Founder's Mentality Blog
Incumbent companies are notably bad at strategic adaptation and will always find it difficult to respond to the threat posed by insurgents in their industries. Yet sustainable growth often demands the ability to explore and commit to new revenue streams to offset the natural slowing of a mature core business. Leadership’s first priority has to be giving the core business model more room to run by reviving the Founder’s Mentality® and dialing in growth led by the front line. But leadership also has to entertain the notion of working on a new business model in parallel.
These things don’t have to be mutually exclusive—scale insurgents focus on optimization and innovation at the same time. The challenge involves mindsets. Most large companies have to force themselves to adapt their strategy-development process to cope with the chronic turbulence and uncertainty of global markets. This rarely comes naturally to an organization vested in the status quo. Large companies also have to look at the innovation challenge through a new set of lenses. They have to upend an incumbent’s propensity to fight the future and must encourage people to imagine how they can use the company’s biggest assets—scale and accumulated experience—to disrupt markets rather than defend them.
This leads to what we’ve coined the Engine 1 vs. Engine 2 problem. Engine 1 is the current core business, supplying 80% of profits and near-term growth. Engine 2 is the full set of adjacent businesses that the company might pursue as it searches for new models capable of taking over when Engine 1 eventually declines. Here’s how to think about addressing both simultaneously:
1. Commit to being a “future maker” and create your own Brocket Hall process. In your early days as an insurgent, you capitalized on turbulence to identify unmet customer needs and create new business models to serve them. You were a future maker. Now you have an established core business and with it comes the risk that you become a “future taker,” more concerned with protecting today’s profit pool than exploiting turbulence to identify the next growth opportunity.
Sir Christopher Gent, the former chief executive of Vodafone, recognized early on that a company’s leadership team needs formal time to debate the future. So he and his team spent almost a week each year at Brocket Hall, an estate near London, where they discussed the new developments in the mobile ecosystem and what Vodafone needed to do differently (if anything) to win. The sessions forced individuals to take off their divisional hats and think like owners of Vodafone—facing down difficult issues, suspending parochial concerns and focusing on this key question: “What business are we in?” That kept the company centered on its core strengths, but also opened up the debate to challenges of the status quo and ideas for new businesses to launch.
Getting a clear understanding of where Engines 1 and 2 stood each year enabled Gent’s team to rethink how to organize to allow both to achieve full potential. The process also insured that the rest of the year was spent executing ruthlessly. If during the year someone raised a big strategic issue in an execution meeting, Gent would say something to the effect of: “Got it. Let’s put that on the agenda for Brocket Hall. Now, let’s return to today’s execution issue.”
At the same time, a Brocket Hall-type meeting encourages the company to develop the skills that will be increasingly vital as firms evolve in the decades ahead. Corporate leadership teams will increasingly borrow from the venture capital model, allowing a 5- to 10-year payback for Engine 2 and other investments, but also expecting a chance to create a completely new market or disrupt the industry with startling new products. Planning for Engine 2, allowing it to thrive, and, ultimately, learning from it, can transform Engine 1 over time. Top leadership’s role is to get out of the way and let it happen.
2. Debate the roadmap—stepping-stones vs. leap and learn. By definition, a commitment to Engine 2 is a departure into the unknown—new markets, new customers, new capabilities and so on. Many incumbents today are facing this dilemma as they debate their digital strategy. While it’s clear that the strategy must address an increasingly digital future, almost everything else is unclear. How technology will evolve, its impact on market structure, the implication for winners and losers, the resulting imperatives for the business—all of this is hard to pin down in an era of rapid digital disruption.
One pragmatic way to address the planning challenge is to take a “stepping-stone” approach that prioritizes a few directions for exploration and commits to a first step in these areas—while also acknowledging that the second step will come into focus only as you build capabilities and learn about the market. Many great adjacency growth stories were built this way.
Yet sometimes building Engine 2 demands an entirely new set of capabilities and assets that cannot be developed fast enough organically. That’s when a “leap and learn” approach to build scale quickly through M&A may make more sense. The Publicis Groupe’s acquisition of Sapient in 2014 is an example of scale M&A playing a key role in building a digital Engine 2.
3. Follow the three Engine 2 design principles. Engine 2 will feel alien to many in your organization and may threaten others. So it is important to carefully spell out the relationship between Engine 1 and Engine 2, including the rules of engagement:
- Engine 2 must be free to do anything it wants to thrive and beat the next wave of insurgents—including cannibalizing all of Engine 1’s revenues. It is a start-up, with hundreds of ideas, lots of experimentation, lots of failure and fast adaptation. It is open to different partners and willing to try “wild things” to support the customer.
- Engine 1 can borrow any great idea from Engine 2 and bring it back to the core. Engine 1 is all about discipline, repeatability, small continuous improvements, careful risk assessment and conventional financial analysis. But its leaders can do anything they want to thrive and beat the next wave of insurgents (including Engine 2) and should be encouraged to freely adopt the best ideas from Engine 2 if they will enhance the core value proposition.
- There is no perfect organizational model for how close or how far to build Engine 2 from Engine 1. Just decide. Whatever decision you make, however, will have organizational consequences, and you’ll need to allocate equal time to mitigating them. Positioning Engine 2 close to Engine 1 in the organization, for instance, will help Engine 2 take advantage of the parent’s capabilities and assets. But close proximity may also feed the impression that Engine 2 is a corporate hobby, scaring off the talent and partners it needs to win. Isolating it from Engine 1, on the other hand, could leave Engine 2 in limbo, unable to take advantage of Engine 1’s resources but not really independent enough to raise venture capital. These problems are surmountable, but they must be managed.
4. Consider the sage advice of those who have gone before. Leaders who have successfully negotiated the transition from Engine 1 to Engine 2 tend to emphasize a few key points:
- First, building Engine 2 will take a lot longer and demand far more resources than you think.
- Second, you are probably not getting the growth you need from all the resources and complexity locked into Engine 1.
- That means you have to get on with radically simplifying Engine 1. You have to stop budgeting against last year’s revenue and start allocating resources to future growth.
- Scale insurgents budget for where they think growth will come from over the next decade. If you are aggressive about simplifying Engine 1 and building a culture that habitually does more with less by zero-basing activities, finding resources for Engine 2 shouldn’t be a problem.
- But it will get noses out of joint, so it is critical to communicate the “journey” to those in both camps to avoid the perception of winners and losers.
5. Set up a strong founding team. Creating an Engine 2 requires a committed founding team that is willing to take the risks required to achieve a bold ambition. You can start by looking for the right talent within the current core business, but you have to be selective. Senior leaders with large salaries and company stock options are unlikely to bring sufficient entrepreneurial fire to building the new business from the ground up. A bitter fit will be the “frustrated entrepreneurs” who are trapped in the various functional and business silos of most large corporations. These individuals can be an essential part of the new team, bringing entrepreneurial energy, but also linking back to the core business.
Typically, however, you need to complement them with battle-tested entrepreneurs brought in from outside the business. Assembling the right team will also require designing compensation and incentive plans that ensure the risk/reward trade-off for the mission-critical talent in Engine 2 is aligned with the risk/reward trade-off for the corporation. The founding team needs skin in the game. Too often, HR policies adopted from Engine 1 prevent Engine 2 from really starting to fire.