obviously the answer must be that there is much more to rejuvenating an organization and obtaining a fresh flow of new-business development than, for instance, simply utilizing a "skunk works" or a new-venture group.

These conditions motivated us to undertake the more onerous task of trying to observe and document the actions and motives of the key players in a management system and seeking to understand the process by which forces leading to change work their way through a whole series of organizational barriers before they become realized. We also perceived the need to develop a theoretical framework showing the complex (but manageable) set of managerial choices and processes that must be meticulously maneuvered and manipulated if innovations are to be created in the laboratory and moved through the many required stages of elaboration that can result in the creation of a commercially successful new product and, eventually, in the existence of a free-standing new-business division for the corporation.

A Study of the Internal Corporate Venturing Process

The scholars whose work we have discussed in the preceding section have attempted to develop theoretical frameworks derived from careful interpretation of data. What we feel has been lacking, however, and where we hope to make a contribution with this book, is to develop an all-encompassing view of how a total organization works when it is seeking to develop major new business activities based on new technologies.

Thus, several years ago we began a research project to examine what we thought were some of the most critical questions regarding the management process involved in the efforts of large, established firms to be innovative. In the Appendix to this book, entitled "Methodology and Research Design," we have explained in some detail how we went about doing the study, but here we want to sketch briefly the essence of what we have tried to do.

We were, of course, aware that many U.S. corporations, like AT&T, 3M, and DuPont, had learned to nurture and commercialize major innovations, and we sought to review what was known about their successes. However, our major efforts were concentrated on a longitudinal study of one major corporation in the multi-billion-dollar class with a major commitment to R&D.

We had the opportunity to look at what could be called a "most difficult case" situation. The term does not mean that we were looking at a near-bankrupt or inept company, but rather that we could examine how a very large, truly massive corporation with major commitments and most of its experience in more routinized, large-scale production and commodities marketing used its enormous capabilities and resources to branch out into really new areas of technology and markets.

We called these "radical innovations" -- from the perspective of the corporation -- because they were not the usual modifications and improvements of existing product lines, but rather represented efforts to move into new industries, to try out new technologies, and to market entirely new products. These efforts could not draw much on the existing corporate know-how and culture, even though the origins of these efforts emerged from internal development efforts. They also required that new administrative units be created to oversee these activities, and these new units would have to be integrated into the overall corporate structure when they reached sufficient maturity.

It was this situation, we felt, that represented the most difficult test of managerial skills and processes and would allow us to examine how such efforts interact with existing corporate strategy and structure. Furthermore, we considered that such radical innovation was not oddball or trivial, precisely because many established firms are now being faced with increasing their capacity to engage in such strategic renewal.

Our objective was to "tease out" the underlying and often hidden organizational events and managerial behaviors that are associated with successful new-business development, as well as to highlight the pitfalls awaiting the unwary or naive. In so doing, we have recognized that the large modern corporation has many features potentially advantageous to innovation, which we will highlight in this book.

As might be expected, the great challenge of successful innovation could not simply be met by a single organizational solution (such as establishment of a new-venture group) or by calling for more "entrepreneurship" on the part of employees. Rather, as we looked systematically and over time at how new ideas jelled in R&D and began to grow into fledgling new ventures, we observed how truly complex were the organizational and leadership requirements for this process to take place. There were countless ways in which new ideas could get distorted, bottled up, or fail to be property elaborated and integrated with marketing and manufacturing requirements (among others). Not surprisingly, failure is more probable than success in initiating new-business ventures. There were literally dozens of critical events that had to be worked out right and come together at the right time in order to effectively build a viable new business based on new technology.

In the following chapters, we seek to describe and conceptualize the "how-to-do-it" aspect in terms of the activities that are required of managers and professionals in the various stages of the process that begins in the laboratory and culminates in the existence of the successful, independent new division. We will highlight the traps and dilemmas that managers experience all along the tortuous way, and document how they cope or fail to cope with them. Before we do this, however, it is useful to situate our study in the research literature on internal corporate venturing (ICV).

Research on Internal Corporate Venturing

Research interest in ICV is relatively new. Early contributions came from practitioners of ICV who described their firm's approach and provided anecdotal observations regarding practices in such corporations as 3M, Owens-Illinois, and DuPont. More systematic research led to the reporting of survey results regarding ICV management practices and to the description of characteristics varying from educational background of the venture manager to the parent firm's reasons for introducing new-venture management.

One major research study of ICV was done by Eric von Hippel. He collected data by means of face-to-face interviews with different levels of venture management and key staff, using a structured interview guide. Financial data were obtained from venture records. Von Hippel found many different forms of implementation of the venture concept, but identified two features that were invariably present in his sample: (1) the existence of a "venture manager" -- the chief executive officer (CEO) of the venture -- and (2) the existence of a "venture sponsor," the executive to whom the venture manager reported. The latter provided funding and formal hierarchical linkage between the venture and the parent corporation. In addition, he found that venture management is being practiced in many different areas of business and can at least potentially succeed or fail in all of these. He also found that there is a strong relationship between venture success and the prior experience of the parent corporation and/or the venturing personnel with the customers addressed by the given venture; that there is no significant correlation between the distance of venture sponsor to corporate CEO and the success of the venture; and that chances of failure seem to be higher if the venture manager comes from a previous position in which he or she managed a greater amount of resources than that involved in the venture.

A second major research study was done by Ralph Biggadike. Based on a sample from the top 200 firms of the Fortune 500 and data from Profit Impact of Market Strategies (PIMS) project, Biggadike found that it takes an average of 10 to 12 years before the return on investment (ROI) of new ventures equals that of mature businesses. He found that rapid share building -- at the expense of current financial performance -- is a key element in venture success, and thus advises large-scale entry for a limited number of ventures as the most adequate strategy for new business development. "Launching new businesses," he says, "takes large entry scale and continual commitment; it is not an activity for the impatient or for the faint-hearted."

A third major research study was carried out by Norman Fast. Fast's research has focused on the "new-venture division" (NVD) level of analysis. Based on a survey of 18 companies that had NVDs at some point between 1965 and 1975, and on three in-depth case studies, Fast found that NVDs not only took on diverse shapes, but also that a high proportion of them were short-lived. Of the 18 NVDs studied 9 were inoperative by 1976. These had an average life-span of only 4 years. Of eleven NVDs established before 1970, seven were inoperative by 1976. Furthermore, Fast found that NVDs become inoperative in one of three ways: (1) by retaining the ventures they had started and growing into an operating division, (2) by being given a staff function, and (3) by being disbanded. He noted that most of the surviving NVDs also evolved through the course of their development, and that the driving forces behind such evolution were: (1) changes in the corporate strategic posture and (2) changes in the NVD's political posture. Fast's research thus indicated clearly the need to study further the ICV activities in the context of the overall corporate strategic process.

Some Remaining Issues

The earlier studies have revealed a number of problems pertaining to the management of ICV. They also have identified key tasks and roles, and certain traits that successful occupants of these roles seem to possess. The review of past studies, however, reveals a number of missing elements in our understanding.

First, the study of ICV has not focused systematically on the transformation of "inventions" into "innovations," which is one of the key problems in today's large high-technology corporations. Invention refers to a company's seeking technical perfection and allied new ways of production as ends in themselves. Innovation refers to a company's efforts in instituting new methods of production and/or bringing new products or services to market. The criteria of success are "technical" for invention, but "commercial" for innovation. The link between invention and innovation is the "entrepreneurial" capability of an individual and/or an organization. ICV typically involves both invention and innovation and requires entrepreneurial ability.

Second, the limitation of past research to the study of ICV development up to the "first commercialization" stage has led to a situation where one of the major stages -- the development of an "embryonic" business into a "mature" one in the context of a corporate structure -- has been incompletely documented. This is the stage where the role of entrepreneurial activities is most strongly manifest. Numerous publications exist that deal with the role of the entrepreneur in the large corporation. However, no systematic studies exist that document the behavior of such individuals step by step and elucidate the contradiction between these behaviors and their rationale and certain routines and expectations in the broader corporate context. In addition, the research we have cited has primarily focused on the individual entrepreneur rather than on the relationship of the role of the individual entrepreneur to the broader concept of "corporate entrepreneurship."

Past studies have insufficiently documented the ways in which specific tasks and roles interact in the invention-innovation process, how these interactions may change from stage to stage, and what the problems are that are correlated with these shifts. One of the authors of this book pointed out that the stages in the invention-innovation process do not form a neat sequential process, and are not independent of one another. Most academic research has focused on the end points of the process: the "inception" (getting good ideas) and the "application" (getting the user to accept the new product). Yet, the more difficult and more critical management problems appear to occur in the middle, in the linkages that tie together all the substages between inception and application. In these intermediate linkages, the management of the interface between R&D and business people is crucial and problematic. Recent studies have repeatedly indicated that the quality of the working relationships and of the communication between these two groups is a major determinant of the chances of successful innovation.

Past studies have also insufficiently recognized that ICV development is a complex "organizational" strategic decision-making process. The ICV process is spread over multiple levels of management and is subject to forces in the corporate context which it can, however, also partially influence. Many decisions and events take place at these multiple levels that affect the developmental course of an ICV project. These events and decisions often take place simultaneously and sometimes even in reverse order to what a typical sequential innovation process would suggest.

Finally, past studies have also insufficiently focused on the generic problems that result from the simultaneous existence of the operating divisions (the "mainstream") and the ICV activities in the corporate context, and the fact that these two different areas may interfere with each other. Figure 1-1 depicts the structure of the corporation that we studied in depth, and allows us to visualize better this category of issues and problems.

Figure 1-1 depicts what we call the "operating system" of the corporation: the set of operating divisions that cover the "current domain" and the "related diversification" efforts associated with the corporate strategy. It also shows the new-venture division that covers the "unrelated diversification" areas. Because the activities of the operating system and the new-venture division are seldom completely independent of each other, tricky areas of interdependence often arise which create complex management problems relating to how to make the interface between these two domains successful.

The Purpose of Our Process Study

The purpose of our study is to build on the past research studies and to provide some additional insights in the areas that remained relatively unexplored.

Our study is a process study of the organizational decision-making process regarding ICV, and it encompasses various levels of analysis. We shall document the entire developmental cycle of new ventures, which as pointed out earlier may take more than a dozen years. We want to elucidate the transformation of invention into innovation, ranging from a discussion of R&D experiments through staged approvals, pilot plant decisions, commercialization efforts, to the attainment of divisional status by the new venture. We will document the entrepreneurial activities of different managers in the various stages of the development, indicate how these activities interlock with each other, and show how the interfaces between different functional groups shift as the new venture moves through the different stages of development. We also want to discuss the issues and problems associated with establishing a separate new-venture division.

At one level, we will be discussing the "evolving constraints," which change through the development cycle and which comprise such elements as user requirements and demands; the achievement of technical feasibility, marketability, and reasonable cost; external related technological developments; the actions of competitors; changing corporate profitability, "slack," and interests; and other changing environmental forces.

At another level, we will be discussing the relatively "fixed constraints" within which the developmental cycle unfolds. These include such elements as corporate culture, values, and strategic orientations; interdivisional competitiveness; and functional technical criteria applied by the various groups that get involved in the process. Figure 1-2 shows the two levels that our discussion will address.

Audience

Who then are we writing for? One audience we have kept in mind is senior executives interested in improving the ability of their organizations to generate real innovation. Obviously those upper- and middle-level managers directly responsible for evaluating and nurturing new products should also find this material relevant to their day-to-day managerial responsibilities. In most businesses of any size, commercial managers have to deal with their technical counterparts both in obtaining technological and manufacturing inputs and, on some occasions, in having to prepare for the potential development and transfer of products resulting from new technological advances. Often their efforts to coordinate events and bridge the cultural gap that separates the technically trained from the business trained are exacerbated by a less-than-realistic view of how new technologically based products come "into the world." A more realistic understanding of the high-risk, complicated route by which a R&D idea gets "developed" into a new product should improve their capabilities to communicate and coordinate effectively.

While our book has been written with maximal emphasis on straightforward description of the innovation process and the development cycle, we think the findings will be of relevance to our academic colleagues who teach and do research on new-product development, innovation, and R&D management. We have sought to provide a first-hand account using data derived from actual experience of a complex organizational process that we believe has rarely been observed systematically. We think this carefully documented, more "sociological" view of the process of corporate innovation should be a useful addition to the literature on the management of modern business organizations.

Overview of the Book

In summary, this is a book concerned with the management of new technologies, with innovation, and with corporate entrepreneurship. We think its unique contribution is that it looks at all these factors in the context of the day-to-day life of a large corporation. Our method stresses how and when events occur and who is involved. It is this managerial process that enables one executive or one company to learn from another in contrast to being told that this or that technique will accomplish great things -- what we have earlier termed the "quick fix."

In the following chapters, we present our findings, theory-building efforts, and recommendations. We start with a discussion of corporate R&D management (Chapter 2), which is a major source for generating ideas for new-business development. In Chapters 3 through 7 we discuss the major stages in the developmental process of a new venture, and the problems emerging in the interfaces between technical and business people in the definition and development of a new business venture. Chapter 8 presents our findings on the difficulties generated and encountered by the existence of a new-venture group within a corporation.

Chapter 9 is the core chapter of the book. It provides a reconceptualization of our findings at the project and corporate levels of analysis, and combines them in a new model of ICV as a strategic process.

Chapter 10 presents recommendations for making the ICV strategy work better. In Chapter 11, our final chapter, we propose a more general framework concerning corporate entrepreneurship and examine an array of organization designs -- over and beyond the NVD design -- for facilitating the strategic management of corporate entrepreneurship.

Copyright © 1986 by The Free Press