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CREATIVITY AND INNOVATION MANAGEMENT

Embracing Innovation as Strategy: Corporate Venturing, Competence Building and Corporate Strategy Making Wim Vanhaverbeke and Nico Peeters Large diversified companies companies do not have good track records in managing discontinuous change and in turning breakthrough innovations into long-term growth and profit engines. Their existing technological capabilities tend to facilitate cognitive inertia, path dependency and low levels of experimentation. However, some companies seem to find a dynamic balance between exploitation and exploration, between path creation and path dependence. We focus on how these established firms manage that continuous change process, and more specifically we seek to answer how corporate strategy, competence building and new business development interact in rejuvenating a company. Furthermore, we investigate how these concepts are at play on an operational level by looking at corporate practices in large companies that have a track record of successful strategic rejuvenation.

n a business environment characterized by rapid and disruptive technological changes, incumbents have to acquire new technological capabilities and explore new business opportunities in order to stay profitable in the long run. New business development as an organizational practice can be an effective carrier to build novel competencies. Yet, these competencies or the technology they constitute may be imitable. It is the meta-capability of integrative innovation management that is the basis for the firm’s competitive strength. It is the way new business development practices interact with new competence building and corporate strategy that makes successful new business development hard to replicate, and therefore a source of sustainable profitability. New business development can only be legitimized if the corporate strategy is creating a misfit between current competencies and those that are required to compete effectively in the future. New competencies in turn further challenge the extant strategy, thereby opening new strategic perspectives. This dynamic interplay between (technological) competencies and

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strategy implies that a firm’s strategic vision actually is a ‘moving target’. A successful innovating company therefore resolves the duality between current strategy, new competencies and future strategy: an ambidextrous organization possesses that capability, with corporate venturing (new business development) as an effective operational mode to reconcile the inherent incongruence in the company.

Introduction The competitive landscape is changing rapidly. Significant discontinuities such as globalization, deregulation, blurring industry boundaries through new business models, technological convergence and disintermediation pose new managerial challenges forcing managers to create new competencies (Prahalad, 1998). Similarly, discontinuous technological innovations (Tushman & Anderson, 1986) may threaten the strategic position of incumbents. While radical innovations have the potential to turn core competencies into © Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.

EMBRACING INNOVATION AS STRATEGY

‘core rigidities’ (Leonard-Barton, 1992), new technologies also enable companies to create competitive advantage both in existing and in new, yet unstructured industries. Many scholars have argued that most companies – with a few notable exceptions such as GE’s successful entry in the CT scanner industry, Du Pont’s biodegradable polymer (Biomax), Motorola’s mobile telephone business, Hewlett-Packard’s development of the ink jet and ink business, and Corning’s optical fibre business – do not have good track records in managing discontinuous change and in turning breakthrough innovations into longterm growth and profit engines (Christensen, 1997; Prahalad, 1998; Prahalad & Hamel, 1990; Tushman & O’Reilly, 1996). Furthermore, incumbents are on average not adept to manage the challenges and reap the business opportunities related to the emergence of disruptive or discontinuous technologies (Bower & Christensen, 1995; Christensen, 1997; Dougherty & Heller, 1994; Dougherty & Hardy, 1996; Leifer et al., 2000). Lastly, even companies with strong technological capabilities systematically have problems converting discontinuous technological innovations into competitive advantage in new industries, applications or markets. An intriguing question then is: why do some firms manage to profitably exploit nontraditional business opportunities and why do others appear to be bound to their existing and maturing set of businesses? More specifically, we will look at exploiting business opportunities that are based on radical technological innovations. We will review this question from a dual perspective. In a first section, we provide a conceptual framework for the understanding of innovation and particularly the management of new venture initiatives based on new technologies. We will see how new business development functions as a carrier for competence building, and that the integrative management of innovation in general – or the new business development process in particular – can be understood as a dynamic capability from which the firm derives its competitive advantage. New business development (NBD) will then be connected to corporate strategy, and the dynamic interaction between both will be explored. More specifically, we provide some organizational practices that have to be present in order to get mutually stimulating effect between new business development, competence building and strategy formation. The result is a resilient or ambidextrous company where corporate strategy stretches the company towards new competence building, which allows it to enter competitively in new

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markets or industries through new business development practices. In a second section, we report how we conducted a series of interviews to get a detailed case study on corporate entrepreneurship and related management practices within DSM, a large Dutch chemical company. The results of this case study are reported in the third section. In this case study we link some of the theoretical concepts discussed in the first section to concrete and rich routines and procedures in the company. In the last section we analyse the mutual relationship between corporate entrepreneurship, competence building and the strategy-making process.

Conceptual Framework New Business Development as an Organizational Carrier for Competence Building New business development can be a valuable process for a company to effectively tackle the challenges posed by emerging radical technologies. Confronted with new technologies, a company has to develop new competencies to meet the technological and commercial requirements of the growth opportunities. Some large diversified companies develop a semi- or quasi-autonomous organization within the company to learn new competencies and to acquire the required technologies (Burgelman, 1983, 1995; Christensen, 1997; Lynn, 1998; Tidd, Bessant & Pavitt, 2001). That is: corporate venturing or new business development1 projects commonly function as drivers for competence development and deployment – an essential condition to successfully manage radical innovation.2 Several authors (Bakker, Jones & Nichols, 1994; Floyd & Wooldridge 1999; Helfat & Raubitschek, 2000; Hoskisson & Busenitz, 1 New business development (NBD) (Roberts & Berry, 1985) is used as synonym for corporate venturing (CV) (Block & MacMillan, 1995; Von Hippel, 1988), corporate incubators (Hansen et al., 2000) and corporate entrepreneurship (Ellis & Taylor, 1987; Kuratko, Montagno & Hornsby, 1990; Zahra & Covin, 1995). 2 Some authors (Christensen, 1997; Christensen & Raynor, 2003; Hamel, 2002) are also critical about the success of dedicated ‘new business development’ units. They are more in favour of dispersed corporate entrepreneurship. Many firms do have indeed bad experiences with new business development experiments, but usually because they did not had the right organizational context in which it could play its role as a carrier for corporate renewal (see also Chesbrough, 2003).

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2002; Kazanjian, Drazin & Glynn, 2002; Zahra, Nielsen & Bogner, 1999) highlight the importance of new product development to the development and exploitation of capabilities and knowledge, and thereby bring the role of product development, venturing initiatives and corporate entrepreneurship into the (dynamic) analysis of resources, capabilities and knowledge. They indicate how firms can utilize competencies and knowledge to introduce sequences of new products that in turn may extend the competencies of the company. Successful new product development and commercialization build on but also broaden the knowledge and capability base of the company. Hence, new product and business development or other types of corporate ventures – for example, internationalization initiatives – are the organizational carriers to extend existing competencies and to build new ones. More specifically, Bakker, Jones and Nichols (1994) argue that the concept of corporate competencies increases the efficiency and effectiveness of the NBD-process, which, in turn, enables the company to build competitive advantage in new, attractive business areas.

Managing New Business Development as a Dynamic Capability Companies have to deepen their knowledge base in their core technologies to stay ahead of the competition in the current markets. But technologies mature and firms usually have to broaden their technology base in technological areas that are required to compete effectively industries which are promising but new to them. Companies face considerable organizational challenges if the most attractive growth opportunities lie outside their current applications and technologies. This challenge largely derives from the fact that the decision to develop new businesses creates a fruitful misfit between the existing competencies and those that are required. Bakker, Jones and Nichols (1994, p. 15) formulate it as follows: ‘NBD endeavors the need to overcome the misfit of the current organization with the desired organization by identifying, acquiring and developing competencies’. NBD functions in the first place as an “organizational carrier” through which new competencies are developed or acquired in order to create new, profitable businesses. Companies try to stay ahead of (potential) competitors by investing in research and development and external technology sourcing (Chesbrough, 2003; Keil 2002). But technology investments only pay off when they are commercialized; that is when companies spot value-creating

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opportunities in technological capabilities and market trends and translate these entrepreneurial insights into valuable products for customers. Each time an NBD-team starts a new NBD-project it attracts people, resources, and technological or market know-how and directs them toward a common goal. It moves knowledge from the idea phase to the full commercialization of a product. During that entrepreneurial process the team encounters continuously technological problems and market uncertainties that have to be resolved progressively as the project proceeds. This in turn boosts the company’s knowledge and skills about markets and technologies. As a result, NBD is one of the most important “organizational carriers” to bolster a firm’s technological capabilities over time. In this way, NBD compels organizations to broaden their knowledge and technology base, but at the same time it is the organizational carrier through which new competencies are developed or acquired. Entering new businesses implies the development of new technological competencies, as the company can no longer solely exploit its current competencies. To enable companies to optimally learn new technological capabilities they need not only a strong in-house technological infrastructure, but also a strong external technology acquisition capability, as internal R&D with knowledge and technology from outside are considered to be complements, reinforcing each other’s productivity (Cohen & Levinthal, 1990; Duysters & Hagedoorn, 2000; Lane & Lubatkin, 1998). This imported knowledge can take various forms, ‘including new employees, purchased equipment, licensed technologies, or acquisitions of other companies. Sources of imported knowledge include customers (Von Hippel, 1988), suppliers (Leonard-Barton, 1992), alliance partners (Gomes-Casseres, 1989; Kogut, 1988), universities, government laboratories and consultants’ (Kazanjian, Drazin & Glynn, 2002, p. 179). Put differently, as technological pace and complexity are increasing, companies have to complement internal development with external acquisition of technology through external ventures (e.g. having a minority holding in venture capital funds or start-ups), alliances and acquisitions (Granstrand et al., 1992; Lambe & Spekman, 1997). As a result, internal and external learning should therefore be managed in an integrative way. A common organizational instrument to do so is the incorporation of NBD into a semior quasi-autonomous new venture division (Brown & Eisenhardt, 1997; Fast, 1978; Schoonhoven & Jelinek, 1990) or a corporate



incubator (Hansen et al., 2000). The advantages of such a semi-autonomous unit – that usually reports only to senior management – are multiple.3 First, the ventures that are too risky for managers of existing business units get nurtured for a considerable time. Second, because of its autonomy the small unit can explore new technologies and build new competencies, as it can hire dedicated front-line managers (project champions), tap into the capabilities of the central R&D lab (and shaping its explorative research), negotiate licence agreements or establish alliance with companies that have (complementary) technology or market know-how (Leonard-Barton, 1992). Maybe the most important advantage is that experienced unit-members become experts in detecting and evaluating new venture opportunities, in establishing a social network outside the company and in acquiring external technology from different sources. In this way, the unit becomes a valuable vehicle for knowledge building (Kazajian, Drazin & Glynn, 2002). On the other hand, many firms have not been successful in managing new business development or focused corporate entrepreneurship (Chesbrough, 2003). Autonomous business units exploring new business opportunities for the company have been crushed by the power mainstream businesses that are cash-generators and have a have a short-term financial focus. ‘New business development’ units are almost by definition peripheral in a company where the majority of the managers at all levels are preoccupied with incremental innovations, improvements, operational efficiency, cost cuts and ‘narrow’ market share competition. Nurturing radical innovations and exploring attractive business opportunities for the future growth of the company is at odds with the dominant logic within the firm. Prahalad and Bettis (1986) introduced this term: it is a set of heuristic rules, norms and beliefs that managers create to guide their actions. Dominant logic facilitates the coordination among the different parts of the company and it filters out ideas and initiatives that do not comport with it. Hence, it is a selection mechanism that allows a company to 3

This semi-autonomy does not imply that the venture unit is not controlled at all. On the contrary, Thornhill and Amit (2000) find empirical evidence that high venture autonomy are charactistic of low performing ventures in large companies. Barringer and Bluedorn (1999) furthermore show that strategic controls that reward creativity and the pursuit of new business opportunities through radical innovations have a significant impact on the entrepreneurship intensity in companies.


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maintain focus and coherence among the firm’s activities (Chesbrough & Rosenbloom, 2002). This drive towards internal consistency is likely to stifle initiatives that experiment, open up new business opportunities and create variations and heterogeneity. If these tendencies towards internal consistency are present, it is clear that a companies that want to balance exploration and exploitation (March, 1991; Benner & Tushman, 2002, 2003) face paradoxical management requirements and have to be managed in a fashion that is distinct from the traditional roles of strategy, structure and systems (Ghoshal & Bartlett, 1997). Long-term involvement of firms in new business development activities indicates that they mastered the ability to recognize new business opportunities and to subsequently build the competencies to capitalize on those opportunities. This ability can be understood as a dynamic capability helping firms to achieve competitive advantage (Eisenhardt & Martin, 2000; Helfat, 1997; Teece, Pisano & Shuen, 1997). Long-term involvement of a company in new business development activities indicates that it has developed the capability to handle the conflicting demands of mainstream and new stream businesses. Successfully managed NBD thus helps a firm build competitive advantage, and as an enabler of new competence development, it is crucial for the rejuvenation of technological capabilities and the long-term profitability of a company. In the next subsection, we will explore the relationship between NBD, new competence building and strategy formation. We argue that successful and sustained NBD involvement allowing a company to detect new path creation and generating options for future business opportunities can only be achieved if it has also developed organizational routines or practices that structure and spur competence building and strategy formation. The relationship between NBD and competence building on the one hand and NBD and strategy formation on the other hand, has received some attention in the literature (Bakker Jones & Nichols, 1994; Burgelman, 1983; Dess et al., 1999; Dougherty, 1995; Thornhill & Amit, 2000; Tushman & O’Reilly, 1996). We will argue that NBD, strategy formation and competence building have to be linked to each other to understand the different roles NBD can play in an established company.

Strategy as a Moving Target Releasing the innovative forces in a company does not automatically translate into the

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desired competence building that secures the firm’s future revenue streams. If there is no sense of overall direction in the company, chaos is likely to emerge; operational business units that are managed as profit centres will stick to incremental innovations with shortterm revenues; central lab researchers will focus on challenging breakthrough inventions that cannot be developed as corporate ventures because of inadequate technology or market feasibility; individual intrapreneurs may start up a venture that has to be spunout or divested later on because there is no way to integrate it in the company. Burgelman (1983, 1986) claims that a company needs to allow for initiatives that do not fit with its current strategy, but they always have to be screened in terms of alignment with the company’s future strategy. The need for cohesiveness and complementarity between the mainstream businesses and the NBD activities has also been stressed by others (Barringer & Bluedorn, 1999; Lengnick-Hall, 1992; Thornhill & Amit, 2000; Tushman & Nadler, 1986). Indeed, when firms have the ambition to rejuvenate competencies or to build new ones, they have to have a sense of overall strategic direction. Corporate strategy as ‘stretch’ – an overarching corporate purpose (Ghoshal & Bartlett, 1997) or strategic intent (Hamel & Prahalad, 1994) – leads to a substantial ‘misfit’ between a company’s extant competencies and its ambitions (Hamel & Prahalad, 1994). This misfit creates a tension between the exploitation of current competencies and the exploration of new ones (March, 1991), between control and stability on the one hand and flexibility and creativity on the other hand (Zahra, Nielsen & Bogner, 1999). Strategy as stretch provides a direction but also identifies the major competencies to build or upgrade, and is therefore a crucial part of strategic renewal processes (Ghoshal & Bartlett, 1997; Volberda, BadenFuller & van de Bosch, 2001). Furthermore, the tension stimulates managers and employees the get committed to learning processes accelerating in this way the building of new competencies. Strategic vision does not only give direction and sense to the development of new competencies, but it is at the same time facilitated by the corporate venturing process and explorative technological research that goes with it. With each new venture the company learns about new technologies, applications and markets, which in turn sharpen the recognition of new strategic opportunities: the current technological competencies of a company or the deepening or extension of it may drive the cognition of

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(future) strategy.4 In other words, the corporate strategy-making process is fostered by the ongoing technology building process: a strong commitment to and deep knowledge of a particular technology field allow ‘a company to see a strategy that other firms fail to imagine’ (Itami & Numagami, 1992, p. 127). Hence, the continuous interaction between corporate strategy and NBD leads to the coevolution of both, where they mutually nurture each other in an iterative process. That is: there is a dynamic interaction between technology development and corporate strategy (Burgelman, 1983; Hamel & Prahalad, 1994; Itami & Numagami, 1992; Kazanjian, Drazin & Glynn, 2002; Zajac, Kraatz & Bresser, 2000).5 The development of technology and strategy are intrinsically related to each other and are complementary, but their joint dynamics can only be understood if they are related to corporate entrepreneurship activities. Others have shown that corporate entrepreneurship and core competencies are mutually constitutive (Burgelman, 1983; Dougherty, 1995). Companies are gradually building new competencies by nurturing external ventures, creating new internal ventures and developing new businesses. However, the same process drives the cognition of new strategic perspectives and, as a consequence, a ‘strategic vision’ has to be considered as a moving target. Building new competencies leads to the cognition of new strategic opportunities putting the current strategic vision under continuous pressure to adapt accordingly. Consequently, we argue that entrepreneurial activities, corporate strategy and competence building have to be considered simultaneously to understand 4

Itami and Numagami (1992) emphasize this positive effect of cognitive processes. The literature has emphasized the negative effects focusing on the inability to unlearn (Hamel & Prahalad, 1994) the impact of technological trajectories and organizational inertia (Ahuja & Lampert, 2001; Cohen & Levinthal, 1990; Dougherty, 1995; Leonard-Barton, 1992; Levinthal & March, 1993). 5 The same need for a dynamic framework is echoed in the literature about technological capabilities, where technology-based companies face an apparent paradox: companies have to take advantage of the existing technical capabilities – competencies – without being hampered by the technological trajectory they followed in the past (Helfat & Raubitschek, 2000; Henderson & Clark, 1990; Leonard-Barton, 1992; Teece, Pisano & Shuen, 1997; Zajac, Kraatz & Bresser, 2000). The tension between leveraging existing capabilities and the creation of new ones through entrepreneurial activities is also at the core of the emergent literature about strategic entrepreneurship (Hitt et al., 2002).



the crucial role of corporate ventures in how established companies change and learn at the corporate level.

From Dominant Logic to Continuous Change Strategy as stretch puts the innovative organization constantly under pressure: the development of new competencies through co-ordinated actions of R&D labs and new business development units brings the company closer to being in line with its strategic vision. At the same time, however, these new competencies, which are for instance based on deep knowledge of a particular technology, stimulate people from central R&D labs, new venture managers or others to envision new business opportunities. The company has to further adapt its corporate strategy if these opportunities are not fully in line with the current strategy. New business development – which might be the firm’s response to discontinuous (technological) change in the environment – thus simultaneously creates ‘fit’ and ‘stretch’. This apparent incongruence challenges management, facing the task to prepare the organization not only to develop the appropriate competencies to implement the current strategy, but also to envision how the leveraging of these novel competencies determines the strategic position of the company in tomorrow’s competitive landscape. Tushman and O’Reilly (1996) suggest that only an ‘ambidextrous organization’ is ready to successfully cope with this apparent paradoxical challenge. Corporate ventures constitute one way to create ‘ambidexterity’ in a company as they are favourable for ‘hosting multiple contradictory structures, processes and cultures within the same firm’ (Tushman & O’Reilly, 1996, p. 24). In this way, a company can succeed to simultaneously exploit its current competencies and explore new technologies (March, 1991) – not passively undergoing the contextual (technological) changes, but proactively shaping its own future. In other words, it is a continuously changing, learning company. How a large company can successfully tackle those challenges and become ambidextrous by developing its dynamic innovation capability is explained and illustrated in the following section. We take DSM as an example: we examine how the company manages to rejuvenate its technological capabilities and sustain its competitive advantage thanks to the strong interactions between strategic flexibility, competence building and the creation of corporate ventures beyond its current markets or technologies.


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Methods There is no unifying paradigm in the research field of (corporate) entrepreneurship leaving us with the option to adopt an explorative research design and to focus on empirically derived rather than theoretical models. Moreover, the dynamics between corporate ventures, the strategy-making process and competence building are complex and contingent to the organizational context. The linkages between venture activities, competencies and strategy are highly embedded in the broader corporate culture and are not always made explicit. In order to capture this complexity and embeddedness, we chose to work with an explorative case study method (Glaser & Strauss, 1967). We made two choices. First, we focused on a single company – DSM, a Dutch chemical manufacturer – in order to get fine-grained information about these linkages that are in the literature as yet an incompletely documented phenomenon. The detailed description of these linkages comes at the expense of external validity. Next, the detailed information could only be obtained by semi-structured in-depth interviews, with managers from different parts of the company. Since corporate entrepreneurship is almost by definition opposed to the mainstream businesses, it was important to interview managers from different parts of the company. We conducted interviews with nine managers during a twoyear period. Four of them had different positions in the corporate venturing unit, one was member of the board, two interviewees were respectively head of Corporate Planning and Development and head of Corporate Research, and the last two were general managers of operational business units. The interviews were semi-structured and took usually two to three hours. As we conducted interviews we focused our attention on the question why the corporate venture unit could play a significant role in the discussions about corporate strategy making and competence building although it was small in terms of budget or number of employees. We focused on the organizational mechanisms or routines that enabled this. We constantly compared information from the most recent interview with that of prior interviews with other managers. In cases where inconsistent information emerged we conducted a follow-up interview until the inconsistencies were resolved or new insights were made explicit.

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The Extended Role of Corporate Venturing at DSM Setting DSM is a Dutch Speciality Chemicals and Materials company that is active worldwide: in 2003 the group had annual sales of close to €6.1 billion and employed about 26,000 people. The company was founded in 1902 as a state-owned coal-mining company, yet a century of change led the firm from coal mining over petrochemicals to speciality chemicals. New business development and corporate venturing over time grew in importance as instruments to drive these strategic changes, and our interest lies in the management processes underpinning the innovation initiatives and successful redefinition of DSM’s strategy. The most recent strategic reorientation of DSM reduced the firm’s business portfolio from the original three clusters ‘Life Science Products’ (LSP, including biotechnology), ‘Performance Materials’ (PM, particularly elastomers, resins, plastics) and ‘Industrial Chemicals’ (IC, mainly petrochemicals) to two. DSM sold its petrochemicals business to the Saudi Arabian company SABIC in 2002, and now concentrates entirely on LSP and PM. The company aims to achieve sales of around €10 billion by 2005, with at least 80 percent of sales accounted for by specialities (LSP and PM). DSM’s management intends to become a leader in the strategic group of global ‘multispecialty’ players6 by readjusting the ecompany’s product portfolio in terms of focus and size. In line with its strategic vision to become a global multi-speciality player DSM defined biotechnology and performance materials as its two technological mainstays. Potential

6 In the chemical industry trends are leading towards a structure with three strategic groups (Porter, 1985) of chemical companies. First, large conglomerates (sales of over €25 billion, e.g. Dow Chemical, DuPont, Bayer and BASF). Second, highly focused pure play specialists (sales usually not surpassing the €3 billion mark, e.g. Lonza, Givaudan and Novozymes). Lastly, the global ‘multi-speciality’ players (size of roughly €5 to 15 billion in annual sales, e.g. AKZO Nobel, CIBA, Clariant, Degussa, ICI, Rhodia, and Rohm & Haas) offering a portfolio consisting predominantly of a set of chemical specialties. Somewhat outside this chemical spectrum are the large global oil companies, which are relevant for chemicals as they increasingly dominate the petrochemical business, and the group of large global pharmaceutical and food processing companies, which are also consolidating.

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synergies at the intersection of both technologies were identified as key technological search areas to find new sources for innovative successes giving the company a competitive edge as a multi-speciality player in the long run. How the company managed the transition from a bulk chemical firm to a multi-specialist player can best be understood by taking a closer look at the internal processes that underpin the company’s strategic flexibility.7

Strategic Vision Innovation is explicitly captured as a value driver in DSM’s strategic vision: innovation is believed to be the key to the long-term profitability of the firm. In order to stimulate innovation within the company, strategy formulation processes are fully interactive, embracing all levels of the organization (General Management, Business Groups, Corporate R&D, Board of Directors and so on). The company has institutionalized a formal ‘Corporate Strategy Dialogue’ and a ‘Business Strategy Dialogue’ for that purpose – complemented by continuous informal dialogue and debate within the organization. These interactive processes assure the bottomup stream of innovative ideas within the firm, on corporate and business level respectively. Furthermore, through a ‘Business Technology Analysis’ (BTA) new technological developments (internal as well as external) are systematically monitored and evaluated in view of the new dimensions they can give to the company’s strategy. Top priorities are subsequently identified, and (resource) provisions for the implementation thereof are made. These are formalized in a ‘Strategic Contract’ with the Board of Directors, in which long-term performance is defined both in terms of financial criteria and (incremental as well as radical) innovation initiatives to achieve sustainable corporate growth. In this way, a balance between shortterm responsibility for business performance and long-term responsibility for sustainability in the future is achieved.

Innovation in Action A strategic vision that puts innovation at the core of the company’s activities, would not be viable if the company did not systematically 7

Based on in-depth interviews with several managers at DSM, a.o. Emmo Meijer, Chief Technology Officer at DSM, and Robert Kirschbaum of ‘DSM Venturing and Business Development’ and company documents.



organize and develop competencies for the exploration of new technologies on the one hand, and the commercial exploitation of these novel technologies on the other hand. The exploration of new technologies is embedded in the mission of DSM’s R&D. At least 10 percent of the company’s R&D budget is assigned to Corporate R&D for the exploration of novel technologies that cannot at first sight be housed in a business group. The remaining 90 percent of the firm’s research budget is allocated to R&D within each business group, partially for the realization of incremental innovations, partly for exploration of radical innovations. R&D can thus be considered the most open function in DSM: it interacts with the entire knowledge infrastructure, internally as well as externally. Internal and external ventures and the related explorative technological research are the key drivers to the development of competencies in this respect. As for the integration and implementation of novel technologies into DSM, the company has set up a Corporate Research Board, where corporate R&D and (mainstream!) business group directors discuss and think together about new scientific and technological developments. This not only makes the business groups aware of and familiar with new technologies, it also increases the businesses’ willingness to market newly developed technologies. The Corporate Research Board thus facilitates the absorption of new technologies in the business, stimulating technological innovation. A ‘Stage-Gate’ process has been designed to further smooth the progress of bottom-up innovation and the absorption of new technologies: ideas are generated by the research community, and their feasibility is subsequently evaluated by a Research Council, in which Corporate R&D joins forces with the R&D Directors of the business groups per cluster. The Research Council in question will also formulate the innovation initiative in a project proposal, to be approved by the Corporate Research Board. The Corporate Research Board will – in view of the company’s strategy – make the ultimate ‘go’ or ‘kill’ decision. Thus, innovation is ‘stratified’ in an objective process, so as not to suppress creativity and avoid bureaucracy, while a firm connection is established between corporate R&D and business units. The final ‘go’ decision for an innovation project also implies the allocation of a project to a particular business or by absence of a business group into which the new technology can be integrated to ‘DSM Venturing & Business Development’ to nurture the innovation. This


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business development unit is a separate business group that organizes new business development initiatives as well as the firm’s external venturing activities. This business group is actively involved in new business development (internal corporate ventures), investments in venture capital funds and in promising start-up companies (external venturing), and equity and non-equity alliances with universities and other businesses with complementary technologies or other intangible assets such as knowledge about and expertise in manufacturing. ‘DSM Venturing & Business Development’ is, as it were, the breeding ground for truly path-creating innovations (Garud & Karnoe, 2001), rooting in DSM. A constant element in this innovation process is the interaction between technology and strategy. DSM’s innovation initiatives – internal and external venturing, sustaining or disruptive – find their origin in the early exploration of new scientific domains or novel technologies. DSM’s acquaintance with new technologies drives the cognition of new strategic opportunities and at the same time lays the foundations for the building of new competencies. This mutual interaction between strategy and technology is in itself a forceful driver in the firm’s innovative ventures. The competitive advantage of the company lies not so much in the technologies or resources the firm develops or acquires, but in the integral process it had designed to manage innovation company-wide.

Imagining Options for the Future As Hamel and Prahalad (1994) have argued, competition for the future is competition for opportunity share rather than market share. DSM too embarked on a search for profitable business opportunities. It therefore explored new technological areas, at the same time related to, yet remote from its current technology base in LSP and PM. At the intersection of both biotechnology and materials science it discovered ‘bioterials’. Bioterials can be defined as each material of which the production has been realized through bio-based processes (e.g. biocatalysis (emzymes) or bioprocessing) instead of synthetic chemistry. The advantages are that traditional products are now produced based on renewable resources that some of these products are biodegradable, or that production costs are considerably lower. The potential value of the growing business opportunities at the intersection of biotechnology and chemical processes has recently also been highlighted by industry watchers (Bachmann et al., 2000), while the

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recognition of the strategic potential for DSM in this area has been growing steadily as a result of the company’s ongoing technology developments and acquisitions in these fields. DSM is consequently committed to further develop its expertise in bioterials, and to finetune its strategy of becoming a leading global multi-speciality player. The opportunity identified in bioterials did thus fit with the corporate strategic objective of becoming a global leader in the multispeciality industry group. Because of the perceived benefits of high added-value activities in this research area, characterized by high growth and more stable profit levels, management had reoriented the company’s strategy in this direction. As a consequence, building technological capabilities in this field was set forth as a stretching goal. In that sense, corporate strategy was a driver for new competence building (bioterials). It is an illustration how current strategy cultivates the firm’s future technology. Yet, at the same time, DSM’s new strategic focus on bioterials was in itself the result of an ongoing recognition process that was a ‘byproduct’ of the research and development efforts and technology acquisitions in the areas of biotechnology and materials science. Researchers and managers identified bioterials because of their acquaintance with and knowledge about both technologies (Cohen & Levinthal, 1990): in other words, current technology drives the cognition of future strategy. The combination of biotechnology and materials science indicates a consistent streamlining of the technological coherence within the company. New business development (bioterials), at the intersection of two existing business (LSP and PM), was the carrier for the development of these new technological competencies, that at the same time ‘fit’ and ‘stretch’ the company’s strategy. This goes to show that corporate strategy and technological competencies mutually interact, generating a process of continuous technological competence building and providing a direction for future competence building that is in line with the stretched strategic goal-setting. The company’s strategy then indeed becomes a ‘moving target’, fostering innovation. The ability to actualize innovation and capitalize on new opportunities originates in DSM’s ‘openness’ to new developments in science and technology: this openness is not only a matter of external co-operative dynamics (external ventures, alliances) but also of internal practices (internal ventures) and corporate culture. Its origin can be traced back to the processes, procedures and man-

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agement practices that the company has implemented, and which are in fact a mere formalization of its underlying values and culture. The company’s true innovative capability is rooted and embedded in that culture, allowing it to reconcile the need for stability and control with the recognition that uncertainty and risk are inevitable in the exploration of new strategic directions. The company could be considered as an ambidextrous organization: it ‘is able to compete successfully by both increasing the alignment or fit among strategy, structure, culture, and processes, while simultaneously preparing for the inevitable revolutions required by discontinuous environmental change’ (Tushman & O’Reilly, 1996, p. 11). In other words, the company has succeeded in making innovation systemic: innovation has become a corporate capability integrated in the entire organization (Välikangas, 2003). Innovation ís the strategy of DSM and its ‘goal is [to be] an organization that is constantly making its future rather than defending its past’ (Hamel & Välikangas, 2003, p. 2).

Discussion and Conclusion This paper focuses on the question of how companies can achieve competitive advantage in new and attractive business areas when this requires the development of new (technological) competencies and a shift in corporate strategy. We have argued that most successful companies build new competencies through a sequence of corporate venturing initiatives (Dougherty, 1995; Leonard-Barton, 1992). The creation of new business based on new technologies forces companies to extend existing competencies and to build new ones. In other words, corporate venturing can be considered as an ‘organizational carrier’ to build competencies. Competence building and corporate venturing are at the same time intrinsically related to corporate strategy making. The relationship between corporate venturing and corporate strategy is typically a dynamic one: corporate strategy may activate and direct new business development and the accompanying competence building, but the latter also drives and refines the former. On the one hand, a ‘strategic vision’ challenges the organization by creating a misfit between what the company is and what it intends to become, by showing the gap between the existing resources and those required to live up to its ambitions. On the other hand, new competence building also drives and refines the cognition of corporate



strategy (Itami & Numagami, 1992). Competencies and corporate strategy co-evolve and, consequently, a strategic vision can be considered a ‘moving target’ for innovation. Managing that iterative process whereby strategy drives competencies and competencies drive strategy poses a major organizational challenge to the innovating company. Successful innovation should provide the firm with a competitive edge in extant or new markets or industries. We identified the integrative management of innovation, whereby innovation becomes a dynamic capability, systemic to the organization, as the key to sustainability. Innovation is no longer merely a tool for the implementation of the strategy but it actually is strategy. This implies that a firm manages to reconcile apparent paradoxes between strategic fit and the need for reinventing itself in view of a changing technology or market context. An ambidextrous organization possesses that ability, and we observed how the integrative management of innovation – new business development in particular – offers a suitable organizational framework in which the multiple and often contradictory demands of mainstream businesses and the new business development activities of the company can not only coexist but do actually nurture the innovative capability of the firm. This has been illustrated by the continuous corporate change process within DSM. In this company, strategy making is intertwined with new business development initiatives and competence building. The strategic vision on the corporate level legitimizes entrepreneurial activities throughout the company and provides criteria to select new initiatives. The corporate strategy at DSM facilitates the participation of managers and employees from virtually all hierarchical levels within the company to participate in the planning process. This, in turn, spurs creativity and facilitates the recognition of new business opportunities. Mainstream businesses recognize these opportunities based on current market needs or existing technological capabilities in the company. The corporate venturing unit on the contrary starts from business opportunities that require new competence building or the exploration of new markets. When the company builds new competencies as a result of its corporate venturing activities, managers also become aware of new strategic opportunities. Corporate venturing activities drive researchers and engineers to explore novel technologies, such as ‘bioterials’ in the case of DSM. The increasing acquaintance with the new technological fields drives in its turn the cognition of new strategic


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opportunities. In this way, the corporate venturing unit plays a potentially crucial role in the dynamics of corporate strategy. However, these new ideas can only be integrated into the heart of the corporate strategy when there exist organizational routines that allow other parts of the company to become convinced of their value. This has not come automatically given the fundamentally different objectives of mainstream and new stream businesses (Chesbrough, 2003). In most companies these new strategic opportunities get suffocated by the ‘dominant logic’ of the mainstream businesses. But DSM installed different organizational routines and procedures – with the ‘Corporate Strategic Dialogues’ as the most important one – assuring that new ideas from different parts of the company could be discussed as potential building blocks for the future corporate strategy. At DSM, corporate venturing is a practice that forces the firm to adapt its competencies over time and acts as a catalyst to recognize new strategic options. Corporate entrepreneurship is traditionally considered as an organizational instrument to generate new business opportunities. Dougherty (1995) argued that it also plays a crucial role in competence building and that venturing and a firm’s core competencies are mutually constitutive. In this paper, we have provided some evidence that the full potential of corporate venturing can only be understood if one relates it not only to competence building but also to corporate strategy-making processes.

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Wim Vanhaverbeke is at the Department of Business Studies – Limburg University Centre, and Eindhoven Centre for Innovation Studies – Eindhoven University of Technology. Limburg University Centre, Department of Business Studies, Universitaire Campus, building D, 3590 Diepenbeek, Belgium and Eindhoven Centre of Innovation Studies, Eindhoven University of Technology, P.O. Box 5135600, MB Eindhoven, The Netherlands. e-mail: [email protected] Nico Peeters is at the Eindhoven Centre for Innovation Studies – Eindhoven University of Technology.

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