Advantage from adversity: Learning from disappointment in internal corporate ventures

Abstract

New ventures represent opportunities to create or renew competitive advantages for established firms by expanding their pools of competences. In undertakings as uncertain as new ventures, however, disappointment is virtually inevitable. The implications of this conclusion are explored at both the strategic and the operational levels of the organization, utilizing cross-case comparisons of 23 ventures initiated by a single financial services organization. Strategic utilization of disappointment . For corporate ventures, strategic decisions involve choosing which ventures to launch, choosing combinations of products, markets, and technologies as the ventures unfold, and choosing which ventures to abandon. Naturally, these decisions are made with the expectation that the firm will eventually benefit from its venturing activity. Unfortunately, the most widely used accounting measures of success (such as return on investment, return on equity, and profitability) are unavailable at the outset, when these key decisions must be made. This article utilizes an alternative, the “trajectory template,” which assesses venture performance in three crucial arenas. The first is the external marketplace. Ventures that succeed in this arena demonstrate “market worth,” an indicator of the attractiveness of a firm's products and services to its customer population. The second arena is the internal marketplace of the firm. Success here results in “firm worth,” meaning that a venture is deemed to be more attractive than competing alternatives within the firm. Finally, ventures also compete in competitive arenas. To the extent that they possess “competitive insulation,” imitation or appropriation of advantage will be delayed. Absent market worth, a venture will never extract profits from customers in competitive markets. Absent firm worth, a venture will struggle for management commitment and attention, and in all probability will be starved of critical resources. Absent insulation, advantages will be rapidly matched or blocked by competitors. Success on the three dimensions together constitutes a template for the ideal venture. Any deviation from this template, and the venture is apt to be on a less than desirable trajectory. The trajectory template is a potentially powerful device for identifying correct management interventions in the face of disappointment. At the outset, participants naturally expect a venture to have high market worth, high firm worth, and significant insulation, or it is unlikely that they would launch the venture to begin with. Disappointing events that suggest that one or more of these criteria are not, in fact, being met, can provide data crucial to assessing the actual trajectory of a venture, setting the stage for strategic redirection. Operational utilization of disappointment . At an operational level, powerful forces mitigate against managers being able to use disappointment constructively. Ventures in which disappointment provoked healthy redirection are compared with those in which this did not occur. This allowed identification of processes that appear to be linked to the constructive use of disappointment. Managers appear more likely to learn from adversity to the extent that they: 1. Develop and dynamically use metrics to assess progress on market worth, firm worth, and competitive insulation; 2. Put in place systems to ensure that they have a “visceral” understanding of those who must support the venture; 3. Empower venture team members to bring emerging disappointments to light; 4. Build a benchmark model for interpreting information about the unfolding venture; 5. Install systems and procedures for the constant retesting and reformulation of this model as the venture unfolds; 6. Focus on redirection; 7. Build in early linkages between the venture and the firm to ensure that the firm will capture any benefits derived from ventures that are discontinued; and 8. Put in place processes that will capture learning from disappointments, particularly for ventures that are discontinued.