Corporate Venturing : Creating New

title:
Businesses Within the Firm
author: Block, Zenas.; MacMillan, Ian C.
publisher: Harvard Business School Press
isbn10 | asin: 0875843212
print isbn13: 9780875843216
ebook isbn13: 9780585232133
language: English
Entrepreneurship, New business
subject
enterprises.
publication date: 1993
lcc: HB615.B625 1993eb
ddc: 658.1/6
Entrepreneurship, New business
subject:
enterprises.
 Page iii

Corporate Venturing
Creating New Businesses within the Firm
Zenas Block
Stern School of Business
New York University
and
Ian C. MacMillan
The Wharton School
University of Pennsylvania
 Page iv
Copyright © 1993 by the President and Fellows of Harvard College
All rights reserved
Printed in the United States of America
97 96 95 94 93 5 4 3 2 1
The paper used in this publication meets
the requirements of the American National
Standard for Permanence of Paper for
Printed Library Materials Z-39.49-1984.

Library of Congress Cataloging-in-Publication Data

Block, Zenas.
Corporate venturing : creating new businesses within the firm /
Zenas Block and Ian C. MacMillan.
p. cm.
Includes bibliographical references and index.
ISBN 0-87584-321-2 (acid-free paper)
1. Entrepreneurship. 2. New business enterprises. I. MacMillan,
Ian C., 1940 . II. Title.
HB615.B625 1993
658.1 '6dc20 92-28830
CIP
 Page v

Dedicated to the innovators who create new busi-

nesses regardless of obstacles, to organization
leaders wise and skillful enough to reduce those
obstacles, and to the pioneering researchers with-
out whose work this book would not have been
possible.
 Page vii

Contents
Preface ix
Introduction 1
1 13
Corporate Venturing: What Is It? Why Do It?
2 33
Getting Started
3 69
Framing and Managing the Venturing Process
4 93
Identifying, Evaluating, and Selecting Opportunity
5 113
Selecting, Evaluating, and Compensating Venture
Management
6 147
Locating the Venture in the Organization
7 161
Developing the Business Plan
8 195
Organizing the Venture
9 231
Controlling the Venture
10 257
A Survival Guide for Venture Managers
11 283
The Internal Politics of Venturing
12 309
Learning from Experience
Appendix A: Abstracts of Some Investigations of Corporate 327
Venturing
Appendix B: Venturing with Corporate Venture Capital 339
Index 365
 Page ix

Preface
The principal purpose of this book is to present concrete
management practices that have proved effective for creating new
businesses and successfully generating innovation within existing
organizations.
It represents a drawing together of knowledge from many sources:
our own hands-on experience at every level in starting new
businesses, both within and outside of existing organizations; the
published research of many others; case research on venturing by
our students; our own research; and our work with large, medium,
and small companies seeking to become more effectively
innovative and entrepreneurial.
Senior managers and venturers who attempt to make organizations
more entrepreneurial and encourage corporate venturing will find
that the existing literature contains a great deal of valuable
information and many contributions to theory. Unfortunately, they
will also find that much of what
 Page x
has been written about these topics focuses on getting things started
and that there is a major information gap when it comes to the
nitty-gritty of managing new ventures and managing an
organization's overall venturing activity.
Much of what must actually be done is in direct conflict both with
traditional management "principles" and with the standard
practices of most companies. Just stopping harmful practices helps,
but this is by no means enough. If senior managers and venturers
are to implement the necessary alternatives to usual practices, they
must also know what has to be done, why, and how. This book will
provide them with significant assistance in their efforts to
successfully build new and innovative businesses.

Acknowledgments
We are especially grateful to Tait Elder (for seven years general
manager of 3M's New Business Ventures Division and now at the
Carlson School of Management, University of Minnesota) for his
extraordinarily thorough and helpful analysis, comments, and
suggestions on an earlier draft; to Susan Cohan, copy editor, who
contributed greatly to the clarity of our book; to Hollister (Ben)
Sykes and Ari Ginsberg (Stern School, Graduate Division, New
York University) for their comments and to Howard Stevenson
(Harvard Business School) for his participation in the early
planning of this book. We also wish to express our appreciation to
Carol Franco, senior editor at Harvard Business School Press, for
her continued help, support, encouragement, and patience.
We appreciate the help of now former NYU graduate assistants,
Bipin Batra and Karim Khouri, as well as the clerical,
administrative, and typing assistance of Patricia Miller and Loretta
Poole at NYU and Patricia Adams at Wharton.
 Page 1

Introduction
Today's marketplace is characterized by fast-paced and unremitting
competition on a global scale. To survive in this environment,
organizations need a level of innovation, speed, and flexibility that
was unheard of even a decade ago. The challenge for the United
States is to create and revitalize organizations so they can
successfully and continuously innovate and generate new
businesses.
Although many large companies have lumbered around like
elephants in this environment, small ones have proved the power of
innovation. In the past decade, there has been an explosion of new-
business formations by independent entrepreneurs. New
incorporations have reached a rate of 600,000 per year. In spite of a
reported failure rate of 50% within five years, these startups
account for almost all the new jobs in the economy, while large
corporate work forces have plateaued or declined. Between 1980
and 1990, Fortune
 Page 2
500 companies eliminated 3.4 million jobs, while companies with
less than 500 employees created more than 13 million.
In a world in which innovators are kings, interest in internal
corporate ventures has grown tremendously. Many large
organizations are anything but entrepreneurial, though. They have
foundered, seeking "critical mass" or survival through acquisitionor
they have been sold or merged into other companies.
Because of all this M&A activity, some say that the term corporate
venture is an oxymoron. But innovation at such companies as
Merck, 3M, Motorola, Rubbermaid, Johnson & Johnson, Corning,
General Electric, Raychem, Compaq, Wal-Mart, and many others
has shown that large size need not be antithetical to venturing. Yet
the fact that so few large companies are effective innovators
indicates the difficulty of achieving this success.
Why do some organizations do so much better than others at
creating new ventures through product and market innovations?
Attempts to explain this difference and provide approaches for
others to follow spawned a new literature on corporate renewal,
innovation, and entrepreneurship, sometimes referred to as
"intrapreneurship." In Search of Excellence, by Peters and
Waterman, was followed by Rosabeth Kanter's The Change
Masters and more recently her When Giants Learn to Dance.
Although these contributions had a great impact on the attitudes
and approaches of U.S. managers toward innovation, new ventures,
and management in general, their primary emphasis has been on
highlighting the culture and values that distinguish successful and
innovative organizations. Drucker's Innovation and
Entrepreneurship, which argues the need for a disciplined approach
to innovation, offers organizations rules and guidelines both for
adopting such an approach and for finding opportunities. Pinchot's
Intrapreneurship provides examples of new products that resulted
from the enterprise and persistence of individuals in large
companies and challenges corporate employees to take the
initiative.
Some have interpreted this literature to mean that any
 Page 3
company seeking to become more innovative and entrepreneurial
should attempt to duplicate the cultures of existing organizations
that have already achieved these goals. This has led to a
proliferation of value statements, resounding slogans, and
programs of cultural change among large
organizationsaccompanied, however, by little substantive change in
management practices. These organizations continue to operate
with rigid planning; interdepartmental functional handoffs;
multiple approval levels; and inappropriate controls, compensation,
and performance evaluation methods.
The "innovation-by-imitation" approach overlooks the importance
of the individual character of each company. An innovative culture
cannot simply be transferred indiscriminately from one company to
another any more than a heart can be transplanted indiscriminately
from one body into another. Although there is little, if any,
disagreement that a company's culture is a major factor in
encouraging or discouraging innovation and entrepreneurship, and
that a supportive culture is highly desirable, it is neither a
prerequisite to, nor absolutely essential for, the success of ventures.
The fact is that every organization has its own history, population,
industry, and competition and must create a unique culture relevant
to those elements. It's highly unrealistic to expect, say, a food
manufacturer to duplicate 3M's culture, which resulted from
decades of commitment in a particular setting.
Developing a unique entrepreneurial culture from within does not
raise dramatic expectations the way a culture transplant would, but
it does have a far greater likelihood of success. In this book, we
propose a fitness program that managers can use to strengthen
innovation within their organizations. It allows corporations to
become leaner, healthier, and more entrepreneurial. Like any
transformation, cultural change, if achievable, takes a long time,
usually several years (five years is not unrealistic); moreover, it is
often impossible without a change in top management. Most
corporations underestimate the complexity and duration of this
change process.
Yet organizations simply cannot afford to wait for the
 Page 4
slow, evolutionary process of cultural transformation to run its
course before they start innovating and creating new businesses.
Instead, they can immediately initiate those actions, practices, and
policies that many companies have found effective for developing
new products, technologies, and businesses. In so doing, they will
find that these measures also contribute to the development of an
entrepreneurial culture.
To develop an organization that continually identifies and selects
opportunities and then transforms them into new and profitable
businesses, three elements are crucial:
1. Leadership that defines and communicates a unifying vision,
together with a strategy for achieving it
2. For long-term effectiveness, an organizational culture that
encourages and supports initiative and innovative behavior
3. The skills and management practices required for managing both
individual ventures and the organization's overall venturing activity
In this book, we show how companies can develop and strengthen
all three elements, with particular emphasis on the skills,
knowledge, and management methods needed to manage individual
ventures as well as an entrepreneurial corporation.
Basic Premises
The following six premises form the cornerstone of this book:
1. Entrepreneurship is a process, not a single act.
2. Entrepreneurs are made, not born. They vary considerably in
their capabilities, which can be improved significantly through
experience and training.
3. Existing organizations provide an environment that
 Page 5
has a major impactpositive or negativeon the creative and
entrepreneurial drive of their members.
4. Entrepreneurs are not risk seekers; they are risk managers.
5. The entrepreneurial process can and must be managed as a
component of the management of organizations.
6. Most large organizations, driven by the need to protect and
optimize the use of existing resources, discourage the pursuit of
opportunity.
The following subsections examine each of these premises more
closely.
Entrepreneurship Is a Process
If entrepreneurship is viewed as a process rather than as a
mysterious potpourri of actions that can only be executed by a born
entrepreneur, it becomes clear why it is so commonly the case that
product champions who start a new venture are rarely around
afterward, compensation and incentive plans are hard to design,
customary planning methods are ineffective, the policies and
procedures that work so well for the parent organization seem to
cripple the venture project, and traditional project-financing
methods fail to meet the venture's needs.
What, precisely, does the entrepreneurial process consist of?
Its stages are universal and cannot be avoided, whether executed by
an independent entrepreneur or a team in a corporation.
An opportunity must be identified.
The opportunity must be evaluated.
A solution must be found or invented to fulfill the opportunity.
Resources must be acquired: money, people, plant, and equipment.
 Page 6
Those resources must be managed to start up, to survive, and to
expand.
In the case of the independent entrepreneur, the business is
professionalized and may be harvested through whole or partial
sale.
In the case of a corporate new venture, it is institutionalized as part
of the parent organization.
Applying this universal process to venturing in an established
company requires adaptation to a corporate environment, and the
design and management of the venturing process. Its specific
stages, not necessarily occurring in the sequence shown, are:
1. Lay the groundwork for venturing: Conditions conducive to the
generation of entrepreneurial ideas are created, and a process for
managing entrepreneurial activity is designed.
2. Choose ventures: Opportunities (i.e., ideas or needs) are
identified, evaluated to determine whether they're feasible and
worth the effort, and selected. Managers are selected to implement
the venturing program.
3. Plan, organize, and start the venture: The venture's location
within the organization is determined, a business plan is developed,
use of the needed resources (people, money, plant, and equipment)
is obtained, and operations are begun.
4. Monitor and control the venture: The overall venturing process
is monitored and controlled, as are the day-to-day operations of the
venture itself and the level of risk associated with it.
5. Champion the venture: As the new entity is expanded,
institutionalized, and established as an ongoing activity of the
organization, its management learns to survive and manage the
internal corporate politics of venturing.
6. Learn from experience: By collecting and examining
information on the venturing experience, the organization learns to
manage both individual ventures and the overall venturing process
more effectively.
 Page 7
These six stages constitute the venturing process model, which is
discussed in greater detail in the following section.
Given the premise that entrepreneurship is a process consisting of
several stages, it becomes abundantly clear that only very rarely
can a single person successfully lead an organization through all
the stages of the process. Steve Jobs definitely qualifies as an
entrepreneur, even though he led his company only up to the point
of institutionalization. Although he recognized the need for new
management skills, he was unable to accept the disciplines required
and was forced to leave. Ray Kroc also qualifies as an
entrepreneur, even though he did not invent the McDonald's
operation; he discovered it in California. Contrary to popular
belief, entrepreneurs are not multitalented wizards who can
accomplish everything personally. Indeed, we believe that the
really great entrepreneurs are precisely those who realize they must
supplement their own talents, desires, and skills and act
accordingly. There is simply no basis, then, for believing that the
first choice for venture management will remain the right choice as
the venture moves through later stages.
Entrepreneurs Are Made, Not Born
Of course, people are born with varying talents. There are great,
good, fair, and poor physicists, grocers, tennis players, and
entrepreneurs. But no one has yet been able to predict who will or
will not be a successful entrepreneur. Even a previous track record
is not a reliable guide. The entrepreneurial drive to pursue
opportunity is a combination of many factors, chief among them
motivation and attitude. These attributes are, in turn, affected by
childhood influences, role models, and later environments, not the
least of which is the environment of the workplace. Although,
providing they work hard, those with more talent will clearly do
better than those with less, entrepreneurial ability can be directly
influenced by education, training, and experience, which result in
the accumulation of knowledge and skills required to carry out all
or part of the entrepreneurial process.
 Page 8
In the words of a colleague, ''No matter how many tennis lessons I
take, I'll never be as good as John McEnroe, but I'll sure as hell
play better tennis."
Successful entrepreneurs do have some characteristics in common,
including a high energy level, great persistence, resourcefulness,
and the desire and ability to be self-directed, together with a
reasonably high need for autonomya need that is greater in
independent entrepreneurs than in corporate entrepreneurs. These
characteristics, however, do not distinguish entrepreneurs from
other groups of high achievers, nor are they enough to ensure
success.
One aspect of managing the entrepreneurial process involves being
able to match the evolving needs of the process with people who
can effectively meet those needs, while keeping in mind that initial
personnel choices are very unlikely to be permanent.
The Corporate Environment Is Critical to Entrepreneurial Success
The organizational culture affects the extent to which
entrepreneurial talent will surface, how people work with one
another, and the content and execution of policies and procedures.
How the management of the venturing process treats unsuccessful
entrepreneurial experienceas an opportunity to gain insight or an
exercise in finger pointingis probably a key to the creation or
destruction of an entrepreneurial environment. Corporations with a
record of successful innovation and entrepreneurial activity
demand learning rather than allocate blame.
Entrepreneurs Are Risk Managers
It is quite understandable why so many organizations, in seeking to
become more entrepreneurial, want their people to take greater
risks. This attitude is sometimes carried to
 Page 9
such an extreme that the amount of risk taken is considered a badge
of honor, a true indicator of an entrepreneur's character. This is an
unwise and probably short-lived reaction to the risk aversion
prevailing in those companies that are driven either by the need to
protect existing resources or by the belief that they must avoid risk
because they are in a highly regulated industry.
Successful entrepreneurs keep their eye on the ball and do not
value risk for its own sake. Instead, they work diligently to reduce
the risks they must take and ultimately take the greatest risk of
allthe risk of failure. As one entrepreneur astutely observed, "You
take the risk, I'll take the reward."
One interesting example of the interpretation of entrepreneurship as
an activity that inherently involves taking big risks is offered in
Harold Geneen's Managing, where he writes that entrepreneurship
is impossible in a corporate setting because it means you have to be
ready to bet the company, something no responsible CEO can be
expected to do. Yet Geneen did rather well as an entrepreneur after
his retirement from ITT and did not bet any companies! The point
is, a risk-seeking and risk-taking character does not indicate
entrepreneurial competence (although it may indicate a fondness
for gambling).
The Entrepreneurial Process Can and Must Be Managed
The idea that the entrepreneurial process can and must be managed
is rather fundamental. Although it is obvious that a new venture has
to be managed, managing the overall entrepreneurial process is
quite a different task, requiring professional managerial skills.
Managing the process means creating and operating the
mechanisms that cause the generation and evaluation of
opportunities as well as every other step in the venturing activity.
Throughout the book, in keeping with this premise, we distinguish
between tasks pertaining to the management of the parent
corporation and tasks per-
 Page 10
taining to the management of the venture itself. We also present
alternative organizational possibilities for handling the function of
managing the venturing process.
Optimizing the Use of Resources Discourages the Pursuit of
Opportunity
As we compare management practices that are effective for stable
organizations with those that are needed for startups, it becomes
evident that "business as usual" (i.e., optimizing the use of
corporate resources, adhering to established policies and
procedures, requiring that all proposals be subjected to a
bureaucratic review process) tends to stifle entrepreneurial
creativity and discourage the pursuit of opportunity.
Each stage of the entrepreneurial process in fact requires its own
unique combination of management skills and strategic focus. In
keeping with this dichotomy between the needs of a startup and
those of an established business, we have organized this book
around a venturing process model that integrates the elements of
primary concern to the parent company with those of primary
concern to individual ventures.
Venturing Process Model
As noted above, successful new-business creation involves two
distinctly different leadership and management rolesthat of the
parent sponsoring organization (senior management) and that of the
people running the venture itself (venture management). The
relationship between these roles is illustrated in the venturing
process model (Table I-1), which shows the six major stages of the
venturing process and provides a broad overview of the
responsibilities that pertain to senior management and venture
management at each stage. You will notice that this model also
forms the backbone of our book, by outlining its structure and flow
and indicating the chapter in which each major topic is discussed.
 Page 11
Table I-1: Venturing Process Model
Setting the Stage
Senior management decides whether
venturing is strategically desirable
and necessary for the organization,
creates conditions that will encour-
age a flow of venture ideas, and de-
signs and frames the process for
man-
aging the venturing activity.
(Chapters 1-3)
Choosing Ventures
Venture champions identify, evaluate,
and select opportunities and build
Senior management selects venture venture proposals for presentation to
management and may also establish senior management. (Chapter 4)
the compensation basis at this point.
(Chapter 5)
Planning, Organizing, and Starting the Venture
Senior management determines
where each venture should be lo-
cated within the organization and
how it should interface with other Venture management completes the
units. (Chapter 6) development of a business plan for
the approval of senior management
and, upon approval of the plan, orga-
nizes and launches the venture.
(Chapters 7 and 8)
Monitoring and Controlling the Venture
Senior management monitors and Venture management manages and
controls corporate risk level. controls the venture. (Chapter 9)
(Chapter 9)
Championing the Venture
 Venture management, while continu-
ing to champion the venture, must
hone its survival skills and learn how
to manage the inevitable challenges
of corporate politics. (Chapters 10
and 11)
Learning from Experience
Senior management uses systematic Venture management uses systematic
methods of information gathering methods of information gathering and
and analysis to learn how to manage analysis to learn how to manage ven-
the internal venturing process more tures more effectively. (Chapter 12)
effectively. (Chapter 12)
 Page 12
Although we would remind you that venturing is a dynamic
process that rarely proceeds in precisely the sequence shown in the
table, every step in this process does eventually occurdeliberately
or accidentallyand needs detailed examination and management.
The model is intended to serve as a useful framework for
presenting and coordinating a wide range of information and
recommendations.
Simply stated, the objective of this book is to provide information,
guidance, and decision alternatives that will enable venture
managers and senior managers to reconcile the needs of a new
venture with those of its parent organization, in such a way as to
prevent damage to either and contribute to the continuing success
of both.
 Page 13

1
Corporate Venturing:
What Is It? Why Do It? What Is Its Track Record?
Every ten years or so there is a surge of interest in internally
generated new businessesi.e., corporate ventures. Is this merely a
recurring fad, or has it had a real impact on organizational
performance?
The track record is mixeda combination of dramatic failures,
successes, and mediocre results. Although many companies have
been discouraged, others have demonstrated the power of venturing
by using it as a strategy for propelling themselves into dynamic
profitability and growth. This record leaves little doubt about
whether organizations can venture successfully. The real challenges
involve how to do so.
We start this chapter by defining ventures and providing examples
of a variety of ventures. We then consider why companies start
venturing, examine research findings that challenge many common
beliefs about venturing's track record, and consider why some
companies stop venturing. Fi-
 Page 14
nally, we explore the proposition that venturing in some form may
in fact be essential for all organizations.

What Is a Corporate Venture?

We consider a project a venture when it:
· Involves an activity new to the organization
· Is initiated or conducted internally
· Involves significantly higher risk of failure or large losses than
the organization's base business
· Is characterized by greater uncertainty than the base business
· Will be managed separately at some time during its life
· Is undertaken for the purpose of increasing sales, profit,
productivity, or quality
Although a venture may originate externally and may be
augmented with a foothold acquisition, the venturing activity is
organizationally part of the parent company. Internal corporate
ventures (ICVs) may include major new products, development of
new markets, commercialization of new technology, and major
innovative projects. They can involve a marked diversification or
be closely related to the company's other businesses. The key
differentiating qualities are risk, uncertainty, newness, and
significance.
The dividing line between a new venture and an extension of
normal business activity is not always clear, but it is important to
determine this. From an operational standpoint, deciding that the
business is in fact a new venture helps an organization define the
kind of management the project will need. That decision is critical
to the project's success.
Creating a new business is different from modifying an old one to
meet new challenges, because new ventures require a
fundamentally different approach to managementone consisting of
integrated entrepreneurial management and
 Page 15
leadership. This contrasts sharply with the traditional approach to
management, in which activities are separated into functional
departments and a new project passes through an interminable
process of interdepartmental handoffs and signoffs as it wends its
slow, weary, and excessively expensive way to commercialization.
Examples of Corporate Ventures
In this subsection, we briefly describe a variety of corporate
endeavors, whose products range from children's clothing to
crawfish bait, and examine why each of these seemingly disparate
activities qualifies as a new venture.
Recreational Vehicle Refrigerators. The evolution of a recreational
vehicle (RV) refrigerator is a good example of the difference
between product and market changes that extend normal business
activities and those that result in new ventures.
The early electric refrigerator was simply a compartment that kept
foods cold. Then along came the ice maker. Although this
enhancement undoubtedly posed some technical challenges at the
time, the marketshome and institutionaldid not change, nor did the
environment in which the machine was required to operate.
Even with the next steps in the refrigerator's evolution the addition
of a frozen-food storage compartment, followed by the automatic
defrosterthe product still served the same markets and operated in
the same environment. Product or project managers may have been
involved, but the challenges were not significant enough for the
commercialization of any of these new models to be regarded as
separate ventures.
The development of refrigerators for recreational vehicles was a
different case. There was a need for machines that would operate
reliably in a completely different environment. Although the
product was still a refrigerator, it had to be sold to a totally
different set of customers (RV owners or
 Page 16
manufacturers of RVs). Service requirements were different, too.
Developing such a product called for venture management, which
involved treating the endeavor as a new business about which
many things were new and uncertain and much had to be learned.
Continuous interaction and integration between manufacturing,
engineering, marketing, and other functions were required. The
combination of uncertainty, the need to learn in each of the
individual functional areas, and the need to integrate the activities
of the various functional areas in order to enter a new market
moved this project into the newventure domain.
CBS Cable. CBS started a cultural cable TV venture in 1982.
Although it was organized as a separate entity, it reported directly
to the CEO, William Paley. This appeared to be a familiar product
in a familiar market but was actually a closely related new-
product/new-market combination. Although CBS certainly had
expertise in the television business, it had no experience in the
cable business. It faced two uncertainties: whether there would be
sufficient acceptance of a cultural channel and whether enough
advertising could be sold. As it turned out, neither occurred, and
the fledgling operation was shut down. It was uncertain, high-risk,
and new-clearly a venture.
Kids " " Us. When Toys " " Us founded a children's clothing
business, Kids " " Us, it used its in-depth knowledge of the market
and retailing to create a new-product/ existing-market combination.
Although the product line was new to Toys " " Us, the children's
market was very familiar. Kids " '' Us was launched as a major
business and has since provided significant growth to the parent
corporation. It clearly qualifies as a venture because of the
magnitude of the risk and the newness of the product line to Toys "
" Us, requiring acquisition and integration of the people,
knowledge, and skills needed to select styles and manufacturers; to
buy, display, and sell products; to process information; and to
establish inventory control systems in a highly competitive field.
 Page 17
USA Today. Gannett's USA Today is an example of a new-
product/new-market/new-technology application in Gannett's
familiar newspaper industry. It is a classic example of a new
business started by an existing company. Begun in 1982, USA
Today has become a national newspaper. The venture involved the
use of new printing technology, the creation of a new national
newspaper market, and an innovative approach to reporting,
coupled with enormous financial risks. As of the end of 1991, more
than $800 million had been invested, and the paper had lost $18
million in 1991. Except for the news-gathering function itself, risks
and uncertainties surrounded every aspect of this undertaking:
production, national circulation, logistics, technology, costs,
marketability, and sale of advertising.
ZapMail. Federal Express's ZapMail was launched in 1983. The
concept, which involved delivering high-quality hard copy within
two hours, was made possible by the development of the facsimile
machine and communications satellites. Federal Express saw the
venture as both an opportunity and a defensive strategic step.
In this case, the newness of the transmittal technology, the growing
competition of direct ownership of fax machines by the target
market, and the enormous investment required to launch the
business created the risks and uncertainties that define a venture.
Federal Express lost a total of more than $600 million before
shutting the venture down in 1986.
Du Pont's Crawfish Bait. An interesting example of a diversifying
internal corporate venture is Du Pont's crawfish bait business. Du
Pont? Crawfish bait? Yes, indeed! The venture originated at a Du
Pont polymer plant in Louisiana. One of the plant's employees
loved crawfish, which he caught by setting out baited traps in the
bayous. The problem was that the bait had to be replaced every two
days because it disintegrates. It occurred to the crawfish lover that
perhaps a Du Pont polymer could be used to hold the bait together
longer. He co-opted one of the plant's chemists, who provided him
with samples, and the collaboration resulted in the develop-
 Page 18
ment of a bait that did not disintegrate for five days. Although the
product was created with a skunk-works approach, the polymer
division decided to market it, using Du Pont's agricultural product
distribution and sales arm for the purpose. The crawfish bait
venture is now a multimillion-dollar business for Du Pont.
Although the financial risk was low, this project certainly involved
a new market and entrepreneurial management!
Learning: The Distinguishing Feature of Ventures
In each of the cases described in the preceding subsection, there is
a common threadthe need to learn a great deal and apply it fast.
The most useful guide to classifying a new organizational activity
is to answer this question: What does the activity primarily
involve? Does it involve learning, or does it simply involve
administering what is already known? Does the business's very
survival depend on its ability to adapt to what is learned?
Of course, all businesses must continually learn. But when learning
is absolutely essential to both structuring and running the business,
when it is needed to develop a "formula" for the business while
building it, then the business is a venture and entrepreneurial
management is called for.
Given this focus on learning, an enterprise classified as an internal
corporate venture by one company might not be so classified by
another company. It depends on the amount of learning needed as
well as the perceived level of risk and consequences for that
particular organization. The judgment often depends on the
outlook of the decision maker. If the project involves a new
product, requiring new technology in a new market, the answer is
relatively clear. When in doubt, our advice is to treat the project
like an ICV. The learning processes built into ICV management, as
described in this book, are more likely to produce success than
traditional management practices.
To illustrate the importance of deciding whether a new
 Page 19
activity should be classified as a ventureand the importance of
managing it as a ventureconsider the case of a software company
that we'll call PCY. The company's principal product line was
software used in large wide area networks that link PCs to
mainframes, both nationally and internationally. PCY had been
successful with its initial product and had established excellent
relationships with many major corporations in the United States
and abroad.
With the growth of wide area networks, PCY developed a product
to efficiently update databases and programs for the hundreds, and
sometimes thousands, of PCs in such networks. At first, PCY did
not handle this new-product introduction as a new venture.
Although its managers recognized that the individuals who
normally bought PCY products would not be the ones making the
buying decision regarding the new product, they felt confident that
the existing relationships with their customers would be helpful in
reaching the new target buyers. The company's sales management
convinced senior management that the product should be handled
by PCY's present salesforce.
After a year of effort, not a single sale had been made. Because
most of its customers were multinational giants, PCY found that its
existing contacts often did not know who would make the buying
decision for an update program such as the one PCY was offering.
Responsibility for the network buying decisions was centralized,
whereas responsibility for updating was scattered across the
subsidiaries.
At that point, PCY decided to treat its new-product introduction as
a new venture. A unit was established under the direction of a very
entrepreneurial leader and provided with separate sales, marketing,
and technical support. The unit was treated as a profit center, with
considerable input from the CEO. The integration of prospect
solicitation, follow-up calls, identification of customizing
requirements, application of technical support, demonstrations,
pricing, and terms occurred simply and rapidly. Sales began within
60 days, and the business was highly profitable within one year,
with the prospect of full recovery of investment in the product
 Page 20
within a two-year period. Those involved agree that this change in
orientation from a "new product" to a "new business" was a
decisive factor in PCY's success.

Why Do Companies Venture?

Companies venture primarily to grow and to respond to
competitive pressures. A 1987 survey by Block and
Subbanarasimha (1989) of 43 U.S. and 149 Japanese companies
found that for both the U.S. and Japanese companies, the most
common reasons for venturing were "to meet strategic goals" and
"maturity of the base business." Table 1-1 highlights the reasons for
venturing that were considered "very important'' or "critically
important" by the companies studied.
An organization's very survival depends on constant growth and
defense against competition. From a defensive
Table 1-1: Reasons for Venturing
U.S. Japanese
Companies
Reasons for Venturing (%) Companies
(%)
Maturity of the base business 70 57
To meet strategic goals 76 73
To provide challenges to 46 15a
managers
To develop future managers 30 17a
To survive 35 28
To provide employment 3 24a
Source: Adapted from Z. Block and P. N. Subbanarasimha,
"Corporate Venturing: Practices and Performance in the U.S.
and Japan," working paper (Center for Entrepreneurial Studies,
Stern School of Business, New York University, 1989).
Note: The data represent the percentage of companies that rated
each reason as 4 ("very important") or 5 ("critically important")
on a I to 5 scale.
a Indicates a statistically significant difference between the
figures for U.S. and Japanese companies.
 Page 21

Figure-1-1:
Growth Paths
Source: Adapted from H. Igor Ansoff, Corporate Strategy (New York:
McGraw-Hill, 1965), p. 99.
standpoint, long-run competitiveness cannot be maintained without
innovation and the generation of new ventures. As shown in Figure
1-1, growth can be achieved by increasing market penetration
within existing markets with existing products; by introducing new
products to existing markets; by entering new markets with
existing products; or by introducing new products to new markets.
The more mature a market, the more difficult and expensive it gets
for a company to grow by increasing its market share (penetration).
Defending share also gets more expensive. Thus, it becomes
imperative for the company to innovate and develop new products
and new markets. If familiar markets and products are in decline,
the company may be forced to sell out or to buy or develop new
businesses in order to survive or grow.
Productivity, quality, and service must be improved simultaneously
if an organization is to remain competitive. In an era of dynamic
technological change, the organization
 Page 22
must also remain technologically competitive, either through
internal research and development or through alliances. But
technology-driven R&D often produces new knowledge that has no
practical utility unless a new business is created to make use of it.
Now that we've considered some of the goals that companies
commonly hope to achieve through venturing, let's look at the
record and see whether companies that have tried venturing have
found it to be an effective strategy for achieving those goals.

What Is Venturing's Track Record?

Judging from media reports, you might think that venturing doesn't
work. For example, an August 17, 1990 headline in The Wall Street
Journal reads: "KODAK EFFORT AT 'INTRAPRENEURSHIP'
FAILS." The subheading reads: "The practices that make
corporations successfultraining procedures, personnel policies,
hierarchical management structuresare anathema to risk-taking,
free-wheeling entrepreneurs." The story goes on to report that of
the fourteen ventures created by Kodak, six have been shut down,
three have been sold, four have been merged into the company, and
only one still operates independently. The Wall Street Journal,
while conceding IBM's success with the PC and Xerox's success
with half a dozen companies, still concludes that "
'intrapreneurship' has lost its cachet."
To paraphrase Mark Twain, reports of the death of intrapreneurship
have been greatly exaggerated. Although "intrapreneurship" may
have lost its "cachet" (along with "MBO," "matrix management,"
and other buzzwords), innovation and the generation of new
ventures have not ceased. Indeed, Kodak's venturing performance
as reported by The Wall Street Journal compares favorably with
that of the venture capital industry, at least in terms of the number
of ventures and their fate. (We don't know the actual performance
of these ventures in terms of profit, loss, or investment.)
 Page 23
The reality is that venturing has proved successful for many
organizations over a broad industry spectrum ranging from
specialty retailing to high-technology products and a host of
service businesses. Examples include Johnson & Johnson, Merck,
Motorola, GTE, Hewlett-Packard, Intel, IBM, General Electric,
Citicorp, Allied Corporation, Rubbermaid, Procter & Gamble, Du
Pont, and many others ("The Innovators" 1988; "Innovation"
1990). The following are among the more notable corporate-
venturing success stories:
· 3M has successfully required that 25% of its business come from
products not in existence five years earlier. With 60,000 products
and hundreds of operating entities, 3M has diversified quite widely
from its original productsandpaper that worked underwater!
· The Raychem Corporation is a highly innovative high-technology
company that has achieved sales of over $1 billion annually
through continuous development of new products and new
markets. The CEO and founder, Paul Cook, says, "To be an
innovative company you have to ask for innovation . . . . It's that
simpleand that hard" ("Interview with Paul Cook" 1990, 98).
· Woolworth (yes, Woolworth!) has started, and achieved success
with, dozens of new ventures in specialty retailing, including
Footlocker, and in the process has transformed the company (Gray
1989).
But individual success stories, however numerous, do not
constitute proof. So let's turn our attention from anecdotal evidence
to hard data. To determine the track record of internal corporate
venturing, two specific elements must be examined: (1) the
performance of individual ventures (i.e., the percentage of
"successful" ventures) and (2) the profitability of organizational
venturing efforts as a whole. Studying the performance of
individual ventures can give us some clues to the general
probability of an individual venture's success and enable us to
develop fact-based expectations. Study-
 Page 24
ing the results of many companies' total venturing efforts can show
us the overall impact of venturing on companies and enable us to
make some judgments about the value of venturing as a growth
strategy. We can then move beyond the statistics to identify those
organizations that have and have not been successful, which would
permit us to probe for an understanding of the factors that may
account for success or failure.
Appendix A summarizes eight significant studies of corporate
venturing. Each summary includes the subject of research, the
results obtained, and the conclusions reached by the authors. These
studies involve a total of more than 2,000 ventures in 150 U.S.
companies and 149 Japanese companies. What does this research
tell us about venturing's track record? In particular, what does it tell
us about how well corporate venturing works as a fundamental
component of a growth strategy?
A review of this research calls into question, and even directly
challenges, some common assumptions about the track record of
internal corporate venturing. It suggests the following conclusions:
· Results vary enormously from one company to another, with
performance ranging from outstanding to disastrous even within
the same industry.
· Although venturing is risky, many companies do well at it, and
internal startups may be less risky than acquisitions as a means of
diversification. (See Table A-1 in Appendix A.)
· Contrary to popular belief, it is not always necessary to wait five
to eight years to see profitable results from new ventures. In fact, it
is common for ventures to achieve profitability within two to three
years. On average, according to a recent report, the percentage of
ventures that reach profitability within a six-year period is much
higher than is generally believed (nearly 50% in U.S. companies).
· In spite of that high average, only about one company in seven
finds that its total venturing activity yields an
 Page 25
ROI better than that of its base business within a six-year period.
· Companies that produced a higher ROI from venturing than from
their base business had an average venture age of 2.8 years, which
further challenges the widespread belief that new ventures
inevitably take 5 to 8 years to become profitable. (Although it is
true that some ventures can require decades to achieve
profitabilityfor example, those that open totally new market
possibilitiesovercommitment to doomed ventures in the name of
patience is risky.)
· Controlling potential damage from large-scale ventures that are
headed for failure is probably more important than either the
percentage of profitable ventures or any other single factor in
achieving high ROI performance from an organization's total
venturing activity.
· Separate venturing divisions or new-venture divisions appear to
have had a short life in virtually all companies. This does not
reflect the performance of ventures themselves; rather, it reflects
the hazards of choosing that particular form of organization.
· The best reasons reported for venturing are strategic necessity and
maturity of the existing businesses; the worst are developing
management and providing challenges. Although managerial
development and challenges are likely by-products of venturing,
they are not in themselves valid reasons for venturing.
· The data seriously challenge the fashionable and almost religious
belief that all companies should "stick to their knitting" and that
diversification per se is a poor strategy. The truth is that such
admonitions are not universally applicable. Many companies have
demonstrated a capacity to successfully diversify to new fields and
new industries through venturingand many have not. See Porter
data in Appendix A.
· Some failures are inevitable: probably half the ventures initiated
in most companies will not pan out.
· Many companies that have made a systematic effort
 Page 26
to learn how to conduct an effective internal venturing program
have found it to be a viable, effective strategy for creating new
businesses.
A high percentage of companies reported a net profit from their
total venturing effort, but as indicated in the preceding summary,
only a small percentage reported higher profitability from
venturing than the ROI of the base business. We suggest two
possible explanations for the difference:
1. The six-year time span used in the Block and Subbanarasimha
(1989) study may be too short for many venturesparticularly R&D-
based high-tech onesto achieve a satisfactory ROI (although the
study found no difference between the results of high- and low-tech
companies).
2. A few big losers can wipe out the gains of many winners.
Anecdotal evidence suggesting that this may be true is confirmed
both by discussions with corporate managers and by the experience
of venture capital firms. It takes either a few very big winners or
many smaller profitable ventures to offset the losses running into
the hundreds of millions from such ventures as Exxon oil shale
(with a $4 billion loss), ZapMail (with a $600 million loss), CBS
Cable, and RCA's Selectavision.
Do Ventures Funded by Venture Capitalists Outperform Corporate
Ventures?
Why do venture capitalists do so much better than their corporate
counterparts? They probably don't if the same criteria are used to
evaluate both groups. Although media reports of corporate
venturing performance might suggest that venture capitalists have a
far better track record than corporations in selecting and supporting
new ventures, this may, in fact, be an "optical illusion."
 Page 27
The performance of venture capital funds is simply not measured in
the same way as the performance of a new venture or an
established corporation. Venture capitalists make money by selling
their interest in an investment to either the public or a buyer. In
effect, they capitalize expected, not actual, earnings. Corporations
and corporate ventures make money by earning a profit over the
short and long runan actual profit, not a multiple of expected
earnings. Since venture capitalists are really at the mercy of the
stock market, the performance of that industry is fairly spotty. An
evaluation of the performance of ventures funded by venture
capitalists must also take into account the unrealized market value
of unsold shares. When the market drops, those unsold equities
decline in value, thus impacting venture capitalists' overall
performance.
Nevertheless, corporate managers can learn a great deal from
venture capitalists about selecting, staffing, and controlling
ventures and about giving entrepreneurs the freedom necessary to
run their businesses, while ensuring that supplementary skills,
contacts, and capital are provided as the businesses grow. On
average, in terms of the percentage of successes and failures,
venture capitalists probably do no better than corporations. It is
"generally accepted" that about one investment in ten turns out to
be a blockbuster, two or three yield mediocre returns, and the
balance are no good, either losers or among the living dead.
Why Do Companies Stop Venturing?
Despite the benefits of internal corporate venturing outlined above,
some companies do abandon such efforts. To determine why, it is
critical to examine the actual work of creating new businesses and
distinguish between organizational entities (such as venture
companies, new-venture divisions, and venture divisions) and
activities involving the development of new products, new markets,
and combinations thereof.
 Page 28
Much of the publicity surrounding intrapreneurship has centered on
the establishment of separate organizational units within
companiessuch as Allied Corporation's New Ventures operation,
which existed for five years; Colgate's Venture Company, which
rose and fell in three short years; and Kodak's New Opportunity
Development. The track record of new-venture divisions (Fast
1978) should not be confused with that of new ventures.
Sykes and Block (1989) suggest that the demise of new-venture
divisions is due in part to the fact that such divisions are highly
visible and involve a concentration of expense, making them an
inviting target when the company is squeezed and goes into a
consolidation mode. Venture divisions can have a longer life and be
more useful by serving as opportunity finders and evaluators rather
than as centers for venture operations. Fast (1979) reports that
diversification tends to be the driving force behind the
establishment of new-venture divisions and that as that drive
diminishes, the new-venture divisions are often reduced to a micro
(analytical) operation or eliminated. He also points out that the
high expectations usually associated with the creation of a new-
venture division increase the likelihood of dissatisfaction.
In addition to eliminating venturing divisions or departments,
organizations do reduce innovation and venturing efforts as well.
The reasons include a new CEO; a decline in the company's
performance accompanied by a perceived need to reduce costs;
competing capital investment opportunities; bad experience with
venturing; shattered expectations; and the conclusion that
acquisition is preferable as a growth strategy. Nor are such
retrenchments limited to large companies. The Wall Street Journal
of December 12, 1990 reports that 250 manufacturers in the $10
million to $200 million sales category would be spending their
money on plant modernization to enhance productivity rather than
on innovation. Half the companies stated that they had no plans to
introduce new products in the next two years.
Organizations that put all their venturing eggs into a new-venture-
division basket are likely to stop venturing when they
 Page 29
disband the venturing division, only to resume, as a matter of
necessity, after the passage of time.

Should All Companies Venture?

We suspect that ultimately, all companies should ventureat least, if
the timing and level of investment are right. Venturing is an
absolute necessity if business and strategic goals require innovation
and the transformation of innovations into new businesses, related
or otherwise. Furthermore, venturing is probably called for if
desired growth cannot be achieved with a current less risky
activity, and it is also a must if opportunities in an industry are not
to be ceded to the competition.
Companies that are achieving all their goals and have ample
opportunity to continue doing so by expanding their efforts to new
geographic areas or extending their product lines might best choose
a venturing strategy focused on enhancing quality, service, and
productivity by means of technical development and process
improvement.
Companies that are not prepared to commit to internal venturing as
an absolute necessity to ensure either the achievement of their
strategic goals or their survival probably should not undertake a
venturing effort until they make such a commitment.
It is clear that all organizations must innovate and venture in order
to survive competitively, but not every organization must at all
times be prepared to mount a program to start new businesses
internally. Other options include creating spin-offs and venturing
with corporate venture capital. The following subsections provide a
brief overview of these alternatives.
Creating Spin-Offs
When an innovation occurs, especially one involving the
development of new technology, a company may perceive a
 Page 30
new business opportunity. But suppose the opportunity would
entail bringing new products to new markets, particularly unrelated
markets, and the company is not ready to support venturing activity
in any form. Does this mean the opportunity should be ignored?
Not necessarily. In such cases, the company can choose the spin-off
option, which has proved very effective in Japan (Ito 1990).
(Toyota was a spin-off!)
Using this option, the existing company invests (and not
necessarily as a controlling investor) in a new company organized
for and dedicated to the development of the new business. This
approach is based on the existing company's recognition that it
cannot be a supportive host for the new business and that the new
business will do much better as a separate organization. It is also
based on the unstated premise that the existing company's culture
cannot or should not be changed in order to create a supportive
base for the new business.
Venturing with Corporate Venture Capital
Over a hundred major U.S. corporations have tried using corporate
venture capital programs as a form of venturing and as a way of
promoting new-business development. Such programs involve
either creating a pool of funds specifically earmarked for venture
capital investment or funding deals on an ad hoc basis. Although a
few corporate venture funds have thrived, many others have
sputtered and finally discontinued operations.
Few comprehensive studies of corporate venture capital efforts
have been undertaken to date, and those that have been done are
more case-oriented rather than focusing broadly on the corporate
venture capital community. However, it is safe to conclude that any
organization hoping to conduct a successful corporate venture
capital program must be fully prepared to deal both with the
considerations that apply to other internal corporate ventures and
with the con-
 Page 31
siderations that are unique to the investment of corporate venture
capital. For a more detailed consideration of the use of corporate
venture capital, refer to Appendix B.

Conclusion
Internal corporate venturing involves using a learning-intensive
project approach to create new businesses in order to
commercialize innovation and technological advances. In essence,
it presents the unique challenge of conducting an entrepreneurial
activity within the framework of an existing corporation.
Companies venture mainly to ensure growth and survival in the
face of ever-increasing competition. According to a number of
studies, venturing is a surprisingly effective means of achieving
these goalsat least, for companies that create venturing programs
for the right reasons; structure, manage, and monitor the programs
carefully; and continually learn from their venturing experience.
Although organizations may temporarily abandon their venturing
efforts for a variety of reasons (which fairly often involve
disenchantment with the use of a new-venture division as a vehicle
for venturing), they eventually tend to resume venturing in
response to competitive pressures.
Although no organization should attempt venturing until it has
made a well-thought-out commitment to the venturing process, it
must recognize that despite the difficulty of undertaking a
successful venturing program, innovation and expansion in some
form are vital to the financial well-being of nearly every
organization.
Guidelines
1. Don't venture unless venturing is an integral part of your
organization's strategy and is seen as essential
 Page 32
to survival and the achievement of corporate objectives. If this is
not the case, reconsider your options.
2. Recognize that venturing in some form and at some level is
essential to your organization's long-term survival in a competitive
world.
References
Block, Z., and Subbanarasimha, P. N. 1989. ''Corporate Venturing:
Practices and Performance in the U.S. and Japan." Working paper.
Center for Entrepreneurial Studies, Stern School of Business, New
York University.
Fast, N. 1979. "Key Managerial Factors in New Venture
Departments," Industrial Marketing Management 8:221-235.
. 1981. "Pitfalls of Corporate Venturing." Research Management
(March): 21-24.
Fast, Norman. 1978. "The Rise and Fall of Corporate New Venture
Divisions." Ann Arbor, MI: UMI Research Press.
Gray, Jackson. 1989. Presentation to a New York University fall-
semester class in corporate venturing.
"Innovation." 1990. Business Week Bonus Issue (June 15).
"Interview with Paul Cook." 1990. Harvard Business Review
(March-April): 97-106.
Ito, Kiyohiko. 1990. "Spinoffs: A Flexible Strategic Alternative."
Working paper. Stern School of Business, New York University.
Labich, Kenneth. "The Innovators." 1988. Fortune (June 6): 50-64.
Sykes, H. B., and Block, Z. 1989. "Corporate Venturing Obstacles:
Sources and Solutions." Journal of Business Venturing 4, no. 3:
159-167.
 Page 33

2
Getting Started
Senior managers can be an organization's greatest promoters of
innovation and new ventures or its greatest obstacles to such an
effort. Senior managers who fail to recognize the role they must
play or learn effective strategies for creating new ventures will
inevitably find themselves at the helm of a venture creation
program that fails to live up to its potential. Venture managers will
experience a great deal of frustration as they try to develop new
ventures in a climate that is inhospitable to their growth.
When a new entrepreneurial venture is created outside an existing
organization, a wide variety of environmental factors determine the
fledgling business's survival. Inside an organization, in contrast,
senior management is the most critical environmental factor. But
because entrepreneurial activity is often at variance with the
existing corporate culture, the ac-
 Page 34
tions or neglect of senior managers may suffocate a new business
rather than nurture it.
How can managers strike a balance between support and control?
How can they build new businesses without compromising the
strengths of the parent company? Senior managers must be able not
only to identify the characteristics and skills of successful venture
managers but also to create a corporate environment conducive to
entrepreneurial ideas and actions. If such an environment is
lacking, even the best venture managers will be forced to deal with
unnecessary obstacles and frustration. If such an environment is
present, it will create a culture of innovation that excites the
organization and draws new ideas from every member.
Perhaps an even more fundamental question is whether it is
important for senior managers to be involved in the new-business
development program at all. If entrepreneurial activities occur
outside the parent corporation's standard operating procedures and
culture, what role is there for senior managers? Research has
shown unequivocally that unless the firm's leaders are willing to
rise to a number of critical challenges, the entire venturing program
will more than likely be worthless (Hill and Hlavacek 1972;
Maidique 1980; Fast and Pratt 1981). Although some U.S.
companies have been remarkably successful at generating new
ventures, the fact that few have been able to develop corporate
venturing programs that have produced successful new-business
growth on a sustained basis would appear to indicate that senior
management's efforts are indeed falling short.
In this chapter, we examine the aforementioned critical challenges,
together with strategies that senior managers can use to meet these
challenges and thereby contribute to the successful creation and
operation of new ventures. These challenges include:
1. Creating a venturesome climate and a pervasive commitment to
venturing
 Page 35
2. Selecting the business development strategyi.e., the strategy that
drives the venturing effort
3. Defining and using venture selection criteria
4. Managing disappointment
Before we discuss these challenges, though, we want to take a
moment to point out that the conclusions presented in this chapter
reflect observations and findings from numerous studies of the
thorny problem of new-business development. Many of these
conclusions are based on a detailed study by MacMillan of five
successful and four unsuccessful divisions of companies wrestling
with this problem. It is important to note that these successes and
failures were at the divisional level rather than the corporate level.
The successful units included a division of an equipment
manufacturer, a financial services division that grew to a
multibillion-dollar diversified business in 15 years, an information
services company that has increased revenues twentyfold since
1975, a manufacturer of engineering materials that added $2 billion
in sales from new business in a decade, and a highly diversified
miniconglomerate that has spawned 30 new businesses in 20 years.
The unsuccessful units included an insurance division, a division of
a telecommunications company, a publishing division, and a
division of an industrial products manufacturer.
MacMillan's study concentrated on management's role in internal
new-business development rather than on such topics as new-
product development, invention, or innovation. Although those
latter topics are all related to and intertwined with the issue of new-
business development, they do not specifically focus on the heart
of the matteri.e., the problem of how to create profitable new
businesses within an existing organization.
Research has shown that the differences between successful and
unsuccessful corporate venturing programs can be attributed first
and foremost to senior management behavior, which leads us to
believe that if a firm is to succeed in creating and sustaining a
profitable venturing program, senior
 Page 36
managers must bear the responsibility for managing the four
strategic challenges discussed in the following sections.

Challenge 1: Creating a Venturesome Climate

Perhaps the most critical challenge for senior management is
creating a pervasive commitment to new-business development. In
the words of the senior manager of the information services
company: "If you can't create the culture, the right climate, the
commitment to grow continuously through new business
development, then nothing else mattersnone of the methods and
systems and checklists and procedures that everyone is looking for
will work. Concentrate on nurturing enthusiasm, and the rest can be
provided easily" (MacMillan 1987, 441). But enthusiasm alone is
not enough, and an organization can accomplish a great deal while
it is creating an entrepreneurial culture.
Fostering an organization-wide commitment to new-business
development means more than merely paying lip service to
innovation. In fact, a superficial commitment is almost worse than
no commitment at all. This was one area in which the unsuccessful
divisions in MacMillan's study failed without exception. The
halfhearted approach is so inevitably counterproductive that we're
tempted to propose the following "rules of the road to certain
failure":
1. Announce to the company that from now on, it is going to
"become entrepreneurial."
2. Create a separate venture department charged with the job of
developing new businesses. Hold no one else responsible.
3. Bring in a horde of consultants and self-professed experts to
harangue management and employees at all levels to aggressively
seek new-business ideas.
4. Hold several one-day senior management retreats to discuss the
need to become more entrepreneurial.
 Page 37
5. Make no further changes in management practices or the
behavior of senior managers.
Don't be led down this road! Senior managers who confined their
efforts to this type of cheerleading behavior created initial
enthusiasm, followed by confusion, then disillusionment and
bitterness or cynicism.
In contrast, leaders of the successful venturing divisions somehow
managed to infuse their entire organization with a pervasive
commitment to innovation. How did these managers create fire
rather than just smoke? Their effort was largely driven by a
personal, demonstrated commitment at the very top. They
recognized that creating a venturesome climate would require
sustained time and attention on their part.
The following ten strategies for creating a venturesome climate
summarize what senior management must do in order to steer an
organization down the road to success:
1. Insist that the entire division pursue new-business development.
2. Don't assume the firm must offer specific, extrinsic rewards for
new-business activities.
3. Demonstrate significant and visible personal commitment.
4. Sustain the commitment over a long period of time.
5. Assign very good people to the new business.
6. Assign the necessary resources to the new business.
7. Develop an in-depth knowledge of customers and markets.
8. Build organizational confidence.
9. Empower the creators of the new business.
10. Build momentum.
In the following subsections, we'll consider how senior managers
can use each of these strategies to foster an entrepreneurial and
innovative organizational mind-set.
 Page 38
Insist That the Entire Division Pursue New-Business Development
In their study of new-product development in Japan, Takeuchi and
Nonaka (1986) observed that the successful companies they studied
had succeeded in creating a pervasive, challenging pressure to
produce new products. In a similar vein, the managers of the
successful venturing divisions studied by MacMillan were adamant
that every manager in their division had to be able to demonstrate
that a significant percentage of revenues in any particular year
came from business created in the past three years. Although all the
senior managers had new-business development functions or
departments within their operation, they nonetheless insisted that
new-business development be a concern of every manager
reporting to them. These subordinates were evaluated annually on
their performance in new-business developmentand this aspect of
the job was a significant element in their overall performance
evaluation.
Creating such a climate of pervasive pressure in which everyone is
focused on new-business development can go a long way toward
defusing the political problems that often arise between a powerful,
entrenched, established operation and a new-venture division.
Don't Assume the Firm Must Offer Specific, Extrinsic Rewards for
New-Business Activities
If the entire organization is seeking and developing new-business
opportunities, then creating new businesses becomes part of the
job, not a special assignment calling for unique reward systems that
sow discontent among those managing ongoing operations. A
recent study by Block and Ornati (1987) found no evidence that
special reward systems encouraged new-business development.
Von Hippel (1977) found that many successful new-venture
managers regarded the
 Page 39
venture as yet another project in their careera project that would
serve as a test of their managerial skills and could be considered a
recognition of, and a compliment to, their competence.
This approach was reflected in the reward systems used by the
managers of the successful venturing divisions. As the manager of
the financial services firm observed: "Nobody who starts a business
gets special incentives herethe real incentive is that if you start a
business that is really successful, and you keep it successful, you
can have a whole division grow under youit's a fast-rising platform
to promotion" (MacMillan 1987, 442). Other managers felt the
same way that the reward for new-business development lies in the
excitement, the challenge, the fun, and above all, the personal
recognition and the opportunity to start another new business.
But as discussed in Chapter 5, there are significant, often industry-
dependent, exceptions to this principle. One successful
organization that did not have a venturesome culture found that
creating a potential for significant financial rewards was useful in
building such a culture. Financial rewards were regarded as
evidence of senior management's commitment to the venturing
activity. The opportunity to start more ventures is a frequently
sought reward as well. In some firms, particularly on Wall Street,
the existing corporate culture calls for incentives and rewards
directly related to performance, whether for new ventures or for
established operations.
Demonstrate Significant and Visible Personal Commitment
If senior managers are to succeed in creating a venturesome
climate, they must be both strongly and publicly committed to
innovation (Quinn and Mueller 1963). The leaders of the failed
venturing divisions studied by MacMillan allowed their time and
energy to be diverted by other problems (often for urgent, perfectly
legitimate reasons, since crises
 Page 40
litter the typical senior manager's calendar). In contrast, the leaders
of the successful divisions systematically and single-mindedly
promoted new-business development.
The manager of the financial services firm deliberately put new-
business development at the top of the agenda for every major
meeting with his subordinates, using the following approach to
clarify organizational priorities for them:
If someone tells me there is a fire in the main computer room, then I
tell him that is clearly a problem, and we must get to it, but first we
need to discuss the important business which is new business
development! If I don't keep new business on the top of my agenda, if
I let it slip to the bottom, then it will slip to the bottom of everyone
else's agenda and then you can forget about new business.
(MacMillan 1987, 443)
This senior manager's subordinates who were responsible for new-
business development had to report to him once a month on their
progress in this area. At that time, they were put through the
wringer and left his office knowing they would be back again in 30
days to report further progress. Such a system generates intense
pressure for the creation of new businesses.
The leader of the information services company goes one step
further in promoting the process of new-business development:
It's not even enough to do it only at formal meetings you have to keep
at it all the timein the halls, in the elevators, even in the washrooms, I
keep asking people how the new businesses are going and finding the
time to listen and maybe give advice, but they hear from me enough
to know that I am thinking about it and taking it seriously and they
believe me when I say that it's important to me because it is.
(MacMillan 1987, 443)
 Page 41
Sustain the Commitment over a Long Period of Time
Although everyone realizes that it takes time to forge a major
change in organizational culture, few realize what it demands of the
senior manager. As Roberts (1980) points out, sustained
persistence is what's essential.
Not one of the senior managers of the successful venturing
divisions studied by MacMillan felt that he or she had
accomplished the turnaround in attitude in less than three years.
The manager of the information services division inherited a staff
of senior managers who averaged 25 years' tenure with the
company. Upon assuming his executive position, he spent much of
his time meeting one-on-one: first with his direct reports to develop
new-business ideas, then with the next level down. This process
took the manager 5 yearswhich meant 5 years of the kind of strong
personal commitment and direct personal attention discussed in the
preceding subsection.
When the managers of the unsuccessful divisions embarked on
their ill-fated new-business development efforts, they neither
appreciated the huge personal commitment that would be required
nor realized for how long the commitment would have to be
sustained. None could focus his or her attention for more than a
year, and all eventually allowed themselves to get sucked into the
maelstrom of enticing, attention-distracting crises that daily beset
senior managers.
Assign Very Good People to the New Business
Aside from the commitment of their personal time, there is no
better way for senior managers to demonstrate the seriousness of
their intent than by the quality of people they assign to each new-
business development effort. Any reluctance to put top-notch
people on the project may be interpreted as clear evidence that
senior management is unwilling to devote the organization's best
resources to the venture
 Page 42
which is a damning indictment of management's true priorities.
Commit the Necessary Resources to the New Business
In their early stages, new ventures are like fragile seedlings, which
need nurturing. If senior management is not prepared to protect
these seedlings from the solidly rooted forest giants, they will
wither and die, for they cannot stand against the entrenched power
of major established products. New businesses may also need far
more resources than their early results might appear to justify on a
pro rata basis. Senior managers, who have the power to provide the
required protection, must demonstrate their commitment to new-
business development by ensuring that ventures receive resources
commensurate with their status as emerging, growing concerns.
Develop an In-Depth Knowledge of Customers and Markets
A clear understanding of the customers' needs can yield a wealth of
ideas for new ventures. A remarkable attribute of all the managers
of the successful divisions studied by MacMillan was the passion
with which they pursued in-depth personal knowledge of the
markets, and particularly the customers they served, as well as the
time they spent keeping themselves up-to-date.
Such familiarity can allow a senior manager to hear out a new-
business proposal and then, instead of ordering a market research
study or some other similarly time-consuming investigation,
respond decisively with, ''This is what concerns me" or "Let's go do
it!" This intimate knowledge of customers is especially critical
when the senior manager must evaluate a business idea involving a
product category that is not
 Page 43
yet in existence and for which normal market research would
therefore be useless.
One senior manager felt that the only way to uncover real
opportunities was to truly know the customers and their problems.
New-product ideas can emerge weekly, if not daily, from an in-
depth understanding of those problems. Another executive was
scornful of managers who remain aloof from their customers:
Show me a firm that says it can't grow because it's in a mature
industry and I'll show you a firm that was asleep at the wheela firm in
which the senior manager has allowed himself to be surrounded by a
staff of bureaucratic nay-sayers who don't want to do anything newlet
alone develop new businesses. You either know your customers and
their markets and how they are developing, so that you grow and
develop along with them or you end up in a "mature industry."
(MacMillan 1987, 444)
Build Organizational Confidence
The strategies outlined in the preceding subsections can create
intense internal pressure for innovation. But this pressure will only
lead to frustration if the organization's people lack the confidence
to rise to the challenge. MacMillan found that another fundamental
difference between the managers of unsuccessful and successful
divisions was the extent to which senior management was prepared
to devote time and effort to building confidence among
subordinates. The managers of the unsuccessful divisions were
inclined to expect too much, too fastthey sought rapid
diversification via grand corporate ventures into unknown markets.
In contrast, the managers of the successful divisions pursued a
strategy of confidence buildingshowing their subordinates that they
were fully capable of developing new businesses.
 Page 44
In the information services company, which grew tenfold in
revenues and fiftyfold in profits in 18 years, senior management
focused first on rethinking the existing businesses. In the words of
one top manager, "Most companies don't really know their
customers and markets well. They can't see that there are often
years of new business development opportunities to be found
simply by mining existing territory" (MacMillan 1987, 445).
By working with middle management and systematically
examining alternative ways of offering, delivering, packaging,
pricing, segmenting, or otherwise reconfiguring the existing array
of products and services, senior management built middle
managers' confidence in their own ability to discover and
implement new-business opportunities. Over time, the momentum
generated by this confidence-building effort has carried the
division from simple, print-based, domestic products into
increasingly diversified, on-line electronic services in widely
diversified international markets.
Empower the Creators of the New Business
Once their confidence has been developed, venture managers must
be able to act on that confidence. It is imperative that senior
management empower venture management with the freedom to
take the initiative without having to get permission to implement
well-conceived ideas. Managers of the successful divisions all felt
strongly that it is vital for their subordinates to feel free to act on
ideas and repeatedly insisted that they did not need to know
everything that was going on.
On the other hand, all the firms with unsuccessful venturing
divisions were obsessed with the need for tight control and clung to
their slow, rigid, multilevel approval process and periodic progress
reviews, which smothered anything at odds with existing policies
and procedures. Thus, their divisions remained mired in their own
bureaucracies.
Notice the contrast: In the unsuccessful divisions, man-
 Page 45
agers demanded performance from subordinates who had little
confidence that they could deliver on those demands. In the
successful divisions, managers demonstrated to subordinates their
belief that the subordinates could do the job and then gave them the
freedom to take the initiative. The former approach alternately
precipitated alarm and frustration, whereas the latter approach
generated enthusiasm, confidence, and perceptible momentum.
Build Momentum
The long-term perspective that is such an important part of top
management commitment and confidence building should also
characterize the venture creation process. Managers should focus
on generating momentum rather than on achieving quick returns.
Starting and implementing several modest new initiatives
simultaneously is preferable to pouring all available resources into
a single megaproject. This steady building of momentum helps
subordinates develop the confidence that comes both from success
and from their growing recognition that they really can do it
themselves.
We found that an important component of building both confidence
and momentum was for an organization to begin fairly close to its
current competence baseto start off with evolutionary rather than
revolutionary ventures, as discussed in the following section. In
keeping with the findings of earlier research (Von Hippel 1977;
Fast 1979; Roberts 1980; Maidique and Zirger 1985), none of the
successful divisions studied by MacMillan started off too far from
an existing competence base. The managers of these divisions
didn't throw all their energies into pursuing ventures in areas where
they knew neither the product nor the market. Rather, the divisions
began either by aggressively expanding into "adjoining" markets
with existing products or services or by creating new offerings for
existing customers.
However, the pervasive, constant pressure generated by this
activity ensured that over time, the divisions did diver-
 Page 46
sify, and significantly so. In the course of this progressive
diversification, new competencies were gained, and these, in turn,
became the seeds for even more new businesses.

Challenge 2: Selecting the Business Development

StrategyRevolutionary or Evolutionary
The next major challenge for senior management is selecting a
business development strategy, which defines the trajectory of
new-business growth. Are you going to send an astronaut to the
moon or add new routes to your existing flight paths? The
organization can either pursue a revolutionary strategy by using
new technology to develop new products and enter new markets, or
it can pursue an evolutionary strategy by aggressively extending
existing product and market know-how into new product or market
areas.
In this section, we outline the markedly different revolutionary and
evolutionary approaches to new-business development and then
examine the advantages and disadvantages of each strategy.
Revolutionary New-Business Development Strategy
A revolutionary strategy focuses on creating new businesses
radically different from an organization's existing business base.
Such a strategy makes sense only if the new businesses are driven
by technology that the organization is developing.
Here are five guidelines for creating new businesses using
technology as the driver:
1. Focus on a core technology.
2. Commercialize evolving technology early and aggressively.
 Page 47
3. Compress the time required for prototype development.
4. Identify and select the pace-forcing technology.
5. Press for technological pace matching.
These guidelines, which draw significantly on the concepts of Itami
(1987) and MacMillan and McGrath (1992), are discussed briefly
in the following subsections.
Focus on a Core Technology. Core technologies are those carefully
chosen, key technologies in which a company elects to excel.
Selectivity is crucial simply because even in the unlikely event that
the company could manage to excel in many technologies
simultaneously, doing so would be prohibitively expensive. For
example, Asahi Glass has focused on liquid-crystal display (LCD)
technology and is now a world leader in LCD technology and the
technology of LCD-based products, and GE Plastics has
concentrated on molecular-level polymer engineering.
By achieving and retaining leadership in a core technology, an
organization can continually adapt to changing customer needs,
search for new markets, and develop successive generations of
productsi.e., create and maintain momentum in the
commercialization of innovations.
Commercialize Evolving Technology Early and Aggressively.
Fully developing a new product before exposing it to the market
creates a huge potential for mistakes and expensive failures. An
organization can minimize these risks by getting the product out to
market as early as possible. For example, Sanyo knew that the
commercial advantage of solar-cell technology lay in heat-
exchange efficiency. But it marketed the technology long before
high efficiency was achieved by entering markets in which
efficiency wasn't importantwatches and calculators. As a result,
Sanyo compiled a wealth of production and market information,
which will come in very handy when a high level of efficiency is
 Page 48
achieved. Another example is Sony, which took its first modest
step into the U.S. TV market with a 6-inch television set. In short,
any market can best be learned by entering it.
Early commercialization is even more important in light of the
shrinking product cycles typical of today's business environment.
Rapid changes in technology, market uncertainty, and competitive
pressures have forced organizations to accelerate
commercialization. Furthermore, marketing a product early tends
to create an entry barrier to competing products simply because of
the cost involved in switching from an existing product.
The task for senior management is to encourage, support, and
require multifunctional teams very early, in order to reduce the
time it will take the project to progress from engineering to
production to marketing. Formalized handoff procedures from one
function to the next must be eliminated if the organization is to
achieve early and successful commercialization.
An aggressive approach to commercialization provides an effective
response to the following major problems associated with the
revolutionary business development strategy:
· Market uncertainty: The market may not want the product, or a
competing technology may preempt the market, as illustrated by
many examplese.g., the RCA videodisks that didn't record and
were therefore swept away by videotapes; the Polaroid instant
movie cameras that were rendered obsolete by electronic
camcorders.
· Know-how development: Before a product can be produced, sold,
or distributed, an enormous amount of know-how must be
developed, including:
Production know-howthe company must learn how to make the
product.
Marketing know-howthe salesforce must learn how to sell the
product.
Distributor and supplier knowhow-these groups
 Page 49
must learn how to deliver, distribute, and service the product.
User know-howcustomers must learn how to use the product.
Early commercialization, as in Sanyo's case, generates production,
marketing, and supplier knowledge that can help the company
successfully commercialize the mature product once it becomes
available.
· Cash burn: If a firm waits until its technology is perfected before
marketing a new product, it can lay out money for years before
getting any revenues. With early commercialization, the firm can
use initial, modest market wins to generate a cash flow that can be
used both to provide an increased level of funding for each
successive round of technology and to fund future market moves.
Compress the Time Required for Prototype Development. Senior
managers need to maintain pressure for rapid prototype
development and manage design cycle time. Although the research
group should develop a working prototype, a multifunctional team
should be created as quickly as possible to address the tasks of
simplifying the product and/or expanding its functionality. This
team should attempt to use the new technology to reconfigure the
industry.
Senior management can play an important role in identifying and
eliminating bottlenecks, such as a shortage of test equipment in the
engineering stage. Senior management should also use a teamwork
approach and provide for an overlap of functions, so that learning
will take place by joint action rather than by formal
communication.
Identify and Select the Pace-Forcing Technology. When any major
new product is created, a number of different technologies must be
developed in parallel. Selecting which of these technologies will
force the pace is critical. For example, Matsushita's introduction of
the 8-millimeter video required
 Page 50
the simultaneous development of tape, tape deck, recording heads,
playback heads, parts, and assembly. Matsushita chose tape
technology as the driver, hoping that by using the company's metal
vacuum deposition technology, it could leapfrog conventional
metal powder deposition technology. This choice then forced all
the related technologies to keep up (which is another important
consideration for senior management, as we'll see in the following
subsection)and advances in those related technologies were fed
back to improve Matsushita's existing product line.
Press for Technological Pace Matching. Management must also
make sure that other needed technologies keep pace with the
development of the core technology and that the sales-force, the
production department, suppliers, and distributors are constantly
kept abreast of the applications of these evolving technologies.
Toray made a costly mistake when it developed a nylon process
technology different from Du Pont's but failed to develop necessary
related technologies. Because Toray needed finishing process
equipment and know-how (involving such operations as spinning,
dyeing, and finishing) as well as access to U.S. and other markets,
it was forced to make an almost crippling financial commitment to
license from Du Pont. Toray realized that without advances in the
related areas, all its production know-how was worthless.
Evolutionary New-Business Development Strategy
Evolutionary new business development involves extending
existing know-how into new products/services and/ or new
markets. Because the company is not starting from scratch,
aggressive extension of know-how offers a greater likelihood of
success than the revolutionary approach of entering areas in which
both the market and the product/service are unknown. Over time,
though, the company can still become highly diversified if it is
aggressive enough.
In the course of marketing new products/services and
 Page 51

Figure 2-1:
Example of Evolutionary New-Business Development through the
Aggressive Extension of Know-How
entering new markets, a firm develops new know-how. The key to
success with the evolutionary approach lies in the firm's being
aware of the specific know-how that it is redeploying as it embarks
on each new venture. An interesting example of extending know-
how is presented in Figure 2-1, which shows how in just 15 years
the financial services company studied by MacMillan has grown
into a highly diversified organization with $60 billion in assets.
The company started as an internal supplier of financing to
domestic durables purchasers, thereby developing know-how in
checking credit and handling delinquent debts. It then used this
know-how to move aggressively into financing other domestic
durables, such as furniture, and eventually, automobiles.
 Page 52
All these steps involved extending existing product know-how
(leasing and sale/leaseback) to new markets. However, the firm
then moved into a new product, leasing, in the automobile market.
In addition to its existing know-how in checking credit and
handling delinquent debts, the firm had to develop know-how at
estimating the residual value of a car when the lease expires, which
is the key to leasing success. Its next step was to aggressively
extend this new know-how (assessing lease residuals) to ever more
diverse new marketstrucks, railcars, aircraft, and even computers.
In the process, the firm developed know-how in asset management,
which it used to aggressively build a leveraged buyout (LBO)
business. In the meantime, the firm has become so effective in the
household-financing business that it has moved into private-label
credit cards.
Advantages and Disadvantages of Both Strategies
The major disadvantage of the revolutionary strategy is that the
organization has little or no know-how on which to base its entry
into the marketit knows neither how to produce the product nor
how to sell it to customers and distributors nor how to service it.
Entering the market against established competition is immensely
expensive under such conditions, unless the organization has
elected to use new technology as the driver, as Du Pont has
repeatedly done (Cohen 1988). Additional disadvantages of the
revolutionary strategy include the following:
· The new technology may not be ''user-friendly" for either the
firm, its new customers, or its new distributors.
· Customers or distributors are often highly resistant to using a new
technology in its early stages.
· Although a firm can win big with the revolutionary strategy, such
wins are infrequent.
· Large-scale entry with the wrong product at the wrong
 Page 53
time can produce large-scale disappointment, which may have a
negative impact on the firm's other venturing efforts.
The major advantages of a revolutionary strategy are that:
· New technology can permit breakthroughs that transform the
industry, making huge wins possible.
· The know-how of existing competitors is of no use in helping
them quickly counter such a new technology.
· The company is likely to achieve a strong proprietary position.
The advantages and disadvantages of the evolutionary new-
business development strategy are essentially the reverse of the
advantages and disadvantages of the revolutionary strategy. The
advantages are as follows:
· Some or all of the company's existing know-how can be applied
to the new venture.
· The fact that the technology is already familiar to the company, its
customers, and its distributors tends to minimize both user-
friendliness problems and resistance to the product on the part of
customers and distributors.
· The probability of success is higher, even though the wins are
often more modest than with a new-technology-driven market
entry.
· By sticking close to its existing know-how base, the company
reduces the risk of a large-scale failure that might adversely affect
its overall venturing program.
Conversely, the disadvantages of the evolutionary new-business
development strategy are as follows:
· Huge wins, of the industry-transforming kind, are much less
likely.
 Page 54
· Some or all of the know-how of existing competitors will be
useful to them in attempting to counter the firm's new offering.
· The firm is unlikely to gain a strong proprietary position.
Although it might seem logical to try combining the revolutionary
and evolutionary strategies in order to mitigate the disadvantages
of each, a combination strategy is often too costly and may spread
the organization too thin in terms of its resources and talents. A
viable alternative, however, is for different organizational units to
pursue different strategies.
Challenge 3: Defining and Using Venture Selection Criteria
As we said in the Introduction, the concept of entrepreneurship as
an endeavor characterized by undisciplined, spontaneous, rash, and
risk-seeking behavior is a myth. On the other hand, rigid, lock-step
adherence to a fixed set of rules can be the kiss of death for
entrepreneurship. New ventures do need discipline, but it's a
different type of discipline than what established organizations
need. Senior management bears the responsibility for requiring
discipline that is appropriate to the unique conditions of venturing.
Choosing which ventures the organization will support is one of the
most important areas in which discipline must be exercised.
We start this section by examining the types of criteria that
organizations often define as a guide to venture selection. We then
consider how organizations use these criteria to help them choose
ventures that are consistent with corporate strategy, feasible, and
worthwhile.
Defining Venture Selection Criteria
Venture selection criteria are the standards by which senior
management judges new-venture ideas and chooses
 Page 55
those it will support. Both general and specific criteria must be
defined, and they must be clear enough to enable senior managers
to select ventures that will prove successful and profitable. General
criteria flow from the goals chosen for the venturing activity as a
whole and from the strategic goals of the parent company. (For
example, Motorola's strategy of being first and dominant in
portable communication devices inevitably provided guidance for
its position in the emerging cellular phone business.) More specific
criteria may be defined as well, involving such considerations as
evidence of consumer or customer want or need, specified
competitive advantage and insulation against competition,
indications of the company's capability to satisfy the perceived
need, and various financial criteria.
Firms often establish screening criteria with respect to the
following critical aspects of an internal corporate venture. Note that
these criteria are very broad and only serve to define the general
"territory." For a more detailed examination of the criteria used for
evaluating specific business proposals, see Chapter 4.
·Strategic fit: The company may define the types of markets,
products, and technology on which it wishes to focus. Conversely,
it may define how much diversity from present markets, products,
and technology is acceptable.
· Potential size: Limits may be established on the size of ventures
the company will support. Some firms will not consider ventures
having only a relatively small potential; others ignore potential
size. Limits may also be established regarding potential size as it
relates to time (i.e., how quickly a venture must be expected to
reach a given size).
·Market position: Some companies require a number 1 or number 2
position or a specified minimum market share.
· Investment limitations: Limits may be imposed on how much the
company is willing to invest to reach each stage of venture
development as well as on the
 Page 56
total amount it is willing to invest before profitability is achieved.
·Financial performance requirements: Criteria may be established
regarding ROI, gross margins, sales growth rate margins, and
potential sales.
·Time horizon: The company may specify the time period within
which a venture is expected to become profitable. This can range
from under three years to ten years or more, depending on whether
the target market exists or requires development. A venture's
expected business life can also be a consideration.
· Risk levels: The company may define the level of financial and
regulatory risk it is willing to take.
·Social responsibility and corporate values: Criteria may be
established to ensure that ventures are consistent with the
company's mission and value system and with how the company
sees its role in society.
·Feasibility: The company may define certain fundamental
determinants of a venture's feasibility, such as the likelihood of
gaining a strong proprietary position; availability of the systems,
management, and leadership required to adequately control the
venture; and how much of the firm's existing know-how can be
applied to the venture.
·Impact: Criteria may also be established regarding a potential
venture's impact on the company's reputation or on its existing
customers.
Although we are not suggesting that an organization must establish
detailed criteria for each issue mentioned in the preceding list, it
should define enough criteria to enable managers and potential
innovators to determine that a proposed venture is consistent with
the firm's overall strategy, likely to produce worthwhile results, and
feasible for the firm to undertake.
Now that we've seen the rather wide array of venture selection
criteria that companies can define, let's consider which criteria are
most commonly used in screening ventures
 Page 57
Table 2-1: Criteria for Selecting Ventures
United States Japan
Selection Criteria (39 (126
Companies) Companies)
Strategic fit 4.1 3.9
Competitive advantage 4.0 3.8
Potential ROI 3.9 3.6a
Existence of a market 3.9 4.4a
Potential sales 3.9 3.9
Risk/reward ratio 3.8 3.6
Presence of a product champion 3.6 4.0
Synergy 3.5 3.7
Amount of money risked 3.3 3.6
Closeness to the present market 3.3 3.3
Presence of an executive 3.3 3.4
protector
Opportunity to create a new 3.1 3.8a
market
Closeness to present products 3.1 3.2
Closeness to present technology 2.9 3.5a
Patentability 2.3 2.9a
Source: Adapted from Z. Block and P. N. Subbanarasimha,
"Corporate Venturing: Practices and Performance in the U.S. and
Japan," working paper (Center for Entrepreneurial Studies, Stern
School of Business, New York University, 1989).
Note: Criteria were rated on a scale of 1 ("unimportant") to 5
("critically important"). The numbers presented here are the
average ratings.
a Indicates a statistically significant difference between the figures
for the U.S. and Japanese companies.

and how these criteria relate to venture performance. Block and

Subbanarasimha (1989) examined this issue in a study involving a
number of U.S. and Japanese companies. The principal selection
criteria used by these companies are shown in Table 2-1, which
lists the criteria in order of declin-
 Page 58
ing importance to the U.S. sample. Block and Subbanarasimha's
findings regarding the correlation between selection criteria and
venture performance are as follows:
· Better-performing companies, those with a higher ROI and profit
contribution from total venturing activity as well as a higher
percentage of profitable ventures, gave the highest ratings to
risk/reward ratio and potential sales as criteria for selecting
ventures.
· Poorer-performing companies gave the highest ratings to the
presence of a venture champion as a criterion for selecting
ventures. (Note: A venture champion may be necessary to get a
venture supported, but the presence of such a champion is not a
sufficient reason for starting a venture.)
· The study found no correlation between performance and the
"closeness to present products" or "closeness to present
technology" criteria. This may be due to the tremendous variation
in performance among companies with diversifying ventures. (See
the discussion of the Porter study in Appendix A.)
· The high rating for strategic fit as a criterion for individual
venture selection is consistent with the principal reason for
venturing noted in Chapter 1 (i.e., "to meet strategic goals").
Thus far in this subsection, we've considered a variety of venture
selection criteria and how some of the most commonly used criteria
relate to venture performance. At this point, you may be wondering
just how senior management can synthesize all this information
into a set of company-specific guidelines that can be used to
effectively evaluate venture ideas. What follows is a sample
statement of venture selection criteria that we have developed for a
fictitious technology-based food ingredient and food-processing-
machinery business with current sales of $150 million and a 16%
ROI.
· We are interested in developing proprietary products, equipment,
systems, and businesses for the food-
 Page 59
processing and food service industrybaking, dairy, confectionery,
frozen foods, fast foods.
· The potential size of ventures we select must exceed $5 million in
annual sales within a three-year period. Ventures should offer gross
margins of not less than 35%. No venture that promises less than
40% annual pretax return on investment within a five-year period
will be considered.
· Products shall be nutritionally sound and contribute to improved
product quality and profitability for our customers.
· The product/business shall be capable of obtaining leading market
share based on clear competitive advantages that can be retained or
renewed over a time period that is long enough to enable the
product/business to achieve market leadership.
· Ventures should require an initial investment level of less than
$500,000 to reach break-even.
In the following subsection, we turn our attention to the issue of
what senior management should do with venture selection criteria
once they have been definedi.e., how the criteria can most
effectively be applied in practice.
Using Venture Selection Criteria
MacMillan's study found significant differences between how
senior managers in companies with successful and unsuccessful
venturing divisions used venture selection criteria to manage the
process of generating venture ideas, evaluating those ideas, and
then selecting or rejecting them.
One difference between the unsuccessful and successful venturing
divisions involved the screening process used by senior
management to select ventures for support. The companies with
unsuccessful venturing programs generally required that fully
developed business plans be submitted to management committees,
which, after much deliberation,
 Page 60
handed down a decision, generally negative, with little explanation.
To a venture's proponents, the process was akin to dealing with the
Delphic oracle: the basic selection criteria emerged only over time
and after the rejection of many seemingly viable ideas.
Managers in the companies with successful venturing programs
generally took a much different approach. They developed a
limited number of key criteria, as discussed in the preceding
subsection, to be used for the initial screening of proposals. They
then disseminated those criteria, both widely and continuously,
within the organization. Because the criteria gave the firm's
members a clear sense of direction, by specifying the types of
venture ideas in which the firm was interested, the criteria tended
to stimulate the generation of ideas.
Dissemination of the criteria also prompted a considerable amount
of self-screening, in which ideas were either rejected or repackaged
by subordinates themselves, thus saving hundreds of hours of
unnecessary plan preparation and subsequent disappointment. As a
manager in the engineering materials company put it: "The
problem is not with too few ideasthe problem is with choosing
from many ideas. The best people to discard ideas that just don't fit
are the people who are thinking about proposing them" (MacMillan
1987, 447). This voluntary reduction in the number of unsuitable
ideas submitted allowed senior management to focus serious and
sustained attention on more feasible ideas right from the start.
Another significant difference between the companies with
unsuccessful and successful venturing divisions involved how
managers handled the rejection of ideas. In the companies with
unsuccessful programs, senior managers uniformly used selection
committees (often composed of high-level staff bureaucrats) who
turned down each idea as a committee. In general, senior managers
in the companies with successful programs turned down ideas
personally and took the time to explain why. As the senior manager
of the financial services firm put it:
 Page 61
It is not easy to tell someone why you aren't going ahead with an idea
that they think is great. Sometimes it is great, but it just doesn't fit. If
it doesn't fit, I owe it to the guy who thought of it to tell him why we
aren't going ahead. I'm not about to get into an argument about it, but
I am going to tell him, eye to eye. Hiding behind a committee is a
cop-out. (MacMillan 1987, 447)
One final advantage of developing and widely disseminating a
statement of venture selection criteria is that the criteria provide
unambiguous standards for the rejection of unsuitable ideas. Hence,
although many ideas will be rejected for failing to meet the stated
criteria, such objective turndowns tend to be far more acceptable to
the ideas' proposers.
Challenge 4: Managing Disappointment
Even if a firm is able to reduce the risks associated with a startup
through astute selection of new-business ideas and meticulous
attention to venture design, failures will still occur. Because new
businesses inherently involve uncertainty and lack of knowledge,
they simply fail more often than established businesses. Thus, the
last and most sensitive area in which senior managers face a major
challenge involves managing the failures that inevitably
accompany any serious drive toward new-business development.
The MacMillan study found four fundamental differences in the
way failure was handled by managers in companies with successful
and unsuccessful venturing divisions. In companies with successful
divisions, the managers had learned to:
1. Distinguish between bad decisions and bad luck
2. Focus on learning
3. Redirect the venture
4. Shoot the wounded (have the courage to quit)
 Page 62
In the following subsections, we consider how each of these
strategies can help senior management either salvage a positive
outcome from initially negative results or, failing that, at least
prevent initially negative results from escalating into a major loss
for the company.
Distinguish between Bad Decisions and Bad Luck
In the companies with successful venturing programs, managers
were very careful to distinguish between plain bad luck and bad
management. As the senior manager of the equipment-
manufacturing company put it:
Some managers came to me and told me that their venture had failed
and that they had lost me several million dollars. When I reviewed the
decisions they made, I realized that in their circumstances I would
have made the same decisions. They had done everything about right,
but their luck ran badly and they were blindsided by an unexpected
technology. So I called the whole company around and I said to them:
''Here's a couple of guys who took a big swing and missed, but for all
the right reasons, and I want you to notice that though we lost a few
million I'm promoting them." If I hadn't done that, people would have
just stopped taking risks. On the other hand you have to make sure
that everyone understands that we can't condone sloppy management,
no matter what. (MacMillan 1987, 449)
Focus on Learning
Another key characteristic exhibited by managers in companies
with successful venturing programs was a determination to learn
from failures, even to capitalize on them (Mai-
 Page 63
dique and Zirger 1985; Block and MacMillan 1985). The
equipment-manufacturing company analyzed a major setback in a
domestic venture and turned it into a promising international
business. The engineering materials company analyzed a
disappointment in one market and identified a whole new
opportunity in another marketan opportunity it subsequently
pursued with great success. This determination to salvage learning
from the wreckage of failure closely parallels the finding of a
fascinating longitudinal study of several innovative organizations
by Maidique and Zirger (1985), who observed that spectacular
new-product successes often emerged as an outgrowth of what
companies learned from major failures.
Redirect the Venture
In companies with unsuccessful venturing programs, the managers
tended to assess a venture's progress by holding periodic committee
reviews and making a "go/no-go" type of decision on the venture at
each review.
In companies with successful venturing programs, on the other
hand, the mind-set of senior managers was completely different.
They generally measured progress according to predetermined
milestones (Block and MacMillan 1985). At each milestone, the
managers decided how to change direction rather than whether or
not to proceed. Several major successes at 3M occurred only
because senior management recognized unexpected new
applications for work performed in connection with ventures whose
original product entries had failed.
As the leader of the information services company observed: "New
business development is like mountain climbing. When you reach
an obstacle you can either stop and weep or you can strike out in
another direction. If you don't keep trying new directions, you
never get up the mountain" (MacMillan 1987, 450).
 Page 64
Shoot the Wounded (Have the Courage to Quit)
An especially painful duty of the senior manager is to shut down
ventures that are just not working out. The pattern in the companies
with unsuccessful venturing programs was that once projects were
well under way, they were allowed to flounder on, consuming
valuable effort and resources long after they should have been
terminated.
Although senior managers in companies with successful venturing
programs also hated to terminate failing projects, they had no
hesitation about doing so, and all of them delivered the news
personally. Here's how the financial services company manager
explained the dangers of mishandling project terminations: "If you
don't shut them down personally and tell them that you're shutting
down and why, they'll think that they failed. It's important to make
them realize that it's the business that failed, not them . . . . If you
don't, you lose them, and who likes to lose good people?"
(MacMillan 1987, 450).

Conclusion
Senior managers play a critical role in enabling new ventures to
grow and develop while maintaining a necessary balance with the
organization's ongoing businesses. On the one hand, the scale,
scope, and degree of aggressiveness of the venturing program must
be tailored to the firm's capabilities in order to avoid crises that can
cause unnecessary damage to both. On the other hand, creating a
venturesome climate will have a positive impact on the
opportunity-seeking spirit of the existing organization.
This chapter identified several key areas in which senior
management involvement is essential to a successful venturing
programcreating a venturesome culture, selecting a business
development strategy, defining and using venture selection criteria,
and managing disappointment. If senior management fails to meet
these challenges, individual new
 Page 65
ventures may succeed, but it is unlikely that the company will be
able to sustain a profitable venturing program for any length of
time. At best, it will experience sporadic success.
By meeting these challenges, senior management will have made a
solid start toward an effective venturing program. But there is more
that corporate leaders must do in order to build a strong,
entrepreneurial culture that will continually generate successful
new businesses. Not only must they understand and support
innovation, but they must design the venturing process itself, which
is the subject of Chapter 3.
Guidelines
Creating a Venturesome Climate
1. Require innovation and new-business development in every
business unit and function.
2. Build organizational confidence by showing subordinates that
they are capable of developing new businesses, by demonstrating
visible and continuing personal commitment, and by empowering
and nurturing new-business creators and units.
3. Start close to the organization's current competence base and
extend from there.
Selecting the Business Development StrategyRevolutionary or
Evolutionary
1. Focus on a core technology and/or industry in which the
company is determined to excel.
2. Commercialize early and aggressively.
3. Use a revolutionary strategy only if the new business is driven
by technology that the company is developing.
4. Use an evolutionary strategy for extending existing know-how
into new products and new markets.
 Page 66
Defining and Using Venture Selection Criteria
1. Develop and disseminate a limited number of key criteria that
will serve to clarify corporate objectives and that can be used for
initial screening. Encourage self-screening of new-business ideas.
2. Turn down unacceptable new-business ideas by personally
advising the proposer of the decision and explaining its rationale.
Managing Disappointment
1. Focus on learning, not blame.
2. Focus on redirection, not venture continuation or termination, at
each milestone.
3. Have the courage to shoot fatally wounded ventures personally
and in a timely fashion.
4. Distinguish between venture failure and managerial failure,
between bad luck and bad decisions.

References
Block, Z., and MacMillan, I. C. 1985. "Milestones for Successful
Venture Planning." Harvard Business Review (September-
October): 184-196.
Block, Z., and Ornati, 0. 1987. "Compensating Corporate Venture
Managers." Journal of Business Venturing 2, no. 2 (Spring): 41-52.
Block, Z., and Subbanarasimha, P. N. 1989. "Corporate Venturing:
Practices and Performance in the U.S. and Japan." Working paper.
Center for Entrepreneurial Studies, Stern School of Business, New
York University.
Brandt, S. 1986. Entrepreneuring in Established Companies.
Homewood, IL: Dow Jones-Irwin.
Cohen, A. 1988. "Innovation at Du PontA Real-Time Perspective."
Research Technology Management (November-December): 47-52.
Elder, T., and Shimanski, J. M. 1988. "Redirection Decisions in
Successful Corporate Ventures." Frontiers of Entrepreneurship
Research (Babson College): 510-526.
Fast, N. D. 1979. "The Future of Industrial New Venture
Departments." Industrial Marketing Management 8: 264-273.
Fast, N. D., and Pratt, S. E. 1981. "Individual Entrepreneurship and
the Large Corporation." Frontiers of Entrepreneurship Research
(Babson College): 443-450.
 Page 67
Hill, R. M., and Hlavacek, J. D. 1972. "The Venture Team: A New
Concept in Marketing and Organization." Journal of Marketing 36
(July): 44-50.
Itami, Hiroyuki. 1987. Mobilizing Invisible Assets. Cambridge,
MA: Harvard University Press.
Kanter, R. M. 1983. The Change Masters. New York: Simon &
Schuster. . 1989. When Giants Learn to Dance. New York: Simon
& Schuster.
MacMillan, I. C. 1987. "New Business Development Challenges
for Transformational Leadership." Human Resource Management
26, no. 4: 439-454. 439-454.
MacMillan, I. C., and McGrath, R. G. 1992. "Technology
Strategy." Journal of High Technology Management Research,
forthcoming.
Maidique, M. A. 1980. "Entrepreneurs, Champions and
Technological Innovation." Sloan Management Review (Winter):
136-152.
Maidique, M. A., and Hayes, R. H. 1984. "The Art of High-
Technology Management." Sloan Management Review (Winter):
17-31.
Maidique, M. A., and Zirger, B. J. 1985. "The New Product
Learning Cycle." Research Policy 14: 299-313.
Peters, T. J., and Waterman, R. H., Jr. 1982. In Search of
Excellence. New York: Harper & Row.
Quinn, J. B., and Mueller, J. A. 1963. "Transferring Research
Results to Operations." Harvard Business Review (January-
February): 49-66.
Roberts, E. B. 1968. "A Basic Study of Innovators: How to Keep
and Capitalize on Their Talents." Research Management II, no. 4:
249-266. . 1980.
. "New Ventures for Corporate Growth." Harvard Business Review
(July-August): 134-142.
Takeuchi, H., and Nonaka, I. 1986. "The New New Product
Development Game." Harvard Business Review (January-
February): 137-145.
Tichy, N. M., and Devanna, M. A. 1986. The Transformational
Leader. New York: John Wiley & Sons.
von Hippel, E. 1977. "Successful and Failing Internal Corporate
Ventures: An Empirical Analysis." Industrial Marketing
Management 6: 163-174.
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3
Framing and Managing the Venturing Process: Senior
Management Decisions
If senior managers are to generate a steady flow of innovation, they
must do more than provide an encouraging environment. They
must actively develop and manage a process that produces ventures
having a high probability of success. Doing so requires an
understanding of the available decision options and who must
make these decisions.
In this context, it is important to distinguish between decisions that
are the responsibility of senior management and those that are the
responsibility of each venture's management (Burgelman 1984),
because managing the venturing function is not the same as
managing a venture. Senior management of the parent corporation
or unit should manage the venturing function or process, not the
venture itself. Management of the venture should be left to venture
managers. This does not mean, however, that senior management
should be detached or disinterested. On the contrary, it means that
se-
 Page 70
nior management should provide support and input, evaluate
performance, and demand results, but not direct day-to-day
operations. In this chapter, which deals with process and venture
design, we concentrate on issues and decisions involving senior
managers (i.e., those to whom venture managers report), not
venture managers.
Senior managers need to make decisions about venturing activities
on two levels. The first involves the organization and management
of the overall venturing process (Burgelman 1983). At this level,
senior management is concerned with the process elements on a
firmwide (or business unit) scale. The second level involves the
design and monitoring (not the operation) of individual ventures.
The effectiveness of these decisions is a major determinant of the
organization's ultimate venturing performance.
In this chapter, we build on the venturing process model shown in
the Introduction (see Table I-1), which outlines the responsibilities
of senior management and venture management at each stage of the
venturing process. Senior management's responsibilities include
taking action in the following five areas:
1. Formulating the corporate venturing strategy
2. Generating new-business ideas
3. Analyzing and selecting new-business ideas
4. Designing the venture
5. Launching and monitoring the venture
Before discussing each of these areas, we want to emphasize that
our objective is to provide guidelines for creating a process that
will enable an organization to generate a continuing stream of
innovations and new businesses and optimize its chances of using
venturing as an effective long-term growth strategy, not to provide
guidelines for merely achieving an occasional venturing success.
Although an organization can actually start by taking action in any
of the preceding five areas, and sooner or later, with or without
conscious planning, every one of these areas will require action on
the
 Page 71
part of senior management, this does not mean the organization
should rely on serendipity to structure its venturing effort. Building
a coherent and internally consistent venturing process through
thoughtful management is far more likely to pay off in terms of the
avoidance of major errors, cumulative learning, and more effective
performance.
And finally, we wish to emphasize that although process design
and management can increase an organization's odds of success,
individual creativity is an absolute essential for which no process
can be substituted.

Formulating the Corporate Venturing Strategy

In developing its venturing strategy, a firm should examine its
fundamental reasons for venturing, set the overall direction of its
venturing effort, and decide on the size and number of ventures it is
willing to support.
Deciding to Venture: What Will Drive the Engine?
Research shows that employing venturing as an organization's
source of growth and renewal is preferably a strategic decision
(Burgelman 1984; Block 1982; and Hanan 1976). Figure 3-1
illustrates the relationship between venturing and strategic goals.
Many key people in the firm, including the CEO but not just the
CEO, must be convinced of the strategic necessity of venturing.
Furthermore, they must become convinced of this need well before
events in the marketplace bludgeon the firm into a belated
awareness of missed opportunities and competitive disadvantages.
NYNEX and IBM provide examples of how venturing can be used
to achieve strategic objectives. NYNEX has a growth objective that
exceeds the projected growth of its traditional telephone
businesses. To achieve that objective, it
 Page 72

Figure 3-1:
Venturing as a Strategic Growth Option
must enter new businesses, which is being done with cellular
telephones and with telephone stores in the United States and
abroad.
In the case of IBM, the company's entry into the personal computer
business achieved two strategic objectivesproviding growth as well
as serving a defensive function. A current example of a venture that
exemplifies a long-term commitment to venturing as a necessary
component of strategy fulfillment is Prodigy, the joint venture
between IBM and Sears whose purpose is to supply information
and other services to PC owners via videotext. By September 1990,
more than $600 million had reportedly been invested with no profit
to that date. What accounts for this commitment is the clear
 Page 73
inevitability of the growth of PCs and the services that will be
needed (i.e., the potential risk/reward ratio), strategic fit, and the
deep pockets of the partners. CBS, an earlier backer of the Prodigy
venture, ''bailed out in 1986 after seeing how far off the payback
would be" (Rothfelder and Lewyn 1990). From a strategic
standpoint, Sears must be in the electronic selling business in the
future, and IBM must be in the computer software and service
business. As of July 1992, when contacted, a spokesperson for
Prodigy reported that 2 million members were expected by year
end and that recent data on investment and profitability were not
publicly available.
Venturing is often initiated as a consequence of strategic necessity
when a business's goals cannot be achieved without new-
product/new-market entries or when the maturing of existing
businesses requires internal venturing or acquisitions as a defense
or to achieve growth. In practice, however, that necessity often
goes unrecognized, and companies begin by simply seizing an
opportunity or responding to a threat, as was the case, for example,
with IBM's PC entry. Some ventures originate as a by-product of an
internal competencee.g., Aetna's entry into mutual funds or
Boeing's computer service business or Du Pont's energy consulting
activity. Firms with large research and development operations
frequently find themselves with new technologies that require
commercialization, sometimes outside the scope of existing
business activity. A venture may be undertaken in order to obtain a
window on a new industry or technology, as Exxon did with its
exploration of wind energy in the 1970s. More recently, companies
have introduced venturing in order to stimulate innovation and
initiatives, as Colgate did with its Venture Company and Kodak
with its New Opportunity Development.
There's nothing wrong with a mixed strategy in which a firm both
actively seeks opportunities and responds to unexpected
opportunities. Smaller organizations or units within large
corporations can be far more flexible in their reaction time than the
giants, starting smaller and increasing resource allocation as the
probability of success increases.
 Page 74
And there are some companies in which venturing is such a deeply
embedded activity, recognized as so fundamental to organizational
life and growth, that the companies themselves are considered
venturing entities. Such is the case with 3M and Hewlett-Packard,
and was for a long time the case with Texas Instruments; it is also
the case with many other firms in industries that are constantly
changing. The more turbulent a business or environment, the
greater the need for innovation and the greater the likelihood that
venturing will be essential for survival.
Setting the Direction of the Venturing Effort: Goals and Limits
Setting the direction of the venturing effort can be done in a wide
range of ways. At one extreme, a firm may clearly define what is
expected to result from its venturing activity; specify its goals, both
quantitatively and qualitatively; and then design plans to meet
those goals. At the other extreme, the firm may simply react to
opportunities, without stating any goals or objectives, other than
possibly the fields or industries in which it is interested in
venturing.
A strong case can be made for establishing venture goals.
Goalswhich specify industries of interest and market position
sought and express economic performance objectives in terms of
sales, total profit, and marginsprovide direction to the
organization's effort. Goals create pressure for action, establish
linkage with strategic objectives, and can serve as a basis for
evaluating performance. We are referring here to goals for the total
venturing effort within either a business unit or the total
organization, not to specific goals for an individual venture, which
are a separate matter.
Providing direction to the venturing effort through the formation of
goals that clearly reflect the organization's reasons for venturing
can also prevent venturing from moving in a direction that conflicts
with corporate objectives. The potential for such a conflict is aptly
illustrated by the case
 Page 75
of a multibillion-dollar company's venturing activity, whose
manager identified its mission as "stimulat[ing] innovation." In
contrast, the parent corporation's chief operating officer stated in an
interview that his criterion for venturing success was the
development of a new business with minimum sales of $100
million per year within five years! Furthermore, the formation of
goals establishes a clear rationale for assessing individual venture
proposalsone that can be used both by those submitting venture
proposals and by decision makers.
A case can also be made for stating what is not of interest to the
firm, in order to sharpen the focus on the firm's strategic goals with
respect to the industries and markets chosen. For example, a food
ingredient manufacturing company decided that it lacked the know-
how, experience, and leadership required to successfully market
food products to consumers but that it was highly skilled and
effective in developing, manufacturing, and marketing products for
other food producers. Its statement of strategic objectives therefore
made it clear that the firm would not undertake internal ventures in
consumer food products.
Organizations should avoid being overly narrow in establishing a
direction and goals for their venturing efforts. Excessive caution
could result in the rejection of a blockbuster proposal that might
arise out of a technological discovery, an innovation, or the
emergence of a totally new and as yet nonexistent market that
doesn't fit within the scope of the formulated direction and goals. It
could also result in the rejection of extraordinarily creative,
imaginative, and "wild" ideas having great potential.
An early example of such goal-limiting myopia involved the
invention of a method for producing a water ice confection on a
stick. The inventor approached a firm in the bakery supply business
and was rejected because the product and market were not related
to the firm's existing business. The inventor then approached a
competing firm, which saw the potential for a new business and
commercialized the invention with great and enduring success as
the Popsicle.
Although, as noted, firms should avoid being overly nar-
 Page 76
row in establishing the venturing effort's direction and goals,
neither should they be unrealistically optimistic. It makes little
sense to establish goals that are clearly impossible to achieve, since
any organizational unit created for the purpose of achieving such
goals will inevitably fail and will then be disbanded.
Deciding on the Size and Number of Ventures
The firm's strategy may be to seek and implement either a
relatively small number of very large-scale ventures or, conversely,
a larger number of smaller ventures (i.e., a portfolio strategy).
In choosing its strategy, a company just beginning to venture
should consider the value of a learning period, in which smaller
ventures are desirable. The company must also consider the
possible failure rate (50% is a good assumption, although 80% is
possible) and what it can afford to lose in terms of time and money
by pursuing the chosen strategy. Ideally, firms that have never
ventured should start small, with two or three ventures, limited
investment, and a reasonable possibility of reaching cash break-
even within a short period of time (three years or less). As
experience is gained and more is learned about venturing, the level
of activity can be increased and the objectives enlarged. Big
companies looking for single-digit growth rates will require giant
ventures to produce it. A $15-billion company seeking a 5%
growth rate from new ventures needs a strategy that will produce
sales growth of $750 million per year! This contrasts with a $200-
million firm seeking a 10% growth rate, for which sales growth of
$20 million per year would be the target.
In simplest terms, the choices are as follows:
· Will the company aggressively seek ventures in specific areas, or
will it respond opportunistically to whatever possibilities arise?
 Page 77
· Will the company sponsor a few ventures or many? How few?
How many?
· Will a minimum size potential be required?

Generating New-Business Ideas

An organization seeking to stimulate a flow of viable new-business
ideas would be well advised to start by examining its venture bases
(Hanan 1976)i.e., its special competencies, the answers to the
following questions: What is this company or unit particularly
good at? What does it know a lot about? What skills, intellectual
capital, technology, market position and market information,
distribution channels, and organizational skills does the company
have that can form the basis for a new business?
In a well-managed venturing process, operating and staff people
are challenged to define the competencies that provide competitive
advantage and that can serve as take-off points for a new venture.
This requires leadership, evidence of commitment to venturing as
part of the firm's strategy, and training to enable personnel to
identify opportunity. It is also important that this approach be
combined with external sources of opportunity, as described in
Chapter 4. No matter how great the firm's internal competency,
unless that competency fits an existing or potential market, the idea
generation exercise will be an answer in search of a question rather
than a valid need in search of a solution.

Analyzing and Selecting New-Business Ideas

If an organization succeeds in generating a flow of new-business
ideas, many of those ideas will probably not be accepted. The
process of analyzing and selecting ideas must be managed so that
idea proposers don't become demoralized
 Page 78
by rejection and senior managers don't feel compelled to accept
ideas merely to avoid demoralization. Several approaches to the
analysis and selection process have proved effective in stimulating
the generation of ideas rather than turning proposers off.
One approach involves judiciously controlling the complexity of
the required approval process. Nothing is more demoralizing to an
entrepreneurial and creative individual than an obstacle course
consisting of multiple approval levels or ponderous committee
deliberations before an idea can even be explored for feasibility. As
described in detail in Chapter 7, an idea evolves into a business by
going through successively more complex and expensive stages.
The organization's process for approval or rejection should
therefore be appropriate to the venture's current stage. For example,
if an idea is in an early stage and approval is needed simply for
testing a concept, no more than a one-stop review should be
required. At the other extreme, if enough work has been done on an
idea to warrant the preparation of a business plan and approval is
needed for launching the venture, and if the commitment sought is
large enough, then it may be reasonable to require a more formal
approval process (e.g., presentation to and discussion with a board
or other authorizing body).
Other useful approaches to the analysis and selection process have
been tried by 3M and Kodak. At 3M, idea proposers are
encouraged to look anywhere in the firm for support. Kodak,
through its New Opportunity Development facilitators, actually
helped proponents of new ventures to develop and modify their
proposals in an effort to get support. Proposals were not rejected;
instead, they were simply not accepted, and the proponents could
continue modifying them and trying to obtain support. Ultimately,
it was the proponents themselves who decided to drop ideas if they
received no support.
Venture selection criteria (discussed extensively in Chapter 2) are
another effective tool for managing the analysis and selection of
new-business ideas. By advising its employees of the key criteria
that ventures must meet in order
 Page 79
to qualify for organizational support, a company can take much of
the guesswork out of the idea generation process and ensure a flow
of more viable ideas right from the outset. Venture selection criteria
can also aid in providing a rational basis for the rejection process,
by providing an objective standard against which new-business
ideas can be compared.
Assessing Venture Needs and Corporate Fit Requirements
One result of evaluating an opportunity and a venture proposal is
that senior management becomes aware of the critical factors
required for the new enterprise's success. The next and perhaps
most significant step in promoting that success is to ensure that the
parent organization can in fact meet the needs of the venture that
the parent is responsible for meeting. This requires carefully
analyzing the venture's needs versus the parent organization's
existing ability to meet those needs and determining what must be
done to fill any gaps. This analysis will be used in making
decisions about the venture's design and organization.
· In performing such an analysis, the following specific questions
must be answered:
· What risks are involved? Can the firm afford to take them?
· What resources, skills, and knowledge are required? Can the firm
supply them?
· What values, culture, practices, and procedures are necessary to
support the proposed venture? Can the firm adapt?
· What are the timing requirements for launching the venture and
seizing market share? Can the firm satisfy those requirements?
These issues are examined briefly in the following subsections.
 Page 80
Risks. In assessing the risks that are involved in a proposed venture
and deciding whether those risks are affordable, senior
management must consider both financial and nonfinancial risks.
Financial risks. The venture will need an infusion of cash until the
first commercial sale is made, positive cash flow results,
profitability is achieved, and the venture's goals are reached. There
will be an impact on the parent organization's profit at each of these
stages. The venture's affordability is determined by the parent's
current and projected cash flow, balance sheet strength, competing
demands for cash, and projected profitability.
Nonfinancial risks. Venture-generated risks include strangeness of
the new business and inability to evaluate performance, impact on
company positioning and reputation, conflict with existing
customers, impact on morale within the company, excessive
demands for management time, and diversion of resources from
existing businesses. The effect of Murphy's law, which applies to
all new ventures, must be kept in mind as well.
The parent organization's ability to afford these risks is affected by
the tenure and security of corporate management, the political
climate within the parent, and attitudes regarding risk embedded in
the company's culture.
Before leaving the topic of risk, we wish to offer two general
observations about the risks involved in undertaking any new
venture. First, senior management should recognize and accept the
fact that running a new venture is very different from running a
railroad. The company will not be dealing with trains traversing
existing tracks according to established, tested schedules. Rather, it
will typically be dealing with comparatively high levels of
uncertainty and risk, and every management practice must be
oriented toward managing uncertainty, not toward managing a
predictable operation. The management practices suggested
throughout this book are designed precisely for the purpose of
managing uncertainty.
 Page 81
Second, senior management should recognize and accept the fact
that failures are inevitable. Some ventures will never become
profitable, will make too little for the investment required, or will
fail to meet (often exaggerated) expectations; some will ultimately
be closed down. This probability therefore dictates a portfolio
policy for venturing, contrary to the findings of Biggadyke (1979).
The failure of individual ventures cannot be used as a basis for
evaluating an entire venturing program any more than the loss on a
single stock investment could be used to evaluate the performance
of a portfolio manager who produced an overall gain.
While we're on the topic of failure, it's worth mentioning New
Coke (a product "failure" that ultimately resulted in Coca-Cola's
regaining leading market share!) and pointing out that there are
plenty of New Coke examples around. The only true failures, then,
are those from which nothing has been learned.
Resources, Skills, and Knowledge. The requirements for resources,
skills, and knowledge include the availability of entrepreneurial
management, knowledge of the industry and market, functional
skills (financial, marketing, R&D, service, etc.) appropriate for the
specific business, facilities, regulatory knowledge, and perhaps
most critical, the ability to evaluate performance.
Values, Culture, Practices, and Procedures. Senior management
must identify the values, culture, practices, and procedures needed
to support the proposed venture. Differences in formality,
communication openness, how mistakes are treated, attitudes
toward customers, and internal competitiveness can generate
serious problems. Conflicts arising from autocratic versus
participative management styles and compensation philosophy and
practices are particularly irksome. There may be disparities
between parent and venture culture as well as between the parent's
practices and procedures and those needed to support the venture.
Will the parent be able to adapt to those needsespecially those
involving compen-
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sation, incentives, control procedures, and capital request
formalities?
Timing Requirements. The timing requirements for launching the
venture and seizing market share are determined by the venture's
proprietary protection, the time window available for establishing
market position, competitive action, and the availability of key
people. These factors may require very rapid decisions regarding
head count, capital expenditures, changes in strategy, salaries, and
incentives. If the parent organization has ground rules that prevent
rapid response, such as lengthy capital approval procedures or
head-count limits that cannot be exceeded without approval (i.e.,
the bureaucratic and procedural machinery designed for an
established business), the venture can be crippled. In one firm, a
new venture delayed building a plant in the East for an entire year
because the project required use of the corporate manufacturing
staff department, which was too busy to undertake the project
immediately. During the waiting period, more than the cost of the
plant was wasted in excess freight charges.

Designing the Venture

Comparing venture needs and parent company characteristics, as
described in the preceding section, will highlight the discrepancies
and gaps between the venture's needs and the parent's ability to
fulfill them. In designing the venture, senior managers must then
attempt to overcome these discrepancies and gaps in order to
ensure that the venture's needs can be met without jeopardizing the
parent's strengths.
Designing the venture requires decisions regarding five major
issues:
1. Composition of the venture management team and how team
members are to be compensated
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2. What form the venture will takefrom project team to wholly
owned subsidiary or spin-off
3. Structure and organizational positioning of the venturing
function
4. Milestones that will be used to trigger successive financing steps
5. The venture's strategy and business plan
Before discussing these issues, though, we would caution you that
designing the venture should not be regarded merely as a finite
stage of an organization's venturing effort. Rather, it should be
regarded as an ongoing process. As a new venture develops and
grows, its needs will inevitably change, as will the ability of the
venture team and the parent to fulfill those needs. Thus, the design
will require continual changes, which are the responsibility of
senior management.
Composition of the Venture Management Team
The issues of selecting, evaluating, and compensating the venture
management team are discussed fully in Chapter 5. At this point,
we merely wish to make one key observation about venture
management. Namely, ventures call for entrepreneurial managers,
not caretakers. Founders of successful new ventures typically
display attitudes, motivations, behavior, and work habits that differ
markedly from those of traditional corporate managers.
Persistence, energy, flexibility, resourcefulness, charisma, team-
building skills, and knowledge of the market are essential. As
ventures evolve, professional managerial capabilities become
increasingly necessary. Founders either recognize the need for
these capabilities and develop them, or they resist changing their
style. Outstanding business starters should not be regarded as
failures simply because they aren't willing or able to become
professional managers. Their talents should be used againfor
starting more new businesses.
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What Form the Venture Will Take
Whether the venture will take the form of a project team, a wholly
owned subsidiary, or a spin-off is a format decision that must be
made early in the venture creation process. The key question is:
Shall the company operate the venture alone, or does it need a
partnership of some kind with an outside organization? The answer
will depend on the affordability of the risks involved and the
availability of know-how.
Alliance possibilities run the gamut from having a minority partner
to being a minority partner to simply licensing to an outside
organization. Temporary alliances may be considered as well. The
nature of any alliance will depend on the particular problem to be
solved. Firms have formed partnerships in order to be able to
attract needed entrepreneurial leadership and free themselves from
the restrictions of existing compensation and incentive systems.
IBM and Sears' Prodigy videotext venture involves sharing needed
know-how and financial risk. Roberts (1980) and Roberts and
Berry (1985) have reported the effectiveness of ''new style joint
ventures," in which a large firm joins with a much smaller firm in
order to gain access to markets or technology and proposes
alternate strategies linked to the degree to which product, market,
and technology are familiar to the parent corporation.
Structure and Positioning of the Venturing Function
Organizational positioning of specific ventures is discussed in
detail in Chapter 6, but here we address the question of the
structure and positioning of the venturing function itself within the
firm. The possible alternatives are:
· A corporate venturing division or unit directly responsible for
venturing in the firmeither as part of the corporate business
development or corporate planning function or reporting directly to
the CEO or COO. Fast (1978 and 1979) has described such
venturing
 Page 85
units and provided case histories of their rise and fall. An inherent
problem with such units is the ease with which they can be
eliminated with a change in CEO, a reversal of corporate fortunes,
or share market price pressure to increase short-term profitability
(Sykes and Block 1989).
· A corporate staff unit responsible for facilitating, stimulating, and
supporting new-venture activities that are managed elsewherefor
example, by an operating unit or as a separate individual venture
reporting to another organizational entity.
· A line or staff function similar to those just described but
operating within a business unite.g., a division, subsidiary, or
department (Du Pont has $4-billion departments)rather than at the
corporate level.
· No special structural arrangement with no separate unit
responsible for any aspect of venturing. Business unit management
initiates and operates ventures as an ongoing part of each unit's
responsibilities.
· Combinations of the preceding approaches.
The choice of structure depends on the following factors:
· The organization's know-how and experience in venturing
· The magnitude and urgency of the intended venturing effort
· The size of the firm or unit
· The degree of the parent organization's commitment to venturing
(i.e., the strength of its conviction that venturing is essential to the
fulfillment of its strategic goals)
· The organization's culture
· The nature and number of the ventures to be sought
At one extreme would be the ideal state, in which the firm has a
strong and widespread commitment to venturing, a favorable
corporate culture, and considerable venturing ex-
 Page 86
perience and know-how, and the ventures undertaken range in
diversity from very related to relatively unrelated. In this
environment, one would expect to see each operating unit, if large
enough, having its own venturing subunit to support and guide
venturesto nurture them until they can fly alone. The corporation
would also have a unit that initiates and operates unrelated ventures
until they can be spun off or operated as new business units of the
firm. All forms of venturing would be in use.
At the other extreme would be a company with little experience in
venturing and a strong sense of urgency to start the venturing
process. In such a case, a corporate unit may be needed to
spearhead the efforti.e., to gain experience by operating a few
ventures, which should preferably be related to ongoing businesses.
This effort should be undertaken in collaboration with operating
units and with the understanding that each venture will be turned
over to the relevant operating unit once it has been established. The
corporate venturing unit thus serves as a stimulus, catalyst, and
teacher. As operating units gain familiarity with the venturing
process and become convinced both of the value of venturing and
of their own ability to manage ventures, the central unit should
begin to function in an advisory role, encouraging the efforts of
operating units and attempting to create self-sufficient venturing
capability in them, which will ultimately eliminate the need for a
corporate unit.
Many large companies engaged in venturing have used every one
of the previously mentioned forms at various stages of the firm's
development. At one time, Du Pont had a centralized new-business
development operation, which has since been decentralized to its
very large departments. Du Pont is still searching for more
effective methods of venturing that will enable the company to
cope with the new realities of very rapid technological change. GE
has had every form imaginablefrom internal ventures generated
within operating units to central business development units.
Similarly, IBM and Exxon have employed every possible variation.
Experience appears to indicate that the closer an organization
 Page 87
can get to the operating unit as the sponsor, the more successful the
outcome is likely to be. Firms that must diversify are an exception,
though, since in their case, it seems preferable for the venturing
activity to be conducted by a central unit that can handle
acquisitions along with internal development.
Milestones That Will Be Used to Trigger Successive Financing
Steps
The corporation should establish a series of milestones, each of
which can be used to trigger the release of additional financing to
get the venture to the next milestone. Milestone planning is
explained in detail in Chapter 7, and at this point, we simply want
to emphasize the need for establishing financing milestones at the
outset of a venture. Much can be learned from venture capitalists in
this regard. Rather than indicating a lump-sum amount that it is
prepared to spend, the company specifies how much will be spent
for concept testing, for feasibility study, for product development,
for market testing, etc. Businesses in development require
additional financing for subsequent stages, which they don't get
unless the preceding milestones have been achieved (i.e., unless the
earlier results justify it).
The Venture's Strategy and Business Plan
Approving the business plan and participating in establishing the
venture's strategy are decisions that must be made by senior
management. Neither of these decisions is operational, but they
determine the context within which the venture's operations are
conducted and dramatically affect the outcome of those operations.
In effect, they define the boundaries of a "playpen" within which
venture management is free to operate. Depending on the size of
the parent company as well as the significance of the venture to the
company, these decisions might be made by the parent board, by a
 Page 88
venture board that includes parent members, or by a senior
manager or senior management group of either the parent company
or a venturing division.
Approving the business plan and participating in formulation of the
venture's strategy require professional management by the parent
organization. Making these key design decisions is a constructive
and supportive alternative to operational interference and
overcontrol of the entrepreneurial venture team and is perhaps the
most important preventive step the firm can take to establish
controls designed to protect it from major unexpected losses.
As noted earlier, a number of these design decisions will obviously
have to be remade as the venture developse.g., project teams can
evolve into new operating units, startup managers may not develop
into expansion and growth managers, original alliances and formats
may not suit later needs. Thus, senior management has a continuing
responsibility both for determining when changes in the venture's
strategy and business plan are needed and for making such
changes. This does not mean that venture management cannot
participate in the design or even originate it, but the approval
responsibility rests with senior management.
Launching and Monitoring the Venture
Once the new venture is designed and launched, senior
management must avoid two dangers: (1) paying no attention to the
venture or (2) paying too much attention. At this point, senior
management's principal tasks are to protect and support the venture
and track its performance, both to help assure its success and to
control the cost of failure if that should be the outcome (and for
some ventures, it will be). By focusing on the control elements we
describe in Chapter 9, senior management can direct its efforts
toward correcting or modifying the venture's design and strategy
rather than toward micromanaging operations, which will paralyze
the venture team's flexibility and effectiveness.
 Page 89

Conclusion
The two main tasks of senior management with respect to
venturing are to create and manage the context in which it occurs
and to ensure that ventures are structured in such a way as to
maximize their chances for success.
By addressing these tasks effectively through strategy making,
generating a flow of ideas, choosing ventures that are consistent
with the organization's strategy, analyzing the needs of the chosen
ventures and the firm's ability to meet them, and designing ventures
in such a way that those needs can be met, senior managers can
craft a venture creation process that produces a continuing stream
of successful ventures.
Guidelines
Formulating the Corporate Venturing Strategy
1. Determine what will drive the venturing program. Does the
organization see venturing as fundamental to future
competitiveness? As a strategic necessity to ensure survival and
growth? Will it actively seek ventures or simply respond to
opportunities that arise?
2. Decide how detailed and quantified goals should be and then
formulate them.
3. Specify the venture's expected relatedness to the firm's existing
businesses.
4. Specify the portfolio characteristics sought: number and size of
ventures, minimum size of opportunities to be pursued, limitations
regarding industries and markets to be entered.
5. Design the venture selection processhow ideas will be processed,
how decisions will be communicated, and who will be responsible
for decision making.
 Page 90
Generating New-Business Ideas
1. Challenge units to define the internal competencies that are
venturable.
2. Provide guidance designed to stimulate ideas that are consistent
with the firm's strategy, worth the effort, and feasible for the firm to
exploit.
Analyzing and Selecting New-Business Ideas
Establish a process for assessing venture needs and corporate fit
requirements in the following areas:
The affordability of financial and nonfinancial risks
Resources, skills, and knowledge
Values, culture, practices, and procedures
Timing requirements
Designing the Venture
1. Select the format, management and compensation plan,
organizational positioning, and financing milestones that meet the
needs of the individual venture and fit the capabilities of the parent
corporation.
2. Assume that the venture's initial design will require changes and
be prepared to make them.
References
Biggadyke, R. 1979. "The Risky Business of Corporate
Diversification." Harvard Business Review (May-June): 103-111.
Block, Z. 1982. "Can Corporate Venturing Succeed?" Journal of
Business Strategy 3, no. 2: 21-33.
Block, Z., and Subbanarasimha, P. N. 1989. "Corporate Venturing:
Practices and Performance in the U.S. and Japan." Working paper.
Center for Entrepreneurial Studies, Stern School of Business, New
York University.
Burgelman, R. A. 1983. "A Process Model of Internal Corporate
Venturing in a Diversified Major Firm." Administrative Science
Quarterly 28: 223-244.
. 1984. "Managing the Corporate Venturing Process." Sloan
Management Review 25, no. 2 (Winter): 33-48.
Fast, N. D. 1978. "The Rise and Fall of New Venture Divisions."
Ann Arbor, MI: UMI Research Press.
 Page 91
. 1979. "The Future of Industrial New Venture Departments."
Industrial Marketing Management 8: 264-273.
Hanan, Mack. 1976. Venture Management, 25-63. New York:
McGraw-Hill.
Roberts, E. B. 1980. "New Ventures for Corporate Growth."
Harvard Business Review (July-August): 134-142.
Roberts, E. B., and Berry, C. A. 1985. "Entering New Businesses:
Selecting Strategies for Success." Sloan Management Review 26,
no. 3 (Spring): 3-17.
Rothfelder, J., and Lewyn, M. 1990. "How Long Will Prodigy Be a
Problem Child?" Business Week (September 10): 75.
Sykes, H. B., and Block, Z. 1989. "Corporate Venturing Obstacles:
Sources and Solutions." Journal of Business Venturing 4, no. 3:
159-167.
 Page 93

4
Identifying, Evaluating, and Selecting Opportunity:
Building the Venture Proposal
An organization's culture has an enormous influence on the
generation of innovative ideas, but as noted in the Introduction,
achieving cultural change can be a very slow process. However,
there are actions an organization can take in the meantime to
increase the flow of new ideas and simultaneously contribute to the
development of an innovation-promoting climate. In particular, this
chapter discusses the steps a firm can take to identify the
opportunities open to it, evaluate them, and select those
opportunities most likely to result in successful ventures.

Identifying Opportunity
Not all ideas are opportunities, and many opportunities are not
right for all firms. As we discussed in the preceding
 Page 94
chapter, when a company conducts the process of searching for
opportunity and generating ideas by providing overall direction and
focus designed to improve the fit between the company's vision,
strategy, and goals and the ideas generated, it increases both the
number of acceptable ideas and the efficiency of the selection
process.
In order to identify opportunity, an organization must generate a
flow of high-quality ideas; it must also become skilled at
examining various types of information that can provide
knowledgeable senior managers with clues to venture possibilities.
Creating a Flow of Ideas
It is important for a firm to generate more ideas than it can possibly
exploit, since the quality of its choices is considerably improved
when it is able to choose, with minimal expenditure, from among a
hopperful of viable new-venture possibilities. Two critical
contributors to generating a flow of ideas are the organization's
people and the training they receive.
People. People vary greatly in their creative capability. The
company's recruiting process should be examined to make sure it is
seeking creative people with pertinent capabilities. A good
indicator of creativity is evidence of it in a job candidate's history.
It should be emphasized that creativity is not simply imagination or
speculative skill. Highly creative people will have been
productively creative at something, sometime, somewhere.
Examine the company's performance evaluation and compensation
system. Is creative behavior rewarded, ignored, or even punished?
Is evidence of innovation routinely considered during the
performance evaluation process? Are managers evaluated for
stimulating innovation in their unit? (We have seen performance
evaluation forms that allocate a maximum of 5 points out of 100
for "creativity" and others
 Page 95
that simply ignore innovation and creativity altogether.) If
innovative and creative accomplishments are neither recognized
nor rewarded (and the reward need not necessarily be financial),
some creative people will quit; others will play by the rules of the
company game and do only what is expected and rewarded,
suppressing their creative impulses or finding an outlet for them
outside the business.
Training. Some people cannot be discouraged from innovating, and
others will not innovate no matter what is done to encourage them.
But it is the very large group in between these extremes that
training can help mostby providing them with information,
enhancing their skills, and helping them develop an opportunity-
seeking attitude. There is little on the face of the earth that cannot
be improved. Many people simply complain about what's wrong;
others, with an attitude of creative discontent, see problems and
seek solutions.
Many programs are available to help people discover and use their
creative capacity and enable them to develop a ''can-do" attitude. In
fact, the material we present in the balance of this chapter can serve
as the nucleus around which to build a program for providing
training and practice in opportunity identification.
Sources of Opportunity
Opportunities can be found within the firm itself, in the industries
and markets it serves, and in the external environment. It is up to
the firm to become familiar with these sources of opportunity and
learn to identify venturable possibilities.
Necessity is still the mother of many inventions, and most viable
opportunities, regardless of their specific source, spring from
problems, needs, and changee.g., a tamperproof lock developed in
response to a rise in the crime rate or new cancer treatment drugs
developed from monoclonal antibodies as an outcome of major
changes in biotechnology.
 Page 96
Therefore, broadening the company's awareness of problems,
needs, and change is a positive first step.
Internal Sources. Internal sources of opportunity may be found in
every aspect of a business. Examples include the need for, or the
possibility of, reducing rejects in a manufacturing process,
improving overall quality, supplying better service to customers, or
replacing a raw material. MacMillan and George (1985) suggest
that if a firm is totally new to the venturing game, this internal area
is a good starting point for learning how to manage venture
projects.
Another approach to internal sources, discussed briefly in Chapter
3, is to identify the organization's areas of special competence that
could be venturablethe process earlier noted as venture basing.
These areas can become the basis for creating a new business or
improving the firm's competitive position. The question is: What
skills does the organization have that are outstanding and
unequivocally excellent? Here are some examples:
· Japanese automakers absolutely had to manufacture more reliable
cars if they were to penetrate foreign markets in which their service
network was inadequate. They could have attempted to develop an
adequate network but instead elected to build cars that did not
require as much service. Their outstanding competence was the
ability to manufacture high-quality products at low cost. However,
since the reliability of their products was no greater than that of the
least reliable component, they proceeded to teach their suppliers
how to manufacture extremely reliable components. The success of
this approach immediately became evident in the reliability of the
cars these companies produced.
· General Electric, unable to obtain suitable materials from the
plastics industry, was forced to create its own special plastics for
use in its electrical products. In so
 Page 97
doing, the company developed special competence at producing
engineered plastics and decided to aggressively enter the
engineered plastics market. This is now one of GE's major
businesses, producing an operating profit of $1 billion in 1991.
· Sears combined its many locations and consumer franchise with
the financial service skills of its Dean Witter unit to launch the
Discover card, now a profitable new business for Sears.
· GTE and other telephone companies have launched businesses
utilizing their excellence in maintenance and service, as has GE in
servicing power plants.
· Anheuser-Busch has proliferated businesses closely related to
beer, such as the maintenance and repair of refrigerated cars; it has
also founded theme parks that are totally unrelated to beer but that
do a brisk business selling beer and snacks that go with beer.
· Allied Corp., 3M, Inco, Motorola, Kodak, and other high-tech
firms have a long record of new-venture attempts based on
internally developed technologies.
The great advantage of basing new ventures on internal sources of
opportunity is the company's familiarity with the resource that has
been identified, which increases the odds for success if it can use
that resource to meet a need. The great disadvantage of this
approach is that there may not be any really worthwhile
opportunity to which that resource can be applied. "Stick with what
you know best" may be eminently sound advice, but it won't do
much good if nobody wants the resulting product or service.
Although the odds of achieving success with technological
innovations are small, such innovations have produced the really
big hits, resulting in the creation of whole new industries. This was
the case with semiconductors and biotechnology, and will surely be
the case with superconductivity. Businesses created in this way
tend to continue for many years, an example being Du Pont and
nylon.
 Page 98
Industry and Market Changes. Changes in a given industry or
market are a major source of new opportunities (Drucker 1985) and
are probably the most fruitful source of opportunities having a high
probability of success. As von Hippel (1978) suggests, in a study of
industrial product ventures, customer ideas are a great source of
new-venture possibilities, since customers are likely to be quite
knowledgeable about the needs of their market and changes in their
industry.
Mergers are one type of industry change that can produce new-
venture opportunities. A frequent consequence of a merger between
two firms is that less attention may be paid to product lines that
were originally important to one of the individual firms but have
now become relatively less important in the context of a much
larger organization. These neglected product lines become
vulnerable to competitive attack by a new entrant.
Here are some examples of ventures generated by industry or
market change. (Note the absence of ventures by corporations
which remain rooted in the past!)
· As pension fund administrators became a larger factor in the stock
market, the need for solid research increased. The highly successful
firm of Donaldson, Lufkin & Jenrette was formed in response to
this opportunity.
· The increase in the size of department stores was accompanied by
a trend toward stocking only the better-moving items and reducing
the inventory of specialty items, such as blue jeans and other
product lines. The resulting unavailability of certain types of
products was partly responsible for the birth of specialty retail
stores, the fastest-growing business sector of the 1980s. Examples
include specialty toy chains, specialty athletic shoe chains, and the
Gap stores, which originally specialized in jeans and then, in
response to the changing demographics of the 1990s, adjusted their
product line to achieve renewed growth.
· Wal-Mart is perhaps the most dramatic, and certainly
 Page 99
the most successful, instance of a business formed in response to
industry and market developments. At the time of Wal-Mart's
creation, discount stores tended to be clustered in larger cities, and
high-quality national brands were sold at high retail in smaller
cities. Clerks in department stores were becoming increasingly less
cordial. "We're out of it, but we'll order it for you" became a
familiar response to product requests. Sam Walton saw this gap and
filled it with the fastest-growing retail chain in history, which kept
prices low, provided better service, maintained high inventories of
stock, and utilized leading-edge information systems.
· In the baking industry, the problem of increased distribution costs
(which, in turn, was attributable to increases in labor, fuel, and
other costs) created gigantic changes. An entire section of this
industrybakers who delivered to the homewas unable to survive
and disappeared. In an effort to offset rising distribution costs,
manufacturing bakeries switched to less costly ingredients, and the
resulting decline in quality created a demand for higher-quality
products. Supermarkets then proceeded to create in-store bakeries
to meet that demand.
One relatively small manufacturing baker sensed the growing
dissatisfaction with product quality and introduced the highest-
quality products that could be made on an industrial scale. The
company, Entenmann's, swept into the market, with its products
becoming a multiregional brand. Entenmann's was acquired by
General Foods and, ultimately, by Philip Morris when the latter
acquired General Foods. This was clearly a case of an industry
change producing a market gap, which was soon recognized as an
opportunity and exploited.
The needs and wants of the existing market are the most reliable
sources of good opportunities in the short run. But it
 Page 100
is the ability to foresee and meet future needs that is the source of
long-term opportunity and competitive advantage.
The External Environment. Threats and opportunities produced by
the external environment can be excellent sources of venturable
ideas. Changing demographics, lifestyles, perceptions and values,
government regulations, and tax laws as well as social problems
such as crime and drug abuse all create problems and the need for
solutions.
Opportunities that buck environmental forces will have a very
difficult obstacle to overcome. In fact, opportunities that are not
supported by at least one environmental trend are likely to be short-
lived. Conversely, opportunities that are linked to environmental
forces will rise, like ships with a rising tide.
Consider the explosive growth of fitness centers; low-calorie, low-
fat, low-cholesterol foods; and the flood of services and products
related to lifestyle changes and perceptions regarding health and
exercise. Paradoxically, this trend has been paralleled by the
success of ultrarich Lady Godiva chocolates and premium ice
creams, which runs directly counter to environmental factors! One
explanation offered for this curious phenomenon is that the calories
consumed are a reward for the exercise and dieting that presumably
preceded. Another is that for part of the population, indulgence is
and will always be present.
Drucker (1985) proposes a disciplined and organized approach to
identifying opportunity. He argues that the process of opportunity
identification can be systematized and that opportunities can be
found by monitoring seven basic sources: demographic changes,
new knowledge, incongruities (gaps between reality and
expectations), industry or market structure, unexpected successes
or failures, process needs, and changes in perception.
An incongruity can be illustrated by the success of the steel
industry's minimills, which defied the principles of economy of
scale and have led to significant changes in the steel industry.
Another incongruity involved the practice of build-
 Page 101
ing larger and larger vessels for transoceanic shipping in order to
reduce costswhich were not reduced. Capital costs were actually
higher, and both pilferage and idle time in the dock were greater.
This incongruity led to the concept of containerized ships and
containerized shipping, which drastically reduced loading time and
labor costs and provided increased protection for the products
shipped.
An example of an unexpected failure was the Edsel automobile.
Prior to that failure, automotive marketing segments had been
conceived of in terms of income demographics. Its experience with
the Edsel led Ford Motor Company to reexamine its marketing
approach and move to the concept of lifestyle marketing segments,
a key factor in its great Mustang success.
Federal Express was surprised to see an increase in its shipments of
high-priced, low-weight computer components. Upon
investigation, FedEx learned that this unexpected success was
attributable to companies' using its service to keep their inventory
levels down, which opened up new and previously overlooked
market possibilities.
To discover the unexpected, as some of the aforementioned
companies have done, it helps to have expectations. For every
function in a firm for which there is an expectation, a history of
performance, or a standard (e.g., sales to a market segment, sales
per territory, yields from a process), the appearance of unexpected
variation can trigger investigation and the identification of new
opportunities.
Process needs refer to interruptions or bottlenecks in a process. The
Polaroid Land Camera filled a process need eliminating the delay
between capturing a previous moment and finding out whether the
moment had been captured. According to legend, it was Land's
daughter who asked him, "Why do we have to wait?" The question
led Land to invent the Land Camera and Polaroid film.
Another example of a process need is the delay at highway toll
stations. According to a recent report, a system involving a scanner
that reads an identifying signal on moving vehicles will be tried.
The data will be stored and a bill auto-
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matically sent to car owners at the end of each month. No more
waiting for change or for stationary vehicles to get moving.
We tested Drucker's recommendations for a systematic search
process with students in an executive MBA course in corporate
venturing and found that his system helped many students identify
opportunities in their company or industry. More important,
though, we found that the reason the assignment resulted in the
generation of so many ideas was not necessarily because of the
effectiveness of Drucker's systematic approach but merely because
students were required to complete the exercise! Participants in the
assignment were quite excited to realize that they could actually
develop interesting and possibly viable opportunities simply by
working at it.
To summarize the process of identifying opportunity, we would
observe that many factors can trigger a flow of ideas, with change
and problems being the best sources. Information and a resulting
awareness of developments both within the company and industry
and in the world at large are essential to the process. Training,
education, exposure to information available at trade shows and
conventions, publications such as trade and professional journals,
and information sharing are powerful stimulants.
Evaluating and Selecting Opportunity
The process of evaluating and selecting opportunity marks the
point at which a firm decides to enter a new business, right?
Wrong! Determining whether an opportunity is possibly right for a
company is not the same as deciding to enter a business, nor is
evaluating an opportunity the same as evaluating a business plan.
(In fact, requiring submission of a serious business plan before a
business idea or proposal has been presented and interest expressed
results in needless wheel spinning and usually great works of
fiction.) Entering
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a business is appropriate only after it has been determined that the
opportunity itself is both valid and right for the company and the
company has a business strategy and plan to which it is prepared to
commit.
Hence, this step in the evolutionary process of venture
development is not the point at which the decision to start a
business is made. Rather, for the proposer of an idea, it is the point
at which a business proposal is developed for further exploration.
For the decision maker, it is the point at which a preliminary
judgment is made as to whether the proposal merits proceeding to
the next stepi.e., concept testing or, if the concept test has already
taken place, feasibility study. The only issue to be resolved at this
time is: "Are we interested in pursuing this idea further?" and not
"Shall we start this business?"
The business proposal, which should be as short as possible, will
range from a single page to as many as five pages, depending
entirely on the nature of the venture being considered. The
proposal should tentatively answer the following simple questions:
· Is the opportunity consistent with the firm's strategy?
· Is it worth the effort?
· Is it feasible? (Can the firm do it?)
These questions, which have been touched on in earlier chapters,
are examined more fully in the following subsections.
Is the Opportunity Consistent with the Firm's Strategy?
In order to generate ideas that will fit the organization's strategy,
the firm's mission and strategic objectives should be known and
understood and have commitment throughout the firm. Even if they
are, however, it may not always be possible to make a definitive
decision regarding strategic fit at an early stage of evaluation if size
and profit potential are
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part of the strategic objectives. But if, on its face, the very nature of
an opportunity is inconsistent with the firm's strategy, then it
should be passed up. To be clear, we are not suggesting that the
venture must fit the firm's current capabilities but rather its
strategic objectives. In order to survive and grow, many companies
absolutely must diversify to some extentpenetrate new industries,
gain new knowledge, and enter new marketsand if strategic fit were
interpreted to mean perfect fit with today's competency and
knowledge, such companies would be doomed to inevitable
decline.
Although we have just recommended passing up venture
opportunities that are inconsistent with a company's strategic
objectives, what about opportunities that seem too good to pass up?
A case in point would be the business proposition that looks
extremely attractive but involves entering a totally new industry
that the firm has rejected as a strategic objective. If an organization
uncovers such an opportunity, a spinoff may be desirable. With the
spin-off approach, the venture may begin with full funding and
majority ownership by the parent corporation, and in time, as the
spin-off develops successfully, the parent's ownership may be
greatly reduced. This is not uncommon in Japan (Ito 1990), where
the parent firm may end up as a minority investor. In fact, 17.5% of
the largest Japanese companies are spin-offshaving once been a
division of a parent organization. Examples include Toyota Motor
Corporation (which was spun off from Toyoda Auto Loom Works)
and Yamaha Motors (which was spun off from Yamaha Musical
Instruments).
In order for the company to determine strategic consistency, it must
examine the business concept in detail. The initial concept should
indicate the product/service to be provided, the market segment
targets, examples of customers to be targeted, a guesstimate of
market size, and the venture's potential value to the firm. Although
its value may be purely economic, a venture can offer less tangible
benefits as well. It could, for example, serve a defensive function,
enhance the company's reputation, or provide a learning
opportunity,
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by giving the company a window on a business or perhaps even
enabling it to simply study a business in order to determine
whether and how to enter on a larger scale.
The following subsections examine these key questions, which the
firm must answer about any new-business concept:
· What factors produce this opportunity?
· What are the character, size, and nature of the market?
· What factors are required for the proposed venture's success?
What Factors Produce This Opportunity? Identifying the factors
responsible for an opportunity enables an organization to make
some meaningful judgments about how long those factors are
likely to last. For example, a drop in interest rates might provide an
opportunity for a new venture related to the building industry. In
evaluating such an opportunity, a firm would have to consider how
long those lower rates could be expected to continue, which would
greatly affect whether to make the entry and how quickly to enter
and exit. In contrast, environmental legislation is here to stay, and
as a source of opportunity, that factor can be regarded as fairly
durable.
An example of an opportunity based on a new technology, rapid
market growth, and ready availability of venture capital was the
development of the Winchester hard disk industry. An analysis of
that industry by Stevenson and Sahlman (1985) demonstrated that
the rush to enter resulted in overcapacity, which, combined with
changes in technology and a drop in computer sales growth,
resulted in severe profit decline and several failuresa scenario that
they concluded was somewhat predictable. A rapidly growing
market is not, per se, a durable opportunity-producing factor,
especially in a fast-moving technological environment.
Although rigorous probing for the factors producing an opportunity
is a necessary part of the evaluation process, this does not mean a
venture should automatically be rejected if
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one or more of the underlying factors prove to be temporary, but it
will affect such issues as speed, scale, and aggressiveness of entry;
investment level; and return requirements.
An important result of this probe is that it will enable the firm to
articulate the most critical assumptions on which the proposed
business is based. These assumptions will have major implications
for the planning process (discussed in Chapter 7) as well as for
later decisions about the venture's direction and fate.
What Are the Character, Size, and Nature of the Market? At what
stage of its life cycle is the marketnot yet in existence, just
emerging, static, growing, exploding, declining? Who are the
players? What is known about present and potential competitors?
What is the current and potential size of the market? What about
pricing practices? Quality levels? Margins? What will this venture
contribute in terms of value to the customer and with what
competitive insulation?
The venture capital industry is a useful source of information about
opportunity evaluation. In a study of 47 venture capital firms to
identify the characteristics associated with successful ventures,
Timmons et al. (1987) learned the following:
· Rather than merely identifying a broad market in general terms,
successful ventures tend to identify the true market in very specific
terms, including a well-defined notion of the actual customer
population, to whom the value-added by the proposed new product
or service is clear.
· A market size between $10 million and $100 million is more
likely to yield success than a very small or very large market. (This
is one finding whose applicability to corporate ventures by large
firms is questionable, although it is quite appropriate for smaller
firms with limited available capital. For some corporations, even
markets having a potential size of $100 million are uninteresting.
This finding may reflect the financing abil-
 Page 107
ity of firms backed by venture capital during their early life and
may be irrelevant in the case of potentially major new markets,
which require massive investment and a longer time frame for
harvest than the normal venture capitalist horizon of five to seven
years.)
· Market growth rates between 30% and 60% are more favorable
than rates outside that range.
· Competitive insulation through patent protection or unique
technologies involving products or services that cannot otherwise
be provided with equal quality or satisfaction is a major success
factor.
· Successful ventures tend to achieve a market share of at least
20%.
What Factors Are Required for the Proposed Venture's Success?
Examining success factors is particularly relevant when a company
is considering an opportunity that is not directly related to the base
business's technology and markets. Although the firm is likely to
be very aware of the differences in success factors in the case of
proposed new ventures that involve a totally unrelated line of
business, there is a great danger of success factors' being
insufficiently considered in the case of businesses that appear to be
closely related.
For example, packaged food products sold to consumers and those
sold to food service establishments look like very closely related
product linesat first glance. Yet the economic structure is quite
different, and for many of these products, the technology,
distribution channels, product shelf life requirements, and
conditions of preparation are different as well. Marketing methods
differ and require different selling skills and knowledge. In this
example, some of the factors required for success include
knowledge of the conditions under which the product will be used,
together with the ability to design and modify products in order to
fit the conditions of use; familiarity with the different segments of
the food
 Page 108
service industry and their unique purchasing practices (e.g.,
government agencies, large hotel/motel chains, fast-food
franchises, individual restaurants versus distributors); technical
service capability for products processed in food establishments;
and reputation in the industry.
To identify the factors necessary for a proposed new venture's
success, the company has to ask the following specific question
about every function: How must this function differ in the new
business as opposed to our present businesses in order for the
venture to succeed? Here are some obvious examples:
· A manufacturer of consumer goods moving into industrial
markets: Direct selling must be done by people who understand
their customers' business and can develop strong relationships with
them.
· A manufacturer moving into retailing: The firm must understand
such issues as managing inventories; providing security to protect
against theft; recruiting and training salespeople who are congenial,
knowledgeable, and helpful to customers; and selecting business
locations.
· A manufacturer, retailer, or distributor entering a new industry:
The firm must develop knowledge of customer needs and wants,
major competitors, supplier sources, technology, usage patterns,
and problems.
When analyzing required success factors, the company must also
understand the relative importance of the various functions
involved (such as marketing, manufacturing, finance, human
resources, and R&D). For example, in the retail business,
merchandising (what to buy, how to price, how to promote) and
information systems are critical; in commodity businesses, buying
and trading reign. If a company is considering, say, a venture in
which the marketing function is primary, it can be disastrous to
initiate the venture under the direction of a manager whose skills
lie mainly in the area of technology management.
 Page 109
An organization seeking clues to the factors required for the
success of a proposed new business would be well advised to study
leading companies in the target industry and identify what accounts
for their outstanding track record.
Is the Opportunity Worth the Effort?
To determine feasibility and potential value, a firm must analyze
each opportunity's economic potential, asking itself, in effect, what
the upside gain and downside loss could be.
For guidelines, we turn once again to the venture capital industry,
in which the economic characteristics of successful ventures
reportedly include the following:
· A break-even time of less than 36 months
· Stable gross margins of 20% to 50%
· After-tax profit potential of 10% to 15%
· Multiple rather than one-shot investments
· For industrial customers, payback in 18 months or less
· Low asset intensity
· Differentiation on the basis of product rather than price (Timmons
et al. 1987)
A few of these attributes are obviously inapplicable to many
corporate ventures. A required break-even time of 36 months is not
feasible in the case of ventures that are based on new technology,
that have a high potential, or that involve new or emerging
markets. Low asset intensity is undesirable if the corporation's
economic power is to be used to erect entry barriers to competition.
New industries are not created with low asset intensity (e.g.,
semiconductors, biotechnology), nor can new entrants to a field,
such as the automotive industry, be competitive without heavy
investment in manufacturing facilities.
Nevertheless, the venture capital guidelines stated here are
applicable to medium-sized corporations that cannot take
 Page 110
Does it contribute to strategy fulfillment?
If yes, then
What factors produce it? Will they continue?
If yes, then
Is the market potential sufficient?
If yes, then
What success factors are required? Can we supply
them?
If yes, then
Do we have a sustainable competitive advantage?
If yes, then
What are the economics? Is it worth it?

Figure 4-1: Evaluating an Opportunity

large investment risks as well as to big corporations that want to
learn about venturing by starting small.
Some additional factors that venturing corporations should
consider include:
· Impact on overall corporate performance during the venture's
early periodprofits, ROI, cash flow
· Impact of entry on the firm's existing customers and business
· Potential impact on total sales, profit, positioning, and the value
of company stock
· Impact on firm's overall competitive advantage
Figure 4-1 illustrates the process for evaluating opportunity.
Is the Opportunity Feasible for the Firm? In evaluating a potential
opportunity, the company must also consider whether it is in a
position to supply the factors required for the venture's success.
The ideal opportunity is one for which
 Page 111
the firm already possesses precisely the mix of special
competencies needed to provide the success factors and the
strategic fit is clear. But if the company lacks the means to provide
the required success factors, it can also assemble the necessary
competencies through alliances, joint ventures, and so forth.
One universally required success factor is knowledge and
experience in the proposed industry (except for cases in which the
industry itself is entirely new). Unless the firm has or can employ
knowledgeable people or can acquire a foothold firm to provide
that knowledge and experience, the opportunity should be dropped
or delayed until the firm can learn something about the business
through a small-scale entry or an acquisition.

Conclusion
To start the process of identifying opportunities, a company creates
a flow of innovative ideas, which it can do by recruiting creative
people and then stimulating their creativity by providing goals,
information, training, and reward systems. Opportunities can be
evaluated using practical analytical methods designed to answer the
following fundamental questions:
· Will the proposed new business advance the firm's strategy?
· Is it worth the effort that will be required?
· Can the firm do it?
As the organization identifies, evaluates, and selects opportunities,
it lays the groundwork for future stages in the venturing process,
because the work done at this stage provides information that will
prove invaluable for creating and evaluating the venture business
plan (discussed in Chapter 7) and making later decisions about
managing the venture.
 Page 112
Guidelines
1. Recruit, train, and retain creative people.
2. Clarify the organization's goals.
3. Evaluate the factors responsible for creating a proposed
opportunity. Will they last long enough?
4. Learn what factors are required in order to achieve success with
the proposed opportunity. Can your company supply those factors?
5. In evaluating an opportunity, you must answer three questions:
Does the proposed undertaking advance organizational strategy? Is
it worth the risk and effort? Is it feasible for the company?
References
Drucker, Peter. 1985. Innovation and Entrepreneurship. New York:
Harper & Row.
Hanan, Mack. 1976. Venture Management. New York: McGraw-
Hill.
Ito, Kiyohiko. 1990. ''Spinoffs: A Flexible Strategic Alternative."
Working paper. Stern School of Business, New York University.
MacMillan, I. C., and George, R. 1985. "Corporate Venturing:
Challenges for Senior Managers." Journal of Business Strategy 5,
no. 3: 34-43.
Stevenson, H. H., and Sahlman, W. A. 1985. "Capital Market
Myopia." Journal of Business Venturing 1, no. 1: 7-30.
Timmons, J. A.; Muzyka, D. F.; Stevenson, H. H.; and Bygrave, W.
D. 1987. "Opportunity Recognition: The Core of
Entrepreneurship." Frontiers of Entrepreneurship Research
(Babson College): 109-121.
von Hippel, E. 1978. "Successful Industrial Products from
Customer Ideas." Journal of Marketing (January): 39ff.
 Page 113

5
Selecting, Evaluating, and Compensating Venture
Management
Organizations committed to creating a venturing program must find
and develop people with entrepreneurial talent and skills, learn to
evaluate their performance as venture managers realistically, and
provide fair compensation and rewards that promote the initiation
and long-term success of ventures. Furthermore, these steps must
be taken with an awareness of changing management needs during
a venture's life cycle.
A corporate environment produces unique human resource
management challenges, which can be major obstacles to venturing
unless they are effectively handled. This chapter discusses the
selection, evaluation, and compensation/incentive practices
followed by many corporations and examines the relationship
between these practices and venture performance. It also offers
selection, evaluation, and compensation/incentive strategies
designed to fit the specific needs of both the parent company and
venture managers.
 Page 114

Choosing Venture Management

The composition of the venture team is the most important decision
that will be made for any new venture. It is at least as critical as the
choice of which business to enter, if not more so. In the venture
capital community, one often hears such comments as "Bet on the
jockey, not on the horse" or "I'd rather back an outstanding
entrepreneur with a mediocre business idea than an outstanding
business idea with a mediocre entrepreneur." But the selection and
motivation of these venture managers is one of the most difficult
issues confronting senior corporate managers, particularly human
resource executives.
For an entrepreneur operating outside a corporation, selection and
motivation are relatively simple issues. The independent
entrepreneur simply finds a source of capital and makes a deal. If
his or her projections are not fulfilled, a venture capital firm will
usually negotiate provisions for greater control of the enterprise or
even replacement of the entrepreneur. Compensation arrangements
include salary and performance incentives, especially stock
ownership and options for members of the venture team. Share
values are determined by the marketplace, or in the absence of an
existing market, investment bankers may be used to price the stock.
The corporate venturing situation is quite different. A corporation
enters a new business in order to ensure its long-term survival and
improve corporate performance. Unlike the venture capital firm,
the parent of a corporate venture does not normally look for gain
through downstream sale of its interest in the venturing unit. From
the standpoint of the parent firm, a new venture's performance has
a direct impact on the parent's cash flow and profitand the effect is
usually negative for the first few years, if not longer. Thus, the
potential economic parameters of a corporate venture are quite
different from those of an independent startup. Furthermore, the
internal corporate venture manager is an employee of the firm,
often recruited rather than self-selected. He or she does not have a
choice of alternative funding sources, is unwilling
 Page 115
or unable to leave the firm, and may be unwilling to take major
personal economic risk.
Despite the fact that internal corporate ventures operate within the
parameters of an existing organizational structure and can avail
themselves of organizational resources, the choice of venture
management is no less critical for corporate startups than for
independent ones.
In the following subsections, we consider the roles to be filled on
the venture team, how management needs can be expected to
evolve over the course of the venture's life cycle, how the company
can find potential venture managers and grow new ones, and
product champions as potential venture managers.
Roles That Must Be Filled on the Venture Team
In putting together the venture team, senior management must
ensure that certain key roles are filled. The following list, drawn
largely from studies of technological ventures by Maidique (1980),
outlines the most significant of these roles:
· Technical innovator: the person who has made the major technical
innovation
· Business innovator (or venture manager): the internal
entrepreneur responsible for the overall progress of the project
· Product champion: any individual who makes a decisive
contribution to the project by promoting its progress through the
critical early stages, particularly up to the point of implementation
· Chief executive of the innovative organization: the individual who
is in charge of the venture (although not necessarily of the parent
firm) and controls the allocation of resources (e.g., a sub-CEO, a
division manager, or a venture division manager)
· Executive champion: the high-level person in the parent company
who acts as buffer, protector, and mod-
 Page 116
ifier of rules and policies and who helps the venture obtain the
needed resources
To ensure the venture's success, senior management must see that
all these roles are filled. For instance, failure to provide an
executive champion to run interference for the venture creates
additional burdens for the innovators, who should spend their time
building the new business instead of overcoming internal obstacles.
In addition to filling the "generic" roles just listed, senior
management must also ensure that the venture team contains
individuals with the required specific functional competencies. A
common practice, to be avoided, is to name a team of competent
functional specialists with no clear entrepreneurial leader. A
marketing person, plus a finance person, plus a manufacturing
person, etc., do not add up to one entrepreneur. No matter how
capable individual team members might be, the team must be led
and the activities of its members integrated.
Venture Life Cycle and Changing Management Needs
Greiner (1972) has described the changes a maturing business
undergoes as it passes through the various stages in its life cycle.
(How a venture's life-cycle stage affects its management
requirements is discussed in detail in Chapter 10, "A Survival
Guide for Venture Managers.") Although we will not detail the
skills and management characteristics required at every stage of a
venture's development, we will mention a few key considerations.
Even with the help of an executive champion, the corporate venture
manager must at every stage of a venture possess the ability to
function within a larger corporate framework. This is essential to
gain the support and collaboration needed while acting in the best
interests of both the corporation and the venture. Beyond this basic
fact of life, the leadership of a new venture faces constantly
shifting demands. In the
 Page 117
following paragraphs, we outline some of the demands facing the
venture manager at the inception of a new business, the most
critical period of its life cycle.
In the preventure stage, before the venture idea has become an
actual business, the outstanding characteristics needed by the
person leading the effort are persistence, resourcefulness, high
energy, and charismatogether with the ability to communicate
clearly and effectively and to sell internally. It is at this preventure
stage that the ability to manage the expectations of three primary
constituencies superiors, members of the venture, and members of
the organization at largeis crucial. Although unreasonably
optimistic expectations will come back to haunt the venture and its
manager downstream, excessively conservative expectations can
kill all support at the outset. Will the venture leader attract
supporters and allies in the firm? Can he or she win and retain the
support of an executive champion?
When senior management is considering the choice of a leader for
this initial stage, it should examine each candidate's longer-term
objectives. Some candidates will want to develop as the manager of
the new business over the long term; others will see the task as a
step toward promotion to higher levels in the parent firm; still
others will want the opportunity to start more new ventures; and
some will want to return to their previous position and activity
once the venture has achieved the status of an established business.
Business starters who want to continue starting new businesses
should be able to look forward to that as a reward for successful
startups (Pinchot 1985).
Senior management must understand and make clear to prospective
venture managers that it will not be regarded as a sign of failure if a
venture's initial manager is not interested in or is not right for the
venture's later stages. In fact, if the experience of the venture
capital community is any indicator, the best venture starters are in
all probability not going to be the best professional managers.
However, this is not to imply that new-business starters should be
ruled out as long-term managers. These individuals
 Page 118
can continue to lead their ventures if they recognize their
limitations and augment their skills by building a complementary
management team. Leaders who are adept at identifying
weaknesses, especially their own, and who act to supplement
themselves can build highly effective teams and thereby increase
their managerial and leadership capabilities.
Sources of Venture Managers
In selecting venture managers, should the organization accept
volunteers or seek recruits? The answer is closely related to the
firm's risk/reward system and its culture.
It is difficult to get volunteers to expose themselves to significant
career risk without the possibility of corresponding gain. Some
companies reduce or protect against the risks, whereas others
provide high rewards to compensate for them. To encourage
volunteers, many firms offer safety nets by guaranteeing return to
the former job if either the manager or the venture fails. Sometimes
such offers include whatever raises the manager might have gotten
had he or she remained at the previous position.
Although these enticements may generate more volunteers, it
would appear that an adequate supply of venture managers can be
found without them. Even though, as reported by Kanter (1989),
ATT Technologies did not offer a guarantee of return to original
jobs, it had no difficulty attracting volunteers.
Once an organization has attracted volunteers, how can they be
screened? The Foresight Group, a consulting and training
organization based in Sweden that assists firms in generating
intrapreneurship and training intrapreneurs, works only with
volunteers within a firm who have a business idea. When proposals
and prospective intrapreneurs are screened, the first question asked
of applicants is, "What have you done so far in your life?" The
Foresight Group looks for people who have actually accomplished
somethingvirtually
 Page 119
anything that indicates initiative, action orientation, and the will
and energy to complete a task.
An organization can also find qualified venture managers through
internal recruitment. A manager of a Du Pont venture group stated
in an interview that in his experience, recruiting can work very
well.
Certainly, there is no reason not to choose a volunteer if one is
available who meets the venture's requirements, but regardless of
whether the venture manager is a volunteer or a recruit,
enthusiasm, desire, and competence are essential.
Growing Future Venture Managers
A company that is seriously committed to promoting venturing
must do more than passively round up whatever likely looking
volunteers or recruits it happens to have available. It must make an
active effort to increase the supply of managers with the skills and
attitudes necessary to successfully lead new ventures.
One way to spot such potential is to seek individuals in the firm
who have shown initiative: the engineer who shepherded a new
process through to successful commercial use, the salesperson who
developed a new territory, the product manager who managed a
new-product launch, the human resource person who developed or
initiated new and more effective training methods, the researcher
who moved a product into productionall activities requiring
leadership and an ability to develop collaboration, cooperation, and
support.
A second approach is to give people assignments requiring
entrepreneurial behaviori.e., to create a process that produces a
pool of possible venture managers and team members. A researcher
who shows signs of commercial interest could be teamed with
people from marketing and sales to develop new accounts; market
researchers could be put on a new-product commercialization team;
or plant managers could be assigned to the startup of a new
physical facility.
 Page 120
One research director identified staff members with what he called
"an instinct for the jugular vein" and offered them opportunities by
challenging them to serve on commercialization teams for new-
product or new-process introductions, which produced a number of
future venture managers.
This process of growing venture managers can be promoted by
ensuring that human resource managers use appropriate criteria in
hiring and evaluating employees. For instance, the corporation can
stimulate innovative activity by assessing entrepreneurial and
innovative initiatives as part of the performance evaluation
program. Human resource managers can provide invaluable help in
identifying, recruiting, training, compensating, and designing
career paths for innovators and internal entrepreneurs.
To be effective at this task, HR managers need to understand the
characteristics of opportunity-driven, entrepreneurial employees
and recruits. Paradoxically, the very characteristics that distinguish
such people are the same characteristics that sometimes mark them
as "troublemakers" and frequently prevent their employment in
large firms. But action orientation, self-direction, and the need for
autonomy are not incompatible with the ability to function as part
of a team. The presence of these characteristics can be detected by
using the Myers-Briggs Type Indicator (1976) and the Schein
Career Anchors Inventory (1985)two test instruments that can
provide valuable information but should be administered only by
people trained to do so. Although the results of these tests can help
an organization identify people with the characteristics necessary
for effective venture management, senior managers should keep in
mind that these characteristics alone are not sufficient and that
promising test results are therefore no guarantee that a candidate
will be able to build successful businesses.
The experience and accomplishments of potential candidates are
the most important predictors of success, and if there exists a track
record of accomplishment in challenging projects that required
learning a lot quickly, team building, high energy, and
resourcefulness, the choice is relatively
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easy. If no such record existsas with entry-level candidates,
relatively new people, or those who have been employed in
traditional managerial taskstesting can be very useful.
Product Champions and Venture Management
The most obvious choice for venture manager is often the product
championthe person who vigorously supports and promotes the
venture idea to the point of approval. Although the product
champion might sometimes be a good choice, actual experience is
also important. Sykes' analysis of the Exxon Enterprises venturing
experience (1986) showed that better results were obtained when
venture management had specific experience in the market as well
as a successful management track record. On the other hand,
Sandburg and Hofer's study of 17 firms engaged in corporate
venturing (1987) found no relationship between prior
entrepreneurial experience or management experience in a related
industry and venture performance. Clearly, the scope, scale, and
nature of the venture, together with the nature and stage of
development of the market and industry, will determine the
experience and resourcefulness required. The one thing we're sure
of is that knowledge of the business and the market combined with
creativity, high energy, and management skills is a tough act to
beat!
When making a venture management decision, it's hard to ignore
the enthusiasm and drive of product champions, but putting them in
charge of a venture does have some potential risks. In one study
(Block and Subbanarasimha 1989), senior managers were asked to
specify the relative weights of two key factors in choosing
venturesi.e., to what extent the decision was based on the business
proposition itself versus the presence of a product champion. Firms
with a poorer track record in venturing tended to select ventures
mainly because of the presence of a product champion. Although it
is obvious that most ventures would never see the light of
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day without a champion, it is also possible that as manager, the
product champion may unnecessarily increase the company's losses
by encouraging overly prolonged efforts to revive moribund
ventures rather than killing them in a timely manner.
At the other extreme, choosing as venture manager an experienced
administrative manager steeped in the practices and policies of the
parent firm often leads to an excessive focus on administration as
opposed to building a business. Such managers tend to follow
organizational rules rather than find ways to get the rules modified
or suspended in order to allow the new business to survive and
grow.
Deciding whether to put the product champion in charge of the
venture is just one example of the challenges involved in
responding to the evolving needs of a new business as it progresses
from an idea requiring approval to an actual startup.

Evaluating the Performance of Venture Management

According to traditional criteria, it makes sense to evaluate the
performance of the venture team and its leadership by how close
they come to achieving their objectives. But the problem lies in
specifying what the new business is trying to achieve, because
nobody really knows what the objectives are going to be.
Furthermore, the initial objectives are quite likely to change.
''There is no 'present' in which people know where they are going,
what they are supposed to do, and what the results are or should
be" (Drucker 1985, 188).
Although each venture can begin with clear objectives, experience
shows that they must be modified to fit reality. In a sense, it is very
much like a battle plan prepared before the outbreak of hostilities.
General Norman Schwarzkopf described such a case in a spring
1991 address to West Point cadets in which he explained the
careful planning done preparatory to engagement. Comparing the
situation to that of an
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orchestra about to perform according to written music, the
conductor (general) raises the baton, and "just at that point some
son of a bitch with a bayonet jumps into the orchestra pit and starts
chasing people all over the place, which plays hell with all the
careful planning . . . ." Schwarzkopf made the point in response to
planners unfamiliar with warfare who had criticized battle results
for failing to meet planned objectives.
As we show in Chapter 7, business plan projections rarely, if ever,
correspond with ultimate reality. About half of all ventures never
even become profitable, and indeed, profitability is not always an
objective. Furthermore, evidence indicates that the performance of
a firm's entire venturing effort can be drastically affected by large
losses in a single venture, so one objective must be to kill the
fatally wounded as early as possible. (See Chapter 9, "Controlling
the Venture.")
Evaluation Criteria
The evaluation criteria suggested in this subsection flow from one
objective: to create a successful business if possible while at the
same time protecting the parent organization against excessive
losses and maximizing learning. These criteria are as follows:
· Actual completion of planned events
· Completion of events competently in a reasonable time and at a
reasonable cost
· Qualities (i.e., evidence of learning and its application)
· Actual business results, judged both on an absolute basis and by
comparison with projections
· Evidence of commitment (in terms of energy and hard work) to
making the venture a success
· Evidence of team spirit
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· Ability to obtain collaboration from other parts of the firm
· Ability to overcome internal obstacles and red tape without
putting the firm at risk
· Minimal turnover of venture team members
· Parsimony in the use of resources
· Training and development of team personnel
These criteria are important at every stage of the venture's
development, since they are the input factors that will produce the
output results.
The most sensitive of these criteria is the evaluation of actual
business results. In performing this evaluation, it is vital that senior
managers fully recognize the venture's stage of development and
take into account the reasonableness of the original expectations in
light of unfolding experience and actual knowledge gained. The
core of evaluation, however, involves the completion of events and
the subsequent adaptation of plans and actions to reflect what has
been learned. Performance deficiency can be defined as failure to
complete an event and/or failure either to learn anything from the
results or to apply what has been learned to future actions.
But it is crucial to avoid confusing mismanagement with
misfortune. Take the example of a company that has the bad luck
of launching a new business based on a technology that is suddenly
and unexpectedly rendered obsolete by an even newer
technological development. Mismanagement in such a case might
very well consist of continuing the firm's high-energy, high-
expense effort to grow that business (as happened with the Polaroid
instant motion picture camera, which was displaced as a potential
consumer product by the videotape recorder). Good management in
such a case would consist of objectively recognizing the new
realities and either changing the venture's direction significantly or
closing it down. In this latter event, the venture manager should be
rewarded for preventing additional losses in a hopeless cause.
The criteria presented in this subsection can be useful to senior
managers in evaluating the efforts and input activities
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that affect a venture's success or failure and in deciding whether to
change, train, or supplement venture leadership. They can also
serve as result evaluation points, which can be employed as a basis
for determining compensation and incentive payment.

Compensating Venture Management

We start this section by discussing how compensation is related to
venture performance, after which, we examine compensation
strategies and practices commonly used by venturing corporations
and consider what can be learned from venture capital
compensation practices. In the last two subsections, we present the
components of an incentive/reward program for venture
management and show how a firm can develop an effective
incentive program.
Does Money Really Talk?
There is no convincing evidence that any specific financial
compensation and incentive plan is related to venture performance.
Research seeking such relationships is sparse, and the results reveal
little, although there is some evidence that the payment of bonuses
is related to better performance both of individual ventures and of
overall venturing programs (Block and Ornati 1987; Steele and
Baker 1986).
Conventional wisdom holds that compensation is very important. A
large majority of the managers we spoke to in three Fortune 100
firms (as part of a series of unpublished surveys) identified
inappropriate compensation as a significant obstacle to venture
success. Interviews with venture managers reveal uniformly that all
would like to see compensation programs related to the venture's
rewards to the firm, yet each person questioned stated that he or
she would act no differently regardless of the compensation
program.
Given the absence of data establishing a clear correlation
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between compensation and venture performance, together with the
strong feeling on the part of both venture personnel and many
senior managers interviewed that compensation is a serious issue, it
is difficult to reach firm conclusions about the significance of
financial incentives and rewards.
It would appear that their significance depends on the
characteristics and needs of the individual venture manager and the
needs of the organization. In a competitive bid to hire a venture
manager from outside the company or an effort to keep a highly
visible manager from jumping ship, money can be a deciding
factor. If an internal person must be wooed away from another
major assignment in the firm, it can be decisive. (Tektronix, a high-
tech firm, reports that financial incentives were required to get
eminent scientists in the organization to join an entrepreneurial
venture.)
If a venture management candidate just doesn't make enough to
maintain an adequate standard of living, money can be crucial. If
the candidate is already earning a high income and has no pressing
financial needs but does have strong needs for independence and
achievement, it will probably be less important. As a demonstration
of appreciation for the value and contributions of the venture team,
and as a simple matter of fairness, financial incentives and rewards
can be very important, regardless of whether the team needs or
desires them. And as compensation for the career risk being taken
by venture managers, money may be very relevant.
In short, although incentives and compensation don't appear to
have much of an impact on how a venture is managed, they may
affect the organization's ability to retain outstanding people who
are offered better incentives elsewhere as well as managers'
willingness to take the career risks involved in venturing.
It is also possible no one has yet developed and tested a program of
financial incentives and rewards that would have a positive impact
on venture performance or that such a program, if it exists, has not
been publicized. Finally, it would appear that no one has developed
a program designed to prevent serious overcommitment to failing
ventures.
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Current Compensation Strategies and Practices
A survey by Block and Ornati (1987) involving 42 Fortune 1,000
firms gives an indication of the practices presently followed in
compensating venture managers. This survey shows that:
· More than 30% of the firms compensated venture managers
differently than other managers.
· More than 50% of all respondents, including firms without special
incentives, believed that variable bonuses based on venture ROI
should be used to improve venture management performance, and
more than 50% of the firms with programs used this incentive.
· More than 50% of the firms using incentives believed that there
should be a ceiling on incentivesranging from 50% to 200% of
salary.
· Internal equity was the major obstacle cited by firms that did not
have an incentive program. Other obstacles included the difficulty
of determining venture goals, concern about shareholder
objections, and administrative complexity. In contrast, those firms
that did have a program pointed to the difficulty of determining
venture goals as the most significant obstacle. Internal equity was
not regarded as an important obstacle in those firms.
The following sample of compensation arrangements for venture
management shows the wide range of approaches to this issuefrom
extremely generous bonuses and percentages to no special
compensation at all:
· Milestone awards: Tektronix reported using an incentive system
that provides awards with a target of 4 to 5 times salary over five to
seven years for venture leaders and 1 to 3 times salary for key
people (Steele and Baker 1986). Awards are offered at four stages:
upon product approval, upon engineering release,
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upon shipping release, and when production and profit
maximization occur.
· Risk levels: ATT Technologies offered venture participants three
risk levels (Kanter 1989), similar to those suggested by Block and
Ornati (1987). The first level is standard compensationfor the
participants' job level, unrelated to the venture activity; the second
involves an agreement to freeze salaries until the venture generates
a positive cash flow, at which point venture participants can receive
a one-time bonus of up to 150% of their salary; the third involves
participants' contributing up to 15% of their salary until the venture
reaches positive cash flow and profitability. Payoff can be up to 8
times their investment.
· Personal investment: GTE, as part of an intrapreneurial program
in one of its divisions, also offered a salary contribution program,
with salary frozen. Up to 10% of salary would be contributed with
no change in salary until a $100,000 profit is reached for a full
year, at which time salary is restored to foregone income and
frozen for another year. The maximum cumulative team award is
$1,920,000. Other awards consist of "intracapital" funds, which the
recipient can invest in another new venture. In its recently
disbanded venturing activity, Kodak also had a program of salary
reduction or investment, including a formula for potential return
and a ceiling.
· Percentage of profit: DCA Food Industries, an industrial food
ingredients firm, provided a percentage of gross profit earned from
new ventures to the venture teams for a limited time period (five
years). This sum could vary by 20% either way, depending on
parent company ROI. There was no ceiling.
· Discretionary bonuses: Du Pont awards after-the-fact,
discretionary bonuses to venture champions and teams.
· Nothing: At the present time, 3M provides no special
compensation for venture managers or teams,
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although the record of former venture managers' becoming top
executives, including CEO, is well known at 3M.
What Can Be Learned from Practices in the Venture Capital
Industry?
Practices in the venture capital industry have significantly
influenced the development of incentives for venture managers.
Many firms have made an effort to design programs that can
provide a capital gain path similar to that possible for independent
entrepreneurs, although not with the same potential.
Is it a mistake for corporations to attempt to duplicate
compensation systems used in the venture capital industry? As we
noted earlier, there is very little similarity between the needs of a
venture capital investor and a corporate investor in an internal
venture. Regardless of their nobility of purpose, venture capitalists
are primarily interested in making money by investing relatively
small amounts in firms that will increase in market value and
produce a profit for the venture capital partnership through the sale
of shares within a five-to seven-year time frame. The potential for a
five- to tenfold gain is often considered a prerequisite for
investment.
Contrast this scenario with the interests of a prospective corporate
venturer. Stock price is important, but for established corporations,
performance is measured by return on investment, changes in
market share, and reputation among customers. A corporation starts
a new venture in order to improve its performance or protect itself
against competition. The measure of a venture's success is its
impact on ROI, market share, market position, growth rate, and
reputation not how much its stock can be sold for within seven
years.
The risks faced by independent versus corporate entrepreneurs
must also be weighed in developing an appropriate compensation
system. Although, in many ways, it is much easier to start an
independent business than a corporate ven-
 Page 130
ture because of corporate red tape, politics, and restrictions, the
corporate venture manager takes less financial risk and has far
more potential support in terms of knowledge and human and
physical resources. Hypothetically, the risk of failure should be
much less in a corporate venture, especially if the firm has some
experience with the market and the technology. No directly
comparable figures are available on failure rates in similar
industries, but a recent study does indicate that on a percentage
basis, the survival rate for corporate ventures may actually be
greater than for private ventures (Block and Subbanarasimha
1989).
The personality characteristics and needs of corporate venturers
versus independent entrepreneurs are also crucial. The motivation
of entrepreneurs has received a great deal of research attention, and
there is general agreement that they are driven by the need to find
and fulfill opportunities and to realize a vision. Money is a measure
and not a motivation, according to many studies. Entrepreneurs are
very largely self-directed and require a high degree of autonomy
(which also seems to be true of individuals who exhibit outstanding
performance in many managerial tasks).
In contrast, entrepreneurs who choose to work in a corporate
setting want interaction with and recognition by their peers, along
with the relative safety of corporate sponsorship and employment.
Our experience (albeit not supported by empirical data) has led us
to conclude that corporate entrepreneurs have greater social needs
than independent entrepreneurs, require greater social and political
skills, and are rarely willing to personally risk everything on a new
business. By functioning within an organizational framework,
corporate venture managers are in fact demonstrating their
willingness to accept more external control than their counterparts
on the outside.
Even so, technical entrepreneurs leave existing firms and seek
venture capital backing for a variety of reasons: frustration at not
being supported in pursuing an opportunity of their choice,
seduction by the prospect of obtaining very high rewards outside
the corporation, and a growing need for
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greater independence than can be achieved within the corporation.
An ironic corollary of the effort to generate internal corporate
entrepreneurship is that the more successful the effort, the greater
the firm's likelihood of losing good people. No company can
support every proposal. The more proposals it generates, the more
will be rejectedand as the rejection rate rises, so does the departure
rate for proposers.
Potential Components of an Incentive/Reward Program for Venture
Management
We now provide a menu of possible incentive/reward components,
which will be followed by a model that can help senior managers
design a system to fit their firm and venture.
The four possible types of incentives are:
1. Equity and equity equivalents
2. Bonuses
3. Salary increases and promotions
4. Recognition incentives and rewards
The following subsections examine each of these components in
greater detail.
Equity and Equity Equivalents. The rationale for using equity is
clear and simple: it is an effort to emulate the independent
entrepreneur's situation, in which the founder can share in the
firm's gain in value and have a piece of the action (i.e., it enables
the corporate venturer to be a pseudo-owner). Equity or equity
equivalents can be provided as shares or options for shares in the
parent firm, shares or share options in the venture if it exists as a
separate corporate entity, or phantom shares or share options in the
venture if it is not separately incorporated.
Equity awards may be made outright at the start of the venture, or
they may be earned over a period of time. The time period for
cashing out is usually specified, and there
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may be provisions for cashing out if the parent corporation changes
strategy or discontinues the venture. Criteria for venture and
venture management performance required to trigger any cash-out
may also be included. And in the absence of market liquidity, the
agreement should provide a formula for buyback by the parent that
reflects any increase in the venture's value.
The essential characteristics of equity participation are that it is a
relatively long-term incentive, and the upside gain potential is
normally greater than with other forms of incentives.
Bonuses. The following are examples of the types of bonus
programs used by venturing companies:
· Fixed amounts, known in advance, for achieving specified results
in a specified time period (e.g., a sales level, cash flow result, profit
level of ROI, and completion of milestone events)
· Variable, calculable percentages of results achieved in a specified
time period (e.g., a percentage of sales or of surplus cash flow over
a predetermined level or of profit based on ROI)
· Discretionary amounts awarded after the fact for major
contributions
Bonus plans may involve a short- or long-term payout (or both),
with the awards ranging from very modest sums to very large ones.
(One venture manager accumulated 4 times the base salary within a
two-year period through a bonus calculated as a percentage of
gross profit in a new venture.) Bonus awards can be triggered by
significant accomplishments, such as the milestones described in
Chapter 7.
Salary Increases and Promotions. Incentive or reward programs
involving salary increases and promotions are based on the premise
that managing a new venture is no different
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from other corporate activities and should be compensated like any
other job. In a firm whose basic climate has for years required
innovation and continual generation of new products and new
businesses, effective new-venture or innovation management
becomes a standard requirement for advancement. As noted earlier
in this section, one of the most successful venturing firms in the
world, 3M, has no special compensation program for venture
managersbut 3M's CEOs generally emerge from the ranks of those
who have successfully managed new ventures.
Recognition Incentives and Rewards. In many firms, and for many
people, nonfinancial incentives may be more important than
financial ones. Examples of nonfinancial incentives include
recognition ceremonies and awards (sometimes involving money,
as in Du Pont's case), increased autonomy (Pinchot 1985),
sponsorship of sabbaticals and special studies, the opportunity to
start more ventures, and recognition by peers. (A study of a
telecommunications company's R&D unit revealed that innovators
regarded peer recognition as more important than management
recognitionsince management was unable to fully appreciate the
technical significance of most innovations!)
Such nonfinancial incentives are effective in companies whose
culture is consistent with the awards ceremony. For instance, one
highly innovative firm specializing in financial information pays
salaries lower than the Wall Street market average. Not only does
this firm tend to retain its innovative people, but those who do
leave often return because of the firm's collegial climate and the
sense of freedom it offers. Its annual innovation award ceremony,
at which relatively modest sums are presented, is a highlight of the
year.
Such incentives are not likely to be effective, however, if they are
the organization's only manifestation of recognition and, more
important, if the organization is unwilling to grant increased
freedom of action to people who have earned it. Kanter (1989),
reporting reactions from recipients of such
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awards at Ohio Bell in its Enter-Prize program, states that
''substantive attention rather than monetary reward was in some
cases more highly prized" (256).
Developing an Incentive Model
The overall objectives of an incentive program are clear: to
promote a venture's success and reduce the cost of failure if that
should be unavoidable. Because the primary function of incentives
is to attract and retain qualified people and enhance their morale,
we need to examine the venture success factors that are both
directly related to people and capable of being affected by an
incentive program. Other critical success factors (such as having
the right product at the right time for the right market and ensuring
that that product is competently developed, produced, and
marketed) are therefore beyond the scope of this examination.
Venture Success Factors, People Factors, and Compensation
Strategies. Table 5-1 provides an overview of the incentive plan
features that affect each of the human factors considered essential
to a venture's success: enthusiasm and continuing commitment,
effective teamwork, organizational support, and recognizing and
adapting to reality.
Enthusiasm and continuing commitment. Both the venture leader
and the team must demonstrate enthusiasm and sustained
commitment to making the venture a success. Without this force to
carry the venture through inevitable difficulties, it will founder. In
this respect, corporations can learn from venture capitalists, who
regard this factor as essential. Entrepreneurs seeking venture
capital demonstrate enthusiasm and commitment through their
sweat equity, through their financial investment, and often through
their willingness to take a low salary out of the business during its
early stages, in the confidence that the downstream gain will make
such sacrifices worthwhile.
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Table 5-1: Incentive Features Associated with People-Related
Venture Success Factors
Success Factor Incentive Features
Enthusiasm and continuing Significant earning potential
commitment
Direct relationship between
incentives
and performance
Competitiveness
Financial and symbolic
significance
Rapidity of feedback
Individualization
Effective teamwork Teamwide incentives
Fairness of distribution
Team recognition
Organizational support Perception of fairness
Balance between potential risks
and rewards
Recognizing and adapting to Payment for results, not for strict
reality
adherence to plan
Significant personal financial risk
for venture managers
Note: Sykes (1992), summarizing his study of venture personnel-
compensation practices of eight major corporations, suggests that
the compensation plan should: match rewards against
achievement and personal risk; provide congruence between
individual, venture, and corporate goals; be flexible enough to
adapt to changes in corporate strategy; emphasize team versus
individual rewards; and be perceived as fair by those outside as
well as those in the plan. Sykes, H. B. "Incentive Compensation
for Corporate Venture Personnel," Journal of Business Venturing
(July 1992): 253-265.

In designing an incentive program that supports enthusiasm and

continuing commitment, the organization must consider the
following incentive features:
· Significant earning potential: The very great odds that most
(albeit not all) starting venture managers will not be around for
very long should be taken into account. Hence, the incentive plan
should be designed to reflect the actual possibility of achievement,
and incentives should be considered which provide for replacing
the starting manager at some future point.
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· Direct relationship between incentives and performance: The
venture's actual results or the extent to which it is meeting its plan
should be assessed.
· Competitiveness: Keeping a firm's incentive program competitive
does not necessarily involve financial considerations alone. Special
attention should be given to providing autonomy and ensuring that
the company's culture remains attractive to innovative and
entrepreneurial managers.
· Financial and symbolic significance: The organization should
consider both the financial needs of its venture managers and the
symbolic value of the incentives offered.
· Rapidity of feedback: The faster the feedback, the better. All
achievers, not just venture managers, want quick feedback.
Handing out recognition awards long after everyone has forgotten
what occasioned them frequently has the effect of annoying rather
than encouraging recipients.
· Individualization: Depending on the manager's life status, cash
may be more important than stock, fame may be more important
than money, and promotion and greater responsibility may be more
important than any of the other rewards. Since life status changes
(e.g., kids start or finish college), the incentive plan should also be
flexible enough to permit changewhich makes more work for
designers and negotiators but is essential to satisfy the plan's
"customer."
Effective teamwork. Big businesses cannot be built without
committed and effective teams. A major advantage that large firms
should have over independents is their access to a staff of highly
competent professionals who have an appreciation of teamwork.
This does not mean, however, that individual achievement and
initiatives are hidden behind the facade of an anonymous team, any
more than a star quarterback's performance is hidden behind the
protection of a star lineman. Individual achievements must be
recognized along with team achievement.
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In designing an incentive plan, the organization can use the
following features to enhance the effectiveness of team action:
· Teamwide incentives: For the past five years, Tektronix has
provided incentives for every employee of its new ventures and is
convinced that this promotes team effort. Similarly, venture capital
investors usually like to see incentives made available to all key
people, not just to the senior venture manager.
· Fairness of distribution: Although there will necessarily be
differentials between senior venture managers and other team
members, the division of incentives among the entire team must be
fair. A scheme used by one product development organization
involved accumulating a pool of funds based on a percentage of the
margin contribution from the products developed by the unit. Each
year, the pool was divided among all the unit's members in
proportion to the salary received by each member as a percentage
of total salaries paid. The only exception was the unit's senior
manager, who received a higher percentage.
· Team recognition: Nothing turns a team off as much as seeing one
team member singled out for a recognition award when many have
contributed to the achievement. Providing recognition for teams as
well as for individuals is critical to an incentive plan's
effectiveness.
Organizational support. The economic value of voluntary support,
both formal and informal, from different parts of the organization is
incalculable. At Du Pont, for example, this kind of support is part
of the culture. Without it, a venture unit is doomed if it remains in
the parent structure, despite the fact that separation from the parent
would restrict the availability of know-how.
Although the factors that promote organizational support are
generated outside of the compensation and incentive program, the
wrong program can destroy such support. One sure
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way to undermine the parent company's support is to provide
venture personnel with incentives that are perceived as unfair. The
perception of unfairness can be reduced if the incentive plan
realistically reflects the relationship between potential risks and
potential rewards. Suppose the firm designs a plan whereby
members of the venture team retain full company benefits, are
assured that they can return to their former position, get the raises
they would have gotten had they not left their former position, and
stand to receive potentially high gains from the venture as welli.e.,
a risk-free plan whose benefits are available only to the members
of the venture team. Such a plan is unfair and will be so perceived
within the parent organization.
This issue is serious and not easily resolved. One reason for
separating ventures geographically and organizationally is that in
order to attract and hold the best people, an organization may have
to devise a special incentive programa program that will be seen as,
and may actually be, unfair. This, in turn, creates the problem of
reducing the organization's ability to leverage its resources to help
the venture.
If the incentive plan needed to get and keep key people conflicts
with the corporate culture, the venture must be separated from that
culture both geographically and organizationally. If the venture will
require collaboration and support from corporate personnel under
such circumstances, the parent corporation should either refrain
from undertaking the venture or find an outside partner to run it.
Recognizing and adapting to reality. The venture team's ability to
recognize reality and adapt to it is the factor that determines
whether the venture will be managed as a fruitless quest for
fulfillment of the original venture planconceived in ignorance and
constantly contradicted by new realitiesor whether experiences will
be milked for maximum learning and future plans and actions
modified accordingly to achieve success. This factor will also
largely determine how much will be lost in a venture that is neither
redirected when it can be nor aborted when it should be.
 Page 139
Recognizing and adapting to reality are fostered when incentive
payments are based on the venture's absolute results rather than on
how closely it meets its plan. Mindless pressure to meet the plan,
not only in connection with incentives but as part of a company's
total value system, fosters desperation in spending and a tendency
to ignore reality.
Venture managers' ability to recognize and adapt to reality is also
directly related to the degree of risk they assumei.e., to their stake
in the venture. As noted earlier, venture capitalists usually require
entrepreneurs to take significant personal riskin terms of either
money, sweat equity, loss of ownership interest, or all three.
Clearly, internal entrepreneurs cannot be expected to risk as much
money as the company does, but they might risk sums that are
highly significant to them. If they don't have the money, the
company might lend them some, or early-stage bonus money might
be invested in the venture.
On the other hand, this limited personal investment could actually
have the opposite effect. It might provide an incentive for venture
managers to keep trying because of their financial leverageone
more dollar of theirs can leverage 10, 20, or more dollars of
company investment, even if "ownership" is diluted. The key is to
require significant personal investment, the loss of which would
really make a big difference to the investor.
A plan requiring investment by venture management would
probably have three effects: the higher reward potential associated
with the venture would be less likely to be perceived as unfair
elsewhere in the firm; the investors would find it economically
counterproductive to keep a dying venture going; and fewer people
would seek venture management positions. We believe that such a
required investment feature could be effective in limiting potential
damage only if the investment were economically significant to the
venture managers.
This approach is clearly different from providing a safety net for
venture managers, as suggested by Burgelman and Sayles (1986).
Both approaches are probably validat differ-
 Page 140
ent times and for different people. When a firm first initiates a
venturing program, a safety net may be necessary, but if it is
combined with a high reward potential, it will generate a sense of
unfairness and can provide managers with an incentive to prolong
the life of fatally wounded ventures.
A Sample Venture Incentive Plan. Although any incentive plan
must of course reflect the unique realities of the parent corporation
and the particular venture, what follows is a "generic" venture
incentive plan consisting of strategies that have often proved
effective at the various stages of a venturing effort.
· Before commercialization: Upon completion of the concept test
and feasibility study, the organization may provide either a small
discretionary bonus or none at all. The rationale for this
recommendation is that a bonus should be awarded only if the
recipient has added value to the results of a testing and feasibility
study by innovatively modifying an idea or recognizing a new
opportunity.
· Product development stage: A bonus may be awarded if product
development is completed on schedule and within estimated costs,
with the exact amount of the bonus being adjusted to reflect the
extent to which actual time and costs vary from plan. Depending on
the scale of the venturing effort, the bonus at this stage can be
significant. Base bonus amounts should be known in advance. The
base amounts can be increased on a discretionary basis for the
addition of unusual value or for insights that affect the firm's
approach to the business, including a wise recommendation not to
proceed. The rationale for linking bonus awards to time and cost is
to provide an incentive to get the job done as quickly and
inexpensively as possible without jeopardizing the quality of the
end product. Quality protection provisions such as this must be
built into any incentive plan.
 Page 141
· Preparation of the business plan: A discretionary bonus may be
awarded for outstanding performance in key aspects of plan
preparation. Examples include identifying critical assumptions and
designing methods for testing them, and making a proposal not to
proceed if that is justified by the facts.
· Startup: The firm may award a bonus calculated as a percentage
of the difference between planned and actual startup expenses. For
instance, the manager of a cable TV company was paid a
percentage of the difference between the contractors' price and the
actual amount spent on the construction of a cable system. The
contractor also received a portion of the savings from the contract
price, which gave him a higher profit on a lower billwith the
proviso that all performance and quality specifications had to be
met. Because money was such a significant incentive to the cable
system manager, he made an extraordinary effort to help the
contractor get the job done at the lowest possible costresulting in
the manager's earning a sum equal to 35% of his annual salary in a
six-month period.
Another incentive at the startup stage is a bonus calculated as a
percentage of sales achieved, with the percentage declining as the
elapsed time increasesfor example, a 2% bonus if minimum sales
of $1 million are achieved in six months; 1.5% if that level is
achieved in eight months; 1% if it is achieved in ten months. The
firm should provide for this bonus to be phased out after a specified
maximum time period.
· Ongoing sales and production: A percentage of dollar-amount
improvement over planned profit or loss can be put into a team
pool for distribution. Significant amounts should be awarded for
significant improvement, and the funds should be distributed
within a relatively short time periodeither quarterly or
semiannually, and certainly no less often than annually. The firm
can use a formula that reflects both sales and
 Page 142
profit. This would be especially appropriate if the drive is to
achieve market share within a specified cost, with a portion of the
pool being calculated on each percentage point of market share
achieved and another portion being calculated on the cost of
obtaining that share as reflected in the venture's profit or loss. A
predetermined milestone bonus for reaching profitability might
also be employed.
General venture incentive strategies. Founder's phantom stock can
be issued, with its starting value being completely arbitrary. The
formula for appreciation can be based on the achievement of
milestones within specified time periods, and after profitability is
achieved, it can be based on ROI. If such stock is not convertible
into parent company stock or is not publicly traded, then an internal
"buyback" price schedule must be devised. In one case involving a
new cable TV venture by a large, multinational firm, founder's
stock was issued at no cost to attract key people, who had an
opportunity to quadruple their salary when the first full year of
profitability was achieved. A variety of forms of incentive
mechanisms involving stock, stock options, phantom stock, and
stock appreciation rights are described in some detail by Shuster
(1984).
In another firm, not publicly traded, in which expenses were well
controlled, a stock option plan was introduced to stimulate sales
growth and market penetration. An arbitrary, but supportable,
valuation of the stock price was made. The buyback formula was
based on the established price multiplied by the sales growth
ratee.g., if sales doubled, then the stock price doubled if it was sold
before a public offering or a sale of the company.
Providing for Changes. Any change in senior management or
parent company ownership can result in venture shutdowns and
alterations in plans and strategy, which can drastically affect
venture personnel. Incentive and compensation plans should
therefore provide a payout mechanism or formula for use in such
cases.
 Page 143
A payout mechanism must also be devised for venture personnel
who voluntarily leave or are transferred or discharged. It is
desirable to establish a "vesting" schedulei.e., a minimum length of
time that a person must remain in the venturebefore any special
provisions are made. The vesting mechanism can consist of a
gradually increasing percentage of participation in a bonus pool,
stock options, or other forms of equity equivalents.
In short, the company must establish a flexible incentive plan that
provides for changes in the plan in response to changes in the
venture's stage as well as in corporate management and objectives.

Conclusion
The firm must understand the roles to be filled in the venture and
make sure the right people are available to fill them. In particular,
ventures need both a business innovator who can lead, integrate,
and manage and an executive champion. Nor is it enough for the
firm to pick the best qualified people to manage the venture; it
must also make sure those people are committed and enthusiastic.
The organization can breed potential venture managers by
assigning tasks with high uncertainty to promising people. Hiring
and evaluation practices should be examined to ensure that
potential innovators are being recruited and encouraged rather than
rejected and discouraged.
The venture's success should be evaluated based on milestones,
with the parent company's senior management assessing not only
the actual completion of events but also the learning that has taken
place. Besides the achievement of goals, senior managers must also
consider more qualitative issues, such as the commitment and
teamwork displayed by the venture group.
There is no sure-fire way to compensate venture managers; existing
plans range from generous to nonexistent. Compensation programs
should be shaped according to a careful examination of the
characteristics of the firm and the ven-
 Page 144
ture's managers, and should be customized to individual situations
insofar as possible.
The corporation can use equity or equity equivalents, bonuses,
promotion, salary increases, and recognition awards to compensate
and motivate members of the venture team. In general, rewards
should be related to risk. The incentive arrangement must also
provide for management turnover and possible changes in the
parent company's strategy or ownership.
Guidelines
1. Ensure that new ventures have a business innovator as well as a
product champion.
2. Grow potential venture managers by challenging promising
people with tasks involving high uncertainty.
3. Evaluate individual performance according to what is learned
and how that learning is appliednot according to blind adherence to
a plan.
4. Compensate venture managers according to the venture's
requirements, the firm's culture, and the venture management
team's needs. Do not automatically assume that incentives will
affect performance.
5. Assume that changes in venture management will someday
become desirable or necessary and take that likelihood into account
in making initial personnel assignments.
References
Block, Z., and Ornati, 0. 1987. ''Compensating Corporate Venture
Managers." Journal of Business Venturing 2, no. 1 (Winter): 41-52.
Block, Z., and Subbanarasimha, P. N. 1989. "Corporate Venturing:
Practices and Performance in the U.S. and Japan." Working paper.
Center for Entrepreneurial Studies, Stern School of Business, New
York University.
Burgelman, R. A., and Sayles, L. R. 1986. Inside Corporate
Innovation. New York: Free Press.
 Page 145
Drucker, P. 1985. Innovation and Entrepreneurship. New York:
Harper & Row.
Greiner, L. 1972. "Evolution and Revolution as Organizations
Grow." Harvard Business Review (July-August): 37-46.
Kanter, R. M. 1989. When Giants Learn to Dance. New York:
Simon & Schuster.
Maidique, M. A. 1980. "Entrepreneurs, Champions and
Technological Innovation." Sloan Management Review (Winter):
59-76.
"Myers-Briggs Type Indicator." 1976. Gainsville, FL: Center for
Applications of Psychological Type.
Pinchot, Gifford. 1985. Intrapreneuring. New York: Harper &
Row.
Sandburg, W. R., and Hofer, C. W. 1987. Journal of Business
Venturing 2, no. 1:5.
Schein, Edgar H. 1985. "Career Anchors: Discovering Your Real
Values." San Diego: University Associates Inc.
Shuster, Jay. 1984. Management Compensation in High Technology
Companies. Lexington, MA: Lexington Books.
Steele, B., and Baker, R. 1986. "Creating Entrepreneurial Pay
Systems for Internal Venture Units." Topics in Total Compensation
1, no. 1: 37-55.
Sykes, H. B. 1986. "Lessons from a New Ventures Program."
Harvard Business Review (May-June): 69-74.
. "Incentive Compensation for Corporate Venture Personnel."
Journal of Business Venturing (July 1992): 253-265.
 Page 147

6
Locating the Venture in the Organization
This chapter addresses the crucial decision of where to locate a
venture in the parent organization, with the key issue being the
extent to which the venture should be separated from the
organization's ongoing operations. Six major location options,
involving progressive degrees of separation, are described and their
pros and cons examined. These options range from simply
assigning the venture to a line manager as part of his or her normal
job to having the venture manager report to a new-business
division or even directly to the CEO. It becomes clear from this
discussion that there is no ideal place to locate a venture.
We then discuss the factors that influence how separated the
venture should be, depending on the circumstances in which the
parent company finds itself. Since the driving principle regarding
the location decision is to ensure that the venture is placed in such
a way as to protect it from any potential
 Page 148
corporate antagonism, we also present several safeguarding
options.
Thus, there are a number of contingencies that must be taken into
account in deciding where to place a venture within the
organization. This short chapter provides senior managers with
enough background information to enable them to determine a
suitable (as opposed to universally optimal) location.
Selecting the Venture's Format
Before discussing the issue of venture location, however, we
should point out that there are alternatives to simply creating a
fully controlled internal corporate venture. A wide variety of
format options are availableincluding selling an innovation off
outright, licensing others to exploit it, starting an internal venture
as a project team, forming a subsidiary to build the business,
creating a joint venture (in which the parent company's ownership
could range from a minority holding to 50/50 to a majority
holding), acting solely as a venture capital source (either for an
internally developed innovation or as a participant in a venture
capital pool), or making an acquisition (either a foothold
acquisition or a major one).
Why would a company choose to give up full ownership of a
venture? The parent firm may be unable to provide the required
expertise, principally involving technology or market, or it may
need to obtain capital or share the risk. Other reasons include
financing capacity (current and projected), an aversion to risk,
timing needs, risk/reward potential, and fit factors. The shared
ownership option may be rejected, however, if the parent company
feels it must retain 100% ownership or is convinced it can meet all
the venture's needs by itself.
Acquisition is used primarily to collapse time or sometimes to get
the kind of management required and reduce the risk. The separate
subsidiary approach can help the parent obtain and retain talented
management and enable it to use innovative incentive and
compensation arrangements without
 Page 149
alienating people in the core business. A joint venture, possibly
with a minority holding, might be appropriate for a corporation that
has a low capacity for risk, an urgent need to accelerate the
venturing process, and a significant culture gap between the parent
firm and the venture.
Of course, whatever the venture's starting format, it is unlikely to
remain in that format permanently, particularly if strategic alliances
or joint ventures are involved. Such agreements should contain exit
provisions specifying the conditions under which the parties can
exit, the pricing formula to be used in the event of buyout, and the
process for handling unresolvable disagreement (e.g., arbitration).
A detailed discussion of the various alternatives to a fully owned
internal corporate venture is beyond the scope of this book,
however, and the remainder of this chapter deals only with
deciding where to locate an internal corporate venture that is fully
controlled by the parent firm.

Venture Location Options

Venture location options range from totally embedding the venture
in the parent company's ongoing operations to creating a
completely separate new-venture division reporting directly to the
topmost level of the organization.
The degree to which a venture is separated from mainstream
corporate operations significantly influences a number of issues
that are important for the venture's progress:
· Focus: The more embedded a venture, the less its chances of
being the focus of attention in that location. Ventures placed in line
operations tend to struggle to attract attention because line
managers are distracted by day-to-day operating problems. So if
focus of attention is important for the venture's success, a higher
degree of separation will be needed.
· Priority: The more embedded a venture, the less likely it is to
receive top priority insofar as the allocation of
 Page 150
resources is concerned. This is because the venture must compete
for resources against established, large, and often much more
profitable subunits in the organization within which it is embedded.
Increasing the degree of separation therefore increases the venture's
chances of receiving top priority.
· Reliability of funding: The more embedded a venture, the more
unpredictable the availability of funds, since there is a tendency to
respond to contingencies by preempting the venture's funding and
diverting it to established operating units. Increasing the venture's
separation increases the probability that needed funds will be
forthcoming.
· Coping with growth: The greater the venture's separation from
ongoing operations, the less built-in infrastructure and staff will be
available to cope with the venture's growth. When a venture deeply
embedded in existing operations needs to grow, the required
systems, facilities, and staff are already in place. When a highly
separated venture needs to grow, these resources must either be
created or recruited, since they simply do not exist in that location.
(The fact that resources are available in embedded locations does
not necessarily mean that those resources will be forthcoming, only
that they need not be created from scratch.)
In light of the preceding issues, an organization seeking to
determine the initial location of a venture should ask itself where
the venture can best be placed in order to ensure that:
· The venture obtains resources, know-how, and rapid processing of
information.
· The venture is protected politically.
· The venture gets the necessary guidance, commitment, and
attention.
· The venture gains optimal access to the target market.
 Page 151
· The venture enjoys a nurturing and supportive environment that
includes appropriate controls.
· The parent firm is protected against major losses and other
hazards (Tushman and Nadler [1978]; MacMillan and Jones
[1986]; Hisrich and Peters [1986]; Mueller [1971]; Bart [1988]).
In the following subsections, we outline six major "levels" of
location and list their main pros and cons. Note that each higher
level represents an increasing degree of separation from the
ongoing operations of the firm.
Level 1: Assigning the Project to a Line Manager. The venture
project is assigned to a line manager to execute as all or part of his
or her ongoing managerial responsibilities, with the line manager
reporting to operating division management.
Pro: The venture enjoys maximum exposure to operations
expertise.
Cons: This location maximizes the venture's intrusion into and
disruption of the unit's present business while minimizing the
attention it receives from line management. It also leaves the
venture highly vulnerable to turf brawling.
Level 2: Creating a Separate Section in an Operating Division. The
venture is assigned full-time to a line manager who reports to an
operating division, and he or she assembles a team of full- and
part-time people to get the venture going.
Pros: The venture gains political support, enjoys maximum
exposure to corporate know-how, and has greater access to the
organization's expertise in the business if it involves a familiar
market. Subsequent integration into the division is facilitated
(assuming that is the ultimate objective).
Cons: The venture has a low priority in terms of commitment, and
its losses detract from divisional performance. It may be the first to
suffer during periods of cost reduction; it faces the dangers of turf
brawling and intrusion from the parent division; and it is
susceptible to red tape.
 Page 152
Level 3: Having the Venture Report to R&D. The venture is
assigned full-time to a venture manager who reports to R&D, and
he or she assembles a team of full- and part-time people to get the
venture going.
Pro: The venture remains close to evolving technology and
technical information that could prove crucial to its success.
Cons: The R&D division may become infatuated with the
technology and be oblivious to market needs and timing especially
if it lacks business and marketing experience, orientation, and
knowledgeand the evaluation of technical alternatives may be
hampered by a "not invented here" attitude. This location also
leaves the venture susceptible to red tape.
Level 4: Having the Venture Report to a Senior Staff Function. The
person in charge of the venture reports to a senior staff position
(such as R&D or corporate development), either individually or as
a venture manager in charge of a team of full- or part-timers.
Pros: This approach ensures dedication to addressing the key
challenges of the venturing operation. Intrusion into existing
operations is minimized, as is vulnerability to turf brawling.
Cons: The venture has little exposure to operations expertise and
may suffer if the parent unit lacks business and marketing
experience.
Level 5: Having the Venture Report to a New-Venture Division.
The venture manager reports to a separate new-venture division,
which interacts directly with top management.
Pros: This approach ensures sympathetic nurturing of the venture,
protection from corporate red tape, and a high level of attention
focused on the key challenges facing the venture. Intrusions into
the parent firm's operations are minimized, as is the venture's
vulnerability to turf brawling.
Cons: The venture is removed from the corporate main-
 Page 153
stream and competes for resources with mainstream businesses.
Exposure to existing organizational expertise is minimized. The
venture becomes a highly visible target, which increases its
vulnerability to elimination.
Level 6: Having the Venture Report Directly to the CEO.
Pros: This arrangement guarantees maximum political protection,
mainstream cooperation, and the availability of resources.
Cons: Strong support from the CEO can hamper objective
evaluation of the venture's progress, and failures are likely to be
more costly. Crown prince jealousy is also a possibility.
As can be seen from the preceding discussion, there is no ideal
location for a new businessno single arrangement that can be
universally suggested or applied. Each option has its strengths and
weaknesses. Although selecting the right location will not
guarantee venture success, selecting the wrong location can
guarantee venture failureand possibly very high-cost failure.

Factors Shaping the Choice of Venture Location

In the preceding section, we stressed that there is no evidence to
indicate that any particular venture location option is either better
than one or more of the others or generally superior. This is not to
imply, however, that the decision is a toss-up. Rather, the
appropriate venture location varies from one case to another,
depending on the individual company and venture. Hence, although
it is impossible to identify a universally superior venture location,
it is possible to identify a location that is right for a given company
and venture. To do so, senior managers should consider the
following eight factors, which play a significant role in shaping the
correct location decision:
 Page 154
1. Acceptance of venturing and of the venture: The level of
acceptance within an organization, both of venturing as an activity
and of a particular venture, varies from one firm to another. If most
of the established organization is indifferent or hostile to the
venture or to venturing in general, or simply does not believe in
venturing, then the venture has a very great chance of falling prey
to lack of support or deliberate obstructionism or getting chewed
up as powerful vested interests engage in turf brawling. Clearly,
when organizational acceptance is poor, there is a need to
safeguard the venture, either by placing it in what Galbraith (1982)
terms "a reservation" (a level 3 or level 4 location, described in the
preceding section) or by creating one of the safeguarding
mechanisms described in the following section.
2. Experience with venturing: An organization's experience with
venturing can range from nonexistent to extensive. Even if the
organization welcomes venturing, it may simply lack the
experience base required to venture successfully. In this case, it is
probably better to locate the venture where it can be protected from
constantly having to account for differences between plans and
results. Once again, it may become necessary to place the venture
in a reservation (i.e., a level 3 or level 4 location).
3. The venture's criticality: The venture's importance to the firm
and the urgency of its success must be considered in making the
location decision. Highly critical ventures tend to need a location
that reports to senior levels of the parent organization.
4. Current organizational and divisional performance: If the
organization is performing poorly or is subject to great stress, the
venture will wither on the vine unless it can command
organizational attention, which means a level 3 or level 4 location.
It is totally inappropriate to place a venture in any division that
 Page 155
is under stress because of environmental turbulence or internal
performance disappointments.
5. Organizational structure: The organization's current structure
also affects where a venture can be located. There are five basic
types of organizational structure: functional, geographic, product,
divisional, and hybrid. Highly functionalized firms tend to have
extensive policies and procedures by which to coordinate cross-
functional activities, whereas geographically dispersed firms tend
to have similar policies and procedures to coordinate activities in
various areas. In geographically dispersed firms, ventures placed in
lower-level locations will tend to get strangled by ''homogenizing"
staff groups whose task it is to ensure that all units comply with
corporate policies. In firms with such homogenizing bureaucracies,
ventures should be placed in locations with a high degree of
separation.
6. Scale of the venture: The venture's size is an important
consideration in making the location decision. A major venture
involving significant commitment of organizational resources and
significant organizational effort will obviously require a large
multifunctional team, which will probably be separated from the
company's ongoing operations. The smaller the scale of the
venture, the more likely it is to be located as a group or an
individual embedded in some part of the organization.
7. Stage of venture evolution: There is no one location that will fit
all the stages through which a venture passes as it evolves. The
location needs of a venture in its very early stages differ
significantly from those of a successful venture that is about to
become a large component of the parent organization. It is quite
conceivable for a venture to start as a one-person investigation in
the development department, perhaps liaising with one or two sales
and production contacts,
 Page 156
and then evolve into a large, separate operation as it grows. The
key is for senior management to step back and reassess the location
decision as the venture progresses, changing the location if it no
longer fits the venture's current needs.
8. The venture's anticipated future location within the firm: If the
new business will ultimately become part of one of the firm's
existing operations, the initial location decision should be made in
such a way as to minimize later integration problems. For example,
in its new-venture program, ATT Technologies did not undertake
any venture unless the business unit in which it would eventually
be placed was represented on the venture advisory board and had
agreed to accept the venture, since the company didn't want any
orphaned businesses floating around. Although ATT Technologies
did have a special group that helped launch ventures by providing
the required initial nurturing and reducing red tape, venture
participants understood at the outset where management ultimately
intended to place each new business.
Safeguarding the Venture from Organizational Antagonism
It should be abundantly clear that the eight factors discussed in the
preceding section are significant determinants of a venture's
outcome and that certain combinations of these factors can lead to
political and bureaucratic conditions that will guarantee the failure
of a poorly located venture, no matter how great its intrinsic
potential.
Although all eight of these factors are important, senior
management's top priority in making the venture location decision
should be, first and foremost, to place the venture where it will be
safeguarded from organizational antagonism (that is, political and
bureaucratic interference). There is no way a venture can survive
simultaneous internal and external
 Page 157
competition, so unless the venture can be protected from internal
attack, at least in its early stages, it is doomed.
As indicated earlier in the chapter, the most effective way to seal a
venture off from organizational antagonism is to separate it from
ongoing operations, but this is not necessarily the only way to
protect a venture that faces opposition. Here are some additional
safeguarding mechanisms the parent firm can use as alternatives to
separation:
· Venture advisory board: A significant measure of protection from
organizational politics and bureaucratic attack can be achieved by
creating a board comprised of important internal and even external
advisers whose task is not only to provide the venture with
technical and managerial advice but also to protect it. Particularly
if one or more of the board's members are very senior executives of
the parent firm, they will be in a position to overrule policies and
procedures that may be obstructing the venture or discourage
political moves against the venture manager.
· Executive champion: In addition to a venture advisory board, the
organization should appoint a very senior manager as executive
champion, with explicit part- or full-time responsibility for
defending any ventures that come under political or bureaucratic
attack. The challenge in filling such an assignment is to find a
senior manager who is widely respected in all functional areas and
possesses an entrepreneurial attitude and mind-set. And if the
assignment is a part-time one, there is a question of whether the
executive champion will devote enough attention to the ventures he
or she is supposed to protect. On the other hand, appointing such an
individual sends the rest of the organization a powerful signal
regarding the seriousness of the firm's commitment to venturing.
· Right of direct appeal: The final and least costly safeguarding
mechanism is to give the venture manager the right to appeal
directly to the senior management
 Page 158
team or policy committee whenever he or she feels that the venture
is being compromised by organizational issues. In theory, this
should work fine. The question is whether the venture manager will
risk challenging a powerful senior executive when the venture's
needs conflict with the executive's wishes. The effectiveness of this
mechanism depends to a great extent on the organization's
experience with and acceptance of venturing as well as how critical
the particular venture is to the organization.
In short, if a venture faces any danger of organizational
antagonism, safeguarding it should take top priority in making the
location decision. And no matter how compelling a particular
location may seem, a venture facing hostility may require
protection through the use of such safeguarding mechanisms as
separation, a venture advisory board, an executive champion, or
some right of appeal to top management.
Conclusion
When the issue of venture location is first raised, senior managers
may wonder what all the fuss is about. Why not simply create a
new-venture division or have the various venture managers report
directly to the CEO? However, as we discuss in detail in Chapter 8,
"Organizing the Venture," separating the venture from the rest of
the organization could deny it access to valuable know-how, which,
in turn could significantly increase the venture's cost and reduce its
chances for success.
Thus, there is always a basic trade-off that must be made: If the
venture is separated, it will be protected from antagonism and/or
bureaucratic interference but its access to valuable know-how will
be restricted, thereby compromising its success in one way; if the
venture is embedded, it will be able to avail itself of that know-how
but it will be exposed to
 Page 159
organizational antagonism and/or bureaucratic interference, thereby
compromising its success in a different way.
In the absence of antagonism, there is no reason why any particular
venture location is superior to anotherall have their shortcomings.
What matters is whether the shortcomings of the particular location
have been recognized and offset through the use of appropriate
mechanisms (discussed in detail in Chapter 8).
Finally, as with every other design decision, the location decision
must be reexamined on an ongoing basis and may require change
as the venture evolves through its various developmental stages
(startup, survival, expansion, maturity).
Guidelines
1. Exercise great care in positioning a venture in the firm, for this
decision is a critical determinant of the venture's success.
2. Since safeguarding the venture from corporate antagonism is
essential, take appropriate protective measures if need be. These
include having the venture report directly to senior management,
providing for an executive champion, creating a venture advisory
board, or establishing the venture manager's right of direct appeal
to the highest levels of management.
3. In determining the venture's degree of embeddedness or
separation, consider the venture's needs in terms of priority in
securing management attention, reliability of funding, and coping
with growth.
4. Revisit and reassess the location decision as the venture evolves.
References
Bart, C. K. 1988. "New Venture Units: Use Them Wisely to
Manage Innovation." Sloan Management Review (Summer): 35-43.
 Page 160
Galbraith, J. R. 1982. "Designing the Innovative Organization."
Organizational Dynamics (Winter): 5-25.
Hisrich, R. D., and Peters, M. D. 1986. "Establishing a New
Venture Unit within a Firm." Journal of Business Venturing 1: 307-
322.
MacMillan, I. C., and Jones, P. E. 1986. Strategy Formulation:
Power and Politics. Saint Paul, MN: West Publishing.
Mueller, R. K. 1971. The Innovation Ethic, 114-140. New York:
American Management Association.
Tushman, M. L., and Nadler, D. A. 1978. "Information Processing
as an Integrating Concept in Organizational Design." Academy of
Management Review (July): 613-623.
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7
Developing the Business Plan
It is common knowledge that business plans for new ventures bear
little resemblance to reality. This is a particularly distressing
problem for corporations in which planning is such a vital part of
management and plan fulfillment is so important in evaluating
performance. But there is a better way to planone that can help
companies develop more realistic expectations, evaluate progress
more effectively, and improve their chances for venture success.
In essence, new ventures are projects with an experimental
component. Their planning and performance can therefore be
greatly improved through the use of project-planning methodsi.e.,
by establishing critical path milestones, identifying and testing key
assumptions, and continu-
This chapter is an expansion of Z. Block and I. A. MacMillan,
"Milestones for Successful Venture Planning," Harvard Business
Review (September-October 1985): 4-8.
 Page 162
ally adapting to the new and surprising information that will
inevitably emerge.
This chapter provides guidelines for developing a useful, realistic
business plan for a new venture. In the first section, we describe the
differences between the purposes of new-venture plans and plans
for established businesses and show how those differences affect
planning. The following sections examine the key elements of new-
venture plans, the use of milestone planning, and the organization's
strategic choices for entering the market. The chapter closes with
an overview of the action steps that venture managers should take
in developing a new-business plan, together with the questions that
senior managers should ask in evaluating such a plan.

New-Venture Business Plans Versus Traditional Business Plans

This section, which contrasts planning done for new ventures with
planning done for established businesses, examines the following
questions:
· What is the planning/performance paradox, and what is it about
new ventures that creates this paradox?
· What are the purposes of new-venture plans, and how do they
differ from the purposes of traditional business plans?
· Is new-venture planning actually necessary? If so, can it be done
effectively?
· What planning process should be used? (Who should do the
planning, when, and how?)
The Planning/Performance Paradox
Venture folklore states that the three keys to a successful new
business are a good business plan, a good business plan, and a good
business plan, and most courses in entrepreneur-
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ship focus on the development of a business plan. Yet new-venture
business plans often have more in common with advertising than
with effective management. Usually, there is little or no connection
between what is projected and what is delivered. All the concrete
numbers and detailed analyses contained in the typical business
plan belie the fact that forecasting the performance of nascent
ventures is even harder than predicting the weather.
In cases where traditional business-planning methods have been
applied to new ventures, the correlation between planning and
performance has been pretty tenuous. A study comparing
projections with the results of ventures funded by a leading venture
capital firm found that actual costs, functional benefits, competitive
action, and, most especially, sales bore little or no relation to plans
or expectations (Sacher and Wolterbeek 1987). These findings were
confirmed by a group of 25 venture managers from a Fortune 100
company at a seminar on new-venture planning as well as by
virtually every one of the managers we interviewed from other
firms.
The most accurate prediction that can be made about any venture
plan is that cost and time estimates will be achieved or exceeded
and revenue estimates will not. Even in the case of roaring
successes, the disparity between plans and performance can be
great. One new-venture plan projected sales of $3 million for the
following year, whereas the actual sales turned out to be $40
million. Although the surprise was not unwelcome, it nonetheless
created a financing crisis.
To make matters worse, despite the recognized limitations of
business plans, corporate managers often use them to pressure
venture managers to achieve impossible results, ultimately leading
to unnecessary losses.
Why do new-business plans fall so far short of reality? One reason
for the gap between projections and performance is the competition
for funding, causing what one venture manager calls "a lying
contest." This is a somewhat harsh, but not entirely inaccurate,
characterization of the "best-case scenario" approach to planning.
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This approach doesn't fool everyone. Indeed, it may not fool
anyone. A former IBM marketing executive reported that when
new-venture projections were evaluated during his time at IBM, the
reviewers made it a practice to double the costs and halve the sales,
and if the proposal still looked good, they would seriously consider
it.
In a 1986 study by MacMillan, Block, and Subbanarasimha, many
of the obstacles to new-business development identified by venture
managers were related to the planning process: imperfect market
analysis; underestimating the competition, the venture's riskiness,
and the required funding; the company's impatience to get results;
and lack of contingency planning.
What is it about new ventures that creates the planning/
performance paradox? Quite simply, the fact that they are newnot
necessarily to the world but to the venturing company. If the parent
firm lacks experience in relevant technologies, products, and
markets, it can only roughly estimate the rate at which any new
venture will develop, the market acceptance, the costs, and the
competitive responseand those estimates are sure to be significantly
inaccurate. In the case of truly new technologies and markets that
have yet to be developed, the level of uncertainty is far greater. It is
not rational to expect certain quantitative outcomes from a
fundamentally unpredictable situation.
Purposes of New-Venture Plans versus Traditional Plans
A new venture can be regarded as a project that must be funded,
and therefore, an initial objective of the business plan is to sell the
investor, the corporation itself. The plan must provide a basis for
determining whether to invest, and it is almost always evaluated in
competition with other proposals.
The outstanding and distinguishing purpose of a new-venture plan
is to learn whether and how to conduct the new business, and such
a plan can be designed to ensure that the necessary learning occurs.
Other purposes of the plan are to
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attract key personnel, apprising them of where the venture is
intended to go and how it will get there, and to stimulate
contribution to and implementation of the plan.
These purposes are quite different from those of a plan for an
established businesswhere the nature of the business is clearly
defined, where the unit's managers have developed the ability to
work together as a team, where the risks have probably already
been identified and managed to some degree, and most important,
where the premises and assumptions on which the business is based
have long since been identified and tested through experience.
The most important difference of all is this: The plan for an
established business is designed to produce predictable
performance extremely accurately, with the actual performance
record being used as a basis for evaluating the business's
management and with people being rewarded or punished based
largely on how close they come to fulfilling the plan. In contrast, a
primary purpose of the plan for a new venture is to help get the
business going in a situation in which predictability is virtually
impossible because the business has no history, the people are new
to the particular project, and the plan must be based mainly on
assumptions rather than facts. Since an established business has a
past, it possesses a wealth of information regarding existing
customers, known competitors, and previous levels of sales and
profit. Hence, when such a business and its environment are
relatively stable, business planning is more straightforward, and
there is every reason to expect performance according to a well-
developed plan.
The Feasibility of Effective New-Venture Planning
Given the formidable difficulties of creating a credible new-venture
plan and the virtual certainty that the plan will be inaccurate in
many respects, some may wonder whether such planning is
actually necessary and, if so, whether it can be done effectively. In
our view, new-venture planning is
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both absolutely essential and entirely feasibleassuming managers
abandon traditional notions of planning as if for an established
business. Although planning is possible, a high degree of long-term
predictability cannot be achieved, at least not in a venture's early
stages. The actions to be taken are predictable, and in a broad
sense, their probable outcomes are reasonably predictable, but
precise outcomes certainly are not.
In short, a new-venture plan is not a static document designed to
enable the parent company to accurately forecast results. Rather, it
is a dynamic tool designed to enable the company to determine
whether the proposed business is possible and worth the effort and,
if so, to yield the knowledge the firm needs to run and build the
business while its operations are actually under way.
Because new ventures face a relatively unknown and unstable
environment, they must deal with shifting assumptions, and in the
case of new businesses, these assumptions take the place of a track
record. In a venture's early stages, the plan provides a strategy for
testing these assumptions. As the venture develops and information
is compiled, assumptions are altered, with many of them ultimately
being replaced by factsa process that gradually leads into more
traditional planning.
The Recommended Planning Process
The process that should not be used is for senior management to
request a business plan immediately after a venturable idea is first
discussed.
The recommended process is based on the concept that a new-
venture plan must evolve in a corporate setting. The first step
leading toward a business plan is the opportunity identification and
evaluation process described in Chapter 4, which is followed by
feasibility evaluation, product development, pilot operations, and
market testing. During the course
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of these steps, more and more facts are learned, and initial
assumptions are verified, modified, or dropped. Before the
company makes a major investment in a new business, a formal
and reasonably complete proposalthe document generally referred
to as ''the business plan"is warranted and needed. But because this
document will still contain major assumptions that have yet to be
tested, it will need to be changed as experience is gained. Thus, the
planning process will continue throughout the first phases of the
new venture's development until the business becomes somewhat
established.
The planning itself must be done by the venture team. For its part,
senior management must understand the dynamic nature of the
new-venture planning process and encourage venture managers to
make appropriate changes to the plan rather than pressuring them
to fulfill initial projections that are no longer valid.
Elements of a New-Venture Plan
In addition to an executive summary, a new-venture business plan
should contain the following major sections:
1. Description of the proposed businessprecisely what it will do,
including its unique characteristics and clear objectives
2. Strategic relationship between the new business and the parent
firm
3. Target marketsincluding their description and size, market
trends, why customers will buy, and the specific accounts to be
targeted initially
4. Present and anticipated competitionincluding the identity of
specific competitors and their characteristics, competitive
advantages, and market share
5. Go/no-go assumptions and the basis for them
6. Definition of failure
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7. Action plans and objectives, with defined milestones designed to
test the go/no-go assumptions in each functional area
8. Necessary resourcesmoney, physical, and humanand how they
will be acquired
9. Principal risks and how they will be managed
10. Sensitivity analysisan assessment of how certain contingencies
might affect the venture
11. Financial projections and objectives, together with the
assumptions on which they are based, including profit and loss and
cash break-even points
12. Description of the venture's management and the compensation
methods that will be used
A number of these sections require no further explanation here,
since they involve topics discussed in earlier chapters. However,
most venture plans and planning guides we've seen do not include
sections on the definition of failure, go/ no-go assumptions, and
action plans with milestones; they also tend to be casual about
identifying the principal risks and how they will be managed and
frequently omit sensitivity analysis.
Such omissions and oversights are understandable when people are
competing for funds and may therefore have an incentive to gloss
over certain aspects of a proposal. But unless senior management
insists on the inclusion of the aforementioned topics (which are
discussed in the following subsections) and then uses that
information to decide which projects to support, it will make very
costly errors in selecting projects and venture management.
Definition of Failure
The plan's section on the definition of failure should simply
describe the conditions under which the project will be dropped,
liquidated, or otherwise disposed of. The most valid condition is
when the fundamental assumption on which the
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business idea was based has become untenabledue, for example, to
a technological leapfrog by the competition, the disappearance of a
need, or a change in a government regulation that makes the
business uneconomic or even illegal. The least valid condition
(albeit a very common one) for terminating a project is the failure
to achieve a specified economic objective within a prescribed time
periodeven though the factors that produce the opportunity remain
unchanged and the opportunity itself still exists. That kind of
"failure" may simply reveal an inability to make accurate
predictions or a need for the firm to either change its approach to
the business or obtain allies to share risks and losses.
Principal Risks and How They Will Be Managed
The primary areas of risk are financial, technological, market, and
management. An example of a financial risk would be the cost of
building a factory in anticipation of a demand that has yet to
materialize. One way to manage such a risk would be to outsource
the product until an appropriate level of demand has been achieved
and then build the factory. Although technological risks cannot
always be managed, approaches that may minimize such risks
include continuing to develop existing technology, licensing
potentially competing technologies, or establishing a sufficiently
strong patent screen.
Sensitivity Analysis
Sensitivity analysis is the "what if" section of the plan, and the
technique for performing this analysis is well known. For example,
in a new-venture proposal for a medium-sized company that
involved a major capital expenditure requiring borrowed funds, the
following questions were asked: How much would projected sales
have to drop before the firm would become unable to repay the
debt on schedule? If gross
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margins dropped by specified amounts, how would cash flow be
affected? The key to sensitivity analysis is to avoid generating
pages and pages of unintelligible Lotus printouts that no one will
read and instead focus on a few realistic possibilities.
Go/No-Go Assumptions
Behind any new business, there are a wide variety of assumptions,
both about the business itself and about the environment within
which it will operate. Assumptions must be made regarding the
following areas:
· The market: growth rate; size; target segments; factors affecting
purchase decisions; usage levels; the effectiveness of distribution
channels; sales closing time; order size; marketing costs; marketing
mix requirements; pricing; distribution costs
· The product: functions; competitive advantages and their
duration; service requirements; switching costs; quality level;
quality control limits; potential enhancements and extensions;
costs; materials; availability of labor and skills
· Technology: development time and costs; scaleup time and costs;
proprietary protection; ability to coordinate with marketing and
manufacturing; availability of required know-how
· Economic: break-even point; upside gain; downside risk; dollars
needed to reach cash break-even (fixed assets, startup costs,
operating negative cash flow) or profit break-even; margins; all
cost categories; age of receivables and payables; financing method;
interest rates
· The competition: present and future; timing of expected responses
in the areas of quality, pricing, service, delivery, marketing
strategy, and product characteristics
· The organization: financial and nonfinancial support,
 Page 171
including limitations on the use of organizational funds and time;
freedom of action; staff interference or support; availability of an
executive champion; political protection; satisfactory compensation
and incentives for venture team members; cooperation from
existing operations when needed; control of publicity
· The environment: government regulations; international relations;
trade and business barriers and opportunities; social and lifestyle
trends; probable major technological changes; industry
restructuring; internal organizational limitations and opportunities;
takeover effects
Why so much emphasis on assumptions? Essentially, every new
venture is an industrial experiment (with the assumptions being the
hypotheses), and the experiment must be designed to ensure that
these hypotheses are tested.
We define a go/no-go assumption as a hypothesis which must be
correct in order to justify getting into the business at all, that is: If
correct, it's "go" and if false, no-go." These and other key
assumptions are the basis for the planning of the business. Changes
in these assumptions based on emerging facts must be examined to
decide whether to redirect the business, change the plan, or abort
the effort entirely. Therefore, managers must not only articulate the
important assumptions, especially those on which the existence of
the business depends, but also develop a business plan which
includes actions for the purpose of testing those assumptions, even
if those actions have no other purpose than that test and thus force
learning to occur.
What's the best way to do this? Scheduling periodic reviews of the
venture's progress can lead to learning. But this approach does not
reflect the importance of completing actions and events in a
required sequence nor of completing actions that have been
deliberately designed to test critical assumptions.
It is very difficult for new businesses to grow in an efficient and
orderly manner. Development costs are often in-
 Page 172
curred before a concept is tested; plants may be built before
development and pilot operations are completed; and marketing
programs begin before product is availableall of which can result in
high cash burn and enormous losses. Competitive pressures
sometimes necessitate such chaos, but that is not always the case.
Like any complex project with many unknowns, ventures benefit
from critical path milestone planning, as was the case with
America's lunar exploration and landing program. This planning
method identifies the actions, event completions, and results
required in the sequence requiredi.e., the completion of each event
is linked to previous events whose completion was a prerequisite to
it and to future events that depend on its satisfactory completion.
Viewed in this manner, it is obvious that new-venture plans must
be changed to reflect what is learned at each milestone and to
ensure that necessary sequences are maintained. This does not
mean that the venture's central objective must be changed
(although it might), but that its pace, direction, actions, and
schedules are very likely to be changed, along with the projected
numbers related to time. Nor does this mean that periodic budget
reviews should be completely abandoned, but the primary
emphasis must be on learning and on modifying plans and budgets
based on the completion of planned events.
In certain cases, it may be crucial for the schedule to become a
driving force if time demands make parallel activity essential. A
limited window of opportunity, a contractual obligation, an
anticipated change in regulations (particularly involving taxation),
or a competitive race for market position may dictate that the firm
take more risk than would otherwise be desirable. The firm may
have to compromise the assumptions-testing process and simply
gamble on some key assumptions' being right, trusting that the
required events can occur on time.
The following example illustrates the risks inherent in such an
approach: A new venture was initiated to produce a computer
enhancement component. According to the busi-
 Page 173
ness plan, development would be completed in March of 1987, the
manufacturing plant would start up in September of that year, and
marketing would begin nationally in October. Development had
been under way for some time prior to 1987. Because training time
was needed for the marketing people, and offices were required in
a number of locations, the company began to employ sales and
marketing people in June 1987 and had opened offices by
September. Land was acquired for the projected plant as well.
Here's what actually happened: Development was completed in
October of 1987 rather than March. The company was unable to
obtain zoning approval for the plant, which could not be built on
the land it had acquired. The marketing people were hired,
however, and the offices opened. The cash burn rate was $500,000
per month. When the product was finally developed, the company
had to have it assembled by an outside supplier, and sales were at
last able to beginin March of 1989.
We are unable to judge from our vantage point whether this
business was actually faced with a clear-cut choice between using
such an approach or losing the opportunity, but we do know that
the venture management group did not consciously consider the
choice in those terms. The moral is: "Don't let time pressures
dictate planned actions unless external factors make it
unavoidable."
Building Assumptions Testing into the Plan. In our investigations
of underlying critical assumptions that companies have made about
new ventures, we have found that management often: (1) makes
unconscious assumptions, (2) makes conscious assumptions but
fails to articulate them, (3) fails to test articulated assumptions, and
(4) fails to use the results of assumptions testing to change plans.
(See Figure 7-1.)
When a company makes any of these oversights, it loses the
underlying premise for rational new-venture control, which can
result in spectacularly expensive failures. Chapter 9, "Controlling
the Venture," provides dramatic examples of this point.
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Figure 7-1:
The Process of Recognizing, Articulating, and Testing Go/No-Go
Assumptions and Making Necessary Changes
 Page 175
Business plans must include built-in, systematic methods for
identifying and testing assumptions, particularly go/no-go
assumptions. The lengths to which an organization should go in
testing these assumptions are determined by the potential
significance of the risks and rewards associated with the venture
and the timing needs.
At each stage of the venture development process, managers must
ask the following questions about their assumptions:
· What is the current basis for this assumption?
· How can this assumption be tested?
· Would the business be pursued if the assumption turns out to be
incorrect and is not replaced either with facts or with a new
assumption that, when tested, justifies pursuing the business in one
form or another?
Checking for Hidden Assumptions. In any new business, there will
always be unarticulated or unconscious assumptions. The more
these hidden assumptions can be ferreted out, the less likely it is
that the new business will be blindsided by one of them.
Pinpointing these hidden assumptions requires vigilance and
consultation with people who are knowledgeable about the
business, the industry, and the organization but are not directly
involved in the new venture. They can be asked, "Do you see us
making any unstated or implicit assumptions whose validity is
fundamental to the venture's success?"
In its oil shale venture, which resulted in a $4-billion loss, Exxon
made the articulated go/no-go assumption that the price of oil
would stay at more than $35 per barrel and wisely exited when the
price dropped, invalidating that assumption. But Exxon also made
the unconscious assumption that conservation efforts would have
no significant effect on the demand for oil and that OPEC would
continue its monopolistic control of oil production. If the
assumption about the effects of conservation measures had been
articulated and tested, perhaps by tracking what was happening to
demand,
 Page 176
Exxon might have been able to make a much earlier and less
expensive exit.

Using Milestone Planning

Figure 7-2 shows the stages through which a venture may pass on
its way from idea to established business. In milestone planning,
our objective is threefold: (1) to relate each stage to the
assumption(s) that can be tested at that stage, (2) to plan actions
that might not otherwise occur in order to test assumptions that are
important to the venture's success, and (3) to plan actions in a
critical path so that the feedback from earlier actions can be used to
modify later ones.
Although each venture has a unique pattern of growth and
development, many stages are common to all ventures, and we will
regard them as potential milestones for assumptions testing, as
shown in Figure 7-2 and described in the following subsections.
Each of these milestones gives the company an opportunity to
decide whether to continue with the business as planned, redirect
the effort, or bow out. Milestones 1 through 6, which are
substantially investigative, offer the best opportunities for testing
the assumptions, refining them, and learning.
At each stage, venture managers should ask the following questions
about the new business:
· What assumptions did we make?
· How have they changed?
· In light of these changed assumptions, what actions do we need to
take (including abandoning the idea)?
Milestone 1: Completion of Concept and Product Testing
Product testing, which can sometimes be done with a low-cost
model, gives the firm an opportunity to test the idea before getting
into more expensive product development with
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Figure 7-2:
Milestones and Events for Assumptions Testing
 Page 178
a fully developed or engineered prototype. If a model can't be
created and product development is expected to be expensive, then
the concept alone can be tested. This testing can validate or alter
the assumptions that have been made about who is likely to buy
and why, assuming specific product characteristics and anticipated
price. In the case of an industrial product, early and direct
discussions with potential customers can help the company
formulate a project in such a way as to increase the likelihood of
the product's acceptance. Without such discussions, the company
will have to make assumptions about the customers and their
needs, spend lots of money on development, and then hunt for uses
that may not be found or may take too long to develop.
Of course, customers don't always know what they need. Some
needs are so profound that consumers may be unaware of them
until they are presented with potential solutions. Examples include
telephones, televisions, gene splicing, semiconductors, transistors,
and other major technological innovations that have changed both
industries and the world. Firms that attempt to develop products
like these must recognize the assumptions they are making and
realize that it takes deep pockets and a great deal of time,
persistence, and patience for such projects to succeed.
These technology-driven, high-impact, and high-risk projects
should be consciously labeled as such and treated differently from
typical new businesses. These are the ventures that can be
enormous winners or losers. Like any highly volatile substance,
they should be handled with care. It is especially important in such
projects to plan for the earliest possible testing of concept
acceptance and to obtain input from potential customers in shaping
the venture's objectives. Unavoidably, these events will probably
occur only after significant R&D money has been spent.
The concept- and model-testing stage provides the first data for
verifying assumptions about the target market, reasons for
purchase, and required product or service characteristics. The
importance of such testing in evaluating ideas is illustrated by the
experience of a food company that supplied
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prepared doughnut mixes to bakers. The firm's R&D department
believed it would be possible to produce a doughnut significantly
lower in fat and calories than the usual product, and in the mid-
1970s, the firm attempted to develop such a product. But since
development costs would have been significant to the company, it
assembled a focus group from the target market to pretest the
concept. The group's response was overwhelming: ''It's impossible.
Such a product couldn't be tasty." This led to the assumption that
consumers might purchase a good-tasting, low-fat doughnut if it
could be developed.
The company could have acted on that assumption by abandoning
the idea or by proceeding, at great expense, with development,
assuming that once consumers tasted the product, resistance would
melt. But instead, the company did another concept test. It
repackaged existing doughnuts with very high consumer
acceptance in dummy cartons that presented them as low-fat and
low-calorie and then offered them to another focus group. The
group judged the doughnuts to be poor-tasting, confirming the
earlier opinion that such a product couldn't possibly be any good!
Therefore, the revised assumption was that the market would not
immediately accept any such product labeled low-calorie and low-
fat. Realizing that it could spend an awful lot of time and money
trying to convert attitudes, the company dropped the project. (Since
then, however, consumer preferences have shifted, and many
products engineered for lower fat and calorie contente.g., frozen
desserts, salad dressings, "cheeses"have been introduced and
successfully marketed.)
Upon completion of concept and product testing, the company can
make one of the following decisions: change the concept and retest
it, put the project on the back burner for later consideration,
abandon it, or proceed with a feasibility study, including prototype
development. The back-burner option is appropriate if the reasons
for postponement involve lack of market and technological
readiness. When the company determines that the reasons for
postponement have been overcome, the project can be brought
back on line.
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Milestone 2: Completion of the Feasibility Study
The feasibility study helps the company improve the determination
of whether the business's objectives are achievable and whether the
underlying assumptions should be changed. Whereas the concept
test is an initial examination of the likelihood of market interest,
the feasibility study, at the very least, should provide the
information needed to develop a business plan, if the results
warrant doing so. The feasibility study is designed to enable the
company to estimate or determine what it will take in time, money,
and people to develop the product or service; possible material,
production, selling, and service costs; selling prices; competitive
offerings and the venture's possible competitive advantage;
physical resources needed to get into production; the range of
investment (preliminary estimate); possible formats; the
availability of needed supplies and potential suppliers; and the
availability of distribution channels.
The completion of the feasibility study should enable the company
to make a more objective estimate of development time and costs,
the functional characteristics and probable quality level that can be
achieved, and possible competitive advantage and also give it some
idea of production costs.
Milestone 3: Product Development
Since product development almost always takes longer and costs
more than planned, it is particularly important to establish
submilestones within the product development phase itself and to
review assumptions at each of these intermediate milestones.
This frequent monitoring is essential to minimize the risks of losses
at this stage. For example, a medium-sized machinery
manufacturer saw an opportunity to develop a device that would
turn out 40 widgets per minute. It would carry a price tag of
$40,000 and yield a 25% ROI to the widget producer. The
feasibility study indicated that the machine
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could be developed for $150,000 and that there was a probable
market for 100 machines per year at $30,000 apiece. Production
costs were estimated at approximately $12,000 per unit. Based on
these data, the company decided to proceed with development.
After spending about $60,000 on design costs, the firm learned that
the device would require metal with different characteristics than
had originally been assumed, raising material and machining costs
to $25,000 per unit (and boosting the price tag to $60,000 per unit).
It also learned that development costs would hit $400,000.
Clearly, the entire venture required re-evaluation. What was the
market for machines costing $60,000 instead of $30,000? Should
the production rate objective be altered? Again, the fundamental
questions had to be asked: Shall we redirect the effort, abandon it,
or proceed with no change in direction, timing, or planned action
sequence? In this case, the project was ultimately abandoned, since
it was clear that there was no significant market for the higher-cost
machine.
The product development phase is a time when managers can also
test assumptions about the product development strategy itselfthat
is, the magnitude of the undertaking and the product characteristics
to be achieved. Canon's entry into the personal photocopier market
is an example of a major effort to develop a new market for
copiers. Because the potential market was so large and copier
competition so strong (i.e., from Xerox, Minolta, and Kodak), the
high risk of a development effort involving more than a thousand
engineers over a five-year period was considered well worth
taking.
The Canon case is also an illuminating example of a development
strategy involving the reassessment of assumptions. The basic
problem was to develop a product with minimal service
requirements because of the impracticality of providing service to
the target market. In order to solve this problem, every feature of
both existing products and the production process had to be
reassessed. In the Canon case (Nonaka and Yamanouchi 1989), the
copier's entire design concept was changed to minimize service
requirements. At
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the same time, design was integrated with production to ease the
design-to-production transition. As firms seek to reduce product
development cycle times, they are increasingly employing this
strategy of expanding development teams to include those who will
be responsible both for designing and operating the production
processes and for marketing.
To apply the lessons from product development, venture managers
must answer the following questions:
· What assumptions did we make about development time and
costs, and how have those assumptions changed? Why?
· What impact should those changes have on plans and timing with
respect to new hires, plant construction, or marketing? How do
they affect needs and timing with respect to financing?
· What has been learned about the costs and availability of labor,
materials, and equipment, and how does this affect pricing plans?
· Do the observations and assumptions about the target markets still
hold? If not, how have they changed, and how should those
changes affect plans for each succeeding event, with respect to
objectives, timing, and resource utilization?
· Do the product's characteristics fit the original concept and plan?
Have any new opportunities been identified? How should actions
be modified as a result?
· Are assumptions regarding significant competitors and the
characteristics of competitive products still valid?
· How should investment requirements be changed?
· Are assumptions about suppliers and distributors still valid?
Milestone 4: Pilot Testing
Feasibility testing and product development provide many answers
needed to validate assumptions, but until the
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product or service is actually produced, those answers are still
theoretical. The pilot-testing stage will provide hard information
about the suitability and costs of materials, processing costs and
skills, investment requirements, personnel training needs, reject
levels and costs, quality control requirements, the uniformity of
materials from suppliers, supplier reliability, processing
specifications, and maintenance requirements.
In the pilot phase, products are sometimes found to have
unsuspected values. One such case occurred during the
development of a process for producing onion rings from diced
onions. Pilot testing revealed that the product was much more
durable than expectedso much so that hand packaging, the industry
standard, was not required. This discovery made it possible to use
fully automated packaging at drastically reduced costs, thus greatly
increasing the economic value of the process, which was to be
licensed to frozen-food manufacturers, and justifying much higher
royalties than had been considered likely. Furthermore, the
product's stability made it feasible to employ transparent film
packaging, which made the product more attractive to consumers
and resulted in a significant expansion of the consumer market for
onion rings.
Milestone 5: Market Testing
Market testing is the time to examine assumptions about the
venture's target market. It is also a critical turning point, because
from here on out, investment in the venture increases
exponentially.
The questions that venture managers must ask at this stage are:
· Have target market customers demonstrated that they'll buy the
product? With what frequency? Why? Why not?
· Is the product really different from and superior to the
competition?
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· Are the pricing assumptions still valid in light of emerging
information about costs?
· Does the product perform well in various field applications? What
problems are occurring and why? What are the positive surprises,
and how can they be exploited?
· How should estimates of achievable market share, size, and target
markets be modified?
· Are servicing assumptions accurate?
· What impact does the foregoing information have on planned
goals, actions, and timing?
Milestone 6: Production Startup
The production startup milestone tests the revised assumptions
about production resulting from pilot testing. The sequence and
timing of planned actions should provide for changes in those
assumptions, particularly with respect to marketing actions,
commitments to customers, and rigidity of pricing. The failure to
build in some time between production startup and delivery may
result in excessively high startup costs due either to high reject
levels or to attempts to squeeze production out of a plant or
services out of a service organization before the facility is fully
ready. Planning for production startup can best be managed by
making a separate critical path milestone plan for the startup and
by providing for the accumulation of a specified quantity of
inventory before shipments begin.
At this stage, it is critical to compare production costs and quality
levels with the cost and quality profile of competitors. After
constructing a cost profile of its competitor in a developing new
market through product analysis, supplier information, trade
journal articles, and company annual reports, a packaging
manufacturer learned that its costs were, and would continue to be,
higher because the competitor had the advantage of a proprietary
production process. As a result, the manufacturer decided that it
needed to utilize its
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greater flexibility, rapid changeover capability, and higher quality
to compete on the basis of fast delivery (and hence, lower
inventory requirements for customers) plus superior quality. With
this approach, it is now successfully building a significant share of
this new market.
Milestone 7: Bellwether Sale
The bellwether sale is the first substantial sale to a major account.
The business plan should specify the first five sales that will be
made, identifying target accounts by name, and at least one of them
should be a potential bellwether account. In the case of an
industrial product, the target should be a respected leader in the
industry; in the consumer product area, it should be a respected
leader in retail marketing or distribution, such as a top supermarket
chain for a food product. Establishing credibility is crucial for the
new venture's success, and there are few better ways to build that
reputation than by selling to an account whose very act of buying is
a statement of belief that the new entrant has something significant
to offer.
The bellwether sale will tell venture management how the product
really compares with the competition, whether its characteristics
and functions are significantly superior, what the service
requirements are likely to be, whether a satisfactory level of quality
control has been achieved, and whether the selling methods need to
be altered.
Milestone 8: First Competitive Response
Although a company has no way of knowing in advance exactly
how the competition will respond to a new product or service, it
can envision possible alternatives and design tests to evaluate them.
It is worth real effort and self-discipline to answer such questions
as: Which competitor(s) will be hurt the most by the new product?
What are the
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strengths and weaknesses of the competitor(s) that will be most
significantly affected? How would our firm react under similar
circumstances? What information is available on previous
competitive responses to threat?
Competitors have various options for responding, which include
lowering prices, controlling the supply of a critical material,
closing off vital distribution channels, adding features that the new
product lacks, stealing key people, or initiating a lawsuit (valid or
not).
What can your firm do to prevent or counteract the competitive
response? Much can be learned from the experience of the GD
Company, which supplies materials to chemical manufacturers. GD
developed a new process for producing a commonly used material.
This processwhich did not require, but could use, GD's raw
materialswas patent-protected, and GD decided to license the
process nonexclusively. A royalty percentage plus an initial
payment and a minimum license commitment period were
formulated.
GD did not know what its major competitor's response would be
but was concerned about it, particularly because of the royalty
level. To smoke out competitive reaction, GD presented its
program to a very loyal customer of the competitor with which it
had little or no hope of doing business. The customer quickly
notified GD's competitor, which advised the customer that it would
be able to supply a royalty-free alternative in 90 days. Given this
information, GD altered its program by eliminating the minimum
commitment period and guaranteeing return of the initial payment
if the licensee chose to replace the program with that of a
competitor within a six-month period. This action completely
blocked the competitor's attempts to stop GD's progress. Although
the customer first approached by GD never became a licensee, the
information GD obtained in dealing with it proved extremely
helpful in marketing the process to other customers.
Although a company may not always be able to get a competitor to
tip its hand as GD did, it can conceive possible competitive
responses to the new product or service. In at-
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tempting to answer key questionse.g., What might the competition
do? How can we find out? How can we prevent or counteract it?the
firm can plan actions to elicit competitive response.
The alternativeseither blithely assuming superiority over the
competition or sitting back and waiting without making any effort
to learn and devise contingency planscan be very dangerous. A
financial services company found this out when it introduced a new
service that offered protection to large-scale bond investors.
Although the service had a significant drawback, in that it failed to
provide investors with hard-copy confirmation, it was very useful
and at first grew rapidly without competition. However, a
competitor subsequently introduced a similar service that included
hard-copy confirmation, which customers wanted, as the originator
of the service was aware. This improvement allowed the
competitor to obtain leading market share. Too late, the first firm
chased after the competition in an attempt to catch up, but failed
and is now a secondary provider.
Milestone 9: Reaching Break-even Volume
A new venture's break-even volume often turns out to be greater
than plannedassuming it is planned at all. If a company lets events
take their course and then learns that the planned break-even
volume is too low, it ends up either scrambling to learn why or, as
so many firms do, just recalculating a higher break-even point.
Clearly, it is preferable to avoid this scenario by testing
assumptions that can affect the break-even volume. Assumptions
about costs and losses should be examined at intermediate volumes
such as 25%, 50%, and 75% of planned break-even (or at any
intervals that make sense for a particular venture) and testing built
into the business plan.
A common source of miscalculation and delay in reaching break-
even and profitability is the company's assumption
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regarding the time interval between the initiation of a sales effort
and its consummation. (And in some markets, overly optimistic
assumptions regarding how quickly customers will pay have
resulted in entirely unrealistic time estimates for cash break-even,
as has occurred with businesses based on the hospital market,
where payment tends to be very slow.) Among the major factors,
usually uncalculated, that cause delays in achieving break-even are:
the risk to customers in switching to the new product/supplier,
actual switching costs incurred by customers, customers' internal
timetable for when funds are budgeted for the category of product
being offered (capital equipment, for example), unexpected service
requirements, customers' internal approval process required for
selecting a new product or an alternate supplier of a product, and
reorder cycle.
If the corporation has done its homework, if it has carefully
identified the important assumptions and used milestone planning
and evaluation up to this point, it will have recognized many of
these potential challenges long before it reaches this final
milestone. In fact, a number of them will have emerged during the
feasibility study and plan preparation and particularly during the
market-testing stage.

Strategic Choices for Entering the Market

When should a firm plan to enter a new business on a large scale
aggressively, taking high risks, and when should it plan to make a
slower, less aggressive entry? Although milestone planning is
desirable and necessary in either case, there are circumstances in
which timing requirements may force the company not only to
abandon the critical path approach, but also to enter the market
with maximum effort and resources in order to reap potentially
high rewards, or to protect its existing market position.
 Page 189
The following guidelines can help a company decide on the degree
of aggressiveness appropriate to an individual venture.
For maximum aggressiveness (i.e., high expenditure and effort in
every areainvestment in facilities, marketing, development):
The market is established and growing or emerging with great
potential and is highly competitive; resources are ample and
affordable; salience to the firm is high; diversity from the existing
business is not great; competition is strong or potentially so;
proprietary protection is present; the corporate culture is
supportive and not excessively risk averse; a large critical mass is
needed in order to start the venture.
For minimum aggressiveness:
The market is in an early state of development, its rate of
development is unpredictable, and the firm does not have the
resources to persevere, or the market is a niche market; resources
are relatively sparse and early large losses are not affordable;
salience to the firm is relatively low; diversity from the existing
business is significant; competition is not present or weak; there is
strong proprietary protection; the corporate culture is risk averse,
not strongly committed to venturing; a large critical mass is not
necessary in order to start the business.
Any one or a combination of these factors may be sufficient to
dictate the level of aggressiveness of entry. For example, if the firm
is highly risk averse and uncommitted to venturing, it is foolhardy
to enter at the maximum risk level inherent in an aggressive mode.
Similarly, a resource-limited firm without a major sustainable
competitive advantage in its new venture would be foolish to
aggressively enter a slowly emerging market with major potential
which will attract powerful competition with deep pockets.
What the company should avoid is selecting an entry strategy that
disregards the critical factors of market, competition, and risk
affordability, or simply assuming that success is dependent on
maximum aggressiveness of entry.
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Creating and Evaluating the New-Venture Plan

This section provides short overviews of the processes used in
developing and evaluating a new-venture business plan.
Action Steps for Planners
The following list summarizes the key steps to be taken by venture
managers in developing a business plan:
1. In the business plan, identify the important events and actions
that must occur in order to achieve the venture's objectives.
2. Determine which events or actions are prerequisites to othersthat
is, establish the necessary sequential links between events or
actions.
3. Develop a critical path milestone chart that displays the
sequence graphically.
4. Identify the significant, go/no-go assumptions on which the
venture's success depends.
5. Ask whether the events or actions on the milestone chart will test
each of the critical assumptions. If not, design one or more testing
steps and insert them into the chart. Specify the information needed
to validate each assumption and how it will be obtained.
6. As each event occurs and assumptions are replaced with facts,
review planned future events, changing their nature and sequence
as necessary.
Evaluation Questions for Senior Managers
The key questions senior managers must ask in evaluating business
plans are:
 Page 191
· Does the business fit the firm's strategy?
· Does the plan clearly specify the critical assumptions being made
about the market, competition, costs, product or service functions,
pricing/margins, investment and timing requirements, and
regulatory and environmental factors? Are actions planned to test,
or achieve control of, each of these assumptions?
· Does the plan state the potential downside risk and upside gain?
· Does the plan clearly define financing triggers?
· Are success and failure defined?
· Does the venture's proposed format meet the needs of the new
business and provide the resources (people, knowledge, physical
requirements, money) necessary for its success? (Refer to Chapter
3 for a discussion of establishing a good match between venture
needs and corporate capabilities.)
· Have relevant internal and external political factors been
considered?
· Does the plan provide a credible possibility of achieving the
promise that led the company to investigate the business idea in the
first place?
· Is the management team capable of supplying the factors needed
for the venture's success?
Conclusion
New-venture plans are based largely on assumptions rather than
facts. If these assumptions are unknown or untested, the parent
company can spend a lot of time and money to find out that it is
headed in the wrong direction. For that reason, effective new-
venture plans must include activities designed to test the critical
assumptions underlying the effort.
Since many of these assumptions will prove to be inaccurate, the
business plan will have to be revised on an ongoing basis to reflect
new information. Such changes may involve
 Page 192
sequences of actions, timing, funding, target markets, pricing,
intensity of effort, and possibly abandonment of the venture.
Because it is based largely on assumptions and not facts, new-
business planning must necessarily differ from planning for
established businesses. Venture managers and their senior
management must clearly understand and accept these differences
or pay the penalty of misguiding new ventures to expensive failure
or only limited success.
The point is to build a business if possible, not to adhere
obstinately to a plan conceived in ignorance and preserved intact
no matter what is learned along the way.
Guidelines
1. Since the first rule of new-business planning is that plans and
results almost never match, recognize and accept the fact that plans
will and must be changed.
2. Articulate, understand, and test the critical assumptions on which
the new venture is based.
3. Include in the business plan actions and events deliberately
designed to test critical assumptionsthat is, make sure the plan
provides for learning as well as doing.
4. Because the results of assumptions testing may dictate changes
in the nature and sequence of future actions, use the critical path
approach for action planning, in which certain actions must be
completed before subsequent actions based on their outcome can
begin.
(Note: Guideline 4 does not apply in cases where a company must
undertake a high-pressure race to market in order to achieve share
or preempt competitive entry and where the potential stakes are
high enough to warrant taking the greatly increased risk of
abandoning a more systematic and cautious approach.)
 Page 193
5. In preparing a new-venture plan, focus primarily on event
completion, not strict adherence to schedulesunless analysis of
competitive factors indicates that a specific time is of the essence.

References
Bangs, David, Jr. 1988. The Business Planning Guide. Dover, NH:
Upstart Publishing.
Brandt, S. C. 1986. Entrepreneuring in Established Companies.
Homewood, IL: Dow Jones-Irwin.
. 1987. Strategic Planning in Emerging Companies, Chapters 6 and
7. Reading, MA: Addison-Wesley.
Burgelman, R. A., and Sayles, L. R. 1986. Inside Corporate
Innovation. New York: Free Press.
MacMillan, I.; Block, Z.; and Subbanarasimha, P. N. 1986.
''Corporate Venturing: Alternatives, Obstacles Encountered and
Experience Effects." Journal of Business Venturing 1, no. 2
(Spring): 177-192.
Nonaka, I., and Yamanouchi, T. 1989. "Managing Innovation as a
SelfRenewing Process." Journal of Business Venturing 4, no. 5
(September): 299-315.
Sacher, W., and Wolterbeek, M. 1987. "A Comparison of Venture
Capital Backed Business Plans versus Business Results." Applied
Business Project Report. Graduate School of Business
Administration, New York University.
Timmons, J. A. 1990. New Venture Creation, 329-397. 3d ed.
Homewood, IL: Dow JonesIrwin. (This book is particularly
recommended for its detailed instructional material and good
examples.)
Welsh, J. A., and White, J. F. 1983. The Entrepreneur's Master
Planning Guide. Englewood Cliffs, NJ: Prentice-Hall.
 Page 195

8
Organizing the Venture
This chapter addresses the two key decisions in venture
organizationnamely, the venture's focal activity (i.e., the
fundamental activity that drives the rest of the activities in the
venture) and the key linkages that should be established between
the venture and the rest of the organization. The crucial variable
that shapes these two organizing decisions involves the degree to
which the venture's product, market, and technology are related to
the parent organization's product, market, and technology. The
more unrelated the venture, the greater the learning challenges
facing the firm; the more related the venture, the greater the
potential for capturing know-how available within the organization.
The different combinations of product, market, and technology
relatedness give rise to seven distinct types of ventures, each with
its own unique pattern of learning challenges, opportunities for
capturing know-how, and potential for the
 Page 196
venture to intrude into various aspects of the parent firm's ongoing
operations. The guiding principles for organizing ventures involve
designing the focal activity with the aim of meeting the learning
challenges and designing linkages with the rest of the organization
with the aim of capturing know-howbut without permitting the
venture to intrude excessively into the established business.
As we argued in Chapter 7, "Developing the Business Plan," the
key to venturing success is to focus on learning on converting
initial assumptions into commercializable knowledge. In
organizing a venture, learning remains the primary challenge, and
the new business should therefore be organized in such a way as to
maximize learning.
For the purposes of discussing venture organization, let us define
learning as "the process of obtaining information and discovering
solutions to problems." This includes developing the capability to
identify and solve problems "automatically," as a matter of
organizational routine. Thus, all ventures have major learning
requirements associated with them, for until a venture has
pinpointed the problems facing it, and developed and fine-tuned
protocols and procedures for solving these problems, it has little
hope of reaching a state of sustained growth and profitability. The
challenge for the venture manager is to organize the new business
in a way that enables such learning to be achieved as rapidly as
possible.
At the start of the chapter, we said that organizing a venture
involves two major sets of decisions: (1) what the focal activity
will be and (2) what the linkages between the venture and the
parent firm will be. Before we begin a detailed discussion of how
to organize a venture, however, it would be productive to briefly
consider some key principles for deciding on focal activity and
linkages:
· Decisions on focal activity: The firm must determine which
activity (development, production, or sales/service) should be the
venture's focal point and major driver, which is determined by what
major challenges must be met if the venture is to succeed. For
instance,
 Page 197
if the major challenge facing the venture is to understand and enter
a new market, then the focal activity will be dedicated sales and
marketing.
· Decisions on linkages: The firm must exploit and capture existing
corporate know-how that may be useful to the venture. Therefore,
it is important to establish mechanisms to link the venture's focal
activity with those parts of the organization that possess the
required expertise.
Furthermore, in any venture, there will always be unanticipated and
unpredictable contingenciesthose events, good or bad, that
suddenly need to be dealt with by different functions in the
organization. So the two purposes of linking mechanisms are (1) to
facilitate the transfer of information and know-how to the venture
and (2) to supply the knowledge and assistance required to deal
with the contingencies that will inevitably arise as the venture gets
under way. Those contingencies vary in predictability (for instance,
manufacturing glitches are an absolute certainty, whereas a
regulatory problem is merely a possibility) as well as in frequency,
and the relative frequency of various contingencies can be
guesstimated.
Galbraith (1982), has suggested linking mechanisms based on
different combinations of frequency, predictability, and scope of
the contingency, which we have summarized in Table 8-1. The
precise nature of the linking mechanism described in each quadrant
of the table depends on whether linkage is required between only
two parties or between various parties. To illustrate, in quadrant I,
if only two departments are involved, it will suffice to name just
one contact person in each department; if more than two
departments are involved, a task force is the recommended
mechanism.
Starting in quadrant I, if the contingency involves a highly
predictable situation that is not expected to arise too often, all the
firm must do is design an appropriate contingency plan, agree on
what events will trigger this plan, and then leave it to the
responsible parties to carry out the plan's
 Page 198
Table 8-1: Linking Mechanisms to Handle Contingencies
Low Frequency High Frequency
High I II
Predictability
Contingency plan is Preassigned liaison or
activated.
"SWAT" team takes
action.
Low III IV
Predictability
Contact person or task Program manager or
force investigates and management team
recommends action. monitors and
coordinates.

provisions when the triggering events occur. An example of such a

contingency would be the loss of a major source of supplyin which
case, a plan can be devised ahead of time to switch to alternate
sources or alternate materials. All that needs to be done is for the
responsible parties (say, people from manufacturing, distribution,
and sales) to be notified of the loss of the original source of supply,
and they can carry out whatever actions have been assigned to
them.
The next level (quadrant II) involves contingencies that are both
highly predictable and expected to occur frequently. Examples of
such events would be an unplanned plant shutdown, an unforeseen
shortage of supplies, or a sudden rush order from distributors or
customers. The organization knows these events will happen, and
rather often; the only question is when. The contingency tool
suggested here depends on whether just two departments are
involved or more than two. In the case of two departments, all the
organization must do is identify a liaison person in each
department. Whenever the contingency occurs, these liaison people
get in touch with each other and decide on which of a prearranged
set of actions they will take. In the case of a contingency involving
multiple departments, each department selects a liaison person who
is a member of a "SWAT" team assigned to the task of handling the
contingency by selecting and coordinating whatever actions they
have prearranged.
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At the next level (quadrant III), we have contingencies whose
predictability and frequency are both lowi.e., the firm cannot tell in
advance when these contingencies will occur and cannot be sure
except in general terms what they might consist of. Examples of
negative contingencies would be an unexplained decline in a new
product's quality or a sudden rise in customer complaints about the
product. A positive contingency would be the discovery that a new
product is performing much better than anticipated.
There are no predetermined actions that can be worked out ahead
of time in such cases. Hence, for a situation involving two
departments, the firm needs to identify a contact person in each
department and designate the two to work together whenever a
level III contingency arisesto investigate the problem or
opportunity and deal with the contingency. These individuals may
be the same as the liaisons named to respond to level II
contingencies, or they may be people higher up in the organization.
If the contingency involves more than two departments, each
department assigns a representative to serve on a task force that
will investigate the problem or opportunity and determine an
appropriate response.
Note that although the individuals assigned to serve on the task
force are "permanent representatives," they are mobilized only
when a contingency arises; the task force disbands when the
contingency has been handled and does not reassemble until the
next contingency arises. The task force members can, of course,
enlist experts or obtain input from knowledgeable contributors as
necessary. Note, too, that as in other cases, the contingencies dealt
with by the task force need not be negative ones. Positive
phenomena such as unexpectedly high market penetration or
unexpectedly outstanding product performance are equally worth
investigation, to ensure that these benefits are sustained.
The final level (quadrant IV) involves low-predictability
contingencies that are expected to occur with high frequency,
which usually happens at the start of a venture. In this case, the
firm must assemble a project team led by a project man-
 Page 200
ager whose sole task is to orchestrate information flows among the
various departments and call on project team members for help on
an as-needed basis.

RelatednessThe Crucial Organizing Variable

In organizing a venture, it makes a huge difference whether the
venture's product, market, and technology are very similar to or
very different from the parent company's existing products,
markets, and technology. Therefore, by far the most important
factor to consider in venture organization is the relatedness
between the venture's business and the established business.
Those features of the venture that are highly unrelated to the rest of
the organization pose the major challenges for organizational
learning. Those features that are highly related offer the major
opportunities to capitalize on existing corporate know-how, for
they represent areas where the firm's past experience and current
relationships can be used to maximum effect to enhance the
venture's chances of success.
Therefore, the concept of relatedness provides the basic framework
for deciding what the venture's focal activity should be and what
linkages should be established. The venture's managerial focus
should be on the activity where the greatest amount of learning
must occur if the venture is to succeed. It is this area that should
receive the most attention. On the other hand, linkages need to be
designed to enable the venture to tap any useful know-how the firm
already possesses.
In terms of priority, we suggest that when making the trade-off
between maximizing learning and maximizing the capture of
existing know-how, maximizing learning should take precedence.
For example, if the primary lack of expertise involves market
knowledge, but the firm knows the product and technology well,
then the venture must be organized around a dedicated marketing
and sales team, with a good
 Page 201
marketing generalist as program manager to maximize market
learning. To capitalize on available corporate know-how, this
marketing generalist should be supported by key liaison people in
operations and development who can provide input on major
product, process, systems, and design issues that affect the
marketing thrust.
Whether the venture has high or low relatedness with the parent
firm's products, markets, and technology largely determines the
learning challenges the venture will face and the opportunities it
will have to capitalize on existing corporate know-howso much so
that different combinations of product, market, and technology
relatedness lead to seven distinctly different types of ventures,
which are discussed later in the chapter. The most important issues
for organizing each type of venture are what specific learning
challenges are faced given various low levels of product, market,
and technology relatedness and what specific know-how can be
exploited given various high levels of product, market, and
technology relatedness.

Learning Challenges Associated with Low Relatedness

Table 8-2 lists the major learning challenges that tend to be
associated with low relatedness between the venture's product,
market, and technology and those of the parent firm.
To maximize learning effectiveness, venture managers should start
by carefully scanning Table 8-2 to identify which of the learning
challenges associated with unrelatedness might apply to their
particular venture. They should then supplement this list with
whatever additional new-product, new-market, and new-
technology learning challenges can be identified by thinking
through the specific venture.
The final step is to identify what must be learned as the venture
progresses, decide how to capture that learning as it occurs, and
assemble a venture unit that will best be able to focus on the
learning needs that have been identified. In the
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Table 8-2: Learning Challenges Associated with Low
Relatedness
Area of Low Types of Learning Challenges
Relatedness
Product Operations turbulence
New processes and systems
Trial runs and reject rates
Debugging problems
Lack of product and supply standards
Lack of service standards
Greater selling effort
Switching cost disadvantages
High customer returns
Market Selling uncertainty
New customers and channels
Lack of relationships
Lack of customer and channel tolerance
and empathy
Poor understanding of industry protocols
New salesforce
Lack of experience in servicing the product
Technology New processes or systems
Reliability
New equipment suppliers
New material suppliers
Debugging problems
New skill requirements
New product, systems, and process
standards

case of a project that primarily requires new-product learning, for

example, there is no point in locating such a facility in one of the
existing operating divisions, since little can be learned from the
firm's present production or systems operations. On the other hand,
much of the necessary learning can occur if the firm creates a
dedicated operating facility specifically for test runs, debugging,
product evolution, evolution of standard operating procedures and
training therein, and development of satisfactory supply, product,
and service standards.
The following subsections provide brief overviews of the specific
learning challenges often associated with low levels
 Page 203
of product, market, and technology relatedness. We make no claim
that these lists are exhaustive. However, any venture that involves
creating a highly unrelated new product, new market, or new
technology will surely face one or more of these learning
challenges, among others. It is up to the organization to identify
which learning challenges the particular venture will face and
decide how the venture can best be organized to meet those
challenges.
Low Product Relatedness: New-Product Learning
The following are among the major learning challenges that may
arise when a venture's product is very different from the parent
company's existing products:
· Operations turbulence: When a new product is being produced,
the operations producing that product are subject to tremendous
turbulence. This creates an operations climate characterized by
high uncertainty and extreme pressures, and can generate an
environment in which the entire work force is tired, demoralized,
and lacking in confidence. Maintaining energy and morale can
become a serious problem.
· New processes and systems: The organization must learn to
deliver quality product with new processes and systems.
Considerable "burn-in" experience is needed before these processes
and systems can be operated without frequent shutdowns, and it
usually takes longer than anticipated to achieve stable operating
conditions.
· Trial runs and reject rates: While learning to make a new
product, a venture is often forced to undertake large numbers of
short trial runs accompanied by enormously high reject rates,
which is both costly and disruptive.
· Debugging problems: Since new processes tend to be
 Page 204
poorly understood, the sources of breakdowns and operating
failures may at first be only vaguely comprehensible.
· Production/systems operation could therefore be plagued by
serious debugging problems.
· Lack of product and supply standards: If the product is very new,
there could be a complete lack of clarity regarding what the
standards should be, both for the product and for material and
equipment suppliers. Even if the product is not new to the world
but is simply new to the parent company, the venture must learn
what standards should be imposed on suppliers. This standards
vacuum creates a great deal of uncertainty as to what the product,
production, and supply characteristics should be. The challenge is
to identify, create, or fine-tune these standards.
· Lack of service standards: Since the firm is unfamiliar with the
product, it is equally unfamiliar with the need for product servicing
and therefore enters the market uncertain of what it will take to
service the product and what its service standards should be.
Particularly in the venture's early stages, while the production
process is being burned in, demands for service can be inordinately
high, as can the level of customer dissatisfaction if service is not
delivered.
· Greater selling effort: When it first attempts to sell a new product,
the salesforce simply does not know what customers really want. In
fact, if the product is very new, neither do the customers. Sales reps
therefore have to make a much greater selling effort for the new
product than for their existing product portfolio.
· Switching cost disadvantages: If the new product enters the
market against existing competition, the challenges facing the
salesforce might be compounded by the fact that a competitor's
offer is preferred and that there are significant switching cost
disadvantages of which the firm is unaware. It could take serious
effort
 Page 205
to identify and overcome these switching cost disadvantages.
· High customer returns: The problems of greater selling effort and
switching cost disadvantages are then further compounded by the
fact that in the venture's early stages, as the production system is
being burned in, there are inevitable problems with customer
returns. This can place a serious strain on the comfortable
relationship that derives from selling existing product to customers,
thereby providing a disincentive for the salesforce to sell the new
product.
Low Market Relatedness: New-Market Learning
The following are among the major learning challenges that may
arise when the market for the venture's product is very different
from the market for the organization's existing products:
· Selling uncertainty: The newer and more unrelated the market, the
greater the level of selling uncertainty that the organization faces.
Little is known about the customers' real needs, who makes their
purchasing decisions, what usage patterns are common in the
industry, and what risks the customers take if they switch to the
venture's product.
· New customers and channels: In many cases, it is unclear what
the true target customer group is and which channels should be
used to reach it. The firm may know very little about the reliability
and quality of service of various existing channels, nor whether a
particular channel will actually promote the product. Often, a firm
is forced to create entirely new customers and/or attempt to reach
them through entirely new channels.
· Lack of relationships: When the company serves ex-
 Page 206
isting markets, relationships are created between the salesforce and
the channels/customersrelationships that perpetuate conditions of
trust, loyalty, and emotional switching costs. When the company
enters an entirely new market, those relationships do not exist, and
it takes a tremendous amount of learning to understand what is
needed to develop and sustain such relationships in a new market.
· Lack of customer and channel tolerance and empathy: When the
company is operating in well-known markets and has good
customer relations, there is a level of mutual tolerance and empathy
between the customers, the channels, and the provider. Because of
past experiences and mutual trust and loyalty, each party has
developed a willingness to tolerate and empathize with the others
when they are experiencing transient difficulties. In new markets,
no such tolerance or empathy exists, and every failure to deliver on
a promised transaction is viewed with suspicious intolerance if not
outright destructive distrust.
· Poor understanding of industry protocols: Every industry has its
own protocols regarding how things are done in that industrywho is
called on, in what order, how the buying decision is made, how the
sale is pitched and closed, how the product is delivered, and what
demands can or cannot be made by buyer and seller. Failure to
understand the requisite protocols often puts a new entrant to a
market at a serious disadvantage.
· New salesforce: The more unrelated the market, the less
knowledge the firm has about the best ways to select, train,
motivate, and remunerate the salesforce. Many firms make the
blunder of using the same principles as they use for the existing
salesforceprinciples that can prove fatal in new marketsor they
attempt to use the existing salesforce when, as is often the case, it
is essential to develop an entirely new salesforce dedicated to the
new market.
 Page 207
· Lack of experience in servicing the product: The newer the
market, the less aware the entrant is of the specific service
expectations of the channels and customers, and the less aware it is
of how much effort will be required in order to meet those
expectations. Once again, the venture's service force may have to
be selected, trained, motivated, and remunerated very differently
from the service force for the company's existing businesses.
Low Technology Relatedness: New-Technology Learning
The following are among the major learning challenges that may
arise when the venture's product employs a technology that is very
different from the technology employed to produce the
organization's existing products:
· New processes or systems: Movement into an unrelated
technology inevitably creates the learning challenge of designing
and developing new processes (in the case of manufacturing) or
new systems (in the case of service).
· Reliability: After the design challenge has been met, there still
remains the challenge of nursing the fledgling process or system
along until it becomes a reliable, predictable operation. This
challenge is compounded by the highly disruptive debugging of
process problems or systems operating problems that typically
occurs as a new design is being burned in.
· New equipment suppliers: As the new process or system is being
developed, the company faces the problem of identifying reliable
manufacturers of the equipment required for the process or system.
It would be unwise for the firm to assume that new equipment
suppliers will necessarily match the standards of quality, reliability,
and service being delivered by its current suppliers. Particularly in
cases involving a new-to-the-
 Page 208
world technology, the suppliers may be experiencing their own
problems, first in determining what the appropriate standards for
their industry are and then in meeting those standards.
· New material suppliers: In addition, since a new technology often
requires very different materials than the ones currently being used,
reliable new sources of material must be identified. And the
standards and protocols being used with the existing group of
suppliers will probably not apply among the new group.
· Debugging problems: As the new technology is being burned in,
the debugging problems occurring in the evolving production
process or in the evolving product itself tend not only to disrupt the
organization's internal systems but also to disrupt and cause major
problems for channels of distribution and customers. The
organization must rapidly develop an understanding of what
external disruptions its debugging problems are creating and
mobilize solutions to channel and customer problems, for if it fails
to do so, it will lose their support.
· New skill requirements: As the new technology begins to be
deployed, there is a dramatic increase in the need to recruit and/or
train a work force that will be capable of using this new technology
or incorporating it into ongoing operations. If the new technology
is to become cost-competitive, the firm must manage to steadily
drive down the skill levels needed to use it. New technologies that
require a large number of highly skilled people to keep operations
flowing smoothly will end up either being too expensive or being
obsoleted by less costly competitive technologies.
· New product, systems, and process standards: As the new
technology develops, it is essential that the company find ways to
at the very least meet, but preferably exceed, the standards of
quality, reliability, and
 Page 209
Table 8-3: Opportunities to Capture Know-how from High
Relatedness
Area of High Types of Know-how That Can Be
Relatedness Captured
Product Predictability and stability of operations
Operating confidence
Operating processes/systems
Long runs and systems reliability
Low customer returns
Supplier trust and confidence
Supplier relationships
Understanding of service needs
Service delivery capability
Switching cost advantages
Market Customer trust and loyalty
Channel trust and loyalty
Seasoned salesforce
Customer and distributor relationships
Understanding of industry protocols
Customer and channel tolerance and
empathy
Experience in servicing the product
Technology Understanding of product design and
redesign
Understanding of process and systems
design
Knowledge of reliable equipment
suppliers
Good relations with equipment suppliers
Knowledge of industry standards for
equipment
and materials
service being delivered by existing products, systems, and
processes.

Opportunities to Capture Know-How Associated with High

Relatedness
Table 8-3 lists a number of places where a venture may
significantly benefit from the know-how associated with high
relatedness between its product, market, and technology and those
of the parent company. Once the venture's focal activity has been
identified, the venture manager can review Table 8-3 and decide
what expertise the firm may possess stemming
 Page 210
from relatedness. Mechanisms can then be devised to link the
venture manager with those parts of the firm that might be in a
position to provide useful input.
To continue the example presented earlier of a company that
undertakes a venture requiring high product learning and sets up a
dedicated operating facility to develop a new product, let us further
assume that the product will use existing technology and be sold to
existing customers. In that case, it makes sense to set up a team of
key line personnel in the existing marketing, sales, and
development operations to serve as points of liaison with the new
venture. This team can facilitate the transfer of know-how to the
venture and work with the venture manager to address problems as
they arise.
As you can see from the list in Table 8-3, a venture stands to gain
significant benefits from the know-how associated with existing
products, markets, and technologies; hence, if there is any way of
deploying this know-how to support the venture, some effort
should be made to do so. Therefore, in organizing a new business,
it is important for the venture manager to carefully consider where
the parent company possesses expertise relevant to the particular
venture and devise linking mechanisms that will enable the venture
to tap that know-how. For instance, the venture manager might
recognize that his or her firm has significant service know-how,
which could lead the manager to arrange for one of the firm's
experienced service managers to assist in designing and monitoring
the venture's service program.
The following subsections provide brief overviews of the specific
opportunities to capture know-how that are often associated with
high levels of product, market, and technology relatedness. Again,
we make no claim that these lists are exhaustive, but any venture
whose product, market, and/or technology is closely related to one
of the parent company's current products, markets, and/or
technologies will surely find itself able to tap one or more of these
types of organizational expertise, among others. It is up to the firm
to identify those areas possessing valuable know-how and decide
what
 Page 211
linkages need to be established in order to enable the venture to
capture that know-how.
High Product Relatedness: Capturing Know-how from Existing
Products
The following are among the major types of expertise that can be
tapped when the venture's product is closely related to one or more
of the organization's current products:
· Predictability and stability of operations: It is difficult to
underestimate the tremendous benefits that derive from well-honed,
smooth operations. Established operations, if well managed, have a
rhythm to themthe operations people know the rhythm of their own
operations as well as the rhythm of the supply industries, the
customers and channels, and the service requirements, and they can
anticipate and cope with the shifts in this rhythm as the business
goes through its cycle. If this know-how can be deployed to assist
the venture, it will provide an invaluable stability, particularly in
the new business's earlier stages.
· Operating confidence: There is an underlying confidence
associated with production and operations know-how. The
responsible people have learned what problems will be experienced
by the suppliers, customers, and channels and have found ways to
solve those problems.
· Operating processes/systems: Those responsible for operations
are also knowledgeable about the operating system. They have
fine-tuned the system and know how to maintain and adjust it and
when to replace worn-out components.
· Long runs and systems reliability: Operating managers know how
to achieve consistent reliability and quality during long production
runs and how to adjust and fine-tune operations to ensure that
reliability and qual-
 Page 212
ity are maintained. If the venture can capture this know-how, it will
be able to keep reject rates to a minimum, thereby holding down
the cost of operations.
· Low customer returns: The parent company has developed
procedures and protocols for responding expeditiously to customer
complaints and returns; hence, it is able to handle those few
complaints and returns that it does receive in a way that maintains
high customer satisfaction.
· Supplier trust and confidence: Established operations have
evolved high levels of mutual trust and confidence between the
suppliers and the company. This tends to elicit significant tolerance
and empathy on the sporadic occasions when either party is
experiencing difficulties.
· Supplier relationships: In many cases, there have evolved over
time powerful relationships between the firm and its
suppliersrelationships that will make the suppliers extremely
willing to go the extra mile when called on to do so.
· Understanding of service needs: Through past experience with the
operations of the business, the firm will have developed an in-
depth understanding of a product's service problems and their
solutions. It will also have a clear idea of how often service is
likely to be required.
· Service delivery capability: An established company will also
know when and where service is important, based on the service
pattern and demands of the customers and their channels, and have
developed the capacity to deliver this service.
· Switching cost advantages: Significant switching cost advantages
will be in place. Customers and channels will have major
investments in supporting the firm's current product offerings and
will have developed economic and psychological dependencies as a
result.
 Page 213
High Market Relatedness: Capturing Know-how from Existing
Markets
The following are among the major types of know-how that can be
captured when the market for the venture's product is closely
related to the market for the organization's existing products:
· Customer trust and loyalty: One of the major benefits of doing
business in existing markets is that as a result of years of mutual
interaction, adjustment, and evolving understanding, the customers
have learned to trust the firm, and thus, significant customer loyalty
may have developed. If the new venture can tap this trust and
loyalty without disrupting it, the venture's progress can be greatly
accelerated. Loyal customers can more easily be cajoled into
accepting new products and/or trying out products based on new
technologies.
· Channel trust and loyalty: As is the case with customers, years of
mutual adjustment and understanding can create channel trust and
loyalty that will cause the channel to go the extra mile or tolerate
temporary difficulties the firm may face. This goodwill can be used
as a lever to persuade the channel to distribute products from the
new venture.
· Seasoned salesforce: If the firm's current salesforce can be
deployed and motivated to support the new venture, tremendous
benefits can be derived. The current salesforce possesses a wealth
of product knowledge, understanding in great detail what the
product can or cannot do; it also has an in-depth understanding of
the needs, concerns, and requirements of both the customers and
the channels of distribution.
· Customer and distributor relationships: In addition to its
knowledge of product characteristics and customer and distributor
needs, the salesforce may have built up significant relationships
with both individual cus-
 Page 214
tomers and channels based on personal understanding and empathy.
If the venture can use these relationships advantageously, its
progress can be accelerated.
· Understanding of industry protocols: A seasoned salesforce is
familiar with the whole pattern of protocols for its industry. It does
not make the mistakes common among novicese.g., failing to
understand who should be called on, what is expected when a sales
call is made, how a deal is closed, and what the peripheral and
implicit agreements are when a deal is closed.
· Customer and channel tolerance and empathy: As a result of
long-standing relationships with customers and channels, the firm
and these parties develop a high level of mutual tolerance and
empathy that can be of enormous benefit to the venture. Because of
these relationships, customers and channels will (within limits)
tolerate the disruptions that are inevitably associated with product
or technology innovations.
· Experience in servicing the product: The firm has an in-depth
understanding of what the service expectations are in the industry
and what is regarded as acceptable in terms of service standards
and product reliability.
High-Technology Relatedness: Capturing Know-how from Existing
Technology
The following are among the major types of know-how that can be
captured when the technology employed in the venture's product is
closely related to the technology employed in the organization's
existing products:
· Understanding of product design and redesign: By working with
an existing technology, the firm develops a rich base of design and
rapid redesign capabili-
 Page 215
ties that can be deployed to speed up the venture's progress.
· Understanding of process and systems design: In addition to the
product design know-how, the firm may also have significant skills
in developing processes and systems to deliver the product.
· Knowledge of reliable equipment suppliers: As it works with
existing technology, the firm develops expertise regarding the
quality, standards, and reliability of various equipment suppliers.
By tapping that expertise, the new business can avoid a host of
problems associated with obtaining equipment.
· Good relations with equipment suppliers: In addition to the
technical know-how just discussed, the firm may have established
powerful relationships with topnotch equipment suppliers. Based
on their high confidence and trust in the firm, these suppliers may
be prepared to go to extra lengths to assist the fledgling venture.
· Knowledge of industry standards for equipment and materials: If
the venture is using an existing technology, the parent firm will
have a pool of expertise involving standards of supply in the
industry for both equipment and materials. Knowing what
standards of quality and reliability to expect from vendors can be
of great use to the venture manager in designing a new process or
product.
Venture Intrusions into the Firm's Ongoing Activities
However attractive it may be to the venture to tap existing know-
how, the venture manager must recognize that in tapping that
know-how, he or she may be perceived, rightly or wrongly, as
intruding into and interfering with the firm's major ongoing
activities. There are two types of perceived
 Page 216
intrusiveness/interference that must be taken into account in
organizing a venture:
1. Passive intrusions: These are intrusions in which the venture's
interaction with the mainstream business is seen as a distraction to
the ongoing activities and treated as a nuisance; the manager is
therefore disregarded when attempts are made to tap know-how or
secure support. We call them passive intrusions, since no real harm
is done. The manager's problem is to overcome the resistance to
providing the needed support or expertise.
2. Active intrusions: These are intrusions in which the venture's
interaction with the mainstream business actually disrupts the
ongoing activities of the firm. We call them active intrusions, since
real harm is done. Intrusions of this second type must be avoided,
and the venture should be organized in a way that prevents
themeven if it means sacrificing the opportunity to capture know-
how.
The two major areas where ventures tend to intrude in the parent
company's ongoing activities are (1) operations and (2) sales and
service. The types of passive and active intrusions that can occur in
these areas are listed in Table 8-4 and discussed in the following
subsections. In pursuing know-how, the venture manager must
recognize, and be appropriately sensitive to, the potential for such
intrusions.
Operations Intrusions
The following subsections provide a brief overview of the passive
and active intrusions that may result if a venture manager seeks to
tap existing operations expertise.
Passive Intrusions. In designing linkages between a venture and the
parent company's operations function, the ven-
 Page 217
Table 8-4: Possible Venture Intrusions into Existing
Operations
Areas Intruded Aspects Affected
Upon
Operations Passive Intrusions
Operations
Operations predictability and
stability
Long runs and low reject rates
Business and customer rhythm
Customer returns
Active Intrusions
Systems and operations
Supplier relationships
Morale
Sales and service Passive Intrusions
Order-taking mentality
Routine selling
Customer complaints
Service demands
Active Intrusions
Customer and channel
relationships
Sales and service
Morale

ture manager may have to overcome resistance to providing

requested know-how in cases involving the following aspects of
the established business:
· Operations: If the problems of process and systems burn-in
disrupt ongoing operations, this will generate resistance to
cooperation.
· Operations predictability and stability: If the venture attempts to
tap operations know-how in ways that require the people in
operations to disturb their comfortable and predictable
manufacturing or systems routines, they will be inclined not to do
this, so the challenge is to find ways to ensure that the venture gets
the necessary attention.
· Long runs and low reject rates: Likewise, people in
 Page 218
ongoing operations are uncomfortable with disrupting the
scheduling of long runs to attempt trial runs, with their
accompanying high reject rates. The tendency to resist this must be
managed.
· Business and customer rhythm: If the venture makes demands on
operations that disturb the even, well-honed, and well-understood
rhythm of business with customers and channels, this will be seen
as an intrusion. The venture manager should therefore be alert to
how the interventions he or she is attempting impact and adversely
affect this rhythm.
· Customer returns: If the firm starts to experience an increase in
customer returns resulting from the venture's activities, this will
generate discomfort and thus resistance to cooperation.
Active Intrusions. In designing linkages between a venture and the
parent company's operations function, the venture manager must
recognize and avoid intrusions involving the following aspects of
the established business. These are the cases in which the
contemplated intrusion would be so harmful to the parent that the
firm should forego any attempt to tap existing internal expertise
and instead either find other means of acquiring the necessary
know-how or abandon the venture entirely.
· Systems and operations: There is no conceivable reason why a
new venture's interactions with the parent company should be
permitted to seriously compromise ongoing systems and
operations. If it becomes apparent that the attempt to extract know-
how will precipitate disruptions to these fundamental activities, it
may result in a justifiable suggestion that the venture be disbanded.
· Supplier relationships: There is also no reason why an attempt to
tap expertise should be permitted to precipitate serious conflicts
with suppliers and thus compromise important supplier
relationships.
 Page 219
· Morale: The venture's interaction with ongoing operations must
not be allowed to generate conflict that will in any way undermine
morale and discipline in the parent firm's affected functions.
Sales and Service Intrusions
The following subsections provide a brief overview of the passive
and active intrusions that may result from attempts to capture
existing sales and service expertise.
Passive Intrusions. As the venture manager tries to establish
linkages to tap know-how available in the parent company's sales
and service functions, the following aspects of the established
business could be affected in ways that generate resistance to
cooperating with the venture:
· Order-taking mentality: If the venture is to use the parent
company's existing salesforce, then it is important to establish
whether an order-taking mentality prevails among the sales reps. If
so, it will be extremely hard to persuade them to shoulder the
burden of the additional effort that will be required to sell the
venture's output.
· Routine selling: Another problem can arise if handling the
venture's output will in any way disrupt the existing salesforce's
selling routinessales routes, sales call requirements, steady
commissions. If such disruption is foreseen, suitable incentives
must be designed to motivate the salesforce to sell the venture's
product under such conditions.
· Customer complaints: The inevitable increase in customer
complaints associated with the venture's product will be perceived
as a burden by the recipients of those complaints. Any effort to tap
the know-how of those recipients will meet with scant cooperation.
· Service demands: If the venture attempts to capitalize
 Page 220
on the firm's existing service capabilities, the service force may
actively resist the increase in both the amount and the
unpredictability of service demands placed on it by the venture.
Active Intrusions. When the venture manager attempts to establish
linkages to tap the parent company's sales and service expertise, he
or she must ensure that the linkages are designed in a way that
avoids active intrusions into the following aspects of ongoing
operations. Such intrusions are so detrimental to the firm that they
cannot be tolerated, and if they are unavoidable, either the
opportunity should be sacrificed or the know-how should be
obtained by some other means.
· Customer and channel relationships: Any attempt to capitalize on
the organization's sales and service capabilities must not be
allowed to lead to serious customer and channel conflicts.
· Sales and service: Any intervention by the venture designed to tap
sales and service expertise cannot be condoned if it might seriously
compromise the delivery of sales and service to channels and
customers.
· Morale: If the venture's interaction with the ongoing sales and
service functions is likely to precipitate conflict that will in any
way damage morale and discipline in the established business, then
it is probably better to forego the opportunity to tap know-how.

Seven Major Venture Types

Table 8-5 shows the seven major venture types, each of which has
a characteristic pattern of relatedness levels, learning challenges,
exploitable know-how, and potential for intruding into the firm's
ongoing activities if the venture manager tries too hard to capture
existing know-how.
 Page 221
Type I venture: product augmentation. Product augmentation
ventures are characterized by low product relatedness and high
market and technology relatedness. They involve introducing a
new product into an existing market using known technology. GE's
move from making plastic moldings for automobile interiors to
manufacturing exterior moldings, such as bumpers, provides an
example of this type of venture. Both these categories of product
require molding technology and serve exactly the same market, but
the kind of plastic needed for the two applications is completely
different. From Table 8-5, we can see that the venture's greatest
learning needs are in the areas of production and operations and
that the firm already possesses know-how regarding sales,
marketing, and technology development. However, if the venture
demands excessive interaction with the marketing department, this
could create intrusions into and disruptions of the firm's existing
sales and service activities, which should be guarded against.
Type 2 venture: product development. Product development
ventures are characterized by low product and technology
relatedness but high market relatedness, an example being
Anheuser-Busch's move into the production and distribution of bar
snacks. In this case, the venture requires both product and
technology learning, whereas marketing know-how already exists
within the firm and simply needs to be tapped by appropriate
linking mechanisms. Once again, excessive exploitation of the
parent company's marketing expertise could lead to the disruption
of ongoing sales and service activities.
Type 3 venture: technology innovation. Technology innovation
ventures are those in which only technology relatedness is low, but
the company knows the products and markets well. Examples
would be IBM's move from mainframe computer technology to
microprocessor technology and Citibank's move from a teller-
driven service distribution system to one based on automated-teller
machines. In these cases,
 Page 222
Table 8-5: Seven Major Venture Types
Relatedness Learning Exploitable Areas Subject
Challenges Know-how To Intrusion
Venture Type Product Market Technology (Table 8-2)(The focal (Table 8-3) (Table 8-4)
activity (Areas where
areas requiring linkages
a separate, dedicated should be
function) established)
1. Product Low High High Operations Marketing and Sales and
augmentation development service
(e.g., interior
to
exterior auto
plastics)
2. Product Low High Low Development and Marketing Sales and
development operations service
(e.g., beer to
bar
snacks)
3. High High Low Development Marketing Operations,
Technology andoperations sales,
innovation and service
(e.g., teller-
based system
to
automated-
teller
machines)

(table continued on next page)

 Page 223
(table continued from previous page)
Relatedness Learning Exploitable Areas
Challenges Know-how Subject
To
Intrusion
Venture Type Product Market Technology (Table 8-2) (Table 8-3) (Table 8-4)
(The focal activity (Areas where
areas requiring linkages
a separate, dedicated should be
function) established)
4. Market High Low High Marketing Development and Operations
augmentation operations
(e.g., gas turbines
to aircraft
engines)
5. Vertical High Low Low Marketing and Operations Operations
integration (rare) development
(e.g., beer to
beverage cans)
6. Technology Low Low High Marketing and Development None
commercialization operations
(e.g., solar cells
to calculators)
7. Blue-sky Low Low Low Marketing, None None
(e.g., oil refining development,
to office and operations
equipment)
 Page 224
the learning challenges primarily involve technology development.
The firm has significant operations and marketing know-how at its
disposal, although the venture manager must recognize the danger
of the venture's intruding in operations, sales, and service if the
connections to operations and marketing are overexploited.
Type 4 venture: market augmentation. Market augmentation
ventures involve taking existing products and technologies into
unrelated markets. GE's move from gas turbines to aircraft engines
is a case in point. Here, the major learning challenge lies in
marketing, whereas the venture can tap the firm's existing know-
how in operations and development.
Type 5 venture: vertical integration. In the (rather unusual) case of
vertical integration ventures, the parent company has high product
relatedness but low market and technology relatedness. An
example was Anheuser-Busch's decision to externally market the
cans originally manufactured as containers for its own beer. The
firm's major learning challenges were to develop its own can-
manufacturing technology capability and an in-depth understanding
of the can market, but it could draw on its experience in making the
product itself.
Type 6 ventures: technology commercialization. A technology
commercialization venture is one in which the firm pushes an
existing technology to commercial exploitation, as Sanyo did in
deciding to use newly developed solar-cell technology to
manufacture light cells for calculators. The learning challenges lie
in the areas of operations and marketing, whereas existing know-
how can be found in the area of development.
Type 7 ventures: blue-sky. Blue-sky ventureswhich involve entering
an attractive market despite low product, technology, and market
relatednessare the most challenging for the venturing firm. An
example would be the decision by
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Exxon, an oil-refining company, to enter the office equipment
business. In such a situation, there is absolutely no existing know-
how to be exploited, and the firm faces significant learning
challenges in the areas of development, operations, and marketing
in spite of foothold acquisitions which may be made.

Organizing the Venture

Based on the foregoing discussion, we can now propose the
following four principles for organizing a corporate venture:
1. Organize to maximize learning: The major benefits of
organization derive from the ability to create a dedicated activity
focused on those areas where the greatest learning must take place.
The organization's first priority is therefore to organize the venture
in a way that maximizes learning.
If learning is required in multiple areas, learning about market
takes precedence over learning about technology or product. Thus,
if the organization does not know the market, it is crucial to have a
dedicated marketing group to drive all other activity in the venture
unit. In contrast, if the organization knows the market but does not
know the product, a dedicated production group is needed to drive
all other activity.
2. Organize to maximize the capture of know-how: If the venture
has areas of high relatedness to ongoing operations, the firm's
second priority is to identify those functions whose expertise will
be of value to the venture and organize linking mechanisms to
ensure that their know-how is applied to the new business.
3. Organize to minimize or manage intrusions: After ensuring that
the venture is organized to maximize learning and the capture of
know-how, the company's
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third priority with regard to design is to minimize the danger of
active intrusions into ongoing operations. It is also important to
identify passive intrusions and design mechanisms for overcoming
resistance to them.
4. Use the simplest possible coordinating mechanisms to meet the
venture's linkage needs: The preceding three principles primarily
involve creating coordinating mechanismsfor instance, to link those
departments possessing know-how with those managers dedicated
to the venture's focal activity. Table 8-1 (see page 198) showed
various coordinating mechanisms used for handling contingencies.
These same types of linking mechanisms are also used to facilitate
the transfer of know-how from the parent company to the venture.
In designing coordinating arrangements, the firm should avoid
organizational overkill and instead employ the simplest possible
mechanism appropriate to the challenge of the particular linking
task.
Earlier in the chapter, we listed the learning challenges associated
with low product, market, and technology relatedness (Table 8-2);
the opportunities to capture know-how from high product, market,
and technology relatedness (Table 8-3); and the aspects of the
established business that a venture may intrude upon in the areas of
operations and sales and service (Table 8-4). And in Table 8-5, we
listed the seven major types of corporate ventures and provided an
overview of their key characteristics.
We would strongly suggest that managers actually involved in
organizing a new venture scan the information in this group of
tables to identify the critical issues that must be addressed and the
key decisions that must be made in designing their particular
venture. These tables can be used as comprehensive (but by no
means exhaustive) checklists for organizing specific programs
designed to maximize learning or
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capitalize on existing corporate know-how or avoid intrusions into
ongoing operations.
To illustrate how this group of tables can be used in venture
organization, we shall work our way through one detailed example,
which involves identifying the major issues and decisions that
managers may face in organizing a product augmentation venture.
Readers should then have no trouble using the tables to extract
guidelines for designing other types of ventures.
Let's start by referring to the first row of Table 8-5, which identifies
the key characteristics of product augmentation ventures. Since
these ventures have low product relatedness, little would be gained
by locating them in or linking them with existing operations. Since
the major learning challenge involves new-product learning, the
focal activity should be operationswhich suggests that a dedicated
operations facility be created, separate from the firm's existing
operations, to ensure that maximum attention is given to
developing the operations skills the new business will need.
Whether the venture should be embedded in an ongoing sales or
development group or be completely separated from ongoing sales
and development activities is a function of what safeguarding the
venture needs, but it is essential for the firm to create linkages that
will enable the new business to capture both market and technology
know-how.
Suppose for the moment that from an organizational standpoint, it
seems advisable to put a skilled manufacturing person in charge of
a separate new-product unit. The question is how this manager will
capture the firm's existing technology and marketing know-how.
Depending on the venture's size, scope, and criticality, marketing
and development managers can either be permanently assigned to
the venture or be named as task force members to liaise with the
venture manager. At this stage, though, simple, informal contacts
will not suffice.
According to Table 8-5, the primary learning challenge for a
product augmentation venture involves operations. In-
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terested managers can refer to Table 8-2 for a list of some of the
specific types of learning challenges commonly faced by ventures
with low product relatedness. Although the actual challenges any
venture will face are a function of the particular venture and the
particular firm, it's a good bet that the venture will need to address
one or more of the challenges listed in Table 8-2. The venture
manager must work with development and marketing, first to
identify which of these challenges apply to the venture and then to
decide how to respond appropriately.
Let's say the major challenges foreseen for this particular venture
involve new-process development and switching cost
disadvantages. This would indicate the need for two major
effortsthe first, in collaboration with the firm's development person,
to design and debug a pilot production system and the second, in
collaboration with the marketing person, to attack the problem of
switching costs. A list of significant milestones, complete with
plans for verifying assumptions, would be developed as part of
each of these efforts.
According to Table 8-5, opportunities for the venture to capture
know-how lie in the areas of marketing and development.
Interested managers can refer to Table 8-3 for a list of some of the
specific types of expertise that can be tapped in cases of high
market and technology relatedness. Once again, the actual
opportunities depend on the particular firm and venture. The
venture manager, in collaboration with the task force members
from marketing and development, should identify all the possible
areas where existing corporate knowhow could help the venture.
Suppose that the key market opportunity involves capitalizing on
customer trust and loyalty and the key technology opportunity
stems from the fact that the firm has good relations with equipment
suppliers whose reliability standards are exceptionally high. To
capitalize on the first opportunity, linkages with key customers
could be used to help shape the standards that might erode
competitors' switching cost advantages; to capitalize on the second,
linkages with the sup-
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plier could be forged to help in developing the production process
and product standards.
According to Table 8-5, sales and service are the functions that face
the greatest risk of being intruded upon by a product augmentation
venture. Interested managers can refer to Table 8-4 for a list of
some of the specific types of passive and active intrusions that can
affect sales and service. Once again, the actual disruptions will
depend on the particular firm and venture.
Let's say the major problem posed by the venture is that members
of the current salesforce will have to increase the number and
frequency of their sales calls and expend greater selling effort
during those calls. This means that the marketing liaison needs to
work with senior sales management to develop a suitable incentive
program that will elicit the desired behavior from the sales reps.
Conclusion
In this chapter, we presented some key concepts of organization,
from which we derived a number of basic principles for organizing
ventures. We also identified the major venture types, based on how
closely the venture's product, market, and technology are related to
the firm's existing offerings. We closed the chapter by showing
venture managers how to use this information to identify a number
of key issues and decisions that should be considered in organizing
each of the major types of venture.
Guidelines
1. Analyze the relatedness between the venture's activities and the
firm's ongoing activitiesi.e., how closely the venture's product,
market, and technology are related to the parent company's
product, market, and technology.
 Page 230
2. Identify the key learning challenges and the key opportunities to
capture know-how.
3. Priority 1: Organize to maximize learning. Create a dedicated
activity focused on those areas where maximum learning is needed.
If learning is required in multiple areas, learning about market
takes precedence over learning about technology or product.
4. Priority 2: Subject to priority 1, create linking mechanisms to
maximize the capture of know-how.
5. Priority 3: Subject to priorities 1 and 2, organize to minimize the
danger of active intrusions. Identify passive intrusions and design
mechanisms for overcoming resistance to them.
6. Priority 4: Use the simplest possible coordination tools.
References
Fast, N. D. 1978. The Rise and Fall of Corporate New Venture
Divisions. Ann Arbor, MI: UMI Research Press.
Galbraith, J. R. 1982. ''Designing the Innovative Organization."
Organizational Dynamics (Winter): 5-25.
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9
Controlling the Venture
Since plans for a new venture should focus on learning and evolve,
the parent company must use control methods that ensure that
learning occurs and is applied. Conversely, the parent must not use
control methods that actually prevent learning and change.
In this chapter, we start by explaining how and why traditional
control methods are inappropriate, then present the objectives and
elements of a venture control system and show how such a system
can be created, and close by clarifying the distinct roles of venture
management and senior management in the venture control
process. How a venture is structured and designed at the outset,
how the corporation's policies and procedures are applied to the
venture, how feedback is built in and used, and how budget
controls are applied determine how well the venture is controlled
and whether
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venture management will have the flexibility and freedom that are
absolutely essential for venturing success.

Traditional Control Methods and Their Inappropriateness

Almost nothing has been written in any detail about the special
control needs of new ventures. Yet every major researcher in the
field of innovation and corporate venturing has pointed out that
traditional control methods are inappropriate, and they advocatein
our view, correctlygranting a high degree of empowerment and
flexibility to venture managers. This is hardly arguable. The
venture's survival and success depend on rapid adjustment to the
unexpected, and those closest to the situation are best qualified to
judge what must be done. All the reasons that can be cited to justify
decentralization, delegation, and empowerment in established
businesses are even more valid in the case of new businesses.
Yet red tapein the form of multiple-level approvals and many
handoffs and sign-offsis more often than not an integral part of
corporate operation. The complex approvals, reports, procedures,
and policies are an importantalbeit unwantedelement of the parent
firm's control system. They are holdovers from an earlier period
characterized by less intense competition and greater market
stability. But this red tape can strangle the efforts of new ventures
(as well as the efforts of established businesses, as many
companies are learning) in various ways: it hampers their ability to
respond to threats and opportunities, it creates a need for political
maneuvering and negotiation in order to obtain approvals, and most
important, it generates a sense of demoralization and outright
disgust on the part of venture managers who want to build a
business and are dragged down by work that is seen as (and often
is) irrelevant to the task that needs to be accomplished. (One
venture manager, shaking his head in
 Page 233
dismay at the delay in getting a relatively small sum approved for a
capital expenditure, observed, "I can cost the company millions by
making a wrong pricing decision, which I am authorized to do, but
I have to go through this [expletive] to get approval to spend
$100,000 on equipment that we need in a hurry to keep up with
growing demand!")
The supposed purpose of such controls is to minimize the risks
associated with new ventures. Some of these controls are designed
to protect the corporation against the risk of violating safety
regulations and other laws as well as the risk of damaging its
reputation, both with the public and with existing customers. Other
controls are designed to protect the corporation against the most
common risk associated with new venturesi.e., financial risk, the
possibility of incurring prolonged, unplanned, major losses that
damage the firm. Yet the evidence indicates that traditional control
mechanisms neither ensure venture success nor protect the parent
firm from substantial, and often unnecessary, venture losses.
Otherwise very well managed organizations such as Time-Life,
Federal Express, Exxon, and Polaroid have all experienced
enormous venture losses, despite traditional controls.
Traditional control mechanisms are based on comparing
performance against plans. In a normal, well-established
organization, a nearly universal control mechanism is comparison
of performance with projections using variance reporting. For even
tighter control, line-item budget control is used. Other common
strategies for maintaining control are establishing head-count limits
and requiring special procedures to get exceptions approved;
periodic review meetings; and linking incentives and compensation
to performance against plan or budget. The application of policies
and procedures, enforced by staff personnel, is an attempt to ensure
equity and uniformity across the entire corporation.
These practices are often absurd and can be dangerous and
expensive; they may provide motivation for ignoring emerging
reality and attempting to achieve plans and projections that are
rapidly becoming obsolete. In fact, we suggest
 Page 234
that the planning and control mechanisms normally used are a
principal cause of large losses rather than merely an obstacle to
venturing success. Given the high degree of unpredictability of new
ventures, it is neither logical nor effective to use a control system
designed for the reasonably predictable circumstances of a normal,
ongoing business with an established track record.
But we are not arguing that venture managers should have absolute
freedom. Far from it. A new business does require control, but it
must be a different kind of controlsuited to its unique needs. The
venture requires control mechanisms that provide enough
flexibility and freedom to allow it to grow, but at the same time, it
requires enough contact with and interest on the part of senior
managers to give them the information and understanding that will
enable them to make the necessary decisions and furnish the
venture with the necessary help.
Damage control must be an essential part of any control system.
Recognizing serious problems and knowing when to pull the plug
on ventures that are headed toward large losses is one of the
biggest challenges corporations face in managing ventures. In a
survey by Block and Subbanarasimha (1989), 41% of 328 ventures
achieved profitability within a six-year period, but only one firm in
eight reported a return on investment from its combined venturing
activities equal to or greater than from the firm's core business. As
noted in Chapter 1, this disparity between the ROI results and the
number of profitable ventures can be explained by one big loser
wiping out the gains from many smaller winners. Thus, a major
objective of a venture control system is to limit the damage from
the inevitable losers while maximizing the gain from those
ventures that do survive.
The control approach we describe in the following section is
designed to ensure that venture management has maximum
flexibility while the parent retains outer-limit controls. One way to
picture such a control system is as a "playpen," with the size of the
pen's floor and the height of its sur-
 Page 235
rounding walls defining the area within which the fledgling venture
enjoys freedom of action. This "playpen" type of control system
can be contrasted with the more restrictive "harness" approach,
which discourages initiative and resourcefulness, hampers
flexibility, and precludes a sense of funso necessary for venture
success.

A Control System for New Ventures

The objectives of any system designed to control corporate
ventures are as follows:
· To maximize the venture's success
· To minimize the costs of failure
· To provide a basis for evaluating the performance of the venture's
staff
· To provide a basis for making decisions about the venture's future
These objectives can be achieved through what we characterized in
the preceding section as a "playpen" approach to venture control.
The parameters of such a "playpen" are formed by the following
key control points, which are discussed in the balance of this
section:
· The design of the venture itselfincluding the management team's
composition, incentives, and compensation; organizational
positioning (i.e., the venture's location within the firm); the choice
of format and entry strategy; and the selection of milestones to
trigger financing
· Modified application of corporate policies and procedures
 Page 236
· The design and use of a feedback system to test major
assumptions
· The use of modified budget control methods
Design of the Venture
As W. Edwards Deming, the man who revolutionized the quality of
Japanese industrial output, has shown in manufacturing, the design
of products and processes has a major impact on controlling
quality. The same holds true for new ventures, for design is just as
important to controlling the quality of a venture's performance as it
is to controlling the quality of a product. Design alone, to an
enormous degree, will determine both the relative difficulty of
operating the venture and the probability of its success. By design,
we mean how the venture is set up: who manages it, to whom the
venture team reports, what format is used, the choice of entry
strategy, and the choice of milestones that trigger successive rounds
of financing. Venture design is what can enable the firm to avoid a
preventable failure whose postmortem concludes, "It was set up
wrong."
As important as the initial design structure is, flexibility must be
built in to allow for change. Furthermore, senior management must
understand the processes and signals that indicate that change is
required. The two dynamic forces that dictate the need for change
are: the problems that develop during the startup and the evolution
of the venture through its life-cycle stages. Senior managers have
to adjust to these forces and modify the venture's design when
necessary.
Design changes can be triggered both by progress and by problems.
If the new business is growing rapidly, changes will be required in
order to manage that growth successfully. If the business is doing
poorly, design changes may be made in an attempt to turn the
situation around. No matter whether the business is flourishing or
withering, some kind of design changes will surely be needed.
In the following subsections, we examine the control im-
 Page 237
plications of three key aspects of venture design: (1) the selection
and compensation of venture management, (2) the new business's
format and its location within the organization, and (3) the use of a
milestone achievement system to trigger financing.
Management Selection and Compensation. One of the central
challenges of venture design is to ensure that the venture has the
right management at the right time. As we discussed in Chapter 5,
the management skills needed to launch a venture are very different
from those needed to grow it successfully. This issue must be
addressed at the outset.
A startup requires venture management that is highly
entrepreneurial, flexible, and resourceful. As the business grows,
management must delegate decision-making responsibility, use
more formal controls (Roberts 1986), and achieve direction
through coordination, which may call for a rapid switch from
entrepreneurial management to more "professional" management
skills. (See Chapter 10 for further discussion of early transitional
stages and the requirements for different management skills.)
Transitions can be difficult, often for psychological reasons rather
than for lack of ability. It is important for senior management to be
alert to these changing needs and act appropriatelyfrom supporting
the venture team to providing needed training to replacing one or
more team members.
If the startup manager is interested in developing the skills required
to manage the new business over the long haul and is personally
adaptable, there may be no need for a change in managers.
However, many venture managers are simply not interested in
running the ventures they begin and will prefer to start new
ventures. This means there will come a time when the venture's
management must be changed. Corporate management has the
responsibility of preparing for this transition, recognizing when it is
necessary, and taking appropriate action.
Senior managers also need to ensure that the startup venture
manager understands this situation from the begin-
 Page 238
ning. Venture capitalists face a similar challenge in supporting new
ventures. One leading venture capitalist, when asked how he
handles the problem, said he discusses the matter with the
entrepreneur before the venture is financed. The discussion goes
something like this:
Venture Capitalist: You know, sometimes we find that the person who
starts a business is neither interested in building the business beyond
a certain point nor capable of doing so. What if we find this to be the
case?
Entrepreneur: Don't worry, if I find that I'm getting in over my
head, I'll be the first t o let you know. After all, it's in my economic
interest to ensure the business's success.
Venture Capitalist: But what if we think a change is needed before
you do?
The venture capitalist then discusses the developments that they
can mutually regard as warning signs requiring action for example,
administrative foul-ups; inability to attract and hold good people
or, conversely, to let go of people who can no longer contribute;
inability to handle the growing work load; or unacceptably slow
growth.
The situation is especially difficult in corporate ventures because
venture managers rarely have continuing ownership interest in the
venture that they will no longer be managing, so it is not to their
economic advantage to initiate a change; moreover, a change is
likely to be regarded as a sign of failure on the managers' part. For
these reasons, there may very well be a conflict between the needs
of the venture, the interests of the venture manager, and the
interests of the parent firm.
These conflicting interests, if overlooked, can create a situation
with a high potential for producing large venture losses or delays in
profitability. Compensation and incentive schemes can help to
bring the needs of the venture manager,
 Page 239
the venture, and the parent into closer alignment, although a major
factor in the venture manager's mind will be the sensed attitude of
the corporation toward a proposed change.
For compensation and incentives to be effective control
mechanisms for venture managers, the venture's stage of
development must be considered. There's no point in establishing a
profit incentive for a manager of a venture that isn't expected to
make a profit for five yearsby which time, the manager will
probably be long gone. Also, as described in Chapter 5, the
incentive must have the potential to significantly affect the
recipient's standard of living. The upside gain that may be achieved
through venture management can be designed to be commensurate
with the downside loss being risked. Venture management can be
given an opportunity to invest in the venture and thus share in the
risks as well as the rewards.
But even if venture managers share some risks, there is an
enormous difference between the potential gains and losses of
independent and corporate entrepreneurs, which leads us to wonder
how the losses of parent firms would be affected if intrapreneurs
had more to lose through venture failure.
Although venture managers and corporate senior managers almost
always place great emphasis on incentives and compensation, how
important are these factors from a control standpoint? As we have
shown in Chapter 5, there is no evidence that incentives, except for
milestone bonuses, are correlated with venturing performance.
Unfortunately, however, there are no data on the effect of
compensation and incentives in preventing big losses. Furthermore,
the overwhelming majority of the compensation or incentive
schemes we studied could not have made a significant difference in
the recipients' standard of living.
To provide effective control, compensation and incentive plans
should be tailored to the venture's changing objectives. One plan,
for example, provided a cash bonus for completing plant
construction, with the bonus's size depending on the time and cost
involved. This was followed by a
 Page 240
percentage of the positive cash flow, with the percentage increasing
with increased cash flow within a specified time period. Finally,
this was succeeded by a percentage of profit, calculated after a
threshold return on investment. This plan reflected the venture's
evolving priorities while providing protection against opportunistic
compromises of quality or failure to achieve market share. In this
case, the venture manager doubled his income in six months while
creating a highly successful business.
Format and Organizational Positioning. The venture's format can
have a major impact on both the control and ultimate success of the
venture. For instance, a joint venture might be appropriate in the
early stages of a new business, but as the venture develops, the
original reasons for having chosen the joint venture format might
become invalid because, say, the venture team has acquired certain
key skills formerly needed from one of the partners, the period of
maximum risk has passed, the risks have increased to the point
where one of the partners can no longer afford them, or
unresolvable disagreements have developed. To cite another
example, a venture that begins as an internal division may develop
to the point where it needs to be included in an existing operating
unit.
Organizational positioning is a particularly changeable element.
What starts as an R&D project may best be continued as a new-
business unit in a venture division or an operating division, or it
may evolve into a new division of the company or be consolidated
with an existing operation. The venture's scale and self-sufficiency
may dictate where it should be located in order to get the necessary
resources and controls.
Because a new business's format and positioning have a very high
probability of requiring change, these aspects of the venture's
design should provide for flexibility and be subject to periodic
review.
Milestones to Trigger Financing. The release of financing for the
venture should be tied to the achievement of mile-
 Page 241
stones and should be changed when the facts support doing so. The
losses anticipated before break-even may climb to a point where
the risk can no longer be borne by the parent alone, which would
call for a change in format. For example, Sprint started as a
foothold acquisition by GTE, but after years of losses, it was
changed to a joint venture in which GTE had 50% ownership, then
to an investment in which GTE had only a minority interest, and
finally GTE disposed of it completely.
In short, the venture's original design provides the basis for
achieving senior management control. And for that design to
remain effective, it must be reviewed frequently and altered when
needed.
Modified Application of Corporate Policies and Procedures
It is not reasonable to expect a fledgling venturewhich requires
nurturing, flexibility, and relief from the costs of expensive
corporate staffto blindly adhere to all corporate policies. Nor is it
reasonable to expect the corporation to put itself in legal jeopardy
or put its reputation at risk as a result of the venture's violating
important policies. Therefore, what is needed is some way to
protect the parent without crippling the venture. For example, a
particularly sensitive area is incentives and compensation methods
that are necessary for venturers but appear to conflict with the
policies of the firm.
There are many ways of allowing the new venture to have different
policies than the parent company. The corporation may spin off
ventures, which are then operated independently; it may enter a
joint venture; or it may appoint a high-level executive champion to
act as an arbitrator on policy issues. This champion can protect
both the venture and the firm by deciding which policies and
procedures can be modified or bypassed altogether.
With the guidance of an executive champion, staff personnel can
provide significant assistance to venture management by
simplifying procedures. For example, in an organiza-
 Page 242
tion that requires the use of the central engineering staff for plant
design, the executive champion could make or expedite the
decision to go elsewhere if the service will be faster and perhaps
more specifically expert, while engineering staff executives could
help in searching for and evaluating such an outside source. This is
not an idyllic dream. The IBM PC could not have been developed
as quickly as it was without such protection and collaboration.
Much of the control in large organizations is exercised through
policies and procedures, which affect hiring procedures, the
number of people hired, the job classification scheme on which
compensation is based, promotion practices, adherence to the law,
publicity about the venture and the firm, purchasing, the
relationship with customers of other organizational units, leases,
contracts, the use of staff functions, and a myriad of other practices
that must be standardized in big firms.
Venture managers often regard these policies and procedures as
obstacles: they cause delays, inflexibility, and higher costs than
would be incurred by a freestanding business. To illustrate the
frustrating impact of such bureaucracy, consider the following
experience of a venture manager in a multibillion-dollar
corporation: When the venture was initiated, office space was
provided in the firm's headquarters. The venture manager wanted
to move his furniture from his previous location, which was
deemed acceptable. As a result, however, wooden furniture
previously used at the new location was freed up. The venture
manager wished to allow another member of the venture team to
use that furniture and contacted the staff person responsible for
furniture allocation to arrange this. The proposed transfer was
disallowed because the team member was not at a high enough
grade to warrant wood, and company rules called for metal! The
venture manager asked, ''Are you telling me that I have to go out
and spend money on new furniture when we have a surplus of
furniture available?" The response was, "That's the company rule."
The venture manager declared, "I'm not going to do it," whereupon
the staff person told him that a previous similar
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incident had been referred to the corporation's executive committee
and put on the agenda at one of its meetings, at which an exception
had been permitted. It took the involvement of the firm's CEO and
a number of other senior executives to obtain a simple agreement
to permit resourcefulness.
Yet this same company is purportedly seeking to encourage
entrepreneurial behavior! How can a firm expect venture managers
to be concerned about costs and losses and retain a sense of
urgency when faced with such blind application of a policy?
Emerson was so right when he observed in his "Self-Reliance"
essay that "A foolish consistency is the hobgoblin of little minds."
On the other hand, it would be foolhardy for the organization to
suspend all policies for new ventures, even if the venturing activity
is totally separated from the parent firm. Nevertheless, an
understanding of how such policies can damage venture
development will help senior management to minimize the blanket
application of parent company policies to new businesses.
Policies and procedures reflect the accumulated learning of a
corporation (Sykes and Block 1989). For a business to grow into a
large organization, delegation is necessary, and effective delegation
requires decision rules that are consistent with the firm's
philosophy, goals, and aspirations. Those rules are a codification of
the firm's specific experience. The new venture, in contrast, doesn't
have experience, and the time for delegation has not yet arrived.
But even if delegation has occurred, the decision rules are not clear
enough, and even if the rules were clear, they would be different
from those of the parent firm.
Organizations that cannot accept such differences had better remain
as close to their present business as possible. It is the inability to
make this adjustment that contributes to the conclusion that
companies should stick with what they know bestespecially those
companies that, like old dogs, find themselves unable to learn new
tricks! It may very well be true that certain organizations fail in
diversifying new ventures not because of what they don't know but
rather because
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of what they do know that isn't relevant to the situationand because
of their inability to learn.
Design and Use of a Feedback System to Test Assumptions
Once again, we emphasize that the economic success of a firm's
overall venturing activity may and probably does depend on
minimizing the losses from failures as well as maximizing the
gains from winners. Venture management is responsible for
building a successful business, but in a corporate framework,
senior management must provide the required resources and limit
serious losses.
How can such losses be prevented? Although venture managers
must control operating expenses, serious losses do not occur as a
result of minor variations in operating expenses or sales revenues,
nor are they prevented by diligent bean counting or high-level line-
item budget control. We suggest that major losses are caused by
continued pursuit of a venture in a predetermined direction even
after the fundamental basis for the venture has turned out to be
invalid. In other words, the venture is based on incorrect
assumptions (which does not necessarily mean that mistakes were
made in arriving at the original assumptions, just that those
assumptions have proved wrong in light of emerging experience).
If the firm fails to recognize these now-wrong assumptions, it will
often fail to recognize the need for changein design, direction, or
objectives, including, but not limited to, abandoning the effortand
will instead continue pouring money into the venture.
Since assumptions are at the heart of venture planning, if senior
managers are to control a venture, they must understand the
assumptions that underlie it and make sure that mechanisms have
been devised to test those assumptions. This is part of the
"playpen" approach to venture design, discussed earlier in the
chapter, and it requires review, analysis, and decisions upon
completion of the assumption-testing events. The following three
subsections illustrate the damage
 Page 245
that can result from overlooking, ignoring, or misreading
assumptions.
Polaroid's Polavision. Introduced in 1977, Polavision was a system
for taking home movies that could be viewed in 2 minutes. In 1978,
the press reported that test marketing was successful. In January
1979, however, it was reported that the system faced obsolescence.
The $7 soundless Polavision cassette, which lasted for 2.5 minutes,
was not faring well against the $20 videotape with sound, which
lasted for 2 hours. Later in 1979, Polaroid announced the addition
of a sound feature. By September of that year, Polaroid had taken a
$68-million write-off on Polavision. The company reportedly spent
over $200 million for research, production, and marketing.
Whether articulated or not, the following assumptions seem to have
been the basis for Polaroid's entry into this business:
· Consumers wanted or would accept instant movies.
· A 2.5-minute cassette costing $7 would compete effectively
against a videotape costing less than one-fifteenth the price per
minute.
· Polavision provided acceptable quality.
· Selling and marketing would enable Polavision to overcome the
superior quality of videotape competition.
Clearly, the second assumption, about Polavision's cost-
effectiveness as compared to the competing videotape product, was
unlikely to have been articulated. Had it been, Polaroid would not
have required $68 million to test it.
Time-Life's Cable Week. This venture, whose history has been
chronicled by Byron in The Fanciest Dive (1986), introduced a
weekly guide to cable television programs customized for specific
systems. Between its start in 1983 and its termination in 1984, the
venture reportedly lost $47 million.
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According to press accounts, demand estimates were based on
computer simulation, not market tests.
Before the Cable Week venture was initiated, the following
assumptions were made:
· Time-Life had the technology to process the data on cable
programming fast enough to ensure timely printing and
distribution.
· Enough cable operators and cable consumers would accept the
publication to generate an adequate level of advertising sales.
· Cable Week would compete effectively against TV Guide and
capture part of that market.
None of these assumptions turned out to be true. However, the
biggest problem was that even though the Cable Week venture's
original proponents had clearly stated that the idea was based on
assumptions that needed to be tested, those tests were not
performed for political reasons. Instead, the pressure was on to
meet the plan, which had been widely announced. And expenses
were increased even more because new offices were constructed
for the venture before there was any evidence that they would
actually be needed.
Federal Express's ZapMail. FedEx's ZapMail venture is reported to
have lost $657 million in the aggregate, including the final write-
off. The ZapMail system, which delivered facsimile copies
anywhere in the nation in two hours, initially required transmission
exclusively to and from Federal Express facsimile machines.
However, when the service was introduced in 1984, many
companies already had competitors' fax machines, and the use of
such machines was growing rapidly. In September 1986, Federal
Express terminated ZapMail. The stated reason was that the
venture would have required an additional several hundred million
dollars for network and customer equipment.
Whether articulated or not, the fundamental assumption underlying
this venture appears to have been that enough
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companies would be willing to use ZapMail service to support the
business, despite the rapid increase in the number of firms
purchasing their own fax machines. Unfortunately for Federal
Express, companies selling competing fax machines were
improving quality and lowering costs. And Federal Express added
nothing of value for firms that already had fax machines. FedEx
could not possibly have articulated this assumption, for had it done
so, the assumption would surely have been tested or rejected as
invalid.
Taking Appropriate Action in Response to Feedback. In the
preceding examples, the key problem is not that incorrect
assumptions were made or that some new ventures failed, but
rather that they were allowed to fail in an unnecessarily expensive
manner. This high level of expense appears to be related to the
failure to articulate or test basic assumptions combined with
internal corporate pressures that prevented venture management
from altering the venture plan or aborting the effort.
When should management pull the plug? Kanter and Fonvielle
(1987) suggest that a project be continued as long as there is still a
demonstrable need for the product or service, internal support, and
evidence that the project can work. However, actions to prevent
large losses must be taken long before a termination decision is
made. Not only will these actions reduce the cost of a possible
failure, but they can also enable the firm to redirect the venture to
increase its chances of success. Here is what assumptions tests can
tell the organization about the actions needed:
· The time to pull the plug is when a go/no-go assumption is found
to be invalid and it is not replaced either with facts or with a new
assumption that justifies continuing the business.
· The time to modify the venture's direction or strategy is when
basic assumptions have changed or the firm has obtained new facts
that indicate the need for change.
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The value of testing assumptions is illustrated by the case of a
textile-manufacturing company that had developed a new material
and was approaching the point of taking orders based on approval
of a sample produced by a pilot plant. The managers had assumed,
unconsciously, that they could produce the fiber without difficulty
in one of the firm's two existing plants, since pilot operations had
given them great confidence in their knowledge of the process. In
an exercise designed to ferret out hidden assumptions in their plan,
they became aware of this assumption as well as others regarding
quality control, available capacity, and costs.
Members of the venture team decided that they had better test their
assumptions about production capability in the plant they had
selected. After a series of test runs, they realized that the plant was
not suitable for producing the new fiber. As a result, they changed
the time of their first delivery, tested their other plant, rechecked
costs, and adjusted prices. That is, the venture's actions, sequence,
and timing were altered to fit the newly learned reality, thereby
avoiding major problems for the new business. If the firm had not
deliberately articulated and tested its basic assumptions, customer
dissatisfaction might have set the venture back by months.
In another case, a food company developed a system for providing
supermarkets with frozen doughnuts that could be reheated to
produce hot, fresh doughnuts with little on-site labor. The system
required a significant investment in each supermarket outlet, as
well as the construction of a central bakery and freezing operation
to serve the outlets. The viability of the entire venture was based on
two clearly stated critical assumptions:
1. A required minimum weekly sales level would be achieved.
2. Service personnel would be available in each store.
The assumption regarding sales was derived from historical data on
doughnut sales in supermarkets and retail doughnut shops. The
assumption regarding the availability of ser-
 Page 249
vice personnel was based on the fact that the new system would be
placed next to the existing deli operations, whose personnel were
expected to be on hand as needed. To test these critical
assumptions, the corporation established a pilot production facility
and ran a six-month test in 6 supermarkets. The results were
encouraging but inconclusive. A larger test was then conducted in
50 supermarkets, with the costs of the test being shared by the food
company and the supermarket chain. The results of the larger test
showed that neither of the two assumptions held.
At that point, the company had a choice of enlarging the product
line and retesting, or stopping the program. It decided to stop the
program because, simultaneously, the environment had moved
toward scratch baking operations in supermarkets. What might
have been a very costly failure had the firm adhered to the original
business plan and doggedly pressed for more customers was
converted into a relatively inexpensive experiment. The pilot
facility, which had been expanded to serve the 50 stores, was then
diverted to a planned backup use.
In both these cases, senior management exercised control by
reviewing the results of assumptions tests and revising planned
actions accordingly. Once again, here are the critical questions
senior managers must ask about each go/no-go (i.e., major)
assumption. The first two questions are asked prior to assumptions
testing; the last four, after testing has taken place.
1. At what point will this assumption be tested? (This should be
specified in the business plan.)
2. How will it be tested?
3. What are the test results?
4. How do those results affect our original assumption? Should it
be changed? To what?
5. What are the implications of the change for the project's
timetable, costs, investment, resource requirements, action
sequence, and critical path strategy?
6. In light of the test results, should we slow the venture
 Page 250
down, speed it up, change design elements, redirect it, or terminate
it?
In many firms, even if assumptions are identified and tested,
internal pressures, described by Staw and Ross (1987), may
prevent managers from exercising the most potent form of control
over the new venturepulling the plug on it. Here are some examples
of such pressures:
· Certain pressures are endemically cultural. In many organizations,
persistence is equated with leadership, and the failure to persist is
seen as a personal or organizational weakness.
· Persistence is expected in order to meet the projections of a
business plan, even though most projections are no more than
fantasies quantified by Lotus and cannot be met.
· A project may become highly symbolic of the firm's stature and
competencea self-imposed test of its vitality.
· Some projects are continued because there is no way to recover
the firm's investment unless they are completed (for example, a
large construction project such as a tunnel). Rather than cutting its
losses, the firm continues the project in the hope of some kind of
recovery.
In short, designing and using a feedback system to test critical
assumptions will do a firm little good unless it then takes decisive
action based on that feedback.
Use of Modified Budget Control Methods
If, as we have observed, budget projections for new businesses are
rarely accurate, what is the point of budget control? The budget is
the financial expression of the business plan, and although both the
plan and the budget will inevita-
 Page 251
bly require change, operating budgets and budget reviews will help
the firm pinpoint the factors that necessitate changes. An
understanding of these factors, coupled with growing knowledge
about the business, will or should result in an increasingly reliable
budget control system.
Tracking the cost of getting from one point to the next in the
venture plan is a more effective means of control than monitoring
monthly expenditures. Let's take the example of a project in which
R&D costs are budgeted at $50,000 per month, with a target of
completing product development in 12 months. Normal control
methods would focus on the $50,000 in planned monthly
expenditures, with variances being reported and investigated. If
product development had not been completed at the end of 12
months, more time and money would be provided.
A step toward a more realistic budget control approach would be to
earmark a lump sum of $600,000 for the completion of product
development. Rather than conducting monthly reviews, the firm
would conduct stage reviewsfor example, upon completion of the
following events: formulation, process design, process testing,
development of quality control procedures, and development of
specifications for raw materials and finished product. In building
the $600,000 budget, the firm would estimate the cost and time
required to complete each stage in the product development
process. Either upon completion of a particular stage, or at some
earlier or later point, the cost to reach that stage would be
compared with the estimate and used to determine the impact on
the cost of completing future stages. This budgeting process can be
carried through for each stage of business development.
Here's a case involving the production of a motion picture that
provides a very good example. An independent producer attempted
to raise additional funds to complete a film, which, at the time,
consisted of raw, unedited footage containing many scenes that
required reshooting. In seeking funding, the producer (whose first
film this was) requested an amount that would supposedly suffice
to completely finish the
 Page 252
film. An experienced film producer was consulted and was asked,
''What percentage of the total cost of a film is usually spent to
arrive at this film's current stage?" The answer was 25%. Yet the
sum requested by the neophyte producer was based on the estimate
that more than 75% of the film's total cost had already been
incurred and that only 25% of that estimated total was still needed.
Additional funds were raised, but the amount was increased enough
to reflect a more realistic estimate of the cost of completing the
film.
To cite another example, a venture's budget calls for achieving $1
million in sales during the first year of commercial sales and shows
cumulative project costs of $2 million. Of that $2 million, the
budget calls for $500,000 to be spent in the first year to achieve the
sales, with that sum covering all costs, including selling costs. By
November 15, though, it is clear that sales for the year will reach
only $500,000, but $1 million has already been spent. The budget
review should focus on the reason for these variations. Should any
assumption be changed? If the company were budgeting now, on
November 15, how would it change the selling cost/sales/ time
numbers? Is the variation in the cost required to reach the event one
that will affect all future projections? The senior manager to whom
the venture manager reports must ask these questions and dig for
causes and work to identify needed changes. The venture manager
must have done likewise and be ready to make or have already
made the required changes in strategy or actions.
On the other hand, let's say the sales result was exactly as indicated
in the preceding paragraph, but just $250,000 was spent in that
year. In this case, the only variation involves the time, and the only
important questions about this variation are whether the venture's
competitive position is endangered by the delay, when the venture
expects to achieve future sales, and how the budget and plan should
be changed to reflect this new knowledge about timingespecially
the sequence and timing of future actions.
(Note: In preparing estimates, it is very common to underestimate
how much time will elapse between the first offer
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to a customer and the first purchase. This is especially true in the
case of industrial products or services, or capital equipment, or
when a prospective customer must change its procedures in
connection with the purchase. The venturing firm really has to
understand the market practices to make any reasonable estimate of
the required selling time.)
It is during the budget review process that destructive pressures can
be brought to bear on venture managers, causing them to
concentrate on meeting timetables and justifying costs based on
line-item review rather than on completing key events and
objectively analyzing the costs required to do so.
Again, we want to make it clear that this systematic approach is not
applicable in the case of certain high-risk ventures in which, for
example, entry barriers to competition are very low, there is little or
nothing proprietary about the firm's venture position, and seizing
market share rapidly is the key to venturing success.

Control Roles: Venture Management Versus Senior Management

Senior management's role, which is to control corporate risk, may
be filled by a corporate or operating unit responsible for a number
of ventures, by an operating unit of the firm, or by senior corporate
executives, all external to the venture itself. Venture management's
role, which is to manage and control the venture, is filled by those
directly responsible for operating the venture, who are inside the
venture itself.
The ever-present and universal dilemma is to find the right balance
between allowing venture management to have the necessary
freedom and enabling corporate management to exercise the
necessary controls. (Table 9-1 illustrates the distribution of control
tasks between parent and venture management.) The suggested
basic principles for senior parent management are to permit venture
management to run the venture within specific outer limits, to
clearly identify the go/
 Page 254
Table 9-1: Distribution of Control Responsibility
Venture Senior
Control Tasks Management Management
Responsibility Responsibility
Design
Select venture management Primary
Design compensation/incentives Primary
program
Select format/entry strategy Secondary Primary
Determine organizational positioning Advisory Primary
Establish financing triggers Secondary Primary
Propose business plan Primary Approval
Feedback Implementation
Articulate assumptions Primary Secondary
Design assumptions tests Primary Secondary
Review test results Secondary Primary
Modify business plan Primary Secondary
Approve plan changes None Primary
Budget Control
Prepare budget Primary Advisory
Approve budget None Primary
Conduct line-item review Primary None
Prepare event completion budget Primary None
Conduct event completion Primary Primary
reviewbudget
versus actual
Policy/Procedure Control
Identify obstacles Primary Remove them
Identify necessities None Primary
Permit exceptions None Primary
Fate of the Venture
Decide the venture's fate Secondary Primary
Note: "Primary" means having the decision-making responsibility. "Secondary"
means having the responsibility for providing input and participating.
no-go assumptions and the events that will be used to test them, to
review the results of those tests carefully, and to assure that appropriate
action is taken based on those results. Aside from the issue of control,
senior management must
 Page 255
supply the required support, as described in Chapters 2 and 8.
Conclusion
Traditional control methodsi.e., line-item budget reviews, variance
from projections, and time-centered budgets unrelated to the
completion of events or the achievement of milestonesare not
effective either for promoting the success of new ventures or for
preventing large losses from venturing.
The most important control instruments are the design elements of
the venture itselfwho manages it, where it is positioned within the
parent firm, what its format is, the key milestones chosen to trigger
the release of financing, and the venture's strategy and plan. These
elements are what must be altered when necessary to achieve the
desired control.
Control can also be achieved by modifying how corporate policies
and procedures are applied to the venture; identifying key
assumptions, testing them, and making appropriate changes based
on the test results; and using modified budget control methods
suited to the unique requirements of a new business.
The goal is to devise a system that enables senior management to
maintain an adequate degree of control without stifling the venture
and at the same time enables venture management to have the
necessary freedom and flexibility without putting the parent
company at risk.
Guidelines
1. Design the venture to provide freedom for venture management
within outer limits. That is, use the "playpen" approach to venture
control rather than the "harness" approach, and redesign the
"playpen" as the ''baby" grows!
 Page 256
2. Designate a senior executive champion or facilitator to cut red
tape and modify the application of policies and procedures.
3. Use budget controls that focus on the completion of events or the
achievement of event-related milestones rather than on line-item
control related to the calendar; compare actual results against
budget; and use what is learned to determine how much should be
budgeted for subsequent events.
4. Make sure critical assumptions are identified and tested and that
test results are used to determine whether and how to redirect
and/or redesign the business.
5. Dispose of the venture (i.e., sell or liquidate it) when a go/no-go
assumption is found to be wrong and cannot be replaced with a
satisfactory substitute assumption, for this means the firm no
longer has any basis for staying in the business.

References
Block, Z., and Subbanarasimha, P. N. 1989. "Corporate Venturing:
Practices and Performance in the U.S. and Japan." Working paper.
Center for Entrepreneurial Studies, Stern School of Business, New
York University.
Byron, C. 1986. The Fanciest Dive. New York: New American
Library.
Kanter, R. M., and Fonvielle, W. H. 1987. "When to Persist and
When to Give Up." Management Review 76, no. 1 (January): 14-
16.
Roberts, M. J. 1986. "Managing Growth." Note #9-387-054.
Boston: Harvard Business School.
Staw, B. M., and Ross, J. 1987. "Knowing When to Pull the Plug."
Harvard Business Review (March-April): 68-74.
Sykes, H. B., and Block, Z. 1989. "Corporate Venturing Obstacles:
Sources and Solutions." Journal of Business Venturing 4, no. 3:
159-167.
 Page 257

10
A Survival Guide for Venture Managers
This chapter is specifically addressed to those who lead the way
toward the creation of new businesses and who manage ventures:
the product or venture champion, who promotes the venture
internally; the business innovator, who is responsible for the
project (the venture manager); and the executive champion, who
acts as the venture's internal protector and buffer. A large part of
the battle to establish a successful venture capable of long-term
survival depends on managing the internal relationships and
expectations of the sponsoring parent organization. (Too often, this
is a case of, "With friends like these, who needs enemies?") The
key problem faced by the venture group, and especially the venture
manager, is to achieve enough credibility so that they are free to
concentrate on the new business rather than negotiate constantly
with their parent. The information in this chapter is designed to
help them meet that objective.
 Page 258
The need to manage the internal relationships and expectations of
the parent firm arises because every corporate venture is an assault
on the status quo. It is a dangerous mission to the frontiers of
corporate culture and management, often pushing the limits of
both. Survival in this environment depends on a finely tuned
instinct and a different set of rules than those that apply to
established businesses.
Venture managers cannot always turn to others in the organization
for guidance, because what works for managers of mature divisions
may not work for the venture. Nor can venture managers look to
independent entrepreneurs for guidance, because corporate
entrepreneurs (i.e., intrapreneurs) must consider more varied and
more numerous constituencies than those dealt with by
independents; they have less control over the money, people, and
physical resources needed than do independent entrepreneurs
(however sparse the independents' resources might be); and they
must be effective internal advocates and politicians, and must
manage the expectations of a variety of audiences (with senior
management being chief among them). Unlike their counterparts
outside the firm, corporate venture champions who initiate high-
reward/high-risk ventures are engaged in what, from their personal
standpoint, is an inherently low-reward/high-risk activity.
Survival in this corporate environment is not easy. Under the best
of conditions, the venture is created within a culture that supports
and rewards innovation and entrepreneurship. But such an ideal
situation is rarely encountered. And even in the best-managed
firms, would-be innovators face a number of significant obstacles,
including the competition for resources. Successful venture
champions know how to use the system to overcome such obstacles
and advance their project.
Despite the drawbacks, there are plenty of people who are
internally motivated to innovate. Unwilling to wait for their
organization to change, they either leave the firm (with or without
venture capital support) or learn how to operate effectively within a
relatively hostile environment. The forces
 Page 259
driving such people vary enormously, but most common are the
urge to see an idea come to fruition and the need for greater
autonomynot too different from the forces driving independent
entrepreneurs.
In many cases, these innovators provide the impetus for a new
venture and then move on to the next innovative effort. They tend
to be out of the picture by the time the venture is operating
profitably, with some being transferred, others promoted, some
replaced, others discharged. At the other extreme, some innovators
are kept in the venture management role too long, resulting in
severe, and often fatal, damage to the ventures as well as to the
intrapreneurs' career.
This chapter, which is designed to help intrapreneurs achieve
greater venturing success in a corporate environment, shows what
they can do to minimize such organizational and professional risks
and to maximize both the performance of their ventures and their
own career development. Achieving venturing success requires a
fundamental strategy of undercommitment and overperformance,
as we discuss in the following section, after which, we offer ten
survival principles that intrapreneurs can use to implement that
strategy.
The Golden Rule of Venturing: Undercommit and Overperform
The greatest need and greatest deficiency of new-venture managers
is credibility. Remember, constant uncertainty is the only sure thing
about new ventures. This means that venture managers have to
adapt rapidly to new information, but in order to do so, they must
be given great freedom and a high level of empowermentfar more
freedom and empowerment than are typically given to managers of
stable business units. Yet senior management does not easily grant
such latitude to people whose credibility has not been established
and who tend not to fit the normal corporate profile. (A remark by
Peter Drucker at one of his symposiums neatly sums up the reason
why corporate innovators often have to work hard to
 Page 260
earn the trust of senior management. When asked, "How do you
identify the entrepreneurs in the organization?," Drucker
responded, "Look for the troublemakers!")
The best way to earn credibility is to have a track record of making
and meeting commitments. Seasoned managers, who have such a
track record, have credibility, but venture champions are usually
not seasoned managers. Hence, the largely untested innovators who
lead new ventures need to gain as much credibility as possible as
quickly as possible, and they have to earn that credibility during the
creation of the venture. Using the planning method described in
Chapter 7which begins early in the game with clearly visible action
targets that have a relatively high probability of being achieved and
gradually aims for more ambitious targets as more is
learnedincreases the odds of achieving credibility.
In building this credibility, it is essential for venture managers to
understand that nobody cares how well they do in an absolute
senseonly how close they come to meeting their projections (or
budget or commitments or expectations). This is particularly
evident in stock market reaction to company performance, which,
in turn, may be responsible for senior executives' low tolerance for
surprise.
A dramatic example was the 10% decline in the price of
McDonald's stock on July 23, 1990, despite the fact that the
company's sales and income were increasing at the time. As The
Wall Street Journal explained: "McDonald's failed to meet Wall
Street's earnings expectations" (A-7). In fact, earnings per share
were $0.59 for the second quarter versus an expectation of $0.60!
Furthermore, sales were 9.9% higher than the previous year, and
net income was up 10.2%! Yet when U.S. Healthcare reported
quarterly earnings of $0.65 a share instead of the expected $0.45,
several analysts felt that they had been misled, which the company
strongly denied. On May 6, 1991, The Wall Street Journal
headlined its story: "Low Balling: How Some Companies Send
Stocks Aloft" (1). Both of these stories illustrate the point that
analysts seem to attach more significance to meeting expectations
than to actual performance. Additional evidence is provided by the
 Page 261
widespread use of incentive plans that are linked to making or
beating budgeti.e., to meeting the financial performance
commitment. Under such plans, even if absolute venture results are
outstanding, the manager can be penalized if those results fail to
meet expectations.
Because meeting commitments is more important than absolute
performance, a fundamental rule for venture managers is to
undercommit and overperform. This will enable them to develop a
track record of consistently meeting commitments, which, in turn,
will build credibility. This rule is particularly applicable when it
comes to predicting the level of sales to be achieved by a given
time, which tends to be the most unreliable prediction in any plan.
Thus, it is advisable for venture managers to predict the lowest
sales level at which the plan will be accepted, even if that level is
lower than their private expectations. In the case of industrial
products or services, no matter what commitments have been made
by prospective customers, those commitments should be
discounted in making sales projections, since many unknown
factors can intervene between such commitments and the actual
sales.
On the other hand, Conner Peripherals (which grew from sales of
$0 in 1986 to $113 million in 1987 to $705 million in 1989) has
successfully followed an unusual strategy for launching major new
products: sell, design, and buildin that order! This strategy moves
the unpredictability to the design and build area, which is subject to
better control than sales (Kupfer 1990).
For most new ventures, the recommended strategy of
undercommitting and overperforming is easier said than done. How
can venture managers meet their commitments in a situation in
which uncertainty prevails and surprise is the norm? How can they
get an idea accepted if its potential value is unknown? How can
they state an idea's potential value conservatively and still obtain
resources if their idea is competing with other ideas or other
demands for investment, particularly if the value of those other
proposals is either more predictable or stated less conservatively?
How can they
 Page 262
maintain credibility with consistent undercommitment and
overperformance?
These challenges illustrate the difficulty and impracticality of
absolute rules. Precisely how far to undercommit must be weighed
in the context of each situation: What will it take to get a project
approved? And what level of performance can actually be
achieved? We do not recommend dissimulation or falsification.
Rather, managers can be direct about making a commitment to no
more than a certain level of performance while at the same time
indicating that a higher level of performance is possible, although
that higher level is more to be aimed at and hoped for than to be
banked in advance.
Despite the difficulties of following the "undercommit and
overperform" strategy, this approach is far superior to
overcommitting, which ensures underperformance and loss of
credibility. And as we show in the next few pages, the shorter the
time span of the commitment the venture manager makes and the
smaller the action he or she commits to completing, the greater the
likelihood that the commitment can be met.
Guiding Principles for the Survival of Venture Managers
This section discusses the following ten principles, which are
drawn from our experiences and the experiences of venture
managers and champions whom we have studied and with whom
we have worked:
1. Don't pursue an idea unless the potential reward justifies the
potential risk.
2. Ask for the smallest possible decision at each stage of
development.
3. Find and use allies, especially an executive champion.
4. Be your own first and most rigorous critic as you change your
plan.
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5. Recognize your own weaknesses and act decisively to
compensate for them.
6. Avoid premature publicity, both internal and external.
7. Do not automatically decide to sacrifice profit and cash flow for
market share.
8. Recognize and adapt to the venture's life-cycle stage.
9. Convince senior management that new ventures need different
policies and procedures than the more mature parent organization.
10. Provide leadership as well as management.
In conjunction with the overall strategy of undercommitting and
overperforming, these principles can help venture managers
survive and thrive in a corporate environment.
Don't Pursue an Idea Unless the Potential Reward Justifies the
Potential Risk
The need to assess the risk/reward potential before proceeding with
an idea may appear self-evident, but such an assessment is often
overlooked, or an idea's benefits are assumed without verification,
or the idea may seem promising at the outset but the promise
doesn't materialize in practice. In moving from concept to reality,
three questions must be answered with increasing confidence at
each step: (1) Is the idea feasible? (That is, can the project be
done?) (2) What are the potential upside gain and downside risk?
(3) Does the idea fit the firm, or can it be made to do so?
Answering these questions is a step-by-step process. There is no
way these questions can be answered with a high degree of
confidence at the beginning of a venture, but at each stage, the
answers should become more definite and refined. Therefore, this
principle combines the need to find the answers with the need to
move the idea forward as far and as fast as emerging reality (i.e.,
performance) justifies.
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Ask for the Smallest Possible Decision at Each Stage of
Development
The venture manager should strive to keep the magnitude of
decisions required by higher authority as small as possible for as
long as possible consistent with achieving the venture's objective.
In keeping with the need to establish credibility, the venture
manager must concentrate on achieving a first small step that
shows the value of the idea or the proposed new business rather
than seeking support for the total project at the outset.
Even getting approval for the first step can be a major hurdle at
some firms. The process usually begins with proposing a new-
venture idea and obtaining funds or time for concept testing. A
common procedure is for the idea generator to write up the idea
and present it through "proper" channels. An uncommon, but by no
means unknown, procedure is to bootleg this first stepto find a way
of accomplishing it without multiple levels of approval.
In one company, five different approval levels were required for
any expenditure relating to a new idea. A snowball has a better
chance of surviving a trek across the Sahara than an idea has of
making it through this process. And yet the top management of this
Fortune 500 firm constantly bemoaned the dearth of innovation in
the organization. Even so, innovation happens in spite of the
system. For example, the senior executive of a highly innovative
and economically successful division of the firm refused to give his
subordinates permission to explore new ideas, replying simply,
"Don't ask me. Just do it."
Doing battle with the corporate bureaucracy can be daunting. In a
large telecommunications company, the usual response was, "Let
me see a business plan," or outright rejection. One idea generator in
this firm spent an entire year writing and revising business plans
based on a single idea, only to have the idea rejected. His comment
was, "How can I be expected to write a business plan when I don't
know anything yet?"
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The following subsections offer a few suggestions for how astute
venture managers can advance incrementally but steadily, even
through the thickest bureaucratic jungles.
Don't Ask for Permission. Some innovators have found clever
ways to avoid dealing with the system altogether, eliminating the
need for permission. A computer programmer with an idea for a
new, marketable program for her firm bought the necessary
hardware, used her own time to verify probable need/value by
checking with a few potential industrial customers, developed a
program prototype at home, and presented management with her
results. The firm bought the hardware from her, recognized her
contribution with a bonus, and then allocated the funds for
complete development.
Use Suppliers. Suppliers can be enlisted as allies in the process of
testing an idea. At one firm where getting approval for a capital
expenditure required three levels of sign-offs and several months,
an innovator convinced a supplier to help establish a new quality
control method. At the innovator's urging, the supplier lent the firm
the testing equipment in order to establish both how it would
function and the magnitude of the process cost savings that might
be achieved. No in-house permission was needed except from a
friendly plant manager. After the tests had been completed, a
request for funds was prepared and justified by specifying the
amount of money that would be lost every week if the equipment
were returned. The expenditure was approved within days, despite
some mild mumbling about ''not following procedures."
Use Customers (They Have More Credibility Than You Do).
Customers can be the venture manager's most effective allies in the
effort to secure approval for testing new ideas. An interested
prospective customer can demonstrate the need for an innovation to
reluctant management and create pressure for rapid approval of the
idea. One research VP of an industrial food company regularly
colluded with customers to request specific developments. This
was also a very
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useful step in determining the likelihood of a market for the
proposed innovations.
Scrounge, Borrow, Beg, Seduce. In other cases, people have used
money diverted from another budget to fund a concept test.
Bootlegging has become so common that some firms positively
encourage it.
The preceding examples show resourcefulness in action and, if
necessary, a willingness to beg for forgiveness rather than ask for
permission. Some of these strategies entail risk to the individual
implementing them, particularly if the idea doesn't pan out, but the
venturing game is not for those who are unwilling to take necessary
risks.
In most situations, such extraordinary tactics are not necessary to
get approval for testing an idea. In these companies, the innovator
should still maintain a focus on the first stagetesting the concept.
But to gain corporate support for initial testing, the concept must be
described. This corporate support is particularly important in the
case of consumer products, for which concept testing requires
professional design and may also require research to determine the
size of the potential marketwhich can involve significant out-of-
pocket costs.
Develop SupportStep by Step. The method we recommend for
creating support for a project involves first writing a proposal, then
proposing a feasibility study, and finally building a business plan.
Step 1: Write a proposal. The process of generating support begins
with writing a proposal, which can then be presented for approval.
The proposal should contain the following elements:
1. A description of the idea that needs to be concept-tested and how
it fits the company's strategy.
2. Either a rough guess of upside gain, downside risk,
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feasibility, and fit or a statement of the need for testing to provide
data on which to base a first estimate.
3. The anticipated target market segments and their rough potential.
4. A statement of the need or want to be fulfilled.
5. A statement of the possible benefits to the firm.
6. Competitive advantages that may be obtainable.
7. A description of the concept test.
8. A statement of the test's objective: to determine whether to
proceed with a feasibility study, modify the concept, or drop it.
9. The funds and time required for the test. (If producing a
modelnot a prototypewould be relatively easy and inexpensive
[e.g., a food product, a simple mechanical device, an information
service in printed form], funds for this should be requested as well.
If producing a model would involve significant cost, time, and
effort, the concept test results should be obtained before proceeding
with the production of a model.)
In order to clarify the objective of the idea proposal and help build
credibility, the proposal's tone should be a combination of
enthusiasm and inquiry. The proposal is for an experiment, to
determine whether the firm should proceed to the next step or
whether the concept might need to be changed and retested. The
test's objective is not to "prove the concept" but to give senior
management the information it needs in order to determine what
the next step should be. No approval is to be sought for that next
step at this time.
Step 2: Propose a feasibility study. When the first step is
completed, the innovator is in an improved position to obtain
approval for the next, more expensive, feasibility verification step,
assuming the innovator has met his or her commitment to get the
answers within the specified time frame and cost and the results
warrant further action. The innovator's credibility is enhanced if he
or she exhibits objectivity and is will-
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ing to modify or reject the concept if necessary. A negative concept
test result does not always lead to abandonment; it can also be used
as an analytic tool for modifying the concept or the target market.
If the concept test results are favorable with respect to the upside
gain, downside risk, apparent feasibility, and fit, the next step is
exploratory product development and market research to get
approximate information regarding the following issues:
· How much it will cost and how long it will take to complete the
development process
· Cost/price range of the product, service, or business
· Market acceptance and size, which should be examined in greater
depth at this time
· Investment requirements
· Competitive positionin terms of quality, costs, and functions
· Quality requirements and possibilities
The purpose of this step is to get enough information to enable
senior management to make a sound decision about proceeding
with the much more expensive step of development. The proposal
for feasibility verification should therefore include a plan for
obtaining all the required information. The proposal's tone should
still convey a spirit of learning and enthusiasm. Its aim is to
achieve the stated purpose in the stated time at the stated cost.
It is at this step that uncertainty becomes more intense, particularly
if laboratory or engineering development is involved. Development
always takes longer and costs more than estimated. The project
champion must clearly state at this point what is and is not
predictable in order to control expectations and minimize
disappointments.
Here's an example, discussed briefly in the preceding chapter, that
illustrates this "one step at a time" approach. In the late 1970s,
many supermarkets were opening in-store
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bakeries. Although these operations were universally unprofitable,
they were considered essential to attract traffic. An innovator in a
company that sold bakery machinery and prepared mixes had an
idea for a system that might solve the profitability problem. Stores
would be supplied with frozen baked products, which they would
convert to a warm, fresh state in minutes with a machine that
would use an infrared-and microwave-based heating process. The
first proposal called for a concept study to determine the system's
acceptability among supermarket chains and learn the economic
(investment/return, margins, labor costs) and capacity
requirements. This proposal was approved, and the study was
conducted within the time limits and budget proposed for that step.
Based on the study's results, a second proposal was developed to
put together a working model of the equipment. This step was
needed to determine its feasibility, design specifications, and cost
range. The proposal also included a first rough estimate of potential
market size for machinery, mixes, and frozen baked products as
well as a protocol for using an alpha site to verify the data upon
which the market estimate was based. This step was also completed
very close to time and budget commitments, with a great deal of
resourcefulness exhibited by the product champion in the process.
Each of the preceding steps was positioned as an effort to learn
whether this idea could be transformed into a commercial reality
and, if so, how. As a result of this testing, a number of changes to
the concept were developed and openly presented. Up to this point,
no major economic decision had been required.
Upon completion of this feasibility study, a business plan was
prepared. It was quickly approved, both because of the project
manager's credibility and because the information accumulated in
the preceding steps provided the basis for writing a sensible and
credible plan. As it turned out, the business was not successful, but
no losses were incurred because the plan provided for recovery of
all costs in that eventuality.
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Step 3: Build a business plan. Because of the enormous uncertainty
associated with the development of any new business, the
preparation of a reasonably reliable business plan must be deferred
until enough is known about the idea to give the plan a fair shot at
credibility. The business plan is presented after the concept has
been proved and enough facts have been obtained through
feasibility analysis and product development to provide the basis
for making reasonable assumptions upon which the plan can be
based. The preceding steps must therefore be completed before
acquiring the bulk of the resources needed for startup, which is
triggered by approval of the plan.
In constructing the business plan (which, from a physical
standpoint, should be modular and in loose-leaf form), the venture
team must keep the following things in mind: (1) the plan will be
based principally on assumptions; (2) many of those assumptions
will turn out to be wrong; (3) the plan will require changes; and (4)
venture managers will tend to be evaluated based on their ability to
meet planned objectives.
In an organization with an innovative culture, senior managers who
understand the inherent unpredictability of new ventures will
continually ask, "How are things going?" In organizations without
such a culture, the venture champion can help change the culture as
well as advance the project by being consistently realistic, open,
and direct with authorizing management. Since an anti-innovative
culture tends to demand plan fulfillment, seek stability, and resist
change, it is important for the champion to openly and realistically
clarify expectations so that, in a sense, there is "planned" surprise
(i.e., learning new things) and there are planned changes to the
plan, by means of adjustments made at key milestones, as
described in Chapter 7. Growing acceptance of this dynamic
process is in fact a cultural change of some significance. The
venture manager accumulates credibility by committing to what
can be done and then doing it better and faster than promised.
However, in addition to building a technically sound business plan,
provisions must be made at this time for managing the expectations
of senior management.
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To accomplish this, the planner should define success criteria for
each stage in the plan and make the process for achieving these
criteria as predictable as possible. (Venture managers frequently
mention lack of a definition of success as a significant obstacle to
venturing.) The two criteria most useful at any point are: (1)
meeting the learning objectives and (2) applying what is learned to
future actions.
Because many of these actions are likely to be quite different than
originally planned, explanation or defense will be required, which
leads to our next principle.
Find and Use Allies, Especially an Executive Champion
In conducting the step-by-step exploratory process of developing a
new venture, it is critically important for the venture manager to
find allies within the organization. Such allies should include
people with knowledge and skills who can contribute to the
program; people with influence who will support the program; and
an executive champion who can act as a buffer, an adviser, and a
guide through the corporate bureaucracy. At Du Pont, for example,
innovators are encouraged to get assistance from people outside
their immediate area of activity, who will actually perform
technical work on a voluntary basis. At 3M, innovators are
encouraged to seek sponsorship anywhere in the firm that they can
find it.
Having an executive sponsor or champion is an important success
factor in venturing. For major projects or businesses, the executive
champions should be the CEO and the top management group.
Only such sponsorship and support by then CEO Regan made
Merrill Lynch's "Cash Management Account" venture possible and
successful. Without the sponsorship and drive of Al Neuharth,
Gannett CEO, USA Today would never have gotten off the ground
and would have been abandoned long ago. Even he, as CEO,
needed to find allies on the board in order to keep the venture alive.
(Note: As of January 1992, USA Today was reported to have
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lost $18 million in 1991 but is expected to turn a profit in 1992.)
Be Your Own First and Most Rigorous Critic as You Change Your
Plan
Venture management's ability to remain both enthusiastic and
realistic will reinforce its credibility with senior management. The
venture manager should critically examine every aspect of the
venture, not only at milestones but throughout the venture creation
process. He or she must relentlessly probe for hidden assumptions
and expose these assumptions to the hard light of reality. If the
project should be discontinued, venture management should be the
first to recommend it, in the best interests of both the corporation
and the venture team.
Recognize Your Own Weaknesses and Act Decisively to
Compensate for Them
As important as it is for venture managers to realistically assess the
venture's progress, it is just as important for them to turn this
critical eye toward themselves. Greiner, in his classic article
"Evolution and Revolution as Organizations Grow" (1972),
describes five phases of development, which involve growth
through (1) creativity, (2) direction, (3) delegation, (4)
coordination, and (5) collaboration. And as we saw in the
preceding chapter, each of the several stages or phases in a
venture's life cycle requires a unique set of leadership skills from
the venture manager. The firm can obtain the required skills either
by replacing existing personnel or by training existing personnel
and helping them to make the necessary changes in their approach
to leadership.
During the second phase, growth through direction, there is usually
a functional organization, job assignments are more specialized,
and communication is more formal. The
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focus is on efficiency; the style is directive; and control is exercised
through standards and cost centers. Upper-level people usually
provide direction and require lower-level managers or supervisors
to act simply as functional specialists. Thus, crises develop if the
people who understand more about the nitty-gritty details of the
business have less to say about what direction it should take. Such
crises can be avoided by delegating more, by moving decision
making closer to the action site. Unless this is done, the people who
know the most about the business are likely to leave. A move
toward empowering others is particularly difficult for highly
directive managers to make, but without such a move, growth
stagnates and the firm will experience an increasingly urgent need
to replace managementsparking another crisis.
The third phase, growth through delegation, focuses on expanding
the market. As the name of this phase implies, the style is
delegative, and control is exercised through reports and profit
centers. This approach results in faster response to customers and
accelerated new-product development. A consequence of
decentralized operations at this stage of business development is
perceived, and often actual, loss of control by the firm's top
executives, who become concerned about duplication, the need for
coordination of planning, and controlling the allocation of
resources, particularly money. Sometimes, the result is a return to
centralizationa solution that negates the benefits of the powerful
market orientation of decentralized business units and may doom
the firm if its products and markets are even moderately
diversified. Such organizations must respond swiftly to customers,
guided by direct and intimate knowledge of their wants and needs.
If growth is to occur, it must happen through coordination methods
that do not sacrifice previous gains.
But the coordination mechanisms found in almost all large and
medium-sized multidivisional enterprises include the establishment
of product groups, formal planning procedures and reviews, and a
corporate staff for control and review. Proposals for capital
expenditures are examined carefully; ROI becomes a measure of
performance for product
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groups; stock options and companywide profit incentives are
instituted; and growth is expected to be achieved through more
efficient use of the company's resources. Although these
coordination mechanisms have been essential to the growth of such
enterprises, in them can be found the seeds of the next crisisthe
crisis of red tape that results from the lack of confidence between
line and staff and between headquarters and field. As Greiner
(1972) describes it:
Line managers . . . increasingly resent heavy staff direction from
those who are not familiar with local conditions. Staff people . . .
complain about the uncooperative and uninformed line managers.
Together both groups complain about the bureaucratic paper system
that has evolved. Procedures take precedence over problem solving,
and innovation is dampened. (43)
A wide array of approaches have been used to solve this crisis of
red tape: empowering the organization's people, restructuring (i.e.,
slashing overhead, consolidating, disposing of operations), and
becoming more aware of the need to stay close to the customer.
Understanding business life cycles and their implications is
indispensable for the corporate entrepreneur. Unless the venture
manager acts to supply the management skills needed at each stage,
new management will be required. This does not mean that all the
skills have to reside in one person, but the leader of the business
must be aware of his or her strengths and weaknesses and must
take the initiative in building a team with the necessary
combination of talent and skills. Self-knowledge is a critical
prerequisite for achieving that combination.
Avoid Premature Publicity, Both Internal and External
In the enthusiasm and excitement of actually launching some
innovative activity, senior management may be strongly tempted to
sound the trumpets before anything has really
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been accomplished. Resist this temptation! All the evidence
indicates that such premature publicity only causes damage. The
first thing that happens is that those involved in the new venture
become crown princes or princesses and objects of jealousy on the
part of their poor, benighted colleagues who are forced to work in
the firm's dull, old businesses. Second, expectations rise. Since
those expectations are rarely met, the initial highs of recognition
and praise are followed by the lows of cynicism and
demoralization, which, in turn, are followed by the departure or
discharge of those who have been lionized.
Premature publicity also aids competitors, both by giving them
more time to counterattack and by providing them with information
that would be useful for recruiting promising entrepreneurs.
Granted, there are exceptions, particularly in high-tech ventures,
when early publicity can be used deliberately to induce potential
customers to postpone buying a competitor's product. Although this
type of early-stage publicity may be a strategic necessity, failure to
fulfill such promises can have a high reputation cost.
Celebration should be postponed until there is real accomplishment
in the marketplace, in application, or in proprietary protection.
Although in-house recognition of innovative initiatives encourages
effort, it must be done with sensitivity and on a scale appropriate to
the situation. One financial services company has found it effective
to hold an internal ceremony with rewards for the innovators,
without any external or print publicity. Finally, whenever publicity
does occur, it is vital to ensure that recognition is given to the team
and individual team members, not just to one lone hero.
Do Not Automatically Decide to Sacrifice Profit and Cash Flow for
Market Share
A few studies, particularly Biggadyke's (1979; discussed in
Appendix A), have shown that new entries that sacrifice early
profit and cash flow for market share do better in the
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long run. This conclusion has been reinforced by reports on the
Japanese practice of sacrificing early profit for market share. But
this strategy is not applicable to all ventures, and the dangers of
using it as a universal guideline are as follows: many companies
can't afford this strategy, and if they try it, they will run out of
money before breaking even; with strong enough proprietary
protection, this strategy is unnecessary and wasteful; if the firm
experiences a change at the top, the new CEO may refuse to
tolerate continued losses or demands for cash; and most likely, the
firm's ongoing businesses will come under pressure for cash and
profit, with help from the stock analysts baying at management's
heels. All these pressures could lead to the abandonment of a new
business.
Share and profit are not related by a simple equation. Competition,
market status, affordability, and competitive insulation must also be
considered. It cannot automatically be assumed that the venture
will gain share only by losing money!
NYNEX learned that market share was less important than profits
in managing its retailing unit, which was running profitably when
NYNEX decided to go for share. After acquiring IBM's retailing
operation, NYNEX went after market share, just as the gurus say
one should, and incurred large losses. Top management then
decided that the market share strategy was too costly and
unnecessary, with no light at the end of the tunnel, and switched to
a money-making strategy. This latter strategy succeeded, and the
business has continued to grow. Another firm started by achieving
a new venture's profitability and share objectives in a single region.
Then it went about establishing share in other regions but carefully
separated the costs of enlarging share from the costs, profit, and
cash flow associated with the core venture in the already profitable
region.
To summarize, the most important factors that contraindicate a
universal strategy of long-deferred positive cash flow and profit are
frequent changes in chief executives, the threat of takeovers, and a
volatile economy. Thus, when planning the business, management
must define the terms of success
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and then select the strategy that is precisely designed to achieve the
success of the specific venture in the specific firm.
Recognize and Adapt to the Venture's Life-Cycle Stage
Starting a new business is so different from running an established
one that the use of the parent company's standard policies,
procedures, and management practices often jeopardizes the
venture's existence. Even the methods that worked successfully in
starting the venture can become dangerously outdated as the
venture matures. Management can kill the venture by failing to
adapt to its changing needs.
Professionalization calls for changes. Making these changes
requires the ability to:
· Recognize when change is needed
· Recognize and act upon the limitations and capabilities of the
venture team, especially those of the venture manager
Earlier in the chapter, we mentioned the phases of development
described by Greiner (1972): growth through creativity, growth
through direction, growth through delegation, growth through
coordination, and growth through collaboration. He argues that a
company's transition through these phases occurs either in an
evolutionary manner or through a revolutionary and disruptive
change process, depending on management actions.
After startup, the first phase of growth is achieved through
creativity. Management focuses on ''make and sell," the
organizational structure is informal and characterized by an
entrepreneurial style, and progress is measured in terms of market
results. Up until this point, the venture champion has needed such
skills as technical expertise and the ability to get resources to the
startup point, but he or she may very well lack the "making and
selling" skills required at this stage. For example, the venture
manager may be a marketing
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person who is weak in the "make" area. During this phase, the
venture manager must also do a great deal of hands-on work,
leading, and inspiring, and key people must be able to perform
multifunctional tasks.
As the business grows, so does the need for administration. If this
need is not anticipated and met, problems appear: substandard
quality, billing and shipping errors, late deliveries, slow collections,
human resource tensions, and excessive and obsolete inventory.
The situation is further complicated by the usual growing
requirement for capital, which places additional pressure on the
already overworked entrepreneur.
Thus, a crisis of leadership develops, and there is a need for a good
directive manager to run the business. This need can be anticipated
and provided for by the founding venture manager; if not, it will be
provided for by the corporate parenteither in anticipation of a crisis
or in response to one. For example, David Ben Daniel (1983)
described such a situation, which occurred when he was a group
vice president of Exxon Enterprises: "We found that we needed one
venture manager to carry us to $2 million [in] sales, another to $10
million [in] sales, and still another to build a big business." A CEO
responding to a survey on venture compensation (Block and Ornati
1987) wrote that there was one incentive plan for the business
starter and then another plan for "the one who comes in to
straighten it out." An anecdote about a venture capitalists' meeting
has one venture capitalist asking the other, "How are you doing?"
The response: "Fine, we just got rid of our entrepreneurs."
Although venture team members may handle ''doing" and perhaps
"managing" very well, they can fall apart when it comes to
"managing managers."
In addition to the Greiner model, another simple model of the
stages of a new venture is based on the number of people
employed. The person responsible for leading the venture will
initially have to do more and manage less. A rule of thumb is that
this leadership mode can work effectively until the number of
employees reaches about 20. Around that point, there is a greater
need for managing and less time for
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doing; hence, management rather than hands-on work becomes the
primary task of the entrepreneur.
This same model then proposes a second rule of thumbthat when
the number of employees reaches about 75, the venture's leader
must manage managers. This evolution follows the pattern that
Michael Roberts (1986) describes as movement from management
by direct coordination to management by indirect coordinationan
absolute necessity if a business is to grow significantly.
This transition is particularly urgent in new ventures that are either
experiencing very rapid growth or must achieve such growth (for
example, ventures in the cellular telephone business, in which
giants are battling for market share and one of the more successful
firms identifies its most significant problem as finding managers).
Although the challenge to entrepreneurs is especially intense as a
business moves beyond its first stage, the founders who survive
that first stage continue to face new challenges as the venture
moves into its later stages. It is to those surviving founders that this
principle and the following one are addressed.
Convince Senior Management that New Ventures Need Different
Policies and Procedures than the More Mature Parent
Organization
Just as ventures pass through stages in their life cycles, so also is
the parent firm passing through stages in its own life cycle. Sykes
and Block (1989), in their article "Corporate Venturing Obstacles:
Sources and Solutions," observe that every new venture is in a
different life-cycle stage than its parent. It is those differences that
are the source of the internal obstacles to success facing a new
venture.
The culture, policies, and procedures of the parent firmwhich often
appear to be irrelevant, arbitrary, and a bunch of bureaucratic
nonsense to those trying to get a venture off the groundare nothing
more than the adaptive
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mechanisms that the parent found effective as the base business
developed. Part of the venture manager's job is to understand the
life-cycle stage of the sponsoring business unit and, with the help
of the executive champion, use that information to convince senior
management that normal control practices are not applicable to an
early-stage new venture and that there is a need for policies and
procedures appropriate for the venture's life-cycle stage. It will be
easier to convince senior management if the argument is presented
in terms of differences in life-cycle stage rather than as an attack on
bureaucracy and bureaucrats.
Provide Leadership as Well as Management
Building a new business demands both leadership and
management. Venture managers must provide both. They must
address themselves to the five key tasks shown in the following list
if they hope to achieve growth and survive as leaders of the
developing business. (Long-term survival in the venture leadership
position may not be an objective for the venture's founder,
however, since in terms of desire and talents, that individual may
be best suited for the role of founding other ventures for the firm.)
1. Provide leadership that produces a can-do, opportunity-seeking,
egalitarian venture cultureleadership that is involved, not distant;
that creates clarity and focus, and most important, offers a vision of
what the venture can become.
2. Concentrate on peopletheir selection, training, empowerment,
and as necessary, replacement.
3. Delegate whole tasks (e.g., "create a new product," "develop a
new market," "prepare a plan," "build a plant," ''create a
salesforce"), not individual actions. That's managing managers.
4. Make sure evaluation is based on performance, not on behavior,
unless the behavior is destructive to the culture being sought.
 Page 281
5. Use objective outside resources, especially people who know the
industry and market. Include corporate staff people if they are
objective and knowledgeable.

Conclusion
Venture managers have a difficult and challenging mission. First,
the company has to be convinced to support an effort that begins
with an uncertain outcome. This calls for persistence and powerful
selling skills, and creates every conceivable pressure to downplay
the hazards and exaggerate the rewards. Once resources are
obtained, the task changes to one of creating an enterprise and
thereafter to building a growing, successful business. Throughout
the process, the parent company's support must be maintained
through a combination of performance and managed expectations.
In the midst of all this, the new venture's leaders must grow and
adapt to the changing character of the job. Following the ten
survival principles presented in this chapter will help them succeed
in their challenging mission.
Guidelines
1. Undercommit and overperform.
2. Act as if it's your own money at stake.
3. Find and use allies, especially an executive champion.
4. Avoid advance publicity unless it will help sell your product.
5. Be the first to recognize when the venture should be redirected
or stopped.
References
Ben Daniel, Dr. David. 1983. Presentation to an Internal Corporate
Venturing class at the Graduate School of Business Administration,
New York University.
 Page 282
Biggadyke, R. 1979. "The Risky Business of Corporate
Diversification." Harvard Business Review (May-June): 103-111.
Block, Z., and Ornati, O. 1987. "Compensating Corporate Venture
Managers." Journal of Business Venturing 2: 41-51. (One of the
individual responses to the survey conducted).
Cohen, Laurie P. 1991. "Low Balling: How Some Companies Send
Stocks Aloft." The Wall Street Journal (May 6): 1.
Gibson, Richard. 1990. "McDonald's Net Rises But Lags
Expectations." The Wall Street Journal (July 23): A7.
Greiner, L. 1972. "Evolution and Revolution as Organizations
Grow." Harvard Business Review (July-August): 37-46.
Kupfer, Andrew. 1990. "America's Fastest Growing Companies."
Fortune (August 13): 48-54.
Roberts, M. J. 1986. "The Transition from Entrepreneurial to
Professional Management: An Exploratory Study." Ph.D. diss.,
Harvard Business School.
Sykes, H. B., and Block, Z. 1989. "Corporate Venturing Obstacles:
Sources and Solutions." Journal of Business Venturing 4, no. 3:
159-166.
 Page 283

11
The Internal Politics of Venturing*
Rational managers often find the idea of having to "play politics"
disturbing; novice venturers, fired up by what they regard as the
enormous potential of their enterprise, can find the idea downright
distasteful. But however unpopular organizational politics might
be, its crucial role cannot be ignored, since it can make or break a
new venture.
Ignoring politics is tantamount to passively accepting its results.
Many venture managers who have formulated venture strategies
and plans that are technically sound still have trouble implementing
them because they fail to understand and anticipate the new
business's political requirements. Given the small size of the
venture relative to the parent and
*The ideas in this chapter draw heavily off: Starr, J. A., and
MacMillan, I. C. "Resource co-optation via social contracting:
Resource acquisition strategies for new ventures," Strategic
Management Journal 11 (Summer 1990): pp. 79-92.
 Page 284
its absolute dependence on the firm's resources, venture plans must
be "politically correct" as well as technically correct.
The harsh reality is that all organizations are inherently political,
made up of individuals acting in their own interests. To implement
a venture plan, the venture manager must often attempt to influence
other people, particularly the key stakeholders on whom the
venture depends. Failure to identify those stakeholders and to
anticipate and manage their behavior can drastically slow the
venture's progress, if not halt it entirely.
There are three types of startup problems in particular that appear
to require political solutions. First, venture managers often have to
overcome problems of legitimacy, both inside and outside the firm
(Stinchcombe 1965)they must convince needed supporters of their
viability. Second, venture managers are often desperately short of
resources, yet they must compete for them internally against
powerful, established departments that resent the venture's
intrusion onto their resource turf. Third, as the harbingers of
change and innovation, venture managers frequently find
themselves facing organizational indifference or resistance, if not
outright enmity, on the part of those inside and outside the firm
who have a vested interest in the existing order or simply cannot be
bothered to provide needed support. To overcome these problems,
venture managers often have to resort to political strategiesthat is to
say, strategies designed to get people to behave in ways they might
not initially choose.
The power of good organizational politics can be seen in the case
of a Swedish manager who deliberately nurtures and uses influence
networks as a means of assisting his ventures. In one very
successful venture, he capitalized on a major opportunity to start a
robot-controlled foundry equipment business by identifying and
confirming this need in Europe via a network of consultants that he
maintains to help him identify just such venture opportunities. He
then used another network of carefully nurtured engineering
professors to confirm that the technology was in place to produce
such equipment. Next, he mobilized every member of his
consultant network to help him persuade each of their foundry
clients to put up a piece of the $200,000 funding he needed to
 Page 285
develop the prototype, persuading the consultants to vouch for his
capability and integrity. This amount was easily raised, and without
the manager's having to give up a single percentage of the action.
Finally, he persuaded the foundry clients to aggressively help him
debug the prototype as it was being developed. The clients
willingly tolerated the disruption to their production systems during
the process of debugging the prototype because they identified with
itas "their" product.
This chapter is designed to help venture managers understand and
use political strategies such as those so skillfully employed by the
Swedish manager, both to overcome the barriers facing the new
business and to promote its progress. We start by examining the
aforementioned key political problemslack of legitimacy, resource
starvation, and organizational resistance and inertiaafter which, we
describe some of the approaches venture managers can use to build
influence, a necessary prerequisite for addressing these problems.
Finally, we consider how creative political strategies can be
employed to overcome these problems.

Sources of Political Problems

This section examines the three major venturing problems that
must be dealt with in the political arena: lack of legitimacy,
resource starvation, and organizational resistance and inertiai.e., the
struggle to establish credibility, obtain an adequate share of what
the organization has to offer, and overcome both active and passive
failure to cooperate with the venturing effort.
Lack of Legitimacy
Any venture faces a number of problems that stem directly from
the simple fact that it is new (Stinchcombe 1965). Because the
business has no track record, customers, distributors, and suppliers
(justifiably) lack confidence in its ability
 Page 286
to survive, which gives them little reason to provide support. The
newer and more different the market being entered, the more
serious this issue of legitimacy. Given the propensity of
corporations to terminate internal ventures, even some insiders will
question the new business's legitimacy.
Thus, the venture faces a credibility crisis at the outset and must
somehow create an impression of viability and legitimacy before it
will receive support. Building legitimacy by trying to
systematically increase a reluctant customer and distributor base
can be an extremely slow, painstaking, and therefore costly
process.
Resource Starvation
To get under way, any new corporate enterprise requires an
adequate supply of resources, including funds, people, materials,
and often access to capacity in the organization's production and
service systems. Yet as indicated earlier in the chapter, the manager
in charge of the startup generally faces severe constraints in the
amount of resources available for the venture. More often than not,
the venture manager is seen as an internal competitor attempting to
invade the resource allocation turf of the firm's established
powerful and turf-conscious departments. This means that even if
the venture manager succeeds in securing the needed resources,
those resources may end up being conceded with reluctance and
lingering resentment.
Resistance and Inertia
The most serious political problems facing the new venture arise
from resistance and/or inertia from inside as well as outside the
organization. The sources of this resistance and inertia are
manifold:
· Indifference: Often, the venture's small size renders key parts of
the organization indifferent to providing
 Page 287
the cooperation the venture requires in order to get off the ground.
Although the venture manager may need support from engineering
or production departments, marketing, or the salesforce, he or she
may receive very little attention simply because the venture is
considered insignificant compared to the ongoing business. This
can also happen in external relations, with suppliers, customers,
and distributors simply ignoring the venture's needs because it is so
small. And even if they do pay some attention to the venture, they
are likely to neglect it when they receive requests from larger and
more powerful departments.
· Distraction: The people responsible for conducting the company's
major ongoing businesses may simply be too distracted by the
pressures of serving those businesses to assist the venture. If the
venture manager happens to need, say, the support of the
manufacturing facility to do short runs, this activity becomes, at
best, a distraction from the principal business and, at worst, a
disruptive irritation.
· Competition: Outright enmity on the part of external competitors
can lead them to mobilize their clout with distributors and suppliers
to deny support to the fledgling venture.
· Disaffection: Direct resistance to the venture's progress and even
attempts to subvert it can be initiated by people in the organization
who either do not believe in the venture, are envious of the venture
or its manager, or feel that the venture is disturbing their
comfortable routines. In particular, staff functions whose mission is
to ensure homogeneity in the organization may attempt to smother
the venture under procedures, rules, and policies. Anything that is
new and requires different treatment disrupts and threatens their
systems. This attitude can extend beyond the boundaries of the
firmto agencies, unions, or any other entity that has a vested
interest in preserving the status quo.
· Direct threat: The final category consists of determined
opponents of the venture who see it as an
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affront to their position or a direct threat to their part of the
organization. Once again, this source of resistance can extend
beyond the organization's boundaries, or affected parties within the
firm can mobilize external resistance to hamper the venture.
The preceding major problems share a common elementnamely,
they represent situations in which, to get a new business's needs
met, the venture manager must attempt to induce someone or some
unit to change current behavior patterns from what the person or
unit might otherwise prefer to do to what the venture manager
needs done. Therefore, it is important for the venture manager to
develop an understanding of the tools that can be used to gain
influence and shape behavior, which are discussed in the following
section.

Building Influence
Because venture managers generally have limited formal access to
sources of power, influence, or authority, they must rely on their
ingenuity and persistence to build influence and use what little they
have effectively.
To build an influence base, venture managers, in essence, create
"social capital"an inventory of liking, trust, gratitude, and/or
obligations that can later be implicitly "traded" when favors are
extracted or obligations are called (Homans 1958 and 1961; Blau
1964). Although the mental records may be ambiguous, each party
knows that at some time in the future, on a completely different
and totally unspecified transaction, the influence builder may ask a
favor, thus "cashing in'' the obligation.
Here are four major approaches for building an influence base
suggested by Walton and McKersie (1969):
1. Solving and receiving help with problems, together with the
related approach of giving and receiving favors
 Page 289
2. Sharing information
3. Creating opportunities for people to demonstrate their skills and
competence
4. Building and using influence networks
These approaches are summarized in the following subsections.
Solving and Receiving Help with Problems
Although solving problems for someone is an obvious way to
develop social assets such as liking, gratitude, or obligation that
can be used to create influence, surprisingly, asking for help can
generate influence just as effectively. People often develop an
intense affinity or a high sense of responsibility for those whom
they assist. Venture managers who seek and follow advice are
frequently able to elicit other types of support as well. Senior
managers who have proffered advice become champions of the
corporate venture they have advised, and individuals who have
given advice may also provide endorsements, recommendations, or
even funding.
For example, a venture manager charged with developing a
margarine business appealed to the contract manager of the
engineering equipment supplier for assistance with the design of a
particularly difficult and expensive piece of the facility. Soon the
contract manager was aggressively helping the venture manager
drive down the total price of his own contract. This included a
recommendation to use some secondhand equipment that was
being freed up in another job that the contract manager's firm was
handling. The contract manager eventually took great pride in the
fact that he had helped cut 40% off the cost of his firm's contract!
As they seek to build social capital and elicit support, venture
managers should also keep in mind the related strategy of giving
and receiving favors, which operates similarly to the strategy of
solving and getting help with problems.
 Page 290
Sharing Information
Information is valuable currency in business. By sharing
information that is important to others, the venture manager may be
able to build up a credit of social obligations or affinities that can
be "spent" at a future date.
For example, a venture manager starting a new pump business for
an engineering supply company was at a distinct disadvantage
competing with several established manufacturers for a fairly large
contract from a refinery. Fortunately, the venture manager
discovered that the refinery's plant manager was having a problem
with a newly installed cooling tower system and suggested that the
plant manager call one of his other customers who had solved a
similar problem the week before. The plant manager followed the
advice and got a solution in minutes. As a result, he was quite
willing to award the contract to the venture manager. By exploiting
his network and providing sorely needed information, this venture
manager created feelings of gratitude that secured a valuable sale.
Creating Opportunities for People to Demonstrate Their Skills and
Competence
People enjoy a chance to show their skills, flex their muscles, and
display their talents. Creating or seeking opportunities for others to
shine and look competent in public can engender considerable
social goodwill. The Swedish venture manager mentioned earlier in
the chapter consistently provided such opportunities to his
consultant network and, as a result, reaped the benefits of their
skills. This approach works extremely well inside organizations, as
demonstrated by a management information venture manager we
interviewed who had increased the profits of his business fiftyfold
in ten years via new ventures. He ascribed much of his success to a
policy of "Always accept the blame yourself; always give the credit
to others."
 Page 291
By devoting time and attention to the preceding three strategies, it
is possible for the venture manager to rather quickly develop an
influence base, which can then be further leveraged by networking.
Building and Using Influence Networks
Managers who have spent time building an influence base are in a
good position to start organizing networks of people inside and
outside the firm. These individuals, with whom the managers have
developed influence, provide a strong reservoir of ideas and
support (Schon 1967; Quinn 1979; Burgelman and Sayles 1986),
which will prove invaluable when the new business encounters its
inevitable obstacles. As needed, venture managers can draw on this
network of contacts to help them induce, persuade, obligate, or
coerce the venture's opponents. They can even magnify their
influence by asking members of the network to use their network
contacts, if necessary (Granovetter 1973; Aldrich and Zimmer
1986; Aldrich 1988). For instance, the Swedish venture manager
mentioned in the earlier example consciously and systematically
nurtured several networks, two of which (consultants and
engineering professors) played a crucial role in his foundry
equipment venture.
The astute use of influence networks by new-venture managers
yields a number of significant benefits (in addition to the obvious
benefit of saving resources):
· Members of the network tend to exercise their influence to
generate more pervasive, positive sentiments toward the venture.
· As a result of these favorable sentiments, early setbacks will be
more easily tolerated and forgiven, both inside and outside the
firm.
· This spirit of tolerance also means that "networked" stakeholders,
both inside and outside the firm, will be more willing to help with
problems.
 Page 292

Using Political Approaches to Solve Political Problems

In this section, we will examine strategies for dealing with the three
political obstacles most often faced by new ventureslack of
legitimacy, resource starvation, and organizational resistance and
inertia.
Overcoming Lack of Legitimacy
If the venture does not have legitimacy, it may be unable to start at
all, or it may be able to start only after incurring a debilitating
delay while building credibility. How can a new business establish
legitimacy quickly and thereby avoid such crippling costs?
The basic strategy for gaining legitimacy is to use personal
influence or influence networks to somehow secure endorsements
that will convince the necessary supporters of the venture's
viability and credibility. The Swedish venture manager mentioned
in an earlier example was able to solve the problem of legitimacy
by securing endorsements from his network of consultants, thus
piggybacking on the consultants' credibility with their clients.
Without such endorsements, it is unlikely that any sane foundry
manager would have allocated funds to develop the "paper"
prototype that the venture manager was proposing.
In another example, a young venture manager was charged with
creating a synthetic filter cloth business in a very conservative
customer industry, which had always used natural cloth. To
establish legitimacy, he employed his persuasive skills to convince
the purchasing agent of the leading firm in the industry to provide
him with an order for a trial batch. He then used this information to
influence other companies in the industry to do the same. In the
eyes of the lesser competitors, the order from the industry leader
was viewed as a sufficient endorsement of the product to warrant a
trial.
 Page 293
Securing endorsements is particularly important for ventures that
are entering new market areas. In such cases, if the venture
manager can rapidly acquire legitimacy via political gambits, the
new business can gain the significant additional benefits of:
· Earlier customer acceptance
· Earlier distributor acceptance
· Earlier revenue streams
Overcoming Resource Starvation
When it comes to securing resources, accounts of entrepreneurial
activity in established corporations are replete with tales of
resourceful politicking. Venture managers hijack materials and
equipment, appropriate production capacity and personnel time,
conceal development activities, and cash in personal favors to
secure the resources needed for their new business (Quinn 1979;
Kanter 1983 and 1988).
The basic mechanism that venture managers can employ to do this
is to co-opt resources that are currently being underutilized. This is
one of the most flexible and easiest ways to gain access to
resources (Selznick 1948 and 1949; Thompson 1967; Pfeffer and
Salancik 1978; Burt 1980 and 1983). However, the key question is,
why should any owner of an underutilized resource willingly give
it up?
The answer lies in the extent to which venture managers can draw
on the social capital they have generated through the influence-
building processes described in the preceding section: sharing
information, solving problems, doing favors, creating opportunities
for others to demonstrate their good qualities, and tapping their
network of contacts. These activities create an inventory of
goodwill, liking, trust, gratitude, or obligations that is often just as
valuable as currency to the small business. Sometimes, it can prove
even more valuable.
Other research (Kanter 1983 and 1988; Burgelman and Sayles
1986), along with many case examples, suggests that
 Page 294
there are three major classes of co-optation strategies for taking
advantage of underutilized resources: borrowing, begging, and
scavenging. Each of these strategies has distinct characteristics
related to permanence of ownership of the resource and the
resource's perceived value in the eyes of the original owner.
· Borrowing: Borrowing strategies are employed to temporarily or
periodically secure the use of assets or other resources, on the
premise that they will eventually be returned. One corporate
venture manager who grew his business tenfold in a decade is very
aggressive about "borrowing." On occasion, when his own funds
run low, he has charged expenses for new projects to the accounts
of other divisions of his firm. He has found that it takes at least a
year before the corporate auditors spot these charges, and by then,
the projects have usually generated enough revenues to repay the
accounts. By the time this manager's activities are discovered, he
has done so well that his sins are forgiven. (Note: We do not
recommend this particular form of "borrowing"!)
· Begging: Begging strategies are employed to secure resources by
appealing to the owner's goodwill. In this way, venture managers
gain the use of the resources without needing to return them,
despite the fact that the owner recognizes the value of the assets. In
her research, Kanter (1983) identifies many cases of "tincupping,"
in which venture managers begged or scrounged resources from the
rest of the firm.
· Scavenging: Scavenging strategies extract usage from goods that
others do not intend to use or that they might actually welcome an
appropriate opportunity to divest themselves of. This approach
involves learning about unused or underused resources (e.g.,
obsolete inventory, idle equipment, or underutilized personnel) and
killing two birds with one stone by putting such a resource to use
while at the same time relieving the original owner of the burden of
carrying it.
 Page 295
These three co-opting strategies allow internal corporate
entrepreneurs to secure resources that would otherwise have to be
obtained at much greater cost. This lowball approach to acquiring
resources has several implications: by appropriating underutilized
resources, venture managers lower the cost of startup; they
dramatically reduce the initial investment, which lowers the risk of
startup; and they increase the venture's return on assets (by
reducing the denominator of ROA).
As a result of resource co-optation, venture managers will:
· Engage in fewer resource allocation battles, thus reducing both
internal enmity and the expenditure of energy.
· Suffer fewer resource setbacks and disappointments.
· Suffer fewer resource shortages.
· Have ventures with lower asset intensity.
· Have ventures with lower fixed cost/revenue ratios.
· Achieve cash and profit break-even in less time.
· Have higher survival rates.
· Have a greater return on assets than venture managers who act
like the typical trustee manager (Stevenson and Gumpert 1985) and
"pay full fare" for their resources. (These managers tend to have
the same painfully slow growth in profits as those discussed by
Weiss [1981] in his comparison of corporate ventures with much
more profitable independent ones.)
Overcoming Resistance and Inertia
Of the three major types of political problems cited at the start of
this chapterlegitimacy, resource starvation, and resistance/inertiathe
latter problem is the most intractable, and it comes from both inside
and outside the organization. Therefore, the balance of this chapter
is devoted to a discussion of the political strategy needed to attack
this prime source of venturing obstacles.
 Page 296
We have identified six major steps that are essential to a political
strategy for overcoming the organizational resistance and inertia
that so often hamper the progress of new ventures. These steps,
which are discussed in the following subsections, are:
1. Clarify the venture's crucial immediate and long-term objectives.
2. Identify potential political obstacles to progress.
3. Identify potential opponents and allies.
4. Anticipate responses by key targets.
5. Formulate a political strategy.
6. Monitor the progress of the political strategy.
Clarify the Venture's Crucial Immediate and Long-Term
Objectives. The first step in attacking resistance and inertia is to
clarify the venture's current crucial objectives. This clarification
process serves two purposes: First, it enables the venture manager
to identify who, inside and outside the firm, will be affected if the
venture accomplishes the stated objectives. These people will
almost certainly want to either support the venture or obstruct its
progress. Second, it enables the venture manager to identify who
will need to help if the venture is to succeed, and establish whether
those parties are prepared to give their support.
The venture manager has to consider two sets of objectives:
immediate and long-term. Immediate objectives are those that must
be accomplished for the venture to reach the next major milestone.
Knowing these objectives tells the manager who is likely to be
immediately affected or needed, and provides the basis for urgent
political action. Long-term objectives are concerned with the
venture's revised ultimate objective. Whatever the venture's
original objectives were, there is a need to periodically review
where the venture should be going now. This new direction is often
shaped by the expected moves and countermoves of those who
have a vested interest in the outcome.
 Page 297
Identify Potential Political Obstacles to Progress. The next step is
to systematically identify all the people, groups, or organizations
on which the venture's outcome depends. These parties include:
· The major internal units that would be affected by the venture's
success (for example, departments competing for the resources
needed by the venture).
· External competitors for the venture's prospective customers and
distributors.
· Such groups as shareholders, employees, unions, and suppliers.
(Their possible interest in the venture should be considered, but
these parties should be retained in the analysis only if they seem
relevant to the outcome.)
Once again, it is important for venture managers to devote attention
to the groups that will be affected when the new business achieves
its next major milestone, but they should not ignore groups that
will have a long-term impact.
(Note: This step and the next several steps in the process of
overcoming resistance and inertia may initially appear very
cumbersome-and can in fact become so if the venture manager
goes overboard [e.g., by attempting to identify every conceivable
obstacle to the venture's progress]-but remember that the analysis
should constantly be simplified and refined to focus on the three or
four most crucial items. The logic is that if these crucial items are
not handled properly, nothing else will work anyway.)
This process of identifying the key parties on which the venture's
outcome depends provides the backdrop for systematically thinking
through the major obstacles the venture will face from groups that
are vested, or need to be vested, in its outcome. To do this, the
venture manager should review the various interest groups and
consider the following issues:
· Identify sources of support: What groups presently support the
venture? Are there potential allies that are
 Page 298
either indifferent or too distracted to provide support and that
therefore need to be mobilized in order for the venture's next major
stage to succeed? Who will be making the decision to provide
support?
· Identify opponents: Which internal and external parties are likely
to be disaffected or threatened by the venture? What damage can
they inflict and how? Can they block the venture's progress and, if
so, how? How effective are their attempts likely to be? Who will be
making the decision to take such action?
· Anticipate opponents' actions: What actions can opponents take at
this stage to subvert the venture's progress and via whom? Can they
threaten suppliers? Customers? Distribution? Can they seek
management or government intervention?
This analysis will identify the principal movers and shakersthe
individuals or groups that can make or break the new venture. Once
this limited number of key parties has been identified, they can be
targeted for the next round of political attention.
Identify Potential Opponents and Allies. The preceding analysis
will enable the venture manager to identify the venture's
opponentsthose who will be or think they will be adversely affected
if the new business succeeds. In particular, the analysis should turn
up two or three key internal parties who are likely to obstruct the
venture's progress, and help the manager pinpoint their strengths
and weaknesses. It should also identify two or three key external
parties that have a vested interest in the venture's failure. These
internal and external opponents are the new business's political
debits.
On the credit side, the venture manager should be able to spot
several key allies inside and outside the firm. All other parties that
would benefit from the venture's success should also be identified,
for even if they have not yet become allies, they are potential allies.
These are the players whose support is most critically needed to
promote the venture's progress.
 Page 299
Particular attention should be paid to those who can help the
venture meet its immediate objectives in order to reach the next
milestone. It is pointless for the venture manager to waste scarce
resources striving toward venture objectives on his or her own if
such allies are available and are willing and able to provide
assistance (or can be convinced to do so).
Thus, the venture manager should end up with two listsone
showing the three or four key people or groups that will be needed
to support the venture and a second showing the three or four key
people or groups that are likely to oppose the venture.
Besides identifying the key allies and opponents, the manager
should identify any currently indifferent or distracted parties whose
support is nonetheless needed if the venture is to succeed. Any
political strategy should include plans for mobilizing the support of
these currently uncommitted individuals or groups. Once the
friends, foes, and important neutral parties have been identified, the
venture manager can develop a political strategy designed to
maximize the assistance they provide, or minimize the damage they
cause, to the venture. This means that both potential allies and
potential opponents are targets of the strategy, and similar political
tools can be used to affect their behavior. So we will call a key
potential player, whether it be an ally or an opponent, a ''target."
After identifying whether the target will support, oppose, or be
indifferent to the venture, the manager needs to ask the following
questions about each target:
· Can we use our existing influence to shift the target's support?
· Can we build influence with the target?
· Can we use our network to do so?
Once these questions have been answered, the venture manager can
proceed to examine the context in which these targets make their
decisions. Understanding this context is essential in securing the
support of key allies, who can then
 Page 300
help to convert the indifferent, reprioritize the distracted, and win
over or neutralize the opponents.
Anticipate Responses by Key Targets. Even with all this
background work in analyzing the environment and key targets, the
impact of actions designed to change the targets' behavior is far
from predictable. Politics is not an exact science. Human
interactions are inevitably complex, so it is important for the
venture manager to consider and be prepared to deal with a range
of possible responses from each target. A strategy that works
effectively with one target may fail completely with another.
Understanding the context in which the target operates allows the
venture manager to be flexible and readjust his or her strategy in
light of the target's anticipated response.
Allison (1971) has identified three modelsthe rational actor model,
the bureaucratic process model, and the organization politics
modelthat can enable venture managers to understand the context
in which a target functions and thus help them predict how the
target is likely to behave in response to any political move they
might make.
The rational actor model. In this model, the target is seen as an
objective decision maker with a well-defined set of goals who
perceives options clearly, examines the available alternatives
carefully, and selects an alternative on a rational basis. To
anticipate responses under this model, the venture manager must
understand the target's objectives, goals, and relative priorities and
how the venture will affect him or her. The venture manager needs
to know the major resource commitments of the target's
organization, where most of the target's discretionary resources are
being focused, and his or her key values, since all these factors
establish a direction and a momentum from which it is tough for
the target to deviate. By considering the same factors that the target
uses in making decisions, the venture manager can generate a list
of the rational decisions the target could make with respect to the
venture.
 Page 301
The bureaucratic process model. Although identifying the rational
decisions the target could make provides a useful starting point, the
venture manager must realize that these are not necessarily the
decisions the target will make. Anyone who has spent more than
five minutes in an organization knows that organizations are not
run by independent managers making strictly rational decisions.
Target managers perforce operate in the context of their
organization, and these organizational factors limit the courses of
action available to them.
The bureaucratic process model therefore considers the target to be
someone embedded in a web of rules, procedures, policies, and
programs. The target's decisions will be determined by the
particular perspectives of the department and organization in which
he or she operates, with each department having its own narrow
perspective on the problem, its own set of goals, and its own
desired choices. This means that it may be very difficult for the
venture manager to elicit the particular response he or she is
seeking for a number of bureaucratic reasons:
· It conflicts with coordination procedures, rules, and so forth.
· It conflicts with control procedures.
· Critical delays may be involved before information reaches the
decision-making level.
· The target's performance evaluation procedures may influence
how action regarding the venture will get to the decision-making
level.
· The differing perspectives of various departments may cause
internal arguments and delay.
So to evaluate the target's potential responses, the venture manager
should answer the following questions:
· What are the major policies that drive decision making in the
target's operation?
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· What rules, procedures, and so forth must the target follow?
· What are the target's major monitoring and control systems?
The answers will help the venture manager delete from the list of
rational responses those that the target will probably avoid
selecting because they conflict with the bureaucratic structure of
his or her organization. In addition, the more bureaucratic the
target, the less likely he or she is to stray from the bureaucratic
path.
The organization politics model. Although the bureaucratic model
may be a convenient simplification, actual organizations are far
more complex than this model would imply. Internal politics affect
how the rules are applied, and therefore, the organization politics
model regards the target as being embedded in a series of coalitions
in the organization, each with a leader who must represent the
interests of the coalition. Decision making is thus characterized by
political perspectives, as each coalition leader views the possible
alternative actions in terms of how they will affect the interests of
his or her coalition; how they will affect the power and influence
structure of the organization; and how they will affect the leader as
a member of the coalition, as a member of the organization, and as
a person.
So in order to anticipate how the target will respond, the venture
manager must answer the following questions:
· What are the dominant coalitions? What are the major
countercoalitions? To which coalition does the target belong?
· To which commitments are coalition leaders currently paying
attention?
· Who can exercise what discretion at what level? How do these
individuals behave when the person with the authority to make a
counteracting decision is on vaca-
 Page 303
tion? What are the consequences of exercising discretion
unsuccessfully?
· What are the consequences of failed decision making for those
who fail?
The answers will allow the venture manager to eliminate the
responses that the target will find politically unacceptable, however
rational and however much in keeping with the organization's
bureaucratic structure those responses might be. In addition, the
more political the target's orientation, the more likely he or she is to
respond in a politically expedient manner.
Performing the preceding three analyses will enable the venture
manager to more accurately anticipate the target's responses and
then shape actions that will be most effective in changing the
target's behavior.
Formulate a Political Strategy. All of this planning and analysis has
been leading up to action. Once the key allies have been identified
and their possible reactions assessed, the next step is to approach
each of them. Since goals of the venture manager and his or her
allies will not be perfectly congruent, the venture manager should
identify any major conflicts that are likely to arise between the
parties if a particular alliance is formed. If those conflicts appear
insurmountable, the manager should forego any attempt to form an
alliance with that target.
Since the venture manager wants to reach an agreement that his or
her allies will be enthusiastic about implementing, the manager
should attempt to structure "win-win" agreementsi.e., agreements
that will benefit both parties.
Here are the questions the venture manager must ask in designing
his or her approach to a particular ally:
· What do I need this ally for?
To mobilize an internal or external party who is currently
indifferent?
 Page 304
To help change the priorities of someone who is currently
distracted?
To help win over someone who is currently disaffected?
To help win over, obstruct, block, or neutralize someone who is
currently an opponent?
· What can I offer that will persuade, induce, or oblige this ally to
support me?
Can I demonstrate that we will both benefit?
Can I offer something in exchange for the ally's help? (If you do A
for me, I will do B for you, such as help you get needed resources
or support your efforts to advance a particular project.)
· Can I use my influence base and draw on whatever social capital I
may have with the ally that could cause him or her to feel a sense
of liking, trust, gratitude, or obligation toward me?
· Do I have time to build influence by solving problems, sharing
information, and so forth?
· Can I use members of my current influence network to
accomplish any of the preceding objectives?
If none of these approaches is feasible, then the target will simply
not become an ally and provide support. Recognize, too, that the
only support that will be forthcoming will be provided in the
context of each target's rational, bureaucratic, and political
constraints, as described in the preceding subsection.
Having engaged the ally, it is now important for the venture
manager to reach an explicit agreement on the actions that both
parties will take to move the project forward. It is especially
important to agree on what each party will do to ensure that the
next milestone is achieved. The particular issues that the venture
manager and his or her ally must address include the following:
· Who will take what specific actions against which opponents?
What is their response likely to be? What will we do if they fail to
respond that way?
 Page 305
· What key implementation steps must be taken, and how should
those steps be timed?
· How can we tell if things are not going as planned, and how will
we let each other know?
· When and how will we review progress?
· What major contingency plans are needed, and what events will
trigger those plans?
This careful examination of critical execution issues helps ensure
that when political action is launched against opponents, either it
will flow rapidly and smoothly or necessary regrouping and
replanning will automatically be triggered.
Once again, it is important for the venture manager to keep the
process as simple as possible by concentrating on a finite number
of key allies and opponents. When agreement has been reached
with these allies, there remains little to be done but launch the
strategy, focusing the most effort on those activities that will move
the venture to the next major milestone.
Monitor the Progress of the Political Strategy. No political strategy
works flawlessly, so the venture manager must monitor progress
and adapt his or her strategy in response to unfolding challenges
and opportunities. As the venture achieves each milestone, the
manager should use that as a chance to re-examine key political
alliances and phase out those that are no longer needed. The
manager should also seek to forge new political alliances that will
be critical both to achieving the next milestone and to ensuring the
venture's longer-term success.
Conclusion
It is easy to assume that developing a political strategy is not worth
the energy, time, and effort it takes or that the task is just too
difficult to accomplish. Other issues in the venture startup may
seem more urgent and more concrete.
 Page 306
But it would be shortsighted for venture managers to focus
exclusively on the new business without considering the context in
which it operates. That would be like a crew of astronauts focusing
exclusively on the mechanics of building a space station without
first ensuring that their pressure suits provide an adequate flow of
oxygen to sustain them while they're performing the work. The fact
is that politics can quickly kill a new ventureeven one that is well
positioned from a technical standpointor it can ensure its success.
Venture failures are as often associated with problems of
legitimacy, resource starvation, and resistance or inertia as they are
with poor execution of the technical, marketing, or financial effort.
Therefore, it is worth devoting at least some effort to thinking
through the politics of the venture.
The danger, however, lies in overcomplicating things in spending
inordinate amounts of time and energy weaving convoluted webs
of intrigue that simply collapse under the weight of their own
complexity. Although, in this chapter, we have provided a very
detailed analysis of the politics of venturing, we would remind
venture managers that this analysis is meant to clarify the process
of examining the venture's political connections, not to create a
new bureaucratic hurdle for the venture to overcome. Venture
managers should use these guidelines to exercise due caution in
moving forward, but without losing sight of the most important
objectiveto ensure that the venture does in fact continue moving
forward. The essence of venture politics, then, is to keep things
simpleidentify the few key problems, know who the venture's key
friends and enemies are, understand what makes them tick, and
plan actions that will solve the venture's key problems through
these key players.
Guidelines
1. Politics exists. Either manage it or be managed by it.
2. Identify the venture's key objectives and needs.
 Page 307
3. Identify the venture's key allies and opponents.
4. Analyze their needs and find ways to co-opt, influence, or
neutralize these parties, as appropriate.
5. Continually monitor the progress of the political strategy and
adjust it as necessary.
6. Involve the executive champion.
References
Aldrich, H. 1988. "I Heard It through the Grapevine: Networking
among Women Entrepreneurs." Paper presented at the National
Symposium on Women Entrepreneurs, April 7-9, at Baldwin-
Wallace College, Berea, OH.
Aldrich, H., and Zimmer, C. 1986. "Entrepreneurship through
Social Networks." In The Art and Science of Entrepreneurship,
edited by D. Sexton and R. Smilor, 3-24. Cambridge, MA:
Ballinger Publishing Company.
Allison, G. 1971. Essence of Decision. Boston: Little, Brown.
Blau, P. 1964. Exchange and Power in Social Life. New York: John
Wiley & Sons.
Burgelman, R., and Sayles, L. 1986. Inside Corporate Innovation.
New York: Free Press.
Burt, R. 1980. Toward a Structural Theory of Action: Network
Models of Social Structure, Perception and Action. New York:
Academic Press.
. 1983. Corporate Profits and Cooptation. New York: Academic
Press.
Granovetter, M. 1973. "The Strength of Weak Ties." American
Journal of Sociology 78: 1360-1380.
Homans, G. 1958. "Social Behavior as Exchange." American
Journal of Sociology 62: 606-627.
. 1961. Social Behavior: Its Elementary Forms. New York:
Harcourt Brace & World.
Kanter, R. 1983. The Change Masters. New York: Simon &
Schuster.
. 1988. "When a Thousand Flowers Bloom: Structural, Collective
and Social Conditions for Innovation in Organizations." In
Research in Organizational Behavior, edited by B. Staw and L.
Cummings, 169-211. Greenwich, CT: JAI Press.
MacMillan, I., and Jones, P. E. 1986. Strategy Formulation-Power
and Politics. St. Paul: West Publishing Company.
Pfeffer, J., and Salancik, G. 1978. The External Control of
Organizations: A Resource Dependence Perspective. New York:
Harper & Row.
Quinn, J. B. 1979. "Technological Innovation, Entrepreneurship
and Strategy." Sloan Management Review 20: 19-30.
Schon, D. 1967. Technology and Change. New York: Delacorte
Press.
Selznick, P. 1948. "Foundations of the Theory of Organizations."
American Sociological Review 13: 25-35.
. 1949. TVA and the Grass Roots. Berkeley: University of
California Press.
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Stevenson, H., and Gumpert, D. 1985. "The Heart of
Entrepreneurship." Harvard Business Review (March-April): 85-
94.
Stinchcombe, A. 1965. "Social Structure and Organizations." In
Handbook of Organizations, edited by J. March. Chicago: Rand
McNally.
Thompson, J. 1967. Organizations in Action. New York: McGraw-
Hill.
Walton, R., and McKersie, R. 1969. A Behavioral Theory of Labor
Negotiations. New York: McGraw-Hill.
Weiss, L. 1981. "Start-Up Businesses: A Comparison of
Performance." Sloan Management Review (Fall): 37-53.
 Page 309

12
Learning from Experience
Those who do not study the past are doomed to repeat it.
Santayana
Rats are different than people. They learn from experience.
Anonymous
In recent years, a great deal of interest has developed in creating
the learning organizationone that ''continually expands its capacity
to create its future" (Meen and Keough 1992). Information
acquisition in itself is not learning or knowledge. Learning is "a
continual process of discovering insights, inventing new
possibilities for action, producing the actions, and observing the
consequences leading to insights" (Meen and Keough 1992).
It is not within the scope of this book to discuss a total
 Page 310
corporate program for building a learning organization. For that,
we recommend Senge's The Fifth Discipline: The Art and Practice
of the Learning Organization (1990).
The underlying principle of organizational learning is the Plan, Do,
Check, and Act cycle for quality management, which originated
with Shrewhart at Bell Laboratories in the 1930s and was used later
by Deming in his systematic approach. That approach is inherent in
the planning and control processes we describe in Chapters 7 and 9.
A new venture is a microcosm in which the need to "expand its
capacity to create its future" is greatly magnified. Learning, in the
broadest sense, is not a postponable option, but a necessity for
survival and success.
While most of what we present in this chapter refers to essential
information gathering, it is important to keep in mind that this
information is converted into knowledge, which creates a learning
organization.
In no other area of human activity is the difference between rats
and humans more pronounced than in corporate venturing! As
important as it is to learn from experience, we were surprised to
discover in our contacts with venturing firms that very few
systematically study their successes and failures to achieve a better
understanding of the process of managing new ventures. They find
it difficult even to capture a simple, factual, chronological record
and history of each venture.
There are many reasons for such shortsightedness: The key people
involved with the venture may have left the firm; the executive
responsible for the venture may have been reassigned to a distant
location; a number of individuals may have participated in the
venture, with each having been involved with a different aspect of
the experience at a different time; or as so often happens, few
records may have been kept other than accounting figures, and
those records that do exist may be squirreled away somewhere but
are not always consolidated and readily accessible. Furthermore,
most venturing experiences will not have been positive, and there
may be a certain reluctance to unearth these skeletons. For all these
 Page 311
reasons and more, each new venture tends to start off as a blank
slate.
To avoid this, any venture must be set up right from the very start
in a way that enables the parent company to study the business's
success or failure and extract maximum learning from the
experience. This chapter explains how to collect the information
that must be studied and then apply this knowledge to future
ventures. We have described several levels of learning effort,
ranging from preparing a simple report to conducting a highly
detailed, intensive information-gathering project. Although few
companies are likely to undertake this latter type of in-depth
learning effort, which is best suited for very major ventures of great
importance for the firm, we have described it fully here, not just in
the interests of thoroughness but because the description can serve
as a source of ideas for whatever level of effort the organization
does choose to undertake.
The Importance of Learning from Venturing Experience
Experience is the best teacherprovided one makes the effort to sign
up for the course! Throughout this book, we have referred to the
learning requirement associated with new-venture management and
the need to continually adjust plans and actions to what is learned.
Each venture is an experimenta live, expensive business
experiment. Learning is critical not only to enable venture
management to redirect the individual venture more effectively but
also to enable senior management to gather cumulative information
on the firm's venturing experiences that will help it manage the
venturing function as a whole more effectively in the future.
Conducting a venture without systematically studying the
experience and learning from it is analogous to performing a
scientific experiment without documenting the procedure that was
followed, collecting and recording the data, and drawing
conclusions. A new venture is no less an experiment
 Page 312
than one that is conducted in a laboratory, although the variables
are far less subject to the control of the organizational "scientist."
If a firm is to learn from its venturing experiences and use what is
learned to improve future performance, it must make an organized
effort to get the facts, study them objectively, and draw conclusions
about what to do (and what to avoid) in the futurei.e., it must
accumulate venturing know-how.
It is ironic that managers are often very curious about what other
companies have done and how their ventures have performed, but
overlook the most relevant learning of allthe learning that can be
extracted from their own venturing experience. Such experience
has been achieved at great expense to the organization, and to
ignore or discard it is to squander an irreplaceable asset.
Failure: The Richest Source of Learning
Although failure is a tough experience, far more can be learned
from venturing disappointments than from venturing successes, but
it takes a strong stomach, great determination, significant effort,
and extraordinary objectivity to do so. This section examines what
various studies can tell us about the causes of venturing failures.
Back in 1977, Hill and Hlavacek analyzed 21 venturing failures in
12 large multidivisional firms. Not surprisingly, venture managers
had quite different explanations for the failures than senior
managers, but of 17 failure causes identified, venture managers and
senior managers agreed on only two"inadequate distribution
channels" and "conflicts with other divisions"! Top management
most frequently cited "inability to meet budget guidelines" as a
failure cause, whereas venture management pointed to "large
overhead to absorb," "insufficient top management support,'' and
"budget too small." The value of identifying these contrasting
perspectives lies primarily in learning that they do in fact differ and
in what respects. The authors supplemented their observations with
 Page 313
their own analysis of failure causes, the leading ones being "weak
planning by the venture team," "a weak or nonexistent venture
charter," and "absence of critical top management reviews.''
In another study, von Hippel (1977) reached very different
conclusions than Hill and Hlavacek. The primary findings of von
Hippel's study of 21 ventures in 20 large firms were that failure
was highly correlated with ventures directed at customers new to
the firm and, conversely, that success was highly correlated with
ventures directed at existing customers.
Block (1989)in an analysis of major venture failures by Federal
Express, Time-Life, and Polaroidargued that the magnitude of
those failures can be explained by the parent companies' having
continued to operate the ventures based on early assumptions that
turned out to be wrong, rather than redirecting the ventures in a
timely or adequate manner or discontinuing them entirely.
Yet the fact is that successes and failures have occurred under
every combination of circumstanceswith good as well as poor
planning, with ventures directed at existing customers as well as
new ones, with and without venture charters, with and without
either support or impatience on the part of top management. Hence,
the findings of previous research in this field are useful only as
general guidelines (albeit they are rarely followed). Each firm is
unique in terms of its peculiarities, people, history, needs, goals,
and leadership and must examine its own experiences in order to
discover the specific reasons for its venturing successes or failures.
Maximizing Learning
In attempting to determine the best way to learn from its venturing
experience, the firm should consider three levels of learning effort:
· Level 1: The venture manager is asked to write a report about the
venturing experience, including a state-
 Page 314
ment of the most important things learned and recommendations
for the future designed to help the firm's overall venturing effort. A
useful question for the manager to address is, "If you could do this
project over again, what would you do differently?" This first level
of learning effort represents the simplest and easiest approach. It
will yield information that is useful but far from complete.
· Level 2: Key venture and senior management people hold one or
more meetings to discuss selected topics from the debriefing
protocol presented later in this chapter. Minutes should be kept and
reports written presenting conclusions and recommendations for
future actions, with the views of both venture and senior
management included. One firm held regular meetings of all its
venture managers and other key venture team members to share
experiences and identify internal obstacles that should be removed
by senior management.
The company can hold separate meetings dedicated to assessing the
venturing experience, or it can perform this assessment as part of
the agenda of other meetings held in connection with the venturing
activity. If it decides to hold separate meetings, they can be
conducted either periodically or at the time a venture changes its
status in some way (e.g., by being terminated, combined with an
existing unit, or established as an ongoing business unit).
· Level 3: The company conducts a full-fledged, in-depth study of
the venturing experience, which will probably require the
participation of people from outside the firm to obtain objectivity
as well as expertise. This third level involves a really significant
research projectone that is time-consuming and may be quite
difficult to accomplish. An undertaking of this magnitude should
probably be reserved for very major projects involving amounts of
money that are highly significant to the firm.
 Page 315
The balance of this chapter explains the steps that should be taken
and the issues that should be addressed in conducting this latter
type of learning efforti.e., a detailed, intensive study of a venture.
Again, we would remind you that few organizations will want or
need to take every one of these steps and address every one of
these issues, but you will find it helpful to study this information,
identify the elements of it that are most relevant to your particular
firm and venture, and then incorporate those elements into the
design of your firm's learning effort.
Conducting an In-Depth Study of a Venture
The process of conducting a full-fledged assessment of a venture
involves recording information on an ongoing basis throughout the
course of the venture; debriefing involved parties; consolidating the
factual material into a narrative history; and finally, performing
analyses, drawing conclusions, and taking action based on those
conclusions. The approach described here is stimulated and
triggered by the longitudinal research methodology used by
Andrew Van de Ven et al. (1989) at the University of Minnesota in
its innovation research program. We suggest that you study this
process and use those parts of it that seem worth the effort for your
firm and venture.
Step 1: Arrange to Record Information and Events
Information and events related to a new business can be recorded
by keeping a venture log, in very much the same way as a captain
documents pertinent data about a voyage by keeping a ship's log.
Another method is to appoint a venture "historian," who collects,
records, and files information and key documents. Both content
and process should be recordedincluding minutes of meetings,
cross-functional ac-
 Page 316
tivities, critical events, major decisions, and individual and team
actions.
Step 2: Using a Debriefing Protocol, Debrief the Key Players and
Some Observers
Although collecting basic documents is a good starting point, the
most important aspects of the venture's story are likely to fall
outside the written record. So the second step consists of searching
for information that is not likely to have been recorded. This
information can be collected by interviewing key players from both
venture management and corporate management, as well as
corporate people who were involved with the venture and others
who were not involved. The actual interviews should be conducted
by individuals who had no stake in the venture or its outcome.
University students and faculty with case research and case writing
experience may be used.
We suggest that a debriefing protocol be used to structure and
provide guidelines for these interviews. The sample protocol
presented in the following subsections illustrates the types of
debriefing questions that can be asked. (Although all questions
relevant to a particular firm and venture should be answered, many
of the answers will be contained in the venture log or venture file,
thereby eliminating the need to raise these issues during the
interviews.)
Origin of the Venture. The answers to the following questions
should provide a clear picture of how the venture idea first came
into being and why it was pursued. (Note: In recording the
answers, be sure to include the dates and elapsed time for each
event.)
· Where did the venture idea originate?
· When was the idea first presented? To whom? By whom?
(Indicate the individual's title and responsibili-
 Page 317
ties.) In what manner (e.g., written, verbally, at a formal meeting,
informally)?
· What were the initial reactions? By whom?
· How did the idea's proposer respond?
· Was any money requested? How much? For what?
· Was money provided? How much? From what budget or source?
· Was there any evidence of political issues or conflict during this
activity? If so, describe.
· What was the essence of the proposition at the time it was first
presented? (Specify the venture's intended function, market fit, and
purpose for the firm.)
· Did the venture idea require significant product or technology
development and/or entry into a new market (i.e., one unfamiliar to
the firm)?
· Did the discussion of the proposition result in any changes in the
basic idea? If so, describe.
· What follow-up actions were planned as a consequence of the
presentation and subsequent discussion?
Concept Testing. Was a concept test conducted? By whom? When?
How was the test designed? Did the test results confirm the
desirability of pursuing the concept in its original form? If not,
what changes were made? (Indicate changes to the concept, the
market segments to be targeted, the product design requirements,
and the technology requirements.) If no concept test was
conducted, why not?
Market Research. What target markets were defined? How was the
market potential determined? What was done to verify actual want
or need for the product and what it would take to cause the market
to buy? Was there any disagreement about the market potential?
What arguments were offered in support of the opposing
viewpoint(s)? How was the disagreement resolved or otherwise
handled?
How were the market research results reviewed? By
 Page 318
whom? In what format? Did the review result in any changes in the
venture concept? If so, what were those changes?
What was defined as the new venture's present and potential
competition? What conclusions were reached about the
characteristics of the market? (Indicate the anticipated size, growth
rate, nature of the competition, want or need for the proposed
product, and other market characteristics relevant to the venture.)
Product Development. What predictions were made about how
much it would cost and how long it would take to develop the
product to the commercialization stage? Was the technology base
for product development already present, or was further work
needed?
How much did product development actually cost, and how long
did it actually take? How were the differences between estimated
and actual cost and time handled? By allocating additional funds?
Through budgeting or control mechanisms? By management?
Were any changes made in the composition of the product
development team? Why? When? Did any key people leave the
firm or get transferred to another assignment within the firm?
Development of the Business Plan. At what stage was a business
plan prepared for the venture? Who prepared it? What was the
rationale for choosing that person (or those persons) to prepare the
plan? Who else was co-opted or participated in putting the plan
together? How long did plan preparation take? (Include elapsed
time as well as working time.)
Who reviewed the business plan? What was the reviewer's
response? Was the plan changed as a result? If so, specify the
primary changes. Why were those changes made? How many
revisions of the plan were required before approval? Were formal
or informal criteria for acceptance known to those who prepared
the plan?
Were business plans for other ventures also being reviewed in the
same general time period? In comparing the
 Page 319
plan for this venture with plans that were rejected, what factors
seem to account for this plan's approval?
Authorization of the Venture. Describe the process used to
authorize the venture. What body or individual authorized it?
When?
Organization of the Venture. What process was used to select
venture management and members of the venture team? What
factors were considered in choosing the venture manager? What
was his or her previous experience?
Was the venture team given any training? Did the team use outside
consultants? What kind? Why were those consultants used? What
compensation or incentive arrangement was made with the venture
manager and team? Did the arrangement include any financial
penalties for venture management? Was any safety net provided?
To whom did the venture report? What factors were considered in
making that decision? Was there an executive champion who acted
to protect and support the venture team and to facilitate the
acquisition of resources? Who was that individual? What were his
or her position and standing in the firm?
What arrangements were made regarding the availability of funds
and financial controls? Was a time-related budgeting system used,
or was the release of funds triggered by the achievement of
milestones?
What control mechanisms were used? Written reports? If so, how
often were they produced? Meetings? If so, how often were they
held?
How much leeway did venture management have in changing the
budget, spending money, and increasing or decreasing head count?
How was performance evaluated? By whom?
How was corporate or divisional staff used in connection with the
venture? To ensure adherence to policies? To provide assistance
when requested? Was venture management required to use staff
personnelfor example, for recruiting
 Page 320
people, for designing or constructing plants, or for implementing
internal financial control systems?
What organizational form was used for the venture itselfsuch as a
joint venture, a new subsidiary, a new division, or a project team?
Why was this form chosen? Did the form change? If so, why? Who
made the decision to change?
Major Underlying Assumptions. Since any new business is based
largely on assumptions, identify the important assumptions
underlying this venture and the process by which those
assumptions were made. (Refer to Chapter 7 for a detailed
discussion of how to identify and test key assumptions.) In
searching for major assumptions, consider the following areas:
· The market
· The environment (especially the economy)
· The competition
· Organizational support and collaboration
· Product costs and selling prices
· Technology
· The break-even point
· Economic return related to time
· Governmental regulations
· Distribution method
Were those assumptions articulated, either in a document or in
some other manner? Were any tests designed to validate the
assumptions?
The point here is to reconstruct the assumptions that provided the
basis for starting the business. The test for identifying a critical
assumption is to determine whether it was a go/no-go assumption:
"If we had known that this assumption was false, we would not
have started the venture or we would have regarded the venture as
being fatally flawed." Up to this point in the learning process, all
effort has been directed toward assembling essential information
and con-
 Page 321
structing a history of the venture prior to startup, establishing what
the expectations were, and examining the major assumptions.
Step 3: Prepare a Chronological History of Venture Performance
Now that a wealth of raw data has been collected, it is time to
synthesize that information into a chronological history of the
venture's performance and major activities. Interviews, reports,
revised budgets, minutes of meetings, and memos can serve as
source material for this step, and the venture log can be particularly
useful as well. It is especially important to highlight critical
decisions and events, including changes in personnel, processes,
and procedures.
When constructing this history, search for changes in assumptions,
the performance results that prompted those changes, and the
action plans that were modified as a consequence.
Up to this point in the learning process, the effort has been focused
on assembling and synthesizing information. Although the extent
to which this data collection effort should be pursued depends on
the significance and complexity of the venture itself, it is essential
that the report be as brief as the facts will permit.
Step 4: Draw Conclusions
Gathering all the information and answering all the questions
suggested in the preceding steps will not, in itself, produce
learning. For learning to occur, you must assimilate this material
and draw conclusions from it. In doing so, you should be seeking
two levels of learning.
The first level is "technical" learningthe answers to such questions
as: What did we do "wrong"? What did we
 Page 322
do "right"? Knowing what we now know, what would we do
differently in terms of our assumptions, decisions, and actions?
These questions should be asked with respect to both content and
process.
The second level of learning, to complete what Argyris (1977) calls
"double loop learning," is probably more important. Here the
objective is to discover why errors, now seen in retrospect, were
made and why they were not recognized and corrected early
enough. In this learning step, the answers to questions concerning
the policies, values, practices, and use of authority and power that
may have affected the ongoing learning process must be assessed.
To achieve both these levels of learning, the following key
questions need to be considered:
· Where (i.e., in what areas of the business's development) were the
most significant differences between what was expected and what
actually happened? Were the expectations unreasonable at the
time? If so, why?
· Was the response to emerging realities quick enough and correct?
If not, why not? What can we do differently in the future to prevent
a repetition of this type of error? (Or conversely, if the venturing
experience was successful, what can we continue doing in the
future to ensure that this level of performance is maintained?)
The target areas for inquiry should include:
· Market factors: need, size, growth rate, target segments,
competitive insulation, competitive response, pricing, selling cycle
time (elapsed time from first approach to first order), marketing
and selling costs, and so forth.
· Production factors: capacity, costs, delivery time, quality levels,
and so forth.
· Product factors: performance characteristics and
 Page 323
function, service requirements, switching costs, life, maintenance
requirements and costs, quality control requirements, customization
needs, economic value, and so forth.
· Development factors: technology status, costs and time, level of
continuing R&D requirements, and so forth.
· Economic factors: break-even point, margins, capital investment
requirements, startup costs and time, staffing levels, investment
recapture time, potential upside gain, potential downside risk, and
so forth.
· Human factors: choice of the venture management team, training
requirements, performance evaluation, and so forth.
· Resource factors: timing and process for allocating the funds;
availability of support from functional specialists, staff people, and
other organizational units; availability of physical resources; and so
forth.
Step 5: Apply What Has Been Learned
How will whatever has been learned be reflected in training
activities and in the modification of policies and procedures? After
all, there is not much point in carrying out the preceding steps in
the learning process unless the firm reaches some conclusions
regarding what action should be taken and then implements that
action. In planning remedial action, a special effort should be made
to correct the underlying causes for errors and misjudgments and
for lack of necessary flexibility and support.
Conclusion
At the time the firm decides to venture, it should also select the
method it will use to capture and record what is
 Page 324
learned from that experience. Then, in organizing the venture, the
firm should make it a point to ensure that the documentation that
will be required to implement the selected approach is
systematically maintained.
More can be learned from failures than from successes. Therefore,
in assessing its venturing experiences, the firm should concentrate
on its disappointments and study the differences between the
successes and failures.
Venturing experience and the learning that can be derived from it
are precious and must be captured in a timely manner, while key
participants are still available to provide their input. If the company
fails to keep a record of what was learned, the benefits of that
experience and learning will be lost forever.
And finally, the venturing experience is likely to have no learning
value whatsoever unless the firm applies what has been learned to
make appropriate changes in future venturing efforts.
Guidelines
1. Organize the venturing process to ensure that the organization
learns from experience.
2. At some point and in some way, keep a record of the venturing
experience.
3. Be sure to get input from venture management and members of
the venture team, senior managers, and staff personnel.
4. Try to record the experience as close to real time as possible,
keeping in mind that the passage of time distorts memories; failure
and success color recollections; and people move, die, or are fired.
5. Analyze the venturing experience to learn what should be
avoided and what should be repeated in the future.
 Page 325

References
Argyris, C. 1977. ''Double Loop Learning in Organizations."
Harvard Business Review (September-October): 115-125.
Block, Z. 1989. "Damage Control for New Corporate Ventures."
Journal of Business Strategy (March-April): 22-28.
Hill, R. M., and Hlavacek, J. D. 1977. "Learning from Failure."
California Management Review 29, no. 4: 5ff.
Meen, D. E., and Keough, M. 1992. "Creating the Learning
Organization." An interview with Peter M. Senge. The McKinsey
Quarterly, 1:58-67.
Van de Ven, A. H.; Venkataraman, S.; Polly, D.; and Garud, R.
1989. "Processes of New Business Creation in Different
Organizational Settings." In Research on the Management of
Innovation, edited by A. H. Van de Ven, H. L. Angle, and M. S.
Poole. New York: Harper & Row.
von Hippel, E. 1977. "Successful and Failing Corporate Ventures:
An Empirical Analysis." Industrial Marketing Management 6: 163-
174.
 Page 327

Appendix A:
Abstracts of Some Investigations of Corporate
Venturing
Biggadyke (1979)
Subject of Research. A total of 68 ventures started by 35 Fortune
200 companies, all in existing markets.
Results. Of the ventures studied, 18% achieved profitability in two
years, 38% in four years. Median performance was 7% ROI in
years seven and eight.
Conclusions
· Ventures that pursued market share rather than immediate profit
performed better than those that did not.
· "It appears that new ventures need, on the average, eight years
before they reach profitability" (106).
 Page 328
· "Entry on a large scale is the best strategy . . . but not for every
opportunity in sight" (110).
· Companies should start fewer ventures with more resources rather
than many with less.
· Venturing is very risky (when starting big).
· The time it takes to reach profitability can be reduced by spending
more earlier to obtain market share.
· Overall: Companies should think big, enter big, go for share, and
not be impatient.
Biggadyke's research has often been quoted as evidence of how
long it typically takes for ventures to become profitable, which has
led to the widespread impression that the norm is eight years. His
data clearly show, however, that nearly 50% of ventures become
profitable within four years.
Fast (1981)
Subject of Research. A total of 11 startups funded by venture
capitalists.
Results. Of the startups studied, an 18% ROI was achieved by year
three and a 230% ROI by year eight, contrasted with the results
reported by Biggadyke for corporate ventures.
Conclusions. Fast notes that venture capitalists differ from
corporate venture groups in the following respects:
· Venture capital investment is staggered, usually in installments,
over one to four years.
· Use of the limited partnership format locks in the pool of capital,
in contrast with corporations, which withdraw support after a few
years.
· Venture capital groups keep their overhead lean and low, unlike
corporations, in which the group oversee-
 Page 329
ing multiple ventures often develops a big internal staff and a
cumbersome bureaucracy.
· Venture capitalists use board membership as a means of
persuasion but have little or no involvement in day-to-day
decisions; however, they do assist in formulating strategy,
recruiting key personnel, and dealing with the financial community.
· Go/no-go decision points are used to trigger "rounds" of
financing.
Fast suggests that corporations invest in venture capital pools as a
means of learning how to handle new ventures more effectively.
von Hippel (1977)
Subject of Research. A total of 18 ventures.
Results. Of the ventures studied, 60% were successful; 40% were
failures. (Von Hippel's criteria for success were a 10% pretax profit
and rapid sales growth within three to five years.)
Conclusions
· Success is related to prior experience with customers.
· Ventures directed to new customers "invariably fail."
· Successes break even in one to eight years. Failures never do.
· The best ideas come from customers.
Porter (1987)
Subject of Research. Diversified acquisitions, joint ventures, and
startups of 33 large corporations from 1950 to 1986.
 Page 330
Results. On the average, 56% of startups were successful versus
46.6% of acquisitions. ("Success" was defined as entities still in
existence. More specific data were unavailable.)
The variation from one company to another was enormous, as
indicated in Table A-1, which shows data from Porter that have
been rearranged to compare startups with acquisitions.
Conclusions Based on Porter's Study. Since Porter's own
conclusions relate to diversification as a strategy, we have not
presented them here. Instead, what follows are a number of
additional conclusions that we have drawn based on Porter's data.
· Venturing into new fields and new industries can be and has been
at least as successful as acquisitions as a diversification strategy for
many corporations and has been highly successful for some.
· Because the range of performance is so wide, information about
the average performance of many companies is of no value in
helping an individual company make a strategic decision.
· In contrast, information about the performance of individual
companies can give valuable insight into the reasons for their
success or failure.
Sykes (1986)
Subject of Research. Exxon's new-ventures program from 1970 to
1981, managed by Sykes. The program involved 19 internal
ventures and 18 venture capital investments.
Results. Venture capital investments of $12 million yielded a return
of $218 million. No internal ventures became profitable. (The
amount spent was not reported.)
Conclusions. Sykes' conclusions are based on an analysis of the
relative performance of the ventures and are stated in
 Page 331
Table A-1: Disposition Percentages for Acquisitions and Startups
Acquisitions Startups
Percentage
Disposed of
Percentage
Company Number (NI) (NI/NF) Number Disposed of
Johnson & Johnson 69 17 33 25 14
Procter & Gamble 25 17 17 11 0
3M 91 26 24 75 2
TRW 81 26 42 17 63
IBM 10 33 33 37 20
Du Pont 20 38 60 40 61
ITT 205 52 61 20 38
Exxon 24 62 80 45 27
Scovill 46 64 64 2 100
RCA 23 80 86 39 99
CBS 72 87 88 18 86
Gulf + Western 169 79 75 13 100
Xerox 42 71 100 21 50
GE 65 65 100 46 33
Average of 33 companies 53.4 60 44
Source: Adapted from an exhibit in Michael Porter, "From Competitive Advantage to
Corporate Strategy," Harvard Business Review (May-June 1987): 43-59.
Notes: NI = new industry; NF = new field. An industry is said to be in a particular field.
(The insurance industry, for example, would be in the financial services field.) A
manufacturing company like Xerox that entered the insurance industry as its first step
into the financial services field would be entering a new industry in a new field.
 Page 332
terms of what he would do differently if he could do it over again.
· If the organization is entering a new area of business, it should
acquire an established company.
· Venture capital should be used as a primary probe strategy.
· Venturing must be an important mainstream operationi.e., it must
fit the parent organization strategically and get a long-term
commitment of resources.
· A completely entrepreneurial environment is impossible to
maintain in a large multiproduct corporate setting because of
compensation, product compatibility, and liability issues.
· Venture management's experience in the relevant industry is a
significant determinant of venture success.
· A venturing environment that encourages resourcefulness is more
important than ample financing.
Block and Ornati (1987)
Subject of Research. Compensation practices and venture
performance of 207 ventures in 42 Fortune 1,000 companies.
Results. Of the ventures studied, 50% were reported to be
successful; 20%, failures; and 30%, too early to tell. (No definition
of "success" was supplied to the survey's respondents.) No
relationship was found between percentage of successful ventures
and compensation method used.
Conclusions
· The incentives used were not sufficient (all respondents reported a
salary percentage limitation).
· Financial incentives may not affect venture performance results
but may affect the retention of key people.
 Page 333
Block and Subbanarasimha (1989)
Subject of Research. Venturing performance and management
practices of 43 U.S. and 149 Japanese companies, mostly large and
public, involving 1,077 ventures. (See Table A-2.)
Results. (See Tables A-3 and A-4.)
· Of the U.S. companies surveyed, 59% reported that their overall
venturing operations were profitable, as opposed to 31% of
Japanese companies.
· Some 13% of the U.S. companies and 16% of the Japanese
companies reported an ROI from venturing equal to or better than
from the company's core business.
Table A-2: Sample Composition
United States Japan
Number of respondents 43 149
Number venturing 39 126
Annual Corporate Salesa
Under $500 million 26% 48%
Over $500 million 72% 52%
Corporate Sector
Manufacturing 66% 74%
Nonmanufacturing 34% 26%
Ownership
Public 96% 82%
Private 4% 18%
Source: Adapted from Z. Block and P. N.
Subbanarasimha, "Corporate Venturing: Practices and
Performance in the U.S. and Japan," working paper
(Center for Entrepreneurial Studies, Stern School of
Business, New York University, 1989).
Note: Percentages were calculated for venturing
companies only.
a$1 = ¥155.
 Page 334
Table A-3: Venturing Performance
United States Japan
Number of ventures reported 328 749
Average number of ventures per company 8.4 5.9
Ventures started since 1984 65% 71%
Individual Venture Performance as of the End of 1986
Ventures That Were:
Profitable 41% 26%a
Unprofitable 43% 54%a
Discontinued 9% 5%a
Meeting expectations 44% not available
Impact of Overall Venturing Performance on the Company
Companies That Reported:
An addition to their net profit 59% 31%a
An ROI from venturing equal to or greater 13% 16%
than from the base business
Positive cash flow to the company 44% 26%a
A contribution to current sales:
greater than 5% 56% 68%
less than 5% 42% 30%
Source: Adapted from Z. Block and P. N. Subbanarasimha, "Corporate
Venturing: Practices and Performance in the U.S. and Japan," working
paper (Center for Entrepreneurial Studies, Stern School of Business, New
York University, 1989).
a"Indicates a statistically significant difference between the figures for U.S.
and Japanese companies.

Conclusions
· Overall firm performance in venturing is most likely determined
by the size of the losses in the losers, rather than the percentage of
ventures that are profitable.
· Time-to-profitability expectations must be based on the specifics
of market development, competitive strength, and resources which
will be applied, not on any general formula.
 Page 335
Table A-4: Comparison of Venture Age versus Corporate
Venturing Performance
Age (Years)
Corporate Venturing
Performance U.S. Ventures Japanese Ventures
ROI greater than from the base 2.3 3.1
business
ROI less than from the base 3.1 2.5
business
Profit for corporation 2.7 2.9
No profit for corporation 3.0 2.4
More than 70% of ventures 2.8 2.0
profitable
Less than 30% of ventures 2.6 2.8
profitable
Source: Adapted from Z. Block and P. N. Subbanarasimha,
"Corporate Venturing: Practices and Performance in the U.S. and
Japan," working paper (Center for Entrepreneurial Studies, Stern
School of Business, New York University, 1989).

· Financial incentives, to help control losses, need to be developed.

· Ventures should not be initiated solely because of the presence of
a venture champion.
· Venturing programs initiated to challenge or develop management
are likely to fail.
· A separate venturing organization appears to be less desirable
than organically integrated venturing activity.
· No difference found between performance of organizations that
stayed close to present markets and technology and those that did
not.
· The management practices of the better performing U.S. firms
and Japanese firms were more alike than the practices within each
country sample.
· More detailed studies of individual firm practices and
performance are needed, rather than using statistical data to
determine individual action by any one firm.
· Some 41% of individual U.S. ventures and 26% of
 Page 336
individual Japanese ventures were reported to be profitable.
· The mean time required for ventures to achieve profitability was
2.7 to 3.0 years for both U.S. and Japanese companies.
Du Pont Review (1988)
Subject. Internal review of innovation and ventures at Du Pont
between 1967 and 1986.
Results. Du Pont initiated 85 new-direction businesses, which
produced sales of $2.8 billion and earnings of $318 million in
1988. No data were included for discontinued ventures, nor did the
review compare the total cost of these ventures with the return
from them.
Conclusions. Proprietary technology, patient development, heavy
investment, conservative financial management, and outstanding
people were found to be success factors. The following lessons
were learned:
· Market-test early and respond to the test results.
· Build a first commercial plant that is small and flexible.
· Put together a lean, dedicated entrepreneurial team with a single
clear leader.
· Keep the venture separate from the established business.
· Be sponsors of a venture, not judges.
· Manage uncertainty with flexible planning.
· Train entrepreneurial leaders.
· Keep visibility low.
· Recognize and reward intrapreneurs.
· Tolerate failure, not stupidity.
· Provide one-stop shopping for ''yes."
 Page 337

References
Biggadyke, R. 1979. "The Risky Business of Corporate
Diversification." Harvard Business Review (May-June): 103-111.
Block, Z., and Ornati, 0. 1987. "Compensating Corporate Venture
Managers." Journal of Business Venturing 2: 41-51.
Block, Z., and Subbanarasimha, P. N. 1989. "Corporate Venturing:
Practices and Performance in the U.S. and Japan." Working paper.
Center for Entrepreneurial Studies, Stern School of Business, New
York University.
Du Pont internal review. 1988. Presented to a New York University
class in corporate venturing.
Fast, N. 1981. "Pitfalls of Corporate Venturing." Research
Management (March): 21-24.
Porter, M. 1987. "From Competitive Advantage to Corporate
Strategy." Harvard Business Review (May-June): 43-59.
Sykes, H. B. 1986. "Lessons from a New Ventures Program."
Harvard Business Review (May-June): 69-74.
von Hippel, E. 1977. "Successful and Failing Corporate Ventures."
Industrial Marketing Management 6: 163-174.
 Page 339

Appendix B:
Venturing with Corporate Venture Capital
Venture capital investment is a form of venturing engaged in by
many corporations. This appendix identifies the success factors
associated with the venture capital business, examines the results of
early corporate venture capital experience, discusses the obstacles
encountered by corporate venture capital units as they attempt to
provide the essential success factors, and suggests some methods
for overcoming those obstacles.

The Venture Capital Business

The venture capital business is a unique enterprise unrelated to
normal corporate activity. It is a high-risk investment business in
which ultimate success is achieved by cashing out through the sale
of equity interest. Venture capitalists who
 Page 340
finance relatively new firms deal and work with entrepreneurs and
must have a keen understanding of and empathy with them.
Although investment decisions are based on careful analysis and
evaluation, such decisions are, in the end, made "between the belly
and the backbone."
Although venture capitalists never deliberately enter into an
investment with the knowledge that it will be a failure, they do
have a clear understanding, rooted in experience, that only a small
minority of investments will yield rewards commensurate with the
risk. The median rates of return to venture capital pools reported by
Venture Economics in the decade from 1980 to 1989 ranged from a
low of2% to a high of 35%. Only two to three investments out of
every ten are truly successfuli.e., return 5 to 10 or more times the
investment.
The following factors appear to be necessary for success in the
venture capital business. (The italicized items on this list are
success factors that can be particularly difficult for corporate
venture capitalists to provide.)
· High integrity (needed to attract entrepreneurs with proposals)
· Contacts with investors and potential sources of deals
· Ability to attract investors
· Relationships with other venture capital firms that could lead to
syndicated deals and referrals
· Ability to analyze business plans and entrepreneurs
· Negotiating ability
· Ability to exercise due diligence
·Ability to monitor and guide investments
·Experience in venture investment
· Knowledge of the field chosen for investment
· Operating experience in the chosen field
·Focus on specific industries
· Adequate capital
·Ability to build a portfolio of investments at different stages
 Page 341
The preceding broad overview of the venture capital business
provides a background for the following section, which examines
how corporations have fared in their attempts at venture capital
investing.

The Corporate Venture Capital Experience

In the past two decades, American business has had an on-again,
off-again romance with corporate venture capital programs, in
which the company participates in some way in venture capital
investments. More than 100 major U.S. firms have at one time or
another tried using such programs to aid in new-business
development (Sykes 1990). Although a few corporate venture
funds have thrived, many others have sputtered and finally
discontinued operations.
The very term corporate venture capital implies a contradiction.
Large corporations are usually nonentrepreneurial in the way they
make decisions and operate, whereas venture capitalists by
definition and desire function in a highly entrepreneurial
environment. This raises questions as to whetherand if so,
howthese two disparate cultures can be reconciled. Thus far,
attempts at reconciliation have produced uneven results.
To date, there have been few comprehensive studies of corporate
venture capital activity, and the studies that have been done tend to
focus more on individual cases than on the corporate venture
capital community as a whole. One study, for instance,
concentrated on the effectiveness of corporate venture capital
investments in three major corporations (Hardymon, De Nino, and
Salter 1983). In 1986, Sykes presented a detailed examination of
Exxon's corporate venture activity, which included a number of
comparisons between Exxon's internal and venture capital
investments and demonstrated the importance of management
experience for achieving success with corporate venture capital
investments.
Much of this appendix draws on two comprehensive studies of
corporate venture capitalone by Siegel, Siegel,
 Page 342
and MacMillan (1988) and the other by Sykes (1990)both of which
were based on responses to extensive questionnaires completed by
corporate venture capitalists. The Siegel, Siegel, and MacMillan
questionnaire was mailed to 142 corporate venture capitalists and
generated 52 responses, 29 of which came from corporate venture
capitalists in Fortune 100 companies. The Sykes questionnaire was
mailed to 86 firms with corporate venture capital programs and
generated 31 responses.
This appendix addresses the question of which approaches to
corporate venture capital activities are most likely to produce
successful results. In order to do this, we start with an in-depth
discussion of the major obstacles facing corporate venture
capitalists, which provides background for the subsequent
discussion of the key decisions that senior management must make
regarding the corporate venture capital function.
Obstacles Confronting Corporate Venture Capitalists
The major obstacles to effective corporate venture capital programs
tend to fall into two classes. The first class consists of obstacles
stemming from the relations between the parent corporation and
the corporate venture capital activity, and the second consists of
obstacles related to the corporate venture capital activity itself. This
section examines both types of obstacles and then closes with a
discussion of how the corporate venture capitalist's growing
experience with this type of investing can help to lessen the impact
of these obstacles.
Obstacles Stemming from the Relations between the Parent
Corporation and the Corporate Venture Capital Activity
This subsection provides an overview of several major obstacles to
corporate venture capital activity that stem from
 Page 343
the relations between that activity and the parent corporation within
which the activity must be carried out. These obstacles include:
· Failure to clarify the mission of the corporate venture capital
activity
· Short time horizons
· Inadequate financial commitment
· Underestimating risk
· Inflexibility
· Incompatibility between corporate and entrepreneurial cultures
Failure to Clarify the Mission of the Corporate Venture Capital
Activity. Research indicates that without doubt the most serious
obstacle to venturing with corporate venture capital is lack of
clarity regarding the mission of this endeavor. Unless senior
management spends the time and makes the effort to define the
roles of the firm's venture capital arm, there will be increasing
confusion as the activity gets under way and investments start to be
made. Corporate venture capitalists will inevitably make
inappropriate investments, which may subsequently have to be
divested with enormous loss of purpose on the part of corporate
venture capital management as well as significant damage to the
firm's credibility with the venture capital and entrepreneurial
communities. As we shall see later in the appendix, lack of
credibility is a significant problem in its own right and needs no
aggravation.
Short Time Horizons. The next most serious obstacle facing
corporate venture capitalists is that corporate management appears
to lose patience too easily, failing to understand that new ventures
require considerably more time to achieve success than established
businesses do. This problem becomes particularly acute when the
organization is under short-term cash flow pressure for whatever
reason. In order to make the highly unpredictable investments
demanded by very uncertain ventures, a venture capital program
needs a
 Page 344
pool of funds whose availability is assured on a long-term basis.
This problem is therefore related to the next one.
Inadequate Financial Commitment. The third most difficult
obstacle facing the corporate venture capital function is the parent
company's unwillingness to make the financial commitment
required for a successful investment program. Remember that
venture capitalists assemble large pools of funds to invest in
portfolios of ventures rather than in individual ventures. This
portfolio approach reduces the exposure to loss from investing in
individual ventures, but considerable funds are needed in order to
make enough investments to benefit from the portfolio effect.
Underestimating Risk. Corporate management tends to be unable
to comprehend the risks associated with venture investing. Because
it is simply not equipped to handle these risks, it becomes
extremely nervous when any ventures start to fail.
Inflexibility. Corporate management also tends to be unable to cope
with the significant variations from plan and budget that typically
occur when investing in new ventures. This inflexibility leads it to
apply rigid, inappropriate controls that only damage the ventures'
potential.
Incompatibility between Corporate and Entrepreneurial Cultures.
Beyond the more direct obstacles described in the preceding
subsections, there are significant cultural differences between the
corporation and a venture capital activity. Venture capitalists have
fundamentally different decision processes, time horizons, planning
and control mechanisms, and even business values, in that they
thrive on informality, inductive thinking, and flashes of insight
rather than formal analysis and deductive reasoning. Unless such
differences are recognized and managed, they can lead to serious
misunderstandings and severely disrupt relations.
 Page 345
Obstacles Related to the Corporate Venture Capital Activity Itself
The major obstacles to corporate venture capital activity related
directly to the activity itself include the following:
· Lack of authority
· Staffing difficulties
· Entrepreneurial distrust
· Inadequate flow of deals and lack of opportunity to participate in
syndications
These obstacles are discussed in the following subsections.
Lack of Authority. The most serious obstacle directly related to
corporate venture capital activity is that in order to operate such a
program successfully, corporate venture capitalists must have the
authority to make significant investment decisions relatively
quickly. Since time is often of the essence, the parent company can
seriously handicap the venture capital function by requiring that
detailed plans be submitted for a review that drags on over a period
of weeks. There is a real need for the corporation to understand the
unique demands of the venture capital business and find ways to
allow autonomous, independent decision making without
compromising the corporation as a whole. This is one of the most
serious obstacles cited by corporate venture capitalists in their
questionnaire responses.
Staffing Difficulties. The next most serious obstacle is the inability
to attract qualified venture capital managers. As we explain later in
the appendix, the compensation offered and the restrictive nature of
the corporate environment combine to render the closely controlled
corporate venture capital operation a less than desirable place of
employment for effective venture capital managers. This problem
is compounded by high turnover rates in the pool of corporate
venture capital managers, who tend to leave the firm for more
exciting and
 Page 346
much more remunerative jobs in independent venture capital
partnerships.
Entrepreneurial Distrust. The third most difficult obstacle involving
the venture capital activity itself is the fact that entrepreneurs
harbor a fundamental distrust of large corporations. This distrust
has two components: The first is the entrepreneurs' suspicion that
the corporations will steal their ideas. The second is their fear that
even if the corporations don't steal their ideas, they will control
their ventures to satisfy corporate objectives at the expense of the
ventures' wellbeing. This distrust goes beyond the entrepreneurs,
for a parallel distrust often prevails among independent venture
capitalists, which leads to the next obstacle.
Inadequate Flow of Deals and Lack of Opportunity to Participate in
Syndications. The aforementioned distrust of large corporations on
the part of both entrepreneurs and independent venture capitalists
results in a dearth of good deals. Entrepreneurs tend to shop their
ideas to the independents first, and therefore, as one corporate
venture capitalist put it, "By the time anything gets to us, it's sure to
be something from the bottom of the barrel."
The Benefits of Experience
Fortunately, over time, the more experienced corporate venture
capitalists find ways to lessen some of the impact of various
obstacles that plague their less experienced counterparts. As they
succeed in moving beyond the first few deals, corporate venture
capitalists learn how to handle:
· The cultural incompatibility between the corporation and the
venture capital activity
· Corporate management's lack of a clear mission for the venture
capital function
· Corporate management's lack of patience with ven-
 Page 347
ture capital investments that do not rapidly produce a good ROI
· Corporate management's tendency to underestimate the riskiness
of venture capital investing
· The corporate venture capitalists' lack of authority and need for
autonomy from cumbersome corporate approval processes
· The entrepreneurs' fear of corporate control
· The inadequate flow of deals
A number of ''learning curve" benefits accrue to these experienced
corporate venture capitalists. It appears that after the first few
successful deals, a mutual confidence starts to build between them
and the parent company. In particular, over time, they learn how to
ameliorate some of the major cultural conflicts and become more
proficient both at handling relations with the corporation and at
attracting deals from nervous entrepreneurs. They also learn to
deliver ROI. So as these corporate venture capitalists gain
experience, they are allowed to operate more like independent
venture capitaliststhe corporation gives them greater authority and
a more certain financial commitment.
Senior managers must keep the obstacles discussed in this section
in mind as they make the key decisions regarding the corporate
venture capital activity, to which we now turn.

Basic Framing Decisions for the Corporate Venture Capital

Function
In setting up a corporate venture capital activity, senior
management must make decisions regarding a number of critical
issues. These issues, which are examined in the following
subsections, include:
· The objectives of the corporate venture capital activity
 Page 348
· The mode of operation (i.e., whether the firm will invest via a
venture capital fund pool or invest directly in specific ventures)
· The funding method and approval process
· Investment criteria (i.e., decision-making standards used to select
the ventures in which the firm will invest)
· Compensation arrangements
· Sources of deals for corporate venture capital investments
Objectives of the Corporate Venture Capital Activity
Because the objectives of corporate venture capital activities are
largely strategic rather than financial, they are somewhat different
than for independent venture capital firms. The fundamental idea is
for the parent company to get a "window" on potential new growth
areas, which is appealing given the historical pattern that major
new-business growth has generally originated with small,
innovative firms.
As far as corporate venture capital objectives are concerned, the
basic decision that must be made involves the scope of the strategic
objective. This scope can range from very broad to very focused, as
the following spectrum of possible opportunities demonstrates:
· To provide a window of opportunity by exposing the company to
completely new technologies and/or markets (the most common
objective)
· To seek opportunities to manufacture and/or market new products
· To identify companies that might be potentially profitable targets
for acquisition
· To seek exposure to new manufacturing processes
· To create or enhance desirable business relationships (such as
research contracts or marketing arrangements) via appropriate
investment
 Page 349
· To learn how to conduct a venture capital investment program
From the discussion of obstacles in the preceding section, it should
be clear that whatever scope is selected, it is very important for the
firm to clearly specify that scope, because without a well-defined
mission, corporate venture capitalists experience major difficulties.
(Again, lack of a clear mission is the most frequently cited obstacle
to corporate venture capital activities.) And in specifying the scope,
the firm must give careful consideration to two important success
factors: knowledge and experience in the specific industries in
which it will be investing.
Although the underlying aspiration may be to achieve one or more
of the strategic objectives indicated earlier in this section,
particularly exposure to new technological and/ or market
opportunities, most firms also tend to emphasize profitability as a
necessary criterion for making corporate venture capital
investments. The inclusion of profitability objectives is important,
since a single-minded focus on strategic benefits, without a hard-
nosed assessment of profit potential, leads to investments that lack
long-run viability. For instance, a corporate venture fund should
only confine itself to investing in a few "strategic" industries if
there are enough opportunities to make high-grade investments
within those industries to ensure an adequate flow of deals.
Investments that may appear exciting from a corporate perspective,
for technological or marketing reasons, but are not financially
attractive may well drain resources rather than produce
opportunities.
On the other hand, there is a danger that the emphasis on
profitability can also become single-minded. Crises in the parent
corporation often force it to focus increasing attention on short-
term returns, to the detriment of the "patient money" requirements
of venture capital investing. Therefore, it is crucial to maintain a
balance between the corporate venture capital function's strategic
mission and its profitability requirements. When there is a
corporate crisis, the actions of
 Page 350
senior management can either prevent or create short-term
pressures to gut or paralyze the venture capital operation. All in all,
the research findings suggest that senior management should
include profitability objectives for the corporate venture capital
program but take care to ensure that those objectives do not result
in the program's succumbing to short-term pressures.
As far as the objectives themselves are concerned, the evidence
suggests that firms are better off when their objectives involve
seeking windows of opportunity and building business
relationships. Acquisition as an objective appears to be
counterproductive: entrepreneurs are very wary of such objectives,
and this wariness has an inhibiting effect on the flow of deals.
Corporate venture capitalists whose primary objective was to learn
how to conduct a program of venture capital investment also
reported dissatisfaction with their results.
In summary, we suggest the following when it comes to setting
objectives for the corporate venture capital activity:
· Senior management must be absolutely clear about the activity's
mission. The scope of the effort should be well defined right from
the start.
· Financial objectives as well as strategic ones should be
established.
· Senior management must recognize its responsibility to protect
the corporate venture capital function from short-term pressures.
· The firm should concentrate on using corporate venture capital
activities to seek windows of opportunity and, in particular, to
build business relationships. These types of objectives tend to be
the most successful.
· The firm should avoid using corporate venture capital activities to
seek acquisitions and learn about venture capital investing. These
types of objectives tend to be the least successful.
 Page 351
Mode of Operation
The second major decision that needs to be made involves the
mode of operation, which can take two forms: venture capital
limited partnerships, in which the firm participates as a co-investor
and limited partner in a venture capital fund pool, or direct venture
capital investments, in which the firm invests directly in specific
ventures. About half the corporate venture capitalists use direct
venture capital investments, and half use venture capital limited
partnerships. Furthermore, just over half use both methods.
Venture capital limited partnerships are attractive if the parent
company is concerned with the legal implications of its access to
proprietary technical and/or market information of the ventures in
which it invests (Hardymon, De Nino, and Salter 1983). Venture
capital limited partnerships are also useful when the corporate
venture capitalist has little experience and few experienced venture
capital managers, since this method enables the company to
piggyback on the expertise of the other members of the partnership.
The learning benefits are not great, however, because by its very
nature, the limited partnership role seriously restricts the transfer of
experience.
There is evidence (Sykes 1990) that both approaches have their
merits. Venture capital limited partnerships were found to provide
contacts with other venture firms as well as contacts that led to
venture opportunities, thus increasing the flow of deals. Direct
venture capital investments were found to be valuable for
enhancing and leveraging existing business relationships.
Therefore, there is real benefit in using both modes, and the
prospective corporate venture capitalist should seriously consider
using both.
Funding Method and Approval Process
The next major set of decisions involves how venture investments
will be funded and the process by which the orga-
 Page 352
nization will approve proposed investments in particular ventures.
In establishing the arrangements by which funds will be released
for investment in ventures, the firm has its choice of the following
funding options:
· A relatively large, separate pool of funds specifically earmarked
for venture capital investment can be created on a one-time basis.
· A separate pool of funds specifically earmarked for venture
capital investment can be created on a periodic basis.
· Deals can be funded on an ad hoc basis.
Nearly half the corporate venture capitalists surveyed by Siegel,
Siegel, and MacMillan (1988) had their deals funded only on an ad
hoc basis.
In establishing a process for approving investment in particular
ventures, a firm also has its choice of several options. Among the
possibilities are that approval from corporate management is:
· Not required at all.
· Required but is typically a formality.
· Required for deals above a designated size and is based on
corporate management's thorough evaluation.
· Required for all deals and is based on corporate management's
thorough evaluation.
The majority of corporate venture capitalists among those surveyed
by Siegel, Siegel, and MacMillan (1988) were given little authority
to select which ventures should be funded without approval from
corporate management. Fully half the corporate venture capitalists
surveyed were required to seek in-depth evaluation and approval
for all deals. Nearly two-thirds of those surveyed were required to
seek formal approval for any projects of significant size.
 Page 353
These funding and approval rigidities add considerably both to the
frustration of the corporate venture capitalists and to the distrust
and frustration of the entrepreneurs involved in the investments.
Compare their situation with that of an independent venture capital
partnership, in which pools of capital are set aside for as long as ten
years, to be drawn down whenever the ventures in the investment
portfolio require it and in which approval decisions are made by
venture partners fully conversant with the ventures.
Evidence of the value of greater autonomy of operation came from
the Siegel, Siegel, and MacMillan study (1988), which identified
two major groups of corporate venture capitalists. The smaller
group was dubbed "pilots," because these individuals had a
considerable degree of independence: they were given far greater
authority to make investment decisions and were able to operate
with a much longer-term and more dependable financial
commitment from the parent corporation. The larger group was
dubbed "co-pilots," because these individuals had significantly less
independence: they had to share decision-making authority with
corporate management and operate with a considerably less
dependable financial commitment from the corporation, since
capital was contributed only on a periodic or deal-by-deal basis.
Almost all the pilots regarded ROI as a major objective of venture
investing. In their screening of ventures, this group placed
relatively heavier emphasis on entrepreneurial talent and leadership
and financial considerations than did the co-pilots. Criteria related
to strategic benefits weighed less heavily in their investment
decisions.
Co-pilots attached greater importance to strategic benefits. Almost
all considered at least one strategic objective to be essential, and
the majority regarded ROI as a less than essential objective. This
group's investment criteria reflected corporate priorities. Criteria
relating to strategic benefits were much more important than
criteria relating to either the entrepreneur or financial performance.
With respect to the obstacles to corporate venture capital activities
discussed earlier in the appendix, the co-pilots
 Page 354
assessed eight of these obstacles as being more damaging than did
the pilots. Four of the obstaclessenior management's lack of a clear
mission for the corporate venture capital function, lack of
flexibility, lack of patience with respect to venture capital activity,
and inability to relinquish authority to the corporate venture
capitalistappeared to be a direct result of the company-mandated
close organizational relationship between the firm and its co-pilot
corporate venture capitalist. The imposed closeness of this
relationship also seemed to magnify obstacles related to the
attractiveness of the corporation as a source of funds: the
entrepreneurs' fear of corporate control and of their ideas' being
pirated, a general incompatibility between corporate and
entrepreneurial cultures, and inadequate flow of deals were all
viewed as more serious by the co-pilots than by the pilots.
The results of this study constitute rather convincing evidence that
close control is a serious impediment to corporate venture capital
activity.
Finally, this argument is further supported by the performance
results of pilots and co-pilots. Pilots not only report higher
satisfaction in achieving ROI generally, but they also do no worse
than co-pilots in achieving strategic benefits. Thus, pilots achieve
equal or higher levels of performance and are plagued by far fewer
obstacles than their co-pilot counterparts, which, again, seems to
constitute convincing evidence that a pilot approach to corporate
venture capital activity is generally more effective than a co-pilot
approach.
Autonomy of decision making and a long-term, reliable
commitment of capital are necessary conditions to create an
environment conducive to an effective corporate venture capital
program. This means that in designing its program, the company
should push autonomy of decision making and independence of
funding sources as hard as it can. The corporate venture capital
function should be established as an independent entity and should
have access to a committed, separate pool of funds. This will
enable corporate venture capitalists to respond aggressively to, and
manage, investment opportunities with minimal corporate
interference. Creating an inde-
 Page 355
pendent entity in this manner will also tend to defuse entrepreneurs'
justifiable concerns regarding such interference. The obvious
exception to these recommendations is if the firm has no
experience in this type of investingin which case, the best approach
is a high emphasis on venture capital limited partnerships, coupled
with an aggressive, proactive program of training by the partners in
venture capital decision making.
Investment Criteria
Once objectives, mode of operation, funding method, and approval
process have been determined, the next major decision involves the
criteria that will be used to select ventures in which to invest.
When it comes to defining investment criteria, it is perhaps wisest
to refer to the criteria already used by the independent venture
capital community, since those investors have a track record in
making such decisions.
Table B-1from Siegel, Siegel, and MacMillan (1988) and
MacMillan, Siegel, and Subbanarasimha (1985)lists the criteria
most generally used by venture capitalists. These data have been
enhanced with criteria that were identified in interviews with
corporate venture capitalists as ones that pertain specifically to
corporate situations. These additional criteria appear in the final
section of the table, headed "Corporate Fit Considerations."
As can be seen from the results of the surveys, corporate venture
capitalists place considerable emphasis on the qualities of the
entrepreneur and less emphasis on the characteristics of the product
or market. This is consistent with past studies examining the
investment criteria of independent venture capitalists (MacMillan,
Siegel, and Subbanarasimha 1985).
However, corporate venture capitalists also weight corporate
strategic considerations heavily, as can be seen from the nine
criteria they most frequently rated as essential, listed
 Page 356
Table B-1: Investment Criteria
Standard
Criteria MeanDeviation
The Entrepreneur's Personality
He or she is capable of sustained effort. 3.65 0.52
He or she is able to evaluate and react well to 3.47 0.58
risk.
He or she is articulate in discussing the 2.96 0.63
venture.
He or she attends to detail. 2.80 0.76
He or she is able to take criticism. 2.58 0.86
He or she has a personality compatible with 2.10 0.74
mine.
The Entrepreneur's Experience
He or she is thoroughly familiar with the 3.42 0.61
product.
He or she is thoroughly familiar with the 3.60 0.63
market.
He or she has demonstrated leadership ability 3.12 0.70
in
the past.
He or she has a track record relevant to the 2.85 0.67
venture.
He or she has assembled a functionally 2.77 0.83
balanced
management team.
Characteristics of the Product
The product is proprietary or can otherwise 3.10 0.73
be
protected.
The product has been developed to the point 2.67 0.79
of a
functioning prototype.
The product enjoys demonstrated market 2.29 0.72
acceptance.
Characteristics of the Market
The target market enjoys a significant growth 3.19 0.72
rate.
The venture will stimulate an existing 2.50 0.70
market.
The venture will create a new market. 2.44 0.67
Competition in the market will be minimal 2.37 0.77
during
the first 3 years.
Financial Considerations
The venture will generate a return equal to at 2.94 0.79
least 10 times the investment within 5 to 10
years.
The investment can easily be made liquid. 2.15 0.92
Corporate Fit Considerations
The product fits with the corporation's long- 2.77 1.20
term
strategy.
The venture is in a market or an industry that 2.81 1.19
is
attractive to my company.

(table continued on next page)

 Page 357
(table continued from previous page)
Table B-l: Investment Criteria
Standard
Criteria Mean Deviation
My company will be the controlling investor in 2.12 1.13
the venture.
The size of the specific investment should be no 2.12 1.00
greater than 10% to 20% of the total funds avail-
able to the venture activity.
The venture's long-term sales potential will have a 1.96 0.97
material impact on corporate performance.
Sources: Adapted from R. Siegel, E. Siegel, and I. C. MacMillan,
''Corporate Venture Capitalists: Autonomy, Obstacles and
Performance," Journal of Business Venturing 3, no. 3 (Summer
1988): 233-247; I. C. MacMillan, R. Siegel, and P. N.
Subbanarasimha, "Criteria Used by Venture Capitalists to Evaluate
New Venture Proposals," Journal of Business Venturing 1, no. 1
(Winter 1985): 119-128.
Note: In the Siegel, Siegel, and MacMillan study, corporate venture
capitalists in the sample were asked to rate the criteria shown in this
table on a I to 4 scale. The following meanings were assigned to the
rating scale: 1 = The criterion is irrelevant. 2 = The criterion is
desirable. 3 = The criterion is important (i.e., if a venture fails to
satisfy this criterion, it would need to demonstrate significant
redeeming qualities to justify investment). 4 = The criterion is
essential (i.e., if a venture fails to satisfy this criterion, it is
fundamentally flawed and would be rejected out of hand, no matter
what other redeeming qualities it might have).

in Table B-2. Two of these criteria are that the venture's

market/industry must be attractive to the firm and that the product
must fit with the firm's long-term strategy. This causes a problem,
because there are some interesting parallels between corporate-
related selection criteria and the obstacles to corporate venture
capital activities. In fact, it has been found that such criteria tend to
worsen the impact of a number of the obstacles. The corporate
venture capitalists who responded to the surveys indicated that
three of the corporate fit criteria in particular correlated
significantly with several of the obstacles. These problematic
criteria are as follows:
 Page 358
Table B-2: Investment Criteria Most Frequently Rated as
Essential by Corporate Venture Capitalists
Percentage of
Corporate
Venture Capitalists
Rating
Criteria Each Criterion as
Essential
The entrepreneur is capable of 67
sustained effort.
The entrepreneur is thoroughly 67
familiar
with the market.
The entrepreneur is able to evaluate 48
and react well to risk.
The venture is in a market or an 39
industry
that is attractive to the corporate
venture capitalist's corporation.
The product fits with the corporation's 37
long-term strategy.
The target market enjoys a significant 35
growth rate.
The product is proprietary or can 31
otherwise be protected.
The entrepreneur has demonstrated 31
leadership ability in the past.
The venture will generate a return 28
equal to at least 10 times the
investment
within 5 to 10 years.
Source: Adapted from I. C. MacMillan, R. Siegel, and P. N.
Subbanarasimha, "Criteria Used by Venture Capitalists to
Evaluate New Venture Proposals," Journal of Business
Venturing 1, no. I (Winter 1985): 119-128.

· An insistence on investing only in products that "fit" the parent

firm: This criterion appears to aggravate both corporate venture
capitalists' frustrations over the inadequate flow of deals and
entrepreneurs' fear of the corporation's taking control of their
ventures. These aggravations then combine to enhance corporate
venture capitalists' frustrations with their lack of
 Page 359
autonomy in decision making and thus worsen the culture clash
between the parent company and the corporate venture capital
activity.
· An insistence on investing only in markets or industries attractive
to the parent firm: This criterion also aggravates corporate venture
capitalists' frustrations with the inadequate flow of deals and
worsens both the culture clash and clashes over authority issues. It
also aggravates the problem of the organization's lack of patience
as the corporate venture capitalist vainly seeks the elusive
opportunities that fit the market or industry sanctioned by the
fastidious parent.
· An insistence on the parent company's having a controlling
interest in the venture: This criterion disrupts the flow of deals,
causing the corporate venture capitalist to accuse the firm of lack
of flexibility, which, in turn, generates frustration with lack of
authority and lack of financial commitment. The preceding
problems combine to seriously aggravate culture clashes and
increase confusion regarding the mission of the corporate venture
capital activity.
Thus, it can be seen that excessive concern by the parent company
with controlling the investment process and directing where
venture investment should be made serves no constructive purpose.
In fact, it increases the already formidable challenges of attempting
to venture from within an established firm.
If the organization is in the corporate venture capital business
purely to make money, as venture capital firms do, then it must
remove the imposed limitations. If, however, the organization
intends the corporate venture capital activity to function as an entry
strategy into new businesses that are to become part of the
company, then it must maintain the imposed limitations.
The ideal is for the corporate venture capitalist to seek deals that
not only meet the criteria used by independent venture capital firms
(i.e., the criteria associated with suc-
 Page 360
cessful investments) insofar as possible but also fit the parent firm's
strategy, do not stray into products or markets that compromise the
parent's values, and can potentially be controlled by the parent.
Although this approach may reduce the number of deal options, it
makes sense in the long run.
Compensation Arrangements
Another decision facing the parent firm as it sets up a venture
capital activity is how to compensate the corporate venture
capitalists who will be managing the fund. The following are the
most commonly used compensation arrangements:
· Base salary only
· Base salary plus a bonus based on the venture capital activity's
performance over the short term
· Base salary plus a bonus based on the venture capital activity's
performance over the long term (more than five years)
· Base salary plus direct participation in the venture capital fund
Ideally, the corporate venture capital fund should be managed by
experienced venture capital professionals, who should be sought
out from the independent venture capital community or the small
but growing pool of experienced corporate venture capitalists.
Seasoned corporate executives may comprise part of the
management team (Sykes' results reinforce the importance of
having a staff with managerial experience, 1986). But if senior
management hopes to attract the type of top-quality managers we
are talking about, it must be prepared to offer compensation and
authority commensurate with their level of skill and experience. In
practice, though, this seldom happens.
The majority of corporate venture capitalists are com-
 Page 361
pensated in a manner that has little or nothing to do with the
performance of their company's investment portfolio. It typically
takes several years or longer for ventures to mature into successful
businesses, yet nearly three-quarters of the corporate venture
capitalists who responded to the surveys reported that they were
compensated by a base salary only or by a base salary plus a bonus
based on the investment portfolio's short-term performance. Thus,
it is not surprising that those firms that do manage to attract or
nurture capable venture capital managers eventually start to face
problems of attrition, as those managers defect to the independent
venture capital firms, which offer much more realistic
compensation.
The basic recommendation is for the parent company to develop a
compensation system that recognizes, and thus enables the firm to
retain, the rare talent needed to select and monitor venture capital
investmentsi.e., a truly competitive compensation system that
reflects the reality of the uncertain corporate venture capital
environment and rewards corporate venture capitalists accordingly.
In short, corporate venture capitalists should be treated like
independent venture capitalists. (Although this of course implies
compensation levels higher than those of the parent corporation,
establishing the venture capital fund as a separate organizational
entity tends to minimize the political problems that could arise
from this discrepancy.)
Sources of Deals
The final major decision the company must make regarding its
corporate venture capital activity is where it will find deals. As
shown in Table B-3, corporate venture capitalists report three major
sources of deals. The most important source is other venture funds,
followed by direct contact by entrepreneurs (this latter despite the
problems of distrust described earlier in the appendix as one of the
obstacles confronting corporate venture capitalists). Finally, other
depart-
 Page 362
Table B-3: Sources of Corporate Venture Capital Deals
Percentage of Corporate
Venture Capitalists Who
Sources Reported Using Each Source
Venture funds 35
Direct contact by entrepreneurs 30
Departments within the parent 25
company
Financial intermediaries 8
Lawyers and accountants 0
Other 2
Source: Adapted from H. B. Sykes, "Corporate Venture
Capital Success," Journal of Business Venturing 5 (January-
February 1990): 37-47.

ments in the firm are often able to identify opportunities,

particularly opportunities that leverage business relationships.
The lesson from these data is that to maximize the flow of deals,
the corporate venture capitalist should aggressively interact both
with other departments within the company and with other venture
capital firms. In the long run, these strategies will generate deals
whose momentum will attract the entrepreneurs.
Conclusion
For a corporation, venture capital investing is, in effect, a type of
new venture. All the guidelines and recommendations we've given
throughout the book regarding new venturesparticularly those
pertaining to the relationship between the corporation and venture
managementalso apply to venture capital activities.
 Page 363
In attempting to successfully manage a venture capital fund,
corporate venture capitalists face a number of obstacles, some of
which stem from the relationship between the parent firm and the
corporate venture capital activity and some of which are directly
related to the corporate venture capital activity itself. As corporate
venture capitalists gain experience, they tend to learn how to
overcome a number of these obstacles or at least lessen their
impact.
In setting up a corporate venture capital function, senior
management must make several decisions that will critically affect
the outcome of this effort. In particular, top managers must define
the objective of the corporate venture capital function (just to make
money, just to support the company's strategy, or both) and ensure
that the fund is managed consistently with that objective. And since
focus is vital for a venture capital activity, top management must
select certain key industries on which to concentrate its effort. It
must also recognize that experienced and successful venture capital
managers are rare and entrepreneurial. Finding them and keeping
them require incentives and a level of autonomy that are
competitive with those offered by independent venture capital
firms. One final word of warning: the firm must know the success
factors required in the venture capital business and either make
sure it can supply them or stay out of the business.

References
Hardymon, G.; De Nino, J.; and Salter, M. S. 1983. "When
Corporate Venture Capital Doesn't Work." Harvard Business
Review (May-June): 114-120.
MacMillan, I. C.; Siegel, R.; and Subbanarasimha, P. N. 1985.
"Criteria Used by Venture Capitalists to Evaluate New Venture
Proposals." Journal of Business Venturing 1, no. I (Winter): 119-
128.
MacMillan, I. C.; Zemann, L.; and Subbanarasimha, P. N. 1986.
"Criteria Distinguishing Successful from Unsuccessful Ventures in
the Venture Screening Process." Journal of Business Venturing 2,
no. 2 (Spring): 123-138.
 Page 364
Rind, K. W. 1981. "The Role of Venture Capital in Corporate
Development." Strategic Management Journal 2: 169-180.
Siegel, R.; Siegel, E.; and MacMillan, I. C. 1988. "Corporate
Venture Capitalists: Autonomy, Obstacles and Performance."
Journal of Business Venturing 3, no. 3 (Summer): 233-247.
Sykes, H. B. 1986. "Anatomy of a Corporate Venturing Program:
Factors Influencing Success." Journal of Business Venturing 1, no.
3 (Fall): 275-294.
. 1990. "Corporate Venture Capital Success." Journal of Business
Venturing 5 (January-February): 37-47.
Tyebjee, T. T., and Bruno, A. V. 1984. "A Model of Venture Capital
Investment Activity." Management Science 30, no. 9: 1,051-1,066.
 Page 365

Index
A
Acquisition, 148
Aetna, 73
Aldrich, H., 291
Allied Corporation, 23, 97;
New Ventures operation of, 28
Allies: finding and using, 262, 271-272;
identifying potential, 298-300
Allison, G., 300
Anheuser-Busch, 97, 221, 224
Argyris, C., 322
Asahi Glass, 47
Assumptions:
checking for hidden, 175-176;
design and use of feedback system to test, 244-250;
development strategy involving reassessment of, 181-182;
go/no-go, 170-176, 247, 249, 320;
testing, building, into plan, 173-175
ATT Technologies, 118, 128, 156
B
Baker, R., 125, 127
Bart, C. K., 151
Bell Laboratories, 310
Bellwether sale, 185
Ben Daniel, David, 278
Biggadyke, R., 81, 275
Blau, P., 288
Block, Z., 26, 85, 161n, 164, 234, 243;
and corporate venturing obstacles, 279;
and corporate venturing strategy, 71;
and demise of new-venture divisions, 28;
and product champions, 121;
and reasons for venturing, 20;
and reward systems, 38;
and venture failures, 63, 313;
and venture management compensation, 125, 127, 128, 130,
278;
and venture selection criteria, 57-58
Blue-sky ventures, 224-225
Boeing, 73
Bonuses: discretionary, 128, 132;
types of, 132
Bootlegging, 266
Budget control:
line-item, 233;
methods, use of modified, 250-253
Bureaucratic process model, 301
Burgelman, R., 69, 70, 71, 139, 291, 293
Burt, R., 293
Business innovator, 115, 257.
See also Venture managers
Business plan, venture, III, 123, 161-162, 191-193;
building, 270-271;
creating and evaluating new-, 190-191;
development of, 318-319;
elements of new-, 167-176;
new- vs. traditional, 162-167;
strategy and, 87-88
Byron, C., The Fanciest Dive, 245
C
Cable Week, 245-246
Canon, 181-182
CBS, 73;
Cable, 16, 26
Channel(s):
and customer relationships, 206, 214, 220;
and customers, new, 205;
trust and loyalty, 213
Chief executive of innovative organization, 115
Citibank, 221-224
Citicorp, 23
Climate, creating venturesome, 36-46, 65
Coca-Cola, 81
Cohen, A., 52
Colgate, Venture Company of, 28, 73
Commitment:
demonstrating significant and visible personal, 37, 39-40;
enthusiasm and continuing, 134-136;
sustaining, over long period of time, 37, 41
Compaq, 2
 Page 366
Compensation, venture management, 125-126;
developing incentive model, 134-143;
potential components of incentive/reward program, 131-134;
selection and, 237-240;
strategies and practices, 127-131
Competitive response, first, 185-187
Concept:
and product testing, completion of, 176-179;
testing, 266, 267, 268, 317
Confidence:
building organizational, 37, 43-44;
operating, 211
Connor Peripherals, 261
Contingencies, linking mechanisms to handle, 197-200, 226
Control, 231-232, 255-256;
methods, traditional, and their inappropriateness, 232-235;
roles of venture management vs. senior management, 253-255;
system for new ventures, 235-253
Cook, Paul, 23
Corning, 2
Corporate venture capital, venturing with, 30-31.
See also Venture(s)
Crawfish bait business, Du Pont's, 17-18
Creativity, 94-95
Credibility: of customers, 265;
of new-venture managers, 259-260, 261
Criteria, see Venture selection criteria
Critic, being your own, 262, 272
Critical path milestone planning, 172
Culture, organizational, 81, 93
Customer(s):
and channel relationships, 206, 214, 220;
and channels, new, 205;
complaints, 219;
and distributor
relationships, 213-214;
and markets, developing in-depth knowledge of, 37, 42-43;
returns, 205, 212, 218;
rhythm, business and, 218;
trust and loyalty, 213; using, 265-266
D
Damage control, 234
DCA Food Industries, 128
Dean Witter, 97
Debriefing protocol, using, 316-321
Debugging problems, 203-204, 208
Decision(s):
asking for smallest possible, at each stage of development, 262,
264-271;
bad, and bad luck, distinguishing between, 62
Deming, W. Edwards, 236, 310
Development, phases of, 272-274, 277
Disappointment, managing, 61-64, 66
Discover card, 97
Distraction, venture viewed as, 287
Donaldson, Lufkin & Jenrette, 98
Drucker, Peter, 98, 100, 102, 122, 259-260;
Innovation and Entrepreneurship, 2
Du Pont, 23, 52, 85, 86, 97, 271;
crawfish bait business of, 17-18;
discretionary bonuses offered by, 128;
energy consulting activity of, 73;
organizational support at, 137;
 recognition ceremonies and awards at, 133;
and recruiting for venture managers, 119;
and Toray, 50
E
Edsel automobile, 101
Emerson, Ralph Waldo, "Self-Reliance," 243
Endorsements, securing, 292-293
Entenmann's, 99
Enthusiasm and continuing commitment, 134-136
Entrepreneurial process, management of, 5, 9-10
Entrepreneurs:
creation of, 4, 7-8;
as risk managers, 5, 8-9
Entrepreneurship, 54;
as process, 4, 5-7
Entry strategy, 188-189
Environment, corporate, impact of, on entrepreneurial success, 4-5,
8
Equity and equity equivalents, 131-132
Evolutionary new-business development strategy, 50-52, 65;
advantages and disadvantages of, 53-54
Executive champion, 115-116, 157, 241-242, 257, 262;
 finding and using, 262, 271-272
External environment, threats and opportunities produced by, 100-
102
Exxon, 73, 86, 224-225, 233;
oil shale venture of, 26, 175-176
Exxon Enterprises, 121, 278
Facsimile (fax) machine, 17, 246-247
Failure:
definition of, in business plan, 168-169;
learning from, 62-63, 312-313
Fast, N., 28, 34, 45, 84-85
Feasibility study:
completion of, 180;
proposing, 267-269
Federal Express (FedEx), 101, 233, 313;
ZapMail of, 17, 26, 246-247
 Page 367
Feedback system, design and use of, to test assumptions, 244-250
Financing, milestones to trigger, 87, 240-241
Focal activity, venture's, 195-197, 226;
and relatedness, 200
Fonvielle, W. H., 247
Ford Motor Company, 101
Foresight Group, 118-119
Format:
and organizational positioning, 240;
selecting venture's, 148-149
Fortune 100 firms, 125, 163
Fortune 500 firms, 1-2, 264
Fortune 1,000 firms, 127

G
Galbraith, J. R., 154, 197
Gannett, 17, 271-272
Gap stores, 98
GD Company, 186
Geneen, Harold, Managing, 9
General Electric (GE), 2, 23, 86, 96, 221, 224
General Foods, 99
George, R., 96
GE Plastics, 47
Goals and limits, establishing venture, 74-76
Golden rule of venturing, 259-262
Granovetter, M., 291
Gray, Jackson, 23
Greiner, L., 116, 272, 274, 277, 278
GTE, 23, 97, 128, 241
Gumpert, D., 295
H
Hanan, Mack, 71, 77, 96
Head-count limits, establishing, 233
Hewlett-Packard, 23, 74
Highway toll stations, use of scanners at, 101-102
Hill, R. M., 34, 312-313
Hisrich, R. D., 151
History of venture performance, preparing chronological, 321
Hlavacek, J. D., 34, 312-313
Hofer, C. W., 121
Homans, G., 288
I
IBM, 22, 23, 86, 164, 221-224, 242;
joint venture between Sears and, 72-73, 84;
and NYNEX, 71, 276
Ideas:
assessing risk/reward potential before pursuing, 262, 263;
creating flow of. 94-95
Incentive:
model, developing, 134-143;
plan, sample venture, 140-142;
reward program for venture management, potential components
of, 131-134.
See also Compensation
Inco, 97
Indifference, organizational, 286-287
Industry:
and market changes, as source of new opportunities, 98-100;
protocols, poor understanding of, 206;
protocols, understanding of, 214;
standards for equipment and materials, knowledge of, 215
Influence, building, 288-291
Information:
 and events, recording, 315-316;
sharing, 290
Intel, 23
Internal corporate ventures (ICVs), 14, 18
Internal sources of opportunity, 96-97
Intrapreneurs, 258-259
''Intrapreneurship," 2, 22
Intrusions, venture, into firm's ongoing activities, 215-216;
active, 216, 218-219, 220;
operations, 216-219, 226;
organizing to minimize or manage, 225-226;
passive, 216-218, 219-220;
sales and service, 219-220, 226
Investment, personal, 128
Itami, Hiroyuki, 47
Ito, Kiyohiko, 30, 104
ITT, 9

J
Johnson & Johnson, 2, 23
Joint venture, 148, 149, 241
Jones, P. E., 151
K
Kanter, Rosabeth M., 18, 128, 133-134, 247, 283, 294;
The Change Masters, 2;
When Giants Learn to Dance, 2
Keough, M., 309
Kids "5" Us, 16
Know-how:
opportunities to capture, associated with high relatedness, 209-
215, 226;
organizing to maximize capture of, 225
Knowledge, 81
Kodak, 22, 97, 128, 181;
New Opportunity Development of, 28, 73, 78
Kroc, Ray, 7
Kupfer, Andrew, 261

L
Lady Godiva chocolates, 100
Land, Edwin, 101
 Page 368
Leadership and management, providing, 263, 280-281
Learning:
challenges associated with low relatedness, 201-209, 226;
conducting in-depth study of venture, 315-323;
defined, 196, 309;
as distinguishing feature of ventures, 18-20;
from failures, 62-63, 312-313;
maximizing, 200-201, 225, 313-315;
organizational, 309-311;
from venturing experience, importance of, 311-312
Legitimacy, lack of, 284, 285-286;
overcoming, 292-293
Leveraged buyout (LBO), 52
Lewyn, M., 73
Life cycle:
stage, recognizing and adapting to venture's, 263, 277-279;
venture, and changing management needs, 116-118
Line manager, assigning venture project to, 151
Linkage(s), 195-197;
needs, coordinating mechanisms to meet venture's, 226
Liquid-crystal display (LCD) technology, 47
Location, venture:
factors shaping choice of, 153-156;
options, 149-153
M
McDonald's, 7, 260
McGrath, R. G., 47
McKersie, R., 288-289
MacMillan, I. C., 47, 51, 96, 151, 161n, 164;
and climate for new-business development, 35-45 passim;
and managing disappointment, 61, 62, 63, 64;
and venture selection criteria, 59, 60, 61
Maidique, M. A., 34, 45, 62-63, 115
Management, providing leadership and, 263, 280-281.
See also Senior management; Venture management; Venture
managers
Market(s):
augmentation ventures, 224;
changes, industry and, as source of new opportunities, 98-100;
developing in-depth knowledge of customers and, 37, 42-43;
research, 317-318;
share, profit and cash flow vs., 263, 275-277;
 strategic choices for entering, 188-189;
testing, 183-184
Matsushita, 49-50
Meen, D. E., 309
Merck, 2, 23
Mergers, and new-venture opportunities, 98
Merrill Lynch, 271
Milestone(s), 132;
awards, 127-128;
planning, critical path, 172;
planning, using, 176-188;
to trigger financing, 87, 240-241
Minnesota, University of, 315
Minolta, 181
Momentum, building, 37, 45-46
Morale, 219, 220
Motorola, 2, 23, 55, 97
Mueller, J. A., 39
Mueller, R. K., 151
Mustang, 101
Myers-Briggs Type Indicator, 120
N
Nadler, D. A., 151
Networks, building and using influence, 291
Neuharth, Al, 271
New-business development: assigning good people to, 37, 41-42,
committing necessary resources to, 37, 42;
empowering creators of, 37, 44-45;
pursuit of, by entire divisions, 37, 38;
and special reward systems, 37, 38-39;
strategy, evolutionary, 50-52, 53-54, 65;
strategy, revolutionary, 46-50, 52-53, 54, 65
New-business ideas:
analyzing and selecting, 77-82, 90;
generating, 77, 90
New-venture business plan, see Business plan
New-venture division, having venture report to, 152-153
Nonaka, I., 38, 181
NYNEX, 71-72, 276

O
Objectives, clarifying venture's immediate and long-term, 296
Obstacles to progress, identifying potential political, 297-298
Ohio Bell, Enter-Prize program at, 134
OPEC, 175
Operating division, creating separate section in, for venture, 151
Operations, 217;
predictability and stability of, 211, 217;
reliability of, 207;
turbulence, 203
Opponents, identifying potential, 298-300
Opportunity:
discouraging pursuit of, by optimizing use of resources, 5, 10;
evaluating and selecting, 102-111;
 Page 369
identifying, 93-102;
sources of, 95-102
Order-taking mentality, 219
Organizational antagonism, safeguarding venture from, 156-158
Organizational positioning, format and, 240
Organizational support, 137-138
Organization politics model, 302-303
Ornati, O., 38, 125, 127, 128, 278
Overperformance and undercommitment, as golden rule of
venturing, 259-262

P
Paley, William, 16
Performance against plans, comparing, 233
Permission, eliminating need for, 265
Peters, M. D., 151
Peters, Tom, In Search of Excellence (with R. H. Waterman, Jr.), 2
Pfeffer, J., 293
Philip Morris, 99
Pilot testing, 182-183
Pinchot, Gifford, 117, 145; Intrapreneurship, 2
Planning/performance paradox, 162-164
"Playpen" approach to venture control, 234-235, 244, 255
Polaroid, 124, 233, 313;
Land Camera, 101;
Polavision of, 245
Policies and procedures, 233;
different, for new ventures vs. parent organization, 263, 279-
280;
modified application of corporate, 241-244
Political problems, 283-285, 305-307:
and building influence, 288-291;
sources of, 285-288;
using political approaches to solve, 292-305
Political strategy:
begging, 294;
borrowing, 294;
co-optation of resources, 294-295;
formulating, 303-305;
monitoring progress of, 305
Politics, managing, 301
Porter, M., 25, 58
Portfolio strategy, 76
Practices, organizational, 81
Pratt, S. E., 34
Problems, solving and receiving help with, 289
Procedures, 81-82
Processes and systems:
design, understanding, 215;
new, 203, 207;
operating, 211
Procter & Gamble, 23
Prodigy, 72-73, 84
Product:
augmentation ventures, 221, 227-229;
design and redesign, understanding of, 214-215;
development, 180-182, 318;
development ventures, 221;
servicing experience, 207, 214;
and supply standards, lack of, 204;
systems, and process standards, new, 208-209;
testing, completion of concept and, 176-179
Product champion, 115, 257;
and venture management, 121-122
Production startup, 184-185
Profit, percentage of, to venture teams, 128
Promotions, salary increases and, 132-133
Proposal, writing, 266-267
Prototype development, compressing time required for, 49
Publicity, avoiding internal and external premature, 263, 274-275

Q
Quinn, J. B., 39, 291, 293
R
R&D, having venture report to, 152
Rational actor model, 300
Raychem Corporation, 2, 23
RCA, Selectavision of, 26
Reality, recognizing and adapting to, 138-140
Recognition incentives and rewards, 133-134
Recreational vehicle (RV) refrigerators, 15-16
Regan, Donald, 271
Reject rates:
long runs and low, 217-218;
trial runs and, 203
Relatedness: as crucial organizing variable, 200-201;
 learning challenges associated with low, 201-209, 226;
opportunities to capture know-how associated with high, 209-
215, 226
Relationships, lack of, 205-206
Reliability:
long runs and systems, 211-212;
of operations, 207
Resistance and inertia, sources of organizational, 286-288;
overcoming, 295-305
Resource(s), 81;
co-optation strategies, 294-295
Resource starvation, 284, 286;
overcoming, 293-295
 Page 370
Revolutionary new-business development strategy, 46-50, 54, 65;
advantages and disadvantages of, 52-53
Rewards: and new-business activities, 37, 38-39;
recognition incentives and, 133-134.
See also Compensation
Risk levels, 128
Risk managers, entrepreneurs as, 5, 8-9
Risks, 80;
financial, 80;
managing principal, 169;
nonfinancial, 80-81
Roberts, E. B., 41, 45, 84
Roberts, M. J., 237, 279
Ross, J., 250
Rothfelder, J., 73
Rubbermaid, 2, 23
S
Sacher, W., 163
Sahlman, W. A., 105
Salancik, G., 293
Salary increases and promotions, 132-133
Salesforce:
new, 206;
seasoned, 213
Sandburg, W. R., 121
Santayana, George, 309
Sanyo, 47, 49, 224
Sayles, L., 139, 291, 293
Scavenging strategies, 294
Schein Career Anchors Inventory, 120
Schon, D., 291
Schwarzkopf, Norman, 122-123
Sears, 72, 73, 84, 97
Selling:
effort, greater, 204;
routine, 219;
uncertainty, 205
Selznick, P., 293
Senge, Peter, The Fifth Discipline, 310
Senior management:
control roles of venture management vs., 253-255;
 relationship between venture management and, 10-12, 33-36;
responsibilities of, 69-71
Senior staff function, having venture report to, 152
Sensitivity analysis, 169-170
Service:
delivery capability, 212;
demands, 219-220;
needs, understanding of, 212;
sales and, 220;
standards, lack of, 204
Shuster, Jay, 142
Skill(s), 81;
and competence, creating opportunities for people to
demonstrate, 290-291;
requirements, new, 208
Solar-cell technology, 47, 224
Sony, 48
Spin-offs, 104, 241;
creating, 29-30
Sprint, 241
Staw, B. M., 250
Steele, B., 125, 127
Steel industry, minimills of, 100
Stevenson, H., 105, 295
Stinchcombe, A., 284, 285
Strategy:
and business plan, venture's, 87-88;
evolutionary new-business development, 50-52, 53-54, 65;
formulating corporate venturing, 71-77, 89;
formulating political, 303-305;
monitoring progress of, 305;
portfolio, 76;
revolutionary new-business development, 46-50, 52-53, 54, 65
Subbanarasimha, P. N., 20, 26, 57-58, 121, 130, 234;
and obstacles to new business development, 164
Success factors, examining, 107-109
Supermarkets, in-store bakeries at, 248-249, 268-269
Supplier(s):
good relations with equipment, 215;
knowledge of reliable equipment, 215;
new equipment, 207-208;
new material, 208;
relationships, 212, 218;
 trust and confidence, 212;
using, 265
Support:
creating, for project, 266-271;
identifying sources of, 297-298;
organizational, 137-138
Switching costs:
advantages, 212;
disadvantages, 204-205
Sykes, H. B., 28, 85, 121, 243, 279
Systems and operations, 218.
See also Processes and systems

T
Takeuchi, H., 38
Teamwork, effective, 136-137
Technical innovator, 115
Technology, commercialization ventures, 224;
early and aggressive commercializing of evolving, 47-49;
focusing on core, 47;
identifying and selecting pace-forcing, 49-50;
innovation ventures, 221-224;
 pace matching, press for, 50
Tektronix, 126, 127-128
Texas Instruments, 74
Thompson, J., 293
Threat, direct, venture viewed as, 287-288
3M, 2, 3, 63, 74, 97, 271;
and compensation for venture management, 128-
 Page 371
129, 133;
diversification at, 23;
idea proposers at, 78
Time-Life, 233, 313;
Cable Week of, 245-246
Timing requirements, 82
Timmons, J.A., 106, 109
Toray, 50
Toyoda Auto Loom Works, 104
Toyota Motor Corporation, 30, 104
Toys "A" Us, 16
Training, 95
Trial runs and reject rates, 203
Tushman. M. L., 151
TV Guide, 246
U
Undercommitment and overperformance, as golden rule of
venturing, 259-262
USA Today, 17, 271-272
U.S. Healthcare, 260
V
Values, 81
Van de Ven, Andrew H., 315
Venture(s):
conducting in-depth study of, 315-323;
deciding on size and number of, 76-77;
defined, 14-15;
designing, 82-88, 90, 236-241;
examples of, 15-18;
form of, 84;
intrusions into firm's ongoing activities, 215-220;
launching and monitoring, 88;
learning as distinguishing feature of, 18-20;
location, factors shaping choice of, 153-156;
location options, 149-153;
necessity of, 29-31;
organizing, 225-229, 319-320;
performance of ventures funded by venture capitalists vs., 26-
27;
reasons for, 20-22, 25;
reasons for stopping, 27-29;
safeguarding, from organizational antagonism, 156-158;
 selecting format of, 148-149;
strategy and business plan of, 87-88;
track record of, 22-27;
types, seven major, 220- 225, 226
Venture advisory board, 157
Venture bases (basing), 77, 96
Venture management:
choosing, 83, 114-122;
compensating, 83, 125-143;
control roles of senior management vs., 253-255;
evaluating performance of, 83, 122-125;
relationship between senior management and, 10-12, 33-36;
selection and compensation, 237-240
Venture managers, 115, 257-258;
growing future, 119-121;
guiding principles for survival of, 262-281;
sources of, 118-119;
undercommitment and overperformance by, 259-262
Venture selection criteria, 78-79;
defining and using, 54-61, 66
Venturing function, structure and positioning of, 84-87
Venturing process model, 6-7, 10-12, 70
Vertical integration ventures, 224
Volume, reaching break-even, 187-188
von Hippel, E., 38-39, 45, 98, 313

W
Wall Street Journal, The, 22, 28, 260
Wal-Mart, 2, 98-99
Walton, R., 288-289
Walton, Sam, 99
Waterman, Robert H., Jr., In Search of Excellence (with Tom
Peters), 2
Weaknesses, recognizing own, and compensating for them, 263,
272-274
Weiss, L., 295
Wolterbeek, M., 163
Woolworth, 23
X
Xerox, 22, 181

Y
Yamaha Motors, 104
Yamaha Musical Instruments, 104
Yamanouchi, T., 181
Z
ZapMail, 17, 26, 246-247
Zimmer, C., 291
Zirger, B. J., 45, 63