Proposition 5: In competence building type of CVI, the focal firm will be more likely to take a minority equity position.
DISCUSSION AND CONCLUSION
To achieve its organizational goal, the focal firm supported by its management team strategically builds new competencies as well as leverages the existing ones by way of CVI.
However, firm’s existing managerial capabilities may be constrained to some extent that building a totally new and unrelated competence is not economically viable. CVI is regarded as a strategic vehicle to bridge this gap by creating a network of competencies by which the focal firm can exploit static synergy (Christensen and Foss, 1997; Zahra and George, 2002) and explore new competencies. To have a profitable growth, firms not only leverage current competencies to exploit resource value but also build new ones to enable resource reconfiguration that generates new rents in an attempt to address rapid change in the environment.
A resource reconfiguration comprising an array of CVI carries two strategic purposes:
dynamic learning and static synergy to enhance growth momentum. Learning new competencies from partners helps a focal firm upgrade its own competencies to a more broad level or build a totally new one, which will be beneficial towards the focal firm’s long term growth. With regard to the purpose of static synergy, it will be realized from an array of multi businesses, which normally surround a specific form of technological competence. In fact, this is what competence leveraging is about: leveraging competencies in all sorts of applied products. We suggest these strategic purposes should be tested in the future research. As we have argued, if a learning mechanism can be properly devised between the focal firm and its partner firms, the focal firm can learn and benefit from obtaining new technological competencies that in turn provide opportunities to create new businesses for the focal firm.
However, how to implement an effective learning mechanism is worth further study.
Resource reconfiguration offers the focal firm tremendous opportunities to diversify in
the future. An equity stake in these entrepreneurial firms enables the focal firm to be informed of what constitutes their competencies, and it helps the focal firm evaluate the importance of partners’ competencies. However, minority investment hardly ensures the focal firm of successful learning from these entrepreneurial firms because they may release their secret of recipe to the extent to which the focal firm commits more resources in the target firm.
Otherwise, there is a potential threat of value appropriation and competition problems by the focal firm as far as these entrepreneurial firms are concerned. Thus, if the focal firm wants to effectuate its learning from these firms, it is more likely to increase equity involvement, which in turn not only shows its commitment but also exercises its control over the target firm.
Notice that these entrepreneurial firms are, by definition, likely to maintain a certain degree of discretion. For this reason, we may not see a dominant control on these entrepreneurial firms by the focal firm if the latter wants to rely on its partners’ competencies without the loss of high power incentive. Thus, there exists research potential to see how likely the focal firm, who intends to learn from its partners, increases its equity stake in these entrepreneurial firms without frustrating the extent to which partners’ incentives are sustained. Otherwise, the transfer of competencies is not feasible. Thereafter, two options remain. First, if the new competencies are transferred through the target firm to the focal firm, then we may expect the focal firm get involved in different businesses and undergo a process of diversification, which is defined as a resource reconfiguration of the focal firm where businesses and organization structure are changed. Thus, in our view, resource configuration precedes diversification.
Alternatively, if the transfer of new competence is effectuated outside the focal firm, we may observe a new venture that is addressable by the focal firm.
According to Sanchez (2003), an integration of transaction costs theory and real options theory can better capture the problem of economic organizing, which predicts several forms of economic organization under different combinations of supply side and demand side uncertainty. This study, starting from competence-based view, contributes by integrating
transaction cost economics and real options theory, to suggest the way a firm can conduct CVI.
This effort has clearly addressed our inquiry into governance structure in each CVI. The value of this integrative view is worth further empirical testing. To note, several variations may also need to be taken into account. For example, human factors may influence the decisions to reconfigure resources, and subsequent governance structure may also be different. Thus, this paper also dictates important managerial implications that enable the focal firm to more precisely delineate its growth foundation.
Conventional wisdom tells us that it is very difficult for the focal firm to self satisfy all its needs. This reality inevitably necessitates collaboration with partnering firms from which the focal firm not only leverages and maximizes the value of its current competencies but also has more opportunities to learn new ones. Among all, as we propose in this paper, a popular collaborative firm behavior is that a firm often conducts CVI that builds their resource configuration more effectively, which in turn enlarges the scope of the firm. Simply put, a well balance of developing new capabilities while managing the existing ones enables the focal firm to grow in a sense that it is so unique as to make imitations less possible and sustain competitive advantage more likely in the market (Kogut and Zander, 1992). Thus, it erects isolating mechanisms that protect the focal firm from imitation and preserve their rent streams (Rumelt, 1984).
To sum up, CVI is viewed as a strategic means to generate profits and establish growth foundation. Once built, all these target firms of venturing investments can be considered as the focal firm’s resource configuration by which the focal firm actually creates an inimitable barrier that is an evolutionary process featuring high level of causal ambiguity and time compression diseconomy.
Extent of Exploitative Learning
High Low
High Extent of Explorative Learning
Low
Figure 1: Corporate Venturing Investment Strategy Source: Liu and Lee (2003).
Types of CVI Items
Competence Replication Competence Leveraging Competence Upgrading Competence Building
Characteristics Scale Up Scope Applications Horizontal Extension New Venture Purpose served Efficiency Business opportunity Complementarities (both
product and competence)
New stream of business (Innovation)
Embedded Risk level Low Moderately low Moderately high High
Short run financial return High Moderately high Moderately low Low
Short term risk Low Moderately low Moderately high High
Long run financial return Low Moderately low Moderately high High
Long term risk High Moderately high Moderately low Low
Figure 2: Typology of Corporate Venturing Investment Source: Liu and Lee (2003).
Competence Upgrading Competence Building
Competence Leveraging Competence Replication
Figure 3: CVI, Resource Reconfiguration and Governance Structure Motivation
Figure 3: CVI, Resource Reconfiguration and Governance Structure Motivation
•Static Synergy
•Dynamic Learning
REFERENCES
Abetti, P. A. (1996), “The Impact of Convergent and Divergent Technological and Market Strategies on Core Competencies and Core Rigidities: An Exploratory Study,”
International Journal of Technology Management, 11 (3-4), pp. 412-24.
Balakrishnan, S. and B. Wernerfelt (1986), “Technological Change, Competition and Vertical Integration,” Strategic Management Journal, 7, pp. 347-59.
Barney, J. B. (1991), “Firm resources and sustained competitive advantage. Journal of Management, 17(1), pp. 99-120.
Bettis, R.A. and C.K. Prahalad (1995), “The Dominant Logic- Retrospective and Extension,”
Strategic Management Journal, 16(1), pp. 5-14.
Block, Z. and I.C. MacMillan (1993), Corporate Venturing, Boston, MA: Harvard Business School Press.
Bowman, E., and D. Hurry (1993), “Strategy through the Option Lens: An Integrated View of Resource Investments and the Incremental Choice Process,” Academy of Management Review, 18(4), pp. 760- 82.
Cantwell, J. (2002), Innovation, Profits and Growth: Penrose and Schumpeter, In Pitelis, C.
(Eds), The Growth of the Firm: The Legacy of Edith Penrose, Chapter 13: 215-24, New York: Oxford University Press.
Capron, L. and W. Mitchel. (1998), “Bilateral Resource Redeployment Following Horizontal Acquisitions: A Multi-dimensional Study of Business Reconfiguration,” Industry and Corporate Change, 7, pp. 453-484.
Capron, L., P. Dussauge and W. Mitchell. (1998), “Resource Redeployment Following Horizontal Acquisitions in Europe and North America, 1988-1992,” Strategic Management Journal, 19(7), pp. 631-61.
Chesbrough, H. W. (2002), Making Sense of Corporate Venture Capital, Harvard Business Review, March, pp. 4-11.
Chi, T. (1994), “Trading in Strategic Resources: Necessary Conditions, Transaction Cost Problems, and Choice of Exchange structure,“ Strategic Management Journal, 15, pp.
271-90.
Chi, T., and D. J. McGuire (1996), “Collaborative Ventures and Value of Learning: Integrating the Transaction Cost and Strategic Option Perspectives on the Choice of Market Entry Modes,” Journal of International Business Studies, 2nd quarter, pp. 285-307.
Christensen, J.F. and N.J. Foss (1997), Dynamic Corporate Coherence and Competence-based Competition: Theoretical Foundations and Strategic Implications, In Heene, A. and Sanchez, R. (Eds), Competence-Based Strategic Management, Chapter 13, pp. 287-312, New York: John Wiley & Sons.
Cohen, W. M. and D. A. Levinthal (1989), “Innovation and Learning: the Two Faces of R&D,” Economic Journal, 99, pp. 569-96.
Cohen, W. M., and D. A. Levinthal (1990), “Absorptive Capacity: A New Perspective on Learning and Innovation,” Administrative Science Quarterly, 35(1), pp. 128-52.
Crossan, M. M., H. W. Lane and R. E. White (1999), “An Organizational Learning Framework: From Intuition to Institution,” Academy of Management Review, 24, pp.
522-37.
Dixit, A.K., and R.S. Pindyck (1994), Investment under Uncertainty, Princeton, NJ: Princeton University Press.
Dushnitsky, G. and M. Lenox (2003), “Investing in New Ventures as a Strategy to Generate Innovations,” paper to be presented at the 23rd Annual Conference of Strategic Management Society held in Baltimore, Maryland, USA.
Eisenhardt, K. M. and J. A. Martin (2000), “Dynamic Capabilities: What are They?” Strategic Management Journal, 21, pp. 1105-121.
Finnie, W. C. (1998), “Strategic Partnering: Three Case Studies,” Strategy and Leadership, 26(4), pp. 18-22.
Folta, T. B. (1998), “Governance and Uncertainty: The Trade Off between Administrative Control and Commitment,” Strategic Management Journal, 19, pp. 1007-1028.
Foss, N.J. (1996), Introduction: The emerging competence perspective. In Foss, N. J. and Knudsen, C. (Eds), Towards a Competence Theory of the Firm, pp. 1-12, London and New York: Routledge.
Ghoshal, S. and P. Moran (1996), “Bad for Practice: A Critique of the Transaction Cost Theory,” Academy of Management Review, 21, pp. 13-47.
Gulati, R. (1995), “Social Structure and Alliance Formation Patterns: A Longitudinal Analysis,” Administrative Science Quarterly, 40, pp. 619-52.
Hannan, M. and J. H. Freeman (1989), Organizational Ecology, Cambridge: Harvard University Press.
Hayward, M. L. A. and D. Hambrick (1997), “Explaining the Premium Paid for Large
Acquisitions: Evidence of CEO Hubris,” Administrative Science Quarterly, 42(1), pp.
103-127.
Hennart, J-F. (1988), “A Transaction Costs Theory of Equity Joint Ventures,” Strategic Management Journal, 9(4), pp. 361-74.
Hurry, D., A. T. Miller and E. H. Bowman (1992), “Calls on High Technology: Japanese Exploration of Venture Capital Investment in the United States,” Strategic Management Journal, 13, pp 8-101.
Kanter, R.M. (1983), The Change Masters: Innovation and Entrepreneurship in the American Corporation, New York: Simon and Schuster.
Karim, S.Z and W. Mitchell (2000), “Path-Dependent and Path-Breaking Change:
Reconfiguring Business Resources Following Acquisitions in the U.S. Medical Sector, 1978-1995,” Strategic Management Journal, 21(10-11), pp. 1061-81.
Knudsen, C. (1996), “The Competence Perspective: A Historical View, In Foss, N. J. and Knudsen, C. (Eds), Towards a Competence Theory of the Firm, pp. 13-37, London and New York: Routledge.
Kogut, B (1991), “Joint Ventures and the Option to Expand and Acquire,” Management Science, 37(1), pp. 19-33.
Kogut, B. and U. Zander (1992), “Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology,” Organization Science, 3, pp. 383-97.
Kogut, B., and N. Kulatilaka (1994), “Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network,” Management Science, 40, pp. 123-39.
Kulatilaka, N., and E. C. Perotti (1998), “Strategic Growth Options,” Management Science, 44(8), pp. 1021-31.
Leonard-Barton, D (1992), “Core Capabilities and Core Rigidities- A Paradox in Managing New Product Development,” Strategic Management Journal, Summer special issue, 13, pp. 111-25.
Levinthal, D. A. and J. G. March (1993), “The Myopia of Learning,” Strategic Management Journal, 14, pp. 95-112.
Levitt, B. and J. G. March (1988), “Organizational Learning,” Annual Review of Sociology, 14, pp. 319-40.
Liu, H. Y. and J-R. Lee (2003), “Exploring Corporate Venturing Investment Strategy: A Competence and Organizational Learning Perspective,” paper presented at the 23rd
Annual Conference of Strategic Management Society held in Baltimore, Maryland, USA.
March, J. G. (1991), “Exploration and Exploitation in Organization Learning,” Organization Science, 2, pp. 71-87.
Masten, S.E., (1984), “The Organization of Production: Evidence from the Aerospace Industry,” Journal of Law and Economics, October.
McEvily, S. K., S. Das, and K. McCabe (2000), “Avoiding Competence Substitution through Knowledge Sharing,“ Academy of Management Review, 25(2), pp. 294-311.
McGrath, R.G. (1999), “Falling Forward: Real Options Reasoning and Entrepreneurial Failure,” Academy of Management Review, 24(1), pp. 13-30
Miles, M. P. and J. G. Covin (2002), “Exploring the Practice of Corporate Venturing: Some Common Forms and their Organizational Implications,” Entrepreneurship Theory and Practice, Spring, pp. 21-40.
Minshall, T. H. W. and E. W. Garnsey. (1999), “Building Production Competence and Enhancing Organizational Capabilities through Acquisition: The Case of Mitsubishi Electric,” International Journal of Technology Management, 17(3), pp. 312-33.
Nelson, R.R. and S.G. Winter (1982), An Evolutionary Theory of Economic Change, Cambridge, MA: The Belknap Press.
Pavitt, K. L. R., M. Robson and J. Townsend (1987), “The Size Distribution of Innovating Firms in the UK: 1945-1983,” Journal of Industrial Economics, 35, pp. 291-316.
Penrose, E. (1959), The Theory of the Growth of the Firm, London: Basil Blackwell.
Prahalad, C. K. and G. Hamel (1990), “The Core Competence of the Corporation,” Harvard Business Review, 68(3), pp. 79-91.
Roll, R. (1986), “The Hubris Hypothesis of Corporate Takeovers,” The Journal of Business, 59(2), pp. 197-216.
Rumelt, R. (1984), Towards a Strategic Theory of the Firm, in R.B. Lamb (Eds.), Competitive Strategic Management, Upper Saddle River, New Jersey.
Sanchez, R. (2003), “Integrating Transactions Costs Theory and Real Options Theory,”
Managerial and Decision Economics, 24: 267-282.
Sanchez, R. and A. Heene (1997), Competence-based Strategic Management: Concepts and Issues for Theory, Research, and Practice, In Heene, A. and Sanchez, R. (Eds.), Competence-Based Strategic Management, Chapter 1, pp. 3-42, New York: John Wiley
& Sons.
Sanchez, R. and A. Heene and H. Thomas (1996), Towards the Theory and Practice of competence-based Competition. In Sanchez, R., Heene, A. and Thomas, H. (Eds), Dynamics of Competence-Based Competition: Theory and Practice in the New Strategic Management, Oxford: Elsevier.
Sanchez, R. and Heene, A. 1996. “Strategic product creation: Managing new interactions of technology, markets and organizations, European Management Journal, 14(2), 121-138.
Shumpeter, J. A. (1934), The Theory of Economic Development, Cambridge, MA: Harvard University Press.
Simon, H. (1961), Administrative Behavior, 2nd ed. New York, NY: Macmillan.
Singh, H. and M. Zollo. (1997), “Knowledge Accumulation and the Evolution of Post-acquisition Management Practices,” Paper Presented at the Academy Management Conference, Boston, MA.
Teece, D.J., G. Pisano and A. Shuen (1997), “Dynamic Capabilities and Strategic Management,” Strategic Management Journal, 18, pp. 537-56.
Trigeorgis, L. (1996), Real options: Managerial Flexibility and Strategy in Resource Allocation, Cambridge, MA: MIT press.
Wernerfelt, B. (1984), “A Resource-based View of the Firm,” Strategic Management Journal, 5(2), pp. 171-80.
Williamson, O. E. (1991), “Strategizing, Economizing, and Economic Organization,”
Strategic Management Journal, 12, pp. 75-94.
Zahra, S.A. and G. George (2002), “Absorptive Capacity: A review, Reconceptualization and Extension,” Academy of Management Review, 27, pp. 185-203.