usiness Planning, Strategy and Financial Consulting.

Constraints Propel New Business Innovation Efforts

Establishing a solid set of criteria to define a new business venture with the participation of all affected parties is critical to the new venture's success.

Identifying and developing new businesses is still one of the hardest management tricks to pull off. Higher spending on R&D is no guarantee of success as lead times and product life cycles get shorter, and systematizing new business development remains an elusive process.

One of the major roadblocks is ethereal and unrealistic expectations on the part of top management. When top management is directing new business managers with statements like "It's your job to come up with the new opportunity and we'll tell you if it fits", or "We don't want to limit your search too much since you might miss the golden opportunity", inevitably this results in fragmented efforts and wasted money.

What is needed is an unambiguous set of constraints or criteria to give direction to business development activities - statements of limitations and directions on strategies, policies, goals, and cultural precepts which in aggregate describe the firm's 'perfect opportunity'.

Typically, criteria should cover five categories.

Financial criteria put the dollar boundaries around the new product or business opportunity - what is the smallest opportunity we will look at? How large a project can we assimilate? What should ROI or other financial measures look like? How long can we wait for breakeven?

Marketing criteria address the what, where, and how of the opportunity - do we stay in current market segments? Would entirely new marketing channels be acceptable? What market share do we need?

Technological criteria define the acceptable technical effort - should we leverage present skills and know how? How high-tech can manufacturing be? Can we accept an R&D intensive project? Is there a unique technical process or product which should be leveraged?

Organization criteria deal with policies and management style - what control will corporate management have over the new opportunity? Can it reshape our charter and mission? Can we allow it a totally different management style?

And timing criteria set out the necessary chronology - how much time do we have? When must we make the first commercial sale? How long before the business must reach maturity? In the case of acquisition, by when must we buy our first company?

This list identifies several important issues. First, leveraging strength. CEOs have an understandable itch to leverage primary strength into new products and businesses. Particularly in mature and aging industries, this may be impossible - a steel company, say, may not find too many new product opportunities to exploit its strength in steelmaking. In this case, secondary strengths - the steelmaker's engineering, fabrication or distribution services - may provide a better fulcrum for leverage.

Criteria must combine statements which both direct the search activities (for example, opportunities which address the needs of a particular industry) and allow for the evaluation of identified opportunities (for example, the project must generate $10 million in sales after four years). Evaluation criteria are easier to define than the search ones - but you must have both.

Because criteria describe the 'perfect' opportunity, they are a mirror image of the organization itself - all its diverse personalities and orientations. Establishing criteria must reflect this diversity with a range of participants. Who? First, the 'problem owners' - those with the authority to enact developments and the responsibility to grow the company. Second, equally obvious, the new business manager who must live with the criteria once settled. And third, the people who are fully aware of the company's real, as opposed to perceived strengths. Criteria defined and agreed to up front on the basis of team consensus will save considerable time discussing and evaluating business options at later stages of work.

If new business strategies are to embrace the entire company rather than a specific new business unit, CEOs must take care to make the distinction between criteria governing direction and values at corporate level and the more operational guidelines for divisions or subsidiaries. Statements like:

• new business will not incorporate activities with a high environmental risk;
• new business must contribute to the continued employment of the current workforce;
• new business must allow the company to broaden its technology base

However difficult, defining new business criteria is essential for the efforts to yield tangible results. Mapping the direction makes notoriously elusive search activities more focused, cost effective, and helps new business managers meet realistic expectations. Criteria aid managers to anticipate situations rather than be caught by surprise, and they have also proven to be an effective internal communications tool. Finally, defining the direction and boundaries of new business development is a vital part of leadership - top management demonstrating to the organization in the clearest possible way that its commitment to change and growth is real.