What precedes an Emerging Business Opportunity?

I had done some briefings for a client in western Canada, and the client executive asked if I would be interested in coaching one of their senior executives on some case studies. The client has retained an independent consultant specializing in executive development, and that consultant had suggested that the board work their way through some Harvard Business School cases, namely Emerging Business Opportunities at IBM (A), Emerging Business Opportunities at IBM (B) and Emerging Business Opportunities at IBM (C): Pervasive Computing. This key executive that I was to coach was to prepare himself to act as a resource to the board members. Our preparatory teleconference ended up with some discussions on organization culture, deeper than I would have anticipated.

The cases describe an IBM study in 2003 that recognized difficulties in starting up new businesses in six root causes:

1. Our management system rewards execution directed at short-term results and does not place enough value on strategic business building.
2. We are preoccupied with our current served markets and existing offerings.
3. Our business model emphasizes sustained profit and earnings per share improvement rather than actions to drive higher P/Es.
4. Our approach to gathering and using market insights is inadequate for embryonic markets.
5. We lack established disciplines for selecting, experimenting, funding and terminating new growth businesses.
6. Once selected, many IBM ventures fail in execution.¹

A book that captured many of the issues, The Alchemy of Growth², decribes the company’s business portfolio in three horizons, based on their stages of development:

• Horizon 1 (H1) businesses were mature and well established and accounted for the bulk of profit and cash flow.
• Horizon 2 (H2) businesses were on the rise and experiencing rapid, accelerating growth.
• Horizon 3 (H3) businesses were emerging and still developing and were the seeds of the company’s future.³

In 2000, Gerstner promoted John Thompson to vice-chairman, to lead the effort. The case describes the challenges of centralization to generate H3 businesses, and then the issues associated with transitioning from H3 to H2.

In our teleconference, the question of how an initiative became an H3 business was discussed. At the point at which a business is declared as H3, it’s so visible that failure really isn’t an option. This may be compared to the spirit of the First-of-a-Kind (FoaK) projects that have been in place for a decade. (The Seiad project was one of the earlier FoaKs in 1997).

The FoaK is the culmination of a number of things, though. It requires IBM Research, as a division to be on board. It requires one of the Sales & Distribution industry solutions unit (e.g. financial services sector, retail and distribution, public sector, etc.) on board. It requires someone who will take on the assets (e.g. Software Group) once the FoaK is complete. But, most importantly, it requires a customer to sign on, and actively be involved during the development of a new technology. The idea of the FoaK is “easy start, easy kill”, so not all FoaK projects will make it through to the end. This should be seen as a normal result of experimentation, and if all FoaK projects were to be successful, it would be easy to criticize the program for setting the bar too high.

The importance of the customer is a key cultural differentiator that is ingrained at IBM. The essential premise in a FoaK is that an industry solutions unit will be interested in rolling out the resulting solution to all of its customers. To kick the FoaK process off, however, the minimum requirement is one interested customer. If a team wants to do something “innovative”, but can’t find a single customer that will spend some time in early development of the technology or service, it’s not likely to gain traction and get off the ground.

The idea of identifying a single customer became the focal point for our discussion on innovation. This successful business in Western Canada had made some bad investments in the past, has now recovered and turned itself around, and doesn’t want to make the same mistakes it had, previously. The key idea from the case study discussion is centered around getting external parties involved. If you can’t get a single customer excited about your innovation, you’re unlikely to get a whole industry excited.

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¹David A. Garvin and Lynne C. Levesque, “Emerging Business Opportunities at IBM (A)“, Harvard Business School Case 9-304-075 (revision Feburary 28, 2005), pp. 3-4.

²Mehrdad Baghai, Stephen Coley and David White, The Alchemy of Growth, Perseus Press, 1999. Previews of the book are available at Questia.

³Garvin & Levesque, p.4.