Overcoming one-size-fits-all management

Firms do not pass through a life-cycle, but individual opportunities do. To thrive in turbulence, organizations must rapidly shift resources from stagnant businesses to the most promising opportunities for future growth, a capability I refer to as portfolio agility. Unfortunately, reallocation of resources is easier said than done.

Opportunities at different stages in the life-cycle vary in objectives, appropriate management style, performance metrics, and predictability. A venture in the start-up stage should focus on milestones that validate customer demand and technical feasibility, for example,  while success of a mature business can be measured by financial metrics.  Many companies, however, apply a one size fits all management style to all businesses in their portfolio, regardless of their stage in the lifecycle.

In late 1999, according to a case study by Harvard Business School professor David Garvin, IBM CEO Lou Gerstner asked a group of executives to study why IBM consistently missed promising market opportunities. The team identified and analyzed twenty-nine cases where IBM had missed a market opportunity that a competitor exploited, or where a start-up team was struggling within the company. The team found six major obstacles to starting a new business within IBM, and all of them resulted from applying a one size fits all approach to managing businesses:

  • Reward short-term results. Short-term Incentives are appropriate for mature business units, but they obscure the long-term orientation necessary to shepherd ventures throught the start-up stage.
  • Preoccupation with existing markets and customers. Managers overseeing established units within IBM rightly focused on their existing clients and markets. This same focus prevented them from exploring opportunities to fill gaps in the market or identify unserved customers.
  • Measure all businesses by profits. IBM management set a high profitability hurdle to ensure mature units focused on profits. Few businesses in the start-up or scale stage, however, could clear this high financial hurdle.
  • Over-reliance on market data. IBM managers prided themselves on making decisions based on hard market data. No data, however, exists for new markets, which led executives to shy away from untested opportunities.
  • Funding process favors existing businesses. IBM’s internal resource allocation system worked best when making large investments in established businesses.This process was poorly suited to placing small bets, monitoring how the venture evolved, and staging subsequent investments based on results. The process also lacked a mechanism to terminate unsuccessful initiatives.
  • Managers not entrepreneurs. The study found that many start-ups within IBM failed because managers accustomed to running stable businesses struggled to secure the resources and manage the uncertainty inherent in starting and scaling a new venture.

To avoid the one size fits trap, executives must recognize that opportunities in different stages of the life-cycle have very different requirements, and adjust their systems accordingly. Below is a summary of the different requirements by stage in the life-cycle: IBM created the Emerging Business Opportunity (EBO) management system to spur organic growth and protect new opportunities until they were mature enough to stand on their own. EBO drew on McKinsey’s “horizons of growth” model that distinguishes between opportunities in the start-up phase, those scaling through rapid growth and mature businesses. IBM recognized that different growth horizons required distinct approaches to people, strategy, resource allocation, and measurement.

The EBO system was designed to protect nascent opportunities and identify when they were ready to move from one horizon to the next. EBO’s approach to measurement went beyond financial metrics to include horizon-specific milestones. Start-up opportunities, for example, might need to win share of mind, as evidenced in press and analyst reports. Scaling businesses needed to demonstrate progress in trials and early customer adoption, while mature businesses against strict profitability and sales-volume objectives.

The milestones helped executives spot when an opportunity was ready to move into the next horizon, perhaps requiring a change of management as well as different forms of support and incentives from EBO. To determine whether an opportunity was ready for prime time, EBO used a set of criteria, including the clarity of its strategy, readiness for execution, and success in the market.

Leading in turbulent times

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Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.