Ventures for corporate growth

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By Knowledge Hub

As the traditional avenues of corporate growth become less attractive, many companies find the appeal of new venture strategies harder to resist. Though difficult to implement and often slow to repay investment, these strategies do offer the promise of facilitating entry into new business areas with innovative, usually technology-based products. And for large companies with many layers of management and detailed control systems, ventures offer the special promise of recapturing some vital spark of entrepreneurial energy.

In this piece we discuss the growing appeal of new venture strategies and the particular kinds of needs that they meet. Then, drawing on his extensive research into venture organizations, 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.

To meet ambitious plans for growth and diversification, corporations are turning in increasing numbers to new venture strategies. 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: Given its uncertain promise, why is corporate venturing proving so attractive?

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 either to enter new markets or to 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 both necessary and desirable to establish for it a structure quite different from that in use throughout the rest of the organization.

Entering unfamiliar markets, employing unfamiliar technology, and implementing an unfamiliar organizational structure—even taken separately, each of these presents a troublesome challenge. Put all three together in a single new venture organization, and it is no wonder that their joint probability of success is rather small.

Nonetheless, venture strategies are increasingly attractive to many companies. My purpose in this article is, first of all, to consider just 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 organization, which is best illustrated by Minnesota Mining and Manufacturing Company (3M) with its long-term record of success in venturing.

Why Establish a Venture Organization?

If the odds against a new venture strategy are high, what makes it so 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:

  • When it was still easy to identify unmet needs in the marketplace, companies could launch products to meet them with every expectation that the markets thus defined would continue to grow and to support continued company growth. Today, however, many such traditional markets have become saturated, incapable of additional sustained growth.
  • When there were still few large companies in the developed world and little technological competition among them, a company could apply its R&D capacities to develop new products, which it could then sustain relatively easily by ongoing efforts at incremental innovation. Today, with technological sophistication diffused throughout the world, for a company to remain competitive—especially with mature high-volume products—requires far more than the uneven performance of traditional R&D.
  • When untapped foreign markets were still plentiful, it was a simple matter to enter them. Today, the overwhelming likelihood is that those markets have long since been populated both by domestic competitors and by native companies.
  • When interest rates were lower, price/earnings ratios higher, and antitrust regulation less strictly enforced, companies could readily grow and diversify by acquiring other companies. Today, an acquisitions strategy can rarely be pursued on such advantageous terms.

In short, the most common growth strategies of an earlier era are no longer so easy to follow or so likely to succeed. Consequently, venture strategies, even with their low probability of success, have begun to look much better.

The Spectrum of Venture Strategies

Exhibit I displays the range of alternative strategies for launching new ventures. At one end are those approaches that feature essentially low company involvement; at the other, approaches that demand high levels of commitment both in dollars and in management time.

Exhibit I Spectrum of Venture Strategies

Venture Capital

At the far left of the spectrum is venture capital, the investment of money in the stock of one company by another. During the mid-to late 1960s many major corporations decided to secure entry into new technologies by taking investment positions in young high-technology enterprises. Major 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, but few of them have been able to make the venture capital approach by itself an important stimulus of corporate growth or profitability.

Venture Nurturing

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 still unlikely to have a significant impact on 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.

Venture Spin-Off

As a by-product of its R&D efforts, a corporation may develop an idea or technology that does not fit its mainstream interest, that may entail substantial risks to the parent, or that may be better developed on an independent basis 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 a good way to hold on to an internal entrepreneur or to exploit a by-product technology, but the limited involvement it allows still promises only limited returns to the parent company.

New-Style Joint Ventures

Because I think this approach of particular importance, I will discuss it in more detail later on. Here large and small companies enter jointly into new ventures. The small companies provide entrepreneurial enthusiasm, vigor, flexibility, and advanced technology; the large ones, capital and, perhaps more important, worldwide channels of marketing, distribution, and service. This combination allows for the rapid diffusion of technology-based product innovations into large national and international markets.2

Venture Merging & Melding

Toward the right side of Exhibit I is an approach that I call, for lack of a better name, venture merging and melding. This is what Exxon Enterprises is attempting 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. In turn, these strengths have allowed Exxon to transform itself from a huge—though unglamorous—one-product, narrow-technology oil company to an exciting company that is expanding into computers and communications, advanced composite materials, and alternative energy devices.3

Internal Ventures

Finally, on the far right are internal ventures, those situations in which a company sets up a separate entity within itself—an entirely separate division or group—for the purpose of entering different markets or developing 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 in some detail later in this article.

Teaming the Large with the Small

Let us now examine in depth 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 entry in the marketplace. The idea here is quite simple. The large company usually provides access to capital and to channels of distribution, sales, and service otherwise unavailable to the small company; in return, the small company provides 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 the process of innovation have shown time and again that small companies and individual inventors account for a disproportionate share of commercially successful, technologically based innovations.5 Whether the explanation lies in their superior commitment, drive, freedom from constraint, flexibility, or closeness to the market, the facts themselves are quite clear. Small entrepreneurially minded companies have been unusually able to come up with technological advances that are competitive in the marketplace.

Balancing Needs with Strengths

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—organizational and financial—in becoming national or international are tremendous. The great success stories of corporations such as Polaroid, Xerox, or Digital Equipment are clear exceptions to the rule.6 In the vast majority of cases, the small technology-based company simply cannot grow from within to large-scale size with the time and resources available to it.

By contrast, a large company has relatively easy access to capital markets as well as significant capital availability within itself. Moreover, it not only has large sales but a large establishment overall. It has ample manufacturing capacity located near its various national and international markets. It has a distribution and marketing organization that covers all its relevant market territory. It can service its products on a national and international basis.

Competitive Advantage

Now, if the entrepreneurial commitment, innovative behavior, and advanced technological products of the small company were combined with the capital availability, marketing strength, and distribution channels of the large, it stands to reason that the synthesis might well create significant competitive advantage. Indeed, many pairs of differently sized companies have entered into just this kind of venture arrangement. Exhibit II lists but 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, and it has been both technically and commercially successful. The development of the product came from a combination of the electronics technology and materials capability of Avco Everett with the marketing, distribution, and field service capability of Roche. More recently, Avco Everett has taken over the entire venture as part of its own diversification movement into the medical field.

Characteristic Difficulties

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 doing clinical analyses of patient fluids.

Though a partial technical success, the product was a commercial failure. Why? Because two kinds of problems often confront new-style ventures.


Often both partners misread the appropriateness of the large company’s channels of marketing and distribution. It is all too easy for a large company to think that it can sell almost anything through its vast field sales and service organization.

In the Johnson & Johnson-Damon case, Johnson & Johnson could correctly say that it had salespeople regularly calling on every major hospital in the free world. Therefore, it might well have felt it had the representation necessary to sell a Damon-developed clinical laboratory system. But Johnson & Johnson sold largely 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, however, 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 largest 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 major piece of clinical apparatus requires a special level of field service. With its different experience, Johnson & Johnson simply did not have that kind of field operation in place. To be fair, Johnson & Johnson had also been selling small medical instruments, but even this had not prepared it for the service requirements of a clinical laboratory analyzer.

Though it is easy to misread at first glance the appropriateness of a large company’s marketing channels, a little careful thought and common sense are often all that are needed. The central question is clear: Do the company’s sales and service organizations 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 specialty salesperson to an existing field office? Incremental change of this sort, if a realistic alternative, is almost always less expensive than starting from scratch and trying to build a whole new organization.

Impedance mismatch:

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 as 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 to commit on the spot whatever is necessary to implement the decision. The large corporation’s time scale for making decisions extends for months and sometimes years.

In general, the behavior 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. The small company executive talks to a few friends in other organizations to get a feeling for how they view a potential product. Such differences in organizational temperament can easily produce strains and misunderstandings.

Despite these various difficulties, I believe that the promise of new-style joint ventures is quite high. More than any other form of venturing, they offer the possibility of reasonably quick market impact and profitability, for they seek to build on competitive strengths already in place.

Internal Venturing at 3M

For over 30 years, 3M has primarily based its steady growth in size and profitability on new businesses developed through internal ventures. More than most other major corporations, it has thoroughly organized 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.

What Is a New Business?

To look at 3M’s organization on paper (see Exhibit III) is initially to see a rather ordinary structure. Near the top of the organization are two divisions that report to the vice president of research and development: the Corporate Research Laboratory and the New Business Development Division. The latter, however, has quite a different charter than that of comparable units in most other companies. Here is where the real 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 charged with the responsibility for evolving, nurturing, and maintaining diverse business activities at various stages of development. It is an internal venture nurturing organization, an operation that not only gives birth but also support and sustenance. When new products are big enough to be self-sustaining, it spins them down the organizational chart as part of an existing division or as a new product line division.

Product Development

The second point worth noting about 3M’s structure is that it is for the most part built on product line organizations, which have doubled in number since 1970, each with its own product development department. By itself this structure is not unusual. What is unusual is the charter of the product development departments. Each of them is charged with assisting the division that it serves by coming up with new products for that division’s present line of business, with incremental improvements in old products, and with useful process changes. All of this is conventional. What is unconventional is that each of the product development departments is also charged with the responsibility 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. Put simply, 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 in fighting trim.

The Eleventh Commandment

From top to bottom 3M’s management provides active, spirited encouragement for new venture generation. Many at the company even speak of a special 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. Benefit of the doubt goes of right to those who propose projects, not those who oppose them.

Of course, pushing a new product idea does not immediately throw open an endless bank account, but it does guarantee a chance to succeed. With the burden of proof on those who wish to kill ideas, the work environment within the company is distinctly favorable to entrepreneurial activity. In part this environment is the result of promoting top management from within, frequently from successes in venture management. But it is everywhere reinforced. 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.”

Sources of Funding

Another important kind of support for new ventures is the multiple sources of venture capital within the company. Corporate groups can provide funding for new ventures without regard to source, and each product line department can provide funding for its employees’ ideas no matter 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 idea does not go alone; he goes with it. The individual must be able to move with his idea and to join with his sponsor in undertaking the product development work. Then he and his sponsor quite properly share the blame if it fails and the benefits if it succeeds.

Product Teams

3M also gives special attention to the formation of product teams, entrepreneurial minibusiness 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 the further development and movement of 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 very big 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 by pointing out all of its deficiencies, its inadequate justification, and its lack of a market. Given the usual incentive systems, why should the marketing person share the risk? But instead of assigning him or her to evaluate the idea, 3M approaches Marketing and says, “Is anyone here interested in working on this?”

Here is a good instant test of a new product idea. If no one in the organization wants to join the new team, the idea behind it may not be very good. More important, whoever says, “I want in,” becomes a partner, not a subordinate. He or she shares both in the risk and in the commitment and enthusiasm that go along with 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 saying to them in effect, “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 measures of performance throughout the life cycle of the product. 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 simply fail, then we will at least guarantee you a backup job.”

And some 3M ventures do get cancelled. Although the company will not reveal its success/failure data, it has said that its ratio of success is comparable to that of other organizations. The key difference, of course, is that 3M starts many more new ventures.

Measures of Performance

The financial measures that 3M applies to new ventures are simple and to the point: ROI, profit margin, and sales growth rate. Only if a product team meets these criteria will the company make every effort to keep it going. These measures are straightforward and objective. What sets 3M’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 prior to its entry into the market, we do not really 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, not before. 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, 3M’s standards do not place area-of-business constraints on the generation of 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 can be sold through our existing sales and distribution channels.”

Reward Systems

The final element of 3M’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 responsibility of management at all levels, 3M has established special compensation incentives for those managers who are able to “breed” new ventures or departments.

Key Lessons from Venture Studies

I can make with confidence only three summary generalizations about successful new venture strategies.

They require long-term persistence. How long is long-term? At the bare minimum, if a corporation is not willing to commit itself to a five-to seven-year involvement, then it should not even think of undertaking new ventures. What is needed is “patient money”—money in the hands of an executive group that is centrally concerned with the future growth and development of the company, money that need not generate payoffs in the next few years. In fact, ten to twelve years is a more reasonable time span.

They depend on entrepreneurial behavior. 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 special virtues of building an entrepreneurial organization and of 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 special needs, abilities, and personnel. This is simple common sense, but—like much sound managerial wisdom—it is all too often forgotten.

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