In various presentations, papers and books on innovation, entrepreneurship or leadership I have come across an organisational pattern I like to call “Startup then Core.” It is a pattern based on the idea that a new dawning business needs a special kind of leadership and special people, skilled and prepared to innovate in an uncertain world. Those in favour of this pattern also suggests that a mature business with “Execution” “execution” as its main mission needs leadership and people aimed to dwell in a more repeatable and secure world.
The new business is many times referred to as a startup, and the mature is called the Core Business. The a core business. A startup has very little revenue, few customers and is most often not profitable. The Core Businesscore business, on the other hand, is expected to make a profit, thus striving to increase revenue and their number of customers.
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A startup can appear in many forms. Any form of completely outsourced to an external party, to just a few internal persons allowed to put time on future ideas. Sometimes the future work is very systematic with clear objectives; sometimes it is just random exploration. Anyhow, in all cases management have decided to do something about the future and reserve the resources they currently can afford. Most organisations follow the "Startup then Core" pattern and make a split to in order to let some people work on the new stuff.
Why splitting organisations?
What are the more detailed arguments for splitting organisations according to the "Startup then Core pattern"? First, there seems to be a common belief that mindsets and techniques are completely different when it comes giving birth to future business. A startup needs to work with assumptions, hypothesis, experiments and quick turnarounds that do not have any room for the proper business plans required in a Core Businesscore business.
The second best argument for putting any new business under a separate umbrella is control and security. "It is important the current business can develop and operate without disturbance. The startup has a small fixed budget we could afford to lose. If it fails, we will just terminate it. The rest of us will continue to serve our customers and make sure cash is coming in". Does it sound familiar? Yes, I have seen many organisations handle their future like this.
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I have heard many more arguments in favour of the "Startup then Core" pattern, " and on the surface, it sounds like a great approach. When there is a fairly simple model with apparently working tools and famous success stories, why should it not be the way to go when dealing with the unknown future?
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- Should the startup be incorporated into the Core Business core business or should it stay as a separate entity?
- Should employees be exchanged or should they all, or just a few, get a proper competence lift?
- Is it possible to outsource any parts of the business?
- How will customers value the trademark when the new business eventually will take over or compete with the old business?
- Does our infrastructure including supply chain, marketing and sales have the proper set up for the new business?
These and many more difficult questions arise, and management will need to handle them in a unique context because the success of startups is diverse and rare. These ample difficulties are well known, and it is not a surprise that most startups will not fly. Forbes is one of many sources writing about the fact that 90% of startups fail and the authors behind Blue Ocean Strategy claim that 90% of all businesses fail within ten years.
Another well-known fact is that many prosperous businesses will not keep on flying. A widely used measure is the list of the Fortune 500 companies. Some articles point out that just 12% of the Fortune 500 companies included in 1955 were still on the list in 2017. Mark J. Perry, who is Professor of economics and finance, calls this phenomenon “creative destruction.’’ And all signs show it will get worse. In a report in from 2016, Innosight writes that half of the S&P 500 companies are expected to be replaced, over the next 10 years.
When Once it happens, initiatives for the future come as scattered showers not seldom shortly after a new CEO has taken up the position. Venture capital is another reason for a company to seize opportunities, again it is something often done without experience in scaling up and will ultimately fail. Bill Gates says the hit rate of venture capital is "pathetic" and I have not been able to find any sources that trustfully contradicts his opinion.
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In theory, it is very logical that any business should want to take care of both the current, the next and the future business, commonly called the three horizons as it is coined in the book The Alchemy of Growth. I would like to believe that every business leader have the long term sustainable growth as their main mission and in many cases , it is what they express. But in practice, I have seen that it is so emotionally difficult to, just slightly, give the current business a lower priority. The current business is where the customers are complaining, where the money is coming in and where the employees have their loyalty. As if this was not enough, the current business is also where managers get most of their credit and create opportunities to jump to new positions with even higher paysalary.
It is exactly these emotional difficulties that require the true future leadership that seems to be rare. I watch managers trying to lead their organisation in a certain direction, but further down in the hierarchy the sight normally gets shorter, and it is very much the current business and operational responsibility that counts. Even if the top management is working hard to establish a long term vision; including corporate identity, values, culture, tradition and such, the middle management is not very keen on changing changes for the future. I even heard frustrated leaders call middle management "permafrost" due to their inability to drive change.
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Let's agree, to prioritise the future over the current business is a delicate challenge. It requires extraordinary leadership to mitigate the friction between new and old. The leadership includes being brave and lean leaning on figures that cannot be proven.
What are the thought leaders saying
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Books like The Lean Startup, perhaps the most well known, andThe Innovator's Method, which is taking the startup methodology a step further, assume new and old businesses need to be run in totally different styles. I have heard many Lean Startup fans saying "A core business does work in completely different ways with large and long lasting projects."
Given the fact that disruptive businesses come with a steady and increasing flow the most important skill for leaders everywhere must be to shape the future. I'm surprised, so many leaders of thought and practice promote the "Startup the then Core" pattern. Is it wise and far fare to just let either a new or an established part of a business die?
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Then what is the alternative for executives who feel frustrated over the ability to stay in shape for the future market and want to have at least the same development pace as the competitors? I argue that the "Startup Then then Core" pattern is far too risky. It has worked for some and will work again, but without plenty of luck and an overloaded wallet, there are more reliable and deliberate paths. The organisational pattern I promote I like to call "Core Developmet and Startup." The name looks very similar, but the "And" changes everything. "And" Operations". It is somewhat similar to the "DevOps" expression, but that is more about technical IT and it has not the business focus I want to have. This pattern is all about integrating new businesses with the current business from the start and let the two evolve together step by step. It is a pattern that is " easier to sustain over time, " and it is less risky.
When I write "easier to sustain over time" it does not mean "easy." It means; since the "Core Development and Startup Operations " pattern " is based on stable and evolutionary learning it will, in comparison, be more predictable and more controlled than for example sudden organisational changes. However, it requires hard work and courage from the leaders who want to grow a business for real. And I'm sure it pays off, just heard Jeff Bezo's net worth surpassed 100 billion dollars. He is a leader with a clear sustainable path in creating a company culture where everyone should be involved in the future.
The "Core Development and StartupOperations " pattern is based, on the two main processes, Development , and Operations, continuously going on in all organisations. Development primarily involves Product Development, but also to take takes care of Business Models, Processes and Tools, Mergers and Acquisitions and more. Operations are about running all the daily business and interaction with customers of the entire value chain including Marketing, Sales, Production, Delivery and Customer service. Operations also include support functions like Finance, Economy, IT-operations and Human Resources.
Development is in its nature aimed at dealing with different changes as the opposite operations any kind of changes and, its opposite, operations is in its nature is aimed at dealing with repeatable deliveriestasks. To bake the two together and treat them as one, and for example call it execution, is a fatal mistake. Of course, a tight cooperation is a need between the two, but the basic nature must be acknowledged and given the proper attention.
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For those of you who think the sustainable "Core Development and Startup Operations" pattern " is just something I made up; take a deep look at Toyota who has had this model for decades and created many innovations both in product and in production. I guess Toyota is the most well-published and well-studied organisation in more than one hundred management books. A protest I have heard many times from my clients is: "But look, we are not a car manufacturer we are a <whatever business>. Those methods and thinking may sure work in the auto industry, but certainly not in our business." If you think this kind of statement is valid for you, I urge you to take a closer look at Toyota. Specially the Toyota Product Development System.
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What is the trick with the "Core Development and Startup Operations" pattern"? How is it possible to make it a long lasting process that successfully will deliver?
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Of course, the world needs brand new startups coming from nowhere. But startups need to scale and continue to grow. Established organisations need to live on taking their responsibilities for owners, employees, and customers. I plan to write a small series of articles regarding the two alternative organisation patterns, "Startup then Core" or "Core Development and StartupOperations ." Next topic is innovation.