As a senior leader, what do you do if a new business line in your organization is not performing up to expectations? How do you avoid shutting it down prematurely or continuing to bet on a losing horse?
These are valid questions you may have asked yourself on the way to work, because your responsibilities include looking for new ways to help your company grow. Doing an acquisition is one way. Organic growth is another. Regardless of what option you choose, avoid falling into a common trap if things start going south.
What precedes the trap?
Executives get concerned with questionable business performance, because their companies have invested valuable resources in the line of business. Senior leaders want to make sure they don’t waste these resources. Plus, they realize their credibility and possibly their job are at stake.
Their concern increases when they consider the failure rate for mergers and acquisitions lies somewhere between 70 percent and 90 percent, and the failure rate on new industrial as well as consumer packaged goods and retail products is at least 50 percent. The failure percentage hits 75 with venture-backed startups.
What does the trap look like?
Excessive meetings and analyses which drain resources. The amount of available corporate information combined with the increased concern caused by the prior statistics makes it is easy for executives to overthink the performance issue. Countless reports, spreadsheets and PowerPoint presentations are the results.
If you are on the verge of falling victim to this pitfall, I encourage you to ask three fundamental questions to help you avoid it:
1) How solid is the framework?
Each acquisition, new product line or new service line is built upon a business model. Before you generate a mountain of financial and operations reports that can be overwhelming, clarify the underlying model. Decide on the critical set of items you must know to accurately evaluate whether this framework can sustain results needed to justify continued support. Then seek the information in an easily-digested form.
2) Who is leading the charge?
A sound business model is essential, but it is not enough to guarantee success. The right leader is required to ensure the business line hits performance targets. Clarify in your own mind what you expect of this leader. Here are initial clarification questions:
- To what extent has the leader built and communicated strategic and operations plans?
- Who has the leader put in place to help implement the plans?
- How well does the leader motivate, collaborate and hold people accountable?
- How effectively does the leader hold himself/herself accountable for executing the plans, especially when it comes to recovering from missteps?
3) What is a fair period?
A sound underlying model and effective leadership are essential to the line of business in question. Is this enough to make the call whether to keep or jettison it? No. You need to test how the model and the leadership work together. Whether the line is a result of an acquisition or innovation in house, you do not have an unlimited amount of time to gauge viability. Instead of setting an arbitrary deadline, use objective standards as a guide. Sales and performance cycles will vary based upon a variety of factors including the product, service, industry, geography and economic environment. Consult reliable sources (e.g., industry associations) for the factors required to set a fair timeframe for assessing the business line.
By answering these three questions, you can dodge the trap as you identify the best course of action for the line of business. Streamline how you use the information gathered to keep your heightened concern in check. If you realize the business model is a poor fit, then consider what it would take to revise it and get the desired performance. What if you have the wrong leader? Estimate how long it would take to a) find the right one, b) get this person up to speed, and c) see an impact on performance. If you are trying to evaluate the business model and/or the leader in an unreasonable period, set a fair time extension before you pass judgement.
As an executive, you have the responsibility to ensure a new business line provides the expected returns. When performance is subpar, avoid the viability pitfall by focusing on the preceding fundamental questions. This will help you make the optimal decision and explain it to corporate stakeholders.
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Ryan Lahti is the founder and managing principal of OrgLeader. Stay up to date on Ryan’s STEM organization tweets here: @ryanlahti
(Photo: Business Analysis, Pixabay)