Traditionally, managing new organizational ventures is difficult for organizations. As venture is synonym for "Major undertaking" or "Adventure" it is not strange why. Venturing goes hand in hand with encountering new situations and therefore facing the unknown, forcing to react and adapt quickly while the whole task is of major scale and importance. Important to note is that a new venture is an entity. This means it is not an instant product but a product which evolves over time to create the end result.
Within this thesis the term New ventures therefore is characterized as an innovation project which is of a fundamental scale which can change the organizational structure of a company by for example adding entire divisions or even entire new companies. A new venture can also be a complete new start up organization which never had any experience within the field of entrepreneurship.
An example of a new venture for an already existing organization is Toyota's Hybrid Technology Innovation.
Toyota has been developing hybrid technology for car propulsion purposes (Coup, 1999). This venture by Toyota resulted in the fact that Toyota to this day is market leader in the hybrid car market worldwide. The market for hybrid cars has since been entered by several other organizations such as Honda, Mercedes, Nissan, Lotus and VW.
According to Weick (1979), new venture creation is "The organizing of new organizations." This almost philosophical definition describes that despite the fact that there is much known about the subject, the knowledge seems to be scattered, vague and in some cases even contradictory. In order for organizations to properly manage their ventures the information surrounding venturing needs to be re-organized and re-analyzed.
When organizations decide to embark on new ventures it is key to disguise that the organization is venturing as long as possible. According to Klemz & Gruce (2001) the response to entry is crucial in order for an incumbent to defend its position. Incumbents who have already gathered a (strong) position in the market are not likely to allow new innovations being developed (if noticed) by (potential) competitors (Leeflang & Wittink, 1991), (Gatignon, Robertson & Fein, 1996), (Koski, Heli A & Majumdar K. Sumit. 2002). Since the actions of incumbents will most likely have a great impact on the complete venture of the organization this factor will also be taken into account. In addition to the problem stated above, venturing organizations with new innovative ideas are not particularly sure which market(s) their products are influencing. This problem is based on the fact that new products fulfil needs which might not exist yet or fall in between existing products which fulfil slightly different needs. A perfect practical example are netbooks*. Are netbooks just PDA's with slightly more functions and therefore compete with companies such as Blackberry and HP? Or are netbooks actually (small) notebooks with slightly less functions and therefore compete with companies such as Asus and Acer. This form of uncertainty counts for both the venturing organization as well as the incumbents within their respective markets.
This thesis will therefore focus on the process venturing organizations have to undertake when managing new organizational ventures in order to enhance their innovative competences in comparison to its competitors. These ventures have to have the intention of creating a new start-up firm. In addition to focussing on new start-up firm ventures managerial solutions for the venturing organization will only be discussed when there is an actual incumbent defending its market. By focussing on these specific criteria this thesis will become more relevant to both the scientific as well as the managerial audience since data will be more specific.
1.3 Problem statement
How can organizations, who are set to embark on new ventures, strategically manage these ventures effectively in an competitive market in which the incumbents pose an aggressive stance towards the venture?
1.4 Research Questions
The following questions have to be answered to be able to answer the problem statement.
What is regarded as a "new venture" considering the various perspectives with regard to this subject.
To what extent can an aggressive incumbent negatively influence the venturing organization in such a way that the venture will fail?
What methods can the venturing organization use to defend itself from negative incumbent influences? how can venturing organizations use these methods?
1.5 Conceptual model
In order to get a clear overview of the exact phenomena stressed by this dissertation a graphical representation in the form of a conceptual model will be made. The conceptual model reveals the (perceived) relationships between different variables.
The graphical representation can be seen as a (rough) process-like flow.
the model decribes the venture perspectives' effects on the eventual venture success. In addition the influence of both the incumbent and of the venturing organization within the actual process needs to be accounted for. A suitable conceptual model therefore should at least consist of: "ideas" of the venturing organization with the perspectives encompass the intended maximum success factors on base of budget, time, implementation success, sustainable competitive advantage etc. in relation to the "remainder" of all the maximum success factors which will create a degree of venture successfulness.
As stated in the problem indication the venture will be influenced by incumbent(s) during the process. It can be said that, whatever influence the incumbent will have, this influence has a direct moderating effect on the venture perspectives which, in return change the eventual venture successfulness.
The second and final variable within the conceptual model should represent the initial protection the venturing organization opts towards the incumbent in combination with the response of the venturing organization towards negative incumbent influences.
An example of a conceptual model could be:
Venture targets
Venture successfulness
Venturer reaction uppon incumbent
Incumbent influence
1.6 Relevance
From an academic perspective this thesis will opt to integrate the knowledge which is currently quite scattered. Alongside some theories seem to be contradictory as well.
From a managerial perspective this thesis will most likely provide managers of various organizations with information on how to manage their process of venturing in order to enhance their innovative competences in comparison to its competitors.
1.7 Research Design
This research will be conducted via an extensive literature review. this review will consist of gather data from various sources in order collect information based on different opinions and perspectives within the field. This research is necessary to indicate whether the problem stated is actually valid and relevant. As a result of the research a vast amount of categorized information from the field will be available for further analysis.
1.8 Overview of the rest of the chapters
In the first parts of the thesis information from scientific sources will be used to determine which perspectives with regard to innovation via venturing there is within the field. According to those findings the second part of the thesis will focus on comparing these different perspectives with one and other to formulate a possible dominant stream of perspective.
In the finalizing chapters research will be opted to be able to determine whether the current perspectives with regard to venturing are complete enough.
Chapter 2. - Theoretical background
Talking about the phenomena "New ventures" creates a wide possibility of definitions. This wide range of definitions finds it source in that new ventures are regarded as multidimensional phenomena which lacks a retrospective backing. (Gartner, 1985). Since new ventures leave a wide area of interpretation they are very interesting to investigate since a clear vision of the field is needed. As already stated by the problem statement the wide area of interpretation might actually also add to the problem of pinpointing which market will be influenced by a new innovative idea. As a result new ventures has gathered a lot of interest from researcher all over the world and therefore data isn't scarce.
After analyzing numerous amounts of data a trend within the perspectives appears to rise. New ventures can roughly be categorized within three different venture types (Chapter 3). In order to analyze all these types of ventures there is need of a universal model which can apply for every type of venture which, in addition, needs to be able to determine the different weak and strong points of new ventures. Strong and weak points have to be measured in order to form a conclusion concerning the research questions. It would be most ideal if the model offers some sort of time reference as the different stages within a venture may differ in strength and weakness characteristics.
Within the analyzed literature a suitable model formed by Webster (Webster, 1975) will become the universal model onto which all the venture types will be tested upon.
A graphical representation of the model by Webster:
Figure 1. Venture stages (Webster, 1975)
2.1 Venture stages
According to the model stated in Figure 1 Webster defines ventures in a total of 6 different stages. Each transition from one stage to another is based upon a (significant) change in the "perceived probability of venture success" in relation to "time". Obviously the reaction within the model is based upon several activities and situations which occur during the different stages. In order to elaborate in more detail about the Webster model and describe the different actions and situations each stage will be described in detail.
Stage 1.
Before the actual start of the venture itself the model sets out in stage 1 with the "Pre-Venture" stage. Within the pre-venture phase organizations mainly search for information in order to be prepared as much as possible. This researching in the pre-venture phase mainly influences the level of uncertainty concerning future predictions. As the period of time of forecast increases the amount of uncertainty whether the predication is true also increases hence the future is unknown. Preparing as much up front as possible in the pre venture stage can result into a more significant future prediction process.
In this phase organizations which are venturing towards a joint venture goal need to form the written agreements to which both companies file their respective tasks within the entire process. Along the entire stage 1 the level of commitment for the organization rises as effort, money and other resources are used.
Stage 2.
After the pre-venture stage the actual venture of the organization starts. The organization will be enthusiastic about the new venture and are likely to work hard and as a team for the common goal. As the model shows this actual start of the venture results in an short uplift on the y-axis as morale is high and prospected success seems more surefooted. As time progresses, stage 2 has a decline of morale. This decline is mostly due to the fact that in the model of uncertainty the expectations of the current position of the venture might be a letdown. Doubt in success of the venture is also rising at this point.
Stage 3.
When the decline of perceived probability of venture success increases the venture reaches stage 3. In this stage the level of uncertainty rises and changes in the initial venture prototype (Stage 1) are made. In the short term this redesign only sets the venture progress back even more. Literature shows different reactions upon this phenomena. (Baron, 2008) This difference can be based upon the fact that entrepreneurs which venture either have had venturing experience or are venturing novices. The first category of entrepreneurs often react in an effectual method based on their experience in combination with causal reason while the latter can only base their reactions upon causal reasoning. While these reactions form the majority of responsive actions from either the experienced or novice entrepreneur the assumption should be interpreted with considerable caution.
Stage 4.
In stage 4 the entire organization has persevered. The organization moved on because realization kicked in that with only maximum team effort a success can be made or the organization is beyond the point of no return. As a practical example in the further stages the implementation of a product is used.
Moving on with the venture lifted morale. The organization has launched its product which gives an confirmation of the initial plans (and probable revisions along the way). Reaching stage 4 also indicates that the complete distribution and promotion of the product has been dealt with successfully.
Stage 5.
After stage 4 it is time to earn back the investments of previous stages. Stage 5 is the most crucial phase within the entire venture. The organization has to find a way to be able to prepare for the final version of the venture by for example issue shares in order to receive money. In the end of this stage there will be the "critical moment"
Stage 6.
In the final stage there is a two course possibility. The venture can on one hand be successful and enter a upwards stream of perceived probability of venture success combined with a decreasing new venture vulnerability. This course is named "Venture Success" and marks the end of the venture. On the other hand there can be a downward trend with decreasing perceived probability of venture success and an increase in new venture vulnerability. This course is named "Venture Failure"
Figure 2. Venture stage 5 and 6 (Webster, 1975)
2.2 Independent entities
New ventures focusing on a goal which leads to an independent entity as the result can be regarded as a venture to independent entity. An organization is regarded to be an independent entity when the organization has no association and/or affiliation to any other company by means of subsidiary, division, or branch. (INTERNET SOURCE)[4] Aiming for an independent entity as a goal is one of the hardest forms of venturing since, after completion, the organization has to be financial independent to be able to be relevant. The entire venture is increasingly more difficult due to risk factors.
2.3 Internal dimensions
While independent entities have no association to any other company by means of subsidiary, division or branch an internal dimension an internal dimension can be seen as a an new department within the existing organization. An upside is that it can benefit from the funding and experience of the rest of the organization. Aiming for an internal dimension within the company is less risky compared to the independent entity hence in the end the internal dimension can (if close to failure) rely on the financial backing of the rest of the organization.
2.4 Joint venture
The last type of venture goals distilled from literature is venturing towards a joint venture goal. A joint venture consist of two or more organizations combining forces to reach a common goal (Hewitt, 2005). A remark has to be made that not every collaboration to reach a common goal counts as a joint venture. Project based collaboration (AI: for a set period of time) is not considered to be a joint venture in this thesis.
A joint venture between organizations most likely has a independent entity as a goal. Since two or more organizations participate it is unlikely that the organizations invest in a new department within one of the venturing partners as none of the partners will reap the benefits in the long term.
In conclusion,
During chapter two six stages concerning the developmental phase of a venture were presented in model 1. Every stage has its own critical circumstances where the entire venture could fail but in the end of stage 5 the actual most critical moment of the entire venture takes place. It can be said that a venturing organization is at its most weak during the last 25% of stage 5. The actual outcome of the venture (failure or success) will be determined afterwards as to whether the line goes into a decline (failure) or ascend (success).
To answer the first research question, it can be said that
Chapter 3. - Incumbent influence.
When organizations are following the six stages presented in chapter two it is very likely incumbents within the market are going to react upon the venture process in order to stop it. This theory has been tested by Koski, Heli A & Majumdar K. Sumit. (2002). The opinion is shared by (Leeflang & Wittink, 1991), (Gatignon, Robertson & Fein, 1996), (Henrik Morch von der Fehr, 1991), (Masahiro, 2000), (Gaskins, 1970).
As determined, organizations venture in order to exploit a potential for their own benefit. this benefit is usually in hand of other organizations unless the venture's goal is towards a completely new market. As this dissertation focuses on a market with competition the incumbent influence will also be measured with regard to a competitive market.
A side note has to be made, the influence of an incumbent is not always negative (Masahiro, 2000), (Fang & Cavusgil, 2006), (Jerez-Gómez et al., 2005). Organizations can learn from each other especially in innovation. When organizations combine forces they can benefit from one another's competences.
A perfect example of organizations combining forces in order to both benefit is Philips and its secret subsidiary R&D program. At the Philips R&D Campus in Eindhoven small start-up organizations which haven't got the financial resources to work out (possible) innovations are subsidized by Philips. When an innovation turns out to be interesting for Philips the small organization has to give up its innovation to Philips in return for the financial backing it received. In some cases Philips even contracts the entire organization as Philips staff in order to retain the know-how.
In addition incumbents which face both a weak and a strong entrant might allow the weak entrant to enter the market in order to collaborate and keep the stronger entrant out if the incumbent can't keep the stronger entrant out singlehandedly (Masahiro, 2000).
In conclusion it can be said that if an incumbent can defend its current position in the market singlehandedly from opposing entrants it will do so. If however, the entrant can and will be in some way beneficial to the incumbent a possible entry from that entrant within the market will be allowed.
In chapter 3 several options of an incumbent in order to hamper the venture will be stated.
Limit pricing:
By using the limit pricing method an incumbent can form a barrier for the venturing organization to enter by, in essence, drop the prices of his products to such a level that entry would be unattractive for the venturing organization. (Market Power Handbook, 2005) (Milgrom & Roberts, 1982). In an extreme form the incumbent can even result to lowering its price in such a drastic way that entry would not only be unattractive but also unprofitable. To determine whether a market is unattractive or even unprofitable the reaction function of both organizations
Legenda
Râ‚(L) = Passive incumbent
Râ‚(H) = Agressive incumbent
Râ‚‚ = Venture organization
0â‚ = Maximum price level
0â‚‚ = Maximum price level
0₃ = Maximum price level
Figure 3. Limit pricing
If the venturing organization can only match 0â‚ then the incumbent doesn't even have to do anything to make the market unattractive or unprofitable.
0â‚‚ on the other hand is unattractive but profitable when the incumbent remains in a passive nature. The market is unattractive because if the incumbent reacts and opts for an aggressive stance the line goes past the 0â‚‚ the venturing organization moves into an unprofitable position and is forced to leave.
0₃ finally is the most ideal position for the venturing organization. Even with an aggressive move of the incumbent the venturing organization cannot be put off into a non-profitable area.
Economies of scale:
When the venturing organization faces a market with an incumbent with a lot of scale advantage in terms of product quantity. Therefore, economies of scale are most effective in markets which rely around producing a lot of units in which economies of scale creates a drop in costs per product which eventually grants the benefit. (Chandler, 2004) These benefits types of costs in this case are also sometimes called falling unit costs. (Market Power Handbook, 2005)
While economies of scale might seem to be more characteristics of a (large) incumbent rather than a technique that the incumbent can use to deter the venturing organization it is actually both. The incumbent can use its economies of scale characteristic in order to set an operating standard by it will operate. The incumbent can send out a signal to the venturing organization that entry would be very unfortunate as the costs per unit are in the favor of the incumbent.
Legenda
$(L) = Costs
Q= Production amount
Figure 4. Economies of scale
Economies of scope:
Benefits from economies of scope can be defined as when the incumbent can use its infrastructure on several different end products. (Market Power Handbook, 2005) An example of this can be a car manufacturer which uses its assembly robots for different types of cars from the same brand or even provide other brands of products. As the amount of variations in products increases the total costs can be more evenly divided over different product ranges.
Legenda
$ = Costs
P Var = Amount of product variations
Figure 5. Economies of scope
Preemptive capacity expansion:
The incumbent can also opt to show a confident attitude towards the venturing organization. By investing a lot in capacity the incumbent shows that it has money which he is willing to spend. By investing in capacity preemptively it might show that the market isn't as profitable as the venturing organization might expect since the incumbent is stocking up on supplies. (Kapida et al., 1984) This option however does have its downsides. As the incumbent stocks up he most likely needs the help of his suppliers in order to receive substantial quantities to make a strong impression. Aside to that, the supply he will attain has the risk of not being sold or depreciate in value as time passes.
To sum up this entry deterring tool, the added costs connected to preemptive capacity expansion have to be lower than the costs the incumbent would have when the venturing organization would have entered.
Sunk costs:
Sunk costs can be defined as costs an organization makes which can cannot (or not easily) be reclaimed when an organization determines to leave the market. An example can be a highly customized production machine which is not suitable for any other market. This machine basically only has value for the organization but has no relevant market value and therefore, in case of bankruptcy or market desertion has (almost) no value. (Gschwandtner & Lambson, 2002)
A market with a high percentage of sunk costs within every investment is relatively less interesting since a failed venture could lead to a higher amount of costs as suppose to a market with lower sunk costs.
Product proliferation:
Product proliferation is closely related to economies of scale. (Hilke, 1984) Incumbents in markets which are characterized by economies of scale can use product proliferation to deter entry in the market. Product proliferation means that by altering your products slightly you can increase the total amount of products in the product line and therefore suit the demand of more customers. (McGrath, 2000)
As the incumbent fills every possible niche within the market with the product proliferation the venturing organization might not see any feasible opportunities within the market.
A major downside however, is that product proliferation may result in a to customer-focused approach. A clear differentiation within the product range is also something consumers appreciate. This can be lost with product proliferation. (McGrath, 2000)
While an incumbent has plenty of mechanisms to discourage a venturing organization to enter the market the chance of (maximal) success of definitively deterring a venturing organization is not measured. Gatignon et al., (1996) claim the chance of successfully defending an entrant is based upon 3 variables, namely:
The speed of response.
The amount of marketing mix instruments used.*
The breadth of reaction.
*As point two does not concern any action by the incumbent point two will not be reviewed in chapter 3.
Speed of response:
When a venturing organization is planning to enter the market of an incumbent and the venturer is posing a serious threat for the incumbent it is crucial that the incumbent reacts fast in order to maximize the successfulness of deterring a venturing organization. Gatignon et al., (1996) concluded that the slower the reaction, the less likely the incumbent can successfully defend itself from entry by the venturer.
Reaction breadth:
As will be described in the following chapters, venturing organizations also have various of techniques and elements which are characterized by these ventures in order to increase the successfulness of market entry. Examples of these techniques are the entire marketing mix (Price, Product, Place, Promotion) and passive characteristics such as causal ambiguity and tacit knowledge. Gatignon et al., (1996) found that the more techniques from the venturing organization the incumbent wants to counter, the less successful the incumbent is to defend itself from entry. This conclusion can be drawn as dividing the countering effort of the incumbent over progressively more techniques the effort per technique will drop and therefore the successfulness rate of counter per technique will drop. Gatignon et al., (1996).
In conclusion,
An incumbent's influence upon the venturing organization is not only limited by opting for the use of deterring mechanisms such as limit pricing, product proliferation, economies of scale and scope. The initial reaction time taken to discover a possible venturing organization willing to enter in combination with the focus of reaction breadth towards the venturing techniques determines the overall successfulness of the entire defence operation of an incumbent.
Chapter 4. - Venture management.
"The essential act of entrepreneurship is new entry" (Lévesque & Shepherd, 2004)
4.1 Managing … what?
While thriving to fill in a market opportunity a venturing organization passes through 6 stages (chapter 2) in order to design and implement a venture. During the 6 stages the venture will have to meet certain criteria in order to continue the venture at all. (Webster, 1975).
As a venturing organization willing to create a start-up company in the market of an aggressive entrepreneur the management process of such a venture should be as optimal as possible hence the crucial stage 5 in figure 1 is near the absolute bottom of the graph. A venturing organization can use techniques to optimize the degree of success of the entire venture. These techniques have a direct moderation in the conceptual model between venture targets and venture successfulness (chapter 1)
Quintessential to a start-up organization is the preparation up front. As figure one illustrates, the pre-venture stage is by far the most lengthy period of the venture. The big question however is whether the actual time spent in stage one represents the actual venture process. As stage one is based upon planning and operationalisation of constructs and idea's it is heavily dependent on innovativeness of the organization and actual indicators in which sub-stage the venture resides in. Especially in stage one, where the venture consists of mostly ideas and concepts it is difficult to pin point where the conceptual pre venture stage starts and where it ends.
Every venturing organization is key to know how the organization can launch its venture within the market of an aggressive incumbent with the highest chance of success. As the success of the venture can be decided in different parts of the entire venture (Webster, 1975) the management of a venture needs to be perfect throughout the entire venture. The success of the venture can be influenced along the way by the venturing organization in order to maximize the chance of success.
While an incumbent can (mostly) rely on techniques in order to defend itself the defense mechanisms of a venturing organization are mostly characteristics instead of mechanisms.
As determined by Gatignon et al., (1996). the success of a venture is strongly influenced by the three criteria stated in chapter three to which an incumbent has influence. By focussing on those three criteria and describing possible methods/characteristics which can increase the defensive potential of the venturing organization the conceptual model stated in chapter one can be finalized.
Reaction time:
As the first criteria is the speed in which the incumbent reacts to entry Gatignon et al., (1996). it is obviously key for the venturing organization to disguise the entire operation as long as possible in order to "delay" the incumbent. While there is also evidence that some researcher opt for the exact opposite approach which involves letting the world know you are venturing. Farrell & Saloner, (1986). This does not necessarily mean that its always the best solution.
As Gatignon et al., (1996) concluded, the reaction of the incumbent upon the venturing organization is the most threatening factor with regard to venture success it seems logical to prevent awareness as much as possible. While this obviously seems to be indirectly contradictory with Farrell & Saloner, (1986) were awareness is key for new product survival it is the most logical choice to prevent the most threatening factor with regard to venture success if the venturing organization can do so. While there is no actual information available concerning the actual extent of an incumbent increase in influence that would created by the awareness techniques from the venturing organization one can safely state that the increase in awareness would not have a positive effect on disguising the entire venture.
In order to create the maximum chance for the new start-up organization to survive is to find the perfect balance between awareness amongst consumers while remaining to keep the venture as disguised as possible in order to minimize the defensive capabilities of the incumbent.
When information with regard to ventures or any other innovation projects for that matter need to be kept secret the organization can refer to a so called "Non-disclosure agreement" (NDA). (Gupta et al., 2007). An NDA is used to ensure that sensitive information will remain private by forcing participating employee's to sign. If the rules in the NDA are violated punishment will be severe.
A side note in addition to the delay of reaction time of an incumbent is that according to Gatignon et al., (1996). an incumbent's reaction is less cautionary towards new start-up ventures if the new start-up firm has no apparent ties with large, influential firms. This incumbent reaction is based upon the fact that new start-up organizations without ties to firms are less likely to pose a significant threat as oppose to start-ups with (financial) backing from large organizations.
Marketing mix:
In order to make the newly released product a success there must be awareness amongst the potential consumers that the new product is actually launched. While the techniques in chapter 4 opt to effect the incumbent the actual focus should actually be on consumers (Howard, 1983).
To create awareness amongst potential customers an organization can fall back upon numerous marketing techniques such as advertising, sampling and product placement etc. According to research by Farrell & Saloner, (1986) the increase in awareness (either pre-launch or after launch) lowers the uncertainty and boasts an increase in willingness to pay. While the methods stated above create awareness amongst potential customers it will most likely also create awareness amongst the aggressive incumbent. As described above, a perfect balance in terms of marketing mix is necessary to optimize the eventual successfulness.
Causal ambiguity and tacit knowledge:
Whilst not actual techniques, causal ambiguity and tacit knowledge are two vital characteristics which directly influence all possible incumbent defensive actions. First, let's take a step back and describe these two characteristics in detail.
Tacit knowledge can be seen as knowledge which is not easy transferable from the source to a recipient. (Business Dictionairy). This type of knowledge within the venturing organization can exists of specific product/service details which will most likely form a substantial amount of the eventual sustainable competitive advantage as information which is normally not accessible (on paper, digitally etc.) are mostly ideas or concepts in one's head. As the basic foundations of every innovative idea are always in one's head the venturing has the edge in comparison to the incumbent as the incumbent will most likely not have the correct knowledge at hand to immitate the ventureres product/service. (Nonaka et al, 2003) (Zeynep et al, 2008).
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