In an unpredictable world, trying to be right can lead managers terribly astray. So what do we do during uncertain times of business? Many leaders of mature organizations don't have the right mind-set or practices to help their organizations survive. Their management practices are suited to an age with higher entry barriers, greater transaction costs, fewer capable competitors, growing and increasingly affluent markets and far less information. Today's environment is less predictable, more complicated and more volatile.
The result is that many core businesses -- involved with mainstream, mature products we all take for granted -- are themselves becoming more uncertain. The good news is that there are other more suitable approaches -- those that successful fast-growth companies, entrepreneurs and corporate new business development groups use to navigate unpredictable, resource-constrained environments.
One of the great ironies of business is that good performance tends to dampen the desire to invest in new opportunities and businesses right at the time a company can most easily afford to do so. When a business is healthy and generating profits, it's easy to overlook the weak signals of performance decline. But when a company realizes it needs to invest, it's often when resources are in short supply. The time to invest in reinvigorating your business is before you're forced to.
Why are managers so often in denial about the health of their core businesses? Because no one has the incentive to step back and question the fundamental assumption that their business is healthy. To address this, people must realistically frame where they believe their business will be in, say, three years. Successful entrepreneurs do that. They don't ask how big the market is. Instead, they want to know if the market is big enough for their aspirations. You need an idea of the concrete results that would constitute success before beginning to assess whether your core business can get you there.
Consider E.I. du Pont de Nemours and Co. For decades, the chemical company had delivered steady, reliable earnings growth with few surprises. But in 1999, then-CEO Charles Holliday and his team realized that while the company had been making significant productivity gains, its revenue increases were lagging. In fact, throughout the 1990s, DuPont's revenue growth averaged only 0.6%.
Without growth in commoditizing and highly competitive markets, the company's long-term sustainability was in doubt. Management believed that the core business couldn't realize the company's growth ambitions. And recognizing that, DuPont executives set a revenue growth target of at least 6% annually. Then the technical parts of the company were charged with generating 33% of sales from products less than five years old.
Once management acknowledges that the core business is in trouble, the next challenge is to determine which projects, initiatives and other activities can drive the company's growth ambitions. The more specific a company can be about which kinds of initiatives will support its future strategy, the more momentum it will create.
DuPont addressed that challenge by creating five “growth platforms”-- each charged with delivering specific growth targets. The company aimed to steer away from commoditized product-based businesses and into growing, knowledge-intensive new businesses.
As the effort began, DuPont spun off its still-profitable textile business and entered more uncertain businesses with better growth prospects, such as bio-based materials and organic light-emitting diodes. The company also began a major expansion into emerging markets, where now it's enjoying a compounded growth rate of 16%.
Most complex organizations are designed to protect and preserve the status quo. Consequently, serious efforts to renew core businesses almost always require organizational change. Being forward looking and honest about your company's prospects, and being prepared to reconsider fundamental business assumptions, will help you weather the currently unpredictable business climate.
This article is adapted from “How to Rethink Your Business During Uncertainty,” by Rita Gunther McGrath and Ian C. MacMillan, which appeared in the Spring 2009 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.