Part 3: Managing for Shareholder Value - New Earnings Engines: How Many Can We Onboard in Parallel?

New Earnings Engines: How Many Can We Onboard in Parallel?

OK, this is a trick question.  The answer is none.  Or to express the idea more completely, with respect to new, organically developed lines of business, the answer is that you can onboard one, and only one, earnings engine at a time.  You cannot and will not succeed if you put more than one in play at the same time.  Period.

Needless to say, this is not conventional wisdom.  But as I mentioned in my first post, conventional wisdom is batting well below .100  So, as my colleagues and I like to say, that’s my point—what’s yours?

But rather than argue about this, let’s just do the math.  Your company has one or more core businesses that represent the current franchise, whether that adds up to $5 billion or $50 billion or more.  And around that set of core businesses you have put in place go-to-market capacity that can reliably deliver on next year’s revenue commitments and a bit more.  The question is, how much more?

Well, could you make the core business number with 95% of your go-to-market capacity, fully dedicated to that end?  Yes, I hear you say (albeit a bit guardedly).  OK, now how about 90%?  Lots of risk here, you say, already shaking your head no, although under interrogation you concede maybe conceivably, but no one around here would be comfortable with the idea.  OK, how about 85%?  NFW!  (You are very clear about that.)

So, anecdotally at any rate, this means you have somewhere around 7% plus or minus 2% go-to-market capacity to allocate to things other than the core business.  Now, how much capacity will it take to onboard a new earnings engine, growing it to a size that will register with investors—I argue this is 10% of total corporate revenue, say, within 4 to 5years, with it on a growth trajectory that will extrapolate to, say, 20% of total corporate revenue in next few years after that?  Are you comfortable you can achieve that with 7% of the total go-to-market capacity of your firm? 

Now, if you have not already dropped out from the race, let me ask you one final question, does anyone believe that their company can achieve this goal with half that amount, with 3.5% of its total GTM capacity? I sincerely hope not.  But that is exactly what any hedge-your-bet-with-more-than-one-option strategic plan commits you to do.  Now, no offense to you or to your colleagues or to the board who approved this plan, but this is just dumber than dirt.

So why do we do it?  Part of the reason is that we know how high risk the venture is and we do want to hedge our bets.  Unfortunately, however, the hedging mechanism we have selected ensures failure in the outcome, thereby increasing the perception of risk, thereby intensifying the hedging behavior.  Some circles really are vicious.

Another big reason we do it is that most large enterprises are divisionalized, and every division has its Next Big Thing in the hopper.  Needless to say, every division head feels entitled to bring his or her NBT to market.  How are you going to say no?  But that is exactly the question you must answer.  How are you going to say no?  Because if you don’t, you are doomed to fail. 

We’ll talk more about how to conduct this winner-take-all dialog in a later post.  For now, let me make one last point.  People of late are in the habit of asking management teams why can’t you be more like Apple?  It’s gotten to be nauseating, but what are you going to do?  Nonetheless, there is one thing you can and should emulate from the gang in Cupertino, and that is their one-at-a-time onboarding principle.  The iPod with iTunes was a fully material business before the iPhone was introduced to the market.  And the same goes for the iPhone before the iPad was launched. 

These were spectacular outcomes, to be sure, but the only way to get anything even remotely resembling them is to make the onboarding of any new earnings engine the singular focus of the entire enterprise for the length of time it takes to get it to materiality.  And that means one, and only one, in the chute at any given point in time.

That is the discipline that Steve with his founder power was able to install.  You don’t have his power, but you and your colleagues must find a way.