When Leaders Should Bet Big on New Businesses and How to
Avoid Expensive Failures
By Andrew Campbell & Robert Park
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EXPAND YOUR IMAGINATION
AND
NARROW YOUR FOCUS
“99% of companies fail to create successful new growth
platforms. less than 10% of companies manage to restart
growth once it has slowed. Only 3% sustain a restart for more
than three years. Less than 1% do so by creating new growth
platforms.”
“90% of companies aim for growth rates more than twice that
of the economy, while less than 10% succeed for more than a
few years”
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SIX RULES FOR NEW BUSINESSES
RULE I
CONTINUE TO INVEST IN THE CORE
Real cost is distraction from core rather than
money lost from failed venture.
Keep opportunistic watch.
Don’t force pace it’ll speed rather than stem
decline.
Kellogs spent 20 years to find way.
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SIX RULES FOR NEW BUSINESSES
RULE II
DON’T BE SEDUCED BY SEXY MARKETS, BUT
RECOGNIZE RARE GAMES
Focus on markets where you have advantage,
rather than markets that are growing.
Two Exceptions:
Dog Markets: More competition, less profits. Avoid if
even have advantage.
Rare Games: Can enter even not have advantage.
Large potential. Advantage built in a couple of years;
generally comes from early mover benefits.
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SIX RULES FOR NEW BUSINESSES
RULE III
LOOK FOR ADVANTAGE, DON’T PLAY THE
NUMBERS GAME
Number game (like venture capital) is detrimental.
Invest in opportunities only when company has a
significant advantage.
When does a company has a significant advantage?
when it believes it can serve the market and earn
30% better margins than competitors.
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SIX RULES FOR NEW BUSINESSES
RULE IV
BE HUMBLE ABOUT YOUR SKILLS
Competitors’ advantage largely unknown.
High learning costs involved, can upset many plans;
Acquisitions mitigate it .
Don’t be overoptimistic of your skills for new business.
Look for SAPLINGS within the company
HP
IBM Global Services
12.02.08

SIX RULES FOR NEW BUSINESSES
RULE V
SEARCH FOR PEOPLE AS MUCH AS POTENTIAL
Start with search of talent rather than search for opportunities;
Finding opportunities and success will be consequential.
Look for the managers who understand the products, the
markets, and the essence of the business model needed to
make a profit in new business.
“At the end of the day, you do not bet on strategy,
you bet on people.”
Larry Bossidy, president and CEO of AlliedSignal
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SIX RULES FOR NEW BUSINESSES
RULE VI
BE REALISTIC ABOUT AMBITIONS
Managers achieve more dramatic advances when
they set BHAGs: Jim Collins, Built to Last
Not true for creation of new businesses.
Don’t put Goals before evaluating opportunities.
Have less instinct about new opportunities. BHAGs
distract them from thinking rationally.
New Business Development better done as a project
team with a finite time frame rather than by setting up
an organizational unit.
12.02.08

“Growth is situational, it is contextual, it is
philosophical and yes it is even spiritual.
The quest for growth is a marathon not a sprint. It
is a journey not a destination. It is culture not
strategy. Ultimately it is less about where you
want to go and more about who you are.”
Mats Lederhausen, McDonald’s
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Avoidable Causes of Failure
12.02.08

AIMS (Icarus Pitfall)
Avoidable Reasons of Icarus Pitfall
Focus on the GAP rather than OPPORTUNITIES.
Plans based on Existing Business.
Pressure from the financial community and
stakeholders.
Belief in the POWER OF STRETCHED GOALS.
Concern for LONG TERM SERVIVAL. “the misery
of uncertainty is less than the certainty of misery.”
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Opportunities (Helen of Troy Pitfall)
Avoidable reasons for HT Pitfall
Seductiveness of “sexy” markets: Looking at Growth and Potential and
investing even:
Having no special advantage over rivals.
Having no exceptional benefits being early investor.
Opportunity is no rare where Demand exceeds Supplies for a couple
of years to come.
No attention to available tools of analysis (5 Forces by Porter)
bargaining power of customers
bargaining power of suppliers
threat of new entrants
threat of substitutes
intensity of rivalry between competitors
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Capabilities (Hubris Pitfall)
Avoidable reasons for Hubris Pitfall:
Focusing primarily on areas of fit rather than taking
a balanced view of a company’s full set of skills.
lack of a framework for deciding whether the company
has the appropriate capabilities, experience, and
knowledge for the new business.
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3 Tools For Assessing Fit
1. Product (or technology) / Market Matrix.
What other products can we sell to our current
customers?
What other markets can we enter with our existing
technology?
12.02.08

3 Tools For Assessing Fit
2. Defining Companies Core Competencies (Broad
functional Skills or Narrow technical competencies)
Honda’s skill at small-horsepower engines
McDonald’s skill at managing its supply chain.
3M’s thin film coating technology
Shell’s relationships with certain governments.
If the new initiative involves one of these core competencies,
it is considered to fit.
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3 Tools For Assessing Fit
3. Adjacency Steps
12.02.08

Process (Number Game Pitfall)
Avoidable Reason for Numbers Game Pitfall
The strong belief that “Because only a small % of new
business ideas turn out to be substantial opportunities, the
company needs to invest in a large number to be confident
of finding at least one.”
The only way to beat the odds is to reject the numbers game
and develop a much more demanding selection process.
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THE NEW BUSINESSES
TRAFFIC LIGHTS
“be more selective about the investments you
make in new growth businesses”
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New Business Traffic Lights
To decide whether the project should go ahead or not
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New Business Traffic Lights
To decide whether the project should go ahead or not
Do we have a significant advantage (green), small or uncertain
advantage (yellow), or significant disadvantage (red) in this new
business?
Is the profit pool for this new market average (yellow), a “rare
game” (green), or a “dog” (red)?
Do we have leaders of this new business (and sponsors in the
parent company) that are clearly superior to (green), similar to
(yellow), or less strong than (red) competitor businesses?
Is the impact of this new business on existing businesses likely
to be significantly positive (green), uncertain (yellow), or
significantly negative (red)?
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Potential/Fit Matrix
For Screening of New Opportunities
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5 Insights That Inform The Traffic Lights
Insight 1:
Managers don’t consider tradability of their unique value
while entering new business.
Reasons:
Managers should deduct from their calculations that part of
their unique contribution that can be turned into value
without entering the new business.
Implications:
Value advantage equation is often neutral (yellow) or
negative (red).
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Traffic Light I
DO WE HAVE A VALUE ADVANTAGE?
Value Advantage Equation
Unique value we bring (from the operating and
parent level) IP/Technology/Brand/market insight etc.
Less Percent of value we could trade (through sale,
license, or joint venture)
Less Unique value our competitors bring
Less Cost of learning the new business, at the
operating level and at the parent level, relative to
competitors
Equals Our value advantage
(green if significantly positive, red if significantly
negative)
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5 Insights That Inform The Traffic Lights
Insight 2: (Traffic Light I)
Managers don’t assess learning costs of a new
business (operating costs and corporate level costs).
Reasons:
Hard to quantify. Fit analysis is one way of knowing
likely learning costs.
Implications:
Since Learning costs are more than 50% of profits
for initial years. the value advantage equation is
often neutral (yellow) or negative (red).
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5 Insights That Inform The Traffic Lights
Insight 3: (Traffic Light II)
Analysis of markets should focus on identifying
extreme situations.
Reasons:
Strategy analysis shows that in most markets
companies with an advantage will earn above-
average returns.
Implications:
Since most markets are at neither extreme, they
score yellow on the Traffic Lights
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Traffic Light II
HOW ATTRACTIVE IS THE PROFIT POOL?
Business model potential for high margins.
Value perceived by customers relative to cost of production
Break-even volume as percentage of market
potential for transforming high customer value into
high margins.
Industry structure potential for high margins.
Power of customers
Power of suppliers
Competitive rivalry
Threat from new entrants
Threat from substitutes
Growth
12.02.08

Traffic Light II
HOW ATTRACTIVE IS THE PROFIT POOL?
Opportunity for us to be a leader in this market.
Cost of trying relative to size of the profit pool.
Taking account of time to commercialization
Business model vulnerability.
Number of enablers
Sensitivity to key variables
joint venture partners
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Michael Porter’s 5 Forces Model
Controlling Margins
12.02.08

5 Insights That Inform The Traffic Lights
Insight 4: (Traffic Light III)
Managers don’t give attention to the issue that who is going
to run the new business/who the new business is going to
report to.
Reasons:
Managers believe that: their managerial resources are good,
talent can be hired, they can learn most new business.
Implications:
An objective assessment shows inferior (red) or at least not
superior (Yellow) managers compared to competition.
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Traffic Light III
DO WE HAVE STRONG LEADERS AND
EFFECTIVE SPONSORS?
Relative quality of leadership team of the unit
Commitment
Personal insights
Entrepreneurial flexibility
Execution skills
Influence with the parent
Status of sponsor within main parent
Significant line manager
Channel resources to the new business, especially during setbacks
Persuade other businesses and services to give help
Protect the business from overenthusiastic functions
Compatible home and 12.02.08
effective oversight

5 Insights That Inform The Traffic Lights
Insight 5: (Traffic Light IV)
Managers underestimate the performance loss in core
business when attention shifts to new business.
Reason:
Managers switch more attention to the new business. New
growth business offer better careers to better managers from
core business.
Implications:
New business creates some distraction from core.
Distraction costs become negative (red) when new business
competes for resources (finance, manpower, attention etc.)
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Traffic Light IV
WHAT IS THE IMPACT ON EXISTING
BUSINESSES?
Size of positive or negative synergies
Risk of distraction costs
Operating level
Sponsor level
Scarce shared resources
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Attention tests for existing businesses
Maturity test
Dominance test
Profitability test
Threat test
Consolidation test
Internationalization test
Extension test
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Traffic Lights
Vs.
Other Prominent Theories
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1.General Management Model
The Growth/Share Matrix
12.02.08

2. The Synergy Model
Based on the assumption that “some businesses are
sufficiently similar or have sufficient connections that
they can be or need to be managed by one company”
success in any industry goes to the company that has
the most appropriate resources in terms of location,
relationships, assets, technology, skills, and other
factors.
Operating Competencies
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The Synergy Model
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3. Parenting Theory
Business must be underexploiting its potential in
some way: there must be an opportunity to
improve it.
Parent company must have the appropriate top-
down skills or synergy capability.
Parent-company managers must understand the
management approach needed in the new
business
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3. Parenting Theory
ASHRIDGE PORTFOLIO DISPLAY
12.02.08

The Parenting Matrix
ASHRIDGE PORTFOLIO
Heartland Businesses
Edge of Heartland
Ballast
Alien Territory
Value Trap
Look for fit between SBU and parent – skills and
resources and ability to leverage them
The degree of fit and opportunities to grow the
business
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The Parenting Matrix
ASHRIDGE PORTFOLIO
Heartland: businesses for which parenting
advantage exists and are likely to be at
the heart of any future strategy.
Edge of Heartland: businesses where the
parent may be able to develop an
advantage, so are also likely to be part of
a future strategy.
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The Parenting Matrix
ASHRIDGE PORTFOLIO
Ballast: businesses where there is a fit between
their critical success factors and the parent’s
skills and resources but value creation logic is
weak. The business unit requires little help from
the parent so can be sold if a better parent
exists or moved to heartland if a new value
creation logic can be developed for them
Alien Territory: businesses that do not fit on
either dimension and need to be sold as soon as
convenient
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The Parenting Matrix
ASHRIDGE PORTFOLIO
Value Trap: businesses in which there is a value
creation logic, the business unit needs help, but
the parent’s strengths and weaknesses do not fit
well with the critical success factors. These
businesses need to be sold unless the parent is
able to change its skills and resources to reduce
the misfit.
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Traffic Lights vs. Parenting Theory
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Disruptive Technologies
Sustaining Innovations
Low End Disruptions
Are there customers at the low end who would be happy to
purchase a less good (good enough) performance at a lower
price?
Can we find a profitable business model at discount prices?
New Market Disruptions
Is there a large population who have not had the money,
equipment or skill to do this for themselves, so have gone
without or paid someone else to do it?
To use the product, do customers need to go to an
inconvenient central location (i.e. involve high search costs)?
12.02.08

Searching for New Businesses
“Companies are organisms with well-entrenched habits and
processes. Improvements are possible, but dramatic change is
not, at least not without dramatic change in personnel.”
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Factors Affecting Natural Flow of
New Ideas
Business Environment
Disruptive Technologies, Legislation,
Fragmentation, Collapse of Dominant Competitor.
Business Environment
Business model of the corporate parent company
(and/or of divisions within the parent company).
FORCING THE PACE OF IDEA GENERATION
DOES NOT WORK
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IMPROVING TOP-DOWN PROCESSES
Assessing Currently Competing Industry.
Allocate Each Business to Develop, Improve,
Maintain, Harvest Categories.
List of Corporate Level Skills and Resources.
Decide Which Parenting Opportunities the Corporate
Level Currently is or Become Good at.
Finally, Developing a Corporate-Level Strategy that
Defines Which Existing Businesses and Which New
Businesses Best Fit With Corporate-Level Skills.
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IMPROVING BOTTOM-UP PROCESSES
Promote a “rugged, confrontational/collegial
culture
Tolerate sponsored initiatives
Embrace ambiguity
Don’t separate Bottom managers
Bolster the will to terminate
Ensure sufficient general managers
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“Bottom Up and Top-Down Processes are Difficult to
manage simultaneously because the bottom-up
process is intuitive and entrepreneurial, while most
top-down processes are locked into past concepts
of the company’s corporate strategy.”
BOTH THESE PROBLEMS CAN BE OVERCOME BY
STRONG SCREENING PROCESSES
“THE TRAFFIC LIGHTS”
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Four types of industry environments
Pressures Influencing Decisions
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ENSURE THE RIGHT PROCESSES FOR
NEW BUSINESSES
MANAGE THE FLOW OF NEW BUSINESS
IDEAS
DILIGENTLY USE THE NEW BUSINESSES
IDEA SCREENING MODELS, i.e. TRAFFIC
LIGHTS
EFFECTIVELY PARENT EACH NEW
BUSINESS INITIATIVE
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POSITIONING AND SUPPORTING
A NEW BUSINESS
Integrate or Separate
Reporting Level
Support from Layers Above
Monitoring Progress
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INTEGRATE OR SEPARATE?
“separate unless there are good reasons not to.”
Nine tests for organization design
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INTEGRATE OR SEPARATE?
“separate unless there are good reasons not to.”
The market advantage test: “more integration if the new
business is selling to the same market, using the same product
or technology.”
The parenting advantage test: “more integration if the new
business is part of some overarching corporate- or division level
strategy.”
The people test: “more integration if the business unit Can’t
allocate managers fully to new businesses.”
The feasibility test: “more integration if some constraint makes
separation impractical.”
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INTEGRATE OR SEPARATE?
“separate unless there are good reasons not to.”
The specialist cultures test: “more integration if culture & Business Model
Similar.”
The difficult links test: “more integration if links with other units are difficult to
resolve on an arm’s-length basis.”
The redundant hierarchy test: “more integration if one-up level needs to draw
on managers for new initiatives.”
The accountability test: “more integration if the new business’s performance
is highly dependent on the actions of other units in the organization.”
The flexibility test: “more integration in situations where the market or
technology across a group of businesses is changing fast.
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REPORTING LEVEL
Reporting High-up (CEO) or Low-Down (Functional Head)
Advantages of Reporting High-up:
Significant attention is focused.
Significant Parenting Advantage.
Easier to recruit high quality managers.
Protection from intrusive functions or divisions.
Help with difficult collaboration issues.
Ensures no unnecessary management layers.
Provides motivating accountability.
Disadvantages of Reporting High-up:
Lack of time
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REPORTING LEVEL
Compromise Between High-up & Low Down
The new business should report into a layer in the organization
for which the new business is an important part of the strategy
at that layer.
The new business should report to a manager with the
knowledge, skills, and time to be a good parent to the business.
Third, there should be the minimum of layers between the
manager allocating the money and the manager leading the
new business.
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SUPPORT FROM LAYERS ABOVE
Parenting Opportunity Analysis
Listing of major tasks that managers in
business unit need to complete in next period.
Assess whether managers likely to do the task
excellently, well, averagely, poorly.
Look for the support for tasks in average or
poor category.
List area of support that higher up managers
think the business will need.
Prioritize top 3-5 areas and make reasonable
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SUPPORT FROM LAYERS ABOVE
Existing Business setup supporting new business
Create some shared objectives for existing
businesses.
Make sure that the progress of the new business is
frequently communicated to all the managers that
need to be supportive.
Structure incentives such that managers in existing
businesses are rewarded for the success of the new
business.
Ensure that managers’ personal objectives include
transferring skills and sharing assets with the new
business.
Set up councils or networks of experts to foster the
transfer of knowledge12.02.08 skills to the new business.
and

MONITORING PROGRESS
“New venture should be monitored against milestones
rather than plans or budgets”
Examples of some milestones:
Approval of a detailed business plan, after the
exploratory phase of a new business idea.
Development of the technology, prototype product, or
service is complete and trial customers are ready to
be involved.
Initial scale-up of the offering has been concluded and
results from customer trials are available.
First expansion phase has been finished and further
investment is required to achieve target profitability.
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CONFIDENCE CHECK
Traffic Light Confidence
Are we confident that the profit pool potential is
still sufficient to justify this project?
Are we confident that our value advantage is
still sufficient to justify this project?
Are we confident that we have project leaders
and sponsors of sufficient quality to justify this
project?
Are we confident that the impact on the core
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CONFIDENCE CHECK
Execution Confidence
12.02.08

CONFIDENCE CHECK
Execution Confidence
we will achieve sufficient sales at the price we
need?
we can develop the technology and deliver our
offer at an attractive cost?
we can find and retain the support of the
partners/enablers/suppliers we need?
we will get the support we need from existing
businesses?
we have or can set up the funding and
governance we need? 12.02.08

When to Pull Plug???
This is the most tricky question for the
management.
Its better to pull the plug and kill the venture when
most of the confidence check criteria
deteriorate.
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Lets always
be alert and
then wait.
Perhaps
what we're
looking for,
is very
near...
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Lets Be determined and
prepared in achieving our
goals...
12.02.08