How do established firms design themselves for entrepreneurship? A structural design perspective
Master thesis, MSc Business Administration Small Business & Entrepreneurship
University of Groningen Faculty of Economics and Business
Name: Roderick Thomas Hidde Ram Studentnumber: S2392321
Date: 30-06-14
Word count: 32.114
2 Acknowledgements
I would like to sincerely thank my supervisor Olga Belousova who gave me accurate guidance and was always available for useful constructive feedback.
Further I want to thank all the companies that participated in the research and provided for crucial insights and information.
Lastly, I thank my peers, family and friends for supporting me in their own way during my studies.
Groningen, June 2014
3 Master Thesis in Business Administration Small Business & Entrepreneurship
Title: How do established firms design themselves for entrepreneurship? A structural design perspective
Author: Roderick Ram
Supervisor: Olga Belousova
Date: 30 June 2014
Subject terms: Corporate Entrepreneurship, Corporate Venturing, Strategy, Organizational Design
Abstract
4 Table of contents
1. Introduction ... 6
2. Literature Review ... 9
2.1 Corporate Entrepreneurship... 9
2.2 Strategy of the venture ... 10
2.3 Organizational design ... 11
2.4 New framework/ factors ... 15
3. Research method ... 17
3.1 Research design ... 17
3.1.1 Case study design ... 17
3.2 Data collection ... 17
3.2.1 Data collection tools ... 18
3.3 Data analysis... 18
3.4 Quality criteria ... 19
3.4.1 Controllability ... 19
3.4.2 Reliability ... 19
3.4.3 Validity ... 19
4. Results and Findings ... 21
4.1 Within case analysis ... 21
4.1.1 Company A... 21
The company ... 21
Organizational Designs ... 21
Placement of the new ventures ... 22
4.1.2 Company B ... 23
Introduction ... 23
Organizational designs ... 23
Placement of the new ventures ... 23
4.1.3 Company C ... 24
Introduction ... 24
Organizational designs ... 24
Placement of the new ventures ... 25
4.1.4. Company D... 26
Introduction ... 26
Organizational designs ... 26
Placement of the new ventures ... 26
5
Introduction ... 27
Organizational designs ... 27
Placement of the new ventures ... 27
4.1.6 Summarizing cases ... 29
4.2 Cross-case analysis ... 32
5.1 Answering the research question ... 37
5.2 Discussion and Conclusions ... 40
Limitations... 40
Future research ... 40
List of references ... 42
Appendix 1: Interview guide ... 50
Appendix 2 Transcript of Company A ... 57
Appendix 4 transcript interview Company B ... 63
Appendix 5 Information Company B ... 70
Appendix 6 Transcript interview Company C ... 72
Appendix 7 Information Company C ... 82
Appendix 8 Transcript interview Company D ... 83
Appendix 9 Transcript of interview Company E... 87
6 1. Introduction
In the scope of the current economic crisis, firms need to be capable of generating sufficient revenue for survival. At times, the opportunities that exist in the current market are insufficient for supporting the firm, in which case the firm must be able to locate opportunities in markets that lie outside the current competence base. One way for companies to grow is to start businesses in product markets in which they have not previously competed (Biggadike, 1979). Peterson and Berger (1971) have found that top management is more eager to consider at new opportunities when the future is less optimistic. Companies must develop an entrepreneurial posture in order to be able to locate new opportunities.
Corporate entrepreneurship (CE) can be defined as “extending the firm’s domain of competence and corresponding opportunity set through internally generated new resource combinations” (Burgelman, 1984, p. 154). Having an entrepreneurial attitude is beneficial for the profitability of the company (Lumpkin and Dess, 1996). Zahra and Covin (1995) concluded from their longitudinal study of 108 companies study that there is a significant positive relationship between CE and financial performance. The difference between entrepreneurial firms and non-entrepreneurial firms is the rate of new product introduction (Schuler, 1986). They additionally concluded that the ability to survive and be competitive is enhanced by greater rate of product innovation, greater level of effectiveness, particularly higher profitability and growth. Thus, to be entrepreneurial is beneficial, but the question is how this can be achieved. Relatively little is known about the processes of large, complex firms engaging in CE (Burgelman, 1983). Dess et. al (2003) elaborated on this article stating that less is known about the process by which CE activities actually unfold. In addition, both scholars and practitioners remain interested in studying and better comprehending CE (Ireland, Kuratko & Covin, 2002).
Guth and Ginsberg (1990) have described two types of phenomena that encompass CE: strategic renewal, and corporate venturing (CV) and innovation. The former involves the creation of new wealth through the combination of new resources. The latter entails the birth of new ventures within the existing organization. This definition is one of the most accepted definitions of CE (Sharma and Chrisman, 1999).
7 different strategies to obtain this, for example: hiring dedicated managers, using the capabilities of the central R&D lab, establishing alliances and negotiating licenses (Leonard-Barton, 1992). Arguably, one of the most important advantages is that the members of the SBU become experts in evaluating new venture opportunities (Vanhaverbeke and Peeters, 2005). Through this, the SBU becomes a valuable vehicle for knowledge building (Kazajian, Drazin and Glynn, 2002). Finally, in these sub-units entrepreneurial responsibilities are placed above manager responsibilities (Hedlund and Ridderstråle, 1992; Kanter, 1986). Considering the small scale of the ventures, corporate venturing can be a valuable strategy for companies; it can increase their speed and levels of innovation, while simultaneously continuing to benefit from the company’s large resources (Husted & Vintergaard, 2004). Consequently, we can conclude that the focused corporate entrepreneurship is potentially beneficial for companies.
At the same time Ernst and Young (2011) conclude that more and more firms are engaging in CV and more resources are being devoted to associated activities. It is therefore necessary to understand how firms could manage this beneficial process that requires ever increasing amount of resources.
One of the most important control units for the venture is its design, the individual (s) in control, where the venture is positioned within the firm and its format (Block & MacMillan, 1993)
The exact form of these control units should, ideally, follow the strategy of the company (Chandler, 1962; Hall and Salas, 1980; Mintzberg, 1990). The company, when it engages in CE, proposes a strategy and an objective what they want to achieve with the ventures.
Chesbrough (2000) stated that throughout the years, many businesses have attempted to detach their new business ventures outside of their current business structures, so as to pursue more innovation and gain more business growth. But how do these companies organize this? Which types of models are used and for which reasons have these been chosen? This research will elaborate on that, further it is interesting to see how the literature compares to the activities that practitioners use. It can be useful to enrich and deepen the existing theories about the organizational designs of CV.
The main research question is thereby as follows:
How do firms organize themselves for entrepreneurship and which factors influence their choice?
In order to investigate this we first look at what kind of organizational design there are in the literature and what are the differences between them. Further, in this thesis we will explore the CV practices employed by large Dutch firms known for their innovation and entrepreneurial spirit, and explore their link to the design structure.
8 1. Which types of organizational designs exist, and what are the differences between them? 2. Where do companies place the new venture in the organizational structure?
3. Which factors influence this?
The initial first contribution of this study is to create a review of how companies design for CV; next it aims to get an understanding about why companies have designed their structures in the way they have. A third contribution is to gain a deeper insight into the relationship between the company and the new venture.
The thesis will proceed as follows first the different concepts of CE will be discussed, followed by the existing literature about the organizational designs that companies can have with their ventures and the factors that can influence the placements of new ventures in the organization. After this the methodology of the research is explained. For this research five managers from five different companies are interviewed to get an understanding how they organize for corporate venturing. In the final section the conclusion, discussion and limitations will be discussed.
9 2. Literature Review
In the literature review, the concepts and constructs most vital for answering the research question are elaborated on. This section will commence with a detailed definition of CE and the concepts related to it, followed by description of the strategy of the new ventures. Next, the framework by Burgelman (1984) is introduced, which will form the basis for differentiating the various types of organizational designs that a company can use. Finally, different factors that could influence the decision making process of where to place the ventures will be presented.
2.1 Corporate Entrepreneurship
Entrepreneurship within companies generally occurs in two different ways, either through CV or strategic entrepreneurship (Morris, Kuratko & Covin, 2008). The CE definition by Sharma and Chrisman (1999) includes CV, innovation and strategic renewal. Innovation can have an effect on both the CV and strategic renewal, i.e.: it can result in either of these two organizational activities. Furthermore CV can be both internal and external to the company.
Morris et. al. (2011) have described two streams that are important for the domain of CE: CV and strategic entrepreneurship. CV entails three types of modes; “internal CV (new ventures are created and owned by the corporation), cooperative CV (new ventures are created and owned with one or more external partners), and external cooperative venturing (new ventures are created outside the company and are acquired by the corporation)” (Morris, et al. 2008. p. 100). They all have in common that they add new businesses to the corporation. Strategic entrepreneurship modes are similar in that they encompass large-scale or important innovations that are adopted by the firm to pursue a competitive advantage. In the case of CV, there is a clear distinction between internal CV and external CV, the cooperative CV is a hybrid form that combines the two. External CV includes corporate venturing capital (CVC) investments, which are generally investments in start-ups (Dushnitsky and Lenox, 2005), alliances (Gulati, 1998), and mergers and acquisitions (Ahuja and Katila, 2001). Internal and external venturing also entails several benefits. External venturing tends to be most beneficial for the corporation when it creates complementary benefits with an external organization (Miles and Covin, 2002). Internal is beneficial in that it creates real options for the corporation by expanding the firm’s resources (Miles and Covin, 2002; McGrath, 1999).
10 2.2 Strategy of the venture
Organizational strategy can be ambiguous. For this reason it should be clear that the unit of analysis in this study is the strategy that the companies employ with the new ventures. In Zahra’s (1991) study it was concluded that growth-oriented strategies have a positive influence on firms’ engagement in CE. When engaging into CV, the company must make choices about the type of CV and the way in which the venture will be structured within the company. This will in large part depend on the objective and strategy the company holds.
Porter (1996, p. 68) has defined strategy as “the creation of a unique and valuable position, involving a different set of activities” i.e.: it can be stated that strategy is about differentiating the company from rivals in the market. A company’s strategy is also referred to as strategic intent, which may defined as the ambition or obsession to achieve organizational and personal goals, and focusing the organization’s attention and resources on achieving these goals (Hamel & Prahalad, 1989). The company has a hierarchy of strategies for each function, one of them entrepreneurship, therefore, CE strategy. Ireland et al. (2009, p. 21) defined CE strategy as “a vision-directed, organization-wide reliance on entrepreneurial behavior that purposefully and continuously rejuvenates the organization and shapes the scope of its operations through the recognition and exploitation of entrepreneurial opportunity”.
Miles and Covin (2002) concluded in their research that firms have three reasons to pursue CV. First is to be more innovative by making the overall company more entrepreneurial and accepting of change. Second is to use the current capabilities of the firm to earn greater value from it or to expand the firm’s knowledge into new areas. Third, quick financial returns. Thus, CV can be a strategy for steering the business in new directions and obtaining new skills and capabilities. Other strategy implications that CV can have is the encouragement of corporate renewal of the organization (Elfring & Foss, 1997), the expansion of the core business of the organization by venturing into new industries or as an opportunity for growth by investing in ventures that have big potential (Block & MacMillan, 1993).
11 Thus, on the one hand, if the company aims to gain sustainable competitive advantage, it should venture into opportunities that are less known to the company (Morris et al. 2008). On the other hand, failure can be a learning process; if a venture fails, the company gains experience through organizational learning. Block and MacMillan (1986) have concluded in their research that experience with venturing can be of great value, firms must be aware of the fact that initial ventures are likely to be less successful, but that the chance of success will increase with accumulated experience. The authors’ advice is to start with ventures that require few resources. In essence, then, one of the goals of pursuing CE is organizational learning, in the sense that new venture failure is a calculated risk.
The various outcomes imply that the different objectives held by company in terms of new ventures, results in different types of structures for the new ventures. If the objective of the company is to achieve short-term success, the new venture is likely to relate closely to the company’s existing competence base. If the company aims to be more innovative, its strategy of the company to venture into businesses that are less associated with the company’s current competence. A general consensus exists that the structure of the company follows from its strategy (Chandler, 1962; Hall and Salas, 1980; Mintzberg, 1990; Miller 1996). Therefore, next we discuss the design.
2.3 Organizational design
12 In organizing the ventures, the relatedness is one of the most important factors. If the venture is similar or entirely different on the basis of products, markets and technology, this can have serious implications. In CE the emergent organization is embedded in the existing organizations and the interface between these two organizations must be managed (Heller, 1999). The emerging organization is dependent on resources of the existing organization but on the other hand it wants to be independent. “It is a two-edged sword bringing needed resources and legitimacy to the projects and, at the same time, exposing the activities of innovators to scrutiny, intervention and possible sanction” (Heller, 1999, p. 28). So, there is a constant clash between the ventures and the organization where they are placed in. Ambidexterity is a related concept. There are challenges in managing an entrepreneurial venture with the characteristics to learn from failure, to move swiftly and long-term focus and with managing a mature business, with its focus on incremental improvement, productivity and short-term orientation (Tushman and O’Reilly, 2008). Ambidexterity could be defined as a focus on both exploitation and exploration simultaneously, with separate business models, subunits, and distinct alignment for each (Tushman and O’Reilly, 1997). These different structures can have different cultures, competencies, incentives and distinct alignment but are held together by a common strategy and structural linkages to share assets (Tushman and O’Reilly, 1996).
The assessment of the two dimensions yields in a table in which the appropriate design for the new venture should be created. This design is displayed by figure 1.
O p er a ti o n a l re la te d n es s Unrelated 3. Special Business Units 6. Independent
Business Units 9. Complete Spin Off
Partly Related 2. New Product/Business Department 5. New Venture Division 8. Contracting Strongly Related
1. Direct Integration 4. Micro New Ventures Department
7. Nurturing and Contracting
Very Important Uncertain Not Important
Strategic Importance
13 The two dimensions have resulted in nine different types of organizational designs. The more important the new ventures, the greater the control that the corporation’s management aims to keep of the new ventures. This will result in more administrative linkages; the new ventures come closer integrated in the structure of the corporation. Strong administrative linkages imply that a firm’s corporate management aims to be involved in the strategic management. According to Burgelman (1984, p. 160) this can be through “direct reporting relationships, substantive involvement in planning/budgeting processes, and involvement in trade-offs between the strategic concerns of the new and existing businesses”. If the operational relatedness is high the new venture is strongly related to the corporation, entailing that the capabilities and skills are strongly related. When the operational relatedness is low, the new venture must be less integrated into the structure of the corporation, as valuable resources will be required for its development. When a new venture has been established or acquired it must be embedded into the organization; it can be originally established internally or externally.
The nine types of design are explained below.
1. Direct Integration: High strategic importance for the company and strongly related to capabilities and skills already established within the company. This requires strong administrative and operational linkages.
2. New Product/Business Department: “High strategic importance and party operational relatedness require a combination of strong administrative and medium-strong operational linkages” (Burgelman, 1984). Entrepreneurial projects are placed in separate departments.
3. Special Business Units: High strategic importance and low operational relatedness. Due to the high importance, strong administrative linkages are required to ensure that strategic objectives are attained. 4. Micro New Ventures Department: Uncertain strategic importance and high operational relatedness. The operational linkages are strong, so they may take full advantage of the corporation’s capabilities and skills.
5. New Venture Division: Uncertain strategic importance and partial operational relatedness. The administrative linkages are relatively free but sufficiently strong enough for transferring knowledge and, information about capabilities and skills back and forth to the corporation. There is a fluid environment, in which the new venture can develop and the strategic importance can be assed later. 6. Independent Business Units: Uncertain strategic importance and unrelated operational relatedness. 7. Nurturing Plus Contracting: No importance, and strong operational relatedness. These generally constitute new ventures that are not important for the company, but the transfer of knowledge may be importance.
14 9. Complete Spin Off: No strategic importance and low operational relatedness. For both the company and the new venture, it is more favourable for the new venture to be a spin off.
Related to the Framework of Burgelman (1984) are the dimensions proposed by Sharma and Chrisman (1999). They argued that in terms of development and performance, the internal corporate venture can vary in several ways: structural autonomy, relatedness to the existing business, extent of innovation and nature of sponsorship.
Structural autonomy: this refers to where in the corporation the venture must be placed. Generally, there are two extremes, to totally integrate the venture or to create a separate division for it. The structural autonomy refers to the extent to which the venture activities are integrated into the units of the existing organization (Sharma and Chrisman, 1999).
Relatedness to the existing business: the relatedness in terms of product offering, markets or core competencies and resources required (Sharma and Chrisman, 1999). As a construct, this scale can range from “entirely unrelated” to “closely related”, which has implications in the way the venture is managed (Block and MacMillan, 1993). There may be more or less administrative linkages.
Extent of innovation: “Refers to the degree of newness of a new venture in the marketplace” (Sharma and Chrisman, 1999 p. 22). The dimension can vary from “frame-backing” innovation to imitative innovations (Stopford & Baden-fuller, 1994).
Nature of sponsorship: This entails the extent of formal authorization for the venture. This can vary from informal or autonomous (entrepreneurial efforts based on employees’ initiative without formal organizational sponsorship) to formal or induced (sponsored by an organization) (Zahra, 1993). Sponsorship implies that the venture is supported, which can be done formally by the organization, or informally by entrepreneurs within the organization.
15 different characteristics and needs (Zahra, 1991). Developments in one market may create opportunities in related markets. Although an increase in heterogeneity entails an increase in complexity, it simultaneously increases firms’ likelihood of engaging in CE (Zahra, 1991).
Naturally, Burgelman’s (1984) framework is not entirely inclusive; there are several drawbacks in its application. As mentioned, the external environment is not taken into account in the framework. Also Burgelman focused primarily on American companies such as General Motors, Du Pont and IBM. The possibility cannot be excluded that there are differences between the U.S. companies and companies from the Netherlands. You could argue that the culture in American companies is different from Dutch companies. Americans have the tendency to be more individualistic (Adler, 1997). There are researchers who assign high levels of entrepreneurship in the U.S. to cultural values as individualism, independence, self-sufficiency freedom, materialism, and achievement (Spence, 1985; Gilder, 1988; Peterson, 1988; Sundbo, 1991). There are cultural differences between ethical business practices between Europe and the U.S., higher emphasis is placed on leader’s role in creating and upholding high ethical standards for the entire organization (Ardichvili, Jondle & Kowske, 2010). Some organizational cultural variables (e.g. individualism) are reported to significantly and positively influence CE in one country but can no effect or negative effect in other countries (Morris, Davis and Allen, 1994). With CE it is possible that there is an intrapreneur who is responsible for bringing an idea to the market but who is not necessarily the author of the idea (Pinchot, 1985). Similar to this is the innovation champion who is an individual who informally promotes innovation and who represent the venture to resource allocators to safeguard sufficient resources are released for development (Howell & Boies, 2004; Howell, et al., 2005; Markham, 1998). It is important for the organization to support radical champions within their positions (Peter, 1987). So, inside a company a person can stand up with a new business idea or be designated by top management. This can be important to know where the venture is originated, just as the strategy of the new venture.
Furthermore, the article is primarily a theoretical paper, implying that it could be elaborated on using a more empirical focus. It would be interesting to compare the framework with the everyday practices of several companies. The paper is predominately conceptual and to our knowledge no proper empirical test on it has been done.
2.4 New framework/ factors
16 Second, external environment, the market in which the company operates can be of influence on the organizational design of the new ventures in the firm. For example, when a market it is more dynamic the company wants to minimize the risk. Therefore in can choose to not integrate the venture closely in the organizational design, for this will only use valuable resources.
The other factors proposed in the research are essentially closely related to the dimension that Burgelman (1984) suggested. Like the extend of innovation is basically associated to the operational relatedness from Burgelman.
The factors can change the approach of Burgelman in the way that companies have another way to solve a potential problem of placing the new ventures. With the framework of Burgelman you take the two dimensions into account but when you use more factors you could better place the ventures in the organization.
17 3. Research method
In the introduction the literature gap was presented: it remains unclear how companies design their organizational structure for CE and which factors are important for this. To fill in this gap a research question and the following sub questions has been constructed. The qualitative research is suitable for understanding phenomena within their context, uncovering links among concepts and behaviors and generating and refining theory (Miles & Huberman, 1994). With this qualitative research it must be able to get a better understanding in the structuring of corporate ventures and what kind of forces influence this. The research will follow an interpretivist paradigm, which is based on qualitative data trying to explain why some things happen in a way and trying to find depth and richness of data (Collis & Hussey, 2014).
After the literature foundation is set interviews are going to be held with managers. The results from these interviews are analysed with each interview being a separate case. After this within-case analysis the cases are compared with a cross-case analysis. This makes it possible to see what the similarities and differences are with the different cases. Then concluding remarks can be made, the limitations have the research are described.
3.1 Research design
The exploratory research design is followed in this research because this is best suitable for situations for which there are no clear, single set of outcomes (Baxter & Jack, 2008; Yin, 2003). To answer the main research question three sub-research questions where constructed. In the analysis and results section these questions are addressed and answered. The data to answer the questions is obtained by doing interviews with managers of several companies. To strengthen the interviews an interview guide was developed, here the methods of the interview was defined and the interview questions were established.
3.1.1 Case study design
To make this research more reliable, a multi-case study design is going to be used. Evidence from more cases makes the research more comprehensive and is considered to be more convincing (Herriot & Firestone, 1983). For this case study five companies are interviewed. The multiple-case study is used because it allows for replication logic, this may lead to noteworthy patterns and confirm or disconfirm them between cases (Yin, 2003). Each of the companies can be seen as a separate case. 3.2 Data collection
18 Venturing Network Netherlands (CVNN). All of the companies are operational on a global scale and active in the Netherlands. They are active in R&D, cable industry, paint, aviation, chemical and life sciences.
3.2.1 Data collection tools
Interviews
The data needed to answer the research question is obtained by doing face-to-face or telephone interviews with top managers who have strategic influence in the company. They are the one who have decision making power and therefore can best explain how the company has organized for entrepreneurship, which steps was needed to take, and which factors did influence the decision making process. Also it is important to know, in retro perspective, if the decisions made are the right one.
Based on this literature an interview guide will be constructed. The structure of the interview will be based on Emans (2004). The interview guide can be found in Appendix 1. Probes are used to let the interviewee elaborate on the answers to get a better understanding of reasons why some decisions are made. The questions from the interview are based on the literature. After the interviews coding is used, these codes are used to analyse the transcript of the interviews.
In total 5 people were interviewed. The interviews were held in English, although all of the interviewee mother language was Dutch English was preferred because this would not lead to any problems during translation. The exact words and definitions used by the interviewees are literally transcribed.
3.3 Data analysis
After the interviews every separate case is analysed with a within-case analysis, after this step a cross-case analysis is going to be done. This last step is for searching for patterns across the different cross-cases. The results or insights from the analysis can be compared with existing literature.
Miles and Huberman (1994) developed a general procedure for analysing qualitative data that involves three activities:
- reducing the data - displaying the data
- drawing conclusions and verifying the validity of those conclusions
Data reductions involve; ‘selecting, focusing, simplifying abstracting, and transforming the data in written-up field notes or transcriptions’ (Miles and Huberman, 1994, p. 10). Displaying the data is about presenting the data systematically this can be done by transferring the data into a visual format. Analytical procedure:
- giving label (codes) to words, phrases, paragraphs and to things that can be interesting - Adding comments, reflections
19 - Using these patterns, themes and so on to help focus data collection
- Develop generalizations that cover uniformities discovered in the data and link these uniformities to existing constructs or theories
For the analysis all interview are digitally recorded and transcribed, these are processed for further analysis. Hence, this will make it possible to compare and analyse all the data that is collected. Transcribing the interview implies that they are “reproduced as a written (word-expressed account using the actual words” (Saunders, Lewis & Thornhill, 2007, p. 475).
3.4 Quality criteria
According to the literature there are three important quality criteria these are controllability, reliability and validity (Yin, 2003; Van Aken et al., 2007; Swanborn, 1996). In the following section the three criteria will be addressed.
3.4.1 Controllability
The controllability is about the making the research controllable for others, it must be clear how the research was executed. In order to comply with this criterion the research method is written down and explained. The description makes it possible for others to replicate the study and to control the results. Furthermore the interview guide and the case study protocol in the appendices make it possible to see which steps were taken to come to the conclusions from this research.
3.4.2 Reliability
Reliability refers to the when the results of the study are independent of the particular characteristics of the study and can therefore be replicated to other studies (Yin, 2009; Swanborn, 1996; Van Aken et al., 2007). There are four potential types of bias: the researcher, the instrument, the respondents and the situation. In the end the research should be independent of the four possible biases mentioned above (Cooper and Schindler, 2008). Instrument reliability means that the instrument measures what is supposed to measure and doing it consistently (Cooper and Schindler, 2008). In this research several research instruments are applied, trying to create triangulation, this means having data from several sources to search for regularities in the research data (O’Donoghue and Punch, 2003). The data sources for this study are the interviews with the managers, published articles, books interviews, cases and the website of the studied firms.
The research only uses single respondents in the same company. However the research question is about how the companies design themselves for CE so interviewing the person directly related or responsible for this should obtain all the data needed the answer the research question. 3.4.3 Validity
20 al., 2012). There are three types of validity construct validity, internal validity and external validity (van Aken et. al., 2012; Yin, 2003).
Construct validity refers to the extent that a measuring instrument measures what it is intended to measure (De Groot, 1969). In this research it is about the quality of the operationalization of your concepts. According to Van Aken et al. (2012) there are two important aspects: first the concepts should be completely covered and second the components should in the way measured match with the meaning of the concept.
Internal validity is defined as “The results of a study are internally valid when conclusions about relationships are justified and complete” (Van Aken et al., 2012, p. 164). Explain why result B is cause by construct A.
21 4. Results and Findings
In this chapter the data gathered from the interviews and documents are presented. Furthermore, the data will be analysed this analysis will result in answering the main research question and the subsequent questions.
The main research question and subsequent questions are as mentioned in the introduction as follows:
Research question:
How do firms organize themselves for entrepreneurship and which factors influence their choice?
Subsequent questions:
1. Which types of organizational designs exist, and what are the differences between them? 2. Where do companies place the new venture in the organizational structure?
3. Which factors influence this?
As mentioned before, each of the companies will be seen as a separate case the results section will follow the same direction. In the next chapter each subsequent question will be answered with each separate case. After this the main research question will be answered.
4.1 Within case analysis 4.1.1 Company A The company
Company A is an independent R&D company with no shareholders and an annual turnover of 600 million Euros. It is the mission of the company to enhance the competitive power of the Dutch business community. Company A has a separate legal entity besides itself and that is Company A Companies and the purpose of this company is to bring new technologies to the market. Company A Companies buys the technology from Company A and then with the use a strategic partners and entrepreneurs a new venture that is able to bring the technology to the market is created. The interview was conducted with the venturing manager (Mr. C.) responsible for identifying technologies that can be brought to the market by new ventures.
Organizational Designs
22 developing and the investing in the R&D in such a way that it has more value for an outside investor to invest”.
Placement of the new ventures
From the interview we found that the following factors play a role: 1. Objective of the company
The new ventures are established outside of the organization, it is an autonomous company where Company A Companies is a shareholder of the interviewee described it as “when we have created a new venture we let go and then it is an autonomous company in the outside world where my company is a shareholder of.” Mr. C. said that the new ventures are spin-outs of the R&D companies and his job is to find strategic partners, to find investors and to assemble management teams. Mr. C. explained the process of establishing new ventures as follows: “Our company is a shareholder, so Company A Companies is separate legal entity that stands besides Company A R&D Company. Company A R&D transfers this IT so this technology to the private Company A Companies so to the private domain, that being paid for of Company A Companies to Company A by a license agreement. But then this separate legal entity, the new venture that is created by Company A Companies and Company A Companies is just a shareholder of this private company.”
The role of the shareholder is to hold a place on the board of the new created company and for try to steer the company. So Company A Companies is involved in some of the more strategic decision, like large investments or if new management is to be hired.
Regarding the objective that the company has with the new ventures, it is the same as the objective of Company A itself it about strengthening the business community of the Netherlands by bringing new technologies to the market. This will ultimately lead to new jobs and the creation of new value chains. Although, Company A companies are a little different than Company A because Company A Companies strives to achieve a minimum Return of Investment (ROI) to able to invest into new ventures.
The new ventures are of strategic importance because creating new ventures is a way to achieve the mission of the company and that is to strengthen the business community of the Netherlands. With each new venture that is created this mission is fulfilled. However, you have to take into account that Company A Companies has another objective that most companies do. Company A doesn’t have any shareholders. The interviewee referred to it as: “not in a normal sense that a big corporate organization is behind it. It is not to create a new business line or whatever.”
23 Summarizing, it is clear that the new ventures which are created by Company A Companies are Spin-outs the most important factor for this is the strategy of the company itself. The objective of Company A Companies is to enhance the Dutch business community this is done by using the technology of the company and create new companies. Company A Companies does not do it by itself but uses external strategic partners, investors and entrepreneurs. So, the companies are not structural related to the current business.
4.1.2 Company B Introduction
Company B is the largest cable company in the world, with total revenue of 18.1 billion dollars. They deliver television, broadband internet and telephony services to 25 million customers. The company is operating 14 countries including the Netherlands. Regarding the strategy of the company they have a statement on the website saying: “The company’s business strategy emphasizes superior organic growth, opportunistic M&A activity”. The organic growth is stimulated through internal innovation competitions and projects. The M&A activity can been seen in the strategy the company uses with their venturing unit. This is focused on minority investments in technologies. The venturing unit is responsible for scouting of new opportunities and bringing innovation into the company. The interview was conducted with the director of ventures in the companies venture unit (Mr. V.).
Organizational designs
The fact sheet of Company B Ventures (Appendix 5) mentioned that the strategy of the fund is to “Leverage the company’s operating resources to drive superior investment returns”. The interviewee mentioned several objectives that the company has with the new ventures: “If we invest because we feel the technology is relevant to our business, we make an investment because we feel that company is going to be successful in that technology space, obviously. We are going to invest in what we feel is going to be a winner. So we do have financial return in considerations”. So from this we can conclude that the first objective is financial return, second is to add new technology to the business and third is controlling the risk.
Placement of the new ventures
From the interview we found that the following factors play a role: 1. Bringing innovation in the company
2. Financial profits 3. Risk
24 company in three or five years.” The ‘not invented here syndrome’ can be explained as a tendency of organizations to reject external innovation. There is a possibility that there is a mismatch because the venture may grow in a different direction, different market. Mr. V. also elaborated on this by saying that the company buys a company/venture or they do minority investments. When a company is bought entirely they are left as they are or they are as the interviewee called it “dissolved” this means that the company integrates the IPR’s, use it or license it out. Another factor that is derived from the interview is risk, the interview mentioned; “If there is a really young cool start-up we won’t integrate them jet because the risk is to high maybe if they are really separate it is ok.”
When related to the strategic importance of the new ventures Mr. V. replied that there are ventures that are more important than the others but within the company they are all placed in the same structure. Mr. V.: “For us physically placed in the same structure, legally they are all placed in the same structure”.
Concluding, from the interview it can be seen that there are two options; the company takes a minor stake in the new ventures and it stays independent or the new venture is completely dissolved in the organization. The organization uses some a type of nurturing and contracting design with the ventures, with using the technology when necessary and supporting the ventures with knowledge. The most important factors are innovation, financial profits and reducing the risk.
4.1.3 Company C Introduction
Company C is the world largest paint and coatings company located in Amsterdam. The interview was conducted with the Director Business Development Industrial Coatings (Mr. K.). In which Industrial Coatings is a separate Business Unit inside the corporation. His responsibility is to get buy in from leading customers on the new technology. When talking about his work and the technology the interviewee usually referred to it as ‘the initiative’.
Organizational designs
Interesting thing about the case of Company C is that they had a Venture Unit in the past but had to kill it due to the financial crisis and lack of money. However, this makes it possible to compare both models and to get an understanding which factors are important in the models. In the new model the company created a special Business Development Team for the Business Unit Industrial Coatings. This is a multidisciplinary team consisting of engineers, chemist and business specialist. The goal of the BD team is to start new projects with new technologies in the Business Units Wood, Coil and Packaging. This means that in every unit a customer must be found that wants to work with the technology. The reason why it is set up organized this way is because all industrial coatings for industrial processes are located here there are also business units for color and powder technology.
25 Business Area at that time. We had a BU X and a BU Y for example and they all created a separate unit and they all put money in it. They all said we can do the incremental stuff pretty good but the long-term stuff needs a different approach. So we create a Team, Fund and a Portfolio to kind of make it happen. We did external investments, we started project from within, and we worked with external”. The venture unit was focused on the earlier stage of the development but according to the interviewee the unit stayed to long in the entrepreneurial phase outside the company, it took too long to develop businesses out of it. The interviewee mentioned “an acquisition we did in 2004 and in November last year they did their first sales”. The old model with the venture unit was not productive so the organization had their reasons to change the model. Mr. K. gave the following conclusion; “We didn’t have sufficient steering and the end result, we had 11 ventures was not telling a story. It was a bit there a bit there. We were extremely opportunistic” and “They were all fantastic stories but as a portfolio is looks messy and chaotic and that killed us”. Furthermore, Mr. K. said that the venture unit as to distant for the business, in that sense you could say that the operational relatedness was low. Another disadvantage of the model is that the interviewee compared it with the role of innovation manager meaning that there was little input from other managers for innovation. The other managers generally said: ”Innovation? Your stuff, your problem. You deal with it”. It is the opinion of Mr. K. that you need input from other managers and customers for innovation.
The organizational design of the old and the new model can be found in Appendix 6 after the interview transcript.
Placement of the new ventures
From the interview we found that the following factors played a role in the new model: 1. Proximity to the customer
2. Strategic alignment 3. Cultural fit
What is important in the new model is the proximity to the customer, Mr. K. said the following: “in the current situation we said: Given the size and importance of our current global clients, we cannot do it without their input”. He also added: “the guys over there work day and night with the customers, they go to trade fairs that is where it happens”. The customers are involved this makes it harder the kill the project and within a reasonable fast time you know if the technology is feasible and what it is going to deliver for the company. About the model he mentioned: “I think it the current time this works better”. Based on the strategic importance this model can be important, the interviewee said that: “We will know by the middle of next year whether this is going to be a three hundred of four hundred million opportunity for this company”.
26 the new model this is solved by bringing the ventures or the new technology initiatives closer to the business units.
Third, the cultural fit is a factor, in the old model there was no input from other managers and basically there was a mismatch between the venture unit and the organization. Or could be referred to as the “not invented here” syndrome.
In the new model the interviewee represents a sort of innovation champion because he is responsible for an idea and that one of his tasks is to develop this idea and to find sufficient resources to support the venture. Therefore, the current model of dealing with new ventures has shown the necessity to overcome ‘not invented here’ syndrome and align the venture with the rest of the organization. Two second important factors are strategic alignment (portfolio management and placing the ventures within Business Unit for a closer and better control over the direction of venture development) and proximity to the customer allowing a quick feasibility check procedure.
4.1.4. Company D Introduction
The company is an airline company located in the Netherlands. The interview was conducted with Director of Innovation (Mr. B).
Organizational designs
Innovation is stimulated in several ways in the company. First, there are internal challenges where people are asked to help or to help colleagues on problems. Second, one of the tasks of the interviewee is start-up scout which entails searching and connecting with outside parties from different industries that might have relevant solutions. Thirdly, there is a venturing unit where two more companies are involved with. Goal is to invest in companies that create solutions in the industry. Finally there are technology programs where the company helps the implementation product technology.
Placement of the new ventures
The most important factors for this case are; 1. Bring innovation in the company 2. Financial return
3. Solving problems
27 is said that the new ventures are closely related to the existing business and current skills and capabilities. So, the innovation is complementary to the technology in the organization. However, there is another edge to it because the ventures can be related to the other companies participating in the investment fund but these companies have a joint interest.
The administrative linkages between the company and the ventures are rather close. There are weekly or quarterly meetings and the ventures are supported with the knowledge, network of the company. The network of the company can be used has useful introduction within the industry. The interviewee said the following; “I must say, in general we are very close to our investments. We are constantly in contact and talking. Seeing how we can help them out”. Furthermore, the company has a seat on the non-executive board, this entails that they can control the ventures but they don’t have any strategic influence, it must be said that this is all via the investment fund.
Therefore, the most important factors are innovation, financial profits and solving problems. The company has no need to integrate the ventures, mainly because the company wants to use the innovation and not necessarily want to become the owner but still want to use it. The company uses a sort of contracting and nurturing design with the ventures. In buying the technology of the ventures when necessary and supporting the venture with knowledge and their network.
4.1.5 Company E Introduction
The company is specialized in chemicals and is originated in the Netherlands. The interview was conducted with the VP of the Global Business Incubator (Mr. W.).
Organizational designs
The company has started a special Innovation Centre to create new businesses. The organization exist of two clusters; the life science side and the materials side each of those clusters consist of two or three business groups within those business groups there are business units. The Innovation Centre is a business group of the organization. The Innovation Centre is split up in two parts; the business creation part plus the incubator, and enabling part which is the group facilitating and helping the company with innovation.
Placement of the new ventures
From the interview it can be concluded that the following factors are important; 1. Pursuing radical innovation
2. focus
3. Signal to the rest of the organization
28 organization specially dedicated and focused on making that a success. The interviewee added; “would not distract the activities of the business groups in doing stuff which is completely outside of their scope. It was on purpose indeed set apart, mainly for focused reasons”. It should be mentioned that new opportunities are also created in the existing business groups. In the beginning the ventures are more explorative of nature and after a while a real business is emerging then it is time to spin-in or spin-out. This entails creating a separate business unit for the venture with all the support function with it, or by selling the company. When assessing new ventures the company used two axes; the market attractiveness and the ability to execute. The former refers to the potential the venture can have to become successful, is about the market and the competition. The later refers to if the company has the competencies in house for the new venture, the money that is needed and possible positions in an industry. During the interview it was mentioned several times that starting the Innovation Centre was a signal the internal and external world that innovation is taken seriously by the company. This way it helped to establish a culture that fosters innovation.
Talking about whether the new ventures are related to the existing business, the interviewee said; “Yes there has to be a link”. Mainly he was referring that the here to be a link with the core capabilities of the company; life science and materials. But still for innovation there needs to be a certain amount of new competences. About the strategic importance of the new ventures he said that innovation is very important for the company and it is part of the strategy of the company. The interviewee added; Innovation is just essential in our line of business”.
The company uses a separate business group for the new ventures, called the Innovation Centre. The interviewee said that this is important for the strategy of the company. The new ventures are used to steer the company in new directions but they are still related to the core capabilities of the company. The interviewee added that the majority of this technology needs to be in-house, “if 75% of this technology needs to come from outside it is going to be a tough innovation”. This would relate to the framework as New Product/Business Department. The article mentioned that a separate department can be created for an entrepreneurial project, where sharing capabilities and skills is significant with the related division or group
4.1.6 Summarizing cases
In this table it will be visible which factors are the most important for the placement of the new ventures in each case. Table 1. Cases with the most important factors.
Placement of the new ventures What
Company A
Companies
Outside the company; Spin-Outs. “When we have created a new venture we let go and then it is an autonomous company in the outside world where my company is a shareholder of.”
Company B Minority investments through investment fund in external ventures or ventures completely integrated in the organization. For example by using the IPR’s.
“it is our objective to also integrate that company in the ‘mother ship’” “we do minority investments.”
“For us physically placed in the same structure, legally they are all placed in the same structure”.
Company C new model
Business Development Team for Business Unit Industrial Coatings.
“And here we created the BD team (Business Development team) that is where I am.”
See drawing organizational design. Company C old
model
Venture Unit in the Business Area Chemicals supported by the different Business Units in that Business Area.
“we had at division level we had a separate venture unit” See drawing organizational design.
Company D In special investment fund in cooperation with two other companies, the ventures stay completely independent.
“third we have a venturing fund in joint with two other companies where we invest in companies that create solutions within the industry.”
30 “The Innovation Centre is treated as a business group”
Table 2. Important factors.
Important factors Why
Company A Companies Objective of the company. “It is our mission to strengthen the competitive power of Dutch business community.”
“identify the technologies that we can bring to the market place in an accelerated way by new ventures and the reason why we do so as an R&D organization is that mostly with breakthrough technology with which we deal with are coming along with too high risks for business partner to invest in.” Company B Bring innovations inside the company.
Looking for financial profits. Risk
“Not invented here” syndrome
“If we invest because we feel the technology is relevant to our business, we make an investment because we feel that company is going to be successful in that technology space, obviously.”
“If there is a really young cool start-up we won’t integrate them jet because the risk is to high maybe if they are really separate it is ok.”
Company C new model Input of the most important customers and the resources of the company to get into contact with these customers.
Proximity to the customer.
“In the current situation we said: Given the size and importance of our current global clients, we cannot do it without their input.”
“We know the customers and take action on it.”
Company C old model Strategic alignment
“Not invented here” syndrome
“we had 11 ventures was not telling a story”
“They were all fantastic stories but as a portfolio is looks messy and chaotic” Company D Innovation, financial return and solving
problems
“We invest purely for each innovation with good outcomes.”
31 “We are more looking at problems with our processes or our passengers that we are solving with these innovations.”
Company E Radical innovation.
Signal to the organization for innovation. Creating businesses beyond the existing business of the company
“The activities we started where so disruptive of character that they would basically placed in an organization which was dedicate and focused on to make that into a success.”
32 4.2 Cross-case analysis
In the cross-case analysis we are going to look for similarities and differences between the cases that are used in this research.
Organizational designs in the cases; A. Inside-Out; Spin-outs
B. Outside-In; Investment fund, contracting and nurturing C. Outside-In; Business development team
D. Outside-In; Investment (pooled) fund, contracting and nurturing E. Outside-In; Business unit focused on new ventures.
The most important factors for the placement of the new ventures in the cases are; A. Objective of the company/Operational relatedness (zero)
B. Cultural compatibility, financial profits and risk
C. Proximity to the customer, feasibility check and cultural compatibility D. Innovation and financial profits
E. Signal to the rest of the organization, operational relatedness (low) and creating businesses beyond the existing business of the organization
General differences
What is immediately noticeable is the origin of the ventures or the technology. Only in one company the technology is created inside and transferred to the outside world. All other company extract their technology outside-in with the use of ventures. It should be pointed out that some companies use internal programs to stimulate innovation but this is more focused on incremental innovation.
33 Industry
When relating to the industry of the different companies it is difficult to come to a generalizable conclusion regarding the placement of new ventures. All five companies are from different industries but it is possible to make a distinction between business-to-business and business-to-consumer companies. The cases B and D are consumer companies the other cases are business-to-business companies. Case B mentioned that they have extra safety or control condition when rolling out new technologies, because they are dealing with so many customers when you make an error your name in the market is ruined. Case C was dealing in a business-to-business environment and from that interview it was really notable that the input from the customers was really important. But in the end it is difficult to generalize a conclusion regarding the different industries.
Innovation
In Companies D and E we can see that innovation plays a role. Nowadays innovation became so important, popular and stimulated, with shortening time-to-market and life cycle of products and technologies, that it creates cultural clash between the existing and new technologies/developing teams, forcing to split them structurally. This is a sad observation, as it means, we are no further in solving the ambidexterity problems as we were 20 years ago when Tushman and O’Reilly (1996) published their article describing this phenomenon.
Of course, bringing innovation inside the company is an important factor. This is interesting because both companies (B and D) where this is important have established an investment fund for investing in new technologies and ventures. These companies buy minority stakes in ventures and then support the company and try to help them. They are basically using a type of contracting which is mentioned in the framework of Burgelman (1984). Because they are also support the ventures with knowledge and with their network they use contracting and nurturing. When using the technology these companies take a different approach, one integrates the company in the organization or chooses for the venture be independent. The other leaves the venture independent and buys the technology or product from it and with a regular transaction.
Proximity to the customer
Furthermore, the customer also plays a role when placing the ventures in the organizational design. As can be seen in the case of Company C it wanted to be close to the customer because in their opinion input of the customer is important in developing the technology and to get a fast understanding if the technology is feasible. In the end the technology needs to be capable of becoming an own independent business group. So, the proximity to the customer plays a role.
34 Miles and Covin (2002) has shown that companies can have three reasons to pursue CV: first, be more innovative. Second, to use the current capabilities of the firm to earn greater value from it or to expand the firm’s knowledge into new areas. Third, quick financial returns. Relating these reasons to the cases it can be said that being innovative and financial return is mentioned by the interviewees. Cases B and D mentioned both these reasons. The second reason can be related to the objective that company C has with the new venture. However, the technology is attracted externally but it used to expand the business in new areas, so in a sense the new technology is not part of the existing capabilities of the firm but it is used to search for new business areas for the firm.
There is a general consensus that the structure of the company follow from its strategy (Chandler, 1962; Hall and Salas, 1980; Mintzberg, 1990; Miller 1996). Both Company A as Company E have the objective in the strategy of the company the use ventures. Although, for the former this means that the ventures are placed outside the company. While for the latter this objective was a signal to the rest of the organization that new innovations would be taken seriously and that was a mean to steer the company in new directions. In addition, in the first case the objective of the company is to strengthen the business community of the Netherlands this is done by transferring knowledge inside the company to the outside world with new ventures. In the second case the company want to be innovative and quick financial returns. For this case in can be logical to invest in ventures through a fund because the ventures can develop on their own and when the innovation becomes important the venture can be integrated inside the company. In the third case the interviewee mentioned: “And we do this for a longer term purpose”. From the rest of the interview it can be summarized that the company wants to establish new businesses in new markets with the ventures or initiative. In the fourth case the interviewee told about the strategy with the new ventures: “We invest purely for each innovation with good outcomes. Of course we also want our money back”. This objective corresponds with the organizational design the company uses with the investment fund, so no need to integrate the ventures. In fifth case, as mentioned before, the company wants to create businesses beyond the existing business. Furthermore the interview mentioned that the ventures need to fit with the strategy of the company, this relates more to the industries in the company operates.
Financial return
We could also see that financial reasoning remains important for most of the companies, who engage in innovation not for strategic reasons only, but for cash generating interests. Two of the five, Companies B and D, companies reported such intents.
Cultural fit
35 the “mother organization”. In case B these two are separated to reduce risk. In the case C the changed the old organizational model to get a better cultural fit between the venture and the organization. In the old model with the separate venture unit, there was no cultural fit with the company. The interviewee mentioned that there was a lack of input from the other managers.
Risk
In case B the interviewee told that they did not integrate the ventures just yet because they want to control for the risk. They first want to see how the venture develops and then when the technology becomes interesting for the company they will use it.
Additions to the framework of Burgelman
When relating the findings to the framework of Burgelman (1984) it can be seen that the framework doesn’t really relate to some cases in the decision making process of placing new ventures in the organizational design. In the end we have seen five different approaches for CE/CV and five different placements and usage of the new ventures. When the factors are further analysed most of them are related to the dimensions of Burgelman (1984), one way or the other they could be linked to the strategic importance or the operational relatedness. For example the objective of the company bring in innovation is derived from the operational relatedness, moving further away from the existing skills and competence of the firm. Also, a signal to the rest of the organizations was mentioned but this is related to the strategic importance. Naturally, the strategy of the ventures and the objectives are also closely connected to the strategic importance. The strategic alignment is also mentioned above however this is more related to the strategic importance, trying to make the ventures fit in the strategy of the organization.
So, in addition to Burgelman’s factors, we also find that the following factors play a role: proximity to the customer, financial return and cultural fit.
Added factors are:
- Proximity to the customer - Financial return
- Cultural fit - Risk
When a company wants to be closer to the customer it should, according to the case in this study, integrate it closer within the existing business. This entails for the framework that it could be on the same scale of one of the dimensions of operational relatedness or strategic importance.
36 Regarding the cultural fit, there are two extremes. In case B there was the problem of the “not invented here” syndrome so they placed the ventures outside the organizational structure. However, in case C the company did not have a cultural fit between the venture unit and the organization for the same reason, the “not invented here” syndrome. But they solved this problem by bringing the new venture closer within the organization. So, should this factor be incorporated the framework of Burgelman? From both cases there are different solutions to work with this dimension, thus probably not. This still implies to companies need to take this dimensions into account and see per venture or unit how they can make the cultural fit.
