Managing the Internal Corporate Venturing Process

Many large established firms currently seem to be trying hard to improve their capacity for managing internal entrepreneurship and new ventures. Companies like Du Pont and General Electric have appointed CEOs with a deep understanding of the innovation process.1 IBM has generated much interest with its concept of “independent business units.”2 To head its new ventures division, Allied Corporation has attracted the person who ran 3M’s new ventures group for many years.3 These are only some of the better publicized cases.

Most managers in large established firms will probably agree that internal corporate venturing (ICV) is an important avenue for corporate growth and diversification. However, they will also probably observe that it is a hazardous one, and will be ready to give examples of new ventures (and managerial careers) gone for naught.

Systematic research suggests that such apprehension is not unfounded. In a large sample study of firms attempting to diversify through internal development, Ralph Big-gadike found that it takes on the average about eight years for a venture to reach profitability, and about ten to twelve years before its ROI equals that of mainstream business activities.4 He concludes his study with the caveat that new business development is “not an activity for the impatient or for the fainthearted.” Norman Fast did a study of firms that had created a separate new venture division to facilitate internally developed ventures.5 He found that the position of such new venture divisions was precarious. Many of these were short-lived, and most others suffered rather dramatic changes as a result of often erratic changes in the corporate strategy and/or in their political position. An overview of earlier studies on new ventures is provided by Eric von Hippel, who observed a great diversity of new venture practices.6 He also identified some key factors associated with the success and failure of new ventures, but did not document how the ICV process takes shape.

The purpose of this article is to shed additional light on some of the more deep-rooted problems inherent in the ICV process and to suggest recommendations for making a firm’s ICV strategy more effective. This article presents a new model capable of capturing the intricacies of managerial activities involved in the ICV process. This model provides a fairly complete picture of the organizational dynamics of the ICV process. By using this new tool, we can identify and discuss key problems and their interrelationships and then suggest some ideas for alleviating, if not eliminating, these deep-rooted problems.

A New Model of the ICV Process

The hazards facing internal corporate ventures are similar in many ways to those confronting new businesses developed by external entrepreneurs. Not surprisingly, the ICV process has typically been conceptualized in terms of a “stages model” which describes the evolution and organization development of a venture as a separate new business. Such a model emphasizes the sequential aspects of the development process, and focuses on problems within the various stages and on issues pertaining to the transitions between stages. For example, Jay Galbraith has recently proposed a model of new venture development that encompasses five generic stages: (1) proof of principle, prototype; (2) model shop; (3) start-up volume production; (4) natural growth; (5) strategic maneuvering.7 He discusses the different requirements of these five stages in terms of tasks, people, rewards, processes, structures, and leadership.

Such a stages model is useful for helping managers to organize their experiences and to anticipate problems of fledgling businesses. However, it does not really address the problems of growing a new business in a corporate context. Many difficult problems generated and encountered by ICV result from the fact that related strategic activities take place at multiple levels of corporate management. These must be considered simultaneously as well as sequentially in order to understand the special problems associated with ICV.

A Process Model of ICV

The work of Joseph Bower and his associates has laid the foundation for a “process model” approach which depicts the simultaneous as well as sequential managerial activities involved in strategic decision making in large complex firms.8 Recently, I have proposed an extension of this approach that has generated a new model of the ICV process.9 This new model is based on the findings of an in-depth study of the complete development process of six ICV projects in the context of the new venture division of one large diversified firm. These ICV projects purported to develop new businesses based on new technologies, and constituted radical innovation efforts from the corporation’s viewpoint. The Appendix provides a brief description of the methodology used in the study. Figure 1 shows the new model of ICV.

Figure 1 shows the core processes of an ICV project and the overlaying processes (the corporate context) in which the core processes take shape. The core processes of ICV comprise the activities through which a new business becomes defined (definition process) and its development gains momentum in the corporation (impetus process). The overlaying processes comprise the activities through which the current corporate strategy is extended to accommodate the new business thrusts resulting from ICV (strategic context determination), and the activities involved in establishing the administrative mechanisms to implement corporate strategy (structural context determination).

The model shows how each of the processes is constituted by activities of managers at different levels in the organization. Some of these activities were found to be more important for the ICV process than others. These key activities are indicated by the shaded areas. They represent new concepts which are useful to provide a more complete description of the complexities of the ICV process. Because they allow us to refer to these complexities in a concise way, they also serve to keep the discussion manageable. The process model shown in Figure 1 is descriptive. It does not suggest that the pattern of activities is optimal from a managerial viewpoint. In fact, many of the problems discussed below result from this particular pattern that the ICV process seems to take on naturally.

Major Problems in the ICV Process

The process model provides a framework for elucidating four important problem areas observed in my study:

• Vicious circles in the definition process,
• Managerial dilemmas in the impetus process,
• Indeterminateness of the strategic context of ICV development, and
• Perverse selective pressures exerted by the structural context on ICV development.

Table 1 serves as a road map for discussing each of these problem areas.

Vicious Circles in the Definition Process

The ICV projects in my study typically started with opportunistic search activities at the group leader level (first-level supervisor) in the firm’s research function. Technical linking activities led to the assembling of external and/or internal pieces of technological knowledge to create solutions for new or known, but unsolved, technical problems. Need linking activities involved the matching of new technical solutions to new or poorly served market needs. Both types of linking activities took place in an iterative fashion. Initiators of ICV projects perceived their initiatives to fall outside of the current strategy of the firm, but felt that there was a good chance they would be included in future strategic development if they proved to be successful.

At the outset, however, project initiators typically encountered resistance and found it difficult to obtain resources from their managers to demonstrate the feasibility of their project. Hence, the emergence of vicious circles: resources could be obtained if technical feasibility was demonstrated, but such a demonstration required resources. Similar problems arose with efforts to demonstrate commercial feasibility. Even when a technically demonstrated product, process, or system existed, corporate management was often reluctant to start commercialization efforts, because they were unsure about the firm’s capabilities to do this effectively.

Product championing activities, which have been well documented in the literature, served to break through these vicious circles.10 Using bootlegging and scavenging tactics, the successful product champion was able to provide positive information which reassured middle-level management and provided them with a basis for claiming support for ICV projects in their formal plans. As the product initiator of a medical equipment venture explained:

When we proposed to sell the ANA product by our own selling force, there was a lot of resistance, out of ignorance. Management did numerous studies, had outside consultants on which they spent tens of thousands of dollars; they looked at ZYZ Company for a possible partnership. Management was just very unsure about its marketing capability. I proposed to have a test marketing phase with twenty to twenty-five installations in the field. We built our own service group; we pulled ourselves up by the “bootstrap.” I guess we had more guts than sense.

Why Does the Problem of Vicious Circles Exist?

The process model provides some insight about this by showing the connection between the activities of the different levels of management involved in the definition process (see Table 1). Operational-level managers typically struggled to conceptualize their somewhat nebulous (at least to outsiders) business ideas, which made communication with management difficult. Their proposals often went against conventional corporate wisdom. They could not clearly specify the development path of their projects, and they could not demonstrate in advance that the resources needed would be used effectively in uncharted domains.

Middle-level managers in corporate R&D (where new ventures usually originated) were most concerned about maintaining the integrity of the R&D work environment, which is quite different from a business-oriented work environment. They were comfortable with managing relatively slow-moving exploratory research projects and well-defined development projects. However, they were reluctant to commit significant amounts of resources (especially people) to suddenly fast-moving areas of new development activity that fell outside of the scope of their current plans and that did not yet have demonstrated technical and commercial feasibility. In fact, the middle-level manager often seemed to encourage, not just tolerate, the sub-rosa activities of a project’s champion. As one such manager said, “I encourage them to do ‘bootleg’ research; tell them to come back [for support] when they have results.”

At the corporate level, managers seemed to have a highly reliable frame of reference to evaluate business strategies and resource allocation proposals pertaining to the main lines of the corporation’s business. However, their capacity to deal with substantive issues of new business opportunities was limited, and their expectations concerning what could be accomplished in a short time frame were often somewhat unrealistic. Also, ICV proposals competed for scarce top management time. Their relatively small size combined with the relative difficulty in assessing their merit made it at the outset seem uneconomical for top management to allocate much time to them.

The process model shows the lack of articulation between the activities of different levels of management; this may, to a large extent, account for the vicious circles encountered in the definition process.

Managerial Dilemmas in the Impetus Process

Successful efforts at product championing demonstrated that the technical and commercial potential of a new product, process, or system was sufficient to result in a sizeable new business. This, in turn, allowed an ICV project to receive “venture” status: to become a quasi-independent, embryonic new business organization with its own budget and general manager. From then on, continued impetus for its development seemed entirely dependent on achieving fast growth in order to convince top management that it could grow to a $50 to $100 million business within a five- to ten-year period.

My findings suggest that this created a dilemmatic situation for the venture manager: maximizing growth with the one product, process, or system available versus building the functional capabilities of the embryonic business organization. Similarly, the middle-level manager was confronted with a dilemmatic situation: focusing on expanding the scope of the new business versus spending time coaching the (often recalcitrant) venture manager.

Ironically, my study indicates that new product development was likely to be a major problem of new ventures.11 Lacking the carefully evolved relationships between R&D, engineering, marketing, and manufacturing typical for the mainstream operations of the firm, the venture’s new product development schedules tended to be delayed and completed products often showed serious flaws. This was exacerbated by the tendency of the venture’s emerging R&D group to isolate itself from the corporate R&D department, partly in order to establish its own “identity.” A related, and somewhat disturbing, finding was that new venture managers seemed to become the victims of their own success at maintaining impetus for the venture’s development. Here are some examples from my study:

• In an environmental systems venture, the perceived need to grow very fast led to premature emphasis on commercialization. Instead of working on the technical improvement of the new system, the venture’s resources were wasted on (very costly) remedial work on systems already sold. After a quick rise, stagnation set in and the venture collapsed.
• In a medical equipment venture, growth with one new system was very fast and could be sustained. However, after about five years, the new products needed for sustaining the growth rate turned out to be flawed. As one manager in the venture commented: “Every ounce of effort with Dr. S. [the venture manager] was spent on the short run. There was no strategizing. New product development was delayed, was put to corporate R&D. Every year we had doubled in size, but things never got any simpler.”

In both cases the venture manager was eventually removed.

How Do These Dilemmas Arise?

The process model shows how the strategic situation at each level of management in the impetus process is different, with fast growth being the only shared interest (see Table 1).

At the venture manager level, continued impetus depended on strategic forcing efforts: attaining a significant sales volume and market share position centered on the original product, process, or system within a limited time horizon.12 To implement a strategy of fast growth, the venture manager attracted generalists who could cover a number of different functional areas reasonably well. Efficiency considerations became increasingly important with the growth of the venture organization and with competitive pressures due to product maturation. New functional managers were brought in to replace the generalists. They emphasized the development of routines, standard operating procedures, and the establishment of an administrative framework for the venture. This, however, was time-consuming and detracted from the all-out efforts to grow fast. Growth concerns tended to win out, and organization building was more or less purposefully neglected.

While the venture manager created a “beachhead” for the new business, the middle-level manager engaged in strategic building efforts to sustain the impetus process. Such efforts involved the conceptualization of a master strategy for the broader new field within which the venture could fit. They also involved the integration of projects existed elsewhere in the corporation, and/or of small firms that could be acquired with the burgeoning venture. These efforts became increasingly important as the strategic forcing activities of the venture manager reached their limit, and major discontinuities in new product development put more stress on the middle-level manager to find supplementary products elsewhere to help maintain the growth rate. At the same time, the administrative problems created by the strategic forcing efforts increasingly required the attention of the venture manager’s manager. Given the overwhelming importance of growth, however, the coaching activities and organization building were more or less purposefully neglected.

The decision by corporate-level management to authorize further resource allocations to a new venture was, to a large extent, dependent on the credibility of the managers involved. Credibility, in turn, depended primarily on the quantitative results produced. Corporate management seemed to have somewhat unrealistic expectations about new ventures. They sent strong signals concerning the importance of making an impact on the overall corporate position soon. This, not surprisingly, reinforced the emphasis to achieve growth on the part of the middle and operational levels of management. One manager in a very successful venture said, “Even in the face of the extraordinary growth rate of the ME venture, the questions corporate management raised when they came here concerned our impact on the overall position of GAMMA, rather than the performance of the venture per se.”

Indeterminateness of the Strategic Context of ICV

The problems encountered in the core process of ICV are more readily understood when examining the nature of the overlaying processes (the corporate context) within which ICV projects took shape. My findings indicated a high level of indeterminateness in the strategic context of ICV. Strategic guidance on the part of top management was limited to declaring corporate interest in broadly defined fields like “health” or “energy.” Also, there seemed to be a tendency for severe oscillations in top management’s interest in ICV — a “now we do it, now we don’t” approach. It looked very much as if new ventures were viewed by top management as insurance against mainstream business going badly, rather than as a corporate objective per se.13 As one experienced middle-level manager said:

They are going into new areas because they are not sure that we will be able to stay in the current mainstream businesses. That is also the reason why the time of maturity of a new venture is never right. If current business goes OK, then it is always too early, but when current business is not going too well, then we will just jump into anything!

In other words, corporate management’s interest in new ventures seemed to be activated primarily by the expectation of a relatively poor performance record with mainstream business activities — a legacy most top managers want to avoid. Treating ICV as “insurance” against such an undesirable situation, however, implies the unrealistic assumption that new ventures can be developed at will within a relatively short time frame, and plays down the importance of crafting a corporate development strategy in substantive terms. Lacking an understanding of substantive issues and problems in particular new venture developments, top management is likely to become disenchanted when progress is slower than desired. Perhaps not surprisingly, venture managers in my study seemed to prefer less rather than more top management attention until the strategic context of their activities was more clearly denned.

Why This Indeterminateness?

In determining the strategic context (even more than the impetus process), the strategies of the various levels of management showed a lack of articulation with each other. The process model in Table 1 allows us to depict this.

Corporate management’s objectives concerning ICV seemed to be ambiguous. Top management did not really know which specific new businesses they wanted until those businesses had taken some concrete form and size, and decisions had to be made about whether to integrate them into the corporate portfolio through a process of retroactive rationalizing. Top management’s actual (as opposed to declared) time horizon was typically limited to three to five years, even though new ventures take between eight and twelve years on the average to become mature and profitable.

Middle managers were aware that they had to take advantage of the short-term windows for corporate acceptance. They struggled with delineating the boundaries of a new business field. They were aware that it was only through their strategic building efforts and the concomitant articulation of a master strategy for the ongoing venture initiatives that the new business fields could be concretely delineated and possible new strategic directions determined. This indeterminateness of the strategic context of ICV required middle-level managers to engage in organizational championing activities.14 Such activities were of a political nature and time-consuming. As one venture manager explained, these activities required an “upward” orientation which is very different from the venture manager’s substantive and downward (hands-on) orientation. One person who had been general manager of the new venture division said: “It is always difficult to get endorsement from the management committee for ventures which require significant amounts of resources but where they cannot clearly see what is going to be done with these resources. It is a matter of proportion on the one hand, but it is also a matter of educating the management committee which is very difficult to do.”

The middle-level manager also had to spend time working out frictions with the operating system that were created when the strategies of the venture and mainstream businesses interfered with each other. The need for these activities further reduced the amount of time and effort the middle-level manager spent coaching the venture manager.

At the operational level, managers engaged in opportunistic search activities which led to the definition of ICV projects in new areas. These activities were basically independent of the current strategy of the firm. The rate at which mutant ideas were pursued seemed to depend on the amount of slack resources available at the operational level. Many of these autonomous efforts were started as “bootlegged” projects.

Perverse Selective Pressures of the Structural Context

Previous research indicates that reaching high market share fast has survival value for new vexntures.15 Hence, the efforts to grow fast which I found pervading the core processes correspond to the managers’ correct assessment of the external strategic situation.

My study, however, suggests that the firm’s structural context exerted perverse selective pressures to grow fast which exacerbated the external ones. This seemed in part due to the incompleteness of the structural context in relation to the special nature of the ICV process. Establishing a separate new venture division was useful for nurturing and developing new businesses that fell outside of the current corporate strategy. (It was also convenient to have a separate “address” for projects that were “misfits” or “orphans” in the operating divisions.) However, because the managerial work involved in these was very different from that of the mainstream business, the corporate measurement and reward systems were not adequate, and yet they remained in effect, mostly, in the new venture division (NVD).

Another part of the structural context problems resulted from the widely shared perception that the position of the NVD was precarious.16 This, in turn, created an “it’s now or never” attitude on the part of the participants in the NVD, adding to the pressures to grow fast.

How Do These Selective Pressures Arise?

Table 1 shows the situation at each of the management levels. Corporate management did not seem to have a clear purpose or strong commitment to new ventures. It seemed that when ICV activities expanded beyond a level that corporate management found opportune to support in light of their assessment of the prospects of mainstream business activities, changes were effected in the structural context to “consolidate” ICV activities. These changes seemed reactive and indicative of the lack of a clear strategy for diversification in the firm. One high-level manager charged with making a number of changes in which the NVD would operate in the future said:

To be frank, I don’t feel corporate management has a clear idea. Recently, we had a meeting with the management committee, and there are now new directives. Basically, it de-emphasizes diversification for the moment. The emphasis is on consolidation, with the recognition that diversification will be important in the future …. The point is that we will not continue in four or five different areas anymore.

At the middle level, the incompleteness of the structural context also manifested itself in the lack of integration between the ICV activities and the mainstream businesses. Middle-level managers of the new venture division experienced resistance from managers in the operating divisions when their activities had the potential to overlap. Ad hoc negotiations and reliance on political savvy substituted for long-term, joint optimization arrangements.17 This also created the perception that there was not much to gain for middle-level star performers by participating directly in the ICV activities. In addition, the lack of adequate reward systems also made middle-level managers reluctant to remove venture managers in trouble. One middle-level manager talked about the case of a venture manager in trouble who had grown a project from zero to about $30 million in a few years:

When the business reached, say, $10 million, they should have talked to him; have given him a free trip around the world, $50 thousand, and six months off; and then have persuaded him to take on a new assignment. But that’s not the way it happened. For almost two years, we knew that there were problems, but no one would touch the problem until it was too late and he had put himself in a real bind. We lost some good people during this period, and we lost an entrepreneur.

At the operational level, managers felt that the only reward available was to become general manager of a sizeable new business in the corporate structure. This “lure of the big office” affected the way in which they searched for new opportunities. One high-level manager observed, “People are looking around to find a program to latch onto, and that could be developed into a demonstration plan. Business research always stops after one week, so to speak.”

Making the ICV Strategy Work Better

Having identified major problem areas with the help of the process model, we can now propose recommendations for improving the strategic management of ICV. They serve to alleviate, if not eliminate, the problems by making the corporate context more hospitable to ICV. This could allow management to focus more effectively on the problems inherent in the core processes.

There are four “themes” for the recommendations which correspond to the four major problem areas already discussed:

• Facilitating the definition process,
• Moderating the impetus process,
• Elaborating the strategic context of ICV, and
• Refining the structural context of ICV.

Each of these themes encompasses more specific action items for management. Table 2 summarizes the various recommendations and their expected effects on the ICV process.

Facilitating the Definition Process

Timely assessment of the true potential of an ICV project remains a difficult problem. This follows from the very nature of such projects: the many uncertainties around the technical and marketing aspects of the new business, and the fact that each case is significantly different from all others. These factors make it difficult to develop standardized evaluation procedures and development programs, without screening to death truly innovative projects.

Managing the definition process effectively poses serious challenges for middle-level managers in the corporate R&D department. They must facilitate the integration of technical and business perspectives, and they must maintain a life line to the technology developed in corporate R&D as the project takes off. As stated earlier, the need for product championing efforts, if excessive, may cut that life line early on and lead to severe discontinuities in new product development after the project has reached the venture stage. The middle-level manager’s efforts must facilitate both the product championing efforts and the continued development of the technology base by putting the former in perspective and by making sure that the interface between R&D and businesspeople works smoothly.

Facilitating the Integration of R&D-Business Perspectives.

To facilitate the integration of technical and business perspectives, the middle manager must understand the operating logic of both groups, and must avoid getting bogged down in technical details yet have sufficient technical depth to be respected by the R&D people. Such managers must be able to motivate the R&D people to collaborate with the businesspeople toward the formulation of business objectives against which progress can be measured. Formulating adequate business objectives is especially important if corporate management becomes more actively involved in ICV and develops a greater capacity to evaluate the fit of new projects with the corporate development strategy.

Middle-level managers in R&D must be capable of facilitating give-and-take between the two groups in a process of mutual adjustment toward the common goal of advancing the progress of the new business project. It is crucial to create mutual respect between technical and businesspeople. if the R&D manager shows respect for the contribution of the businesspeople, this is likely to affect the attitudes of the other R&D people. Efforts will probably be better integrated if regular meetings are held with both groups to evaluate, as peers, the contribution of different team members.

The Middle Manager as Coach.

Such meetings also provide a vehicle to better coach the product champion, who is really the motor of the ICV project in this stage of development. There are some similarities between this role and that of the star player on a sports team. Product champions are often viewed in either/or terms: either they can do their thing and chances are the project will succeed (although there may be discontinuities and not fully exploited ancillary opportunities), or we harness them but they will not play.

A more balanced approach is for the middle-level manager to use a process that recognizes the product champion as the star player, but that, at times, challenges him or her to maintain breadth by having to respond to queries:

• How is the team benefiting more from this particular action than from others that the team may think to be important?
• How will the continuity of the team’s efforts be preserved?
• What will the next step be?

To support this approach, the middle manager should be able to reward team members differently. This, of course, refers back to the determination of the structural context, and reemphasizes the importance of recognizing, at the corporate level, that different reward systems are necessary for different business activities.

Moderating the Impetus Process

The recommendations for improving the corporate context (the overlaying processes) of ICV, have implications for the way in which the impetus process is allowed to take shape. Corporate management should expect the middle-level managers to think and act as corporate strategists and the operational-level managers to view themselves as organization builders.

The Middle-Level Managers as Corporate Strategists.

Strategy making in new ventures depends, to a very great extent, on the middle-level managers. Because new ventures often intersect with multiple parts of mainstream businesses, middle managers learn what the corporate capabilities and skills — and shortcomings — are, and they learn to articulate new strategies and build new businesses based on new combinations of these capabilities and skills. This, in turn, also creates possibilities to enhance the realization of new operational synergies existing in the firm. Middle-level managers can thus serve as crucial integrating and technology transfer mechanisms in the corporation, and corporate management should expect them to perform this role as they develop a strategy for a new venture.

The Venture Managers as Organization Builders.

Pursuing fast growth and the administrative development of the venture simultaneously is a major challenge during the impetus process. This challenge, which exists for any start-up business, is especially treacherous for one in the context of an established firm. This is because managers in ICV typically have less control over the selection of key venture personnel, yet, at the same time, have access to a variety of corporate resources. There seems to be less pressure on the venture manager and the middle-level manager to show progress in building the organization than there is to show growth.

The recommendations concerning measurement and reward systems should encourage the venture manager to balance the two concerns better. The venture manager should have leeway in hiring and firing decisions, but should also be held responsible for the development of new functional capabilities and the administrative framework of the venture. This would reduce the probability of major discontinuities in new product development mentioned earlier. In addition, it would provide the corporation with codified know-how and information which can be transferred to other parts of the firm or to other new ventures, even if the one from which it is derived ultimately fails as a business. Know-how and information, as well as sales and profit, become important outputs of the ICV process.

Often the product champion or venture manager will not have the required capabilities to achieve these additional objectives. The availability of compensatory rewards and of avenues for recycling the product champion or venture manager would make it possible for middle management to better tackle deteriorating managerial conditions in the new business organization. Furthermore, the availability of a competent replacement (after systematic corporate search) may induce the product champion or venture manager to relinquish his or her position, rather than see the venture go under.

Elaborating the Strategic Context of ICV

Determining the strategic context of ICV is a subtle and somewhat elusive process involving corporate and middle-level managers. More effort should be spent on developing a long-term corporate development strategy explicitly encompassing ICV. At the same time measures should be taken to increase corporate management’s capacity to assess venture strategies in substantive terms as well as in terms of projected quantitative results.

The Need for a Corporate Development Strategy.

Top management should recognize that ICV is an important source of strategic renewal for the firm and that it is unlikely to work well if treated as insurance against poor mainstream business prospects. ICV should, therefore, be considered an integral and continuous part of the strategy-making process. To dampen the oscillations in corporate support for ICV, top management should create a process for developing an explicit long-term (ten to twelve years) strategy for corporate development, supported by a resource generation and allocation strategy. Both should be based on ongoing efforts to determine the remaining growth opportunities in the current mainstream businesses and the resource levels necessary to exploit them. Given the corporate objectives of growth and profitability, a resource pool should be reserved for activities outside the mainstream business. This pool should not be affected by short-term fluctuations in current mainstream activities. The existence of this pool of “slack” (or perhaps better, “uncommitted”) resources would allow top management to affect the rate at which new venture initiatives will emerge (if not their particular content). This approach reflects a broader concept of strategy making than maintaining corporate R&D at a certain percentage of sales.

Substantive Assessment of Venture Strategies.

To more effectively determine the strategic context of ICV and to reduce the political emphasis in organizational championing activities, top management should increase their capacity to make substantive assessments of the merits of new ventures for corporate development. Top management should learn to assess better the strategic importance of ICV projects to corporate development and their degree of relatedness to core corporate capabilities. One way to achieve this capacity is to include in top management people with significant experience in new business development. In addition, top management should require middle-level organizational champions to explain how a new field of business would further the corporate development objectives in substantive rather than purely numerical terms and how they expect to create value from the corporate viewpoint with a new business field. Operational-level managers would then be able to assess better which of the possible directions their envisaged projects could take and would be more likely to receive corporate support.

Refining the Structural Context of ICV

Refining the structural context requires corporate management to use the new venture division design in a more deliberate fashion, and to complement the organization design effort with supporting measurement and reward systems.

More Deliberate Use of the New Venture Division Design.

Corporate management should develop greater flexibility in structuring the relationships between new venture projects and the corporation. In some instances, greater efforts would seem to be in order to integrate new venture projects directly into the mainstream businesses, rather than transferring them to the NVD because of lack of support in the operating division where they originated. In other cases, projects should be developed using external venture arrangements. Where and how a new venture project is developed should depend on top management’s assessment of its strategic importance for the firm, and of the degree to which the required capabilities are related to the firm’s core capabilities. Such assessments should be easier to implement by having a wide range of available structures for venture-corporation relationships.18

Also, the NVD is a mechanism for decoupling the activities of new ventures and those of mainstream businesses. However, because this decoupling usually cannot be perfect, integrative mechanisms should be established to deal constructively with conflicts that will unavoidably and unpre-dictably arise. One such mechanism is a “steering committee” involving managers from operating divisions and the NVD.

Finally, top management should facilitate greater acceptance of differences between the management processes of the NVD and the mainstream businesses. This may lead to more careful personnel assignment policies and to greater flexibility in hiring and firing policies in the NVD to reflect the special needs of emerging businesses.

Measurement and Reward Systems in Support of ICV.

Perhaps the most difficult aspect concerns how to provide incentives for top management to seriously and continuously support ICV as part of corporate strategy making. Corporate history writing might be an effective mechanism to achieve this. This would involve the careful tracing and periodical publication (e.g., a special section in annual reports) of decisions whose positive or negative results may become clear only after ten or more years. Corporate leaders (like political ones) would, presumably, make efforts to preserve their position in corporate history.19 Another mechanism is to attract “top performers” from the mainstream businesses of the corporation to ICV activities. To do this, at least a few spots on the top management team should always be filled with managers who have had significant experience in new business development. This will also eliminate the perception that NVD participants are not part of the real world and, therefore, have little chance to advance in the corporation as a result of ICV experience.

The measurement and reward systems should be used to alleviate some of the more destructive consequences of the necessary emphasis on fast growth in venture development. This would mean, for instance, rewarding accomplishments in the areas of problem finding, problem solving, and know-how development. Success in developing the administrative aspects of the emerging venture organization should also be included, as well as effectiveness in managing the interfaces with the operating division.

At the operational level where some managerial failures are virtually unavoidable, top management should create a reasonably foolproof safety net. Product champions at this level should not have to feel that running the business is the only possible reward for getting it started. Systematic search for and screening of potential venture managers should make it easier to provide a successor for the product champion in time. Avenues for recycling product champions and venture managers should be developed and/or their reentry into the mainstream businesses facilitated.

Finally, more flexible systems for measuring and rewarding performance should accompany the greater flexibility in structuring the venture-corporate relations mentioned earlier. This would mean greater reliance on negotiation processes between the firm and its entrepreneurial actors. In general, the higher the degree of relatedness (the more dependent the new venture is on the firm’s resources) and the lower the expected strategic importance for corporate development, the lower the rewards the internal entrepreneurs would be able to negotiate. As the venture evolves, milestone points could be agreed upon to revise the negotiations. To make such processes symmetrical (and more acceptable to the nonentrepreneurial participants in the organization), the internal entrepreneurs should be required to substitute negotiated for regular membership awards and benefits.20

Conclusion: No Panaceas

This article proposes that managers can make ICV strategy work better if they increase their capacity to conceptualize the managerial activities involved in ICV in process model terms. This is because the process model approach allows the managers involved to think through how their strategic situation relates to the strategic situation of managers at different levels who are simultaneously involved in the process. Understanding the interplay of these different strategic situations allows managers to see the relationships between problems which otherwise remain unanticipated and seemingly disparate. This may help them perform better as individual strategists while also enhancing the corporate strategy-making process.

Of course, by focusing on the embedded, nested problems and internal organizational dynamics of ICV strategy making, this article has not addressed other important problems. I believe, however, that the vicious circles, managerial dilemmas, indeterminateness of the strategic context, and perverse selective pressures of the structural context are problem areas that have received the least systematic attention.

The recommendations (based on this viewpoint) should result in a somewhat better use of the individual entrepreneurial resources of the corporation and, therefore, in an improvement of the corporate entrepreneurial capability. Yet, the implication is not that this process can or should become a planned one, or that the discontinuities associated with entrepreneurial activity can be avoided. ICV is likely to remain an uncomfortable process for the large complex organization. This is because ICV upsets carefully evolved routines and planning mechanisms, threatens the internal equilibrium of interests, and requires revising a firm’s self-image. The success of radical innovations, however, is ultimately dependent on whether they can become institutionalized. This may pose the most important challenge for managers of large established firms in the eighties.

Appendix: A Field Study of ICV

A qualitative method was chosen as the best way to arrive at an encompassing view of the ICV process.

Research Setting

The research was carried out in one large, diversified, U.S.-based, high technology firm, which I shall refer to as GAMMA. GAMMA had traditionally produced and sold various commodities in large volume, but it had also tried to diversify through the internal development of new products, processes, and systems in order to get closer to the final user or consumer and to catch a greater portion of the total value added in the chain from raw materials to end products. During the sixties, diversification efforts were carried out within existing operating divisions, but in the early seventies, the company established a separate new venture division (NVD).

Data Collection

Data were obtained on the functioning of the NVD. The charters of its various departments, the job descriptions of the major positions in the division, the reporting relationships and mechanisms of coordination, and the reward system were studied. Data were also obtained on the relationships between the NVD and the rest of the corporation. In particular, the collaboration between the corporate R&D department and divisional R&D groups was studied. Finally, data were also obtained on the role of the NVD in the implementation of the corporate strategy of unrelated diversification. These data describe the historical evolution of the structural context of ICV development at GAMMA before and during the research period.

The bulk of the data was collected by studying the six major ICV projects in progress at GAMMA at the time of the research. These ranged from a case where the business objectives were still being defined to one where the venture had reached a sales volume of $35 million.

In addition to the participants in the six ICV projects, I interviewed NVD administrators, people from several operating divisions, and one person from corporate management. A total of sixty-one people were interviewed. The interviews were unstructured and took from 11/2 to 41/2 hours. Tape recordings were not made, but the interviewer took notes in shorthand. The interviewer usually began with an open-ended invitation to discuss work-related activities and then directed the interview toward three major aspects of the ICV development process: the evolution over time of a project, the involvement of different functional groups in the development process, and the involvement of different hierarchical levels in the development process. Respondents were asked to link particular statements they made to statements of other respondents on the same issues or problems and to give examples where appropriate. After completing an interview, the interviewer made a typewritten copy of the conversation. About 435 legal-size pages of typewritten field notes resulted from these interviews.

The research also involved the study of documents. As it might be expected, the ICV project participants relied little on written procedures in their day-to-day working relationships with other participants. One key set of documents, however, was the written corporate long-range plans concerning the NVD and each of the ICV projects. These official descriptions of the evolution of each project between 1973 and 1977 were compared with the interview data.

Finally, occasional behavioral observations were made, for example, when other people would call or stop by during an interview or in informal discussions during lunch at the research site. These observations, though not systematic, led to the formulation of new questions for further interviews.

Conceptualization

The field notes were used to write a case history for each of the venture projects which put together the data obtained from all participants on each of the three major aspects of venture development. The comparative analysis of the six ICV cases allowed the construction of a stages model that described the sequence of stages and their key activities. The process model resulted from combining the analysis at the project level with the data obtained at the corporate level.