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Venture Management

 

Venture management is an approach to new product development and marketing that is based on the systems approach to corporate planning. Essentially, it requires that the management should view new product programmes as 'ventures'. In other words, from conception to commercialization each new product is treated as one product, and handled by a small team, which is responsible for the creation, evaluation, and marketing aspects of new product development and testing.

 

Venturing is an attempt to make innovation more predictable and less random than it otherwise might be by managing the new product development as a continuing commitment, rather than as a sporadic or periodic crash programme.

 

To be most effective, venture management requires that projects be subjected to a rigorous, multistage evaluation procedure. At each stage in this procedure the project is subjected to a go/no go decision to determine its eligibility to proceed to the next stage. The criteria on which these decisions are made should be clearly defined corporate objectives. The stages may be:

• concept testing;
• qualitative screening;
• economic analysis;
• product testing;
• test marketing; and
• phased launch/national launch.

 

Each particular new product venture will be unique, and will require its own specific combination and sequence of evaluation steps. It is the role of venture management to provide a framework within which the results of these various tests may be interpreted.

 

The usefulness of the venture analysis approach is in the viewing of project activities in relation to all other inter-related activities, rather than in total isolation. It enables management to compare alternative courses of action in a systematic way, with such results as:

• The impact of possible current decisions on the freedom of the firm in the future may be revealed.
• A clarification of the significance of current assumptions about the future, or the corporate objectives, may occur.
• A clearly defined and acceptable set of assumptions can be formulated.
• An internal consistency in the product plan may be achieved.
• Sensitivity analyzed may be applied to each stage of the plan to illustrate the impact of changed assumptions and changes in policy on the end result.

 

By adopting a systems perspective that allows for interrelationships, it is obvious that present decisions will affect future outcomes. But by making explicit all possible alternatives or strategies, present and future analysis reduces the level of uncertainty, and thus reduces the likelihood of error in making the wrong decision.

 

Each strategy is a route to an objective, and the problem becomes that of choosing among alternative strategies to ensure that the best one is followed in terms of goal-attainment.

 

For projects to be effectively evaluated, venture analysis requires that some finite time horizon be specified. Such a planning horizon permits the building-in of the time-related effects of competing strategies, and the life of the project itself is best described in terms of the product life cycle.

 

Given the length of the project, and the annual costs and revenues over that life, it is possible to evaluate the project in accordance with the discounted cash flow (DCF) procedure. Decision rules should be devised to facilitate simple evaluation of each stage, in relation to the expected financial outcome. The form of these decision rules may be:

 

For launch decision, the likelihood (i.e. possibility) of obtaining at least the ROI that can be obtained from other ventures must be greater than, say, 0.8 (i.e. 80% certain). For a scrap decision, the probability of obtaining this ROI must be less than, say, 0.4. If the probability of obtaining this ROI is between 0.4 and 0.8, the decision must be taken to test the product further.

 

At all stages, due consideration must be given to risk and uncertainty. These matters are discussed below.