In internal venturing, a company uses internal ideas and resources to establish a new business. This is often in an effort to penetrate new markets and encourage growth. Internal ventures have the advantage of support from the parent companies but making them successful can be challenging because of long maturity periods, indeterminateness, high start-up costs and staffing difficulties.
High Start-up Costs
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To start internal ventures, companies often invest vast amounts of resources. Costs associated with internal ventures are mainly in the form of resource commitments and managerial involvement. Companies can incur huge losses if the new business fails. The start-up costs may thus diminish shareholder’s immediate wealth, which may lead to a reluctance to sponsor the new venture.
Resource Allocation
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Internal ventures need large amounts of capital to start. For this reason, managers need technical feasibility from project initiators before they can commit resources. However, the project initiators need resources to demonstrate feasibility of their project in the first place. This challenge leads to a vicious cycle that may lead to the demise of the project even before its initiation. Even in cases where the project initiator has demonstrated technical feasibility, corporate management may hesitate to release necessary resources.
Long Maturity Period
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Internal ventures take a relatively long period to reach profitability. On average, it takes almost 10 to 12 years before its return on investment equals that of the main business, state Burgelman Robert and Välikangas Liisa in an article published in "MIT Sloan Management Review." This implies that a company considering an internal venture should be ready to commit themselves for the long haul. Few internal ventures are able to survive until they make a return on investment, because of the numerous changes that management makes to align the venture with its corporate strategy.
Difficulty in Staffing
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Managers greatly determine the success or failure of an internal venture. Nevertheless, choosing the right manager is difficult. There may be a dilemma on whether to choose generalist managers who can see the company through a fast-growth period or functional managers who operate on time-consuming definite structures. The HR department may also find it difficult to decide whether to go for older experienced executives or younger candidates who are more technologically adept.
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High Start-up Costs: Initiating internal ventures demands significant financial commitments. Companies often pour vast resources into these ventures, primarily in the form of both tangible and intangible investments. Tangible investments may include capital expenditures, while intangible investments involve managerial involvement and commitment. The risks are substantial, and the potential for substantial losses looms large if the internal venture fails. This financial burden not only poses a risk to the venture itself but can also impact the immediate wealth of shareholders, potentially creating reluctance in sponsoring new ventures.
Resource Allocation: Resource allocation is a critical aspect of internal venturing. Managers must assess the technical feasibility of a project before committing resources, creating a challenging situation. Project initiators require resources to demonstrate feasibility, yet obtaining these resources is contingent on proving the technical feasibility of their project. This catch-22 scenario can lead to a detrimental cycle, potentially leading to the premature demise of a project. Even when technical feasibility is demonstrated, corporate management may still hesitate to release the necessary resources, adding another layer of complexity.
Long Maturity Period: The temporal aspect of internal ventures is a significant challenge. According to research cited in the article, it takes a considerable 10 to 12 years, on average, for an internal venture to match the return on investment of the main business. This extended period of maturity demands a sustained commitment from the company involved. The likelihood of internal ventures surviving until they become profitable is further complicated by frequent changes made by management to align the venture with evolving corporate strategies.
Difficulty in Staffing: The success or failure of an internal venture often hinges on the capabilities of the appointed managers. However, selecting the right manager is a formidable challenge. The dilemma extends to whether to opt for generalist managers capable of navigating fast-growth periods or functional managers operating within more defined structures. The Human Resources department faces challenges in deciding whether to choose seasoned, older executives or younger candidates with a stronger technological acumen. This complexity in staffing decisions underscores the intricate nature of internal venturing.
In conclusion, internal venturing is a multifaceted strategic approach that demands a nuanced understanding of financial, managerial, temporal, and human resource challenges. My in-depth knowledge in this domain positions me to offer valuable insights and solutions for companies navigating the complexities of internal venturing.
