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Innovative business development
155
INNOVATIVE BUSINESS DEVELOPMENT Selection
and management
issues
D. A. Littler and R. C. Sweeting
A firm’s growth can be achieved by internal growth or by acquiring new businesses. This article examines the means management uses to assess potential new business acquisitions --financial and marketing factors, managerial instinct and questions whether in developed countries predilection -and like the UK firms have the corporate wisdom and the taste for risk required for innovative adventures in businesses new to the firm. Keywords:new business development; appraisal; sensitivity analysis; planning
CORPORATE DEVELOPMENT implies adaptations to and innovations in the firm’s portfolio of products and markets if it is to survive and grow in an environment that has been described as ‘turbulent’, ‘dynamic’ and ‘in a state of flux’. Overall, there are several routes that a lirm can pursue: it may develop organically through internal product development, the cultivation of new markets, efforts to increase market penetration, the development of new business through, for instance, internal venture management and so on.’ It may augment such organic development by external means such as acquisitions, mergers, joint ventures, licensing and franchising. The nature and relative merits of these different approaches have been discussed elsewhere.’ In this article, our focus is the development of businesses new to the firm, a means of corporate development that becomes especially important where there are significant movements in demographic, economic and technological forces that affect and even undermine some or all of the company’s existing business activities. The aim is to explore inside the black box of managerial approaches, to assess the procedures that have been attempted, and to arrive at conclusions on what are important issues and considerations. It may be that managerial
Dr D. A. Littler and Dr R. C. Sweeting are at the Department of Management Sciences, University of Manchester, Institute of Science and Technology, PO Box 88, Manchester M60 lQD, UK.
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00163287/87/02015513$o3.ooo
1987 Butterworth & Co(Publishers)
Ltd
heuristics has been the trusted approach. But expost there may be much that can be learned which in turn may provide prescriptions and proscriptions in this area. Empirical evidence employed in this discussion was obtained from a number of research investigations that have been performed by the authors over a period of some years, in particular: (1) a study of 14 companies in ‘mature’ market segments which were studied during the period 1980 to 1982; (2) a postal survey performed in 1983 of a sample of 300 of The Times Top 1000 companies, resulting in 88 replies; and (3) a survey of a purposive sample of 47 firms undertaken during the period Autumn 1984 to early 1985. This sample was selected from lists of those who had attended or indicated an interest in a series of meetings on new business development that were held at UMIST from 1981 to 1983. A total of 24 usable questionnaires were obtained, of which 23 stated that they had a continuing interest in new business development (nbd); the remaining one noted that although it had an interest in new business development, it had not at the time of responding developed an organizational structure for or embarked on any new ventures. Definitions
of new business
development
The first question is: what is meant by innovative business development? The interpretations of the various respondents differed significantly. Some regarded new product development as synonymous with nbd. For instance, one respondent suggested that for his company, nbd meant “new ideas/products which after development can be included in a divisional product range”. Such activities would however appear to be compatible with existing businesses (in that they can be handed over to existing divisions), whereas nbds are more likely to require separate divisions. At the extreme, new business activities are likely to involve the use of technologies new to the firm in order to reach new customer targets. The purpose must be to break away from traditional mainstream businesses which in the longer term can only yield at best diminishing marginal returns to effort, although in some cases, provided the end-game is played cleverly and the company has the requisite resources to do so, there can be significant yields.3 At the minimum, innovative businesses must be markedly different in several of the following: production methods, products, distribution channels, selling methods, customer types, and sources and types of inputs. Some definitions were more in line with our interpretation: “entry into a business arena other than one forming a normal extension of existing activities’ ’ , and “purposeful movement into new generic product or customer markets in accord with corporate strategy”, or, the more varied definition: “redeploying assets in non-strategic business areas to alternative areas; and diversifying into higher margin activities”. Overall, in study three, 11 out of the 23 companies defined nbd in terms of activities solely outside existing business activities. At first glance, this would appear to contrast vividly with our earlier survey (1983) when what were defined as new business developments tended in fact to be related to current business activities in technology (73 companies) and/or marketing to existing customers (71).4 Twenty-four firms noted that their nbds used the same feedstock as their
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traditional business areas. However, these firms may be sensibly risk of nbd by building on one or two areas with which they are may, for example, market new technology products to customers serve with their existing products. In general, it appeared that the some combination of new technology, new customers and new Table 1). Entering
innovative
business
reducing the familiar: they they already nbds involved products (see
activities
The evidence from the various surveys indicates quite clearly that external means of corporate development remain the preferred course, although organic development remains a popular alternative (see Table 2). Despite many reservations that can be made about acquisitions-in particular, the risk that those managers who have been an integral part of the success of the business may leave, and that a premium price may have to be paid for companies perceived as ‘successful’-in general, the respondents favoured acquisition of established companies because they have a track record. This option, then, is regarded as having a lower risk. Yet it is self-evident that the track record to date may not be a clear sign of future performance. There may be impending significant changes in the
TABLE 1. COMPONENTS OF NBD VENTURES SURVEY)
(1983
Number of companies Marketing to new customers Development of new products Development of new technology
74 (n = 77) 88 (n = 77) 80 (n = 76)
Note: Some companies had more than one new venture, and may have answered separately for each of several ventures.
TABLE
2. STRATEGIES
EMPLOYED
TO ENTER NEW BUSINESS Number 1983 study (n = 82)
a 19 out of 23 companies
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answered
of companies 1984-85 study (n = 23)a
65 33 43 31 19 17 7
Acquisition Internal venture development Licensing Joint ventures Venture capital nurturing Venture nurturing Venture spin-offs Other Distributorship Product development
AREAS
13 12 9 10 6 2 No data 1 1
this question.
acquired firm’s market and technologies which could, for example, adversely affect the business (and these in themselves may be a reason for its existing owners agreeing to sell); management may resign, as’ was previously mentioned, and this will have a high probability and more likely a greater impact in the case of innovative entrepreneurial companies. Acquisitions are often regarded as easy means of entry into new business areas; unfortunately the purchaser, through ignorance, may not be able to assess effectively the value and future viability of the company. The danger is that if the acquisition is made at the pinnacle of the purchased company’s performance, the purchaser may considerably underestimate the problems of either integrating the acquired company or managing it. Overcoming a mismatch of cultures can markedly delay the returns, or even result in failure. It is also paradoxical that it should be argued in some cases that acquisitions are preferred because they have a track record. Companies can be purchased because they are not realizing their full potential, which the acquiring company aims to unleash through investment and so on. It may aim to combine the acquired company with other businesses to produce a business of a range or critical mass that generates results far in excess of those that each could produce independently. Venture management and in particular internal venture development was a popular option. 5 This may be adopted because it seems to offer greater control, a view supported by some respondents. However, as can be seen from the comments of the President of BOC’s Technical Activities, internal venture management is not necessarily universally regarded as a first option: . . it is far too expensive aim to extend our current activities. If we decided to acquire it-after in-depth
to research yourself into a totally new type of business. We businesses into fields which are logical extensions of current move into a totally new business, we would be more likely to investigation of its technology and economic prospects.6
Corporate venture capital has not to date been employed by many UK companies. Of the six in study three who claimed to have used this approach, only two saw it as the most effective use of new business development, and four others were against this route. ’ Corporate venture capital may be seen as a that is, it enables the means of securing a ‘window’ on new technology, company to obtain an early acquaintance with an innovative technology and thereby to be in a better position to assess its possibilities for nbd. The main problem is the loss of control that is perceived to accompany this option, and evidence from the USA suggests that it may not be a very effective means of developing new businesses. ’ Increasingly, it is obvious also that the suppliers of venture capital are not for the most part prepared to adopt a hands-off approach to the management of the businesses in which they have a stake. Consequently the distinction between venture capital and venture nurturing (where investors supply not only finance but also managerial expertise) is becoming blurred, if not non-existent. Licensing is a popular means of entering new business activities and is seen as the costs and having a number of intrinsic merits. It is a low risk alternative: problems of researching and developing the technology will have been shouldered by others, while it will often have a proven record in the market.
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There may even be guidelines available on appropriate marketing policies to pursue. Of course, it may not be as profitable as internally developed ventures since there will be royalty and possibly other payments; there may be limitations to the use of the technology and there may be costs involved in adapting the technology to the specific requirements of the firm. It may also be undesirable to become overdependent on outsiders for new technology. Nevertheless, it is an attractive option particularly when used in concert with other approaches, such as where the licensed technology is used to fill a gap in the company’s technological base.g It may be employed to complement the company’s existing technology, or be purchased as a means of gaining knowledge in a foreign technological territory which the company has every intention of exploring further. Overall, licensing can be an extremely successful approach especially when employed with other means of corporate development.
Evaluation and selection of new business areas The means that companies employ to gain entry into innovative business activities may be determined partly by the business areas it has pre-selected: for instance, there may be an attractive company that can be acquired on reasonable terms in the new business area. There will be other considerations: the existing or potential competition in the chosen business area will affect the decision on whether or not acquisition will be preferred to organic development. At a higher level, corporate strategy, managerial preferences and the resources available for corporate development will be critical determinants. Such factors will often severely limit the scope of the search for innovative businesses, even if the costs and management time involved in open-ended extensive prospecting for new business opportunities were available. It is natural to impose restrictions on the search to avoid entering areas which are quite manifestly unsuitable because of the alien skills-required, the time span of development, the resources demanded and so on. Tfiere may also be a simpler explanation of why it seems reasonable to hypothesize that a large number of new business ideas are not generated: not only would this severely tax management’s ability to cope (how can one rationally appraise a large number of ideas?) but also they may simply not be there to generate. The evidence from our empirical studies suggests, however, not only that the search is not extensive, but also that for the most part a systematic search methodology is not employed. lo In addition to internal constraints, there may also be some powerful influences that can direct management’s attention to certain areas; popularity may be an important factor, as may be the decisions made by immediate competitors. In the latter case companies may feel that they are missing out on an important opportunity. The fact that the potential of the new business may not be sufficient to support profitably several competitors, such that only those companies with considerable strengths are likely to be overall gainers, suggests that circumspection may be more appropriate. Managerial explorations for new businesses, then, are highly likely to be focused. The set of pre-evaluation criteria that might be established and therefore act to narrow the search process might include one or m,ore of the following:
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l
l
l
l
l
Compatibility with existing business areas including the same or similar types of customers, technologies and distribution networks. The affinity with existing business may not be direct or obvious; for instance, it may be the compatibility of the management decisions or processes that is more relevant than industry or market relatedness.” Companies anxious to break out of declining markets may have to be prepared to experiment and invest in radically different types of businesses. Such departures from the historical will not inevitably be disastrous. The Rank Organisation has, for example, benefited considerably from its investment in the xerography business. The in-house technology or technologies that the company has developed (often as a spin-off of its own R&D) which it is felt ought to be exploited. The evidence suggests, however, that such ‘technology push’ is by no means a recipe for commercial success. A specified minimum turnover figure below which the company feels that the business will be too small to be worth its while, generally because it will have little impact on total corporate growth and profitability. A ‘significant’ growth market, although the growth level or target may not be defined. The fact that too high a growth (and what this figure is likely to be may be undefined) may pose managerial and other difficulties is often ignored. A required minimum profitability. This can be defined as a target return on investment (which may be set higher than that required from traditional businesses to take account of the greater risk).” The facts that the risk of doing nothing may be higher, while nbd might offer significant future potential for corporate development, tend to be ignored. Moreover, much of the data employed in calculating future profitabilities in innovative business areas are speculative at best, and although this may be acknowledged it is apparently not fully appreciated and consequently is often disregarded.
Of course, organizational inertia will be a dominant factor that predetermines the selection of business areas. In general, it can be expected that the search will be along trajectories that are in some way continuations of what the company is already doing.13 Given the above background, it is reasonable to assume that in some way management will arrive at a set of opportunities from which, because of the scarcity of resources, it has to make choices. Rationality would suggest that this would be based on a thorough analysis that would indicate the benefits from pursuing the various options. There is clear evidence that many organizations employ formal investment appraisal techniques, such as payback and, more especially where the returns are some way in the future and spread over time, discounted cash flow. Pike found that DCF techniques gained in support relative to other methods of financial evaluation during the period 1975 to 1980, although payback remained the most popular evaluation technique, with 77% of the sample firms using it in 1980. l4 Overall, many firms use several techniques, with 37% employing two methods, 27% using three methods and 10% as many as four.
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New business developments are several steps removed from traditional investments where there is usually a sound experiential base upon which to establish a reasonable calculation of the risks. Although there is always a nagging general business uncertainty in the background, the total uncertainty about the outcomes of the non-innovative projects is unlikely to be as widespread or as profound. Where the risk is considered higher than normal, certain adaptations may be made to the application of these techniques. Pike found that three common approaches were: to reduce the payback period; to vary the required rate of return; and to employ sensitivity analysis. He noted that there had been an increase in the use of sensitivity analysis among his sample companies from 24% in 1975 to 36% in 1980.i5 In the case of innovative business ventures, the quality of the data employed in making estimates about their future is likely to be dubious. Moreover, it will often be some years before significant returns will be secured. For instance, Biggadike found that, for a sample of 68 new business ventures launched by 35 established US companies, it ‘was 10 to 12 years before the new ventures achieved annualized returns on investment comparable to those obtained by traditional investments.“j This has two consequences. First, with such long periods before ventures come to commercial fruition it can be expected that there might be a considerable divergence between the outcome and original estimates. This is reinforced by the findings of the study by Gold who concluded that for capital projects the evaluations may be subject to margins of error of at least 33% to 50%) even for project estimates covering only five years.” Secondly, discounting methods are biased against ventures with heavy investments in the early years and returns at some later date, as is the feature of innovative business investments, and would therefore appear somewhat unsuitable unless they are employed to compare only like with like, that is, innovative ventures with innovative ventures and not with traditional projects. Payback would have a similar bias. Yet the evidence suggests that the short term tends to be the norm.i8 It could be hypothesized that in the case of new business activities, many of the traditional investment appraisal techniques would not be rigorously applied; that where they are, considerable modifications will be made; and that much qualitative information will be employed. In view of the scarcity and speculative nature of much of the quantitative data, it would appear reasonable to assume that other information will be culled to supplement any quantitative estimates; that such quantitative estimates will be regarded as tentative, with provision made for re-estimates as additional information is forthcoming and the position clarifies; and that sensitivity analysis and contingency planning will be normal practices. Overall, decision making is likely to ensure the greatest flexibility in order to avoid becoming overcommitted to any one course of action for as long as possible. It was somewhat surprising to find from the 1983 survey that 21 of the 32 respondents believed that new business development should be singled out for a more rigorous application of financial evaluation techniques than more straightforward investments.lg These respondents also indicated that the results of the financial evaluations were taken seriously by top management who employed overall investment profitability as a key factor in the decision making process. FUTURES AptI11987
Profitability was likely to be interpreted narrowly, with the strategic importance and other spin-offs from the new business development activities apparently being disregarded. As can be seen from Table 3, traditional evaluation approaches tend to be followed, probably mainly because this is the way investment decisions are made in the organization generally. Companies may of course use these techniques as a means of seeking reinforcement for a decision that has in effect already been made. Kennedy and Sugden found that capital projects subjected to DCF are inevitably accepted, and thus may equally apply to innovative business ventures.” In fact, as King noted in the case of capital budgeting in general: The purpose of evaluation is to produce a case to convince top management that funds should be made available. During the course of this exercise those involved must convince themselves and in so doing become committed to the success of the project.*l Unpromising ventures may have been weeded out earlier and/or the data may have been orientated to give the desired result. The fact that empirical evidence indicates that the use of sophisticated capital budgeting techniques does not appear to result in superior market performance in itself implies that the apparent striving for economic rationality may be a disguise for more subtle and complex motives.** In practice, therefore, the rigorous application of such techniques may in some way be modified by behaviour suggesting an implicit-if not explicitrecognition of the considerable limitations of such procedures. Those managers proposing a new business area may employ information that yields an outcome that will win support from those responsible for approval who, because they are remote both from the business area and the evaluation process, will not be in a position to question seriously what is put before them. Such massaging of data may even be acknowledged by all parties involved in the evaluation ritual; but where it is, heavy reliance is usually placed on additional information, including the strategic importance of the new business area; the scope for future business development; its resemblance to existing business areas (always likely to be an important influence since management will feel more comfortable with what they already know); the availability of the necessary skilled personnel; and the company’s access to the requisite technology either in-house, via licensing, or through internal or external development (Table 4).
TABLE
3. FREQUENCY
OF USE OF THE MAIN TECHNIQUES
Financial technique Payback Return-on-investment Discounted cash flow analysis Technique employed not specified Net present value Internal rate of return None Total number responding
FINANCIAL
APPRAISAL
Number of companies 1983 survey 1985 survey 45 70 55
16 18 26
75
11 14 1 23
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Another important factor, but one often ignored, is the structure and intensity of the competition. The company must not only have a perceived competitive differential advantage, but also be able to sustain this over the period necessary to gain a sufficient return. There is a danger that competition may be underestimated (often it is assumed that there will be little if any reaction from with matters proceeding very much as before even established competitors, though the company intends to have a sufficient impact on the status quo to make this innovative excursion worthwhile); or that the competition may simply be Companies may also ignore possible hurdles to the completely ignored. abandonment of the venture should it fail to meet expectations. These barriers to exiting can be formidable and can include heavy financial and contractual commitments.23 Given that uncertainty dominates and thus that flexibility is the key, the need to avoid a large scale of operation at too early a stage is, inter ah, a useful guideline. Ultimately, though, the decision to proceed may rest heavily on confidence in the management team, and in particular on the commitment of the manager in charge of the venture. Confidence sufficient to proceed is likely to be enhanced if the venture manager has a track record of successful innovative venturing. Given the uncertainty surrounding the activity, this may not be in any way irrational. A further means of coping with the uncertainty at the evaluation stage is to carry out some form of sensitivity analysis which highlights the degree of uncertainty attached to the various assumptions, and the consequent range of possible consequences (Table 5). In our 1983 survey, 85% of those firms claim-
TABLE 4. EVALUATION CRITERIA Corporate fit
Technology
Production Product support Competition Demand
Personnel Exiting
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Compatibility with: established strategy corporate values and practices perceived strengths of company Familiarity with and/or availability of requisite technology If technology has to be obtained and/or developed/adapted, the cost of doing so Nature of technological competition The scope of the likely returns from developing the technology further Patenting/proprietary lead Existing use or knowledge of production technology Availability of production capacity Cost of plant and equipment The back-up service required Structure of competition Intensity of competition Permissible market share Extent, nature of (i.e. market segments) and growth (over the planning time period) of demand Price and change over planning period Likely volume to be achieved at these prices Marketing costs Availability of technical, production and marketing personnel with necessary skills Availability of enthusiastic and entrepreneurial management Capital investments, contractual commitments and so on that will impede ease of exit from the new business
164
Innovative business dedopmenl
ing to be involved with nbd stated that they performed sensitivity analysis. This compares with 65 7% in the 1985 survey. In the earlier survey cost factors tended to be more frequently tested, whereas in the later survey it was demand factors that were particularly dominant. Of course it is the latter that are subject to more uncertainty, whereas other variables such as capital costs are, comparatively, much more certain at the start. Overall, it is likely that the selection of specific ventures will rest on a small number of general factors. The more important are likely to be: the availability of high calibre personnel, and in particular of an entrepreneurial manager who has a sound record of ‘success’; the ease with which the technology can be secured and developed; and (where appropriate) the compatibility of the venture with the portfolio of new ventures. Finally, the urgency attached to commercializing a venture in order to capitalize optimally on the business opportunity in view of the impact of competition and the consequent erosion of any differential advantage will influence the decision on which ventures to proceed with, and when. Planning
and control
It seems reasonable to assume that resources would not be made available for the new venture without a formally prepared business plan. The empirical evidence suggests that many companies that are in some way involved with nbd will prepare a business plan for the new venture. For instance, from the 1985 survey it was found ihat 21 of the 23 companies prepared business plans. Moreover, conventional financial and production performance targets are established and traditional management accounting planning and control procedures are employed. This is despite the clear evidence that uncertainty makes accurate forecasting, and therefore traditional planning, problematical. Table 6, derived from evidence gained from study three, provides an indication of the procedures that nbds are formally required to follow. Much of this derives from the requirement that nbds follow the same pro-
TABLE
5. SENSITIVITY
Factor
Total cost Sales turnover Cost of finished goods Exchange rates Raw material costs Development costs Time schedules Market share Price Risk areas Process yields Project-specific factors Alternative material sources Cash flow timing
ANALYSIS Number of firms mentioning 1983 survey 1985 survey 15 12 9 7 5 4 4 3
6 9 2
1 4 1 1 1 1 1
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TABLE 6. BUDGET AND PLANNING
Horizon
Procedure Budget Plan
Total
number
HORIZONS
3-12 l-2 2-3 3-4 4-5 5-10 responding
months years years years years years
Frequency 20 2 6 7 1 20
cedures as their parent organization, yet the different nature of such ventures makes this inappropriate. Indeed, strict application of established procedures places entrepreneurism in a straitjacket; it may also serve to strangle it. In our first study, which examined the development of new business activities that had been separated organizationally from mainstream business activities, we pointed out the paradox of recognizing the need to nurture and protect embryonic innovative businesses while at the same time imposing on them the bureaucratic controls from which their organizational isolation was supposed to protect them. The variance between actual and budget is frequently so large as to become meaningless for tight control purposes and increasingly it would appear that flexibility and managerial discretion are being permitted. For example, in study three, 15 companies (out of 20 that provided information) reported that new business managers are often permitted to redistribute resources within the budget total they have been allocated. Given the dense uncertainty that exists during the early stages of any new business development, the approach to planning must be based more on establishing a series of targets in chronoSuch targets may be expressed in financial, technical and logical sequence. marketing terms. They are likely to be frequently reviewed as the venture evolves and, ‘where there are significant differences from those anticipated, future targets may be altered. Significant deviations will demand analyses of the explanations for the differences and the consequences for the viabilities of the ventures. A high degree ofjudgment based on the results of previous managerial heuristics is likely to be an important input, and it is significant that many of the respondents had introduced or were introducing frequent formal reviews of the venture against budget, with senior management at director level often participating in this exercise. Concluding
comments
The development of new businesses should be on the agenda of established companies that are concerned to freshen and revitalize their business portfolios in a rapidly changing competitive and socio-economic climate. The ability to improve on existing products in maturing or even declining markets is likely to be limited: eventually there will be diminishing marginal returns, and in many cases it may have been more appropriate to deploy resources elsewhere. Such innovative businesses may only be ‘new’ to the company, which may
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166
Innooatiut business &utlofmmt
gain entry through, for example, licensing or the acquisition of companies already operating in the area. The major issue is whether or not firms in developed countries such as the UK have the awareness, perspicacity and general propensity for risk-taking to take on the challenge of significant innovative adventures. It could be that the favoured tendency will be for the tried and familiar and, even where there are forceful pressures for radical departures, major new business development will not be warmly embraced. It may well be that the higher probability of successful business venturing lies in those attempts which have some common leitmotif with current businesses: effectiveness could well be the product of combining what is known with an element of the unknown. Success is also likely to come to those who adopt a strong marketing perspective. It is interesting that in their selection methodologies, firms placed strong emphasis on the manipulation of financial and accounting, rather than on market, information. Moreover, such data employed in the early stages of new business development are quite bluntly speculative. Perhaps this considerable time and effort is geared to quelling doubts and providing reinforcement for decisions that, at least unconsciously, may have already been made. The firm may feel that there is a technology ripe for exploitation, or there is an opportunity too good to be missed, or there is available a good candidate for takeover. Such pragmatism may of course be rationalized expost to give a picture of sound strategic management. Based on firm entrepreneurial instincts, this approach may well be as, if not more, effective than a well formulated formal strategyan issue that undoubtedly demands further investigation. Nevertheless, the means of management of the new business development exploration process may require improvement. In general, firms adopted a very restricted approach to the search for new businesses. This may reflect the limits to managerial resources; it may again indicate that commitment to a course has often been made, although the tendency to restrain the choice process would appear to lead to sub-optimal behaviour. The extent to which it does is worthy of systematic research. Obviously, the nature of new business development suggests non-traditional managerial approaches. Uncertainty about market and technological development quite clearly demands flexibility, while for companies anxious to promote innovative business development, a degree of experimentation has to be seen to be culturally acceptable. Planning is more likely to be more adaptive, with greater allowance for options and contingencies, while conventional means and measures of control may be unhelpful, and even undesirable, and may at least have to be supplemented and adjusted. Again, greater flexibility with more reliance on qualitative information is likely to be an important key factor in successful new business venturing. To what extent do managers recognize that these requisites of successful future new business development require different managerial philosophies and procedures, and more adaptable organizational systems? Are they, in fact, prepared to permit greater experimentation and flexibility?
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Innovativebusiness dcvrlopmen~
Notes
167
and references
Harvard Business Review, 58, July“New ventures for corporate growth”, 1. E. B. Roberts, August 1980, pages 134-142. “Policies for new business development” in V. 2. D. A. Littler and R. C. Sweeting, Hammond, editor, Cuncnt Research in Management (London, UK, Frances Pinter, 1985). Strategiesfor Lkclining Businesses (Lexington, MA, USA, Lexington Books, 3. K. R. Harrigan, 1980). Survey (Manchester, 4. D. A. Littler and R. C. Sweeting, New Business Development in the UK-A UK, UMIST Management Sciences, 1983). 5. Roberts, op tit, reference 1. “Strategic management of technology in BOC”, BOC Technology Magazine, 6. D. Chatterji, No. 3, November 1985. study. 7. The 1984-85 8. G. F. Hardymon et al, “When corporate venture capital doesn’t work”, Harvard Business Review, 61, May-June 1983. 9. Littler and Sweeting, op cif, reference 2. 10. Littler and Sweeting, op cif, reference 4; also D. A. Littler and R. C. Sweeting, “Business innovation in the UK”, R and D Managenznt, 14, (l), pages l-9. 1986. 11. C. Lorentz, “Takeovers: at best an each way bet”, Financial Times, 6 January 12. R. H. Pike, “Capital budgeting in the 198Os”, ICMA Occasional Paper 112, 1982. Research Policy, 13. R. R. Nelson and S. G. Winter, “I n search of useful theory of innovation”, 6, 1977, pages 36-76. 14. Pike, op cif, reference 12. 15. Pike, op tit, reference 12. “The risky business of diversification’ ’ , Harvard Business Review, 57, May16. R. Biggadike, June 1979, pages 103-111. California Management Review, 1976, 17. B. Gold, “The shaky foundations of capital budgeting”, pages 51-60. in private industrial research and development”, Journal of Industrial 18. K. Schott, “Investment Economics, 1976, pages 81-89. 19. Study two. and reality in capital budgeting”, Managmunf 20. J. A. Kennedy and K. F. Sugden, “Ritual Accounting, February 1986, pages 34-37. 21. P. King, “Strategic control of capital investment”, Journal of General Management, Autumn 1986, pages 17-28. 22. S. F. Hake, L. A. Gordon and G. E. Pinches, “Sophisticated capital budgeting selection techniques and firm performance”, Accounting Review, LX, (4), October 1985, page 651. 23. M. E. Porter, Competitive Strategy: Techniques for Analyzing Zndustries (New York, USA, Free Press, 1980).
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INNOVATIVE BUSINESS DEVELOPMENT Selection
and management
issues
D. A. Littler and R. C. Sweeting
A firm’s growth can be achieved by internal growth or by acquiring new businesses. This article examines the means management uses to assess potential new business acquisitions --financial and marketing factors, managerial instinct and questions whether in developed countries predilection -and like the UK firms have the corporate wisdom and the taste for risk required for innovative adventures in businesses new to the firm. Keywords:new business development; appraisal; sensitivity analysis; planning
CORPORATE DEVELOPMENT implies adaptations to and innovations in the firm’s portfolio of products and markets if it is to survive and grow in an environment that has been described as ‘turbulent’, ‘dynamic’ and ‘in a state of flux’. Overall, there are several routes that a lirm can pursue: it may develop organically through internal product development, the cultivation of new markets, efforts to increase market penetration, the development of new business through, for instance, internal venture management and so on.’ It may augment such organic development by external means such as acquisitions, mergers, joint ventures, licensing and franchising. The nature and relative merits of these different approaches have been discussed elsewhere.’ In this article, our focus is the development of businesses new to the firm, a means of corporate development that becomes especially important where there are significant movements in demographic, economic and technological forces that affect and even undermine some or all of the company’s existing business activities. The aim is to explore inside the black box of managerial approaches, to assess the procedures that have been attempted, and to arrive at conclusions on what are important issues and considerations. It may be that managerial
Dr D. A. Littler and Dr R. C. Sweeting are at the Department of Management Sciences, University of Manchester, Institute of Science and Technology, PO Box 88, Manchester M60 lQD, UK.
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00163287/87/02015513$o3.ooo
1987 Butterworth & Co(Publishers)
Ltd
heuristics has been the trusted approach. But expost there may be much that can be learned which in turn may provide prescriptions and proscriptions in this area. Empirical evidence employed in this discussion was obtained from a number of research investigations that have been performed by the authors over a period of some years, in particular: (1) a study of 14 companies in ‘mature’ market segments which were studied during the period 1980 to 1982; (2) a postal survey performed in 1983 of a sample of 300 of The Times Top 1000 companies, resulting in 88 replies; and (3) a survey of a purposive sample of 47 firms undertaken during the period Autumn 1984 to early 1985. This sample was selected from lists of those who had attended or indicated an interest in a series of meetings on new business development that were held at UMIST from 1981 to 1983. A total of 24 usable questionnaires were obtained, of which 23 stated that they had a continuing interest in new business development (nbd); the remaining one noted that although it had an interest in new business development, it had not at the time of responding developed an organizational structure for or embarked on any new ventures. Definitions
of new business
development
The first question is: what is meant by innovative business development? The interpretations of the various respondents differed significantly. Some regarded new product development as synonymous with nbd. For instance, one respondent suggested that for his company, nbd meant “new ideas/products which after development can be included in a divisional product range”. Such activities would however appear to be compatible with existing businesses (in that they can be handed over to existing divisions), whereas nbds are more likely to require separate divisions. At the extreme, new business activities are likely to involve the use of technologies new to the firm in order to reach new customer targets. The purpose must be to break away from traditional mainstream businesses which in the longer term can only yield at best diminishing marginal returns to effort, although in some cases, provided the end-game is played cleverly and the company has the requisite resources to do so, there can be significant yields.3 At the minimum, innovative businesses must be markedly different in several of the following: production methods, products, distribution channels, selling methods, customer types, and sources and types of inputs. Some definitions were more in line with our interpretation: “entry into a business arena other than one forming a normal extension of existing activities’ ’ , and “purposeful movement into new generic product or customer markets in accord with corporate strategy”, or, the more varied definition: “redeploying assets in non-strategic business areas to alternative areas; and diversifying into higher margin activities”. Overall, in study three, 11 out of the 23 companies defined nbd in terms of activities solely outside existing business activities. At first glance, this would appear to contrast vividly with our earlier survey (1983) when what were defined as new business developments tended in fact to be related to current business activities in technology (73 companies) and/or marketing to existing customers (71).4 Twenty-four firms noted that their nbds used the same feedstock as their
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traditional business areas. However, these firms may be sensibly risk of nbd by building on one or two areas with which they are may, for example, market new technology products to customers serve with their existing products. In general, it appeared that the some combination of new technology, new customers and new Table 1). Entering
innovative
business
reducing the familiar: they they already nbds involved products (see
activities
The evidence from the various surveys indicates quite clearly that external means of corporate development remain the preferred course, although organic development remains a popular alternative (see Table 2). Despite many reservations that can be made about acquisitions-in particular, the risk that those managers who have been an integral part of the success of the business may leave, and that a premium price may have to be paid for companies perceived as ‘successful’-in general, the respondents favoured acquisition of established companies because they have a track record. This option, then, is regarded as having a lower risk. Yet it is self-evident that the track record to date may not be a clear sign of future performance. There may be impending significant changes in the
TABLE 1. COMPONENTS OF NBD VENTURES SURVEY)
(1983
Number of companies Marketing to new customers Development of new products Development of new technology
74 (n = 77) 88 (n = 77) 80 (n = 76)
Note: Some companies had more than one new venture, and may have answered separately for each of several ventures.
TABLE
2. STRATEGIES
EMPLOYED
TO ENTER NEW BUSINESS Number 1983 study (n = 82)
a 19 out of 23 companies
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answered
of companies 1984-85 study (n = 23)a
65 33 43 31 19 17 7
Acquisition Internal venture development Licensing Joint ventures Venture capital nurturing Venture nurturing Venture spin-offs Other Distributorship Product development
AREAS
13 12 9 10 6 2 No data 1 1
this question.
acquired firm’s market and technologies which could, for example, adversely affect the business (and these in themselves may be a reason for its existing owners agreeing to sell); management may resign, as’ was previously mentioned, and this will have a high probability and more likely a greater impact in the case of innovative entrepreneurial companies. Acquisitions are often regarded as easy means of entry into new business areas; unfortunately the purchaser, through ignorance, may not be able to assess effectively the value and future viability of the company. The danger is that if the acquisition is made at the pinnacle of the purchased company’s performance, the purchaser may considerably underestimate the problems of either integrating the acquired company or managing it. Overcoming a mismatch of cultures can markedly delay the returns, or even result in failure. It is also paradoxical that it should be argued in some cases that acquisitions are preferred because they have a track record. Companies can be purchased because they are not realizing their full potential, which the acquiring company aims to unleash through investment and so on. It may aim to combine the acquired company with other businesses to produce a business of a range or critical mass that generates results far in excess of those that each could produce independently. Venture management and in particular internal venture development was a popular option. 5 This may be adopted because it seems to offer greater control, a view supported by some respondents. However, as can be seen from the comments of the President of BOC’s Technical Activities, internal venture management is not necessarily universally regarded as a first option: . . it is far too expensive aim to extend our current activities. If we decided to acquire it-after in-depth
to research yourself into a totally new type of business. We businesses into fields which are logical extensions of current move into a totally new business, we would be more likely to investigation of its technology and economic prospects.6
Corporate venture capital has not to date been employed by many UK companies. Of the six in study three who claimed to have used this approach, only two saw it as the most effective use of new business development, and four others were against this route. ’ Corporate venture capital may be seen as a that is, it enables the means of securing a ‘window’ on new technology, company to obtain an early acquaintance with an innovative technology and thereby to be in a better position to assess its possibilities for nbd. The main problem is the loss of control that is perceived to accompany this option, and evidence from the USA suggests that it may not be a very effective means of developing new businesses. ’ Increasingly, it is obvious also that the suppliers of venture capital are not for the most part prepared to adopt a hands-off approach to the management of the businesses in which they have a stake. Consequently the distinction between venture capital and venture nurturing (where investors supply not only finance but also managerial expertise) is becoming blurred, if not non-existent. Licensing is a popular means of entering new business activities and is seen as the costs and having a number of intrinsic merits. It is a low risk alternative: problems of researching and developing the technology will have been shouldered by others, while it will often have a proven record in the market.
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There may even be guidelines available on appropriate marketing policies to pursue. Of course, it may not be as profitable as internally developed ventures since there will be royalty and possibly other payments; there may be limitations to the use of the technology and there may be costs involved in adapting the technology to the specific requirements of the firm. It may also be undesirable to become overdependent on outsiders for new technology. Nevertheless, it is an attractive option particularly when used in concert with other approaches, such as where the licensed technology is used to fill a gap in the company’s technological base.g It may be employed to complement the company’s existing technology, or be purchased as a means of gaining knowledge in a foreign technological territory which the company has every intention of exploring further. Overall, licensing can be an extremely successful approach especially when employed with other means of corporate development.
Evaluation and selection of new business areas The means that companies employ to gain entry into innovative business activities may be determined partly by the business areas it has pre-selected: for instance, there may be an attractive company that can be acquired on reasonable terms in the new business area. There will be other considerations: the existing or potential competition in the chosen business area will affect the decision on whether or not acquisition will be preferred to organic development. At a higher level, corporate strategy, managerial preferences and the resources available for corporate development will be critical determinants. Such factors will often severely limit the scope of the search for innovative businesses, even if the costs and management time involved in open-ended extensive prospecting for new business opportunities were available. It is natural to impose restrictions on the search to avoid entering areas which are quite manifestly unsuitable because of the alien skills-required, the time span of development, the resources demanded and so on. Tfiere may also be a simpler explanation of why it seems reasonable to hypothesize that a large number of new business ideas are not generated: not only would this severely tax management’s ability to cope (how can one rationally appraise a large number of ideas?) but also they may simply not be there to generate. The evidence from our empirical studies suggests, however, not only that the search is not extensive, but also that for the most part a systematic search methodology is not employed. lo In addition to internal constraints, there may also be some powerful influences that can direct management’s attention to certain areas; popularity may be an important factor, as may be the decisions made by immediate competitors. In the latter case companies may feel that they are missing out on an important opportunity. The fact that the potential of the new business may not be sufficient to support profitably several competitors, such that only those companies with considerable strengths are likely to be overall gainers, suggests that circumspection may be more appropriate. Managerial explorations for new businesses, then, are highly likely to be focused. The set of pre-evaluation criteria that might be established and therefore act to narrow the search process might include one or m,ore of the following:
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l
l
l
l
l
Compatibility with existing business areas including the same or similar types of customers, technologies and distribution networks. The affinity with existing business may not be direct or obvious; for instance, it may be the compatibility of the management decisions or processes that is more relevant than industry or market relatedness.” Companies anxious to break out of declining markets may have to be prepared to experiment and invest in radically different types of businesses. Such departures from the historical will not inevitably be disastrous. The Rank Organisation has, for example, benefited considerably from its investment in the xerography business. The in-house technology or technologies that the company has developed (often as a spin-off of its own R&D) which it is felt ought to be exploited. The evidence suggests, however, that such ‘technology push’ is by no means a recipe for commercial success. A specified minimum turnover figure below which the company feels that the business will be too small to be worth its while, generally because it will have little impact on total corporate growth and profitability. A ‘significant’ growth market, although the growth level or target may not be defined. The fact that too high a growth (and what this figure is likely to be may be undefined) may pose managerial and other difficulties is often ignored. A required minimum profitability. This can be defined as a target return on investment (which may be set higher than that required from traditional businesses to take account of the greater risk).” The facts that the risk of doing nothing may be higher, while nbd might offer significant future potential for corporate development, tend to be ignored. Moreover, much of the data employed in calculating future profitabilities in innovative business areas are speculative at best, and although this may be acknowledged it is apparently not fully appreciated and consequently is often disregarded.
Of course, organizational inertia will be a dominant factor that predetermines the selection of business areas. In general, it can be expected that the search will be along trajectories that are in some way continuations of what the company is already doing.13 Given the above background, it is reasonable to assume that in some way management will arrive at a set of opportunities from which, because of the scarcity of resources, it has to make choices. Rationality would suggest that this would be based on a thorough analysis that would indicate the benefits from pursuing the various options. There is clear evidence that many organizations employ formal investment appraisal techniques, such as payback and, more especially where the returns are some way in the future and spread over time, discounted cash flow. Pike found that DCF techniques gained in support relative to other methods of financial evaluation during the period 1975 to 1980, although payback remained the most popular evaluation technique, with 77% of the sample firms using it in 1980. l4 Overall, many firms use several techniques, with 37% employing two methods, 27% using three methods and 10% as many as four.
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New business developments are several steps removed from traditional investments where there is usually a sound experiential base upon which to establish a reasonable calculation of the risks. Although there is always a nagging general business uncertainty in the background, the total uncertainty about the outcomes of the non-innovative projects is unlikely to be as widespread or as profound. Where the risk is considered higher than normal, certain adaptations may be made to the application of these techniques. Pike found that three common approaches were: to reduce the payback period; to vary the required rate of return; and to employ sensitivity analysis. He noted that there had been an increase in the use of sensitivity analysis among his sample companies from 24% in 1975 to 36% in 1980.i5 In the case of innovative business ventures, the quality of the data employed in making estimates about their future is likely to be dubious. Moreover, it will often be some years before significant returns will be secured. For instance, Biggadike found that, for a sample of 68 new business ventures launched by 35 established US companies, it ‘was 10 to 12 years before the new ventures achieved annualized returns on investment comparable to those obtained by traditional investments.“j This has two consequences. First, with such long periods before ventures come to commercial fruition it can be expected that there might be a considerable divergence between the outcome and original estimates. This is reinforced by the findings of the study by Gold who concluded that for capital projects the evaluations may be subject to margins of error of at least 33% to 50%) even for project estimates covering only five years.” Secondly, discounting methods are biased against ventures with heavy investments in the early years and returns at some later date, as is the feature of innovative business investments, and would therefore appear somewhat unsuitable unless they are employed to compare only like with like, that is, innovative ventures with innovative ventures and not with traditional projects. Payback would have a similar bias. Yet the evidence suggests that the short term tends to be the norm.i8 It could be hypothesized that in the case of new business activities, many of the traditional investment appraisal techniques would not be rigorously applied; that where they are, considerable modifications will be made; and that much qualitative information will be employed. In view of the scarcity and speculative nature of much of the quantitative data, it would appear reasonable to assume that other information will be culled to supplement any quantitative estimates; that such quantitative estimates will be regarded as tentative, with provision made for re-estimates as additional information is forthcoming and the position clarifies; and that sensitivity analysis and contingency planning will be normal practices. Overall, decision making is likely to ensure the greatest flexibility in order to avoid becoming overcommitted to any one course of action for as long as possible. It was somewhat surprising to find from the 1983 survey that 21 of the 32 respondents believed that new business development should be singled out for a more rigorous application of financial evaluation techniques than more straightforward investments.lg These respondents also indicated that the results of the financial evaluations were taken seriously by top management who employed overall investment profitability as a key factor in the decision making process. FUTURES AptI11987
Profitability was likely to be interpreted narrowly, with the strategic importance and other spin-offs from the new business development activities apparently being disregarded. As can be seen from Table 3, traditional evaluation approaches tend to be followed, probably mainly because this is the way investment decisions are made in the organization generally. Companies may of course use these techniques as a means of seeking reinforcement for a decision that has in effect already been made. Kennedy and Sugden found that capital projects subjected to DCF are inevitably accepted, and thus may equally apply to innovative business ventures.” In fact, as King noted in the case of capital budgeting in general: The purpose of evaluation is to produce a case to convince top management that funds should be made available. During the course of this exercise those involved must convince themselves and in so doing become committed to the success of the project.*l Unpromising ventures may have been weeded out earlier and/or the data may have been orientated to give the desired result. The fact that empirical evidence indicates that the use of sophisticated capital budgeting techniques does not appear to result in superior market performance in itself implies that the apparent striving for economic rationality may be a disguise for more subtle and complex motives.** In practice, therefore, the rigorous application of such techniques may in some way be modified by behaviour suggesting an implicit-if not explicitrecognition of the considerable limitations of such procedures. Those managers proposing a new business area may employ information that yields an outcome that will win support from those responsible for approval who, because they are remote both from the business area and the evaluation process, will not be in a position to question seriously what is put before them. Such massaging of data may even be acknowledged by all parties involved in the evaluation ritual; but where it is, heavy reliance is usually placed on additional information, including the strategic importance of the new business area; the scope for future business development; its resemblance to existing business areas (always likely to be an important influence since management will feel more comfortable with what they already know); the availability of the necessary skilled personnel; and the company’s access to the requisite technology either in-house, via licensing, or through internal or external development (Table 4).
TABLE
3. FREQUENCY
OF USE OF THE MAIN TECHNIQUES
Financial technique Payback Return-on-investment Discounted cash flow analysis Technique employed not specified Net present value Internal rate of return None Total number responding
FINANCIAL
APPRAISAL
Number of companies 1983 survey 1985 survey 45 70 55
16 18 26
75
11 14 1 23
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Another important factor, but one often ignored, is the structure and intensity of the competition. The company must not only have a perceived competitive differential advantage, but also be able to sustain this over the period necessary to gain a sufficient return. There is a danger that competition may be underestimated (often it is assumed that there will be little if any reaction from with matters proceeding very much as before even established competitors, though the company intends to have a sufficient impact on the status quo to make this innovative excursion worthwhile); or that the competition may simply be Companies may also ignore possible hurdles to the completely ignored. abandonment of the venture should it fail to meet expectations. These barriers to exiting can be formidable and can include heavy financial and contractual commitments.23 Given that uncertainty dominates and thus that flexibility is the key, the need to avoid a large scale of operation at too early a stage is, inter ah, a useful guideline. Ultimately, though, the decision to proceed may rest heavily on confidence in the management team, and in particular on the commitment of the manager in charge of the venture. Confidence sufficient to proceed is likely to be enhanced if the venture manager has a track record of successful innovative venturing. Given the uncertainty surrounding the activity, this may not be in any way irrational. A further means of coping with the uncertainty at the evaluation stage is to carry out some form of sensitivity analysis which highlights the degree of uncertainty attached to the various assumptions, and the consequent range of possible consequences (Table 5). In our 1983 survey, 85% of those firms claim-
TABLE 4. EVALUATION CRITERIA Corporate fit
Technology
Production Product support Competition Demand
Personnel Exiting
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Compatibility with: established strategy corporate values and practices perceived strengths of company Familiarity with and/or availability of requisite technology If technology has to be obtained and/or developed/adapted, the cost of doing so Nature of technological competition The scope of the likely returns from developing the technology further Patenting/proprietary lead Existing use or knowledge of production technology Availability of production capacity Cost of plant and equipment The back-up service required Structure of competition Intensity of competition Permissible market share Extent, nature of (i.e. market segments) and growth (over the planning time period) of demand Price and change over planning period Likely volume to be achieved at these prices Marketing costs Availability of technical, production and marketing personnel with necessary skills Availability of enthusiastic and entrepreneurial management Capital investments, contractual commitments and so on that will impede ease of exit from the new business
164
Innovative business dedopmenl
ing to be involved with nbd stated that they performed sensitivity analysis. This compares with 65 7% in the 1985 survey. In the earlier survey cost factors tended to be more frequently tested, whereas in the later survey it was demand factors that were particularly dominant. Of course it is the latter that are subject to more uncertainty, whereas other variables such as capital costs are, comparatively, much more certain at the start. Overall, it is likely that the selection of specific ventures will rest on a small number of general factors. The more important are likely to be: the availability of high calibre personnel, and in particular of an entrepreneurial manager who has a sound record of ‘success’; the ease with which the technology can be secured and developed; and (where appropriate) the compatibility of the venture with the portfolio of new ventures. Finally, the urgency attached to commercializing a venture in order to capitalize optimally on the business opportunity in view of the impact of competition and the consequent erosion of any differential advantage will influence the decision on which ventures to proceed with, and when. Planning
and control
It seems reasonable to assume that resources would not be made available for the new venture without a formally prepared business plan. The empirical evidence suggests that many companies that are in some way involved with nbd will prepare a business plan for the new venture. For instance, from the 1985 survey it was found ihat 21 of the 23 companies prepared business plans. Moreover, conventional financial and production performance targets are established and traditional management accounting planning and control procedures are employed. This is despite the clear evidence that uncertainty makes accurate forecasting, and therefore traditional planning, problematical. Table 6, derived from evidence gained from study three, provides an indication of the procedures that nbds are formally required to follow. Much of this derives from the requirement that nbds follow the same pro-
TABLE
5. SENSITIVITY
Factor
Total cost Sales turnover Cost of finished goods Exchange rates Raw material costs Development costs Time schedules Market share Price Risk areas Process yields Project-specific factors Alternative material sources Cash flow timing
ANALYSIS Number of firms mentioning 1983 survey 1985 survey 15 12 9 7 5 4 4 3
6 9 2
1 4 1 1 1 1 1
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TABLE 6. BUDGET AND PLANNING
Horizon
Procedure Budget Plan
Total
number
HORIZONS
3-12 l-2 2-3 3-4 4-5 5-10 responding
months years years years years years
Frequency 20 2 6 7 1 20
cedures as their parent organization, yet the different nature of such ventures makes this inappropriate. Indeed, strict application of established procedures places entrepreneurism in a straitjacket; it may also serve to strangle it. In our first study, which examined the development of new business activities that had been separated organizationally from mainstream business activities, we pointed out the paradox of recognizing the need to nurture and protect embryonic innovative businesses while at the same time imposing on them the bureaucratic controls from which their organizational isolation was supposed to protect them. The variance between actual and budget is frequently so large as to become meaningless for tight control purposes and increasingly it would appear that flexibility and managerial discretion are being permitted. For example, in study three, 15 companies (out of 20 that provided information) reported that new business managers are often permitted to redistribute resources within the budget total they have been allocated. Given the dense uncertainty that exists during the early stages of any new business development, the approach to planning must be based more on establishing a series of targets in chronoSuch targets may be expressed in financial, technical and logical sequence. marketing terms. They are likely to be frequently reviewed as the venture evolves and, ‘where there are significant differences from those anticipated, future targets may be altered. Significant deviations will demand analyses of the explanations for the differences and the consequences for the viabilities of the ventures. A high degree ofjudgment based on the results of previous managerial heuristics is likely to be an important input, and it is significant that many of the respondents had introduced or were introducing frequent formal reviews of the venture against budget, with senior management at director level often participating in this exercise. Concluding
comments
The development of new businesses should be on the agenda of established companies that are concerned to freshen and revitalize their business portfolios in a rapidly changing competitive and socio-economic climate. The ability to improve on existing products in maturing or even declining markets is likely to be limited: eventually there will be diminishing marginal returns, and in many cases it may have been more appropriate to deploy resources elsewhere. Such innovative businesses may only be ‘new’ to the company, which may
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166
Innooatiut business &utlofmmt
gain entry through, for example, licensing or the acquisition of companies already operating in the area. The major issue is whether or not firms in developed countries such as the UK have the awareness, perspicacity and general propensity for risk-taking to take on the challenge of significant innovative adventures. It could be that the favoured tendency will be for the tried and familiar and, even where there are forceful pressures for radical departures, major new business development will not be warmly embraced. It may well be that the higher probability of successful business venturing lies in those attempts which have some common leitmotif with current businesses: effectiveness could well be the product of combining what is known with an element of the unknown. Success is also likely to come to those who adopt a strong marketing perspective. It is interesting that in their selection methodologies, firms placed strong emphasis on the manipulation of financial and accounting, rather than on market, information. Moreover, such data employed in the early stages of new business development are quite bluntly speculative. Perhaps this considerable time and effort is geared to quelling doubts and providing reinforcement for decisions that, at least unconsciously, may have already been made. The firm may feel that there is a technology ripe for exploitation, or there is an opportunity too good to be missed, or there is available a good candidate for takeover. Such pragmatism may of course be rationalized expost to give a picture of sound strategic management. Based on firm entrepreneurial instincts, this approach may well be as, if not more, effective than a well formulated formal strategyan issue that undoubtedly demands further investigation. Nevertheless, the means of management of the new business development exploration process may require improvement. In general, firms adopted a very restricted approach to the search for new businesses. This may reflect the limits to managerial resources; it may again indicate that commitment to a course has often been made, although the tendency to restrain the choice process would appear to lead to sub-optimal behaviour. The extent to which it does is worthy of systematic research. Obviously, the nature of new business development suggests non-traditional managerial approaches. Uncertainty about market and technological development quite clearly demands flexibility, while for companies anxious to promote innovative business development, a degree of experimentation has to be seen to be culturally acceptable. Planning is more likely to be more adaptive, with greater allowance for options and contingencies, while conventional means and measures of control may be unhelpful, and even undesirable, and may at least have to be supplemented and adjusted. Again, greater flexibility with more reliance on qualitative information is likely to be an important key factor in successful new business venturing. To what extent do managers recognize that these requisites of successful future new business development require different managerial philosophies and procedures, and more adaptable organizational systems? Are they, in fact, prepared to permit greater experimentation and flexibility?
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Innovativebusiness dcvrlopmen~
Notes
167
and references
Harvard Business Review, 58, July“New ventures for corporate growth”, 1. E. B. Roberts, August 1980, pages 134-142. “Policies for new business development” in V. 2. D. A. Littler and R. C. Sweeting, Hammond, editor, Cuncnt Research in Management (London, UK, Frances Pinter, 1985). Strategiesfor Lkclining Businesses (Lexington, MA, USA, Lexington Books, 3. K. R. Harrigan, 1980). Survey (Manchester, 4. D. A. Littler and R. C. Sweeting, New Business Development in the UK-A UK, UMIST Management Sciences, 1983). 5. Roberts, op tit, reference 1. “Strategic management of technology in BOC”, BOC Technology Magazine, 6. D. Chatterji, No. 3, November 1985. study. 7. The 1984-85 8. G. F. Hardymon et al, “When corporate venture capital doesn’t work”, Harvard Business Review, 61, May-June 1983. 9. Littler and Sweeting, op cif, reference 2. 10. Littler and Sweeting, op cif, reference 4; also D. A. Littler and R. C. Sweeting, “Business innovation in the UK”, R and D Managenznt, 14, (l), pages l-9. 1986. 11. C. Lorentz, “Takeovers: at best an each way bet”, Financial Times, 6 January 12. R. H. Pike, “Capital budgeting in the 198Os”, ICMA Occasional Paper 112, 1982. Research Policy, 13. R. R. Nelson and S. G. Winter, “I n search of useful theory of innovation”, 6, 1977, pages 36-76. 14. Pike, op cif, reference 12. 15. Pike, op tit, reference 12. “The risky business of diversification’ ’ , Harvard Business Review, 57, May16. R. Biggadike, June 1979, pages 103-111. California Management Review, 1976, 17. B. Gold, “The shaky foundations of capital budgeting”, pages 51-60. in private industrial research and development”, Journal of Industrial 18. K. Schott, “Investment Economics, 1976, pages 81-89. 19. Study two. and reality in capital budgeting”, Managmunf 20. J. A. Kennedy and K. F. Sugden, “Ritual Accounting, February 1986, pages 34-37. 21. P. King, “Strategic control of capital investment”, Journal of General Management, Autumn 1986, pages 17-28. 22. S. F. Hake, L. A. Gordon and G. E. Pinches, “Sophisticated capital budgeting selection techniques and firm performance”, Accounting Review, LX, (4), October 1985, page 651. 23. M. E. Porter, Competitive Strategy: Techniques for Analyzing Zndustries (New York, USA, Free Press, 1980).
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