Avoid impulsive start-up decisions

Business leaders and managers are engaged in a constant quest for a 'pot of gold' that will reward them, their shareholders and other stakeholders. One of the usual ways of seeking this prize is to branch into new businesses. However, it is well known that most attempts by businesses to develop new growth fail.

by Ashridge Journal 360
Last Updated: 23 Jul 2013

Studies by the Corporate Strategy Board demonstrate that fewer than 4% of 1,640 large companies sustained profitable growth throughout the 1990s. Fewer than 10% managed to restart growth and only 3% sustained it for more than three years. Fewer than 1% did so by creating new growth platforms.

Various reasons are suggested for this. They range from the different skills needed to run new streams of business compared with those needed to run the mainstream business to an over-reliance on strategy driven from the top. But there have been no significant success stories to suggest that any of these explanations is right.

A different conclusion is that managers need to assess opportunities more strategically and be less activity-driven. The majority of successful new businesses come from the more traditional route of strategic planning. More failures result from failures in strategic selection than from failures in entrepreneurial management.

Central to this new way of thinking is a belief that for any company, there may be only a small, maybe even zero, set of opportunities that will make a significant difference in growth and that will fit with its existing capabilities.

Six rules can help managers in search of growth opportunities to avoid costly mistakes and yet be ready to move decisively when a promising opportunity emerges. These rules are:

  • Continue to invest in the core business
  • Don't be seduced by sexy markets, but recognise rare games
  • Look for advantage, but don't play the numbers game
  • Be humble about your skills
  • Search for people as well as potential
  • Be realistic about ambitions

The Ashridge Strategic Management Centre has augmented these rules by developing a screening tool to see if the strategic logic is still there. It can be applied to an idea before a business plan has been developed, alongside a business plan to assess the strategic logic, or to an existing investment that is failing to meet short-term targets.

The screen takes the form of four 'traffic lights'. First, does the company have a significant value advantage (green), a small or uncertain advantage (amber) or a disadvantage (red) when compared with likely competitors? Second, is the profit pool average (amber), a 'rare game' (green) or a 'dog' (red)?

Third, does the company have leaders of the new business (and sponsoring managers in the parent company) who are especially insightful or skilled (green), average (amber) or less skilled (red) than its likely competitors? Finally, is the impact of this new business on the existing business likely to be significantly positive (green), small or uncertain (amber) or significantly negative (red)?

If the portfolio of new investments in most companies were subjected to such a test the result would be many red lights. Research shows that it can take several years for a company to find a growth opportunity that fits. So managers should bide their time. Unwise investment in new businesses is the most common form of corporate suicide.

Source: Going for gold: wait on amber
Andrew Campbell
Ashridge Journal 360, Autumn 2005

Review by Roger Trapp

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