A Portfolio of Small Wins can be Worth More

Most IT people don’t spend much time thinking about the future of the business that employs them. But they should, and here’s one reason why:

A majority of the large company executives I have talked to recently have bemoaned the same condition. All of them wanted to create a major new revenue stream.

What this led them to was inaction: they couldn’t find a new business opportunity to build that promised to reach the billion-dollar mark almost immediately, so they turned down their organizations’ many viable ideas for ten-million dollar efforts.

This may well be a viable consideration during an upturn, where managing the number of diversions of effort is important.

During a downturn, on the other hand, it may well be counter-productive (assuming you have access to start up capital suited to new ventures). Here’s why:

It takes several years for a new venture to properly launch and find its place in the market, even if you are leveraging much of your existing infrastructure and competencies to do so.

As long as you can attend to the capital requirements of the new effort out of your own current resources, this developmental time, while the market is soft, does no harm.

Indeed, during downturns, there is often an interest in and craving for new offerings, as buying organizations look for value propositions that make sense under their current conditions.

The business therefore has the opportunity to refine itself and bring in revenue, growing to a take-off point for when the economy rights itself.

Once this occurs, the new business can then raise capital and expand to become a valued member of the firm’s family of businesses.

Whether this is done with a spin-off structure such as had been frequently used by Thermo Electric to create one venture after another, or whether it uses a different share class to isolate a division, a technique used previously by GM, this allows the venture to be properly “seen” by investors and valued appropriately, rather than being lost in the bigger picture of the firm.

As venture capitalists know, for every ten ventures that are funded, the odds are that if any of them hit “a home run” only one of them will.

More likely are the two to four solid businesses that are built.

As a result, having a surfeit of ideas for new lines of business — as opposed to simple product or services defined as products (a product without the potential for diversification or new parallel products does not generally create a sustainable business) — is actually a good thing during a downturn.

Four or five such ventures can be taken on; the company hedges its bet and has a better chance of creating a new winner.

What about finding resources for these ventures?

Now is the time to take your best people and put them into the new ventures, perhaps with long-term success incentives attached.

Stable parts of the business can be run by the “second team”: it is a good developmental opportunity for both, and is an optimal allocation for success.

Meanwhile, stale and end-of-life parts of the product line or divisions can be pruned and resources reallocated as needed.

In other words, this is a good opportunity refresh the company’s portfolio of activities and shift more of it into the growth category, ready to take advantage of the upturn to come.

Thinking of the company as a portfolio in this manner does not commit you to a holding company structure, but we observe that thinking of families of products as elements in a holding structure managed for its potential future contributions does lead to revenue growth more directly than trying to milk one last end-of-life spin out of an established and stable family.

In other words, there is a difference between budget allocation and investment at work here, and it is the second that leads the company firmly forward into the future.

I’d like to note, by the way, that the skills and mind-set required to make this work seem to be the opposite of that required to grow by acquisition.

What this suggests to me is that as a business there is a fundamental choice to make about the path to future success, one that will need (in most cases) a longish strategy discussion and than an investment in time to consolidate the types of behaviour being sought.

But the bottom line here is clear. Oaks grow from acorns, not from other oaks.

Expecting a new business idea to pop up that is a significant percentage of your existing business in year one is a rare event, along the lines of expecting to win a Trifecta at the race track from the three horses with the longest odds.

A portfolio of vibrant small ideas, on the other hand, has the potential to turn out one or more solid performers for the future. Think a little smaller, in other words, to grow another giant venture.

From an IT point-of-view, this implies a flexible architecture, component-driven, that can quickly be deployed and redeployed to meet the needs of these ventures, and set to grow with the ones that do.

It is, in other words, the exact opposite of the “one size fits all” standardized package architectures I’m used to seeing.


About passionateobserver

I am a passionate observer of our society, the economy, and politics. Mostly I don't like much of what I see, so I write as a concerned citizen. To the fray, I bring a background in the philosophy of history, a lifetime's reading, a work history in information technology management, consulting and education.
This entry was posted in Strategic positioning and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s