Archive for the ‘Business Strategy’ Category

Houston, We Have a Problem: Understanding Sacred Cows

Founders of successful startup initiatives within a larger organization experience something akin to astronauts in space. Even though they rely on the infrastructure and support of the larger organization, maintain communications, regularly monitor systems and provide feedback, the founders operate with a level of autonomy and accountability that is palpable. Issues must be addressed and opportunities pursued with agility and speed. Decision-making tends to be streamlined and results, both good and bad, come quickly. With it comes both a sense of weightiness of purpose and weightlessness from the larger organization’s gravitational pull.

In this series we are focusing on six factors critical for success. I asserted in the last post, that in order for the startup team to move quickly through space, it is essential for them to be given the latitude to make decisions outside of the host organization’s normal approval process. For anyone who has started his/her own company, this assertion is obvious. The benefit of speed to market far outweighs the risks of making a bad decision. When the startup is part of an existing organization, though, the risks associated with a bad decision can be much greater.

When a startup has a miss-step, it is usually not catastrophic. First, because of a small constituency, few people suffer the consequences of a bad decision. Secondly, people usually understand the experimental nature of innovation, and tend to be more forgiving.   The host organization, however, will have a larger constituency and brand equity to protect, which presents a unique challenge for the startup venture within a larger organization. Many startup ventures within larger organizations fail to launch based on how they address this very dynamic. Out of concern for the host organization’s health, startup ventures from within are often expected to eliminate risk, resulting in either limited growth or certain death. To increase the odds of success, a more strategic approach would be for the team to develop a deep awareness of larger organization’s “sacred cows” and powers reserved.

Over time, established organizations develop sacred cows. Sacred cows can be things we honor and protect or things we avoid at all cost.   In politics we hear the term, “third rail.”  This is a reference to the third rail of subway track that is electrically charged, and refers to issues too politically charged to risk taking a strong position. These sacred cows are developed over time to uphold the established values of the organization, maintain goodwill, and build/protect a positive corporate reputation. While it is useful from time to time to challenge these sacred cows for currency and to remain relevant, they have an important role in the organization, and the responsibility to challenge them falls on the leaders of the host organization—not the startup from within.

The challenge for leaders of the startup team is to dig deep into the history and past decision-making of the host organization, and to have a keen awareness of the current sacred cows. A good place to start is to understand existing powers reserved. These refer to decisions made only with the approval of the host organization leadership. That is, the power to make the decision is reserved, in advance, to a pre-specified leadership position. Powers reserved should be limited to decisions that have a significant impact on the host organization. Significance can be defined based on legal and/or financial liability or risk to corporate reputation. The startup leader should also make considerable efforts to dialogue with senior leaders in the host organization to gain an understanding of the most important protocols and organizational imperatives.  This will inform his/her decision-making on a daily basis.

To the entrepreneur this may seem cumbersome and bureaucratic, but for the startup leader within a large organization it is liberating. It provides him/her the freedom to act quickly and decisively—the freedom to fail fast, in order to fail forward.

Houston, We Have a Problem: 6 factors critical for success

Founders of successful startup initiatives within a larger organization experience something akin to astronauts in space. Even though they rely on the infrastructure and support of the larger organization, maintain communications, regularly monitor systems and provide feedback, the founders operate with a level of autonomy and accountability that is palpable. Issues must be addressed and opportunities pursued with agility and speed. Decision-making tends to be streamlined and results, both good and bad, come quickly. With it comes both a sense of weightiness of purpose and weightlessness from the larger organization’s gravitational pull.

In order for the initiative to have a successful launch and orbit there are six factors critical to success. In this post I will address the need for the first.

Latitude.

Much like scientific discovery, new venture creation requires an iterative process of establishing key assumptions/hypotheses, and then testing and modifying those assumptions as needed until a successful model is articulated.  While the process requires discipline, it is often messy and circuitous. Discovery is as much about finding what does not work as what does. In order to save precious time and resources, speed is of the essence. Startups within larger organizations need a certain level of autonomy in order to develop and modify products and services until the model works. Said differently, new venture creation requires a “fail fast to fail forward” approach. There will certainly be setbacks. The idea is to move through the process before too much time and energy is expended.

The good news is that when a startup stubs its toe, it is usually not catastrophic. First, because of a smaller constituency, fewer people suffer the consequences. Secondly, people usually understand the experimental nature of innovation, and tend to be more forgiving.

Conversely, established organizations focus on ensuring appropriate controls are in place to protect the organization’s image, and for good reason. They have something of value to protect. Startups need be more concerned about building brand equity than protecting it. A bicycle lock is of little value for someone with no bicycle.

The ability to make judicious decisions quickly requires a streamlined approval process that is separate and distinct from that of the host organization. These space-travelers cannot navigate new frontiers if they are bound by the “earth’s” gravity, so they require far more latitude to explore and make decisions. This increased level of autonomy, however, must carry with it an increased level of accountability.

There are always consequences resulting from our decisions and strategies, and those executing the strategies should be held accountable for their decisions.   Keep in mind that even though this is a new venture, it is associated with an established host organization with brand equity and an image to uphold, so the stakes can be high. In my next post, I will offer some suggestions on how to minimize the risk of this increased autonomy to the host organization.

Houston, We Have a Problem: Feeling alienated as a startup

As mentioned in a previous post, startups within a larger organization often operate in a realm outside the core competencies of the host organization.  This can cause some level of dissonance around actions, decisions and strategies. Let me illustrate with a hypothetical. Imagine you are an alien being who just materialized in the emergency department at Children’s Hospital of Philadelphia (CHOP). You immediately find yourself disoriented and confused, seeing what appears to be some kind of receiving and distribution center for offspring of adult humans. On the wall you see in very large letters the word CHOP, creating a disturbing juxtaposition behind the cherubic faces of these offspring.

Suddenly, you hear a howl as your attention is drawn to one offspring experiencing intense pain from his abdominal region. This offspring is being quickly carted into another room, surrounded by adult humans wearing masks that conceal their identity. It soon becomes disturbingly obvious why these adults want to shield their identity as they take turns inflicting some kind of ritualistic punishment to this offspring. It starts with a form of voodoo where a needle is inserted into the offspring’s body, followed by ritualistic markings with amber colored ink. Just when you think you have seen all you can bear, the apparent chief of this sadistic tribe is handed a small, but extremely sharp, weapon, where she proceeds to make a life-threatening incision it the abdominal region. Convinced you just witnessed a human sacrifice, you think in horror, “No wonder this place is called CHOP!”

In reality, you witnessed a child being saved from a life-threatening ruptured appendix. Without prior knowledge of the human anatomy or earthlings’ medical protocols these actions, decisions and strategies appeared confusing, cruel and inappropriate.

If the differences in domain knowledge between a host organization and its startup initiative are significant enough, the startup can at times feel alienated from the host. If you have ever found yourself in this situation you may have even received glib comments like, “what planet are you on?”

In previous posts I offered some operating principles and governance suggestions to create a successful startup within an existing organization. In future posts I will detail six factors critical to success.

Houston, We Have a Problem–Governance for Startup Initiatives

When building a startup within an existing organization, the initiative often falls outside the competency wheelhouse of the host organization.  This requires a unique governance focus. As mentioned in the last post, it is important for the startup leader to meet weekly with the report-to executive from the host organization in order to stay connected with the mother ship. The report-to executive will be a valuable champion who can provide a host organization perspective of the startup leader’s strategies and activities. He or she can also be very effective in running interference. Remember, speed is of the essence, so any help keeping away the ankle-biters should be welcomed.

 

It is equally important to engage thought-leaders specific to startup’s domain. Early in the process, it is advisable to assemble a small advisory team made up of leaders experienced in the specific domain to provide outside accountability, advice and counsel. It is important that these advisors challenge the startup leader, and provide input without pulling punches. While advisory boards are often set up to provide access to influencers and funding, it should be only a secondary objective here. Startups outside the orbit of the host organization are often blazing new frontiers, which can make adequate governance a challenge. Advisors experienced in the arena or ecosystem in which the startup operates are essential to ensure sound governance. A word of caution: you want these advisors to be brutally honest with you, so be prepared to check your ego at the door before meeting with them.

Houston, We Have a Problem–Operating Principles for Startup Initiatives

Building a startup initiative within an established organization offers opportunities and challenges.  The following are some operating principles, based in part on my previous experience with startups within established organizations.

  • Until the initiative is proven successful, resources will be scarce, so find only the best, most resourceful people to help build the center.  Someone able to use their position, or a significant budget to get results is not enough.  Include people on your team with the talent and interpersonal skills necessary to get things done through charm, dogged determination and persuasiveness.  Another important attribute is a strong need-to-achieve.  I will offer more in a later post on building the right team.
  • Position and job title provides no guarantee of support. To receive adequate support from the host organization the leader must gain trust and generate buy-in of purpose from all levels of the host organization.  A common mistake of many leaders is the belief that their position, or the endorsement from higher-ups, is sufficient to garner the necessary support from members of the organization.  While support from an organization’s leadership in necessary, it is certainly not sufficient.  If folks within the larger organization do not want to help you, they will find very clever and covert ways not to.  It is always better to engage people throughout the organization in a way that they want to help you.
  • Work only on items/activities that can be directly linked to strategic objectives.  Time is the great equalizer.  We all have the same amount of it each day.  In order to build something meaningful that is outside the core competency of the host organization you will have to build momentum and show results quickly.  That means you cannot afford to spend energy on anything that is not directly tied to your strategic objectives. I offer more details in later post regarding tips for accomplishing this objective.  As an aside, this objective is one that every organization should strive for.  In this fast-paced, competitive world, your most precious resource is time.
  • Schedule weekly 15-minute meetings with your report-to executive in the host organization to stay connected with the mother ship.  I learned an important lesson, while a mid-level executive with IBM managing a site team in Colorado that reported to a headquarters executive in New York.  Always being a self-starter, and someone who prefers a great deal of autonomy, I made the mistake of making decisions and delivering results without “wasting my bosses time”.  After all, she had much on her plate, and there were others who needed her attention more than I.  While it seemed like a good strategy at the time, I learned (rather painfully) that it needed fine-tuning.  With effective accountability metrics and a capable team in place, bosses don’t need to be involved with the day-to-day decision making of the team, but they need to stay informed.  These weekly 15-minute meetings serve another purpose.  They provide an opportunity to reinforce the vision and strategic objectives of the team, and to highlight progress.  Remember, the work you are doing is less important to the host organization than it is to you.  For the host organization it is just one of many initiative.  For you it is everything, so it is helpful to find opportunities to bring it top-of-mind for the host organization.  The saying, “out of sight, out mind” definitely applies in this case.
  • Speed of execution is essential—better to ask forgiveness than to ask permission.  As mentioned above, there is typically a small window of opportunity to convince the host organization that your initiative is worthy of continued support, so speed is of the essence.  In order to keep pace it is better to make decisions judiciously and quickly, which often means making them without asking permission.  Ask yourself this simple before making a decision.  “Do I feel comfortable enough with this decision that I am willing to be held completely accountable for the outcome?”  If the answer is “yes”, just do it!  But don’t make any decisions before reading the next two objectives.
  • Ensure strategies are well nested within the overarching strategies of the host organization.  This is a great way to feel confident in your strategic decision-making.  It will require a thoughtful understanding of those overarching strategies.  If you are looking for more face-time with the senior executives of the host organization, this is a good use of that time.  It will not only provide an opportunity for them to articulate their vision and strategies, it provides you an opportunity to speak to your strategic objectives within the context of theirs.  This creates a rare opportunity for buy-in from the host organization, and provides necessary context for your decision-making.
  • Do NOTHING that would jeopardize the reputation of the host organization. When in doubt, seek advice.  If anyone tells you “there are no sacred cows in this organization” don’t believe it.  Every organization has them, and many successful organizations go to the trouble of codifying them in the form of policies and/or practices.  Organizations, like people, rely on goodwill (a favorable reputation) to thrive.  When building a startup initiative within a larger organization, the surest and quickest way to certain death is to do something that damages the host organization’s reputation.  Don’t do it!

Starting With Common Objectives May Be Overrated

Most would agree that when trying to develop effective strategies to drive transformative change it is helpful to start with agreement regarding objectives.  After all, if we are each working toward a common objective, how hard can it be to reach agreement?  Look!  It’s a bird.  It’s a plane.  It’s a Debt Ceiling!

The current debt crisis in the U.S. provides ample evidence that starting with common objectives may be overrated.  I would like to believe that there is a common objective to which every member of Congress can agree.  Oh, I don’t know.  How about something like, “we all agree we would like to maintain a AAA bond rating?”  The problem is that finding a common objective that becomes the common denominator is often too far removed from strategies to be useful.  Said differently, the more abstract an idea, the farther it is from concrete strategy or policy.

Over the past two days I was involved in a strategy advance (as opposed to a strategy retreat) with a group of my colleagues at Drexel University.  At the beginning of the first day the facilitator asked each of us to reflect on past meetings or strategy sessions that were particularly productive.  She then asked us to recall if there was an essential ingredient that made it successful.  Upon reflection, I settled on one ground rule that I feel is essential–complete transparency of objectives.

While it is not necessary that we start from a common objective, it is essential that we be honest and transparent regarding our objectives.  Said differently, there should be no hidden agendas.  Often, facilitators argue that everyone must check their egos at the door.  One can check one’s coat at the door.  One can check one’s purse at the door.  One can even check one’s smart phone at the door.  But it is very difficult to check one’s ego at the door. Even if we could, it could prove dangerous.  All those very large egos would likely block the exit, creating a fire hazard! Furthermore, our passion, creativity, drive and intellectual power is often fueled by our egos. How transformative would our strategies be without passion, creativity, drive and intellect?

During those two days, I witnessed a diverse group of very bright, passionate, creative people working together in an energetic and collegial fashion to tackle tough issues toward positive, transformative growth.  As a result, we were able to celebrate the victory of a great start on a long journey.  One reason for the success is that we established realistic ground rules up front.  Not the least of which was to ensure complete transparency of objectives.

© Mark Loschiavo

Can Music Promote Social Change?

When my son was in middle school he got involved in a program called Children’s International Summer Villages (http://www.cisv.org/about/history.html).  A woman who believed that if children could learn to relate to kids from other countries it would promote world peace started CISV shortly after WWII.

In my travels, I have found music to be a common denominator—the universal language.  Whether it was singing along to a Beatles tribute band at a table in Roppongi with two Koreans and six Japanese, jamming in a karaoke bar in Tokyo with musicians who spoke no English, or jamming with an outdoor market vendor in Bangkok for 45 minutes, playing a stringed instrument called a Thai Pin, that I picked up for the very first time that day, connections were made.  The Thai vendor and I couldn’t communicate with each other in any other way, but we became brothers that day.  When my business associates finally found me they were relieved to learn that I was NOT abducted–just distracted.

I am privileged to serve on the board of LiveConnections (http://liveconnections.org), an organization dedicated to providing innovative music education programs to build bridges and connect cultures.  It was started by a group of people who are passionate about music, but more passionate about making a difference in the world through music.  Now, that is something to sing about!

If this is something that resonates with you, please go to http://liveconnections.org to make a donation.

The Disintegration of Companies: Why Alliances Fail

Salvador-Dali-The-disintegration-of-the-persistence-of-memory--1952-83836Previously, on The Disintegration of Companies, I wrote about the art of alliances.  The blog ended with the caution that alliances often fail.  In this installment I would like to discuss some of the reasons for failure.

In their work on Entrepreneurial Alliances, Jeffrey J. Reuer, Africa Ariño, and Paul M. Olk argue that alliances fail because of changes in the environment of the alliance, poorly aligned partner strategies, governance issues, deficiencies in managerial capabilities and commitments, and a failure to collaborate.  While all of these reasons are relevant I will focus on two.

Partners’ Strategies

Partners’ strategies, should be carefully evaluated during the selection process and before an alliance is created.  The more closely aligned the strategic interests of the prospective partners, the more likely the alliance will succeed.  Several years ago I was one of the founders of a Joint Venture between two fortune 100 companies.  The Joint Venture provided computer maintenance and network services to customers for all of the top tier brands.  As a private label company, we acted as representatives of the companies who sold the products to the end users.  Even though we delivered service to thousands of companies in the US, our direct customers were IBM, HP, Gateway, Dell and others.

The majority partner in this strategic alliance was IBM.  As such their strategic interest in the alliance was quality service at an affordable cost.  The other partner’s strategic interest was primarily one of financial return.  While these two strategic interests are not mutually exclusive, it proved challenging.  As expected, both partners cared deeply about financial returns, but one partner was unwilling to gain it at the cost of customer satisfaction.  Ultimately, the joint venture did exceedingly well, but not without its share of governance issues that may have been minimized if the partner selection process focused more on partner strategies.

Culture

As mentioned above, Africa, Ariño, and Olk discuss managerial capabilities and commitments and collaborative processes.  I tend to group both of these under culture.  The need for a cultural match among alliance partners compounds as the level of interdependence and commitment among the parties increases.  If the alliance is in the form of a preferred vendor, cultural fit matters, but not as much as it does with a merger or acquisition.

In an attempt to enter the telecommunications market in 1984, IBM partnered with (and later acquired) Rolm Communications of Santa Clara, California.  In the mid-1980s IBM was known as an innovative company with a no-nonsense, button-down culture.  While employees were encouraged to take judicious risk and think outside the box, they were also encouraged to act and dress in only the most professional manner, which meant dark suits for both men and women. Alcohol was forbidden during the workday. A salesperson was only allowed to have a drink at lunch if his or her customer wanted a drink.  If that occurred, the salesperson was not supposed to make another call that day. While not forbidden, beards were discouraged.

Contrast that with the culture of California based Rolm, which held on-premise beer bashes for its employees each Friday, and the majority of the men I met sported full beards, and came to work dressed in casual clothes.  As far as I know, the women did not have facial hair, but they did dress casual.  I think you get the picture.  The two cultures were distinctly different, and I think it contributed heavily to the ultimate collapse of the alliance.

Cultural differences can lead to difficulties in collaboration, which can ultimately lead to the inability to adapt, a lack of communication and trust, and inadequate coordination and conflict resolution.

Before entering into an alliance it is important to look for fit—both in strategic interests and in culture.  All of these things can, and should be, evaluated during the selection process.  The selection process is much like the courting process in a romantic relationship, where each party is trying to put their best foot forward.  A dear friend once offered advice to her daughter regarding finding a mate.  “Take the one thing that bothers you about that person just a little bit now, multiply it by 100, and ask yourself if you could live with it for the rest of you life.”

©Mark P. Loschiavo

The Disintegration of Companies: The Art of Alliance

DisintegrationIn part 1 of this series I talked about how more and more startup and emerging growth entrepreneurs are disintegrating their companies by outsourcing one or more of their three core business processes (product innovation/infrastructure/customer relationship).  Even corporate giants are outsourcing subsets of one or more of these processes.  Companies, who in the past would never consider entrusting any portion of the company’s customer relationship process to outsiders, have entered into agreements with outsiders to handle many of their customer sales, support and service processes.

In my last blog, I also wrote about the conflicts inherent in vertically integrated companies that can be minimized through disintegration. I would like to offer two more arguments in support of company disintegration through alliance.

The first is expedience.  In a world where technology cycles are measured in weeks or months and competition is truly global, speed to market has become increasingly important.  As mature companies attempt to grow, by entering new markets or expanding product lines, it is often more expedient to do this through acquisition or partnering.  Large pharmaceutical companies, who in the past have differentiated themselves through R&D, now allocate a higher percentage of their R&D budgets to acquiring technologies rather than developing them in-house.  This usually comes in the form of company acquisition or technology licenses.

For start-ups entering an existing market, the most viable protection from being crushed by incumbents is to get to market, reach scale and build brand equity quickly. eBay acquired Half.com in 2000 not because they were unable to build the same product but because Half.com had already owned the brand in the eyes of the consumers.  In order for start-ups to enter markets and reach scale quickly it is often necessary to partner with others to handle one or more of the core business processes.  One entrepreneurial company I worked with developed, manufactured, and sold fashionable compression garments aimed at women suffering from lymphedema—a condition that often accompanies breast cancer patients and survivors. In order to build the company they created an alliance with the company that produces LYRCA® and Coolmax® to develop the product.  They also used a toll manufacturer to handle production.  In other words, they disintegrated their company to the point where significant parts of their product innovation and infrastructure were handled through alliances.  What they kept in-house was what they saw as their points of differentiation (POD), print design and customer relationships.

The second good reason for company disintegration through alliance is economics.  For mature companies the decision to outsource is typically driven by income statement considerations.  While a solid balance sheet is always important, most large successful companies have sufficient access to capital.  They also have a healthy appetite for profit.  With increased specialization and advancements in technology come two economic principles, absolute advantage and comparative advantage.  Absolute advantage refers to the ability of a firm to produce a particular good at a lower absolute cost than another.  In this case a company may outsource the manufacture of the product it sells to an alliance partner who can produce the product at a lower absolute price. Comparative advantage speaks to one firm’s ability to produce a particular good or service at a lower opportunity cost than another.  In this case a firm may outsource one or more of their business processes to an alliance partner in order to focus their finite attention on those processes in which they are most efficient.

For start-ups the economics of disintegration tend to be driven by the balance sheet.  Unlike established companies, access to capital is difficult for new ventures.  As such, a start-up venture may choose to ally with a partner in order to enter markets and grow the business while conserving cash.  This often comes at the detriment of profit margins, but high margins on zero revenue still equals zero profit.

While alliances can help you build and scale your company quickly, they frequently fail.  When they fail, the results can be fatal.  It is important to:

  1. choose your partners wisely,
  2. implement the alliance carefully and,
  3. nurture the ongoing partnership diligently.{a

©Mark P. Loschiavo

The Disintegration of Companies: Resolving Inherent Conflict

Salvador-Dali-The-disintegration-of-the-persistence-of-memory--1952-83836Ever since the industrial revolution there has been an inherent problem for companies.  A problem stemming from the nature of being vertically integrated—where research, development, operations, sales and support were all managed under the same roof.  While vertical integration has its benefits—centralized control of information, complete ownership of the customer experience to name two—it creates motivational conflicts throughout the organization.

Most business ventures can be broken down into three core processes—product innovation, infrastructure and customer relationships.  The inherent problem comes from the conflicting objectives associated with these three processes.

Successful product innovation requires speed-to-market and differentiation.  By contrast, economies of scale and standardization are watchwords for companies trying to maximize infrastructure efficiencies.  In the words of Henry Ford, “Any customer can have a car painted in any color that he wants so long as it is black.”  It doesn’t take long for conflict to arise when product developers are striving to frequently and rapidly introduce completely redesigned products, which require variations in infrastructure like tooling, molds, presses, automation equipment and assembly line alterations.

If that doesn’t create enough conflict, those involved with the customer relationship process care mostly about scope, wanting to satisfy each and every customer’s needs.  “What do you mean it only comes in black?  My customer is a Kentucky Wildcat fan, and wants his in UK blue!”

Until recently, companies have learned to live with these conflicts in order to ensure effective information flow and quality control regarding customer solutions and interactions. Rapid changes in information technology over the past two decades, however, have allowed for the disintegration of companies, where companies are becoming less vertically integrated.

In Corporate America this shift is happening at glacial speed, but in the new and emerging venture space it is becoming more the rule than the exception.  Over the past five years I have reviewed hundreds of business plans.  Virtually all of them employ a business model that is disintegrated, where one or more of the three core business processes are outsourced to vendors or alliance partners.

In this hyper-competitive business environment, the astute entrepreneur understands the need to focus attention on the company’s points of differentiation (POD) rather than trying to build a vertically integrated company.  The dichotomy is that new venture creation is not a linear process.  Often, discerning a company’s POD is an iterative process, making it important early in the strategic planning process to protect core business activities that may be critical to maintaining competitive advantage.  After all, we don’t want to throw out the proverbial baby with the bath water.

©Mark P. Loschiavo

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