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” 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 Start-up and the mature is called the Core Business. The Start-up has very little revenue, few customers and is most often not profitable. The Core Business, on the other hand, is expected to make profit, thus striving to increase revenue and their number of customers.
A Start-up can appear in many forms. Any form between 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.
Why splitting organisations?
What are the more detailed arguments for splitting an 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 a future business. A Startup needs to work with assumptions, hypothesis, experiments and quick turnarounds that does not have any room for the proper business plans needed in a Core 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 and make sure cash is coming in". Does it sound familiar? Yes, I have seen many organisation handle their future like this.
A third argument would be; "Look, Google has Startup labs which are working separately on new products. That is the way to go!" What people forget is that Google has a mindset of creating new business also in their core. They foster all employees to be innovative and seek the future. This is not the case in most organisations, regardless of industry management is creating cultures that embrace current customers and cash flow first.
I have heard many more arguments in favour of the "Start-up then Core pattern" and on the surface it sounds like 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?
The challenge
The question is what to do with future ideas in the long run? When the "Start-up then Core” pattern is practised the ultimate challenge is always how to scale the ideas.
- Should the Start-up be incorporated into the 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 the proper set up for the business?
These and many more difficult questions arise and management will need to handle them in a unique context, because success of Startups are 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. A number of 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 2016 Innosight writes that half of the S&P 500 companies are expected to be replaced over the next 10 years.
When it happens, initiatives for the future come as scattered sheds not seldom shortly after a new CEO has taken up the position.
Riskkapital. Venture... No time. Quick payback
The friction between new and old
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 so emotionally difficult to, just slightly, give the current business a lower priority. The current business is where the customers are complainng, 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 pay.
It is exactly these emotional difficulties that requires the true future leadership that seems to be rare. I watch managers trying 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 are 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 for the future. I even heard frustrated leaders call middle management "permafrost" due their inability to drive change.
What top managers do not seem to fully grasp is how strong the signals coming from annual or quarterly reporting are. Most of our society is awaiting montary results form current businesses. Even Gartner, who make all their business from predicting the future, have a traditional annual report with mostly historic and operational figures. I wonder what will drive the future of future predicting services?
Let's agree, to prioritise the future over the current business is a delicate challenge. It requires extraordínary leadership to mitigate the friction between new and old. The leadership includes being brave and lean on figures that cannot be proven.
What are the thought leaders saying
Much of the business literature describes how to do innovation and delivers many examples of successful serial entrepreneurs. But hardly any literature gives practical advice about how to continuously develop a business by transforming it into the future over time. Some books like Good to Great, written by Jim Collins, does take a long term perspective but it is mostly about high level principles rather than organisational patterns.
Books like The Lean Startup, perhaps the most well known, and The Innovator's Method, which is taking the Start-up methodology a step further, assume new and and old businesses need to be run in totally different styles. I have heard many lean Start-up 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 to shape the future. I'm surprised so many leaders of thought and practice promote the "Start-up the Core" pattern. Is it wise and far to just let either a new or an established part of a business die?
A sustainable alternative
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 "Start-up 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 and Start-up". The name looks very similar, but the "And" changes everything. "And" is all about integrating new businesses with the current business from start and let the two evolve together step by step. This is a pattern that is "easier to sustain over time" and it is less risky.
When I write "easier to sustain over time" it absolutely does not mean "easy". It means; since <a thinking> <vs the "Core and Start-up pattern" is> based on stable and evolutionary learning it will in comparison be more predictable and more controlled <than a thinking based on...>. However it requires hard work and courage from the leaders who want 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 to create a company culture where everyone should be involved in the future.
The "Core and Start-up" 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 care of Business Models, Processes and Tools, Mergers and Acquisitions and more. Operations is about running all daily business and interaction with customers of the entire value chain including Marketing, Sales, Production, Delivery and Customer service. Operations also includes support functions like Finance, Economy, IT-operations and Human Resources.
Development is in it's nature aimed for dealing with unique changes as the opposite operations in it's nature is aimed for dealing with repeatable deliveries. To bake the two together and treat them as one, and for example call it execution, is a fatal mistake. Ofcourse a tight cooperation is need between the two but the basic nature must be acknowledge and given the proper attention.
Modern Product Development
What many start-up fans seem to have missed is that modern Product Development, for an established business, has been tailored to handle all sorts of uncertainty. In fact much of the same uncertainty a start-up is facing. There are well proven frameworks and techniques that supports simultaneous development of the current business as well as any future business. It is true, many organisations are still working too bureaucratic and without acceptance of uncertainty. However the absolute majority is trying to adopt new and modern ways of working. The same goes for Operations which I think is more mature than Product Development in general. Continuous improvements, automation and empowering of people have been around for ages. The target is ever increasing volumes, productivity and the superior quality.
For those of you who think the sustainable "Core and Start-up 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 ..... 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.
modern p d use the same tools surprise
It takes time to develop a pd process. Systems thiking. Invest a smoth process running without firefighting
Many organisations like harley davidson and scania have followed toyota. Investing in a product development flow, getting rid of firefighting and releasing innovation.
The feedback loops
What is the trick with the "Core and Start-up pattern"? How is it possible to make it a long lasting process that successfully will deliver?
First of all short feedback loops and swift change is needed both for the current business and any new business. Top management need to establish behavior and culture supporting short feedback loops and the ability to do swift changes. Failing to do so will ultimately risk the the survival of the organisation. In order to understand what "short" and "swift" are, it is crucial to have metrics in place to guide on the path of improvements.
The feedback should preferable involve Operations also for new and not industrialised products. Operations acts in the reality and need to catch the real insights of customer needs. The insights may lead to improvements of the Operational processes or
Devops It
Both dev and operations need to improve quickly Never swift and easy to scale up a Start-up Establish continuous growth and change instead
Emerging ideas..........
The role of suppliers raises even more questions. Are we ready to climb the value pyramid and outsource low end parts to suppliers?
The target audience of this article is not those who have a unique and fantastic idea and want to create a new innovative company. The intention is to reach out to normal companies, large or small in any industry, who want to take care of their future business. I want describe how futuristic development can be incorporated as a part of the normal work and where all coworkers are able to contribute.
Of course the world needs brand new start-ups coming from nowhere. But also the established organisations need to live on taking their responsibilities for owners, employees and customers. My plan is to write a small series of articles regarding the two alternative organisation patterns, "Start-up then Core" or "Core and Start-up". Next topic is innovation.
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