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Most startups are not surviving and many established companies disappears! What is the recipe for stable long-term growth?

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This article describes the basic organisational patterns which are controlling how a business is run from top management.

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 startup, and the mature business is normally called a core business. A startup has very little revenue, few customers and is most often not profitable. The core business, on the other hand, is expected to make a profit, thus striving to increase revenue and their number of customers. This article is addressing both startups and core businesses with the ambition to stay in shape in the long run.

What I call a startup can appear in many forms. Naturally, the first to think of is a totally new venture of its own. But a startup could also exist within an established organisation where it can take any form of completely outsourced to an external party, to just a few internal people allowed to put time on future ideas. Sometimes 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 engage the resources they currently can afford. Unfortunately, a majority follow the “Startup then Core” pattern, make a split of the organisation and let some people work apart from the core business as the only ones who are supposed to shape the future.

Why splitting organisations?

What are the more detailed arguments for splitting organisations? First, there seems to be a common belief that mindsets and techniques are completely different when it comes to giving birth to future businesses. 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 business.

The second best argument for putting any new business under a separate umbrella is control and security. “It is important that the current business can 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.

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 businesses 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 “Startup then Core” pattern and, on the surface, it could sound 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?

The challenge

The big question is what to do with future ideas in the long run? When the “Startup then Core” pattern is practised the ultimate challenge is always how to scale the ideas.

• Should the startup 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 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 500companies. 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 from 2016, Innosight writes that half of the S&P 500 companies are expected to be replaced, over the next 10 years.

I think it’s hard to find organisations who approach the challenges of scaling in a systematic manner. They act as if blindfolded and only take off the cover now and then, typically shortly after a new CEO has taken up the position. Venture capital is another reason when companies try to seize opportunities to scale. Again, it is something that often seems to be a unique happening done by chance and likely to 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.

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 has 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 an even higher salary.

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 top management is working hard to establish a long-term vision; including corporate identity, values, culture, tradition and such, middle management is not very keen on changes for the future. I even heard frustrated leaders call middle management “permafrost” due to their inability to drive change.

What top managers do not seem to grasp fully is how strong the signals coming from annual or quarterly reporting are. Most of our society is awaiting financial results that tells how well a current business is doing. Even Gartner, who make all their business from predicting the future, have a traditional annual report with mostly historical 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 extraordinary leadership to mitigate the friction between new and old. The leadership includes being brave and leaning 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. A few books, like Good to Greatwritten by Jim Collins, do take a long-term perspective but it is mostly about high-level principles rather than organisational patterns.

Books like The Lean Startup, which is perhaps the most well-known, and The 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 also 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 then Core” pattern. Is it wise and fare 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 and want to have at least the same development pace as competitors? I argue that the “Startup 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 “Development and Operations”. The 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 “Development and 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 look at Jeff Bezos whose net worth recently 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 “Development and Operations“ pattern is named after the two main processes continuously going on in all organisations. Development primarily involves Product Development, but should also take 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 any kind of changes and, its opposite, operations is in its nature aimed at dealing with repeatable tasks. To bake the two together and treat them as one, and for example call it execution, is a fatal mistake. Of course, a tight collaboration is a need between the two but the basic nature must be acknowledged and given the proper attention.

Modern Product Development

What many startup 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 uncertainties a startup is facing. Some well-proven frameworks and techniques support 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 superior quality.

For those of you who think the sustainable “Development and 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 as it has been written about 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 bank (or whatever business). Those methods and that way of thinking may certainly work in the auto industry, but 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. Especially the Toyota Product Development System.

It takes hard work to develop and maintain a great Product Development process, but when done right it will give continuous payback. There are many books and case studies describing how innovative organisations like Amazon, Harley Davidson, and others have followed in the footsteps of Toyota. No one is perfect, but repeated evidence shows that when taking care of the development flow, there will be room for innovation and less firefighting. This will in turn lead the upward spiral which comes with Modern Product Development.

The feedback loops

What is the trick with the “Development and Operations” pattern? How is it possible to make it a long-lasting process that successfully will deliver?

First, short feedback loops and swift changes is the essence needed in both the current business and any new business. To make it work, top management needs to establish behaviour and culture supporting short feedback loops and the ability to do swift changes. Failing to do so will ultimately risk the long-term survival of the organisation. To understand what “short” and “swift” are, it is crucial to have metrics in place to guide along the path of improvements.

The feedback should preferably involve Operations also for new and not yet industrialised products. Operations acts in the reality and need to catch the real insights of customer needs. The insights usually lead to improvements in the Operational processes. To take the full benefit of this model, operations must also feed the insights back to the development process. A great advantage is when the insights are based on predefined assumptions and hypothesis, and not just random findings.

From a technical perspective, it is equally difficult (or easy) to establish short feedback loops in a startup as in a core business. In my experience, the difficulties are the same regardless of company size. The large impediments, I see, is all about the leadership. If a core established business can overcome these impediments, it will have many advantages over the startup. More control of resources, existing customers to connect with and hopefully a great future vision.

Final words

The target audience of this article are owners, CEOs and others with overall responsibility of a business. The intention is to reach out to conventional businesses, large or small in any industry and any phase, who want to take care of their future. I want to describe how futuristic development can be incorporated, as a part of the normal work and where all co-workers can contribute.

I do not have to invent new tools, methods or principles. There are plenty of well proven frameworks already. My current favourites are Nail It Then Scale It and The Corporate Startup, which both address innovation and new businesses very well. My take is that theories, in popular frameworks targeting startups, combined with theories from Change Management and Product Development should be used in any business. What needs to be changed is mindset and leadership.

To look at Development and Operations as the same kind business and the same need for management principles, has in my experience never worked out. And as said earlier, Development and Operations must have a tight collaboration to succeed. Without tight collaboration the feedback loops will disappear in bureaucracy and other meltdowns.

Of course, the world needs brand new startups coming from nowhere. But startups need to scale and continue to grow. In the same way established organisations need to live; on taking their responsibilities for owners, employees, and customers. I do believe the same thinking will satisfy both needs.

I plan to write a small series of articles regarding the two alternative organisation patterns, “Startup then Core” or “Development and Operations”. Next topic is innovation.