Implementing Innovation in New Ventures

By Roy Serpa

At the conclusion of the CE Roundtable, ”Building a Better Innovation Model Roundtable” summarized by Jennifer Pellet (March 2008) she posed a crucial and provocative question to the participants: "So how can companies connect people and their ideas with processes that will vet, refine, and develop these ideas effectively." An even more profound question for chief executives is how to move the ideas to successful new ventures. Moving these ideas to profitable business ventures confront many challenges within large corporations.

The frequently occurring challenges to innovation and new ventures in large corporations are:

1. the lack of vision at the executive level
2. the initial magnitude of the opportunity
3. the internal competition
4. the availability of resources
5. the isolation of the innovative function.

These impediments have been experienced in three large global corporations and observed in several others over the past three decades. They are typical of the obstacles that exist but are not insurmountable. The following are actual examples of such situations and strategies that can be employed to deal with them successfully.

The Lack of Vision

Many senior executives lack the vision of future opportunities from the convergence of new and existing technologies along with emerging market trends. Unfortunately due to their hubris they are not receptive to the vision of creative and insightful subordinates who yearn to contribute to the growth of their firms.

I recall a flight with the top executives of a Fortune 500 company who were returning to their corporate headquarters from their semi-annual visit to their research facility to review the current research projects. During this flight they questioned the direction of the research and its potential value to the growth of their business. It was perplexing since they never raised these questions during the day long meeting with the research director and his research team. It occurred to me that these executives were reluctant to approach these issues during the meeting with the research team because they were not prepared to provide the guidance and advice that would necessarily be expected to follow.

Another example of how this lack of vision can occur was demonstrated during the evolution of the one quart plastic oil container which became ubiquitous in the late 1980's. The pioneer of this new package was a major oil company yet it was unable to take economic and strategic advantage of this innovation by the lack of vision of one of its senior executives.

During the 1970s the one quart oil container was constructed of fiberboard which had replaced metal. At that time a team of engineers from the plastic division of the oil company started experimenting with forming the oil container from plastic sheet made of resin that they produced. The resultant container was tested and found acceptable providing that it could be produced using a higher volume production process and filled on the current filling lines in refineries. Two years of design and process development followed resulting in a blow molded plastic container with a wide mouth top that could accommodate the existing filling lines.

The plastics division moved ahead to commercialize the new container. It produced a significant quantity for part of the parent company's requirements and supplied a small number of private label motor oil package. As the business grew it came under the direction of a new business manager and was considered a viable new business venture.

The business manager could foresee the further evolution to an all plastic oil container replacing the standard fiberboard package based upon the plastic container's convenience, recyclability, faster filling speeds and lower cost. As a first mover the venture had the advantages of proven product performance, demonstrated production capability, developed graphics on plastic and an initial distribution capability. The venture offered a profitable revenue stream and the ability to consume substantial quantities of the plastic division's resin. A business plan was prepared to expand the venture and provide significant production and marketing resources. In spite of the attractive financial projections and the proven performance to date a senior executive blocked the project because he did not accept the strong probability that plastic would replace fiberboard. Five years later the plastic motor oil container became the preferred package. This outcome was a clear example of a lack of vision and the reluctance to accept guidance that occurs all too often among executives of large firms.

The Initial Magnitude of the Opportunity

It is unlikely that a new venture will result in hundreds of millions of dollars of revenue in the initial five years of operation. Due to this fact senior executives perceive little impact on the firm's financial performance and thus tend to display little interest and support for such activities.

At the outset new innovation opportunities for revenue and profit seem miniscule when compared to the existing businesses of billion dollar corporations. All too often large corporations seek the elephants that may offer immediate sizeable revenues and profit through acquisition strategies. They lack the foresight to realize that the lion cub can become part of a pride of kings of the jungle.

If DuPont executives had it to do over again would they have sponsored Bill Gore in his new venture rather than have him leave to start W.L. Gore on his own? He left DuPont in 1958 started a business in his garage and created a company recently estimated to have billions of dollars of revenue and to extremely extremely profitable.

The Internal Competition

In spite of all that has been written in the past decade about the need for teamwork especially at the executive level many senior divisional and functional executives continue to compete internally. This internecine competition can serve as a serious challenge to new innovations when either marketing executives sense a potential threat to their position at a major customer or research executives resent the licensing or acquisition of emerging technology. So often marketing focuses on existing business and its potential loss rather than how a new innovation can bring synergies to their existing customer relationships. Research executives on the other hand may try to convince senior executives that they are capable of developing better technology than can be acquired externally.

An example of this internal competitive challenge from marketing occurred when a major supplier prepared to enter a rapidly growing and extremely profitable market served by a large customer. The marketing executive convinced senior management that such a move would result in the loss of their supply position. Based upon this perceived threat the new venture was aborted. Shortly after, this supplier's major competitor entered this market directly and due to their strategic position and size continued to supply the customer. More than two decades later the aforementioned supplier entered the market by acquisition and became a minor factor in this now exploited downstream market. More recently the major competitor acquired the major distribution outlets for the business.

An example of this challenge from research concerned a new venture that was blocked by a research executive in an emerging area of technology. The corporation in this case was a major supplier to the food packaging area. For several years the research department had tried unsuccessfully to develop new technology that would produce a revolutionary new product to add to the firm's line. A Japanese company became successful in this area of technology and was searching for a joint venture partner to exploit it in the United States. This opportunity appeared to provide an excellent strategic fit for the above mentioned companies. During the period of preparation for launching the joint venture it was terminated when the research executive convinced the senior executive that they were on the verge of completing the development of a more economical technological approach to producing the product. The Japanese company found another partner, moved ahead with the venture and built a large extremely profitable proprietary business. The original potential partner stopped their research two years later due to the lack of progress and never pursued that area of technology again.

The Availability of Resources

In many large firms the availability of funding is the least of the resource challenges to the new innovative activity at the outset. The greatest challenge in this area is the availability of talented, entrepreneurial personnel with a balance of technical and commercial knowledge and experience. These same individuals are much sought after by the established departments and divisions in spite of their interest in pursuing their intrapreneurial desires.

I recall a young, extremely capable individual who was anxious to leave an existing departmental function to join the new venture department but was held back by the functional department head because this individual was extremely talented. It was not until he had resigned and accepted a position in another firm that the department head allowed him to be considered for the new venture function the day before he was scheduled to leave. Fortunately, he reconsidered and remained with the large firm in the new venture department.

Often those assigned to the new venture effort are past their prime and have lost their entrepreneurial enthusiasm and are caste off from the existing businesses. At the same time there is a reluctance to recruit leaders for new ventures externally since they may not fit the caretaker cultures that exist in many firms. In addition, their aggressive leadership style may pose a threat to the existing executive group.

The Isolation of the Function

There have been many proponents of the need to isolate a new venture function in order to avoid the interference and cost that a large corporate bureaucracy can impose upon it. This isolation can be political suicide since it allows a definite lack of understanding, interest and support from the existing corporate function of executives. It can result in the latter influencing senior executives to question the value of the new ventures and lose patience with the slow progress that may occur.

One such situation took place when a major corporation formed and funded a highly talented intrapreneurial team that was isolated from the divisions and began to evaluate new business opportunities outside the direct sphere of corporate interest. With no exposure to the existing divisions it was considered by the division executives as a renegade activity that was consuming valuable financial and human resources. The division executives convinced the senior executives that this effort was wasteful and that it should be terminated. They prevailed and the new venture function was disbanded and the personnel were transfered to the divisions.

Overcoming the Challenges

Creating The Vision

Peter Drucker has characterized different kinds of managerial "work" within an organization and among them are:

1. The operating task, which is responsible for producing results from today's business
2. The innovative task, which creates the company's tomorrow and directs, gives vision and sets the course for both today and tomorrow.

The innovative executive performs the innovative task as well as assists top management develop the vision and set the course for tomorrow. To do so he/she must become extremely well informed about market trends of the existing and related technologies to the firm's business. In addition, he/she searches for potential technological and market synergies. With this knowledge guidance and advice can be provided to senior management and to research colleagues as they explore new technology or the modification of existing technology. This guidance and advice will aid in rapidly transferring applicable technology to the market place. As the relationship with the research function develops senior research executives will aid in assisting senior corporate executives create the vision of the company's tomorrow.

Enhancing the Magnitude of the Opportunity

Initially new venture revenue and profit potential may be forecasted to be modest when compared with the firm's current size. It can be enhanced by convincing senior executives that there are related opportunities that can be expected to evolve. The selection of the new venture should allow for the "Corridor Principle" to apply. That is, the new venture should readily lead to other new ventures as entering a new corridor will lead to other corridors and doors of business opportunity. During the past ten years many firms have moved from an initial product position to distribution and then to installation and repair service. The magnitude of the opportunity can grow substantially as the awareness of new corridors become evident.

An example of the Corridor Principal occurred at the Bayer Corp. when a new venture that introduced the returnable plastic milk container led to a larger business in the five gallon water bottle.

Avoiding Internal Competition

Since most internal competition is likely to come from marketing and research, relationships with both of these functions must be developed and nurtured. If the collaboration with research to assist senior management in creating the technological vision is successful a similar outreach effort should be made with senior marketing management. In this case the latter function should be requested to provide guidance and advice on the potential new business opportunities that compete with existing customers but are vulnerable to competitors and those that are in related markets.

An example of how internal competition can be avoided was the entry of a major raw material supplier to the conventional pipe market. This large corporation chose to start a new venture in the specialty pipe segment that had not been pursued by its customers. Later as the specialty pipe business grew the supplier took a major step forward by acquiring the largest remaining non-captive conventional pipe manufacturer. The initial venture laid the foundation for the acquisition.

Accessing Resources

Capable individuals from within and outside large firms are the critical resource needed for successful new ventures. In order to attract them, the visionary executives must build both internal and external networks. Once the vision of the new venture function is developed it must be communicated through the internal network. Experience has shown that promising candidates will come forward as evidenced by the example in the section on the lack of resources. Enlightened functional and divisional managers will encourage prospects to consider new ventures as part of their career path in such a culture. To facilitate this effort the visionary executive must establish linkages to these managers.

To overcome the reluctance to recruit externally requires the careful identification of the need as well as the selection of such individuals. Special technological and/or market knowledge along with entrepreneurial talent are the requisits. On this basis internal candidates and their supporters must be convinced that external recruiting is needed and in the firm's best interests. Here the visionary executive may use an external network as a means of identifying candidates that have special experience and skills for specific new venture projects.

Avoiding Isolation

Several years ago the Boston Consulting Group contended that the improvement in corporate performance is possible in four areas:

1. Within existing divisions
2. Through new divisions created either by acquisition or by in-house research and development
3. By collaborative effort between divisions, and\
4. Through divestment.

It is in areas two and three that the new ventures function can contribute to improved performance, growth and profitability. Two organizational approaches may be taken to avoid isolation while facilitating understanding, communication and even support from existing divisions and functions.

One approach that was the most successful from my experience with both is to establish a subsidiary of the major firm to pursue new ventures. This approach was taken by the Gulf Oil Corp. when it formed Gulf Plastic Fabricated Plastic Products Co. The board of directors of this subsidiary had representatives from an existing division, the legal, research and finance functions and was chaired by the innovation executive. New venture managers were to be added to the board from within and without the parent firm as new ventures proliferated. This structure would allow the existing divisions and departments to have a stake in the new subsidiary, provide guidance and support as well as keep communication flowing to and from their respective areas. This subsidiary had the option to contract for support services from within or from without the parent firm and avoided bureaucratic involvement and cost.

Another approach to avoiding isolation was tried with moderate success by Gulf Oil Chemicals Co. It involved the creation of a new ventures function at headquarters reporting to the President of a large firm. This function was linked to the new venture functions within its divisions and shared the funding of new ventures with the divisional executives. In this arrangement the divisional new venture managers reported to the leader of the innovative function as well as to the divisional executives. Essentially the divisional executives were partners with the head of the headquarters new venture function in building new business opportunities for the divisions while they could concentrate on their existing business activities. This matrix organization although challenging insured that isolation could be avoided.

The Bottom Line

In a Business Week-Boston Consulting Group survey published by the former in 2006 focused on the major obstacles to innovation confronting executives. Of the 1070 surveyed 72% indicated that innovation was one of their top three priorities. Almost half said they were dissatisfied with the returns on their investments in that area.

Chief executives have placed strong emphasis upon creating corporate cultures that encourage innovative ideas however, the struggle to move these ideas to successful new ventures has been inadequately addressed. Although there are many innovative ideas that originate in large corporations these executives must become more knowledgeable of the challenges that confront moving them to successful commercialization that exist within their organizations. These challenges have been clearly identified during the past thirty years and strategies have been developed to overcome them.The commitment to implement these strategies rests with these executives if they intend to have their corporations survive and grow in the global environment of the twenty-first century.

Roy Serpa served as CEO of Permian Research Corp. and EnviroGuard Corp. Earlier in his career he was manager of new business ventures of the Bayer Corp., director of commercial development of Borg-Warner Chemicals and chairman of the Gulf Plastic Fabricated Products Co., a subsidiary of the Gulf Oil. Since retirement he has been a volunteer consultant with the Executive Service Corps of Houston providing free assistance to non profit organizations. He can be reached by e-mail at luzo03@yahoo.com.