Corporate Venturing
Strategic Objectives Fitness Index
Corporate Venturing
Strategic Objectives Fitness Index Final Thesis
Rijksuniversiteit Groningen
Author: M.H. Kwik
Place: Amsterdam
Date: May 27
th2004
Student number: 1003534
Research done at: Philips Corporate Venturing Amstelplein 2
1070 MX Amsterdam First academic supervisor: Prof. Dr. J.J. van der Werf Second academic supervisor: Drs. M.M. Bergervoet
The author is responsible for the content of the thesis; all rights regarding this thesis are
reserved for the author.
Preface
This thesis lying in front of you concludes the almost five years that I spend at the Faculty of Business Administration, Rijksuniversiteit Groningen, in order to become a Master in Financial Value Management.
Completing my studies is an important milestone in my life as it marks the end of my relative carefree student life and the beginning of my professional career.
A strategic control system to track and review the progress of realisation of the strategic objectives of venturing investments is outlined in this thesis. Philips Corporate Venturing assists the five Product Divisions of Philips with investments in emergent technological companies. Strategic objectives have significant importance in the evaluation of investment proposals. There is however currently no monitoring system in place to track and review the progress of realisation of the strategic objectives of new venturing investments.
I have done the research and written the thesis at Philips Corporate Venturing in Amsterdam, the Netherlands. I would like to thank Rene Savelsberg and Wouter Jonk for this opportunity and for their valuable help, assistance and support along the way.
Next to my research I have assisted the Philips Corporate M&A team extensively in different projects. This maybe was as good a learning opportunity as writing this thesis. I would like to thank the entire M&A team for their support and for the opportunity to work with them.
My supervisors from the University, Drs. M.M. Bergervoet and especially Prof. Dr. J.J. van der Werf, deserve my thanks because they have added significant value helping me to structure the research and increase the academic value of my thesis.
Last but most important I would like to thank my family and especially my parents for their support and guidance. Life of a student is most of the times easy going but it is great when your family is there to support you when this is temporarily not the case.
I am confident that the strategic objectives fitness index (SOFI), which is outlined in this research, will prove to be a valuable tool for Philips.
Welcome to the SOFI!
Maarten Kwik
Amsterdam, May 2004
Executive summary
Philips Corporate Venturing is the Corporate Venture Capital (CVC) arm of Philips and assists the five Product Divisions (PDs) of Philips with investments in emergent technological companies. Strategic objectives have significant importance in the evaluation of investment proposals. There is however currently no monitoring system in place to track and review the progress of realisation of the strategic objectives of new venturing investments.
The research reason and knowledge demand is to develop a strategic control system that can be used to track and review the progress of realisation of the strategic objectives of venturing investments. The problem of the research has been formulated as follows:
Main objective of the research:
Design a strategic control system that will contribute in tracking and reviewing the progress of realisation of the strategic objectives of venturing investments.
Arising question of the research:
Which variables should be incorporated in the design of a strategic control system that will contribute in tracking and reviewing the progress of realisation of the strategic objectives of venturing investments?
First the context of the strategic control system is determined in this research by describing the characteristics of CVC and by outlining the specific Philips process. Then the content of the strategic control system is defined. The to-be-designed strategic control system is fine tuned during the research. The strategic control system is specifically designed for Philips Consumer Electronics (PCE).
Four investment models of CVC investments can be distinguished combining an assessment of the company’s corporate objective and the degree of linkage between the company and the start-up receiving funding. The used investment model affects the value and design of a strategic control system.
The investment model of all new Philips venturing investments can be characterized as driving investments because they are aimed to advance the strategy of the current business.
Driving investments are characterized by a strategic rationale and tight links between a start- up and the operations of the investing company.
The three main reasons for a strategic control system are coordination and precision, motivation and management intervention. The investment model of Philips implies that a strategic control system can have value for Philips but that it should not be tightly administered. This means that there should not be a tight link between the achievement of the strategic objectives and the personal incentives and that management should be prepared to change the objectives.
The designed strategic control system could be linked with the current Business Balanced Scorecards (BBS) that are in place in the different PDs. Big advantage of such a linkage is that the implementation can be executed fast and that the system can be part of the overall measurement of the performance of the PDs.
The outcome of the designed strategic control system to track and review the progress of
realisation of strategic objectives should be a key performance indicator (KPI) because the
different BBS’s use KPI’s.
Different variables for the design of the strategic control system are identified analysing an internal and external case. These variables are tested with a panel of 20 relevant Corporate Venture Capital departments.
The strategic control system is designed using an adapted conceptual model linking quality strategy and strategic control practices to organisational performance. The outcome of the model is a KPI that can be implemented in the PCE BBS. Elements of the model are quality strategic objectives, implementation, external monitoring, internal monitoring and the outcome. The outcome is the KPI strategic objectives fitness index or SOFI.
The strategic objectives that are relevant for Philips have been included on a fixed list from which the strategic objectives of an investment are chosen. The frequency of monitoring should be dependent on the importance of the investment but at least one time per month.
Prerequisite for using the model is that it should be easy to measure and specify the strategic objectives.
A red flag system is used because the value of such a system is that top management attention can be raised for specific milestones. This can contribute significantly in assisting top management in determining when and how to intervene in the investments.
The SOFI fits excellent in the learning and growth perspective, which is the competence perspective in the Philips BBS. The priorities to create a climate that supports organisational change, innovation and growth are described in this perspective. The main strategic objectives of venturing investments directly contribute in creating such a climate. The SOFI should be implemented in the competence perspective of the PCE BBS.
A drawback of implementing the SOFI in the competence perspective of the PCE BBS is that the weight of this perspective is limited. It is therefore important that top management is involved in the implementation of the system and in communicating the importance of the tool towards the employees.
Eight reasons of transformation failure have been identified in this research but the majority of these reasons have not yet been prevented by the actions taken during and after the research. The SOFI is not yet implemented.
The practical value of the designed strategic control system is that it contributes in tracking and reviewing the progress of realisation of strategic objectives of venturing investments and that it will assist top management to determine when and how to intervene in the entities that are reporting to them. Next to that will the strategic control system align, commit and motivate employees to realize the determined strategic objectives.
The academic value is that the designed strategic control system will contribute in a better understanding of the possibilities to combine the used models for the design of a strategic control system for venturing investments. The research also contributes to a better understanding of the impact on the used investment model of a CVC department on the value of a strategic control system.
The research is applicable because the research is reliable and relevant. The designed strategic
control system fits with the knowledge demand of the research and the research is precise and
consistent.
Table of Contents
1 Introduction ...9
1.1 Chapter overview ...9
1.2 Royal Philips Electronics ...9
1.3 Research reasons... 11
1.4 Applicability and structure of the research...13
1.5 Research Stakeholders...15
1.6 Conclusion...15
2 Research Design...16
2.1 Chapter overview ...16
2.2 Problem diagnosis ...16
2.3 Problem formulation ...16
2.3.1 Main objective of the research... 17
2.3.2 Arising question ... 17
2.3.3 Prerequisites ...17
2.4 Research model... 18
2.5 Conceptual model ...19
2.6 Sub Questions ... 20
2.7 Methodological Approach ...21
2.7.1 Research Type...21
2.7.2 Collecting and Processing ... 22
2.8 Conclusion...23
3 Corporate Venture Capital ...24
3.1 Chapter overview ...24
3.2 Description Venture Capital ...24
3.3 Description Corporate Venture Capital ...25
3.3.1 Definition ...25
3.3.2 Objectives ... 26
3.4 Historic perspective...28
3.5 Investment models ... 29
3.5.1 Driving investments...29
3.5.2 Enabling investments...30
3.5.3 Emergent investments ...30
3.5.4 Passive investments ...30
3.6 Investment structure ... 31
3.7 Exit possibilities...31
3.8 Conclusion...32
4 Philips Corporate Venturing...33
4.1 Chapter overview ...33
4.2 General information ... 33
4.3 Portfolio companies and new investments ...34
4.4 PCV Process Flowchart...35
4.5 PCV Process Outline...36
4.6 Impact on strategic control system... 40
4.7 Conclusion...40
5 Initial Design Idea... 41
5.1 Chapter overview ...41
5.2 Strategic control system specification...41
5.3 Reasons for strategic control system...42
5.4 Value of strategic control system... 44
5.5 Balanced Scorecard...46
5.6 Fit strategic control system with BBS...49
5.7 Impact on strategic control system... 49
5.8 Conclusion...50
6 Cases strategic control systems ...51
6.1 Chapter overview ...51
6.2 Hewlett-Packard...53
6.3 Impact on strategic control system... 55
6.4 Conclusion...56
7 Testing Initial Variables ...57
7.1 Chapter overview ...57
7.2 Initial identified variables...57
7.3 Testing Objective and structure ... 58
7.4 Respondents of the test...60
7.5 Outcomes of the test... 60
7.6 Impact on strategic control system... 61
7.7 Conclusion...61
8 Final Framework ...62
8.1 Chapter overview ...62
8.2 Design of the strategic control system ... 62
8.3 Quality Strategic objectives ...64
8.4 Implementation ... 65
8.5 Monitoring...68
8.6 Realisation ...68
8.7 Conclusion...71
9 Implementation... 73
9.1 Chapter overview ...73
9.2 Chosen perspective ...73
9.3 Impact Taken actions ... 74
9.3.1 During research ... 74
9.3.2 After research... 75
9.4 Prevention of failure reasons ... 75
9.5 Conclusion...76
10 Conclusion and recommendations...77
10.1 Chapter overview ...77
10.2 Value of the research...77
10.2.1 Practical value ... 77
10.2.2 Academic value ...78
10.3 Limitations of the research ...79
10.4 Applicability of the research...79
10.4.1 Relevance of the research ...79
10.4.2 Reliability of the research...80
10.5 Recommendations of the research ... 81
10.6 Role of the researcher... 81
10.7 Conclusion...82
List of abbreviations... 83
Nomenclature ...84
References...85
Appendix A: List of tables...87
Appendix B: List of figures ... 88
2 Introduction
2.1 Chapter overview
Royal Philips Electronics is shortly described in this chapter and the organisation scheme of Philips is illustrated to provide the reader with a better understanding of the organisation in which the research has taken place. The research reasons are described and the factors that influence the applicability of the research are discussed. The structure of the research is outlined because this will clarify the sequence in which the research has been conducted. The chapter is concluded with an analysis of the different Philips stakeholders involved in the research.
2.2 Royal Philips Electronics
The foundations for what has become one of the world's biggest electronics companies were laid in 1891 when Gerard Philips established a company in Eindhoven, the Netherlands, to 'manufacture incandescent lamps and other electrical products'
Royal Philips Electronics today is one of the world’s largest electronics companies and Europe’s largest with sales of EUR 30 billion in 2003. It is a global leader in colour television sets, lighting, electric shavers, medical diagnostic imaging and patient monitoring. Philips has around 160,000 employees in more than 60 countries.
Philips has five relatively independent Product Divisions (PDs) namely, Consumer Electronics (CE), Medical Systems (MS), Semiconductors (SC), Domestic Appliances and Personal Care (DAP) and Lighting. The organisation scheme of Philips is illustrated in the below figure:
Figure 2-1 Organisation chart Philips Electronics Supervisory Board
Board of Management
Group management committee
Product divisions
Other Businesses
Regions Corporate
staff services Corporate
research Medical systems
Consumer electronics
Lighting
Semiconductors
Domestic Appliances
Corporate M&A
Corporate Venturing
The different PDs consist of Business Groups (BG), which are responsible for a range of products.
The Philips supervisory board is the board of directors that represents the stakeholders in the governance of the company. The Supervisory Board supervises the policies of the Board of Management (BoM) and the general course of business, advises the BoM and has to approve major decisions including appointment of BoM members.
The Board of Management (BoM) manages Philips, under supervision of the Supervisory Board and consists of four members with Mr. Kleisterlee as chairman. The BoM is collectively entrusted with the management of Philips and the general direction and strategy of the Philips group as a whole. The BoM is supported in carrying out corporate functions and managing its core processes by the corporate staff services.
The most important groups for my research are Corporate Mergers and Acquisitions (M&A) and Corporate Venturing. Corporate M&A is one of the corporate staff services and is located in Amsterdam at the global headquarters of Philips. Mission of Corporate M&A is to be the center of excellence within the Philips organisation in M&A processes in order to create shareholder value.
Philips Corporate Venturing (PCV) is the Corporate Venture Capital (CVC) arm of Philips Electronics and is a separate entity within the Philips Corporate M&A department. PCV is an internal service organisation that assists the Philips PDs with investments in emerging technological companies and monitors the holdings on behalf of the Philips Board of Management (BoM) and PDs.
The mission of PCV is to augment partnerships between Philips PDs and emerging technological companies with an (potential) equity component thus creating strategically viable and financially sound minority holdings.
M&A is responsible for shareholdings of more than 50%, divestments and acquisitions. PCV
is responsible for minority stakes of less than 20%. The leading department for a deal will be
determined on a case-by-case basis for investments ranging from 20% to 50%.
2.3 Research reasons
PCV is the Corporate Venture Capital arm of Philips and assists the five Product Divisions of Philips with investments in emergent technological companies as is previously mentioned.
Strategic objectives have significant importance in the evaluation of investment proposals.
There is however currently no monitoring system in place to track and review the progress of realisation of the strategic objectives of new venturing investments.
An analysis of developments in the pharmaceutical industry has indicated that the importance of strategic linkages for pharmaceutical companies has increased during the past ten years.
Number of alliances and the total value of R&D outsourcing activities clearly grew in this period. Merck, Johnson & Johnson and Novo Nordisk are examples of pharmaceutical companies that have publicly stated that strategic linkages have significant importance in their overall business strategy.
Strategic linkages activities are for example Mergers and Acquisitions, Licenses, Joint Ventures, Alliances, Outsourcing and Corporate Venture Capital (CVC). There are indications that the importance of strategic linkages for Consumer Electronics (CE) companies has increased as well during the past ten years.
The developments in the key areas of the value chains of CE and pharmaceutical companies have been compared. This analysis can be found in the appendix of this research. These developments give an indication of the drivers of the increased importance of strategic linkages.
Marketing & sales (M&S) and research & development (R&D) are key areas in the value chain of pharmaceutical companies. M&S is a key area because it is important to earn as much as possible from the few treatments that are introduced each year in this competitive industry. Increasing the number of patients that requests a certain treatment at the attending physician is also important. R&D is key as this industry is fundamentally R&D driven which is illustrated by the fact that more than 10% of total turnover is invested in R&D. Total costs for the development of a new treatment are around USD 800 million.
The key areas in the value chain of CE companies are also M&S and R&D. M&S is a key area because it is important to earn as much as possible from new CE products that arrive in this competitive industry before competition intensifies for the products. CE companies are also R&D driven because companies are continuous looking for new products that can improve baseline profits.
M&S costs have significantly increased as a result of a substantial shorter market exclusivity period in the value chain of CE companies. The entire product lifecycle of CE products has shortened as well in this period. The number of CE competitors has increased and is still increasing due to the digitalisation of the CE industry. The shorter market exclusivity period is illustrated by high price erosion and equal shelf share distribution for new CE products within a few years after market introduction.
PCE focuses its resources on a number of selected product categories. R&D capabilities will also be limited to these product categories as a result.
The dynamics in the value chain of CE companies are comparable with the developments in
the value chain of pharmaceutical companies as the market exclusivity period has
significantly decreased during the past ten years and because control of R&D costs is
important. This indicates that strategic linkages have become more important for CE
companies. The importance of CVC has thus also increased in this period.
The main objectives of these strategic linkages can be divided in strategic and financial objectives. Philips Corporate Venturing (PCV) is a strategic linkage activity and strategic objectives are important in the evaluation of investment proposals. Currently no strategic control system is in place that can be used to track and review the progress of the realisation of the strategic objectives of new investments.
Literature advocates the establishment of some system of strategic controls to monitor strategic progress and ensure the implementation of strategic plans. Three reasons for establishing such a control systems have been identified
1.
The first reason is that it is a fundamental task for a large organisation to coordinate the efforts of all its employees and in particular to align managers from different levels in the corporate hierarchy on the plans and strategies that will guide decisions and actions.
Necessary condition for such an alignment is that agreement is sought on the objectives in all parts of the organisation. The objectives should be precise and measurable in order to prevent that plans will lack substance and specificity. The establishment of control objectives is an essential step in the planning process.
The second reason is that the different involved managers must be personally motivated to seek the objectives that have been agreed.
The final reason is that even the best plans will sometimes fail and management must then decide when and how to intervene, either by agreeing to altered goals, pressing for new plans or changing the responsible management. Control system prompts such action.
Many writers on business strategy have argued that control objectives set primarily in terms of short-term financial controls are insufficient. This is illustrated in the following table
2:
Author Focus on short term financial objectives can…
Donaldson & Lorsch (1983)
Not take into account the inherent incompatibility between the time required to bring about fundamental strategic change and the customary financial planning cycles.
Roush & Ball (1980) Lead to a misdirection of effort.
Hayes & Abernathy (1980) Nurture an environment in which no-one feels that they can afford the slightest drop in the bottom line.
Table 2-1 Focus on short term financial objectives
Case studies have identified three principal reasons firms are adopting non-financial measures. Companies believed that there are limitations in traditional accounting-based measures. Many firms also experienced a perceived shock to their operating environments that motivated management to find new ways of managing, measuring and controlling operations. Final reason was that companies adopted non-financial measures because of an outgrowth of improvement initiatives that required new performance indicators
3.
Research reason and knowledge demand is to develop a strategic control system (SCS) that can be used to track and review the progress of the realisation of strategic objectives of venturing investments.
Such a strategic control system will have value to Philips in two different ways. The value for the different PDs will be that a tool will be in place that can be used to track and review the progress of the realisation of the strategic objectives of an investment.
1 Goold & Quinn, The paradox of strategic controls, 1990, page 43
2 Goold & Quinn, The paradox of strategic controls, 1990, page 44
3 Ittner & Larcker, Innovations in performance management, 1998, page 217
The value of the strategic control system for PCV is that the department can offer the different PDs a valuable tool. With this tool PCV will be able to better assist the Philips PDs with investments in emergent technological companies. This will contribute in the realisation of PCV’s mission.
Progress of realisation of the strategic objectives of a venturing investment can be quantified using the strategic control system. PCV can use the quantified progress of the realisation of the strategic objectives of a venturing investment to show the value of venturing investments to the management of the different PDs.
2.4 Applicability and structure of the research
Research is applicable when the research is relevant and reliable. The relevance component means that the outcome of the research meets the knowledge demand. The reliability component means that the research is precise and consistent
4. The research will be applicable if the strategic control system can indeed be used to track and review the progress of the realisation of strategic objectives of venturing investments.
The structure of the research can be divided in the phases Diagnosis, Design and Implementation
5. These different stages will now be shortly discussed.
The research domain is determined and defined in the Diagnosis stage. The research reasons are analysed in this stage and the different Philips stakeholders in the research are determined.
The main problem is used as input for the formulation of the Main Goal of the research.
Approach of the research is described in the Methodological Approach.
The chapter Corporate Venture Capital provides a better insight what CVC is and the Philips process and mission is described in chapter Philips Corporate Venturing. These three chapters combined are the diagnosis phase of the research.
Specification, design and realisation are the three main components of the Design stage
6. Specification of the strategic control system is the necessary functionality of the strategic control system and this is evaluated in the chapter Initial Design Idea in which also applicable concepts are described.
Existing applicable practical knowledge from inside and outside Philips is outlined in the chapter Cases Strategic Control Systems. The strategic control systems from different companies are reviewed.
The initial variables for the design for the strategic control system that are identified in the chapter Cases Strategic Control Systems are tested with a panel of around 20 relevant European CVC departments.
Final Framework chapter outlines the final framework of the strategic control system.
Knowledge gathered in previous chapters will be used in this framework. In this chapter the final framework will be tested and adapted within Philips. This is the realisation component of the design phase.
In the chapter Implementation is described how support from the PDs and more specific PCE can be ensured to implement the system.
4 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 22
5 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 180
6 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 194
Finally the conclusion of the research and recommendations are described. Restrictions of the research and the academic relevance are outlined. Also recommendations for further research are described.
The following figure illustrates the previously described structure of the research:
Figure 2-2 Structure of the research Chapter 1: Introduction
Diagnosis Chapter 2: Research Design
Chapter 3: Corporate Venture Capital Chapter 4: Philips Corporate Venturing
Design Chapter 5: Initial Design Idea
Chapter 6: Cases strategic control systems Chapter 7: Testing initial variables Chapter 8: Final Framework
Implementation Chapter 9: Implementation
Chapter 10: Conclusion and recommendations
2.5 Research Stakeholders
It is important to assess who the Philips stakeholders are of the research in order to solve the problem effectively. Only financial objectives of new Philips venturing investments are currently monitored through normal periodical profit and loss statements. Strategic rationale and thus objectives of investments are however crucial when an investment is considered.
Currently no strategic control system is in place to track and review the progress of the realisation of the strategic objectives of a venturing investment both within PCE and within the PCV department. The financial objectives are however closely monitored.
The lack of such a strategic control system is not perceived to be a problem in PCE but PCE can be considered as a stakeholder of the research as the strategic control system will contribute in getting a better understanding of the progress of the realisation of the strategic objectives. Financial top management of PCE currently monitors the financial objectives of an investment.
PCV can also be considered as a stakeholder because PCV will be able to assist the Philips PDs better with investments in emergent technological companies using this tool. The tool will contribute in realising PCV’s mission.
The Board of Management is also a stakeholder as they are responsible for the overall performance of the company and accountable for the realisation for the objectives that are determined. Research can also assist the BoM in determining the direction of PCV.
Other PDs are also stakeholders because the strategic control system that is designed in this research can also have significant value for them.
The progress of realisation of the strategic objectives of a venturing investment is quantifiable with the strategic control system. PCV can use the quantified progress of realisation of the strategic objectives of a venturing investment to show the value of venturing investments to the management of the different PDs.
Next to the Philips stakeholders the University can be seen as a stakeholder. The research will contribute to the existing knowledge on strategic control systems.
2.6 Conclusion
PCV is the Corporate Venture Capital arm of Philips Electronics and is a separate entity within Corporate M&A. The research reason and knowledge demand is to develop a strategic control system to track and review the progress of realisation of the strategic objectives of venturing investments.
The structure of the research is divided in the components Diagnosis, Design and Implementation. The different chapters of the research have been divided in these three steps.
PCE, PCV, BoM and other PDs can be considered as a stakeholder of the research.
3 Research Design
3.1 Chapter overview
The research design is outlined in this chapter and the main research problem is diagnosed.
Problem of the research is formulated in order to define the objective of the research clearly and accurately. The research model, conceptual model and the sub-questions of the research are described in order to clarify my approach towards the problem. Finally the methodological approach of the research is defined evaluating research type and the collecting and processing of data.
3.2 Problem diagnosis
Strategic objectives have significant importance in the evaluation of new investment proposals and the request for approval for a new investment that has to be approved by the BoM. Currently no strategic control system is in place, as is previously mentioned, that can be used to track and review the progress of realisation of the strategic objectives of new investments.
Many writers on business strategy have argued that control objectives set primarily in terms of short-term financial controls are insufficient. Next to that several authors mention different values of a strategic control system.
The design of a strategic control system to track and review the progress of realisation of the strategic objectives will have value for different stakeholders within Philips and outside Philips.
3.3 Problem formulation
The problem formulation is used to define the objective of the research clearly and accurately using the methodology of de Leeuw
7. This methodology consists of three different components:
1. Main objective of the research 2. Arising question
3. Prerequisites
According to de Leeuw several demands have to be met when the problem is formulated.
Content of the problem formulation should be relevant and it should be feasible to research the different sub-questions. Every component of the problem formulation should lead to realising the main goal of the research.
The research aims to develop a strategic control system to track and review the progress of realisation of the strategic objectives of venturing investments.
7 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 81
3.3.1 Main objective of the research
Design a strategic control system that will contribute in tracking and reviewing the progress of realisation of the strategic objectives of venturing investments.
3.3.2 Arising question
Which variables should be incorporated in the design of a strategic control system that will contribute in tracking and reviewing the progress of realisation of the strategic objectives of venturing investments?
3.3.3 Prerequisites
Prerequisites with regard to the result and prerequisites with regard to the research can be distinguished
8.
Identified prerequisites with regard to the result:
• Strategic control system will be dedicated for the realisation of the strategic objectives of an investment.
• Strategic control system should be adaptable on a case-by-case basis for each separate investment.
• Final version of the strategic control system will be confidential and cannot be disclosed.
• Information used in the research regarding E-Ink and R&D activities of PCE cannot be disclosed.
• Result of the research needs to meet the demands of the Rijksuniversiteit Groningen and more specific the demands of the Faculty of Business Administration.
Identified prerequisites with regard to the research:
• Customer of the research is Philips Corporate Venturing.
• Research will take place in the period September 2003 until May 2004.
• The university supervisors will be Prof. Dr. J.J. van der Werf and Drs. M.M.
Bergervoet.
• Company supervisors are Ir. Wouter Jonk, Director Venturing and Ir. Rene Savelsberg, Vice-President Venturing.
8 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 213
3.4 Research model
The research process is illustrated in the following research model:
Figure 3-1 Research process
First the context of the strategic control system is determined by describing the characteristics of corporate venture capital and by outlining the specific Philips process. This will contribute in getting a better understanding of the need of a strategic control system and the characteristics of the activities.
Then the content of the strategic control system is defined. The to-be-designed strategic control system is fine tuned during the research. First issues from theory concerning strategic control systems are discussed. Then practical issues are described to further focus the scope of the system. The initial design variables of the strategic control system are tested with a panel of relevant CVC departments. The final framework is designed taking the results of test into account and tested and if necessary adapted within Philips. The decreasing scope of the research is illustrated in the discussed model by the narrowing model width.
CVC Context PCV
SCS
Content SCS Initial Design Idea
Final Framework Initial Design
Cases SCS
Testing
Testing
3.5 Conceptual model
The conceptual model using theories from Chesbrough, Goold & Quinn and Ittner & Larcker is illustrated hereafter
9:
Figure 3-2 Conceptual model
The factors that have an effect on the value of the strategic control system and the characterizing factors of the investment type that is used by a company are situated outside the model for the design of the strategic control system. Outlining and considering these factors in the design will enhance the appropriability of the strategic control system.
The strategic control system consists of quality strategy, implementation and internal and external monitoring. The model will be dedicated for tracking and reviewing the progress of realisation of the strategic objectives and will be adaptable on a case-by-case basis. These issues are both important prerequisites in the research.
The outcome of the model is a key performance indicator that can be implemented in the business balanced scorecard of the different PDs.
9 Goold & Quinn, The paradox of strategic controls, 1990, page 55
Chesbrough, Making Sense of Corporate Venture Capital, March 2002, page 95
Ittner & Larcker, Quality strategy, strategic control systems and organisational performance, 1997, page 295
Quality
Strategy Implementation
External Monitoring
Internal Monitoring
Balanced Scorecard Strategic Control System
Link to Operational Capability Ability to specify and
measure strategic objectives
Environmental Turbulence Corporate Venture
Capital
3.6 Sub Questions
The arising question of the research is, which variables should be incorporated in the design of a strategic control system that will contribute in tracking and reviewing the progress of realisation of the strategic objectives of venturing investments, as is previously mentioned.
The following sub-questions will be answered in order to answer the discussed arising question:
1. What is Corporate Venture Capital?
This question is answered in order to provide the reader with knowledge of the definition of Corporate Venture Capital, some historic perspective, and describe the different investment stages, models and structures.
2. What is the structure of Philips’ venturing process?
Structure of the Philips’ venturing process is analysed as this process has a significant influence on the design of the strategic control system to track and review the progress of realisation of the strategic objectives of venturing investments.
3. Which issues arise in theory concerning the design of a strategic control system?
Literature on strategic control systems will be outlined, as this can be valuable in the design of a strategic control system.
4. Which issues arise in practice concerning the design of a strategic control system?
Existing applicable knowledge from inside and outside Philips is outlined and this knowledge is used in the design of an initial design of the strategic control system.
5. What is opinion of the CVC community towards the initial variables for the design of the strategic control system?
The initial variables for the design will be tested with a panel of around 20 relevant European CVC departments.
6. What should be changed in the final strategic control system as a result of the testing?
The strategic control system that is designed will be tested inside Philips and if necessary adapted.
7. How can the support of the PDs be ensured to use the strategic control system in venturing investment?
Answering this sub question should substantially increase the probability of a
successful implementation of the strategic control system.
3.7 Methodological Approach
The used research type will be defined and the collection and editing of the data is discussed in this paragraph. Collection and processing of data will be described analysing information sources, measurement and observing techniques and ways of processing and reporting the information
10.
3.7.1 Research Type
Main research objective will be reached using a combination of desk research and field research.
First of all relevant internal documents and electronic databases will be used to search for relevant theories and concepts that can contribute in the design of a framework for the strategic control system for the strategic objectives of a venturing investment. Desk research is also used to determine reasons to use a strategic control system and to determine value of such a system for Philips.
The field research will be an important part of this research as it is used to gather both internal and external best practises on the monitoring of strategic objectives of a venturing investment.
Case study is used in this research analysing an internal and external case of strategic control systems. Relevant variables for the design of the strategic control system to track and review the progress of realisation of the strategic objectives of venturing investments are identified with the case analysis.
The described internal case has been selected because it is a current and high profile venturing investment that has some interesting strategic objectives. The outside case has been selected on basis of availability and because strategic objectives are crucial for this company in the evaluation of investment proposals.
Variables for the design of the strategic control system are further analysed using desk research. Relevant variables for the design of the strategic control system that are identified in the case study and desk research will be incorporated in the framework for the strategic control system.
10 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 89
3.7.2 Collecting and Processing
Primary and secondary sources of information will be used in this research. Primary sources of information are sources of information that have been specifically generated for the research and secondary sources of information are information sources that have already been analysed and documented. Most sources of information that are used in this research can be defined as secondary sources.
Secondary sources of information that are used include relevant theories and concepts.
Relevant theories and concepts are gathered from the (Electronic) Libraries of the Rijksuniversiteit Groningen, Copenhagen Business School and the University of Amsterdam.
Theories and concepts are used in the research design, during the diagnosis and in the design component.
Case studies are another secondary source of information that is used. These case studies will be used to determine relevant variables for the design of the strategic control system. Reports from inside and outside Philips will be used in the research as a source of information.
The measurement and observation techniques that are being used include registering and measuring with incentives. Registering is defined as looking at developments that will continue without the information need of the research. This is also called measuring without incentives. Measuring with incentives adds an incentive and then observes the result
11. The incentive in an interview is for example the interview question.
The outcome of measuring will always be an empirical statement for which reliability, validity, accuracy and appropriability are demands for quality
12. Registering will be used in this research and more specific analysing documents, analysing research reports and observation, which are the most important forms of registering
13.
PCV documents and outside research reports will be used in order to gain a better insight in venturing, Philips venturing investments and strategic control systems for strategic objectives of investments.
Tools for processing of the information that will be used in this research include trying to put the information in schemes and thoroughly think about the information that is gathered and the information that is still missing.
11 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 107
12 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 104
13 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 107
Reporting relates to all the possibilities that can be used to share the results of the research
14. I want to divide these possibilities in internal Philips and external Philips possibilities to share the results. The external possibilities will be limited as confidential information is used in the research that cannot be disclosed. Internal possibilities are PCV, financial top management of PCE and other internal stakeholders that have contributed in the research or to whom the results could be valuable.
Important external possibility to share the results of the research is the thesis that will be accessible to members of the Faculty of Business Administration at Rijksuniversiteit Groningen. Confidential information will be removed from the thesis that will be stored in the library at the faculty.
The internal possibilities will be leveraged using written report and presentations. This thesis will be the written report. Presentations will be planned with the financial top management of CE and other interested departments.
3.8 Conclusion
The problem of this research has been formulated and the main objective, arising question and prerequisites with regards to the research and result have been defined. Two important prerequisites have been outlined. The first one concerns the confidentiality of the research and the other one concerns the research into the extent to which strategic linkages have become more important.
Each part of the research has its own sub-questions that will be analysed during the research.
The research types that will be used in this research are desk research and field research.
Primary and secondary sources of information are used in the research.
14 De Leeuw, Bedrijfskundige Methodologie; management van onderzoek, 2001, page 112
4 Corporate Venture Capital
4.1 Chapter overview
First venture capital (VC) will be outlined, as this will also contribute to a better understanding of Corporate Venture Capital (CVC). Then CVC is described in this chapter outlining the definition and the objectives. A historic perspective will be given and the different investment stages will be discussed. Different investment models can be distinguished on basis of the objectives of an investment and the linkage of operations. These models will be discussed as companies often choose one investment model for their CVC investments. The investment structure of CVC activities is described and exit possibilities are outlined in order to complete the description of CVC.
4.2 Description Venture Capital
Pension funds, insurance companies, banks and asset managers have EUR billions in capital that needs to be invested. Investment possibilities are for example bonds, real estate and equity.
Investments in equity can be done in public equity (e.g. shares in a listed company) or in private equity. The possibilities to invest in private equity include hedge funds, buy out funds and VC funds.
VC companies are specialized in investing resources in emergent companies in different investment stages. The following different investment stages can be identified in each start- up
15:
The seed stage starts with the generation of overall business idea and business plan. Business plan details resources, specifications, and product development schedules. The business plan ties costs and revenues together. Investments are necessary to prove the viability of the concept.
Prototype is developed in the start-up stage so that the market can be assessed. Investments are necessary for development and testing.
The product is in pilot production in the early stage. Investments are necessary for initial manufacturing and marketing.
The product is launched in the market and revenue growth is shown during the development stage. Investments are necessary for manufacturing and shipping.
Expansion stage is the last stage. Product experiences continued revenue growth. Investments are necessary to enable sufficient sales growth to reach or to grow profitability.
These investment stages typically correlate with the development stages of a start-up.
Investors can make investments in early stage start-ups or in more mature start-ups. This decision will affect risk of the investment and entry price. Five different successive development stages can be identified
16.
15 Gompers & Lerner, The venture capital cycle, 2000, page 139
16 Corporate Strategy Board, Corporate Venture Capital, Executive inquiry, May 2000, page 43
The prospects for the firm are periodically re-evaluated. The shorter the duration of an individual round of financing, the more frequently the venture capitalist monitors the entrepreneur’s progress and the greater the need to gather information
17.
Other authors use different names for the development stages of a start-up but these stages are comparable with the previously discussed names of development stages. The following figure illustrates the risk of loss expectations and rate of return demanded by venture capitalists per development stage of a start-up
18:
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
80,0%
Seed Start-up Third stage
Fourth stage
Exit stage Expected risk of loss Rate of return demanded
Figure 4-1 Risk of loss and rate of return demanded
The rate of return that venture capitalists demand for investments in the different development stages is of course higher than the expected risk of loss that is associated with the different development stages. The risk of loss decreases during the different development stages.
4.3 Description Corporate Venture Capital
4.3.1 Definition
CVC refers to the process of actively investing in small start-up businesses by large firms.
Typically Corporate Venture Capital is managed through a separate entity
19. This is the CVC team in case of Philips.
Different definitions of CVC can be distinguished as becomes clear from the following table
20. CVC covers a wide variety of activities, from making small investments in independent start-ups, to incubating internal business ideas, to spinning-out businesses.
17 Gompers & Lerner, The venture capital cycle, 2000, page 139
18 Ruhnka & Young, Some hypothesis about risk in venture capital investing, 1991, page 123
19 London Business School, Corporate Venturing, State-of-the-art and the prospects for the future, July 2002, page 9
20 Wouter Roduner, Contribution to option games to corporate venturing
Author Definition: Corporate Venturing
Chesbrough (2002) Investment of corporate funds directly in external start-up companies Eloranta (2000) Corporate venturing refers to the corporate entrepreneurial efforts that lead to
the creation of new business entities within the corporate organisation Albrinck et. al. (2000) Leveraging the assets and capabilities of the existing company to help create
new business Venkatamaran et. al.
(1992)
The creation of business by members of the firm that already exist
Niederkofler (1989) Corporate venturing refers to the efforts of established companies to improve the success rate of new business development and to protect existing business, whenever these businesses are influenced by developments outside the areas of established corporate expertise. These efforts are based on utilising the structural advantages of small entrepreneurial ventures.
Burgelman (1983) The process whereby firms engage in diversification through internal development which requires new resources combination to extend the firm’s activities in areas unrelated, or marginally related, to its current domain of competence
Table 4-1 Definition Corporate Venturing
The definition of CVC by Chesbrough will be used in this research. The objectives of CVC can differ from e.g. making financial returns to providing a window on new technologies, to acting as a catalyst for change inside the parent firm
21. The objectives of CVC will be further discussed hereafter.
The objective of CVC and degree to which the operations of the investing company and the start-up are linked are the two characteristics that define CVC investments
22.
The definition of CVC that is used in this document excludes investments made through an external fund managed by a third party, even if the investment vehicle is funded by and specifically designed to meet the objectives of a single investing company.
CVC organisations have similar missions and are staffed by individuals with backgrounds resembling those of independent venture capitalists. But the organisational and incentive structures in corporate funds are very different to normal venture capitalists; most are structured as corporate subsidiaries and have much lower incentive based compensation
23. A defining characteristic of CVC is the objective of the investment. Although companies typically have a range of objectives for their CV investments, this type of funding usually advances one fundamental goal.
4.3.2 Objectives
Some objectives of investments are strategic and others are financial
24. Strategic investments are made primarily to increase the sales and profits of the corporation’s own businesses while financial investments are made to generate attractive returns.
Different objectives are stated in the literature. These will be shortly discussed in order to get a better understanding of the most important objectives.
21 London Business School, Corporate Venturing, State-of-the-art and the prospects for the future, July 2002, page 9
22 Chesbrough,. Making Sense of Corporate Venture Capital, March 2002, page 92
23 Gompers & Lerner, The venture capital cycle, 2000, page 95
24 Chesbrough,. Making Sense of Corporate Venture Capital, March 2002, page 92
In a global CVC study 56% of the respondents stated only to pursue strategic objectives, versus 33% financial and 11% a combination of these objectives
25. Top three strategic objectives that were mentioned are:
• Window on technology
• Leveraging internal technological developments
• Importing/ enhancing innovation within the existing business units.
Four strategic objectives of an equity investment in start-ups are identified in a report of the Corporate Strategy Board
26:
• Access to technologies to improve existing operations: companies invest in start-ups developing technologies that can improve existing business processes or increase the overall quality of a firm’s value proposition to its customers.
• Identify emerging business models that may threaten incumbent market position:
companies invest in early-stage start-ups to understand what emerging technologies or business models have the potential to undermine existing business practises that rely on current technologies, relationships and infrastructure.
• Outsource R&D: Fast technological changes in certain industries make internal R&D insufficient to obtain a full view of development options. Companies therefore look to the external market to source new technologies or business ideas.
• Drive product demand: Companies invest in start-ups that require the investing company’s products to develop their own technologies or applications, thus increasing demand for their own technology.
In a report by Bain & Company three main reasons are indicated to engage in CVC
27:
• Gain a window on technology
• Improve the company’s innovation power
• Test new business models
Block and MacMillan identity several different strategic objectives in their book corporate venturing
28:
• Identify new opportunities
• Develop business relations
• Find potential acquisitions
• Learn how to do venture capital
• Change corporate culture
• Assist spin outs from the corporation
Another defining characteristic of CVC is the degree to which companies in the investment portfolio are linked with to the investing company’s current operational capabilities-that is, its resources and processes
29.
25 Ernst & Young 2002
26 Corporate Strategy Board, Corporate Venture Capital, Executive inquiry, May 2000, page 7
27 Corporate Venture Capital, Managing success in challenging times, Bain & Company, 2001, page 5
28 Block en MacMillan,. Corporate venturing, 1995, page 348
29 Chesbrough,. Making Sense of Corporate Venture Capital, March 2002, page 92
4.4 Historic perspective
The first CVC funds began in the mid sixties as a reaction to the success of the first organized venture capital funds. During the late 1960s and early 1970s more than 25% of the Fortune 500 firms attempted CVC
30. The market for initial public offerings abruptly declined in the early 1970s due to the oil crisis. IPOs are an important exit possibility for CVC departments as will be discussed later. Number of CVC funds decreased significantly as a result of this development.
The number of active CVC departments increased again dramatically during the late 1970s and early 1980s. But the market for IPOs declined sharply in 1987 as a result of the stock market crash. Corporations scaled back their efforts again as a result.
In the late 1990s interest in CVC climbed again stimulated by the success of the independent venture sector, the rapid growth of funds and attractive returns.
The burst of the Internet bubble at the end of 2000 has however had a significant impact on the total amount of money that was committed to venturing. CVC has become less popular again as a result.
The following figure illustrates the amount of money that is committed to venturing worldwide
31.
9 7
25 32
40 53
33
3 0
10 20 30 40 50 60
1995 1996 1997 1998 1999 2000 2001 2002
Year Annual Committed Money ($ Billion)
Figure 4-2 Committed money to venturing
30 Gompers & Lerner, The venture capital cycle, 2000, page 97
31 Venture Economics
4.5 Investment models
Chesbrough has identified four types and purposes of CVC investments combining an assessment of the company’s corporate objective and the degree of linkage between the company and the start-up receiving funding
32.
Corporate investment objective
Figure 4-3 Investment model CVC
These four different investment models will now be shortly discussed. Companies often choose one investment model for their CVC investments. The chosen model has a significant impact on the value and design of a strategic control system. This will be discussed further in this research.
4.5.1 Driving investments
The goal of such an investment is to advance the strategy of the current business. This type of investment is characterized by a strategic rationale and tight links between a start-up and the operations of the investing company.
Although it is clear that many driving investments can advance a corporate strategy, there are limits to what they can achieve. The tight coupling of these investments with a company’s current processes means that these investments will sustain the current strategy. They will be unlikely to help a corporation cope with disruptive strategies or to identify new opportunities when the company must go beyond its current capabilities to respond to a change in the environment. If a corporation wants to transcend current strategy and processes, it should not rely on driving investments, which are ill suited for these tasks.
Investments made in start-ups making products and services that promote the adoption of a technology standard you own or are backing are driving investments
33.
As an example Microsoft is using a driving venturing model as it aimed to invest more than USD 1 billion in start-up companies that could help advance its new .Net Internet services architecture. This technology will enable Windows to provide different Internet services and is in the race to set the standards for the next generation of products and services available on the Internet.
Invested companies are tightly linked to the operations of Microsoft through the Windows software and tools that Microsoft provides to them for the development of new products.
32 Chesbrough, Making Sense of Corporate Venture Capital, March 2002, page 95
33 Chesbrough, Making Sense of Corporate Venture Capital, March 2002, page 94
