Excerpt
Dissertation on the subject
An evaluation of the relevance of corporate venture
capital investment as a means for diversified high-
technology concerns to sustain competitiveness
written by
Karsten Jennissen
born in Cologne, Germany
at Coventry Business School, Coventry University under the supervision of
Simon Horsman, and at the Business School of the University of Applied
Sciences, Aachen, Germany
1998/99.
2
Contents
List
of
abbreviations
5
List
of
figures 6
List of tables
7
A. Introduction and methodology
8
B. Basics regarding technology and high
10
technology
concerns
I. Definitions and characteristics of technology and the
10
technology market
1.
Science
and
research
10
2.
Technology
10
3.
Technique
13
4.
Types
of
research
14
5.
Innovation
14
6. The concept of core technology
15
7.
Technology
S-curve
and
life-cycle
16
8.
Technology
intensity
19
9.
Customers
22
10.
Technology
companies 24
11. The field of research "management of technology"
25
12. The scope of this paper
26
II. Target firms and the high technology market
26
1.
Market
trends
27
2. Strengths and weaknesses of target firms when compared
28
with other types of technology companies
a.
Weaknesses
28
b.
Strengths
29
3.
Window
on
technology 29
4. New technologies and new markets
32
3
C.
Competitiveness
33
I. Customer values
34
1. Real option values for customers
36
2.
Competitive
values
38
II.
Shareholder
values
40
1. Real option values for shareholders
42
2. Relation of customer and shareholder values
42
III. The ability to act and react and the dynamism of the
43
competitive environment
1. External organisational structures
43
2. Monopoly effect of innovation
45
3. Innovation and value creating business processes
47
a.
General
issues
47
b.
Development
process
49
c. Additional considerations to raise the customer value
50
d. Market introduction and diffusion
51
4. Reducing the threat by competitors' technologies
53
5. Dealing with shareholder pressure
54
IV. Developing a competitiveness approach for target firms
55
1.
Competitive
intelligence
56
2. Competitive support and education
58
3.
Shareholder
communication
58
4. Research
59
5. Capability to focus development
60
6. Organisation structures
and
culture
60
7.
Interdependencies
62
8.
Investment
levels
66
D. Corporate venture capital and competitiveness
68
I. Basics of corporate venture capital
68
1.
Definition
and
differentiation
68
2. Types and internal organisation of CVC investment
69
3. Characteristics of the investment process
71
a. Finding suitable investments
71
b. Portfolios
72
4
c.
Maintaining
investments
72
d. Developing investments and divesting
73
II. Corporate venture capital investment and sustaining
73
competitiveness
1. Potential benefits of corporate venture capital
73
2. Potential problems of corporate venture capital
78
3. How benefits and problems relate to competitive
79
investments
4. Conclusions about CVC investment and sustaining
82
competitiveness
Bibliography
86
5
List of abbreviations
CFD
Capability to focus development
CI Competitive
intelligence
CSE
Competitive support and education
CVC
Corporate
venture
capital
EIB
European Investment Bank
OSC
Organisational
structures and cultures
R Research
R&D
Research and development
SC
Shareholder
communication
6
List of figures
1. Technology
model 13
2. Diffusion, performance and substitution, relative to
17
potential maximum
3. Diffusion, performance and substitution, differential
17
4. Incremental application product and process
18
innovations
5. Core technology life-cycle and its industry
19
6. Customer
categories
23
7. Timing and risk of technology adoption
31
8. Conceptual framework of competitiveness
33
9. Components
of
competitiveness
34
10. Competitive threshold of customer values
39
11. Dynamism of threshold with respect to innovation
39
12. First-movers
and
followers 46
13. Direct interdependencies between
investments
64
14. Cumulative direct contributions to and from
65
other investments
15. Direct contribution to and from number of investments
65
16. Spectrum
of
venture
strategies
69
17. Types and internal organisation of corporate venture
70
capital investment
18. Competitive investments and corporate venture capital
83
investment
7
List of tables
1. Scopes of management of technology
25
2. Real option value sources for target firms
42
3. Competitive
intelligence
57
4. Competitive support and education
58
5. Shareholder
communication
59
6. Research
59
7. Capability
to
focus
development
60
8. Organisational structures
and
culture
61
9. Objectives of CVC investment as identified by Silver
74
10. Objectives of CVC investment as identified by Schween
74
11. Objectives of CVC investment as identified by McNally
75
12. Categories
of
objectives
76
13. Potential contribution of CVC investment to competitive
81
investments
8
A. Introduction and methodology
US Industrial corporations have started investing in small ventures in the 1960s.
After stock market declines in the 1970s, which led to exits from corporate
venture capital activity, many companies such as DuPont, Monsanto, General
electric, AT&T and 3M re-entered the venture capital market in the 1980s and
became an important source of finance for entrepreneurs in the late 1980s and
1990s. European and Japanese firms followed US firms during the 1980s,
however corporate venture capital activity has not been as frequent as in the USA.
Especially European firms have been more cautious (McNally, 1997: 58-63).
Research about corporate venture capital is limited in comparison with
research on venture capital in general. Usually corporate venture capital is simply
mentioned within other contexts, such as interfirm collaboration, general venture
capital activities or corporate new business development. Nevertheless, there is a
small number of empirical studies specifically on corporate venture capital, most
of which were done in the 1980s (McNally, 1997: 57-8). Recent studies by Silver
(1993), Schween (1996) and McNally (1997) present an overview of the current
range of corporate motivations. The objectives from the investors point of view
have changed from diversification to primarily strategic concerns which is
reflected in literature. However, studies do not examine whether corporate venture
capital is the appropriate instrument for investors to cope with the demands of the
high technology market environment which is characterised by dynamic
competition and uncertainty. A further question is how CVC investment relates to
the overall range of activities of investors to cope with the market environment.
This paper tries to evaluate how corporate venture capital investment can
contribute to sustaining competitiveness of large high technology concerns. To
obtain a means of evaluation, the issue of competitiveness firstly has to be
examined in general. As the aspects that determine competitiveness cover a broad
spectrum, the main part of this paper deals with the competitiveness of high
technology concerns in the current market situation. Once an approach to
sustaining competitiveness has been developed the following part examines in
which way recent empirical data regarding corporate venture capital investment
support the findings.
9
In the first chapter the paper deals with definitions in the context of the
term technology. This is necessary because many definitions are not clear or
uniform and because a common base for the paper is needed. The second part of
the first chapter outlines general issues regarding high technology concerns and
the market environment to clarify more specific terminology and indicate aspects
that are relevant to the discussion of competitiveness.
The second chapter discusses the competitiveness of high technology
concerns. In the first part competitiveness is examined with the help of a general
framework developed by Feurer and Chaharbaghi (1994). Along this framework a
substantial amount of secondary literature is reviewed and discussed to bring
forward evidence for all aspects that influence competitiveness. In the second part
of chapter two an approach to competitiveness for high technology concerns is
developed by finding common elements from the discussion in the first part and
by examining their characteristics.
The third chapter then looks at how corporate venture capital investment
contributes to competitiveness. First the basic characteristics of corporate venture
capital are outlined. Then the results of recent empirical studies are taken to
examine in which way the efforts of high technology concerns to sustain
competitiveness are advanced by corporate venture capital investment.
The reason why the author has chosen to rely on secondary data is twofold.
Firstly, the issue of competitiveness has many facets which are far-reaching.
Secondary data can provide the range needed to make informed statements.
Secondly, the studies on corporate venture capital indicate that additional primary
research would not be able to contribute significant new insights as to potential
benefits of corporate venture capital investment.
10
B. Basics regarding technology and high technology
concerns
I. Definitions and characteristics of technology and the
technology market
1. Science and research
Contrary to what one might expect there are no generally accepted definitions of
science and research. The scope of the term science varies in different languages,
as described by Staal (1995:7, cited by Braun, 1998). In the English language it
denotes physical, life and mathematical sciences whereas its equivalent in other
languages also comprises human science, social science and natural science.
Furthermore, the nature of science and its differentiation from research is not
always clear. Often the terms have circular definitions (Braun, 1998: 9; Betz,
1998: 77). In the context of this paper, the term science shall be used for the
`knowledge base', i.e. the understanding of nature and humanity, as well as
accepted methods to describe, manipulate and expand the knowledge base.
Science therefore is an object which consists of a knowledge base and methods.
Research shall be regarded as the activity of using scientific methods to describe,
manipulate and expand the knowledge base.
1
2. Technology
Technology, often used broadly as in `the state of technology', has meanings
ranging from the `general level of scientific knowledge' to `means of production'
(Basadur, 1995: 4, 53). Definitions either take a more practical route in stressing
the aim of technology to be `attaining performance characteristics of products and
processes' (Siemens AG Definition, cited in Braun, 1998), see technology
primarily as machines (Rhodes E. and Wield D., 1994) or see it as the application
of science (Layton, 1977, cited in Rhodes E. and Wield D., 1994). As a variation
of the first type technology is sometimes used as a synonym for technique or
1
These definitions are not given in the intention to clarify overlapping meanings in the general use of the
terms science and research but rather to have a consistent terminology for this paper. Furthermore, the term
research shall be looked at again after `technology' has been defined.
11
algorithm (Basadur, 1995: 43). However, technique and technology have distinct
meanings as one will see after a more accurate definition of the latter.
2
Betz (1998: 46-7) has identified four semantic contexts of the term
technology. These are
1. Technology as a generic concept, e.g. `flight' or `gun'
2. Technology as a system, which denotes the different configurations that are
possible to achieve a generic concept, e.g. aeroplanes or helicopters achieve
flight in different configurations
3. Technology as application contexts, i.e. the human context the technology
system is set in, e.g. flight is used in military or in commerce
4. Technology as artefacts, i.e. actual, recognisable products and devices
One needs semantic contexts in the definition process. They do not, however,
represent a viable definition in themselves, as they are still vague (e.g. what
exactly constitutes a generic concept?). Moreover, from a management point of
view, contexts may not prove useful.
A useful starting point is to attempt to derive the properties of technology
that encompass all definitions. Betz (1998: 9) defines the three basic
characteristics of technology as ,,the knowledge of the manipulation of nature for
human purpose",
3
i.e.
1. form of knowledge
2. manipulation of nature
3. human purpose
These elements need to be outlined in more detail.
Technological knowledge draws on the scientific knowledge base. This
has been discussed to a fair extend in research (Rhodes E. and Wield D., 1994).
Rhodes and Wield also find that science and technology have distinct traditions.
What remains unclear, however, is the exact relation between technological
knowledge and scientific knowledge, except for the presumption that knowledge
flows in both directions (Layton 1971, cited in Rhodes E. and Wield D., 1994).
This issue does not need to be resolved because it would lead too far in the
context of this paper and it restricts the view needed for the management of
change.
2
The term technique will subsequently be differentiated.
3
This is an approach similar to the second conceptual framework described by Rhodes and Wield (1994)
12
The fields of science technological knowledge draws on have changed in
the course of time. For many industrial goods, the predominant field, even though
not exclusively, has been natural science. As the trend towards more service and
information in relation to all goods produced changes the way industries function,
other sciences, e.g. languages and social sciences, contribute to technological
knowledge as well. A typical example is software development, which not only
draws on hardware specifications, but uses behavioural sciences to optimise
interfaces. For technology to fulfil a human purpose in a better way a variety of
sciences need to be recognised as an equally important basis.
Technology is a general manipulation of nature. Therefore the term
technology needs to be differentiated from actual products and processes.
Products most closely resemble technological artefacts as described earlier. There
can be a variety of distinct products that use a common technology, i.e.
technology achieves a certain functionality which in turn can be used in more than
one product. For example, different cars of the same manufacturer might be based
on exactly the same technologies, where only the shape of the metal, the
arrangement of items and the colours are different. All technologies encompass
processes which, again using Betz's semantic contexts of technology, can be
regarded as systems. Processes can be broken down into two or more
technologies. This also highlights the fact that the knowledge base of a certain
technology may comprise knowledge bases of other technologies.
Above definitions are not satisfactory if one takes the view of the
management of technology firms. In an attempt to give a definition of technology
to best fulfil the purpose of this paper, one can extend Betz's three characteristics.
The knowledge base of a technology cannot only incorporate all sciences as its
foundation, but also includes how scientific knowledge can be taken advantage of
for use as well as knowledge about user and market needs.
4
Technology therefore
resembles a knowledge base in the described sense which is particularly fit to be
developed into marketable products, or to be licensed to others.
5
(See figure 1.)
6
4
The prerequisite that a technology must be used or fulfil market needs to be successful has been recognised
by Child (1987 cited by Pettigrew A. and Whipp R., 1991) and other authors (Chattel, 1998: 11). Still, market
needs have commonly been overlooked in technology definitions.
5
Mandeville's (1998: 362) definition of technology as ,,information applied to doing things" supports the
unrestricted potential knowledge scope as a basis of technology, which is an important circumstance to
remember. However it lacks differentiation to `technique'.
6
The author acknowledges that there are a variety of models that describe types of knowledge and processes
between them in detail (e.g. Betz, 1998: 96). These views, however, are not appropriate, as they would be too
stringent in this context.
13
Figure 1: Technology model
A few notes can be made regarding before-mentioned definitions. Firstly, the fact
that a technology incorporates a degree of fitness for the development of
marketable products is its main differentiation factor from science. Secondly, the
categorisation core technology refers to its qualification as a generic technology.
A generic technology incorporates a wide scope of development potential, i.e.
further developing potential for a high variety of artefacts, for different
configurations or in a diverse range of application contexts. A generic technology
is created when knowledge is significantly expanded in either or a combination of
the three types. The terms core technology and specialist technology need to be
seen as relative. Not all core technologies create whole industries, as did for
example the compact disc or the "von Neumann Principle" in today's computers.
Nevertheless, a technology might be the core of a certain product or system range
or application context.
3. Technique
As mentioned before the term technique needs to be differentiated from
technology. As Braun (1997: 10) states a technique is ,,the knowledge and
mastery of the rules and practices of an activity". Techniques can therefore be any
recognisable pattern of an activity that may or may not serve a purpose and need
not include the manipulation of nature.
scientific knowledge
how scientific knowledge
can be taken advantage of
for use
knowledge about
user and market
needs
knowledge base for a technology
held together by a degree of fitness
to be developed into
marketable products
(artefacts)
to be licensed (transferred)
to others
14
4. Types of research
The definition of research given earlier determined the scope of research as being
scientific knowledge. Opposite to other terms there are accepted categorisations of
the scopes of research in literature (OECD, 1984 cited in Braun, 1997; Rhodes
and Wield, 1994; Budworth, 1996). Commonly, three types of research are
recognised, basic research, applied research and experimental development. The
last type widens the scope of the original definition towards technological
knowledge, which is already implied in the term `development'. According to the
OECD (1984, cited by Braun, 1997: 11-12 ) the three types are defined as follows:
Basic research is ,,experimental or theoretical work undertaken primarily
to acquire new knowledge of the underlying foundations of phenomena and
observable facts without any particular use in view." Applied research is ,,original
investigation undertaken in order to acquire new knowledge directed primarily
towards a specific practical area or objective." Experimental development is
,,systematic work drawing on existing knowledge gained from research or
practical experience directed towards producing new materials, products and
devices, to installing new processes, systems and towards substantially improving
those already produced and installed."
7
5. Innovation
Technological innovation as defined by Betz (1998: 3) is ,,the invention of new
technology and the development and introduction into the marketplace of
products, processes, or services based on the technology". Some authors
distinguish between innovation and the market introduction of products (e.g.
Shan, 1990: 131) or use innovation in the same sense as Betz speaks of invention
(e.g. Leonard-Barton, 1994; Chattel, 1998). In recent literature, however,
innovation is regarded as the process from invention to market introduction
(Rhodes and Wield, 1994; ESRC definition, cited by Budworth, 1996). The ESRC
even considers success a vital element of innovation, a point which is debatable.
Much attention has been given to invention, probably because it is the
most vague element of innovation. Invention is thought of as being a certain
7
If one were to adhere to the original definition of research, one could argue, as far as the research and
development function of companies is concerned, that the scope of the `research part' was scientific
knowledge and the scope of the `development part' was technology knowledge. Betz (1998) states that
research in industry is primarily to advance technology whereas research in universities is to advance science
and generic technologies.
15
mindset such as creativity, intuition, imagination and insight (Chattel, 1998: 11,
233; McIlveen, 1994; Kuczmarski, 1996) as well as a process that requires a
certain social context (McIlveen, 1994; Lowe, 1995; Kwasnicki, 1996).
Kwasnicki (1996) found that invention is usually associated with individuals
because it embodies an idea
8
that one person had. However, as ideas are not
always generated by an individual in a business context team work is much
more likely the relation to the individual cannot be a core element of invention.
What one can learn from studies on invention is that it is an activity
requiring insight or intuition into more than one area. A new technology not only
stems from new scientific knowledge, possibly from various scientific areas. It
may also stem from an understanding of market needs or an understanding of the
application of science and technological knowledge.
9
As the likelihood that one
person has expert knowledge in all three fields that coincide to result in a new
technology is small, invention will always be a mixture of insight and intuition.
Moreover, there may be social contexts that favour these qualities, such as
interdisciplinary teams.
10
6. The concept of core technology
The term core technology has been explained earlier. If one takes the point of
view of an existing business or industry, a core technology can be seen as unique
to the business's or industry's products or processes.
11
One could say that the
view presented earlier is ex-ante, i.e. the potential to be a core technology. In an
ex-post view the core technology of a business or an industry is the requirement
for their products and processes. In other words, a core technology is a reason
why an industry exists. A business needs to have competence in that technology to
operate in the specific industry.
12
With regard to the importance a technology assumes for a business or
industry, Betz (1998: 55) also introduces the term ,,support technology", loosely
defined as being ,,necessary, but not unique". Twiss (1992: 72-3) differentiates the
term further into ,,complementary" and ,,peripheral technology". The former is
8
,,Invention is ... an idea for a new technology" (Betz, 1998: 4).
9
The balance of these elements has been the object of the ,,technology push (research-led) or market pull
(market-led)" debate which sought to find the predominant motivator for invention and innovation. Evidence
from research does not support the predominance of either direction (Rhodes, Wield 1994; Rothwell, 1994).
10
See Ahmed (1998) for a cultural best practice study on innovative companies.
11
Betz (1998) has used the term `unique' to describe a core technology
12
`need' is meant in the sense of `required', not as `sufficient' to be successful
16
`essential', the latter is not essential but contributes `to the effectiveness of the
business'. Betz continues saying that a technology which changes at a high rate
can be called `strategic technology'. If a strategic technology is also the core
technology of an industry it can be called ,,pacing technology". He implies that a
technology which changes at a high rate will offer many opportunities for
temporary competitive advantage, i.e. competitive advantage through innovation.
As he calls the so achieved competitive advantage temporary, he points out one of
the most significant disadvantages of innovation, which shall be discussed in
chapter two. One also has to keep in mind that a technology and the innovation
thereof bases on three types of knowledge. All three bear the potential of
significantly determining innovation, which can be important when competitive
advantage is sought through innovation.
7. Technology S-curve and life-cycle
A commonly conceived phenomenon of core technology is that it develops in a
curve pattern. (Betz, 1998: 127, 164; Twiss, 1992; Freeman, 1988; Kumar and
Kumar, 1992, cited by Betz, 1998; Gold et al., 1980; Rogers, 1983: 241).
Researchers have found three aspects of technology which develop in an S-shaped
curve in the course of time. These are technology diffusion, technology
substitution and technology performance. The diffusion of technology is the rate
of its adoption by companies for product and process development whereas the
substitution of technology is the rate of its replacement in products or processes
by a new technology. The performance of technology, also called technology
progress, expresses the efficiency and effectiveness with regard to its functionality
as it develops in the course of time.
Diffusion, substitution and performance are measures used in technology
forecasting.
13
All three figures assume that there is a hypothetical maximum
potential inherent in a core technology. The measures form an S-shaped curve if
one depicts relative numbers with regard to the maximum. (Figure 2). One could
also show growth rates, i.e. differential figures (Figure 3). As diffusion rises, more
companies direct their resources towards that particular technology. With a lag
after diffusion, incremental innovation raises the performance of a core
13
Betz (1998: 172) uses the example of IC chip density and maps the S-curve to forecast performance
development and maximum.
17
technology. As the growth rates of technology performance decline the
substitution growth rate reaches its peak.
Figure 2: Diffusion, performance and substitution, relative to potential maximum
Source: adapted from Betz (1998: 127, 164)
Figure 3: Diffusion, performance and substitution, differential
These are obviously idealised curves. Mapped curves of real cases will have
altered forms. Furthermore, even though they are used for prediction purposes,
unforeseen innovations particularly radical ones can make a technology
% of
hypothecial
potential
TIME
Diffusion
Performance
Substitution
growth
rate
TIME
Diffusion
Performance
Substitution
18
obsolete before its forecasted time or alter the path in other ways. S-curves do
however provide the basis for empirical research which tries to depict ex-post
graphs of particular technologies.
14
In an extension of these models, Betz (1998) and others (Matsuyama,
1999) have postulated that incremental innovations circle around application and
products, first. After some time the significance of incremental process
innovations rises above application and product innovations (Figure 4). Betz
(1998) also describes that the number of companies in markets rises sharply with
high incremental application innovation and decreases when incremental process
innovations start to dominate. He implies that competition becomes fiercer which
results in the reduction of the number of companies as the application context of a
technology matures. Furthermore, process innovations may require more
resources, i.e. economies of scale, or specialised competence than initial
application innovations. All models combined result in the technology life-cycle
that shows the market volume of the industry of a core technology (Figure 5).
Figure 4: Incremental application product and process innovations, differential
Source: adapted from Betz (1998: 60)
14
For examples see Freeman (1988)
Innovation
Time
Application
product innovations
Process
innovations
19
Figure 5: Core technology life-cycle and its industry
Source: Betz (1998: 63)
8. Technology intensity
The terms ,,high technology" or ,,high-tech" as well as ,,medium technology" and
,,low technology" are frequently used. Many times, however, they are simply
intended as specifying particular industry sectors without evidence of why the
given sector is classified as high, medium or low technology (examples:
Pinnington and Haslop, 1995; Schween, 1996).
Common characterisations usually incorporate only some aspects of
technology intensity. Pinnington and Haslop merely state that high technology
companies are characterised by comparatively shorter product life cycles than
medium-to-low-technology companies. Gerke and Grupp (1994, cited by
Schween, 1996) argue that technology intensity can be distinguished by the
percentage of research and development costs of total sales. Betz (1998) holds
that industries are called high-tech if their core technology changes at a high rate.
He does not comment whether performance growth rates of a core technology are
high or whether core technologies are substituted quickly. The latter would result
in constantly renewed technology life-cycles.
Market
volume
CORE TECHNOLOGY
LIFE CYCLE
Time
Technology
development
Application
launch
Applications
growth
Mature
technology
Technology
substitution
and obsolescence
NUMBER OF FIRMS
Excerpt out of 91 pages
- Quote paper
- Karsten Jennisen (Author), 1999, An evaluation of the relevance of corporate venture capital investment as a means for diversified high-technology concerns to sustain competitiveness, Munich, GRIN Verlag, https://www.grin.com/document/185631
Similar texts
Publish now - it's free
✕
Excerpt from
91
pages
Comments