Intuitively one thinks that when moving into a new business venture it’s the new start up that has the greatest challenges to face. You’d think with the inordinate resources at the disposal of a large corporate that it’s going to crack any nut that it wants. Well actually you don’t have to look very far too realise that the reality is very different and the size of an organisation is a trivial element when it comes to determining success in a new venture. Many big companies have tried something only to fail where smaller ones have succeeded.
If the new business venture is something that’s very different to the core business for a larger organisation then I’d argue that they got bigger hurdles to overcome to be successful than smaller start ups. Sure a corporate in theory has infinitely more money and people to throw at a problem, but in this case size really doesn’t matter or rather it matters but not in the positive way you’d want it to. What’s a better determinate of success is a companies culture and approach to new business development.
Let’s list some of the challenges larger corporates and start ups face when trying a new business venture.
|Start up challenges
|Larger corporate challenges
|Lack of money and collateral
||Lack of agility due to size
|Not enough resources and hours in the day
||Inappropriate financial assessments or financial assessments more suited to core businesses
|Access to the right sort of talent at a low price
||Constant compromise and consensus leading to a dilution of the original idea/vision
|Lack of specialised skills in all areas of the business
||Trying to force the new business into the existing business model, culture and processes
|Financial backers pushing their agenda rather than letting the original vision happen
||Assumptions and biases from the core business that are applied to the new business ventures
|Reliance on individuals for key tasks and function
||Aversion to risk and moving into the unknown
|Limited number of attempts to get it right before money and/or patience runs out
||Smaller return from new business venture as a percentage of the total revenue in the short-medium term making the business disinclined to invest
|Less negotiating power with larger partners and suppliers
||Portfolio management and contention with the core business for resources and funding
|Lack of trading history making partners and investors harder to find
||Setting the wrong KPI measures and targets
As you can see from this list, there are some really significant hurdles that can make it harder for a larger business to succeed. Let’s look at a few of these in more detail.
Lack of agility and slow decision making process
This is probably one of the most common challenges faced. Bigger organisations are like oil tankers. Everyone can agree that we want to move in a certain direction but it’ll still take a lot of time to turn the ship as you have realign many more people and get further approvals from departments and functions that weren’t directly involved in the original decision making process for the new business venture.
However, the first challenge isn’t getting the oil tanker to turn its to get everyone to agree that you have to turn! The more people that are involved in the decision making process the more likely there will be differing views on how it should be executed. The more democratic and consensual the culture of the organisation the worse it can be, which is ironic because you want to be part of a democratic and consensual organisation.
Constant compromise and consensus leading to a dilution of the original idea/vision
You’ll hear comments inside the company along the lines of:
- Well it doesn’t quite fit with the brand so if you do X, Y and Z then it’ll be a better fit
- The business case for this doesn’t really work so if we monetise it like this (because that’s what others/we do) then we’ll get a better deal
- Why are we doing it like this?
- We’ve tried this before and it didn’t work
- Actually our experience with X says that you need to do Y and Z
- Unless we do it this way I can’t support this
All the time you’re trying to get this new venture off the ground and you can’t because of the lack of consensus and in the end you compromise because you figure its better to compromise and get it launched rather than try and hold your ground at the risk off never getting it out there.
One of the things that I admire about Apple is that they come up with a vision and a product and then stick to their guns. There is no dilution (or very little) of the original idea and people strive to make it happen. So many times big companies start off with a grand vision and plan which really is a wow, but slowly and surely it gets watered down until you end up with standard family saloon rather than the Ferrari you wanted.
Inappropriate financial assessments or financial assessments more suited to core businesses
Lots of big companies manage large portfolios and each of the items on the portfolio goes through some form of investment appraisal. These are usually in the form of discounted cash flow or net present value. In themselves these measures are not bad, but they are based on some fundamentally flawed thinking that can give the wrong impression. These measures compare the cash flows of the new business venture against the do nothing scenario. The do nothing scenario often assumes that the core business cash flows will continue in the future as they are today, which is a pretty big assumption to make particularly if the existing business is in decline or some major disruption comes along to cause a sudden drop in revenue or profitability. The second major problem with these measures is that if the new business venture is truly new in that there aren’t many companies currently doing it, then the future predictions of cash flow are just that – predictions – and they are predictions that can be very wrong if there is no historical data to go on.
Big businesses may also use a investment appraisal that’s suited to the core business. If the new business venture is very different to the existing core business then the models applied can at best be inappropriate and at worst lead to answer that shows a less favourable return than investing in the core business. In this case companies may shy away from investing.
Smaller return from new business venture as a percentage of the total revenue in the short-medium term making the business disinclined to invest
The larger the existing revenue stream for the core business the larger the challenge to invest in a new but smaller business venture that doesn’t make a huge impact on the top line immediately. Let’s say for example a company has a £1bn annual revenue stream and it seeks to improve the revenues by 5%. Well a 5% improvement on £1bn is still £50m. Growing a new business venture to this size could well take 2-4 years and that means once again there will be a tension on whether to invest in this new business venture or something else in the core business that might give a bigger, more certain return sooner.
This is also one of the reason that some companies are more inclined acquire larger established businesses with bigger revenues rather than growing their a new business from the ground up. The larger revenues register a higher percentage increase on the core business revenue almost immediately.
Portfolio management and contention with the core business for resources and funding
Lots of larger companies operate a portfolio for projects to ensure the maximum return on every pound spent. A new business venture may need resources and funding from the same portfolio used for the core business and that will create a tension as people are vying for resources from the same pot. Justifying new business investments against bigger and more immediate returns from core business investments can be hard. Most modern companies almost never have enough people working on projects and if some of those available resources are diverted away into non-core activities then it can be hard sell.
The other challenge faced is that portfolio structure and mechanics maybe more suited for investments in the core business. New business ventures that are very different from the core may struggle to fit into the portfolio. However if the portfolio is structured to take account of new business ventures with the right investment criteria then this is easily overcome.
Setting the wrong KPI measures and targets
All companies like to have targets. It’s a good way of measuring how well you are doing and off course psychologically it gives comfort you’re doing the right things. Having the wrong measures for your new business ideas however can be fatal. Again this is where the core business thinking can creep in. I won’t dwell on this much more other than to say do your homework on the measures for new business ventures. An example of a good measure used by companies include looking at the % of revenue coming from new business ventures. Such measures will drive the company in the right direction because they encourage the right behaviours.
Hopefully some of the brief review of the key challenges demonstrates that just because you’re a big business doesn’t mean its easier to execute a new business venture. All of the challenges are surmountable, but you need to be aware of them up front so you can put in place a strategy for dealing with them.
The bigger you the harder it can be………