Corporate Venturing Creating New Businesses Within the Firm free essay sample

Introduction In a world which innovators are kings, interest in internal corporate ventures has grown tremendously. In my literature review, I would like to share my insights from reading the book titled â€Å"Corporate venturing: creating new businesses within the firm† by Zenas Block and Ian C. MacMillan. In this book, the authors shared their views on the importance of corporate venturing especially in this competitive global economy. Also, other aspects of venturing like the management, organisation and control of the ventures are also covered in great detail. However, much focus will be placed on the imminent need for corporate ventures and also issues like what determines the new venture success. I would also discuss the difficulties faced by managers in ventures as after all; venturing is not as simple as one would like it to be. In the later part of my review, I would also provide some evaluations in relation to this topic. What is a corporate venture? We consider a project a venture when it: †¢Involves an activity new to the organisation †¢Is initiated or conducted internally Involves significantly higher risk of failure or large losses than the organisation’s base business †¢Is characterised by greater uncertainty then the base business †¢Is undertaken for the purpose of increasing sales, profits, productivity or quality †¢Will be managed separately at some point during its life (Block Macmillan, 1993) In essence, it is a practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise. The objective of such venture is to be able to gain a specific competitive advantage. It is very important to be able to distinguish between is a corporate venture and an extension of a normal business activity as even till today, there are many misinterpretations of what entails a venture. Hence, I see the importance of being able to understand what a corporate venture is. Corporate venture: the growing phenomenon There have been a growing number of large companies creating business development organisations aimed at leveraging their IP portfolio through external licensing and/or partnerships. There are many successful examples of companies that enjoy high growth from new ventures including renowned companies like Nokia. Nokia adopted a very interesting corporate venturing approach for finding innovation. They moved beyond â€Å"not invented here† and are now embracing the idea of â€Å"finding the best ideas where ever they are†. Nokia Venturing Organisation is focused on corporate venturing activities that include identifying and developing new businesses. They introduced it as â€Å"the renewal of Nokia†. Nokia Venture Partners invest exclusively in mobile and IP related start-up businesses and they have a third group called Innovent that directly provides support and nurtures innovators in hope of creating vast future opportunities for Nokia (Docherty, 2004). It is the very fact that venture capital and opportunities is the essential tool available for companies to increase their innovativeness, quoting Wharton management professor Gary Dushnitsky and thus be able to develop a competitive edge in the economy. In another paper â€Å"When does venture capital investment create firm value,† by Dushinitsky and Lenox, they present the evidence that corporate venture capital investment is associated with the creation of firm value which goes beyond narrow financial returns and capture both the financial returns and the strategic benefits. Furthermore, in some researches, through the use of databases of hundreds of companies, the researchers compared companies that invested in venture capital and those that did not. They found that the greater the amount of corporate venture capital invested, the greater is the innovation rate of the investing company, measured by either the number of patents generated or by the citation-weighted patents output. Hence, this further presents the importance of venturing to keep up with the pace of innovation and competition in the economy. In addition it is said that corporate venture capital is one leg of a three-legged stool whose other two legs are strong internal RD capability and strong alliances with academic or government researchers. This highlights the crucial role corporate venture plays in the success of a company. Furthermore, not all firms are able to reap the full benefits of corporate ventures as results have shown that firms that invest for strategic reasons are more likely to continue to invest and in larger amounts. This is because strategically oriented firms are more likely to learn how to make good investments over time and this is not sometime that all firms are able to achieve overnight. As such, it is true that not every company can or should set up their own new ventures group due to various uncertainties or structural changes the firm might face in such circumstances. However, firms should still be focused on moving beyond the idea of â€Å"not invented here† to â€Å"finding the best ideas and technologies where ever they are†. What determines the new venture success? The strategic adaptation perspective implies that new venture success is a function of the managers or entrepreneurs ability to assess internal capabilities and environmental conditions for the purpose of developing and executing effective strategies (Andrews 1980; Porter 1980; Vesper 1980; Timmons 1982). The environment is viewed as a (major) constraint within which strategy is developed. Furthermore, environments are not immutable and are subject to negotiation and manipulation (Child 1972; Miles and Cameron 1982; MacMillan 1983). Such factor plays an important role in determining the success of the venture. Difficulties faced in venturing Reasons why companies stop venturing What we have constantly been told is the importance of venturing, the benefits that comes with it and there is a need to venture as ‘my competitors are also doing it’. However, behind the scenes, there are many circumstances that companies face which makes venturing hard and challenging and sometimes, companies are even discouraged from doing so. In order to determine why this is so, it is critical to examine the actual work of creating new businesses and distinguishing between organisational entities (such as venture companies and new venture divisions) and activities involving the development of new products, new markets and combination thereof (Block MacMillan, 1993). Much of the publicity surrounding intrapreneurship has centered on the establishment of separate organisational units within the companies. For instance, Colgate’s venture company rose and fell in three short years as well as Allied Corporation’s New Ventures operations which existed only for five years. The track record of a new venture division should not be confused or mixed with that of new venture. For organisations that put all their venturing eggs into a new venture division basket are likely to stop venturing when they disband the venturing division, only to resume as a matter of necessity after the passage of time (Block MacMillan, 1993) Another great challenge faced by organisations in their quest of venturing is that there can be extreme changes to their management teams within the company when firms engage in venturing. Such structural changes that come about with the new ventures might be a push factor for organisations considering engaging in new ventures that could potentially be of great benefits to the organisation. Furthermore, in recent years, it is frequently said that the venture industry especially in the US is facing a decline. It is thus rumoured that perhaps such venturing might not be as beneficial for the firms as it had in the past. The US venture capitalists have a depressed view of the industry mainly due to the weak IPO market and the unfavourable tax and regulatory policies present in the US domestic market. There is a shift in the amount of venture capital from the US market to the emerging market and this is a rising trend today. However, contrary to the popular belief, the venture capital industry is not a necessary condition in driving high-growth entrepreneurship, according to Right-sizing the US Venture Capital Industry, a new study by the Ewing Marion Kauffman Foundation. It is analysed that while venture capital will continue to be crucial to some forms of high growth companies, the report concluded that the sector’s size must be reduced for it to be viable. In recent years, the venture industry has been seen stagnating and declining returns coupled with rapid expansion in venture capital assets under management. It is said that the venture industry needs to shrink its way to becoming an economic force again. In various studies, it has been shown that the venture industry is profitable for many. In fact, professionals in the venture industry have gotten comfortable with the way their industry is set up in terms of size, structure and compensation. However, there is a need for venture participants to overcome their resistance to change and to get out of their comfort zone so as to be able to more effectively fund entrepreneurs and offer investors competitive returns. As such, there is a need for the venture industry to change so as to better realise the benefits it can potentially offer. Evaluation of the book This book by Block and MacMillan gave me great insight into the view of the business world and role ventures play in the economy. However, one drawback is that the context of the business world is based on that during the economic boom of the 1990s. With all the economic changes since of the following decade, some of the arguments made in the book may seem to fall flat and is less updated. Additionally, because of these new economic realities, it would be assumed venturing approached would to be reassessed with reference to the dot-com bust and the very recent global financial meltdown. Though I do not think that venturing would no longer be of importance to firms today, reassessment has to be made in the area of the risk involved, the management as well as planning due to the change in economic environment so as to ensure that firms are able to better reap the potential benefits corporate venture can offer. Conclusion The main take away from the book is that companies venture mainly to ensure growth and survival in the face of ever increasing competition. According to a number of studies and cross referencing with other academic papers, venturing is a surprisingly effective means of achieving these goals- at least for companies that create venturing programs carefully; and continually learn from their venturing experience. On a more personal note, this literature review was not an easy feat as the book includes many academic terms that I might not be clear of. However, after reading the book and other academic articles, I have to admit that this topic can indeed be interesting and it provided me with the knowledge and greater understanding of this highly debated topic. References Business dictionary. com: http://www. businessdictionary. com/definition/corporate-venturing. html Dushnitsky and Lenox, When Do Firms Undertake RD Investing in New Ventures Dushnitsky and Lenox, When Do Incumbents Learn from Entrepreneurial Ventures? Corporate Venture Capital and Investing Firm Innovation Rates Ewing Marion Kauffman Foundation (2009): US venture capital industry must shrink to be an economic force http://www. kauffman. org/newsroom/venture-capital-industry-must-shrink-to-be-a n-economic-force-kauffman-foundation-study-finds. aspx Ewing Marion Kauffman Foundation (2011): Right sizing the US venture capital industry http://www. kauffman. org/research-and-policy/right-sizing-the-venture-capital-industry. aspx Kenneth Liss (2000), Harvard business school: Corporate Venturing: Entrepreneurship on the Inside Leena Rao (2010), Study: U. S. Venture Capital Industry Expected To Shrink While Emerging Markets Grow http://techcrunch. com/2010/07/13/report-u-s-venture-capital-industry-expected-to-shrink-while-emerging-markets-grow/ Mike Docherty(2004), Innovation. net weblog:http://venture2. typepad. com/innovationnet/corporate_venturing/ Robert A. Burgelman and Liisa Valikangas (2005), Managing Internal Corporate Venturing Cycles Zenas Block Ian C. MacMillan (1995), Corporate Venturing: Creating new Businesses within the Firm