The delicate art of growth

Inside Business: Large companies need clear objectives when they go down the capital venture route or they may well get lost, writes Roger Trapp

WHEN Apple Computer set up a programme to pursue ventures in the mid-1980s, it had the twin objectives of earning high returns and supporting the development by third parties of Macintosh software.

McKinsey & Co, the international management consultancy, says in a study it achieved an internal rate of return of about 90 per cent over five years, but had little success in improving the position of the Macintosh.

Furthermore, Paul Brody and David Ehrlich, the authors, point out that these returns, "though attractive, had minimal impact on the company's overall performance" as will be clear to anybody in the least bit familiar with the company's chequered past.

The point made by Mr Brody, a former McKinsey consultant now working as a specialist in high technology markets with i2 Technologies, and Mr Ehrlich, a consultant in the firm's Kuala Lumpur office, is that a venture programme is just one instrument for implementing a company's business mission. Claiming that the Apple programme's managers later admitted that the strategic potential of their investments had not been realised, they say that the primary objective "should clearly reflect the company's overall strategy".

In the latest issue of The McKinsey Quarterly, they set out how their experience suggests that only four objectives can legitimately claim to do this. The first of these is improving the capture of value from strategic assets. This is most appropriate for companies that are able to exploit traditional assets such as world-class manufacturing skills, extensive distribution networks or strong brands, but lack enough good product ideas to capture the full value.

Merck, the pharmaceutical company, and 3M, the industrial company, have pursued venture programmes for such a reason.

Second, is improving the capture of value from good ideas. This is most suited to companies that are good at generating ideas but struggle to bring many of them to market. Organisations with extensive technical skills but a lack of enterprise suffer from such problems, with Xerox PARC perhaps the most-often-quoted example.

The third objective is responding more competitively in a rapidly evolving industry. Organisations that are battling with energetic upstarts can find themselves aiming in this direction, and a venture programme can provide a platform for boosting successful product innovation, with strategic bets used as a defence mechanism to keep competitors from gaining access to key evolving technologies. The article "Can big companies become successful venture capitalists?" says that Cisco Systems, the fast-growing producer of internet-related products, has pursued this route to gain control of important technologies.

The final objective is supporting demand for core products. This, say Mr Brody and Mr Ehrlich, applies when the demand for a company's core products is affected by the evolution of a separate industry niche, and a well-structured venture programme can be useful in shaping the direction of such an evolution. They point to how both Intel and Adobe Systems have used venture programmes to support technologies that drive demand for their core products.

The objectives and the clear thinking needed to pursue them form a key part of the article's argument that successful venture capital investment is a lot harder than it sometimes looks. With management gurus and consultants urging the boards of large companies to follow the example of the fast- growing companies that are driving the economies of many of the world's leading industrial nations and become more enterprising, executives must feel under pressure to start venture capital funds.

One of the problems is that, while venture capitalists' successes gain publicity, the failures tend not to be noticed. As Messrs Brody and Ehrlich note, venture capitalists are specialists who tend to have a simple goal: "Take a pile of money and make it bigger." Such a steady focus on financial returns makes decision-making easier. But when larger companies go down this route, there is a tendency to confuse this with the desire to gain access to innovation or markets, to retain entrepreneurial talent and to achieve greater growth for core products.

They say that the fact that Adobe Systems, for example, has been so successful with the $40m venture fund launched in 1994 that it has recently set up another demonstrates that big companies can apply the venture capital model effectively. But more often the results are disappointing.

Among the reasons are difficulty in establishing the systems, capabilities and cultures that make good venture capital firms successful, corporate managers' lack of freedom to fund innovative projects or cancel those that will not live up to promise and the fact that managers are typically equipped with the skills for managing mature businesses rather than nurturing start-ups. But at the route of the problem, suggests the McKinsey article, is a lack of understanding of the characteristics of the venture capital model and the need to tailor a programme to an organisation's own circumstances without losing sight of the essentials.

Above all, an organisation needs to be absolutely clear about its reason for launching the programme, which, of course, brings you back to the four key objectives and Apple.

Suggested Topics
Premier League Live
footballLIVE Follow all the Premier League action as it happens
Life and Style
3D printed bump keys can access almost any lock
gadgets + echSoftware needs photo of lock and not much more
The slice of Prince Charles and Princess Diana's wedding cake and the original box from 29 July 1981
newsPiece of Charles and Diana's wedding cake sold at auction in US
James Argent from Towie is missing, police say
peopleTV star had been reported missing
Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
i100(and it's got nothing to do with the Great British Bake Off)
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind the scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
ebooksAn evocation of the conflict through the eyes of those who lived through it
i100Steve Carell selling chicken, Tina Fey selling saving accounts and Steve Colbert selling, um...
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Mario Balotelli pictured in his Liverpool shirt for the first time
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Network Engineer (CCNP, CCNA, Linux, OSPF, BGP, Multicast, WAN)

£35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...

DevOps Engineer (Systems Administration, Linux, Shell, Bash)

£50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...

Data Scientist (SQL, PHP, RSPSS, CPLEX, SARS, AI) - London

£60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...

Financial Technical Consultant (C++, C#, Finance, MSc, PhD)

£50000 per annum: Harrington Starr: Financial Technical Consultant (C++, C#, F...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone