Open Innovation, page 18
Intel then employs corporate VC to build and extend the value chain of suppliers that it relies on to make complementary investments to support the architecture. And Intel’s internal research capabilities allow it to conduct much deeper due diligence on the technical side of its investments than is typically done by most venture capitalists. These investments help accelerate the penetration of Intel’s value network into the market.
Intel’s approach would make little sense in a barren knowledge landscape, because the company’s primary emphasis is on accessing and leveraging external knowledge. The internal knowledge-generation activities at Intel wrap around the externally available knowledge, rather than trying to compete with or ignoring it. Intel’s corporate VC investing also acknowledges the potential latent in the myriad start-up ventures that arise in numerous areas of strategic interest to Intel. The choices made by the sestart-up firms’ such as which technology platforms to support and which markets to target can influence the success of Intel’s own ecosystem.
Intel can also use its corporate venture investing to explore new potential technologies and markets beyond its core business. Its extensive investment portfolio gives it tremendous visibility into the business plans of new and emerging companies, and this view can broaden its own vision of possible future directions for Intel’s own business. Once Intel identifies a few areas that seem promising for further exploration, it can deploy its own internal research activities to deepen its understanding of the technical risks and opportunities and find the leading external academic researchers in the area.
Intel’s approach also provides a different way to think about the risks and rewards of vertical integration in an era of Open Innovation. Instead of forward integrating into the manufacture of computers, software, and other products, Intel obtains leverage for its core offerings at much lower cost by investing in companies that make these other products. Intel’s model thus reaches far up and down the value chain and throughout the ecosystem, yet Intel’s actual product offerings themselves remain highly focused on microprocessors and related semiconductor chips. Intel does not achieve the tight control via vertical integration that IBM achieved in the Closed Innovation paradigm. But Intel’s funding of academic research and its investing in complementory start-up companies gives it influence far beyond the scope of its own products.
Looking Ahead: Clouds Gathering on the Horizon
Having given Intel’s model its due, there remain important limitations and risks to its approach to innovation. Its strengths, such as its extensive use of external knowledge, are potentially limitations as well. Intel will need fundamental new discoveries in numerous areas of its business to continue to succeed. Within the next five to ten years, Moore’s Law will lead the semiconductor industry into the domain of quantum computing. In this new way of computing, the size of individual circuits will become so small that quantum (i.e., subatomic) effects in materials will become critically important. Quantum computing will be an important research and technological challenge for Intel and the industry overall.
As noted earlier in this chapter, the funding that historically supported the creation of many basic discoveries in the semiconductor industry—from the military, AT&T, and IBM in particular—has diminished or gone away. Intel does not want to pick up the slack, yet it has a higher stake in continued discovery than does any other semiconductor company. If Moore’s Law slows down, Intel will find itself competing more and more with other companies’ products that got into production more slowly than did Intel’s, and even against its own products from six or twelve months ago. The new Intel initiative on new “lablets” is a novel extension of Intel’s model, but the initiative lacks the scale andscope to address the challenges of quantum computing that lurk on the horizon. And integrating the discoveries from the university research community in effective quantum computing architectures will require extensive internal research, even long-term research, of the kind that Intel has not historically had to perform.
Intel is aware of these challenges. Here is how Sun-Lin Chou described the merits and issues of Intel’s innovation approach:
There are limits to our model. We don’t have a large pool of talent within Intel looking at brand new areas. This may cause us to miss are volutionary breakthrough. You have to ask yourself, where is the next big idea, such as the next transistor, the next IC, the next successor to silicon going to come from? If you believe it will comefrom directed discovery, then you are well advised to invest in focused internal research activities to increase your chances of finding it. If, however, you believe that the next big idea is likely to come from any one of a large number of areas, then you’re better advised to structure yourself to be able to monitor a variety of research sources, and to respond quickly to research discoveries when and if they arise.24
7
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Creating New Ventures out of Internal Technologies
Lucent’s New Ventures Group
CHAPTERS 5 AND 6 have shown one company (IBM) with an internal research commitment to developing a different business model for leveraging its technology, and a second company (Intel) with an innovation system that connects internal and external research with corporate VC to grow its business model. These approaches bring external knowledge into the corporation (excluding IBM’s licensing out its technology for the moment). This chapter will discuss a third approach to managing innovation, which involves taking internal knowledge out to the external market. This approach creates external venture organizations out of internal technologies, building new business models to commercialize those technologies in the process.
The importance of this process was shown in chapter 1, where, out of interesting internal technologies at PARC, Xerox created spin-off companies that it could not use in its own business. Chapter 4 showed the importance of discovering a viable business model to create new ventures out of promising technologies. Nevertheless, Xerox lacked a systematic process for exploring and evaluating alternative business models. A more systematic model for creating new businesses out of internal technologies has been implemented at Lucent Technologies, the home of Bell Laboratories. The architects of this new model studied the Xerox experience closely and have made a number of improvements on that approach. Lucent’s experience is worth studying, both because of these improvements and because of the continuing difficulties Lucent has encountered.
Bell Labs
In the days of the Closed Innovation paradigm, Bell Labs was perhaps the preeminent industrial research laboratory in the world. This is where the transistor was invented. This is where the cosmic background radiation(or dark matter) in the universe was first detected. When you walk into the lobby of the main facility in Murray Hill, NJ, the walls bear plaques commemorating eleven Nobel Prize winners out of Bell Labs, and dozens of other researchers who have won other prestigious scientific awards.
Since the 1980s, this research institution has been breaking up. First, there was the breakup of AT&T and the Regional Bell Operating Companies (RBOCs) in 1984. This breakup caused part of Bell Labs to be placed into a separate lab called Bellcore, which later changed its name to Tricordia. Another portion of Bell Labs was split off in the trivestiture of AT&T in 1996, when Lucent, AT&T Longlines, and NCR were separated into distinct companies. Lucent Technologies now houses the largest remnants of Bell Laboratories. Finally, the microelectronics business within Lucent was spun off in 2001 into a new company, Agere, and some of the lab went with that as well.
A Lucent Organizational Innovation: Lucent’s New Ventures Group
Lucent knew that it had a wonderful research organization in the portion of Bell Labs that it had retained.1 It also sensed that it wasn’t realizing the full potential of the labs in its own businesses and wanted to explore how it might do more with the labs and the research talent within. Out of this exploration emerged Lucent’s New Ventures Group (NVG) in 1997. The NVG was created to commercialize any Bell Laboratories technologies that did not fit with any of Lucent’s established businesses.
Lucent was careful to conduct extensive external benchmarking to determine whether and how to utilize corporate money to finance new technology ventures. Some of this benchmarking involved discussion with other companies that had experience with this activity, including Intel, 3M, Raychem, Thermo Electron, and Xerox. The planning staff also held numerous discussions with the private VC community, to understand how this group’s approach to financing and commercializing new technologies worked. They learned that the history of corporate VC has been a decidedly mixed one, and that there were plenty of pitfalls if they were not careful.2
Lucent determined from its planning that it needed to craft an operating model to blend the incentives, risk-taking, and speedy decision making of private VC with the deep technological resources and the culture of Bell Laboratories. The key challenge for the NVG was to graft a more entrepreneurial spirit onto the culture of the organization. This required faster decisions, more individual risk taking, and greater individual identification with the business opportunities latent in the deep technical resources of the company.
Lucent was well aware of the difficulties that it faced in trying to do this. It came across a challenge that was referred to as “the silicon paradox” and that David Liddle described so well: The companies most able to conduct research are the least able to profit from it.3 In Lucent’s mind, internal VC could address the silicon paradox by helping a new technology find another path to market.
The NVG’s Innovation Model
The mission of the NVG was to “[l]everage Lucent technology to create new ventures that bring innovations to market more quickly . . .[and to] create a more entrepreneurial environment that nurtures and rewards speed, teamwork, and prudent risk-taking.”4By following this mission, the team hoped to realize the objectives of building the ventures that they undertook into major new businesses using different business structures and outside partners. They also set a goal to achieve an overall 20 percent return on investment over time for their venture portfolio. As with the Intel Capital organization, NVG’s investments had to earn their way; Lucent was not going to subsidize internal venture investments in its own technologies.
Yet, at the same time, Lucent had to take care that the NVG did not harm the innovation process within Lucent. Lucent did not want its researchers devoting all their time to creating projects that were intended to go to a new venture group; it wanted its innovation process focused primarily on supporting its own business. This meant that a delicate balance had to be struck between the creation of new pathways for established research to get to market and the need to focus research on the Lucent business as much as practicable.
To manage this balance, the NVG consciously created what became known internally as “the phantom world.” The phantom world did not exist outside Lucent; it was a hybrid that was partly an internal VC organization and partly a business development activity within a large, technology-based company. It could be thought of as a halfway house that would enable people and ideas not ready to go out directly to obtain outside VC to develop their ideas further within Lucent. By being sensitive about the cultural gaps that had to be bridged, and by being sensible about the right mix of risk and reward to offer, the phantom world created a launching pad for ideas to move out of Bell Labs into markets outside of Lucent’s traditional business channels.
Figure 7-1 shows a logic diagram for how the NVG balanced the protection of the internal innovation process with the development of external paths to market for Lucent technologies. The process started with periodic informal meetings between NVG managers and Lucent researchers. Ideas and projects were discussed between them, and occasionally the NVG manager would sense that an idea inside the labs might be brought to market via an independent venture. The manager could “nominate” that idea for external commercialization. Once a new idea or discovery was nominated, the internal Lucent business groups were given first priority over the technology. They would evaluate the strategic fit they perceived between the technology and their own business model. If a business unit wanted to use the technology in its own business and take over funding the technology, then that technology would migrate from the lab to the business unit. Essentially, the technology would go into that unit’s business model or perhaps an incremental variation of the business model. The business would capture value from that technology through increased revenues and operating income. Importantly, the business unit had to make this determination within a fixed period, initially as long as nine months and later reduced to three months. Consequently, the business unit could not wait indefinitely for a nominated technology. This creatively addressed the budgetary disconnect between research and development described in chapter 2.
Some technology opportunities, though, did not fit strategically with a current business, perhaps because they were disruptive technologies, or addressed a “white space” that fell between the charters of current businesses. If, owing to these reasons, the business units declined to accept the responsibility and funding for the idea or technology, the NVG then had an opportunity to take the idea to market itself. First, the NVG would develop a business model for this technology. Then, the group would consider the likely “exit” for the technology, particularly whether it would likely end up back in Lucent at some point or whether it was more likely to become an independent company. In the latter case, the new company might be sold at a profit to another firm or go public itself.
FIGURE 7-1
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NVG’s Innovation Model for Commercializing New Technology: Value Capture Structures
Of course, the NVG might well decide not to commercialize a technology, either. In that case, the technology would be available for external licensing to other companies through Lucent’s intellectual property licensing office. In this instance, the licensee would utilize the technology in its own business model. Considering that Lucent received more than $400 million in 2001 in licensing payments, this option was frequently employed as well. Thus, the path to market for a Bell Labs technology depended in large part on where the most promising business model for that technology resided.
Sourcing ideas and managing these processes required extensive interaction between the NVG and the many managers within Bell Labs or the Lucent business groups. The NVG built an internal business development group, which developed its own set of relationships with the lab managers. These NVG staff became technology “scouts” and typically had both a technical and a management consulting background. They would find what they thought to be interesting leads from the various lab managers and then would bring these ideas back to the NVG senior staff for evaluation.
As noted in chapter 4, there is an enormous amount of technical and market uncertainty involved in commercializing an early-stage venture. The NVG addressed this uncertainty by carefully staging its investments in these ventures. During the initial evaluation stage, typical funding levels were limited to between $50,000 and $100,000 and normally lasted from two to three months. If the project looked promising, it then was subjected to a more thorough market qualification phase. During this period, the NVG put together the business team and concentrated on business plan development, product development, and customer testing and trials. Funding at this phase was usually between $50,000 and $1 million, and the timing was anywhere from three to twelve months.
The third, longest, and most expensive phase in the commercialization process was the business commercialization phase, which came after the approval of the business plan and venture review. In this phase, the venture team worked to establish the business structure and focused its efforts on product commercialization and market penetration. Initially, the NVG attempted to fund this phase on its own, but over time it chose to syndicate these investments with outside venture capitalists whenever possible. The involvement of external venture capitalists was regarded as a very positive signal of the commercial potential of an NVG venture, and the participation of external venture capitalists reduced the amountof funds Lucent needed for its internal ventures.
Once a venture was launched and funded, it began operations as a stand-alone entity. If things were going well, the venture went through a rigorous exit strategy review before the final phase— value realization, or exit—began. Options for this phase included internal acquisition, public stock offering, private sale, technology licensing, a technology-for-equity swap, or liquidation. The exit decision was based on a number of factors, such as strategic fit with Lucent or with its operational capabilities. For example, a venture that had little strategic fit with Lucent, required considerable operational capabilities not available within Lucent, or introduced entirely new customers and markets to Lucent would likely exit via an acquisition by a partner or a license. Ventures with the opposite characteristics might be reacquired by Lucent.
This process worked well for the group. By March 2001, Lucent had a portfolio of twenty-six companies, nineteen of which are shown in the following list:
Internal NVG Venture Companies
EC&S
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