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FMI Quarterly/June 2015/June 1, 2015

Dividing, but Not Conquering: Ready, Fire, Aim

Meeting_Boardroom_imageThe industry of the future awaits the companies willing to re-evaluate their business and make difficult decisions about future needs.

The purposeful approach to dealing with targets is outlined by the commands, “Ready, Aim, Fire.” The reactive, often disastrous approach can be found in the title above. The construction and engineering industry is full of action-oriented entrepreneurs. Entrepreneurs, by their nature are action-oriented, often preferring quick response. (Fire!) Such desire for action often leads to the rapid-fire proliferation of initiatives, easily overwhelming an organization. Couple that internal combustion with the creative destruction1 of disruptive changes in the marketplace, and you have ingredients for an organizational disaster.

Growth and profit are concepts that shape and mold our everyday business lives. Business owners or executives continually look for new avenues of higher production, new business services and new partnerships that will propel the organization towards increased growth and profits. Additionally, these same executives and managers more and more frequently encounter new technology and processes that are more than the normal evolution of industry standards. Within this newness is further fuel for disruptive change in the marketplace. In times past, significantly new standards and procedures were introduced most often as new generations of executives took over ownership of the business and its operations. Nowadays, rather than a slow pace, changes are rampant. Business disruptions across industries are more the daily norm. Retailing is not just shops or even big boxes. Communications are not just telephone and fax. Banking is hardly just saving and lending. Health care has so many faces that the boundaries are hard to define. Higher education is not just provided within ivy-covered walls. Business leaders are continuously challenged to keep up with the churning demand of developing technologies and the growing complexities of their customers’ changing needs.

In this ever-changing and rapidly morphing environment, business owners and executives respond with different strategies, operations and tactics in an effort to stay ahead of the volatility, to remain relevant, and to hopefully catch at least one of the new waves. One frequent response to market changes includes developing a business or operation unit that focuses on a niche market need for a unique process or a specialty in materials and manufacturing. Executives foresee that honing a high level of expertise or specialization allows the company to gain a competitive edge in the market. In and of itself, the concept of specializing is a good approach and responds directly to technology-driven market opportunities. However, simply changing a company’s operations or developing different tactics does not necessarily generate new growth or profit. In fact, taking on new targets without due diligence and analysis may well expose the company to higher levels of loss with minimal options for recovery, all the while wasting precious resources of talent and money.

Step by Step or Take a Leap

As companies look to grow, executives find it harder to maintain the agility and responsiveness that is imperative to meet the market’s tempo. Over time, the industry’s changing demands often result in companies that are hard-pressed to bring about new solutions. To stay competitive, the concept of developing a new division or business unit feels like a natural response. Yet the expected advantages from developing a new business unit can quickly turn into weakness if the new direction is not judiciously evaluated or if the resulting organizational entity is not managed effectively.

As posed at the outset of this article, many executives within the construction and engineer sectors demonstrate entrepreneurial spirit; they tend to be action-oriented and focused on getting the task done. Although the industry often demands a “can-do” response, that same proclivity for action can produce reactionary response during times of crisis or high pressure. What may be appropriate or even necessary on the job level for a quick fix is generally much less appropriate at the executive level. Boardroom decisions should not be based largely on gut feelings that produce knee-jerk reactions. Relying on intuition alone typically produces a “tunnel-vision” perspective. Having cast their lot based upon nonfact-based decisions, companies compound their losses through failure to see their own blind spots within their competitive fields. In such environments, competitive edge is easily lost if it ever existed in the first place. What were intended to be growth and profitability are now merely sunken costs of misapplied talent and unwisely spent funds.

So how should an organization respond to rapidly evolving market demands for specialized services or customized product development? How can companies take steps towards smart growth and development of special skills, whether through cross-functional teams or special-use business units?

To produce the best outcomes, entrepreneurial management should develop strategic plans using evidence-based market analysis. Setting the right goals and objectives is not enough. Key elements in the strategic planning must deal with how rapid achievement of essential skills and further management development will be accomplished. Further, the strategic plan and its organizational end product must provide cohesive implementation, including coordination oversight, metrics of and means of achieving consistency in results. The intent is to be responsive to emerging market trends — retooling company assets as required — all while maintaining sustainability of the core.

Don’t let a bias for action undermine your need to properly analyze and plan. Entrepreneurial executives tend to fear that they will be bogged down by analysis, thereby missing a window of opportunity. The marketplace does not generally reward those who jump blindly into a new business entity simply because of the scent of a business opportunity. Rather, growth and profit favor those who develop a thought-out process where their business unit is planned, prepared, ramped up and primed for the opportunity at hand. Achieving success requires skillful integration of strategy, business structure and a sustained effort.

Implementing the Plan of Action

Proliferating new divisions or business units can easily lead to decreased performance across the company, even erosion of core competencies, hardly the intent of the venture(s). In one situation, the leadership team worked diligently to study the market and identify adjacent businesses to deliver in its geography. Over a two-year period of time, the company adjusted from three divisions to six after a reorganization to reflect its new strategy. Unfortunately, the efforts did not involve the company administrative staff in the analysis and lacked administrative support and integration. While efforts to identify and trigger startup divisions were initially well-thought-out, their execution and coordination were disjointed across payroll, accounting, HR and estimating. The results led to a rocky implementation. Performance across the company suffered because of weak staff support to the new divisions.

It’s Not a Farm but It Might Have Silos

Poor implementation during a business unit’s infancy often leads to a silo mentality across what should be a cross-functional business group. Troubles in the infant make them a pariah that no one wants to engage. As the implementation unfolds, the new organizational construct generates confusion across operations. How does 1 + 1 = 3? If the separate divisions cannot work together and maximize each other’s advantages to add value to the parent organization, company leaders need to reconsider if the division fits the ”whole.”

In some cases, startup divisions are instant silos as they pull resources (people and even work awarded) from the profitable divisions. The immediate effects are certainly perceived as harmful by the donors, but the long-term wake of such decisions, absent early success for the new ventures, is a strained culture for all. If nothing else, new business units are a distraction for company leadership. Future leaders are often assigned to lead “the next great thing,” either as a test of their prowess or because leadership has great confidence in their skills. Many of them put their hearts into the effort, but sometimes their efforts and development would yield higher return if applied to the efforts of the core business. For the first year(s), this is almost always true. Having realistic and clearly communicated metrics of success and time frames is essential for wide organizational support.

…Still Not a Farm, but It May Have (Sacred) Cows

In other cases, early business unit successes can result in sacred cows over time. A high-potential business developed 20 years ago, for example, may not be relevant today. It is difficult to let go of those businesses that were developed and flourished for a time. Holding onto legacy divisions as a show of respect for the company founder is seldom a solid business decision. In similar fashion, companies hold onto some of their least profitable and most capital-intensive business units (with only 15% of total revenue) because they are part of their identity. Sometimes you ought to hold ‘em and sometimes you ought to fold ‘em. “There is a time and a season for everything,” as the old adage states. Recognizing when to augment or to close down a business unit is a crucial skill for management and company executives.

Pain Without the Gain

A factor rarely established during the startup of a new operation or business unit involves the time expectations for a return of investment. When will this venture be profitable? When will growth be evident? Typically, the time horizon given for these initiatives to become contributors to the whole is woefully short. Studies show new businesses take longer to develop and flourish than is usually allotted. Most leadership teams expect to see returns in one to two years; yet it historically takes at least four years for most new divisions to be profitable. One study indicates that new ventures need approximately eight years before reaching profitability.2 The study sampled Fortune 500 companies, and the results showed that corporate ventures suffered severe losses through their first four years of operations, and average ROI was an average of -40% in the first two years and -14% in the second two years.

Similar to an investment portfolio, it is good management to periodically evaluate your portfolio of business units. In the development of new lines of business, budget assumptions often lack any market grounding or fact gathering. Companies develop a new capability to answer a key customer need (build a high-pressure coatings capability) and consider the great things that could evolve from the new capability. At the completion of that one-off project, the new service or product becomes a capability in need of a customer. Assigning leadership to further develop a potentially unneeded business will likely result in unmet budget promises year after year. Some of the most basic costs to run the business unit are ignored, yet the actual cost to acquire new clients and build projects may exceed that of any logical or fact-based market determination. With facts in hand, an analysis of less than a day could have foreseen disaster on the horizon.

Crystal-Clear Vision

Clear company strategy recognizes limited resources and identifies the best allocation of those resources. In a declining market, this often makes sense because there are fewer resources to assign to tasks along with fewer opportunities to pursue. Companies pay more attention to highest and best use in tough times. However, a similar review is often neglected in a growing market. It is just as critical to ensure the company keeps focus during good markets. Rapid changes in the markets, especially changes that create abundance of opportunities, mean companies should conduct a portfolio analysis to ensure that their divisions are reinforcing their core business proposition and maintaining their relevance. This review process searches for laggards or wayward initiatives that are draining energy from the core.

Another benefit of such a portfolio analysis is to identify and focus efforts for the development of the right new business units in the future. Exhibit 1 demonstrates the evolution of company services over time. Typically, the majority of company revenue often comes from the core businesses and customers, with select businesses and customers accounting for a high percentage of profit margin. New business concepts are often at the top of the triangle. Over time, these businesses mature to select businesses or, through evaluation, are replaced with other market opportunities. This allows the organization to consider new ideas, while constantly developing and improving the core business. In the example below, the company is evaluating where it came from (2008) and where it is heading (2020) in services provided to the market. While foundations were a new concept in 2008, the business matured and became a select business unit. Likewise, drilling was evaluated and, after a suitable period of time, not invested in to mature into a business unit.

Divisions or business units are relatively easy to start up, yet it can be hard to shut them down or spin them off. Using a portfolio approach allows for clear communication of goals and a sequencing of initiatives. It also allows a company to face reality in the markets and head off disruption while pursuing innovative concepts. Take Blockbuster, for example. Had it focused on its core business (retail rental of entertainment) while “testing” small blue boxes located at grocery stores and convenience stores, it may have evolved to a more relevant business model rather than losing business to both Redbox and Netflix.

2015q2_dividing_ex1

Navigating Strategy

Some guiding principles achieve strategic diversity while maintaining the core. Whether examining current divisions or thinking through the “best fit” for future divisions, consider the following:

Companies must be deliberately clear about their core competency. Core competencies are no place for generalities. Getting specific about the language used to describe the company’s greatest advantages becomes much more difficult. For example, “general construction” is not enough of a core competency around which to frame a business. Few companies are “standouts” in their markets across all new construction types and for all customers. Parent companies that lack clarity and specificity around their core competencies will find themselves wandering into different business distractions. Vagueness of core competency may also limit great opportunities that don’t fit the general sense of the term. Take, for example, Time Warner’s acquisition of AOL. Time Warner’s action was based on becoming the world’s largest media company. For many reasons, the merger didn’t work, much of it stemming from a lack of clear purpose around Time Warner’s true competitive advantage and definition of the market in which it competed.

Is there room for growth if we took the same energies and put them towards growing the existing business? This trade-off question forces critical decision-making regarding market penetration and market expansion. Should we invest these resources and efforts in delivering new solutions to current clients, or should we target another customer segment? If, after our analysis, our resources and investment are better-suited in a future growing segment, then that is the right target to pursue.

Do we have a culture and system of disciplined execution? There is no excuse for sloppy execution, and pushing more work (or more types of work) through a broken system will not yield better results. In many cases, success is at the intersection of competency and market opportunity. Company strategy is often limited by what we can deliver and by our own execution. If the company lacks the ability to self-perform and track costs, starting a self-performing division may be a stretch.

Revisit company structure. Construction companies have a tendency to align themselves by capability rather than by customer need. Selling services based only on company capability could shortchange effective recognition of market needs. Customer focus rather than capability focus on “what we do” is a more successful model to evolve with the market. For example, an industrial contractor that goes to market with mechanical, electrical and sheet metal services will not yield the same results as a company that targets manufacturing, biopharmaceutical and energy markets. The difference is a team devoted to knowing common customer needs and developing solutions to fit them compared with a fragmented approach to the market – mechanical divisions seeking only mechanical work and little or no collaboration across divisions.

People are the most critical resource to lead new initiatives. When we end up involving our great leaders and high potentials on distractions or wrong-fit clients, it is criminal abuse of talent. Great talent is limited, so we must ensure that the right people are focused on the best market initiatives with the highest potential return. Knowing this, constant development of new talent and empowering for business responsibility are critical. A weak people strategy is a recipe for poor results over the long term.

Good strategy focuses the company for profitable growth and should serve as a filter to review both the core business and each division/business unit. It should serve to challenge current business models to innovate. General Electric CEO Jeff Immelt once said, “Constant reinvention is the central necessity at GE. We’re all just a moment away from commodity hell.” The current market requires a change in how businesses operate and how decisions are made in the boardroom. As the construction industry continues to recover, good companies will face the challenge of choosing from myriad market opportunities. The industry of the future awaits the companies that are willing to re-evaluate their current business and make difficult decisions about business needs in the future. Using this approach, companies can prune the weak branches, graft the right stock, plant the right seeds and flourish in the future.


1 Creative destruction, a term coined by Austrian-American economist Joseph Schumpeter to describe the essential characteristics of the capitalist dynamic. Essentially the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
2 “The Risky Business of Diversification” by Ralph Biggadike http://hbr.org/1979/05/the-risky-business-of-diversification/ar/4

 

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