Wednesday, July 02, 2008

Stop Kissing Frogs
Growth opportunities that hold out real promise for mature companies are rare. Success comes from careful selection and a willingness to reject all projects until a good one emerges.
Reprint: F0407D
HBR July/August 2004
by Andrew Campbell

A very insightful article!

Mature companies attempting to grow by entering new businesses fail far more often than not, as numerous studies confirm. Clayton Christensen estimates the failure rate to be over 90%, and a study by the Corporate Strategy Board suggests it may be as high as 99%. No matter how the terms are defined (what can be called a new business, what’s considered core versus noncore, and what constitutes success), the finding still holds.

The explanation most frequently offered is that companies mismanage the venturing process. They are too risk averse, their cultures are inappropriate, they fail to provide sufficient incentives, and they involve the wrong managers. As experienced venture capitalists point out, you have to kiss a lot of frogs to find a prince. If corporations would only copy more of the best practices from the venture capital industry or from serial new-business creators like 3M, they could reduce the failure rate to an acceptable level.(They have very strong processes for commercializing innovation)

Our findings suggest that this argument not only misses the real reason behind the high failure rate but may also promote practices that make things worse. Stemming from a project at Ashridge Strategic Management Centre, the research involved three studies: shadowing managers responsible for developing new businesses in large companies, gauging the success rates of various corporate-venturing units, and looking for patterns in a database of success stories.

The shadowing research included companies like Shell, McDonald’s, and Whitbread. In every case, the real problem we found was a shortage of opportunities rather than a shortage of courage or venturing skills. Given the companies’ strengths and weaknesses, few, if any, of their projects had a reasonable chance of success. (The need for process tools like developing clear Decision Criteria)In one company, 24 separate ideas were considered, and 11 were launched as new ventures. However, when our team applied a screen based on the principles of good strategy, only one of the ideas showed an honest chance of succeeding; two others were marginal. (The screen consisted of reasonable questions as to whether the proposed venture offered attractive market potential, was in a realm where the company held sufficient advantages to cover the learning costs, would be supported with an effective leadership team, and would complement, not undercut, the core businesses.) Three of the 11 ventures are still alive, but the total write-offs from failed projects exceed $750 million.

Our research into corporate venturing units also pointed to a lack of suitable opportunities. Many units were launched with gusto in the second half of the 1990s to mimic the processes and methods of the venture capital industry. Corporate financing and third-party venture funds were available for all promising projects; in other words, normal rules of corporate risk aversion were suspended. Yet only a handful of the more than 100 such units in our survey developed any significant new business. More to the point, the total costs exceeded even optimistic forecasts of the potential value of the few successes. Corporate venturing units do have their uses, but they don’t solve the growth problems of mature companies.

Finally, our database of success stories also suggests that frog kissing is not the way forward. Fewer than 5% of the successes in the database were launched as part of a new-businesses development process. The majority resulted from more deliberate strategy decisions that led managers to select one or two promising candidates and commit to them heavily. (It is critical to have clear, transparent decision and portfolio processes to enable supporting the critical growth initiatives to win while meeting the quarterly numbers)

A good example is a venture launched by the Prudential, one of Britain’s largest insurance companies. Insurance customers, when their policies mature, need to put the money they receive somewhere—and in the mid-1990s the Prudential decided to create an option within the company itself called the Prudential Bank. At about the same time, senior managers, led by a new CEO, became concerned about the rise of direct-to-consumer channels such as telesales and the Internet. So they decided to build the Prudential Bank into a significant new direct-to-consumer business. They hired the founder of First Direct, at the time Britain’s leading branchless bank, to head the project. Over the next few years, they invested around £500 million in the venture, renamed Egg, which is now, despite a setback in France, one of the world’s more successful Internet banks.

The conclusion that most mature companies have few new opportunities worth investing in might sound defeatist. (“You are asking me to commit premature suicide,” one manager complained to us.) If, however, the problem is an opportunity shortage rather than a lack of courage or venturing skills, the implications for managers are important.

First, firms should institute much tougher processes for screening out wild ideas and new venture suggestions. Most business books encourage managers to take more risks, fly more kites, and launch more ventures. The opposite is probably what’s needed.

Second, some companies must face up to a future of lower growth. A successful company with zero top-line growth can still produce an average return for investors. Making this the target and using cash to increase dividends and buy back shares is the easy part. Much harder will be learning how to communicate with shareholders and motivate managers in a low-growth organization. Most mature businesses have more mileage in them than their managers presume. Continuing to drive the existing businesses forward is often the option that will create the most value.

Third, just because a company has few opportunities for new businesses today doesn’t mean it will never have good opportunities in the future. Rather than pushing water uphill with new business initiatives, companies may have to learn a much harder skill—patience. A company may have to wait five years or more for the right new growth platform to come along.

Fourth, managers may need to develop a deeper appreciation for the grow-mature-die cycle of business and let go of the seductive grow-grow-grow view of business. Companies grow when they have a unique proposition that enables them to outperform competitors. During this phase, management’s duty is to exploit that advantage as fully as possible. But in the mature and die phases, the art is to return as much money to the financial markets as possible while still keeping a watchful eye out for other unique propositions.


Bob Cooper said...

Great comments from Cyndi:

I really enjoyed this article, and it made me think. We often fall into the habit of thinking that more is, well, more. The most telling part of the article below was the story concerning Prudential Bank. It appears that they listened to their customers, watched the market closely, and found a gap that needed filling. Their approach allowed them to provide a new and emerging service in an emerging marketplace - direct to consumer and online banking. To me, this shows a savvy and gutsy approach, with plenty of courage. But most importantly it shows that the management of Prudential Bank were paying attention to the trends in their market.

Ideas that percolate from true marketplace need or customer need have a much higher likeihood of success. If the company can see this emerging trend and need, and can develop a process and plan to meet it, then I believe they will have a higher than 5% chance of success. In evaluating the feasability of a new venture opportunity, I believe you must also add one more criteria to the list below - timing. Great ideas launched at the wrong time can suck up resources and money and fail. This doesn't mean the idea was bad, it could have just been ill timed. I suggest keeping your idea graveyard close at hand and re-evaluating it from time to time. Egg was an idea whose time had come, and Prudential successfully developed an innovative approach that allowed them to capture market share. The market was ready for this service, the technology was in place, the legislative environment was favorable, and they had the plan to successfully implement.

Cyndi Greenglass

Bob Cooper said...

Another thought from Cyndi raises one of the most critical and difficult issues for leaders—how to manage businesses that have little growth potential. This is important from a portfolio perspective if the business is one of many in a corporation or one of potential survival if this is the only business of the company.

Although the authors of the article imply the importance of patience for new opportunities to arise, waiting ~5 years can be a bit much. My advice is to sit back and really understand the basic underlying competencies of your business and see if there is a collision with future trends. Western Union is a classic example of how a company leveraged their global network to transfer funds, a business that was killed with the global ATM system, into a great global growth business managing fund transfers from immigrant workers to their homes plus a lot of the adjacencies that go with it.

The bottom line is that the leaders must reach about how to deal with the situation. The Western Union case is one extreme while the other was part of our course on Driving Organic Growth. We analyzed the business profile of a company we called Danaka and set clear goals based on our assessment of the futures and realigned resourcing accordingly.

We would love to here your thoughts.

One more thought Bob - or I guess a question based on this article.

If you know the business is mature, has limited or flat growth potential, and you chose NOT to innovate around it to save the business, then my question is: How do you milk the cash cow successfully and plan for the ultimate demise while still preserving the financially feasible parts of the business? Or do you simply accept the inevitability of business death? I would be interested in your (and the groups) opinion on this issue as well.