The Growth Gamble - When Leaders Should Bet Big On New Businesses And How To Avoid Expensive Failures


Published on

“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.”

Published in: Business
No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

The Growth Gamble - When Leaders Should Bet Big On New Businesses And How To Avoid Expensive Failures

  1. 1. When Leaders Should Bet Big on New Businesses and How to Avoid Expensive Failures By Andrew Campbell & Robert Park Lets Celebrate Knowledge
  2. 2. 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” Lets Celebrate Knowledge
  3. 3. 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. Lets Celebrate Knowledge
  4. 4. 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. Lets Celebrate Knowledge
  5. 5. 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. Lets Celebrate Knowledge
  6. 6. 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
  7. 7. 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 Lets Celebrate Knowledge
  8. 8. 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
  9. 9. “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 Lets Celebrate Knowledge
  10. 10. Avoidable Causes of Failure 12.02.08
  11. 11. 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.” 12.02.08
  12. 12. 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 Lets Celebrate Knowledge
  13. 13. 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. Lets Celebrate Knowledge
  14. 14. 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
  15. 15. 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. Lets Celebrate Knowledge
  16. 16. 3 Tools For Assessing Fit 3. Adjacency Steps 12.02.08
  17. 17. 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. Lets Celebrate Knowledge
  18. 18. THE NEW BUSINESSES TRAFFIC LIGHTS “be more selective about the investments you make in new growth businesses” Lets Celebrate Knowledge
  19. 19. New Business Traffic Lights To decide whether the project should go ahead or not Lets Celebrate Knowledge
  20. 20. 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)? Lets Celebrate Knowledge
  21. 21. Potential/Fit Matrix For Screening of New Opportunities 12.02.08
  22. 22. 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). Lets Celebrate Knowledge
  23. 23. 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) Lets Celebrate Knowledge
  24. 24. 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). 12.02.08
  25. 25. Lets Celebrate Knowledge
  26. 26. 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 12.02.08
  27. 27. 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
  28. 28. 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 Lets Celebrate Knowledge
  29. 29. Michael Porter’s 5 Forces Model Controlling Margins 12.02.08
  30. 30. 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. Lets Celebrate Knowledge
  31. 31. 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
  32. 32. 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.) with core. Lets Celebrate Knowledge
  33. 33. 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 Lets Celebrate Knowledge
  34. 34. Attention tests for existing businesses Maturity test Dominance test Profitability test Threat test Consolidation test Internationalization test Extension test Lets Celebrate Knowledge
  35. 35. Traffic Lights Vs. Other Prominent Theories Lets Celebrate Knowledge
  36. 36. 1.General Management Model The Growth/Share Matrix 12.02.08
  37. 37. 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 Lets Celebrate Knowledge
  38. 38. The Synergy Model Lets Celebrate Knowledge
  39. 39. 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 Lets Celebrate Knowledge
  40. 40. 3. Parenting Theory ASHRIDGE PORTFOLIO DISPLAY 12.02.08
  41. 41. 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 Lets Celebrate Knowledge
  42. 42. 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. Lets Celebrate Knowledge
  43. 43. 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 Lets Celebrate Knowledge
  44. 44. 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. Lets Celebrate Knowledge
  45. 45. Traffic Lights vs. Parenting Theory 12.02.08
  46. 46. 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
  47. 47. 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.” Lets Celebrate Knowledge
  48. 48. 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 12.02.08
  49. 49. 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. 12.02.08
  50. 50. 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 Lets Celebrate Knowledge
  51. 51. “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” 12.02.08
  52. 52. Four types of industry environments Pressures Influencing Decisions 12.02.08
  54. 54. POSITIONING AND SUPPORTING A NEW BUSINESS Integrate or Separate Reporting Level Support from Layers Above Monitoring Progress Lets Celebrate Knowledge
  55. 55. INTEGRATE OR SEPARATE? “separate unless there are good reasons not to.” Nine tests for organization design 12.02.08
  56. 56. 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.” Lets Celebrate Knowledge
  57. 57. 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. Lets Celebrate Knowledge
  58. 58. 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 Inflexible arrangement Lets Celebrate Knowledge
  59. 59. 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. The reporting relationships should provide some process of objectivity or governance Lets Celebrate Knowledge
  60. 60. 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 support plan. Lets Celebrate Knowledge
  61. 61. 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
  62. 62. 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. Lets Celebrate Knowledge
  63. 63. 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 businesses is such that this project is still justified? Lets Celebrate Knowledge
  64. 64. CONFIDENCE CHECK Execution Confidence 12.02.08
  65. 65. 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
  66. 66. 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. Lets Celebrate Knowledge
  67. 67. Lets Celebrate Knowledge Lets Celebrate Knowledge
  68. 68. Lets always be alert and then wait. Perhaps what we're looking for, is very near... Lets Celebrate Knowledge
  69. 69. Lets Be determined and prepared in achieving our goals... 12.02.08