The innovation process and corporate ventures

Week 4(INN001, 5 p.)

Lecture onSeptember 18th 2007

Emelie Stenborg

Chapter 9

Managing the internal process

Figure 2.1 Simple representation of the innovation process

©2005 Joe Tidd, John Bessant and Keith Pavitt

Repetition chapter 9 The innovation process model in detail

Figure 9.8 The development funnel

©2005 Joe Tidd, John Bessant and Keith Pavitt

Search

– Search space– As a result of change – technical, cultural,

trends– Communication – customers, suppliers,

universities, government, internal, competitors– Monitor technological change – tipping trends– Forecasting – market, technological

Select

• Strategiy analysis, choice and monitoring

• Fit between innovation strategy and the business strategy

• Estimate the actual capabilities of the firm

• Involve different people – across functional boundaries, suppliers of components and sub-systems, regulatory frameworks

Implementation

• Generation of knowledge and technology transfer internally and externally

• Absorptive capacity

• Increasing commitment of resources makes it difficult to change direction

• Test the market, have a market strategy, supportive organisations

Chapter 10

Learning through corporate ventures

How to prepare for entering a new market or business?

• Change competencies and culture in the organization

• Acquire another firm

• Develop a separate organization within the firm itself

What is a corporate venture?

• Differs from conventional R&D/product development activities through objectives and organization

• Primary function is to learn new competencies

• Mostly aiming at radical rather than incremental innovation

Why corporate ventures?

• To manage innovation is not the same thing as to manage everyday business

• Corporate strategic planning and financial control – Budgeting– Production – Sales and marketing

• Such an environment is unlikely to be conducive to radical innovation!

• To exploit the resources of the large corporation, but provide a safe environment for radical innovation

• Might be necessary when a firm attempts to enter a new market or to develop a new technology

• Key distinguishing factors of new venture – risk, uncertainty, newness and significance

• To meet the needs of new, high-risk, but potentially high-growth business.

• ”intrapreneurship”

Why corporate ventures?

The idea of corporate ventures

”If managed effectively, a corporate venture has the resources of a large organization and the entrepreneurial benefits of a small one.” (Tidd et al, 2005, p. 425)

The form of a corporate venture

Usually depends on two dimensions:1. The strategic importance of the new venture

for corporate development.

2. Its proximity to the firm’s core technologies and markets.

Strategic aspects

• Competitive capacity in new areas• New niches• Where not to go• Risk• How to exit

→ Determines the required degree of administrative control. The greater the strategic importance, the stronger the administrative linkages.

Proximity aspect

• Required key capabilities • Where, how and when to acquire • Effect on existing capabilities• Exploition of the new competencies • Competition

→ Determines the desired degree of operational integration. The closer the competencies are to the core activities, the greater the necessary degree of operational integration.

What drives what??

• A new venture may be driven by newly developed skills and capabilities...

• ... or the venture may itself drive the development of new skills and capabilities!

• Cause and effect?

Figure 10.1Role of corporate venturing

©2005 Joe Tidd, John Bessant and Keith Pavitt

©2005 Joe Tidd, John Bessant and Keith Pavitt

Corporate venturing to diversify

• Grow via diversification• Sectors that have long been associated with

innovativeness but that are now facing maturity or stagnation

• Example: fossil fuel firms (corporate ventures of BP, Elf, Shell, Standard Oil, Total, etc.)

• Vertical vs. Horizontal diversification• Diversification vs. Focus on core competencies

• Organizational learning1. Knowledge acquisition

2. Information interpretation

3. Information distribution

4. Organizational memory

Corporate venturing to learn

©2005 Joe Tidd, John Bessant and Keith Pavitt

Managing corporate ventures

• Corporate venturing is a process that has to be managed

• Create an environment that encourages and supports entrepreneurship – Barriers could be legitimacy, lack of resources

and organizational resistance

• Consists of identifying an oportunity for a new venture, evaluate it and provide resources

Definition stages

1) Create an environment that make possible entrepreneurial activity

2) Select and evaluate opportunities and managers

3) Develop a business plan

How to identify potential corporate ventures?

• Corporate responsibility

• Long-term commitment to venturing

• Example: 3M and Google

What types of people provide the best ideas for corporate ventures?

1. R&D personnel – technology push

2. Marketing managers – market pull

3. Marketing and R&D personnel to work together – coupled model

→ Third option is most desirable... but in reality the technology push method appears to be the dominant strategy.

Key roles

• The technical innovator

• The business innovator

• The product champion

• The organizational champion

• The high-level executive

Table 10.5 Components of a typical business plan for a new venture

©2005 Joe Tidd, John Bessant and Keith Pavitt

Development stages

1) Make it develop

2) Promote the new venture

3) Learn from experience

Figure 10.3 The structure of a corporate venture depends on the balance between the desire to learn and leverage

competencies

©2005 Joe Tidd, John Bessant and Keith Pavitt

Structures for corporate ventures

• Direct integration• Integrated business teams• New ventures department• New venture division• Special business unit• Independent business unit• Nurtured divestment• Complete spin-off

Direct integration

• No organizational boundaries• When

– Radical changes impact mainstream operations

– People involved are in the same as in mainstream business

• Examples: – Companies introducing consultancy – Firms with labs selling tests

Integrated business teams

• People from different departments continue to work within these but with additional tasks

• Are treated as a separate accounting unit• When

– Expertise are found from mainstream operations– Needs support from mainstream operations– The product is sufficiently related to the mainstream

business

New ventures department

• Techniques are built on internal comepetencies that cannot be separated from mainstream activities

• Separate from management with own responsibilty

• When– Projects frequently come from everyday business– New markets– New packages

New ventures division

• A separate adminstrative entity for projects to develop

• A level of managerial control until greater clarity• Can become a dustbin – critical to define the

limits of its operation• When

– Bring competence together – Acquire expertise– Examine new markets

Special business unit

• Wholly owned by the corporation - high strategic relevance, strong administrative control

• Key people from the mainstream operation

• Produce significant revenue

• Access to resources from the parent – but also a danger of not gaining independence

• When– Potential for stand-alone business

Independent business unit

• Differing degrees of ownership – wholly-owned subsidiary to minority stake

• Possibility of bringing in external funding

• Problem could be to find people

• When– Focus on core competencies without

operational burden – Learning from external actors

Nurtured divestment

• Evolved from mainstream business• Parent supports the venture, but is not

interested in strategic control• Build up of external markets• Parent ownership is more of a financial

investment • When

– Activity is not critical to the mainstream business

Complete spin-off

• The parent sells the corporate venture• Usually related to an increased emphasis

on core competencies or changing corporate strategic focus

• May still be some links to support the venture

• When– Value of spin-off– Grown to big

Table 10.9 Motives, structure and management of corporate ventures

©2005 Joe Tidd, John Bessant and Keith Pavitt

Learning

• Take note on bad decisions

• Measure progress against agreed milestones

• Terminate when necessary

• View venturing as a learning process

Rrade-off between rapid growth and strategic learning

• Long-term benefits of venture operations

• Specify functions, procedures, boundaries and rewards

• Limited number of ventures with independent budgets

• Multiple sources of sponsorship

Table 10.7 Potential sources of conflict between corporate and new venture management

©2005 Joe Tidd, John Bessant and Keith Pavitt

Does corporate venturing pay off??

• Around 50% of corporate ventures become operating divisions

• Almost 50% of ventures are profitable within 6 years

• Less risky than other strategies

Summary

• Corporate venturing– What it is– Where to find it – How it should be managed– How to learn

Seminar assignment week 4September 20th, 2006

Choose a firm with whom you are familiar, and imagine that you are an innovation consultant to that firm, facing the task to help increase the firm’s growth rates through innovation.

Suggest some possible elements of an overall innovation strategy for the firm and, in particular, some implementation mechanisms that you think would make it possible for the firm to reach the goal!

Extra question (if you have time): Would there be a difference in your advice to the firm if the aim is to grow through radical as opposed to incremental innovation?