Corporate ventures and knowledge
William C. Bogner
The roles of knowledge, learning new know ledge, and searching for new knowledge are crit ical components to understanding successful corporate venturing (CV). This essay examines some of the recent insights in each of these areas and how they tie to entrepreneurial activities in established firms. In discussing these issues, I regularly contrast two very different types of corporate entrepreneurial activities that firms could pursue: continual rejuvenation and domain redefinition (Covin and Miles, 1999). These two approaches represent end points on a continuum capturing the relative uniqueness of the resulting new knowledge, and hence competitive advantage, that a firm seeks through CV and they require very different choices on man agers’ parts.
This discussion is built on the resource based view of the firm (Barney, 1997) and its core ideas of how firms gain advantage in otherwise open and competitive markets. The important role of knowledge and learning in this view is grounded in the tenets of the knowledge based view of the firm (Grant, 1996; Spender, 1996). These inter relationships are briefly outlined below. Based on these views, an assumption I make is that the key goal of corporate venturing is the creation of new knowledge for building and sustaining competitive advantage. I posit that in existing firms, entrepreneurial success is driven by the development of new knowledge that the firm can actually exploit, and that its exploitation is de pendent on choices that increase the likelihood of new knowledge being acquired, assimilated, and transformed into exploitable form (Zahra and George, 2002).
Knowledge in the Resource-Based View of the Firm
The role of learning and knowledge in organizations has long been an issue of scholarly interest; it is the tie to dynamic competitive advantage that is relatively new. The Carnegie school’s behavioral view of the firm (e.g., March and Simon, 1958; Cyert and March, 1963), the work of Joseph Schumpeter (1934), and Nelson and Winter’s (1982) evolutionary view of eco nomics all contributed to our understanding of knowledge’s key role in dynamic markets, the importance of developing new knowledge, and the difficulties firms encounter in searching for and processing new knowledge. In the early 1990s, scholars (e.g., Nonaka, 1994) began developing sophisticated models of how learning can effectively take place so that the firm can change and adapt to its environment. Spender (1996), Grant (1996), and others argued that organizational learning is the genesis for the knowledge based resources and capabilities that firms are able to exploit in unique ways. Thus, the unique knowledge about products and markets, and about the skills, processes, and capabilities for effectively reaching those markets (Makadok and Walker, 1996), became the critical point of focus in the firm.
The role of this knowledge based view fits tightly with contemporary perspectives of entrepreneurial behavior. Effective entrepreneur ship includes the process of discovering and exploiting opportunities that are not obvious to others (Shane and Venkataraman, 2000). This is exactly the type of behavior the knowledge based view suggests is the key to understanding how firms build and sustain competitive advantage.
Search Choices
The process of discovery first involves choices about search. Regardless of the firm’s subsequent ability to learn, transmit, and utilize corporate ventures and knowledge 45 information, a firm can only learn that to which its search routines expose it. In CV, the type of search initiated must fit the type of venturing pursued. Issues such as the search breadth and depth, and the age of the search target, are all important considerations that will determine the quantity of new insights the firm will develop, as well as the relative uniqueness those insights provide when compared to the firm’s current products, services, and capabilities.
Breadth is the primary consideration in aligning CV strategy with new knowledge search. How broadly a firm searches for a solution to a problem determines the learning opportunities it will encounter. For basic problem solving, firms prefer local searches and minim ally satisfying, or ‘‘satisficing,’’ solutions (Cyert and March, 1963). This type of search is often called exploitive search and this is the type of search seen in corporate venturing that seeks sustained regeneration with limited opportunities for new competitive postures (Stuart and Podolny, 1996). More far ranging searches are exploratory searches (March, 1991). These searches deliberately go into market or techno logy domains where the firm lacks significant knowledge and understanding.
As firms move their CV focus toward domain redefinition, emphasis on this latter type of search needs to increase. The main challenge in conducting exploratory search is that it has a high failure rate in producing entrepreneurial opportunities. This is because such opportunities arise when existing knowledge of a firm complements the new data that is brought in by the search. As will be discussed further in the next section, the less overlap a firm’s existing knowledge and understandings have with the new information coming in, the less likely it is that an opportunistic insight will emerge. How ever, when these exploratory searches do pro duce insights, they can be quite valuable. This is due to the relative uniqueness for the knowledge that the combination produces. Consistent with the knowledge based view of the firm, the relative uniqueness of a firm’s capabilities should be related to the degree of success the insight will produce. Still, while there is a high potential payoff for exploratory searches, the large number of failures leaves average returns far below those of exploitive searches.
On this point, however, some important observations need to be made. First, it is an exploratory or ‘‘outlier’’ search that will produce the major breakthrough into a new market or business configuration. Thus, along Covin and Miles’ (1999) continuum, a search approach that is a rational preference for sustained regeneration will likely be of limited effect in strategic renewal, and will almost surely fail to provide sufficient change in domain redefinition.
Second, managers can moderate these odds through the leadership choices they make in their CV activities. In CV units, searches may be wide ranging, but they also are directed. Fleming and Sorenson (2000, 2001) studied the effects of different search approaches, emphasizing the role of a search leader who is processing information on an ongoing basis and redirecting search resources accordingly. Thus, someone who has a strong sense of the search terrain and of how to process information as the search progresses leads the wide ranging search. The search direction is in constant flux. For firms instituting domain redefinition, however, it must be recognized that a trade off exists. On the one hand, the greater the break that is sought with current firm configurations, the broader the search will have to be. Yet, on the other hand, at any level of search breadth, the one leading the search will bias or limit the search process and, eventually, the entrepreneurial opportunities to which the firm will be exposed. The search leader’s knowledge of the terrain to be searched, as well as the cognitive schema the search leader holds in processing the stimuli encountered, will determine these opportunities. Thus, the search leader in a venture unit becomes a key moderator of the flow of new knowledge acquisition into the firm.
The second dimension of search that is tied to the learning that will occur is scope depth. The increased use of the same knowledge leads to deeper understanding of that knowledge, with a resulting level of predictability and reliability in the knowledge that is used (Katila and Ahuja, 2002). This type of search increases the number of similar new products firms develop; however, it also limits the likelihood of moving from a firm’s existing technological trajectory and may even help reinforce existing routines (Argyris 46 corporate ventures and knowledge and Schon, 1978). Thus, in CV, deep search is only suited for sustained rejuvenation goals.
Age is a final search dimension that affects both knowledge sought and venturing success. Katila (2002) showed that searching new know ledge to stimulate learning is most effective only in domains close to existing knowledge and understanding. As a firm moves into new domains, as it would in CVs seeking domain redefinition, searching in older knowledge of the target domain will be more helpful. Older knowledge is still new to the firm, and more is likely to positively affect performance. To understand this further, some aspects of entrepreneurial learning have to be considered.
Learning
The ability of a firm to observe stimuli is only the first step in creating new knowledge; that stimulus has to be understood in some way. Nahapiet and Ghoshal (1996) take a Schum peterian idea and argue that this occurs through ‘‘exchange and combination.’’ Exchange occurs when knowledge held by a firm or individual is transferred to another firm or individual. Com bination occurs when that newly received information is combined with the existing knowledge base of the recipient. New knowledge and entrepreneurial opportunities emerge from this interaction. An important part of this process is the interpretive schema, a firm’s ‘‘dominant logic’’ (Prahalad and Bettis, 1986). Because no two firms’ interpretive schemata are the same, each firm can uniquely understand the same information. These entrepreneurial opportunities emerge from learning knowledge that is new to the firm, although others already know it.
Such a description of how new knowledge is created also shows why dramatically new opportunities that are far from a firm’s current product/market base are harder to create. Stimuli that come into the firm from new domains do not encounter existing knowledge structures that can help in the exchange and combination processes of interpretation. Thus, although the firm may be able to understand the stimuli on a very basic level, the insight, or ‘‘conjecture’’ (Shane and Venkataraman, 2000), that would enable the firm to see rich and unique entrepreneurial opportunities is more difficult to con struct due to the limited prior information about the domain held by the firm.
Zahra and George (2002) make a similar point in discussing bisociation (see bisociation) (Koestler, 1966) as another perspective on how new knowledge emerges from learning after search. Like combination and conjecture, bisociation addresses bringing newly acquired know ledge together with existing knowledge. Here, however, the focus is on the act of recognizing incompatibilities between new and existing knowledge, and developing some knowledge from reconciliation is seen as shaping entrepreneurial action within the firm (McGrath and MacMillan, 2000).
From all of the above, it can also be under stood why entrepreneurial activities that rely on local searches produce new knowledge that is close to that already known and why it can be produced with a high degree of success. When new stimuli carry many of the traits of existing knowledge, they can be easily manipulated in the context of existing routines and heuristics (March and Simon, 1958).
Similarly, to build richness in new areas, Kati la’s (2002) suggestion that firms search old knowledge touches on the important distinction between tacit and explicit knowledge (Polanyi, 1966) and the effect of that distinction on a firm’s ability to learn. Older knowledge has more often been made explicit in a way that is easier for others to understand. Moreover, this explicated, older knowledge should already be linked in more complex ways to other pieces of competitive information, creating increased likelihood that a firm encountering it will develop a richer understanding of how it can benefit its competitive situation. By bringing in such well developed knowledge, a firm increases the likelihood of bridging a domain. Indeed, Katila’s (2002) research shows that searches in old know ledge that are outside a firm’s domain are more fruitful in producing new products than searches on the new knowledge in the same domains.
How new opportunities, once discovered, are integrated into the firm presents many challenges to successful CV. Christensen (1997) de scribed how firms in a number of industries were able to develop new technologies that should have allowed them to penetrate new markets, but then failed to do so because of the power of corporate ventures and knowledge 47 the routines and culture that surround existing products and services. Entrepreneurial activities had discovered the opportunity, but systems and structures outside of the CV activity prevented exploitation. Importantly, he also showed how firms can avoid these difficulties and manage a venture successfully, even if the venture could be perceived as cannibalizing existing products and customers.
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