The Coexistence Approach

A firm may seek to develop a new business around some valuable process or technological breakthrough. With the coexistence approach, the new venture activities are conducted within an existing business or business unit. Typically, an executive or group of executives will champion the innovation, and the process will proceed when the business concept has been tentatively validated and many of the major uncertainties resolved or reduced.Diana L. Day, “Raising Radicals: Different Processes for Championing Innovative Corporate Ventures,” Organization Science 5, no. 2 (May 1994): 148–72. Attention then shifts from opportunity validation to the process of bringing the new business to life. Efforts are directed at assembling resources and capabilities, meeting production and sales goals, and solidifying organization. Interestingly, researchers note that creating a business climate supportive of entrepreneurial activity is the most difficult task faced by a large company in trying to integrate an innovative new business.David A. Garvin, “A Note on Corporate Venturing and New Business Creation,” Harvard Business School Note 302-091, March 2002, 1–20.

As a general rule, new-venture activities like those described are less predictable and are therefore riskier than those in which a firm traditionally engages. In particular, they face four obstacles:

1. Although false starts and failures can sometimes be important learning mechanisms, most large firms naturally try to mitigate them by improving efficiency.
2. Moreover, new ventures often meet resistance because they challenge long-established assumptions, work practices, and employee skills. After all, new by definition means different.
3. New ventures can threaten existing businesses beyond simply being different. For instance, a retail store that sets up an Internet sales site has the challenge of growing both its online store and its brick-and-mortar store, even though the Internet may inevitably be cannibalizing the brick-and-mortar store’s sales.
4. Ironically—and most importantly—large organizations often lavish too many resources, including cash, on new ventures. How can this practice be a problem? To be successful at a new corporate venture, large firms must learn to be simultaneously patient and tolerant of risk on the one hand and stingy on the other. The need for stinginess comes from the observation by strategy researchers that corporate new ventures tend to thrive when their managers must face new markets on the same realistic terms that start-ups outside the corporate bureaucracy typically do.

The Structural-Separation Approach

The second form of organizational intrapreneurship, in which the firm sets up an internal new-venture division, is actually a structural solution to these same problems. In many ways, this division acts like a venture-capitalist or business incubator, working to provide expertise and resources and to impart structure and process in developing the new opportunity. In this case, too, the opportunity may revolve around some proprietary process, product, or technological breakthrough. This approach is designed to achieve one of two possible objectives:

1. To create a high-growth new venture that the firm can sell off through an IPO at a significant profit
2. To create and retain internally a new business that will fuel growth and, perhaps, foster corporate renewal

The advantage of the structural approach is the system for investing in a team that’s assigned specifically to the creation of new ventures. If the system is managed properly, these divisions can function like the best venture-capitalist operations—that is, they can be cost conscious while still encouraging risk taking, experimentation, and novel, market-oriented solutions. Even this approach, however, falls far short of creating a win-win situation. A new-venture division—and for that matter, new venturing in any form—is a form of diversification, with the firm betting that it has the resources and capabilities to do something new.

The structural approach first became popular in the late 1960s, when 25 percent of the Fortune 500 maintained internal venture divisions.Norman D. Fast, The Rise and Fall of Corporate New Venture Divisions (Ann Arbor: UMI Research Press, 1978). The next wave came in the late 1970s and early 1980s, as large players such as Gillette, IBM, Levi Strauss & Co., and Xerox launched internal new-venture groups.R. E. Gee, “Finding and Commercializing New Business,” Research-Technology Management 37, no. 1 (1994): 50. Next came the Internet boom, when many firms set up divisions to run e-commerce operations that mirrored their traditional brick-and-mortar operations. Remember, however, that the hallmark of new-division performance isn’t internal rate of return. It’s the amount that a dedicated venture capitalist would earn on the same amount of money invested over the same period of time. By this standard, the performance of most internal venturing divisions falls short.Henry Chesbrough, “Designing Corporate Ventures in the Shadow of Private Venture Capital,” California Management Review 42, no. 3 (Spring 2000): 31–49. Why? Although a firm may have proprietary access to a valuable technology, it probably doesn’t possess the necessary venture-capitalist managerial skills and experience. In addition, when it’s in the hands of a new-venture division, the new business is isolated from the rest of the organization. As a result, the parent firm is insulated from the new business and, therefore, less likely to learn from its successes and failures. By the same token, the new venture has limited access to other proprietary resources and capabilities possessed by the parent firm.

Is corporate new venturing, then, doomed to failure? Of course not. Firms must, however, be careful to balance the requirements of entrepreneurial ventures—such as a supportive entrepreneurial climate—with the benefits of sustained linkage to the parent firm. Entrepreneurship professor David Garvin of Harvard Business School has recently reviewed the history of corporate new venturing. He suggests that corporate new ventures are more likely to succeed when they

• are developed and validated in firms with supportive, entrepreneurial climates;
• have senior executive sponsorship;
• involve related, rather than radically different, products and services;
• appeal to an emerging subset or current set of customers;
• employ market-experienced personnel;
• test concepts and business models directly with potential users;
• experiment, probe, and prototype repeatedly during early development;
• balance demands for early profitability with realistic timelines;
• introduce required systems and processes in time, but not earlier than the new venture’s evolution required; and
• combine disciplined oversight and stinginess with entrepreneurial autonomy.David A. Garvin, “A Note on Corporate Venturing and New Business Creation,” Harvard Business School Note 302-091, March 2002, 1–20.

Garvin’s guidelines for successful corporate venturing suggest that there are other inherent tensions in the decision-making process as well. Even when a firm succeeds in creating a climate that’s supportive of intrapreneurship, the evolving characteristics of the new venture may result in a unit that’s more distinctive from the core businesses than it is complementary to them. In that case, it might be wise for the parent firm to allow the new business to function independently—physically and legally. In part, the increase in new-venture public offerings or carve-outs, where the parent company takes the new business public through an initial public offering, or IPO, can be attributed to the willingness of firms to take this advice.