Strategy

Overreacting to corporate scandal will hobble risk taking, innovation and growth

During the late 1990s stock market boom, many large companies established corporate-venturing units, seeking to develop innovative new businesses and spur growth. However, with the downturn of the economy, many of these units ceased operations -- while others managed to survive and a few even thrived. What went wrong with failing companies, and how do those that still have corporate-venturing units manage to succeed? The authors studied nearly 100 venturing units, proposing that failures often occurred because such groups lacked clarity -- both in their objectives and in their business models. Using the example of successful venturing units, such as Intel Capital, Mustang Ventures at Siemens, Lucent New Venture Group and GE Equity, the authors outline four common types of venturing scenarios that, by using a careful, steady approach, companies can execute well: ecosystem venturing, innovation venturing, harvest venturing and private-equity venturing. They discuss the characteristics and benefits of each and how successful companies avoid the pitfalls that snare others. In the end, the authors conclude, there are many ways to do corporate venturing. But to succeed, companies must define their goals clearly and narrowly, understand the differences among the various types, and use the appropriate type for the appropriate activity. The ultimate key to accomplishing that, say the authors, lies in effectively employing the differences to their advantage.

People often talk about business competition as if it’s a short race: Get to market first and you are bound to win. Indeed, the importance of first-mover advantage has been drummed into the heads of many business executives, and some have almost been brainwashed to think that speed is everything. But when a new technology like the Internet threatens to transform an industry, the companies that are quickest to respond aren’t necessarily the ones that reap the greatest benefits. In fact, choosing a fast strategy can lock them into a set of decisions that actually hurt them in the long run. Instead, organizations that choose the right strategy for the entire race & #8212; both for the early and late stages & #8212; will come out ahead. Specifically, we have found that companies that respond quickly by launching a spinoff usually have difficulty achieving true staying power in the market. For enduring success, incumbent companies are better off creating a group that is & #8212; or will eventually be & #8212; integrated within their organizations. Only then will they be able to tap fully into their numerous strengths and assets, leveraging their incumbent’s advantage.

A misapplied bottom-up approach can often lead to unintended consequences.

Stakeholder theory may be more conducive than shareholder theory to curbing company impropriety.

Intellectual property assets now account for 50% to 70% of the market value of all public companies, and corporate America is intensifying efforts to maximize the return on those assets. That explains why a small but growing number of Fortune 500 enterprises are moving away from a strict reliance on the “exclusivity value” of their patents and other intellectual property & #8212; that is, their power to exclude or hinder competitors & #8212; and are instead seeking to tap the often enormous financial and strategic value of their core technology assets by licensing them to other companies, including competitors. The practitioners of this strategic licensing, as it is called, are betting that any loss of market exclusivity that may result from making available their “crown jewel” technologies will be more than offset by the financial and strategic benefits gained. For this article, the author interviewed some of the pioneer practitioners of this emerging approach and got them to explain the nature and degree of the benefits their companies are now reaping. Although patent rights should always remain an important weapon in a company’s competitive arsenal, strategic & #8212; licensing initiatives are encouraging managers to rethink what it means to create and sustain competitive advantage in business.

In the wake of corporate scandals and ensuing concerns about board oversight, various suggestions for reforming boards and redefining the role of directors have been put forward. The proposals have focused on issues such as board composition and ways to ensure board independence from management. Such recommendations, while useful, do not deal with the fact that directors, no matter how dedicated and diligent, cannot serve as adequate monitors of management without sufficient information and the means to analyze it. The author urges companies to provide directors with that information in the form of detailed discounted-cash-flow (DCF) valuation models & #8212; the tool that can help them understand how the company intends to create value over time. In conjunction with observed financial results, review of the evolution through time of the valuation models can give directors the critical information they need to discharge their duties to shareholders. The author stipulates that DCF models are not the silver bullet that will forever safeguard investors from management chicanery & #8212; the models can be manipulated. But a sequence of DCF models serves two important purposes. It forces management to translate its vision into specific numbers that show how shareholder value will be created, and it forces the board to continually monitor and evaluate those numbers in light of ongoing financial performance and stock market valuation.

Many managers in traditional product-oriented organizations are struggling to turn their companies into solutions-oriented businesses, widely considered the route to success in the 21st century. A good shortcut may be to establish corporate consultancies & #8212; consulting units that offer customers solutions based on the traditional business’s products or expertise. Thus computer companies such as IBM are moving toward integrated information-technology solutions, and telecom-equipment manufacturers such as Nokia are providing turnkey network solutions. Changing from a product-oriented manufacturer to a customer-focused solutions provider can be rewarding, but because it involves a sweeping reorientation of the organization, it is also difficult. That’s why the less radical approach of a consultative component often works best. But even that strategy has its challenges, with success depending on determined managers who know what the pitfalls are and how to avoid them. Without firm management, the consultancy may be swept away by forces that draw it too far into the product business or too far away from it. By thinking through the mission, identity and structure challenges and choosing the right strategy for handling them, leaders can both manage the consultative component and attain synergies between the product-centric business and the corporate consultancy’s customer solutions.