Why companies struggle with business building

by Frank Mattes, Jörg Killer | July 5, 2022
Why companies struggle with business building

There is probably no business area that has absorbed more attention, books, blogs, and conferences over the last decades than innovation.

As a special area of innovation, business model innovation and creating new businesses within a corporate has come into the spotlight as well. For example, according to McKinsey business building is a top-3 priority for most European companies.

But on the other side, there is perhaps no business area where the discrepancy between ambitions and results is higher. When it comes to incremental, small-step innovation, companies are doing okay – according to BCG, the success rate is 40-60 percent.

But companies struggle dramatically when they innovate outside of their core, especially when they aim for business model innovation. In other words, companies are doing okay when they repeat past successes, but they cannot create new ones. The stats tell you that

  • only 1 of 8 corporate startups achieve scale (Bain),
  • only 1 of 20 business innovations are successful (BCG) and 
  • SMEs are not significantly better at building new businesses than large corporates (BCG). 

But why is business building so hard? We found that the ‘business building problem’ has three root causes:

Root cause 1: One company, two systems

These days, almost every company would agree that innovation is important. In the annual reports, there are usually a few pages demonstrating how the company tries to change the rules of the game and outsmart its competitors. Yet only few companies take the effort to work out how the two value creation systems that are under its corporate roof should collaborate.

The company’s first value creation system is the NOW system. This system comprises today’s day-to-day business (“Core”) and small-step, incremental innovation. The NOW system is designed to exploit the proven business model. It aims to squeeze out every dollar or revenue and every cent of costs (if this makes commercial sense, of course). 

The NOW system’s business context has a lot of knowns – for example, the company knows the products customers want to buy, which distribution channels are best, what the optimal pricing strategy is to maximize revenues, how it creates and delivers value, how to engage qualified partners and ecosystems, the main competitors and their plans are, etc. In a business context full of knowns, one can operate with high certainty. One can make accurate forecasts about sales, predictions about growth – and delineate detailed plans to get there and implement proper execution of these plans.

Core’s NOW management system puts efficiency, productivity, and predictability (meeting e.g., monthly, quarterly and annual targets) front and center and relies on well-defined and well-managed processes to achieve these two goals simultaneously. To make sure that the efficiency, productivity and predictability machine of its day-to-day business keeps on humming, the company tries to reduce risk as far as possible (if this makes commercial sense, of course).

The company’s second value creation system is Innovation. This system is about the NEW – exploring new value pools and business models that could create new revenue streams in the future.

However, this exploration has many unknowns. So, for example, at the start of the innovation journey, it might not even be clear who should be the customer – is it the (B2B) business partner or should the company go direct-to-consumer (B2C business models). Additionally, the right problem to be solved for the customer, the value potential, the value proposition, how to create and deliver value, the revenue models, the largest cost blocks – these may also not be clear or even unknown in the beginning as well.

If the exploration team finds a repeatable, profitable business model, it may have discovered the germ cell of a sizable, profitable new business. As this business grows, it will eventually be managed with efficiency, productivity, and predictability as top goals.

The optimal strategy in an environment with many unknowns is build-test-measure-learn-pivot/move-on (see HERE) – in other words, best-in-class exploration is not a process but a flow of “disciplined entrepreneurship.”

Best-in-class exploration teams are masters in hunting and prioritizing assumptions, validating them with meaningful experiments and systematically reducing uncertainty. They may even decide to go back one or more steps if they find that the assumptions (“what would need to be so that this becomes a success?”) cannot be validated.

In other words, for a corporate startup agility is the optimal operating mode – as compared to efficiency, productivity and predictability in Core’s business context. If a company assumes that corporate startups should reinvent the company while operating on Core’s management system – being risk-averse, process-driven, and execution-minded – it will fail. If the company tries to bolt these two systems together, the incompatibility will manifest in “areas of tension” that impede a productive collaboration. 

Area of tension: Incompatible governance

Core’s system for governing the NOW is designed for the flawless and efficient execution of the proven business model and manage its risks. Typically, there are well-defined processes and handovers within those processes.

Core’s governance system is designed for maintaining the status quo and taking carefully planned and fully validated small steps of change. This system cannot deal with uncertainty or big leaps.

Hence, when it comes to innovation, incremental improvements with calculable risks are the most that Core’s governance can accept. The NOW governance system is averse to radical or disruptive innovations. Some call this adversity the “corporate antibodies” that eat away the innovation concept as soon as it begins to course through the organization. 

On the other side, the NEW system needs a different governance to support its mission of systematically reducing uncertainty and building a new business at pace. “Leap of faith” – moving on while being aware that there is an assumption that could not fully be validated – is a key concept to succeed in business building.

A corporate startup also needs a small governance board who is engaged in the corporate startup’s validation and scaling work, and not the typical large-scale committee of Senior Managers that one finds for corporate projects in a context full of knowns.

Area of tension: Different clock speeds

Another significant area of tension is the different clock speed of Core and Innovation. The clock of a corporate startup ticks differently than the Core’s in two ways: it has a longer time horizon and yet, at the same time, it is running faster when making decisions and executing them.

The time horizon of a corporate startup is longer than Core’s strategic horizon – and, by the way, longer than the typical tenure of many corporate managers since it usually takes three to five years from idea to business impact – and even longer when the corporate scaleup builds on new-to-the-world technologies or new-to-the-industry business models. 

Ironically, scaleups typically are much faster in making decisions and executing them as Core. This explains the frustration that scaleup leaders have when they see that “it takes Core ages to take baby steps.”

Root cause 2: The lure of past successes

There is an ancient proverb saying that “whom the gods want to destroy, they send forty years of success.” Success at exploiting the proven business model can undermine a company’s ability to explore – it is falling preey to the lurs of past success.

When companies get too attached to their existing patterns of thinking – which trace back to why the company has initially become successful – they become prisoners of their own way of doing things. Because they look at the world with a lens of past success recipe and they are so busy to optimize their day-to-day machine, they miss the truly disruptive game-changing innovation breakthroughs from outside of their core success.

When these companies finally become aware of the disruption going on, they will use money to buy solutions. But the combination of old thinking with money to buy solutions will in many cases not solve the challenge – Kodak, Blockbuster, Nokia, BlackBerry, Sears and many other examples make the point.

The problem is that many companies are not aware about how the mental models (ingrained assumptions and theories about how the business world works) of Senior and Middle Managers limit their future-proofness of their companies. Mental models are needed – they help managers navigate the existing fast-paced market space.

But they can prevent companies from understanding in dues time that the business context is shifting. There are four assumptions that companies should pay attention to:

  • hold the greatest insight into the pain points that the company does not address so far and hence limits its growth potentials.
  • R&D and technology innovation are widely seen as key drivers of innovation and business building. But business building is not primarily about technological innovation – it is primarily about value. Successful new products or services create opportunities for new businesses by offering a leap in productivity, simplicity, ease of use, convenience, fun and fashion, or environmental friendliness. 

Root cause 3: Ineffective thinking tools

Most companies lack a comprehensive approach to reducing innovation’s inherent uncertainties and to take the corporate startup to scale, once “worthy to be scaled” and “ready to be validated” are validated.

80 percent of companies build their validation of corporate startups on the Lean Startup (see HERE). But the Lean Startup was not designed for corporate startups – it was designed for ‘greenfield startups.’

Consequently, many companies work on the dimensions that the Lean Startup (and Design Thinking) suggests – desirability, feasibility, and viability.

But they miss out on the dimension that reflects the organizational context, which the Lean Scaleup framework calls ‘Contextuality.’ This dimension is relevant over the entire innovation journey, for example

  • early-stage validation – why should the company pursue this innovation?
  • later-stage validating “worth to be scaled” – which corporate assets should be leveraged for an unfair advantage?
  • late-stage validating “ready to be scaled” – is the innovation and its ties to Core scalable?
  • transitioning from validation to Scaling-Up – what is the best pathway to Scaling-Up, and how should the collaboration model between EBO and Core be designed?
  • Scaling-Up – how and when should corporate assets be leveraged to accelerate Scaling-Up?

This list also shows that to solve the ‘business building problem’, companies need to have an end-to-end view: they need to look at the entire innovation journey, from idea to scale and impact in the market.

The points made above are actually just symptoms of a deeper issue: Until the Lean Scaleup framework was published, business building had not yet been covered in management literature and management education. When Senior Managers search for inspiration and guidance in building a new business from innovation, they find bits and pieces, for instance:

  • early-stage thinking tools and mindsets (e.g., Design Thinking and Lean Startup)
  • structural questions (e.g., ambidextrous organizations, open innovation)
  • strategic questions (e.g., disruptive strategies, business model innovation, digital business models, platform strategies)
  • technology management-focused programs

Since there is no clear guidance, senior management’s confidence in these questions is limited. When a lack of guidance and the root causes mentioned above come together, I speculate that appetite and confidence for business-building drop. Case in point: A Deloitte study has found that Chief Strategy Officers see initiatives to improve “Run the business” as important as those to “Change the business” (e.g., disruptive growth outside Core, Digital Transformation). But success confidence in the latter dimension is less than half compared to the former.