Interim Report of The Committee on New Business of Keidanren
Recommendations for Creating New Businesses:
Building an Economy and Society that Nurtures the Entrepreneurial Spirit
Chapter IV: Problems in Creating Corporate Ventures
-- Developing New Business Within Existing Firms
Although major corporations are treasure houses of human resources, technology
and capital, they are not necessarily using all the resources at their disposal.
Venture business will play a critical role in the revitalization of Japan's economy,
without question. In order for existing corporations to participate in this
revitalization process, they must perform at full capacity through tapping all
their resources and through reforming the thinking of top management.
- Progress Report on "Creation of New Businesses" :
- Creation of new businesses by existing corporations:
The vast majority of new businesses created within major corporations is
comprised of sophisticated refinements or extensions of their main line of
business. Even in the case of businesses created within entirely new fields,
many instances involve provision of a budget line to a form of business that
already existed, had prospects of turning a profit, and was positioned as a
receptacle for the parent corporation's surplus manpower. There seem as well
to be many cases in which the term "creation of new business" became merely
an expression of the "me too" instinct of mimicking other's corporate behavior.
It goes without saying that most of these "creation" are not producing
Until recently, creation of new industries and businesses by major corporations
was never an issue. On the assumption that the Japanese economy would
continue to prosper, it was deemed sufficient for each firm to devote itself to its
principle business. However, if these corporations are now to play their proper
role in new business creation that will have a far-reaching effect on the nation's
economy, they must revise their thinking and place more value on new business
Top management must first of all change their attitude, re-engineer their
organizations, display initiative in new business creation, and manifest
responsible leadership. Given this, a corporate climate can be created in which
highly capable researchers, engineers and innovative and diligent employees
will be able to demonstrate their full potential.
- The Factors That Are Impeding Real Diversification:
It is essential that we identify and remove the impediments to diversification that
exist in every corporation, if we are to expedite new business creation.
- The limits of the top-down/pyramid type organization:
Major corporations in Japan excel in undertaking large-scale projects into which
all their resources are thrown, but is can not be said that they are capable of
finely tuned business responses that are in keeping with social trends and market
needs. It is essential that these institutions simplify their internal decision-
making infrastructure so they will be able to respond quickly to changes. To
this end, these firms should no longer use the top-down, pyramid organizational
structure. Authority should be delegated to project teams that are expert in
their fields and that possess a realistic understanding of market trends. The
adoption of a multi-peak organizational structure should be considered, in which
each team is allowed to assume responsibility for its own business activities.
- Appropriate use of management resources:
In past corporate practice, a section or department that was given responsibility
for a new field of business was placed outside the corporate organizational
mainstream. It often happened that the best personnel and management
resources were not assigned to this section. Assignment of human resources,
naturally, tends to be influenced by the judgment of the manager responsible for
a particular field. Corporations must attempt to accomplish a "radical change"
in the thinking and attitudes of its managers if these issues are to be addressed.
Regarding the personnel needed to creation of new business field, corporations
should select highly qualified people and highly trained managers who can take
full responsibility for their new business field and can appropriately use the
management resources available through the parent corporation.
- The limits of the "parent company and subsidiary" relationship:
When a company is positioned as a subsidiary, its operation and general policies
are apt to be strongly influenced by the parent company's wishes. For that
reason, the subsidiary is not necessarily the most appropriate form for launching
a new business. The ideal would be to allow the establishment of pure holding
companies so that "free" companies could engage in new business fields under
there own leadership. In the meantime, parent corporations should attempt to
delegate as much authority as possible to their subsidiaries.
- Promotion of Corporate Venture Businesses:
- Large corporations should take the lead in venture business creation:
If major corporations were to organically combine the human, technological,
capital and other resources they command, they would easily be able to form
powerful high-tech venture enterprises within their own corporations. They are
the institutions capable of being the initiators of uniquely Japanese-style venture
businesses in either totally new fields or in fields that are extensions of existing
lines of business.
However, it is not difficult to imagine that they are hindered from undertaking
innovative new businesses by the "Big Business Disease" -- that favors the status
quo and shies away from innovation. In order to dedicate the resources of a
major corporation to new business opportunities, not only the top, but middle
management as well, must commit themselves to positioning the new business
as the firms' main initiative of the next generation. And they must approach
this challenge courageously without fearing risks.
The major corporations would be applauded if they were to take the lead in the
growth of both the environmental and health-care industries, development of
which has been eagerly awaited in this aging society.
- Creation of venture business inside companies:
Corporations can create a foundation for advancing into new business fields by
establishing an internal venture business and capital mechanism which would
serve as a system for screening creative ideas using clear-cut standards and for
supplying capital to potential new undertakings.
The personnel assigned to such in-house venture businesses must be employees
who are creative, experienced and decisive. If it is impossible to make full use
of in-house personnel who are creative and technologically innovative,
corporations could consider spinning-off a new venture business and using these
individuals to build it up outside of the parent.
In this case it would be necessary to adopt a new personnel evaluation system to
target and assess entrepreneurial human resources, using this system in concert
with the standard system. Through adoption of a stock option system those
who were willing to take risks would be rewarded appropriately if the new
venture proved successful. At the same time, new venture failures should be
regarded positively, as valuable experiences and employees involved should be
allowed to reinstate themselves in the parent firm. If such an equitable system
were adopted, at long last the conservative status quo attitude could be swept
aside and talented individuals would have the courage to take the risks necessary
for success. The entire firm would be revitalized by such innovation.
- Large Corporations and the Corporate Alliance:
- As Partners with Venture Businesses:
Another major role that large corporations are expected to play in the future is
that of a mentor, within new corporate alliances that provides a wide-range of
assistance to independent venture businesses, such as funding, marketing, R&D
support, etc. Previously, relationships formed between large corporations and
smaller companies resembled that of master and servant, as is seen in keiretsu
marketing and subcontracting.
Now we must create a new partnership between large corporations and
independent venture businesses, similar to those that have been undertaken in
the US where high-tech venture firms develop creative new technologies and
their large corporate "partner" markets the results. The independent venture
business must be positioned as a corporate partner, with both sides contributing
their special advantages to the unique corporate alliance.
- The Role of Market Evaluation:
The most expedient and effective support a large corporation can lend to venture
firms it to evaluate the new products and services they develop and to maintain
an active relationship, whether or not the new firm is part of the keiretsu. And
it must be acknowledged that the corporate employees who actually market the
products or services are exposed to the same risks as the venture firms
employees. Therefore, it is necessary to evaluate and reward them accordingly.
- Creating the Entrepreneurial Spirit Within Each Employee:
- Corporate Cultures That Promote Entrepreneurship:
The development of new products and services within a firm leads to the
creation of new businesses and the sowing of the seeds of potential new business
throughout the firm. In order to foster these seeds, every employee, not only
management or R&D employees, must share the entrepreneurial spirit. In
order to nurture this spirit, all businesses must strive to create a corporate culture
that respects the freedom and independence of each employee and promotes an
open and brisk exchange of views.
- The Chief Executive As Entrepreneur:
Whether or not a corporation can re-invent itself and create new industries and
businesses depends on the approach of the chief executive officer. The
allocation of a firm's management resources reflects the CEO's business
philosophy. Unfortunately, there is a tendency for major corporations in Japan
to advance into a new field and conduct business according to their previous
corporate experience or that of a predecessor in the field. As a consequence,
despite enormous investments of capital, they often aim for stability instead of
innovation and end up with very little profit.
Hopefully, in the future CEOs will display stronger entrepreneurial spirit and
have the courage to take actions, such as revising their articles of incorporation,
in order to advance aggressively into new and unpredictable fields of business.
To accomplish this, the CEO must of course be sensitive to social and market
trends and be willing to delegate authority -- even allowing staff members who
are "on the spot" to sometimes make decisions.
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