Companies often tell me they want to diversify their business into new areas, but don’t know how. Here is a brief summary of an approach that has worked well for businesses I have worked with. It involves an easy but systematic 5-steps business process:
1) Analysis:
It is important for a company to have a Vision and a Strategy to achieve this Vision. Early in the process, one’s team must be open to many possible scenarios. One effective, multi-pronged approach is to create a “Hopper” of potential new spaces for increasing company value. Besides brainstorming on macro-trends and their possible business implications, one should use well defined processes and frameworks to analyze such things as: the fastest growing companies and what sectors of the economy they are in, the sectors in which venture capitalists are investing, the new markets in which competitors are going, the challenges that society is facing, etc. Each of these will lead to list of markets or segments that, if pursued, would have an impact. Below are just partial examples to illustrate the concepts:
2) Ideation:
This is where a company must conceptualize what it could do in a given prioritized market or what kind of product or service it could provide to address a given trend. The company should start by establishing a list of its core competencies, i.e. the know-how that resides in its people, the intellectual property, technologies and business processes it is good at. By doing so, a company currently doing CRM software development, for instance, might find that its people can speak a total of 15 languages, that the people who did its web site can do very cool videos, that some of its IT/MIS people can write custom code to track what users select and automatically modify content accordingly. With that new way to look at its intellectual assets, it becomes conceivable to offer novel e-learning software solutions in multiple languages. This becomes an idea in the data repository for new ideas, called a hopper.
3) Idea Hopper prioritization:
Resulting ideas need to be prioritized. Different techniques can be used to do so. I personally like the Harvard Business Review’s Real-Win-Worth (RWW) filter, but quantified and scored via a Six Sigma tool called Weighted Evaluation Matrix. Basically, one assesses:
- if the market need is real and a differentiated concept can be envisioned to satisfy it,
- if the company can win against its direct and indirect forms of competition and
- if it is worth it for the firm to go in that direction (e.g. strategic fit, level of profitability, risks, etc.).
Each of these attributes must be quantified (with triangulated data for better accuracy, when feasible). A scale must be established, based on natural breakpoints, to convert each of these results into a score, each attribute must be given a relative weight. It becomes possible to calculate a composite score that takes all these variables into account, and to prioritize the hopper based on this score.
At the end of the process, the top 2 to 3 ideas should be explored further
4) Planning and launch of the best idea
The fact that an idea made it to the top 3 score in the RWW filter does not mean it should necessarily be pursued. A lot of planning is necessary before a decision to launch an initiative is made. Elements of the planning phase should include allocating time from a technical and a marketing resource to further define and validate the idea. This involves the following:
- Quantifying the market for a given idea via secondary research, and validating the assumptions via collection of the “Voice of the Market” (primary research).
- Identifying the team that could be used to deliver the solution, and the time it would take them.
- Comparing that time to the timing of the need that led to the idea. Estimating the launch forecast and the longer term forecast, based on realistic assumptions.
- Quantifying the cost penalty on other programs of using the team to work on the new idea (delays, cancellation, hiring needs to replace them).
- Envisioning possible pricing, supply chains, costs and ways to market.
- And when applicable, identifying gaps in competencies to deliver the solution or to minimize the risk, and a possible strategy to overcome it.
With all the above, a comparative business plan, including a good financial model, for the top 2 or 3 ideas should be presented to the company’s executive management for initial approval.
5) Monitoring and readjustments
On anything new that a company embarks on, it is important to track progress and to react in real time to the data. The classical Plan-Do-Check-Act approach and the notions behind the agile methods of project planning can be helpful. It is important to track leading indicators tied to the assumptions behind the business plan. For instance, if an assumption had been made that the cost of competing solutions would decline by x% a year and data exists early in the project that a competitor has lowered its pricing by 2x%, an assessment must immediately be done to decide whether the assumed value-based pricing for the idea remains valid. If not, unless additional features can be added faster than planned at minimum extra cost, the impact on expected margins must be quantified. Appropriate decisions can then be made early regarding continuation of the project.
The process I have described above just touches on a few of the main elements of a systematic approach that has lead to significant growth in new directions at companies where I have deployed it. Going in a new direction should never be an arbitrary decision. The companies who have succeeded at re-inventing themselves have used a similarly rigorous approach in their decision. In a nutshell, they have asked themselves what problem needs to be solved and, what unique things could they bring to the party. When there was a good match between the two, they have resourced the initiative for success and tracked it closely. I strongly encourage you do the same.