Managing Internal Corporate Venturing Cycles

Thirty years of systematic study of internal corporate venturing has revealed that many major corporations experience a strange cyclicality in their ICV activity. (See “About the Research.”) Periods of intense ICV activity are followed by periods when such programs are shut down, only to be followed by new ICV initiatives a few years later. Like seasons, internal corporate venturing programs begin and end in a seemingly endless cycle.

Consider Lucent Technologies’ New Ventures Group, which was set up to reap commercial value from Bell Labs technology. In January 2000, the group was acclaimed as exemplifying best practice for a new-ventures division.1 Yet Lucent, in the aftermath of the telecom downturn, in 2002 sold 80% of its interest in the New Ventures Group to Coller Capital, a British private-capital management company.

Other ICV programs have substantially changed their character or mission. In its first three years of existence, Baxter International Inc.’s nontraditional-innovation program, for example, transformed its mission from the pursuit of new technologies in new markets to the exploration of business opportunities closer to the core business.2 (A new CEO has recently revived a broader search for new growth areas.) A few years ago, Shell GameChanger, the radical innovation program at Royal Dutch/Shell Group of Companies, might have solicited ideas ranging from carpooling to waste reclamation to sandwich sales to urbanites. However, in today’s innovation climate, such ideas are too radical.3

Xerox Corp. offers still another example. After ad hoc efforts to manage its technology ventures, Xerox established an innovation board in the 1980s to aid decision making. The administrative board soon gave way in 1989 to an internal venture-capital group called Xerox Technology Ventures, to invest in Xerox technologies that showed market potential but were outside Xerox’s core business interests. XTV was terminated in the mid-1990s, and yet another structure, called Xerox New Enterprise, became its replacement. XNE took more aggressive ownership of the ventures yet sought to infuse them with entrepreneurship. XNE, in turn, was terminated in the late 1990s.4

These examples should not come as a surprise. Earlier research found that in many companies, ICV programs manifest significant cyclicality.5 Chesbrough describes the ICV cycle as follows: “The general pattern is a cycle that starts with enthusiasm, continues into implementation, then encounters significant difficulties, and ends with eventual termination of the initiative. Yet within a few years, another generation of businesses undertakes the effort anew, and the cycle occurs again.”6 This recurring phenomenon seems wasteful of a company’s financial and human resources. ICV programs are usually closed before investment pays off, and careers are often damaged. Also, potentially important learning from a previous program often does not inform the next one.

Interestingly, as our recent examples indicate, ICV cyclicality continues several decades after researchers first observed the phenomenon. That suggests that companies have not yet learned to use some of the research findings about ICV in their strategic-management approaches. It also underscores the fact that managing ICV is quite difficult. It is so difficult that one scholar, Andrew Campbell, has argued in a recent debate inEuropean Business Forum against even trying to develop a strategic leadership discipline for dealing with internal corporate venturing as a dynamic internal force.7 Instead, Campbell recommends adopting a tight, top-driven approach to project selection that leaves very little room for new-business experimentation. He and others basically advocate giving up on what they call “new leg” venturing: efforts to develop entirely new businesses for the corporation.8

The fact that ICV activities have persisted over decades, however, suggests that the management issues associated with ICV cyclicality are not likely to go away.9 Historical evidence from the last three decades suggests that the perceived importance of ICV may fade away for a while, but ICV predictably comes back with a vengeance and will likely continue to be a nagging strategic leadership challenge for top management.

Why Internal Corporate Venturing Cycles Persist

Early research efforts suggested that the interplay between the prospects of a company’s mainstream businesses and the availability of uncommitted financial resources created a strong force driving ICV cyclicality.10 There are four common situations that can result from that interplay. (See “What Drives Internal Corporate Venturing Cycles?”)

Situation 1: “ICV Orphans”

If a company has uncommitted financial resources, it can afford to support internal-venturing projects. If, however, the prospects of the mainstream businesses are sufficient to meet the company’s profitable growth objectives, there is little motivation to support ICV actively, and top management is more likely to pay lip service to it. A number of entrepreneurial projects that nevertheless have managed to get started in the nooks and crannies of various business units are likely to drift along as “orphan” projects. In this case, the ICV cycle has started, even though top management is not actively managing it.

Situation 2: “All-Out ICV Drive”

If the company has financial resources available but the prospects of the mainstream business are expected to be insufficient for meeting corporate objectives for profitable growth, top management is motivated to support ICV projects actively. In this situation, top management is likely to form a new-venture division or new-business group. Such a structural arrangement then becomes the home for all existing ICV orphan projects and also serves as the implementation tool for starting an ambitious top-driven ICV program.

Situation 3: “ICV Irrelevance”

If there are few uncommitted financial resources available, but the prospects of the mainstream businesses at the moment look sufficiently promising, top management is likely to consider ICV largely irrelevant. All attention is to be focused on exploiting opportunities in the core businesses.

Situation 4: “Desperately Seeking ICV”

A lack of uncommitted financial resources combined with a mainstream business with inadequate growth prospects is likely to lead top managers to latch on desperately to the first reasonable-looking ICV project that comes their way. Given the limited choice of ICV projects that executives face in this situation and the substantial uncertainty associated with any ICV project, the likelihood of failure is high.

Forces Determining the Length of the ICV Cycle

To some extent, corporate venturing may follow the ups and downs of the economy. When cash is readily available, corporations invest in new-venture programs; when cash becomes short, the programs are terminated. However, the macroeconomic explanation for ICV cyclicality is probably partial at best. Corporate strategic and administrative factors likely have greater bearing on the length of the venturing cycle.

Estimates of the length of the ICV cycle vary. Block and MacMillan assess the cycle to be 10 years.11 Fast, however, notes that the corporate venturing programs started by many Fortune 500 companies in the late 1960s and early 1970s were disbanded during the late 1970s.12 Burgelman’s in-depth study of a new-venture division in a large diversified company during the mid-to-late 1970s also found a somewhat shorter cycle.13

Annual budgeting and three-year rolling budgets may contribute to the ICV cycle by establishing a one- to three-year time horizon in which top management expectations must be met or a venture program risks being deemed ineffective. This timeline puts perverse pressures on ventures to “grow big fast” and potentially leads to dysfunctional managerial behavior, such as neglecting to develop the organizational infrastructure of a venture in order to secure continued and timely new-product development.14

Biggadike has shown that, on average, it takes 10 to 12 years before the return on investment for new ventures equals that of mature businesses.15 That is much longer than the average time fast-track executives are expected to stay in the same job in most large companies. This creates at least three potential problems. First, executives who do stay that long in a venture-manager position may be running severe career risks, especially if the venture eventually is unsuccessful.16 Second, unless the company’s human resources function has developed clear executive career paths that require experience in venture positions and has ensured that capable managers are available to take over from those who are due to rotate out of a venture position, either some executives will end up staying in the position too long or the venture program will experience disruptive management changes.17 A recent case study of a product innovation in a technology company, for example, showed that frequent changes in the executive sponsor were detrimental to the commercial success of a disruptive innovation.18 Third, unless a process is in place to measure managerial performance in new ventures in terms of clearly established milestones, executives may engage in rational but narrowly opportunistic behavior; they may focus on achieving short-term results at the expense of building the necessary infrastructure for long-term venture development.19 They do so because they anticipate that, given the normal rotation of executives to different positions, someone else will be in charge by the time the innovation can be fully harvested.

Forces Driving the End of an ICV Cycle

The simplest driver for ending ICV programs is their failure to deliver. But if corporate venturing programs are typically closed before they have had a chance to prove themselves, other reasons than mere performance must be involved. Recent studies of various forms of corporate venturing shed interesting new light on the role of performance in ending an ICV cycle.20 In particular, some ICV programs have been terminated despite their apparent success. In general, these findings suggest that both top management and the executives involved in the ICV program fail to appreciate the role of ICV in a company’s corporate strategy.

One important case involves Xerox Technology Ventures in the mid-1990s. This program is credited withtoo much success in that “success might have made the [Xerox’s] internal units look bad by comparison.”21 There was the added fear that such success might have come at the expense of Xerox shareholders, as the startups funded by XTV may have competed for business with Xerox.22

In another case, a group of scientists at AT&T Corp. started a campaign called Opportunity Discovery Department in 1995 and sought to revitalize Bell Labs research and its links to the corporate strategy.23 ODD developed innovative strategies, worked with business units to think of future scenarios, networked with many external experts, and ignited a grassroots movement of some 400 people. The ODD initiative came to an end, however, in 1998 as the group was judged by standard performance metrics to have failed to produce enough patents. A more important reason was that management found it difficult to accept that the group was taking credit for strategy making, something that was considered a top-management responsibility and privilege. Those who saw setting strategy as their prerogative perceived ODD as a threat, and the group’s highly innovative approach only added to the discomfort.

Administrative factors can also end an ICV cycle. Companies often reorganize to meet changing environmental demands or to keep things fluid. An ICV program may create interference with the new organizational structure. A newly appointed executive to the ICV program may not be committed to the course of action taken by the prior manager and may want to leave a mark by making changes. In addition, ICV programs are usually easy targets for incoming CEOs to end.

The combination of such administrative issues with a general lack of understanding of the role of ICV programs in long-term corporate-development strategy may lead to what game theorists call “weakness of will.”24 Weakness of will is about the inability to sustain commitment. Investing in innovation is a long-term commitment and sometimes involves difficult trade-offs with short-term pressures. As Machiavelli observed, the benefits to the innovator are uncertain, but the costs to those affected by the changes involved are not.25 That is one reason resistance to innovation is likely to be stronger within an established organization than support for it.

Implications for Strategic Management of ICV

After a recent downsizing of corporate ventures, one CEO lamented privately that the extent of the cuts had eliminated future growth options. As that lament illustrates, the bad news stemming from our analysis is that ICV cyclicality is a nagging strategic leadership challenge facing top management of established companies. The good news is that the cyclicality of ICV is primarily the result of executives failing to master the forces that cause fluctuations in long-term support for ICV — a failure that can be remedied.

Too often, there is either too much or too little venturing going on at any point in established corporations, and top management allows support for ICV to oscillate among the four scenarios described earlier. ICV, however, is too important for a company’s long-term success to be dictated by fluctuating financial fortunes, short-term strategic pressures, perverse administrative routines or fickle management fads. Research shows that achieving growth through diversifying acquisitions is fraught with expensive failure.26 Thus internal corporate venturing remains a key capability for established companies seeking to achieve strategic renewal and avoid stalled growth.27 It is a strategic leadership imperative for top management to learn to better manage the ICV cycle. Specifically, several important implications for the discipline of ICV strategic management emerge from our analysis.28

There is always ICV going on, so manage it.

There may not be a dedicated internal-venturing unit in a company, yet it is likely that some employees are exploring new-business opportunities that are outside the scope of the corporate strategy at the time that the initiatives originate. Internal-venturing activity may very well be an irrepressible force in all established companies.29 Realizing that ICV activity is actually hard to stamp out completely may increase top management’s motivation to manage it better.

However, without management encouragement, much of the autonomous, employee-driven ICV activity will cease, either because the employees involved grow frustrated by an eventual lack of traction or because they leave the company to pursue the opportunity in a startup. This is often the case in companies in Situation 1, in which orphan ICV initiatives find it difficult to get senior management support, and even sometimes in Situation 3, where the ICV initiatives that are likely to emerge are considered irrelevant.

To better capitalize on the company’s natural source of ICV activity, top management needs to put in place a process that makes entrepreneurial employees comfortable coming forward with their ideas and mobilizes senior management to begin determining the new opportunities’ “strategic context,” a process that involves evaluating innovations and championing promising ones that the company can then embrace and fully support.30 Such a process needs to superimposestrategic discussions on top of financial analyses such as net present value calculations, in order to better ascertain what the potential impact of an innovation may be on the company’s future.

An old but striking example of the hazards of evaluating innovations by strictly financial measures is the emergence of electronic fuel injection.31 Today, Robert Bosch GmbH, based in Stuttgart, Germany, is a leading supplier of electronic fuel-injection systems. However, Bendix, an American company, invented electronic fuel injection. At Bendix, net present value calculations, together with anticipated near-term reactions from original equipment manufacturers in the United States, did not suggest that electronic fuel injection would be an economically viable new product. When Volkswagen AG decided to work with Bosch to bring a mass-produced car with electronic fuel injection to market during the late 1960s, Bendix opted to license its technology to Bosch. By the time Bendix realized that electronic fuel injection would be a big opportunity and rushed to pursue it, it was too late, given the time remaining on its patents, to establish a position of market leadership.

By now, the concept of “disruptive technology” has begun to raise top management’s awareness of the need to adopt a more strategic approach to innovation.32 But the link between disruptive technology and ICV, which is often its source, remains undermanaged. Eastman Kodak Co. is a case in point. One of the great industrial and commercial success stories of the 20th century, Kodak had a somewhat checkered history in pursuing ICV during the 1970s and 1980s.33 During the late 1990s, however, the company was still seeking to migrate from film — a source of a “breathtaking” decline in earnings — to invest $3 billion in digital photography, a major disruptive force.34 Ironically, Kodak had been making investments in digital photography since 1972. However, by 2003, film still accounted for about 50% of Kodak’s profits.35

View ICV as a source of insights that can inform strategic direction.

Even when not needed to support profitable growth objectives at a particular moment in time, ICV activity can be an important indicator of where the company’s employees think future opportunities lie. Indeed, self-organizing, emergent ICV activity can be an important source of strategic foresight. Smart top executives recognize that ICV is a discovery process that should be evaluated first and foremost in terms of the information that it generates and not viewed only in terms of dollars added to the revenue line.36 Rather than seeking to quash ICV or direct it too heavily, top management should view it as a source of strategic insight into the future. Senior executives should be interested in the ideas and related autonomous strategic initiatives that entrepreneurial employees may be working on in their spare time. Management should try to understand what is so motivating and promising that people are willing to work on it, often after regular working hours or on weekends. If a company’s employees are working on such innovations, competitors and startups may also be. Companies can capitalize on grass-roots innovation by their employees. For example, during the last five years, Whirlpool Corp. has systematically tapped employee ideas, ending up with a pipeline of product innovations including dishwashers for single-person households, ovens that freeze and heat, and garage appliances for men.37

An “all-out ICV drive” biases the process and often engenders costly mistakes.

Such top-driven initiatives tend to warp the ICV process because many employees then perceive the ICV career route as the most attractive one simply because of management’s forcefully expressed interests. As a result, the mainstream business runs the risk of losing top talent, to the great frustration and resentment of those still generating all of the company’s profits. Intel Corp.’s all-out drive in the late 1990s to develop new businesses, for example, had executives in the microprocessor business complaining that they could not hold on to key employees who wanted to join the more exciting new ventures supported by top management. Top-driven ICV may also result in big losses, because top management may prematurely invest significantly to try to fully exploit and accelerate new growth opportunities. For example, by the time Iridium LLC, a satellite-telephone service, filed for Chapter 11 bankruptcy in August 1999, Motorola Inc. had invested $3.5 billion in the venture.

If ICV is desperately needed, it may be almost too late.

When desperately seeking ICV, a company is faced with the dire prospect of a decaying core business. Such decay is often caused by disruptive technologies, which the company may very well have dabbled in early on but given up or failed to capitalize on. To avoid ending up in this situation, it is imperative that top management remains actively involved in a corporate ICV strategy on a continuous basis even when the mainstream business is prospering. If top management waits until new business opportunities are desperately needed, it is usually already very late in the game.

Building Leadership Capability to Manage the ICV Cycle

How can companies develop the necessary strategic leadership to avoid getting trapped in any of the four common situations associated with the ICV cycle? To avoid the pitfalls of unmanaged cyclicality, ICV should be viewed as an integrated and continuous part of the company’s strategy-making process, rather than as an insurance policy whose appeal varies according to the prospects of the company’s mainstream businesses. Effectively integrating ICV into the strategy-making process requires recognition on the part of top management that internal corporate venturing involves a distinct strategic leadership discipline — a discovery process based on experimentation and selection38 —that informs executives about emerging opportunities and facilitates nuanced adjustments to the company’s strategic direction.39 Treating ICV this way consistently over time is likely to raise important questions that will help shape corporate strategy. For instance, which new opportunities consistent with the core strengths of the company does ICV open up? Which new leverage points in competition might ICV provide? How does ICV inform us about the potentially unmet needs of our customers and new market segments? What does ICV tell us about the blind spots in our current competitive strategy, especially in relation to potentially disruptive technologies?

UPM-Kymmene Corp., a leading Finland-based forest and paper-products company that is listed on the Helsinki and New York stock exchanges, has experienced benefits from its venturing activities, in part because the activities both challenge and broaden the interpretation of corporate strategy. UPM has a history of new business creation beyond paper, partly through one of its predecessor companies, Yhtyneet Paperitehtaat. The company’s newest venture, UPM Rafsec, was founded in 1997 to mass-produce radio-frequency identification tags for global markets. Currently, through its New Ventures organization, UPM is dedicated to exploring new areas in which the company has materials and manufacturing know-how, such as printed electronics, nanotechnology, smart labels and chemical indicators. But New Ventures also helps facilitate innovation more broadly inside UPM’s core businesses. It has developed forums for innovators across focal areas — called “clusters” — that represent core technologies and significant future opportunity for existing UPM divisions. These clusters and their activities offer vehicles for cross-divisional collaboration, bringing innovation processes and tools that New Ventures has developed from the venturing periphery to the core. For instance, New Ventures has helped introduce product-development tools, such as prototyping, that make innovation less risky and more efficient. The return on investment for UPM’s small 13-person New Ventures group is so far perceived to be high and exemplary.

When companies recognize the importance of ICV to strategy, they are less likely to try to do away with ICV entirely. Intel’s decision in 2001 to scale back rather than end its efforts to develop new ventures offers an example of a leading corporation attempting to better manage the ICV cycle. (See “Lessons From Intel.”) Intel is persisting as the company tries to make its commitment to venturing pay off in the long run.40

Taking control of the ICV cycle allows executives to rationalize resource allocation. This will reduce the tendency to flood ICV with resources in good times, which takes away entrepreneurial hunger, and to starve it in bad times, which aborts potential successes. Rationalizing resource allocation implies careful early experimenting with small amounts of resources to gain insight into radically new opportunities that inherently involve high technological and market uncertainties. It also implies consistent nurturing of new businesses that pass strategic and financial milestone reviews, with carefully calibrated resource commitments increasing over extended periods.41 It is important to maintain some predictability in resource allocation so that, once milestones have been met, further funding will result independently of the business cycle.

Another key aspect of managing internal corporate venturing cyclicality is making ICV a responsibility of all senior executives. If senior executives in the mainstream businesses do not feel that they share responsibility for ICV, do not feel that ICV efforts are central and lasting, or do not feel that the executives running ICV are equally able peers, the forces driving ICV cyclicality are likely to prevail. In order to make a new venture a corporate success, executives involved in ICV need to be able to sponsor and guide the new venture and to start the process of determining its strategic context within the corporation. Determining a new venture’s strategic context involves working diligently to explore its links to the corporate strategy and to persuade top management to make the venture part of the corporate business portfolio. But that process depends on getting support from at least some of the senior executives from the mainstream businesses, so that top management can be assured that the rest of the organization will embrace the new venture. As a result, a climate of mutual respect on the part of all the senior executives involved is critical. Intel achieved this by assigning highly respected senior executives to head up its ventures organization. Nokia Corp., too, achieved this, in part through the development of a ventures board of directors on which all the senior executives serve. And, equally importantly, the president of Nokia was put in charge of all the company’s corporate venturing efforts.42

ICV cyclicality is probably here to stay because of the powerful forces that create it. Learning to better manage the ICV cycle, however, is important for large, established companies because other profitable growth avenues may not be promising. Major, portfolio-diversifying acquisitions are costly and often do not create shareholder value. Smaller and midsize acquisitions can play an important role, but eventually smallish acquisitions may not remain sufficient to reach corporate growth objectives. Developing an effective ICV capability thus seems an unavoidable strategic imperative for top management of large companies.43 We should perhaps not be surprised that few companies have been successful in developing such a capability because the strategic leadership skills that are required to effectively explore and develop ill-defined and uncertain new-venture opportunities are different from those required to exploit well-defined and incremental core-business opportunities. Our analysis suggests, however, that top management can learn to better manage the forces that drive ICV cyclicality — and avoid being driven by them.