As the traditional avenues of corporate growth become less attractive, many companies find the appeal of new venture strategies harder to resist. Though challenging to implement and often slow to repay investment, these strategies offer the promise of facilitating entry into new business areas with innovative, usually technology-based products. For large companies with many layers of management and detailed control systems, ventures offer the unique promise of recapturing some vital spark of entrepreneurial energy.
In this piece, we discuss the growing appeal of new venture strategies and the particular needs that they meet. Then, drawing on his extensive research into venture organisations, he outlines in some detail the various major types of ventures, pinpointing the virtues and defects of each. He concludes with a few pieces of general advice about venturing.
Corporations are increasingly turning to new venture strategies to meet ambitious plans for growth and diversification. However, most new ventures fail. And even when they do succeed, they often take ten years or more to generate substantial returns on the initial investment of capital and management attention. The question is obvious: Why is corporate venturing so attractive, given its uncertain promise?
The odds against its success are enormous. The push toward a venture strategy usually comes when a company wishing to address customer needs it has not previously served seeks to enter new markets or sell dramatically different products in its existing markets. Second, most ventures involve a new technology—whether that technology is new to the world or only to the company. Third, almost every corporation undertaking a venture has found it necessary and desirable to establish a structure quite different from that in use throughout the rest of the organisation.
Entering unfamiliar markets, employing unfamiliar technology, and implementing an unfamiliar organisational structure—even separately—presents a troublesome challenge. If all three are combined in a single new venture organisation, it is no wonder that their joint probability of success is relatively small.
Nonetheless, venture strategies are increasingly attractive to many companies. My purpose in this article is to consider why this should be so. I then examine and evaluate the various options available to companies embarking on a venture strategy. Finally, I discuss what companies can do to improve the likelihood of venture success.
Though I address all three points, my focus will primarily be on two of the options: the large and small company joint venture, which has the principal virtue of speed of market impact, and the internal venture organisation, best illustrated by Minnesota Mining and Manufacturing Company (3M), with its long-term record of success in venturing.
If the odds against a new venture strategy are high, what makes it very appealing? The answer is really quite simple: the alternatives are no better. No other strategy for enhancing growth in size or profitability currently offers a higher probability of success. Consider:
In short, the most common growth strategies of an earlier era are no longer accessible to follow or so likely to succeed. Consequently, venture strategies have begun to look much better despite their low probability of success.
Exhibit I displays the range of alternative strategies for launching new ventures. At one end are approaches that feature essentially low company involvement; at the other are approaches that demand high levels of commitment, both in dollars and in management time.
Exhibit I Spectrum of Venture Strategies
At the far left of the spectrum is venture capital, the investment of money in one company’s stock by another. During the mid-to-late 1960s, many major corporations decided to secure entry into new technologies by investing in young, high-technology enterprises. Significant companies in a variety of industries—companies such as Du Pont, Exxon, Ford, General Electric, and Singer—sought out a “window” on promising technologies through the venture capital route. Still, few of them have been able to make the venture capital approach by itself an essential stimulus of corporate growth or profitability.
Second, along the spectrum, venture nurturing involves more than just capital investment. Here, the investing company also gives managerial assistance to the nurtured enterprise in such areas as marketing, manufacturing, and research. Though perhaps a more sensible approach to diversification than just the arm’s length provision of funds, venture nurturing is unlikely to significantly impact the investor’s sales or profits. Cabot Corporation, for example, tried this approach but gave up after two years of frustrating experience with several start-up companies.
As a by-product of its R&D efforts, a corporation may develop an idea or technology that does not fit its mainstream interest, entail substantial risks to the parent, or be better developed independently outside the company. The originating company will then spin off the new business as a separate corporation, either seeking to gain market and operational experience in a new field, as Exxon Enterprises did temporarily with its Solar Power Corporation, or to attract outside growth capital, as General Electric did with its formation of Nuclepore and other companies.1 Venture spin-off may be an excellent way to hold on to an internal entrepreneur or to exploit a by-product technology. However, the limited involvement it allows still promises only limited returns to the parent company.
Because I think this approach is critical, I will discuss it in more detail later. Here, large and small companies enter new ventures jointly. Small companies provide entrepreneurial enthusiasm, vigour, flexibility, and advanced technology; large ones provide capital and, perhaps more importantly, worldwide marketing, distribution, and service channels. This combination rapidly diffuses technology-based product innovations into large national and international markets.2
Toward the right side of Exhibit I is an approach that I call venture merging and melding because of a lack of a better name. Exxon Enterprises is attempting this by deliberately piecing together all the various forms of technologically oriented venturing shown in Exhibit I into a critical mass of marketing and technological strengths. These strengths have allowed Exxon to transform itself from a vast—though unglamorous—one-product, narrow-technology oil company to an exciting company expanding into computers and communications, advanced composite materials, and alternative energy devices.3
Finally, on the far right are internal ventures, in which a company sets up a separate entity within itself—an entirely separate division or group—to enter different markets or develop radically different products. This approach has great potential but a mixed record to date. Du Pont, for instance, has had a spotty record in internal corporate-level venturing for nearly two decades.4 Ralston Purina, however, has done reasonably well. For the record, the most consistently effective performance with internal ventures I know of is that of 3M, whose philosophy and methods I will describe later in this article.
Let us now examine an approach to venturing that has shown itself to be relatively “quick and dirty” and adaptable: the new-style joint venture. You will recall that new-style ventures are those in which large and small companies join forces to create a new market entry. The idea here is quite simple. The large company usually provides access to capital and channels of distribution, sales, and service otherwise unavailable to the small company; in return, the small company offers advanced technology and a degree of entrepreneurial commitment the larger one often lacks. Together, the strengths of both add up to a distinct competitive advantage.
Numerous studies on innovation have repeatedly shown that small companies and individual inventors account for a disproportionate share of commercially successful, technologically based innovations.5 The facts themselves are pretty straightforward, whether the explanation lies in their superior commitment, drive, freedom from constraint, flexibility, or closeness to the market. Small, entrepreneurially-minded companies have been unusually able to develop competitive technological advances in the marketplace.
But the small company has an obvious problem: its size. It has neither extensive market coverage nor an extensive sales force. It is usually not even a national company. Young entrepreneurial companies are often regional at best, and the obstacles they face—organisational and financial—in becoming national or international are tremendous. The great success stories of corporations such as Polaroid, Xerox, or Digital Equipment are apparent exceptions to the rule.6 In most cases, small technology-based companies cannot grow from within to a large scale with the time and resources available.
By contrast, a large company has relatively easy access to capital markets and significant capital availability within itself. Moreover, it not only has large sales but also a large establishment overall. It has ample manufacturing capacity located near its various national and international markets. It has a distribution and marketing organisation that covers all its relevant market territory. It can service its products on a national and international basis.
Suppose the entrepreneurial commitment, innovative behaviour, and advanced technological products of the small company were combined with the large’s capital availability, marketing strength, and distribution channels. In that case, it stands to reason that the synthesis might well create a significant competitive advantage. Indeed, many pairs of differently-sized companies have entered into just this kind of venture arrangement. Exhibit II lists a few of the attempts in the Boston area alone.
Exhibit II Examples of Large/Small Company Joint Ventures
A typical example of a successful arrangement is the joint venture between Roche Electronics, a division of Hoffmann-La Roche, and the Avco Everett Research Laboratory. Their venture was to produce an inflatable balloon heart assist pump, which has been both technically and commercially successful. The development of the product came from a combination of the capability of electronics technology and materials of Avco Everett with Roche’s marketing, distribution, and field service capabilities. More recently, Avco Everett has taken over the entire venture as part of its diversification movement into the medical field.
However, no matter how appealing the prospect, the problems with this new-style approach are significant and troubling. Consider, for example, Johnson & Johnson’s joint effort with Damon Corporation to develop automated clinical laboratory equipment.
At the time of the joint venture, Johnson & Johnson had annual sales of roughly $3 billion. By contrast, Damon, a spin-off from the MIT Research Laboratory for Electronics, had only $3 million in sales when it started negotiations with Johnson & Johnson and $30 million by the time it successfully concluded negotiations to initiate the joint venture three years later. The intended product was to sell at prices of $100,000 or more to large hospitals for clinical patient fluids analyses.
Though a partial technical success, the product was a commercial failure. Two kinds of problems often confront new-style ventures.
Often, both partners misread the appropriateness of a large company’s marketing and distribution channels. It is too easy for a large company to think it can sell almost anything through its vast field sales and service organisation.
In the Johnson & Johnson-Damon case, Johnson & Johnson could correctly say that salespeople regularly called on every major hospital in the free world. Therefore, it might have felt it had the representation necessary to sell a Damon-developed clinical laboratory system. But Johnson & Johnson sold essentially disposable medical products such as Band-Aids; the people to whom it sold were reorder clerks, inventory supervisors, or head nurses, and the basis on which it sold was a combination of product quality and volume discounts.
To whom does one sell a $100,000 piece of clinical laboratory equipment? Certainly not reorder clerks or inventory supervisors. The director of the hospital’s clinical laboratories will be involved, as will the hospital’s chief administrator. And in all but the most prominent hospitals, so will the board of trustees. It is too much to expect that sales personnel used to selling Band-Aids to reorder clerks can switch overnight to such a different level of responsibility and remain effective.
In addition, a significant piece of clinical apparatus requires an exceptional level of field service. With its different experience, Johnson & Johnson did not have that kind of field operation. Johnson & Johnson had also been selling small medical instruments, but even this had not prepared it for the service requirements of a clinical laboratory analyser.
Though it is easy to misread the appropriateness of a large company’s marketing channels at first glance, a little careful thought and common sense are often all that is needed. The central question is straightforward: Do the company’s sales and service organisations meet the particular requirements of the new product? If not, can they be made appropriate with only slight modifications—say, expanding an existing service capability or adding a speciality salesperson to an existing field office? Incremental change, if a realistic alternative, is almost always less expensive than starting from scratch and trying to build a whole new organisation.
This is more of a generic problem of new-style ventures than the misreading just discussed. Differently sized companies tend to breathe, play, and act on very different frequencies. They have very different ways of managing themselves and their decision processes. David Kosowsky, the president of Damon, is quoted as saying that he would come to a negotiating session with Johnson & Johnson prepared to bet his company, ready to make decisions as needed. Yet he saw the Johnson & Johnson people coming to the same meetings prepared to listen, absorb, report, and carry information back to their superiors for further consideration.
The small company entrepreneur is often ready to make a decision based on gut feelings and commit whatever is necessary to implement the decision on the spot. The large corporation’s decision-making time scale extends for months and sometimes years.
In general, the behaviour of a large company is very different from that of a small one. The large company does basic research, the small company does technical problem solving, the large company does market research, and the small company executive talks to a few friends in other organisations to understand how they view a potential product. Such differences in organisational temperament can quickly produce strains and misunderstandings.
Despite these various difficulties, I believe that new-style joint ventures offer a high promise. More than any other form of venture, they offer the possibility of reasonably quick market impact and profitability, for they seek to build on competitive strengths already in place.
For over 30 years, 3M has primarily based its growth in size and profitability on new businesses developed through internal ventures. More than most other major corporations, it has thoroughly organised itself to encourage and support them. Its long-term record of success—ROI increasing at approximately 16% compounded annually—speaks for itself, but we may legitimately ask just how 3M goes about venturing so successfully.
Looking at 3 M’s organisation on paper (see Exhibit III) initially means seeing a rather ordinary structure. Near the organisation’s top are two divisions that report to the vice president of research and development: the Corporate Research Laboratory and the New Business Development Division. However, the latter has quite a different charter than comparable units in most other companies. Here is where the fundamental distinctions begin.
Exhibit III 3M Structure for New Ventures
In 3M, a new business is defined behaviorally as one that has not yet reached critical mass in the marketplace, although it has perhaps as much as $20 million in annual sales. This means that the corporate New Business Development Division is responsible for evolving, nurturing, and maintaining diverse business activities at various stages of development. It is an internal venture nurturing organisation that gives birth, support, and sustenance. When new products are big enough to be self-sustaining, it spins them down the organisational chart as part of an existing or new product line division.
The second point worth noting about 3 M’s structure is that it is,, mostly built on product line organisations, which have doubled since 1970, each with its own product development department. By itself, this structure is not unusual. What is remarkable is the charter of the product development departments. Each assists the division it serves by creating new products for its present line of business, with incremental improvements in old products and helpful process changes. All of this is conventional. What is unconventional is that each product development department is also responsible for new venture development—new ventures without product line or business area constraints.
It is perfectly acceptable for any of these departments to develop products in any line of business, even if the new product competes with the output of another product division. The 3M philosophy is, “We would rather have one of our own new products competing with an existing product line of 3M than have a competitor’s new product competing.” To the argument, “Surely that creates dissent and competition; isn’t it bad?” 3M responds, “No, not from our way of thinking. We think that it can be good.”
Does this philosophy create duplication of resources? Of course, it does. Does it create efficiently used resources? I suspect that it does because the model of efficient competition is applied not just to the external but also to the internal marketplace. Competition for money, ideas, people, and market dominance keeps all participants fighting trim.
From top to bottom, 3 M’s management provides active, spirited encouragement for new venture generation. Many at the company even speak of a particular eleventh commandment: “Thou shalt not kill a new product idea.” And they follow it seriously in practice. Contrary to the situation in many other companies, those in 3M who want to stop the development of a new product are saddled with the burden of proof. The benefit of the doubt goes right to those who propose projects, not those who oppose them.
Of course, pushing a new product idea does not immediately open an endless bank account, but it guarantees a chance to succeed. With the burden of proof on those who wish to kill ideas, the work environment within the company is distinctly favourable to entrepreneurial activity. In part, this environment is the result of promoting top management from within, frequently resulting from successes in venture management. But it is reinforced everywhere. As one longtime observer has remarked, “You can’t even talk for ten minutes to a janitor at 3M without the conversation turning to new products.”
Another important kind of support for new ventures is the company’s multiple sources of venture capital. Corporate groups can provide funding for new ventures without regard to source, and each product line department can fund its employees’ ideas regardless of what market they are aimed at.
Say someone engaged in product development or marketing approaches his boss with an idea for a new product; if, despite all of the pressures on the boss to be supportive, he still answers, “We really don’t have the money; we can’t afford to handle it; we can’t support your activity,” the proposer is not then shut off permanently inside 3M. He is free to go elsewhere in the company to seek support for his idea, and a real market exists for the potential support of these ideas.
Moreover, if he can convince someone else to support his idea, then his concept does not go alone; he goes with it. The individual must be able to move with his concept and join his sponsor in the product development work. Then, he and his sponsor quite correctly share the blame if it fails and the benefits if it succeeds.
3M also specialises in forming product teams and entrepreneurial mini-business groups that 3M calls business development units. At an early stage of developing a new product idea, 3M tries to recruit individuals from marketing, the technical area, finance, and manufacturing to come together as a team, each member of which is committed to further developing and moving this particular product into the market.
To make the team more effective, 3M does not assign people to such activities; the team members are recruited. This makes a massive difference in results. In most companies, a marketing person assigned to evaluate a technical person’s idea can get off the hook most easily by saying that the idea is poor and pointing out its deficiencies, inadequate justification, and lack of a market. Given the usual incentive systems, why should the marketing person share the risk? But instead of assigning them to evaluate the idea, 3M approaches Marketing and says, “Is anyone here interested in working on this?”
Here is an excellent instant test of a new product idea. If no one in the organisation wants to join the new team, the idea behind it may not be exceptional. More importantly, whoever says, “I want in,” becomes a partner, not a subordinate. They share both the risk and the commitment and enthusiasm that accompany it. Team members are not likely to say, “This cannot be produced. It can never break even. It will never sell.” They are involved as a team because they want to be, and they have a lot invested in making the idea work.
3M then supports its teams by telling them, “We are committed to you as a group. You will move forward with your product into the marketplace and benefit from its growth. But we cannot promise to keep you together forever as a new venture team. We will do our best to keep the team going so long as you meet our standard financial performance measures throughout the product’s life cycle. If you fail, we will give you a backup commitment of job security at the level of job you left to join the venture. We cannot promise any specific job. But if you try hard and work diligently and fail, then we will at least guarantee you a backup job.”
Some 3M ventures do get cancelled. Although the company will not reveal its success/failure data, it has said that its success ratio is comparable to that of other organisations. The critical difference, of course, is that 3M starts many more new ventures.
The financial measures that 3M applies to new ventures are simple and to the point: ROI, profit margin, and sales growth rate. If a product team meets these criteria, the company will try to keep it going. These measures are straightforward and objective. What sets 3 M’s standards apart, however, is what they do not include. First, they do not require a minimum “promised” size in sales volume for any given product idea. Instead, 3M says something like this to its product teams:
“Our experience tells us that before it enters the market, we do not know how to anticipate the sales growth of a new product. Consequently, we will make market forecasts that stick after you have entered the market. We will listen to your ideas, argue with them, and do all kinds of analyses and estimates, but we will not say at the outset, ‘The idea must be capable of generating $50 million or $100 million per year in sales.’ Of course, we prefer larger businesses, but we will accept smaller businesses as entries into new fields.”
Further, 3 M’s standards do not place area-of-business constraints on generating new product ideas. Unlike most other companies, it does not say to its teams, “Whatever ideas you come up with are fine, so long as they fall within business areas where we are strong.” Nor does it say, “We want your new ideas—provided, of course, that the resulting products can be manufactured in our existing plants out of our existing stocks of raw materials and sold through our existing sales and distribution channels.”
The final element of 3 M’s approach to new ventures is its handling of rewards. All individuals involved in a new venture will have more or less automatic changes in their employment and compensation categories as a function of the sales growth of their product. Moreover, because the stimulation and sponsorship of new products is a management responsibility at all levels, 3M has established special compensation incentives for those managers who can “breed” new ventures or departments.
I can confidently make only three summary generalisations about successful new venture strategies.
They require long-term persistence. How long is it? At the bare minimum, if a corporation is unwilling to commit to a five-to-seven-year involvement, it should not even consider undertaking new ventures. What is needed is “patient money”—money in the hands of an executive group centrally concerned with the company’s future growth and development, money that need not generate payoffs in the next few years. In fact, ten to twelve years is a more reasonable period.
They depend on entrepreneurial behaviour. The basis of every venture strategy is the attempt by a large company either to link up with or to emulate a small entrepreneurial company. In a sense, this is surprising because it violates many of the textbook arguments for economies of scale. Yet, in increasing numbers, multimillion- and multibillion-dollar corporations are trying to scale down their manner of operating when they want to enter new business areas. They have rediscovered the virtues of building an entrepreneurial organisation and harnessing entrepreneurial energy.
No single strategy works for all. What works for 3M will not necessarily work for every company. There are no magic formulas, and it is dangerously misleading to mimic the particular success of others. The current state of knowledge about venturing supports a far more modest conclusion: a variety of possible venture strategies is available, and it is up to each company’s management to assess its own unique needs, abilities, and personnel. This is simply common sense, but—like much sound managerial wisdom—it is all too often forgotten.
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