THE LARGE COMPANY ENVIRONMENT 27 cept, taking into account the risk of failure, the time value of money, and the company's performance in its established businesses. The new idea is thus judged as an alternative to other investment opportunities available to the company. Such alternatives are not available to a new company of the kind we explored in Chapter III. As part of its venture analysis the company also engages in directional planning, based on the realities of the market place and aspirations and capabilitics of the organization. Directional planning involves questions such as: "Where are we?" "Where are we going?" "How will we get there?" "How did we get to where we are?" "What business are we in?" "What should we be in?" "How does the idea we're considering fit in with what we are or should be?" Despite the logic and helpfulness of the planning process, it cannot cope with certain internal barriers to the new idea being considered. If it has come from outside the company, the new idea may undergo a fatal battering because of the "not invented here" syndrome. As Charles Kettering once put it, "The greatest obstacle course in the world is trying to get a new idea into. a factory." 2 A large company has greater concern for the time value of money. Unlike a small company beginner, a large established company has the option of applying its money to a number of alternatives. An investment that will not yield returns for several years is made less attractive because it is discounted substantially. As a consequence, the company may choose less ambitious shorter-run opportunities. A large company tends to be inbred; in extreme cases the company may thereby actively resist any change. More important, however, is the problem that a new market represents to the large company's established marketing staff. Indeed, there is no question that good innovative opportunities often are not exploited because the company lacks the requisite market familiarity. The irony, as we have seen, is that new markets are the key to the kind of new growth businesses that the large company needs to develop. EXPERIMENTAL APPRAISAL In those cases, however, where the large company management elects to try to develop a new business opportunity, it proceeds next to an experimental appraisal of the key elements of the new business. This often involves a research effort for which the company has an institutionalized research and development activity. However, the company may be missing some of the technical skills needed in the new field it is exploring. If, for example, its traditional business is in electronics, but the new venture has to do with washing machines, its technical people may not possess the required mechanical skills for the new business. But a large company has the resources to acquire these skills. The large company is a complex social organization. The fast reaction 'Italicized words in this chapter correspond to terms appearing in Chart 16. 'See Concentration. Invention and Innovation. U. S. Senate Antitrust Subcommittee (Government Printing Office, 1965), pp. 1099, 1115. TECHNOLOGICAL INNOVATION: ITS ENVIRONMENT AND MANAGEMENT 28 time we discussed in reference to the small company environment is not easily attainable here. The distance from the chief executive's office to the maintenance shop may be a long way. He is, in fact, often removed from the operational details of his company; surely, he is not familiar in detail with each new venture early in its lifetime. The complexity of the organization itself leads to certain problems. There are the "know-it-alls." They explain that they have thought about similar new ideas many times before, and have concluded that there arc many, many reasons why each new concept cannot succeed. Or, it will not work because it has never been done before. There are many other reasons why, in this experimental appraisal stage, prior experiences and predispositions rise up to block innovation. Often these take the form of an overly conservative estimate of risk-versus-probable cost for new ventures. It is easy to make such decisions because there is always the choice of extending the present business rather than taking the organization into unknown territory. As we have noted, the beginning small business has no analogous option. These are different kinds of problems from those we discussed in reference to the small company environment. There, when the problem was to obtain initial financing for the incipient firm, the problems were largely external ("Can we get the capital?”). Here, we are concerned with what may be a lack of entrepreneurial spirit and commitment within a well-established, wellfinanced organization. In a complex organization the overriding problem often is maintaining an adequate commitment to a new idea in the face of internal obstacles to change. There is an understandable reluctance to depart from what has been a successful pattern of business. So we come back again to the need for understanding, within and outside the company, of the special problems of managing and exploiting technological change. These problems are no less formidable in a large organization than they are in a small firm. They are just different. THE EMBRYO BUSINESS The experimental appraisal is over and the idea has proved itself. An embryo business is formed within the framework of the corporation. Because of its ancestry, the business needs no major effort to establish a long-range R&D program. It has the tradition and the backing to fill in gaps in the R&D sector. But the embryo business usually does need outside inputs—in the marketing area, for instance. Key management is also important. The established company can get these inputs more casily than can the small firm, for it can offer the incentives of high salaries, security, and other inducements already mentioned. But sometimes the most effective strategy is to purchase the needed elements by acquiring assets from another company or merging with it. Here, again, antitrust considerations play an important role in limiting the company's course of action. At an equivalent point in its growth pattern, a small company is in a “do or die" situation. The large company, however, may still elect to abandon the venture if it fails to show signs of measuring up. For example if, in the early THE LARGE COMPANY ENVIRONMENT 29 years, the embryo business fails to meet the established criteria for return on investment, the large company may drop the venture altogether. A SUCCESSFUL GROWTH BUSINESS Just as the desired final stage of the small-company cycle was a successful growth business, so it is for the new business development within a large technologically based company. Here, too, the characteristics of the firm include growth contributing to the gross national product, jobs to provide new employment opportunities, and products to fulfill needs and to diffuse technology. Antitrust can be a problem if, for example, the corporation seeks to enhance its new business by acquiring other companies that are capable of complementing it. It should also be noted that if, in the first instance, the large corporation, instead of developing a new business venture completely internally (as in our illustrative example), had preferred to add a new business through external acquisition or merger, antitrust questions could have arisen then. As a further observation on the large-company example discussed in this chapter, we should mention the difficult problem of assimilating the new growth business into the parent corporation. Adjustments and dislocations are inevitable; disharmonies will occur. This is a painful but absolutely necessary step, since the full value of the new business cannot be realized if it operates separately from the supportive strength of the entire company, to which it can also add strength and skill. It is apparent, therefore, that small and large technologically based companies have similar goals and problems, though different environments. Both wish to develop successful growth businesses, but they go about the task in very different ways. No attempt has been made to construct a generic model of the innovation process as it occurs in "the" small firm or in "the" large firm. We chose instead two illustrative examples of the process. Much more could have been said about the problems and characteristics of large and small technologically based companies. We believe, however, that we have identified an adequate number of problems and characteristics of the innovation process in large and small firms to enable us to explore, in a more reasoned approach, possible ways to improve the environment for technological change. Moreover, what we have noted regarding the respective characteristics and problems of large and small technologically based firms suggests an important challenge to the business world. The challenge is to explore new ways for large companies to work with small technologically based companies, while maintaining the creative qualities of each or, alternatively, for large companies to develop, within themselves, sub-environments that foster the enthusiasm and entrepreneurial spirit of the small firm, while benefitting from the over-all resources of the total corporate environment. TECHNOLOGICAL INNOVATION: ITS ENVIRONMENT AND MANAGEMENT 30 V PROBLEMS AND RECOMMENDATIONS Having explored various aspects of incentives and barriers to technological change and having analyzed some of the salient features of small and large companies in the management of technological innovation, we are in a position now to present our recommendations. For reasons already stated, and which will be supplemented, they are aimed primarily at the problems encountered in the small company environment. A. TAXATION ! 1. THE PROCESS OF SELECTION We have reviewed many tax proposals aimed at either (1) encouraging innovation in a positive way, or (2) eliminating disincentives or barriers to innovation. We are recommending only a few, having rejected most of the proposals we considered. It would please us to be able to say that our evaluation was made on the basis of clear, statistical evidence of the prevalence and importance of a given barrier to innovation, or on the basis of a sophisticated cost-benefit study of the impact of a given tax change on the amount of innovation or even on the level of tax revenues. Unfortunately, there are few such data available. In fact, the lack of objective data, in or out of government, on the innovation process, in general, and the technologically based firm, in particular, is symptomatic of a very serious deficiency in our thinking regarding technological innovation. As we have said carlier, too few people in government, in industry, in banks, and in universities understand the special forces at work in the conception, appraisal and nurturing of the innovative, technological enterprise. Yet, even a casual reading of the business history of this country makes it clear these innovative See Appendix D for provisions of the Internal Revenue Code discussed in this chapter. |