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Full text of "Entering new businesses : selecting the strategies for success"

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WORKING PAPER 
ALFRED P. SLOAN SCHOOL OF MANAGEMENT 



Entering New Businesses: 
Selecting the Strategies for Success 



Charles A. Berry+ 
F.dward B. Roberts^ 



October 1983 
WP# 1492-83 



MASSACHUSETTS 

INSTITUTE OF TECHNOLOGY 

50 MEMORIAL DRIVE 

CAMBRIDGE, MASSACHUSETTS 02139 



Entering New Businesses: 
Selecting the Strategies for Success 



Charles A. Berry+ October 1983 

ndward B. Roberts* WP# 1492-83 



+ MIT Program in the Management of Technology, 
and Pilkington Brothers Limited 

* MIT Sloan School of Management 



-1- 



ABSTRACT 



Selection from the alternative strategies available for entering new 
businesses is a key issue for diversifying corporations. Alternative 
approaches include internal development, acquisition, licensing, joint 
ventures, and minority venture capital investments. An intensive liter- 
ature review is used to devise a matrix of company "familiarity" with 
relevant market and technological experiences and to demonstrate the con- 
ceptual utility of the matrix for entry strategy choice. Performance data 
on 14 business development episodes by one successful diversified techno- 
logical firm are used to support the selection concepts embodied in the 
"familiarity matrix". 



LITERATURE REVIEW 

Extensive writings have focused on new business development and the various 
mechanisms by which it may be achieved. Much of this literature concentrates 
on diversification, the most demanding approach to new business development, in 
which both the product and market dimensions of the business area may be new 
to a company. 

Rumelt has developed a now widely accepted scheme for classifying di- 
versified companies. This scheme combines the extent of diversification with 
a measure of the relatedress of the various businesses forming the company. 
Although Rumelt identified nine types of diversified companies, these fell into 
three basic categories: Dominant Business Companies, Related Business Companies 
and Unrelated Business Companies. On analysing the performance of companies 
within these categories, Rumelt concluded that Related Business Companies out- 
performed the averages on five accounting-based performance measures over the 

period 1949 to 1969. 

12 
Peters supports Rumelt':; conclusions on the superior performance of 

related business companies. In his study of 37 "well managed" organizations 

he found that they had all been able to define their strengths and build upon 

them. They had not moved into potentially attractive new business areas which 

required skills that they did not have. In their recent book Peters and 

13 
Waterman classed this as "sticking to the knitting". 

Even in small high technology firms similar effects can be noted. Re- 
cent research by Meyer and Roberts on ten such firms revealed that the most 
successful firms in terms of growth had concentrated on one key technological 
area and introduced product enhancements related to that area. In contrast, 
the poorest performers had tackled "unrelated" new technologies in attempts to 
enter new product-market areas. 



-3- 

The research work discussed above tends to indicate that in order to ensure 
highest performance, new business development should be constrained within 
areas related to a company's base business - a very limiting constraint. How- 
ever, no account was taken of how new businesses were in fact, entered and the 
effect that the entry mechanism had on subsequent corporate performance. 

Possible entry mechanisms are now examined. 

/' 

Internal Development. Companies have traditionally approached new business 

development via two routes: internal development or acquisition. Internal 

r development exploits internal resources as a basis for establishing a business 

^ new to the company. Biggadike studied FORTUNE 500 companies that had used this 

approach in corporate diversification. He found that typically 8 years were 

needed to generate a positive return on investment, and performance did not 

match that of a mature business until a period of 10 to 12 years had elapsed. 

19 
However, Weiss asserts that this need not be the case. He compared the per- 
formance of internal corporate development with comparable businesses newly 
started l)y individuals and found that the new independent businesses reached 
profitability in half the time of corporate effort - approximately 4 years 
versus 8 years. Weiss attributes this to the more ambitious targets established 
by independent operations, and sees no reason why large corporations should not 
be able to achieve comparable performance levels. 

Miller indicates that forcing established attitudes and procedures upon 
a new business may severely handicap it, and suggests that success finally may not 
come until the technology has been adapted, new facilities have been established, 

or familiarity with the new markets has developed. This last factor is very 

4 
important. Gilmore and Coddington believe that lack of familiarity with new 

markets often leads to major errors. 



Acquisition . In contrast to internal development, acquisition can take weeks 
rather than years to execute. This approach may be attractive not only be- 
cause of its speed, but it may also offer much lower cost of entry into a 

17 
new business or industry. Salter and Weinhold point out that this is parti- 
cularly true if the key parameters for success in the new business field are 
intangibles such as patents, product image or R§D skills which may be difficult 
to duplicate via internal developments within reasonable costs and timescales. 
Miller believes that a diversifying company cannot step in immediately 
after acquisition to manage a business it knows nothing about. It must set up 
a communication system that will permit it gradually to understand the new 
business. Before this understanding has developed, incompatibility may exist 
between the managerial judgment appropriate for the parent and that required 
for tlic new subsidiary. 

Anti-trust legislation may be yet another complication in acquisition. 

I 8 
Shanklin discusses potential impacts, stressing that a company in a dominant 

industry position may have great difficulty extending its base business by 

acquisition. Indeed such companies may even encounter problems in internal 

development. 

I Licensing. Acquiring technology through licensing represents an alternative 

1 8 

\ to acquiring a complete company. Killing discusses licensing as a vehicle 

^f- for product diversification, pointing out that it avoids the risks of product 

development by exploiting the experience of firms who have already developed 
1 

and marketed the product. 

Roberts mentions that many corporations are now adopting new venture 

strategies in order to meet ambitious plans for diversification and growth. 



Internal Ventures. Internal ventures have some similarities to internal de- 



"^ 



velopmcnt, which has already been discussed. In this venture strategy, a firm 
S*:^/ attempts to enter different markets or develop substantially different products 
' from those of its existing base business by setting up a separate entity within 
the existing corporate body. Overall the strategy has had a mixed record, but 
some companies such as 3M have exploited it with considerable success. This 
is due to a large extent to their ability to harness and nurture entrepreneurial 
behavior within the corporation. Fast^ agrees that internal venturing has had 
a mixed record, and suggests that major corporations can learn more details of 
the venture development process by studying venture capitalists. He cites, as 
examples, 3M and Coming who have invested as limited partners in venture capital 
partnerships. This involvement in business development financing can keep the 
company in touch with new technologies and emerging industries as well as pro- 
viding the guidance and understanding of the venture development process 
necessary for more effective internal corporate venturing. 
Joint Ventures. Despite the great potential for conflict, many companies success- 



9 
fully diversify and grow via joint ventures. Killing points out that as pro- 
jects get larger, technology more expensive and the cost of failure too large to 
be borne alone, joint venturing may become increasingly important. Shifts in 
national policy in the United States are now encouraging the formation of several 
large research-based joint ventures involving many companies. 

Hlavacek et al. and Roberts believe one class of joint venture to be of 
particular importance - "new style" joint ventures. This refers to situations 
in which large and small companies join forces to create a new entry in the 
market place. Primarily the small company provides the technology, the large 
company provides marketing capability and the venture is synergistic for both 
parties. 



-6- 

Venture Capital and Nurturing. The venture strategy identified by Roberts 
which permits the lowest level of corporate commitment is that associated with 
external venture capital investment. Major corporations have exploited this 
approach in order to participate in the growth and development of small companies 
as investors, participants or even eventual acquirers. Roberts points out that 
this approach was popular as early as the mid-to-late 1960s with many large 
corporations such as DuPont, Exxon. Ford, General Electric and Singer, Their 
motivation was the opportunity to secure entry into new technologies by taking 
minority investments in young and growing high technology enterprises. However, 
few companies in the '60s were able to make this approach by itself an important 
stimulus of corporate growth of profitability. Despite this, ever increasing 
number of companies today are experimenting with venture capital, many showing 
important financial and informational benefits. 

Studies carried out by Greenthal and Larson show that venture capital in- 
vestments can indeed provide satisfactory and perhaps highly attractive returns, 

14 
if they are properly managed. Rind distinguishes between direct venture m- 

v'estments and investment into pooled funds of venture capital partnerships. 
He points out that although direct venture investments can be carried out from 
within a corporation by appropriate planning and organization, difficulties are 
often encountered due to a lack of appropriately skilled people, contradictory 
rationales between the investee company and parent, legal problems, and an 
inadequate time horizon. Investment in a partnership may remove some of these 
problems but if the investor's motives are other than simply maximising fin- 
ancial return, it may be important to select a partnership concentrating invest- 
ments in areas of interest. Increasingly corporations are trying to use pooled 
funds to provide "windows" on new technonogies and new markets, but these re- 
quire special linkages with the investment fund managers. 



-7- 

In situations where the investing company provides managerial assistance 
to the recipient of the venture capital, the strategy is classed as venture 
nurturing rather than pure venture capital. This seems to be a more sensible 
approach to diversification than a simple provision of funds, but it needs to 
be tied to other company diversification efforts. 
Summa ry 

Major prior research work on large U.S. corporations has indicated that 
highest performers had diversified to some extent but had constrained the de- 
velopment of new business within areas related to the company's base business. 
The range of mechanisms available for entering new businesses and a summary of 
various advantages and disadvantages of each mechanism is given in EXHIBIT 1. 

These various entry mechanisms require different levels of corporate in- 
volvement j EXHIBIT 2 therefore extends Roberts' earlier "spectrum" of venture 
strategics to include internal development and acquisition. The resulting 
array of entry strategies is divided into three regions, each requiring a 
different level of corporate involvement and commitment. Note that this spec- 
trum includes an entry mechanism not discussed in the above literature - the 
"educational" acquisition. The purpose of an acquisition of this type is to 
provide a more transparent window on a new technology than a venture capital 
investment. This mechanism will be discussed in more detail in later sections. 

No one mechanism is ideal for all new business development. It may there- 
fore be possible that selective use of entry mechanisms can yield substantial 
benefits over concentration on one particular approach. If this is valid, then 
perhaps there are ways to reduce the risk associated with new business de- 
velopment in unrelated areas. 



-8- 



EXHIBIT 1 



ENTRY MECHANISMS: ADVANTAGES AND DISADVANTAGES 



NEW BUSINESS 

nr.vni.opMENT 

MECHANISM 


MAJOR 
ADVANTAGES 


MAJOR 
DISADVANTAGES 


INTERNAL 
DEVEI.Ol'MENT 


Uses existing 
resources 


Time lag to break 
even tends to be 
long (on average 
8 years) 

Un familiarity with 
new markets may 
lead to errors 


ACQUISITION 


Rapid market 
entry 


New business area 
may be unfamiliar 
to parent 

Impacts of anti- 
trust 


LICENSE 


Rapid access to 

proven 

technology 

Reduced financial 
exposure 


Not a substitute 
for internal 
technical competence 

Not proprietary 
technology 

Dependence upon 
licensor 


INTERNAL 
VENTURE 


Uses existing 
resources 

May enable company 
to hold a talented 
entrepreneur 


Mixed record of 
success 

Corporation's 
internal climate 
often unsuitable 


JOINT 

vi;nture 


Technological/ 
marketing unions can 
exploit small/large 
company synergies 

Distribute risk 


Potential for 
conflict between 
partners 


VliNTURi; 
CAPITAI, 


Can provide window 
on new technology 
or market 


Unlikely alone to 
be a major stimulus 
of corporate growth 



-9- 

EXHIBIT 2 
SPECTRUM OF ENTRY STRATEGIES 



INCREASING CORPORATE INVOLVEMENT 





'm/m///A 


• 
• 


• •• 

• •• 


• 
• 




INTERNAL 
DEVELOPMENT 






LICENSE 




^ VENTURE 
CAPITAL 


ACQUISITION 






INTERNAL 
VENTURE 

JOINT 
VENTURE 




"EDUCATIONAL" 
ACQUISITION 



■10- 



ENTRY STRATEGY: A NEW SELECTION FRAMEWORK 

New l)usincss development may address new markets, new products or both, 
in addition, these new areas may be ones that are familiar or unfamiliar to 
a company. Let us first define "newness" and "familiarity": 

"NEWNESS OF A TECHNOLOGY OR SERVICE" 

- The degree to which that technology or service has 
not formerly been embodied within the products of 
the company. 

"NEWNESS OF A MARKET" 

The degree to which the products of the company 
have not formerly been targeted at that parti- 
cular market. 

"I'AMIIJARITY WITH A TECHNOLOGY" 

The degree to which knowledge of the technology 
exists within the company, not necessarily em- 
bodied in products. 

"FAMILIARITY WITH A M.ARKET" 

- The degree to which the characteristics and business 
patterns of a market are understood within the company, 
not necessarily as a result of participation in the 
market . 

If the businesses in which a company presently competes are its BASE 
businesses, then market factors* associated with the new business area may be 



* Here, "market factors" refers not only to particular characteristics of the 
market and the participating competitors, but also includes the appropriate 
pattern of doing business that may lead to competitive advantage. Some al- 
ternative patterns are performance/premium price and lowest cost producer. 



-11- 

characterized as BASE, NEW FAMILIAR, or NEW UNFAMILIAR. Similarly, the tech- 
nologies or service embodied in the product for the new business area may be 
characterized on the same basis. EXHIBIT 3 illustrates some tests that may 
be used to distinguish between "base" and "new" areas. EXHIBIT 4 lists 
questions that may be used to distinguish between familiar and unfamiliar 
technologies. (Equivalent tests may be applied to services). Questions to 
distinguish between familiar and unfamiliar markets are given in EXHIBIT 5. 

The application of these tests to any new business development opportunity 
enables it to be located on a 3x3 technology/market FAMILIARITY MATRIX as 
illustrated in EXHIBIT 6. The nine sectors of this matrix may be grouped 
into three regions, with the three sectors comprising any one region having 
broadly similar levels of familiarity. These three regions are illustrated 
in liXllllUT 6. 

WliJch entry strategies are appropriate in the various regions of the 
familiarity matrix? The literature provides some useful guides. 

In his discussion of the management problems of diversification, Miller 
proposes that acquisitive diversifiers are frequently required to participate 
in the strategic and operating decisions of the new subsidiary before they are 
properly oriented towards the new business. In this situation the parent is 
"unfamiliar" with the new business area. It is logical to conclude that if 
the new business is unfamiliar after acquisition, it must also have been un- 
familiar before acquisition. How then can the parent have carried out compre- 
hensive screening of the new company before executing the acquisition? Most 
probably preacquisition screening overlooked many factors, turning the acqui- 
sition into something of a gamble from a business portfolio standpoint. Similar 

arguments can be applied to internal development in unfamiliar areas and Gilmore 

4 
and Coddington specifically stress the dangers associated with entry into un- 
familiar markets. 



-12- 

EXHIBIT 3 
TESTS OF "NEWNESS" 



Is the technology or 
service embodied with- 
in existing products? 



YES 



NO 



Base technology 
or service 



New technology 
or service 



Are existing products 
sold within this 
market 











fc. 



YES 



NO 



Base market 



New Market 



■13- 



EXHIBIT 4 



TESTS OF TECHNOLOGICAL FAMILIARITY 



DECREASING 
FAMILIARITY 



1) Is the technological capability used within 
the corporation without being embodied in 
products, e.g., required for component 
manufacture (incorporated in processes 
rather than products)? 



2) Do the main features of the new 

technology relate to or overlap with 
existing corporate technological skills 
or knowledge, e.g., coating of optical 
lenses and aluminizing semiconductor 
substrates? 



7>) Ho the technological skills or 

knowledge exist within the corporation 
without being embodied in products or 
processes, e.g., at a central RfiD 
facility? 



4) Has the technology been systematically 
monitored from within the corporation 
in anticipation of future utilization, 
e.g., by a technology assessment group? 



5) Is relevant advice available from 
external consultants? 



■14- 



EXHIBIT 5 



TESTS OF MARKET FAMILIARITY 



DECREASING 
FAMILIARITY 



1) Do the main features of the new market 
relate to or overlap existing product 
markets, e.g., base and new products are 
botli consumer products? 



2) Does the company presently participate in 
the market as a buyer (relevant to backward 
integration strategies)? 



3) Has the market been monitored systematically 
from within the corporation with a view 
to future entry? 



4) Does knowledge of the market exist within 
the corporation without direct partici- 
pation in the market, e.g., as a result 
of previous experience of credible staff? 



5) Is relevant advice available from external 
consultants? 



■15- 



EXHIBIT 6 



THE FAMILIARITY MATRIX 



MARKET 
FACTORS 



NEW 
UNFAMILIAR 



NEW 
FAMILIAR 



BASE 




BASE 



NEW 
FAMILIAR 



NEW 
UNFAMILIAR 



TECHNOLOGIES OR SERVICES 
EMBODIED IN THE PRODUCT 



KEY: 



Y///m*^* \ 



INCREASING CORPORATE FAMILIARITY 



-16- 

This loads to the conclusion that entry strategies requiring high cor- 
porate involvement should be reserved for new businesses with familiar market 
and technological characteristics. Similarly, entry mechanisms requiring 
low corporate input seem best for unfamiliar sectors. In this way it is 
possible to align the three sections of the entry strategy spectrum of 
liXIIIRir 2 with the three regions of the FAMILIARITY MATRIX^EXHIBIT 6. Let 
us now analyse this alignment for each region of the matrix, with particular 
regard to the main factors identified in the literature. 
Region 1: Base/Familiar Sectors 

Within the base/familiar sector combinations illustrated in EXHIBIT 7, 
a corporation is fully equipped to undertake all aspects of new business de- 
velopment. Consequently, the full range of entry strategies may be considered, 
including internal development, joint venturing, licensing, acquisition or 
minority investment of venture capital. However, although these are all valid 
from a corporate familiarity standpoint other factors suggest optimum entry 
approaches . 

The potential of conflict between partners may reduce the appeal of a 
joint venture, and minority investments offer little benefit since the investee 
would do nothing that could not be done internally. 

The most attractive entry mechanisms in these sectors probably include 
internal development, licensing and acquisition. Internal development may be 
appropriate in each of these sectors, since the required expertise already ex- 
ists within the corporation. Licensing may be a useful alternative in the 
base market/new familiar technology sector since it offers fast access to 
proven products. Acquisition may be attractive in each sector but may be 
infeasible for some companies in the base/base region as a result of anti- 
trust legislation. 



MARKET 
FACTORS 



•17- 



EXHIBIT 7 



PREFERRED ENTRY MECHANISMS 
IN BASE/FAMILIAR SECTORS 



NEW 
UNFAMILIAR 



NEW 
FAMILIAR 



BASE 



Internal Market 
Development 



or 



Acquisition 

(or Joint 
Venture) 



Internal 

Base 

Development 



(or Acquisition) I 



Internal 

Product 

Development 

or 
Acquisition 

or 
License 



BASE 



NEW 
FAMILIAR 



NEW 
UNFAMILIAR 



TECHNOLOGIES OR SERVICES 
EMBODIED IN THE PRODUCT 



KEY: 



TRANSITIONS OVER TIME 



•18- 



It may therefore be concluded that in these base/familiar sectors, the 
optimum range may be limited to internal development, licensing and acquisition 
as illustrated in EXHIBIT 7. In all cases a new business developed in each 
of these sectors is immediately required to fulfill a role within the corporate 
business portfolio. For this reason, acquisitions in these sectors will be 
referred to from now on as "portfolio" acquisitions. 

I'inaily, since new businesses within the base market/new familiar tech- 
nology and new familiar market/base technology sectors immediately enter the 
corporate business portfolio, they transfer rapidly into the base/base sector. 
These transitions are illustrated in EXHIBIT 7. 
Region 2: {"amiliar/Unfamiliar Sectors 

EXHIBIT 8 illustrates the sectors of lowest familiarity from a corporate 
standpoint. It has already been proposed that a company is only competent to 
carry out totally appropriate analyses on new business opportunities which lie 
within its own sphere of familiarity. Large scale entry decisions outside this 
sphere are liable to miss important characteristics of the technology or market, 
reducing the probability of success. Furthermore, if the unfamiliar parent 
attempts to exert strong influence on the new business, the probability of 
success will be reduced still further. 

These factors suggest that a two stage approach may be best when a company 
desires to enter unfamiliar new business areas. The first stage should be de- 
voted to building corporate familiarity with the new area. Once this has been 
achieved, the parent is then in a position to decide whether to allocate more 
substantial resources to the opportunity and, if appropriate, to select a 
mechanism for developing the business. 

Venture capital provides one vehicle for building corporate familiarity 
with an unfamiliar area. By nurturing a venture capital minority investment 



-19- 



EXHIBIT 8 



PREFERRED ENTRY MECHANISMS 
IN FAMILIAR/UNFAMILIAR SECTORS 



MARKET 
FACTORS 



NEW 
UNFAMILIAR 



NEW 
FAMILIAR 



BASE 



1 Venture 


1 Venture 1 


1 Capital 


1 Capital 1 


1 or 


1 or 1 


1 Venture 


1 Venture 1 


1 Nurturing 


1 Nurturing 1 


1 or 


1 or 1 


1 Educational 


1 Educational 1 


1 Acquisition 


i, Acquisition | 




y/'l Venture 1 


? 


1 Capital 1 




1 or 1 




^ 1 Venturing 1 




1 Nurturing 1 




1 or i 




1 Educational i 




1 Acquisition 1 



BASE 



NEW 
FAMILIAR 



NEW 
UNFAMILIAR 



TECHNOLOGIES OR SERVICES 
EMBODIED IN THE PRODUCT 



KEY: 



\ 



TRANSITION OVER TIME 



■20- 



the corporation can monitor, at first hand, new technologies and markets.* 
Over time the new opportunity moves into a familiar market/technology region, 
as illustrated in EXHIBIT 8, from which the parent can now exercise appropriate 
judgment on the commitment of more substantial resources. 

Targeted small acquisitions can fulfill a similar role to a venture capital 
minority investment and, in some circumstances, may offer significant advantages. 
In an acquisition of this type, the acquiring firm immediately obtains people 
familiar with the new business area, whereas in a minority investment, the 
parent relies upon its existing staff building familiarity by interacting with 
the investee. Acquisitions for educational purposes may therefore represent a 
faster route to familiarity than the venture capital "window" approach. Staff 
accjuired in this manner may even be used by the parent as a basis for redirect- 
ing a corporation's primary product-market thrust. Harris Corporation (formerly 
Harris- Intertype) entered the computer and communication systems industry using 
precisely this mechanism to acquire internal skills and knowledge through its 
acquisition of Radiation Dynamics Inc. 

One potential drawback in this "educational acquisition" approach is that 
it usually requires a higher level of financial commitment than minority invest- 
ment and therefore increases risk. In addition, it is necessary to ensure that 
key people do not leave soon after the acquisition due to the removal of entre- 
preneurial incentives. A carefully designed acquisition deal may be necessary 
to ensure that incentives remain. When Xerox acquired Versatec, for example, 
the founder and key employees were given the opportunity to double their "sell- 
out" price by meeting performance targets over the next five years. 



It is clearly essential that if the investment is to be worthwhile, the in- 
vestec must be totally familiar with the technology/market. These must be 
his base business. 



-21- 

It is also important that the performance of acquisitions of this type be 
measured according to criteria different from those used to assess the "port- 
folio" acquisitions discussed in the previous section. These "educational" 
acquisitions should be measured on their ability to provide increased corporate 
familiarity with a new technology or market, and not on their ability to per- 
form immediately a conventional business unit role within the corporate business 
portfolio. 
Region 3: Marginal Sectors 

The marginal sectors of the matrix are the base/new familiar combinations 
plus the new familiar market/new familiar technology area, as illustrated in 
liXHlBlT 9. In each of the former sectors, the company has a strong familiarity 
with cither markets or technologies, but is totally unfamiliar with the other 
dimension of the new business. In these situations joint venturing may be very 
attractive to the company and prospective partners can see that the company 
may have something to offer. However, in the new familiar tec hnology /market 
region the company's base business does not advertise familial ity with that 
technology or market. Hence, prospective partners may not perceive that a 
joint venture relationship would yield any benefit to them. 

In the base market/new unfamiliar technology sector the "new style" joint 
venture discussed by Roberts and Hlavacek et al. is appropriate. The large 
firm provides the marketing channels and a small company prov; des the technolo- 
gical capability in a union that can result in a very powerful team. The com- 
plement of this situation may be equally attractive in the new unfamiliar 
market/base technology sector. 

Joint ventures such as these not only provide a means of fast entry into 
a new business sector, but also offer increased corporate familiarity over time 
as illustrated in EXHIBIT 9. Consequently, although a joint ^'enture may be the 



-22- 



EXHIBIT 9 



PREFERRED ENTRY MECHANISMS 
IN MARGINAL SECTORS 



MARKET 
FACTORS 



NEW 
UNFAMILIAR 



NEW 
FAMILIAR 



BASE 



Joint 
Venture 



Internal 
Venture 

or 
Acquisition 

or 
License 



'New Style" 

Joint 

Venture 



BASE 



NEW 
FAMILIAR 



NEW 
UNFAMILIAR 



TECHNOLOGIES OR SERVICES 
EMBODIED IN THE PRODUCT 



KEY: 



\ 



TRANSITION OVER TIME 



-23- 



optimum entry mechanism into the new business area, future development of that 
business may be best achieved by internal development or acquisition as discussed 
in the earlier Base/Familiar Sectors section. 

In the new familiar market/new familiar technology sector, the company may 
be ideally placed to undertake an internal venture. Alternatively, licensing 
may provide a useful means of obtaining rapid access to a proven product em- 
bodying the new technology. Minority investments can also succeed in this 
sector but, since familiarity exists, a higher level of corporate involvement 
and control may be justifiable. 

Acquisitions may be potentially attractive in all marginal sectors. How- 
ever, in the base/new unfamiliar areas this is dangerous since the company's 
lack of familiarity with the technology or market prevents it from carrying out 
comprehensive screening of candidates. In contrast, the region of new familiar 
market/new familiar technologies does provide adequate familiarity to ensure 
that screening of candidates covers most significant factors. In this instance 
an acquisitive strategy is reasonable. 
Sector Integration: Optimum Entry Strategies 

The foregoing discussion has proposed optimum entry strategies for 
attractive new business opportunities based on their position in the FAMILIARITY 
MATRIX. EXHIBIT 10 integrates these proposals to form a tool for selecting entry 
strategy based on corporate familiarity. 

TESTING THE PROPOSALS 

In testing the proposed entry strategies. Berry studied 14 new business 
development episodes that had been undertaken within one highly successful di- 
versified technological corporation. These episodes were all initiated within 
the period 1971 to 1977, thus representing relatively recent activity while 
still ensuring that sufficient time had elapsed for performance to be measurable. 



■24- 



EXHIBIT 10 



OPTIMUM ENTRY STRATEGIES 



MARKET 








FACTORS 












1 Venture 


1 Venture 1 






1 Capital 


1 Capital 1 


NEW 
UNFAMILIAR 


Joint 
Venture 


1 or 
1 Venture 
' Nurturing 


1 or 1 
1 Venture 1 
1 Nurturing 1 






or 
1 Educational 


1 or 1 
Educational | 






Acquisition 


1 Acquisition i 




Internal Market 


Internal 


Venture | 




Development 


Venture 


Capital 1 


NEW 


or 


or 


or 1 
Venture j 


FAMILIAR 


Acquisition 


Acquisition 


Nurturing | 




(or Joint 
Venture) 


or 


or I 
Educational , 


' 


License 


Acquisition i 






Internal 






Internal 


Product 






Base 


Development 


"New Style" | 


BASE 1 


Development | 


or 1 


Joint 1 




(or Acquisition) 


Acquisition | 

or 1 

License | 


Venture | 




BASE 


NEW 


NEW 






FAMILIAR 


UNFAMILIAR 



TECHNOLOGIES OR SERVICES 
EMBODIED IN THE PRODUCT 



-25- 



The sample comprised 6 internal developments (3 successful, 3 unsuccessful), 
6 acquisitions (3 successful, 3 incompatible) and 2 successful minority invest- 
ments of venture capital. These were analysed in order to identify factors 
which differentiated successful from unsuccessful episodes. The scatter of 
these episodes on the familiarity matrix is illustrated in EXHIBIT 11. Internal 
developments are represented by symbols A to F, acquisitions by G to L, with 
M and N showing the location of the minority investments. 

The distribution of success and failure* on the matrix gives support to 
the entry strategy proposals that have been made in this article. All high 
corporate involvement mechanisms (internal development and "portfolio" acqui- 
sitions) in familiar sectors were successful. However, in unfamiliar areas, 
only one of this category of entry mechanism, acquisition G, succeeded. This 
acquisition was a thirty year old private company with about 1000 employees, 
producing components for the electronics and computer industries. It was 
believed to offer opportunities for high growth although it was unrelated to 
any of the parent's existing business. The deal was completed after a period 
of two years of candidate evaluation carried out from within the parent. The 
only constraint imposed upon Company G following acquisition was the parent's 
planning and control system, and in fact the acquired company was highly re- 
ceptive to the introduction of this system. This indicated that Company G 
was not tightly integrated with the parent and that any constraints imposed 
did not severely disrupt the established operating procedures of the company. 



Success here is defined as fulfilling a satisfactory role within the corporate 
business portfolio. Failures had not achieved this and had been discontinued 
or divested. 



-26- 

EXHIBIT 11 

EPISODE SCATTER ON THE FAMILIARITY MATRIX 



MARKET 
FACTORS 



NEW 

UNFAMILIAR 



NEW 
FAMILIAR 



BASE 



hi 






\ 

1 
1 


^ 




1 1^ 


^ i 


1 



BASE 



NEW 
FAMILIAR 



NEW 
UNFAMILIAR 



TECHNOLOGIES OR SERVICES 
EMBODIED IN THE PRODUCT 



KEY: 



^ 



= SUCCESS 
= FAILURE 



-27- 



All factors surrounding the acquisition of Company G - its size, growth 
market, low level of constraint and low disruption by the parent - suggest 
that Company G may have continued to be successful even if it had not been 
acquired. Representatives of the parent agreed that this might be the case 
although they pointed out that the levels of performance obtained following 
acquisition might not have occurred if Company G had remained independent. 
Hence, if an acquired company is big enough to stand alone and is not tightly 
integrated with the parent, its degree of success is independently determined 
by itself. 

It is important to point out that despite the success which occurred 
in this instance; an acquisition of this type in unfamiliar areas must carry 
risk. rhc parent is liable to overlook many subtle details while screening 
candidates. It is also important to point out that when an established company 
is acquired and continues to operate with a high degree of independence, ident- 
ification of synergy becomes difficult. Synergy must exist in any acquisitive 
development if economic value is to be created by the move. Consequently, 
an acquisition of this type not only carries risk but may also be of questionable 
benefit to shareholders. 

The other success in an unfamiliar area, episode N, is a minority invest- 
ment of venture capital. By the very nature of minority investments, corporate 
involvement is limited to a low level. Although some influence may be exerted 
via participation on the Board of Directors of the investee, again the investee 
is not tightly bound to the parent. Consequently, the success of the investee 
tends once again to be determined to a large extent by itself. 

Detailed examination of episodes G and N has therefore suggested good 
reasons for the subject companies' success despite their location in unfamiliar 
sectors - the companies didn't require a significant input to decision making 



■28- 



from the unfamiliar parent. This suggests that new business development success 
rate in unfamiliar areas may be increased by limiting corporate input to the 
decision making process to low levels until corporate familiarity with the new 
area has developed. These experiences support the entry proposals already out- 
lined in til is article. 

Some companies have already adopted entry strategies that seem to fit the 
proposals of this article, and Monsanto represents one of the best examples. 
Monsanto is now committed to significant corporate venturing in the emerging 
field of biotechnology. Its first involvement in this field was achieved with 
the aid of its venture capital partnership Innoven which invested in several 
small biotechnology firms, including Genentech. During this phase Monsanto 
interacted with the investees, inviting them in-house to give seminars on their 
work. Once some internal familiarity with the emerging field had developed, 
the decision was then taken to commit substantial resources to an internal 
venture. Monsanto is effectively entering biotechnology by moving from top 
right to bottom left across the familiarity matrix of EXHIBIT 10. They used 
venture capita] to move from an unfamiliar region to an area of familiar tech- 
nology and market. Joint ventures with Harvard Medical School and Washington 
University of St. Louis are further enhancing its familiarity with biotech- 
nology, while producing technologies that Monsanto hopes to market. Contract / 

research leading to licenses from small companies is another strategy Monsanto >^ 

'i 

is employing. -. ) 

CONCLUSIONS 
A spectrum of entry strategies was presented in this article, ranging from 
those requiring corporate involvement, such as internal development or acquisition, 
to those requiring only low involvement, such as venture capital. This was 
then incorporated into a new conceptual framework designed to assist in select- 
ing entry strategy into potentially attractive new business areas. The frame- 



-29- 



work concentrates on the concept of the corporation's "familiarity" with the 
new business area and a matrix was used to relate familiarity to optimum entry 
strategy. 

In this concept, no one strategy is ideal for all new business development 
situations. Within familiar sectors virtually any strategy may be adopted and 
internal development or acquisition is probably most appropriate. However, in 
unfamiliar areas these two approaches are very risky and familiarity should be 
built before they are attempted. Minority investments and small targeted 
"educational" acquisitions form ideal vehicles for building familiarity and 
are therefore the preferred entry strategies in unfamiliar sectors. 

Despite recent criticism , venture capital may be the most important of 
these approaches. By means of a corporate venture program using either 
direct funding or partnerships of pooled funds, a company has the opportunity 
to interact with investees and gain insight into a wide range of unfamiliar 
technologies or markets without large financial commitment. The knowledge 
that can be developed in this situation increases the likelihood that decisions 
on subsequent commitment of more substantial resources have addressed all re- 
levant factors. 

At the start of this article, research results were outlined which had 
indicated that in order to ensure highest performance, new business develop- 
ment should be constrained within areas related to a company's base business. 
However, this research had not accounted for alternative entry mechanisms. 
This article proposed that a multi-faceted approach, encompassing internal 
development, acquisitions, joint ventures and venture capital minority in- 
vestments, can make available a much broader range of business development 
opportunities at lower risk than would otherwise be possible. 



-30- 
REFERENCES 

1. Berry, C.A. "New Business Development in a Diversified Technological 
Corporation", MIT Sloan School/Engineering School Master of Science 
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2. Biggadike, H.R. "The Risky Business of Diversification", Harvard Business 
Review , May /June 1978. 

3. Fast, N.l). "Pitfalls of Corporate Venturing", Research Management , 
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4. Gilmore, J.S. and Coddington, D.C. "Diversification Guides for Defense 
Firms", Harvard Business Review, May/June 1966. 

5. Crcenthal, R.P. and Larson, J. A. "Venturing into Venture Capital", 
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6. Ilardymon, G.F., Denvino, M.J., and Salter, M.S. "When Corporate Venture 
Capita] Doesn't Work", Harvard Business Review , May /June 1983. 

7. Hlavacek, J.D., Dovey, B.H. and Biondo, J.J. "Tie Small Business Technology 
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8. Killing, J. P. "Diversification through Licensing", R5D Management , 8, 3, 
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9. Killing, J. P. "How to Make a Global Joint Venture Work", Harvard Business 
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10. Meyer, M.H. and Roberts, E.B. "New Product Strategy in Small High 
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11. Miller, S.S. The Management Problems of Diversification , John Wiley, 1963. 



-31- 

12. Peters, T. "Putting Excellence into Management", Business Week , 
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13. I'eters, T.J. and Waterman, R.ll. In Search of Excellence , Harper and 
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14. Rind, K.W. "The Role of Venture Capital in Corporate Development", 
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15. Roberts, E.B. "New Ventures for Corporate Growth", Harvard Business 
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16. Rumelt, R.P. Strategy, Structure and Economic Performance , Harvard 
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17. Salter, M.S. and Weinhold, W.A. "Diversification via Acquisition: 
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Tomorrow", Business Horizons, October 1979. 



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