Experiments to identify golden opportunities

My last post discussed how managers can collect information to spot emerging opportunities in turbulent markets and illustrated these points with the case of Brazil’s Banco Itau’s acquisition of privatized banks in the 1990s.  Information are most likely to reveal new opportunities to the extent it is real-time, combines first-hand observation with statistical data, shared across silos in the organization, and drawing on multiple data sources within and outside the firm.

In addition to gathering data, managers can also design and run experiments to actively evaluate opportunities. Typical experiments include pilot projects, minor acquisitions, and prototypes of new product development.  Despite differences in form, successful experiments share a few common characteristics, which Banco Itaú’s experiment with the Argentine market illustrate.

  • IN-BOUNDS.Firms often use the term experiments to justify undisciplined forays outside their core market. The best experiments, in contrast, fall squarely within a firm’s declared strategic domain.  The small scale start-up in Argentina, was clearly within Itaú’s strategic domain of “financial services”. Building a new branch in Argentina allowed Itaú to leverage its business know-how and even the software it had developed for its Brazilian operations while learning what did and did not work outside Brazil.
  • EARLY. The best experiments are run before it is obvious to everyone that an opportunity is there to provide a head start in exploiting a market gap. Itaú’s top executives decided to explore options in Argentina in 1992,  well before that country’s economic meltdown in end of 1999-2000 gave rise to a host of acquisition opportunities as local banks floundered.
  • CHEAP. Itaú did not enter the market through a major acquisition of an Argentine bank, although they certainly could have leveraged their strong balance sheet to fund a big purchase. Rather, executives sent two senior Itaú employees, who then hired a local team and spent the following two years learning about customers, identifying competitors’ strengths and weaknesses, and preparing a detailed plan of entry. In 1995, Itaú launched its first branch in Argentina, embodying the latest in information technology and tailored to the local market’s needs. Itaú made a larger commitment to Argentina with the medium-sized acquisition of Banco BuenAyre, only after the terrain was well mapped out. Itaú was one of the few banks to make money in Argentina in 2002.
  • PART OF A PORTFOLIO. In an unpredictable environment, managers don’t know which opportunities will turn out to be golden, at least not at the outset. Some opportunities that look promising initially will peter out. Others that appear only remotely interesting, may later emerge as critical. Given this unpredictability, managers should think in terms of a portfolio of experiments, rather than focus on a single potential opportunity. Itaú experimented with new geographies, but also  untapped customer segments and new products such credit cards, auto financing, and insurance to explore potential market demand. When running experiments, some reveal that an apparent golden opportunity is really fool’s gold; others turn up modest opportunities; but some can reveal the s next golden opportunity.  In a turbulent environment, where managers do not know which direction to take, it is important to run multiple experiments.This is not a licence for anything goes, of course, since experiments should fall within the company’s chosen strategic domain.
  • STAFFED WITH GOOD PEOPLE. Seasoned executives know that they cannot afford to deploy “expendable” employees on experiments. Inexperienced managers are prone to exhaust their limited resources too quickly, overlook an opportunity’s fatal flaw, or mistake fixable obstacles for deal-breakers. Executives need to staff strategic experiments with their most talented managers, even those these initiatives will not provide high profits in the short term, or perhaps ever. In launching its Argentine branch, Itaú sent Ruy V. Moraes Abreu, a promising young executive who had earned his stripes in the treasury department and later in retail banking working closely with Roberto Setubal.

Running experiments is not alone sufficient. Companies must decisively seize golden opportunities that they discover. Exploiting opportunities will be the topic of my next post.

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.