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.

  1. Progress Report on "Creation of New Businesses" :
    1. Creation of new businesses by existing corporations:
    2. 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 satisfactory results.
      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 creation.
      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.

    3. The Factors That Are Impeding Real Diversification:
    4. 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.

      1. 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.

      2. 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.

      3. 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.

  2. Promotion of Corporate Venture Businesses:
    1. Large corporations should take the lead in venture business creation:
    2. 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.

    3. Creation of venture business inside companies:
    4. 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.

  3. Large Corporations and the Corporate Alliance:
    1. As Partners with Venture Businesses:
    2. 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.

    3. The Role of Market Evaluation:
    4. 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.

  4. Creating the Entrepreneurial Spirit Within Each Employee:
    1. Corporate Cultures That Promote Entrepreneurship:
    2. 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.

    3. The Chief Executive As Entrepreneur:
    4. 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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