What Every CEO Should Know About Creating New Businesses

Not every CEO runs a major company. Some CEOs run small businesses. Regardless, the responsibility is still heavy.

That said, attaining that CEO title probably won’t happen for quite a few years. Becoming a CEO takes many years of education and hard work building experience and connections. But the sooner the better.

Many teenagers and young adults are starting their own businesses and are working their way to the top to becoming CEOs of their own companies. Having leadership and CEO-like experience even in building and running one’s own small company is one of the best ways to prepare for a future role at a much larger firm.

Not everyone wants to start their own business though. If you’re a teen hoping to become the next CEO of Disney or some other large corporation, you will have to climb some corporate ladders and navigate some bureaucracy.

The Skills a CEO Needs

It’s important that you prepare both for the soft skills and the hard skills that it takes to become a CEO.

For soft skills, CEOs need to understand how to adapt to situations. Running a business is difficult and often unpredictable. Learning how to adapt will help you make better decisions for the company.

CEOs also need strong communications skills. How you speak to people individually and in a group setting is important for different situations. For example, motivating and reprimanding are two very different situations. You will need to know how to communicate effectively for each one.

A CEO also understands how to empathize with others. Empathy helps build strong relationships both personally and professionally and unifies a company.

For hard skills, CEOs need years of education and experience which we will discuss throughout this post.

If you’re still up for the challenge, then choosing a field of study is next on your list.

Choosing a Field of Study

The first question to consider is what industry or field you are passionate about. Is there a particular dream company you see yourself working for or becoming CEO of?

There are often three different types of CEOs:

Knowing what type of CEO you want to be will determine the path and areas of study you should pursue, and how long it will take to reach that goal.

Don’t Fear Failure

Part of having big aspirations, like that of attaining a CEO job, means accepting that as you face challenges, you may experience some setbacks or failures. However, you can never let that stop you or derail you on your journey. In fact, the true test of a person’s ability to lead an entire organization has a lot to do with how they handle those setbacks and failures. CEOs face problems and failures, too; they make incorrect decisions; business deals go south. They have to evaluate the situation, regroup, and determine the best course of action to right the ship. And you should do the same with your career on your road to becoming the CEO you plan to be.

The challenges in top-line growth are vast, and it’s difficult to know how, or even whether, to move forward. Most CEOs would benefit from having a few rules of the road.

Fortunately, scholars have studied the problem for decades. And whether they’ve called it “new business creation,” “corporate venturing,” “corporate entrepreneurship,” “corporate innovation,” or “intrapreneuring,” their observations have been remarkably similar. Yet these findings have seldom been summarized or presented in an easily accessible form. Here, then, is a primer on the topic—the ten things every corporate venturer should know.

1 Ultimately, growth means starting new businesses.

Most firms have no alternative. Sectors decline, as they did for Pullman’s railroad cars and Singer’s sewing machines. Technology renders products and services obsolete—the fate Polaroid suffered, as digital cameras decimated its instant photography franchise. Markets saturate, as Home Depot is now finding, after establishing more than a thousand stores nationwide.

2 Most new businesses fail.

New businesses may be necessary for long-term growth, but successes are hard to pull off. The numbers are downright depressing. In the 1970s and 1980s, 60% of small-business start-ups failed in their first six years. Large companies did only a bit better. A study of sizable corporations during the same period, which included such household names as DuPont, Exxon, IBM, Procter & Gamble, Sara Lee, 3M, and Xerox, found that they divested or closed 44% of their internally generated start-ups and 50% of their joint ventures in the first six years.

3 Corporate culture is the biggest deterrent to business creation.

New ventures flourish best in open, exploratory environments, but most large corporations are geared toward mature businesses and efficient, predictable operations. When a company’s leaders recognize and support mavericks, encourage diverse perspectives, tolerate well-reasoned mistakes, and provide resources for exploratory ventures, employees are apt to embrace entrepreneurship. When leaders reward conformists and rule followers, insist on acceptance of the party line, demand error-free performance, and tightly ration resources, employees are likely to shun exploratory projects. New ventures whose operating sponsors are close to the action and know their businesses intimately tend to do better than those championed by the CEO alone.

4 Separate organizations don’t work—or at least not for long.

If new ventures require a new environment, the reasoning goes, they should be in a separate unit. Accordingly, from the 1960s through the 1980s, such companies as Boeing, Exxon, GE, Gillette, Levi Strauss, and Monsanto set up separate internal venture divisions. In the 1990s, companies like Bertelsmann, Chase, Intel, and UPS favored corporate venture funds that would act like Silicon Valley venture capitalists, nurturing nascent businesses by offering managerial oversight, funding in stages, and technical advice.

But allowing a different culture to flourish in either type of separate organization eventually leads to repeated power struggles and culture clashes, which members of the mainstream organization invariably win. Interest in the new ventures tends to be cyclical. Brief surges of enthusiasm, triggered by abundant resources and the desire to diversify, are followed by sharp declines. The life spans of both internal venture units and corporate venture capital funds, therefore, tend to be short—on average, only four to five years.

5 Starting a new business is essentially an experiment.

New ventures can go wrong in so many ways. They can encounter customer failures (insufficient demand or unwillingness to pay for the product or service), technological failures (inability to deliver the promised functionality), operational failures (inability to deliver at the required cost or quality levels), regulatory failures (institutional barriers to doing what’s desired), and competitive failures (a competitor’s entry changes the rules of the game). These setbacks are unavoidable, and no amount of TQM or efficient management will anticipate them all. There’s usually no alternative: A new venture simply has to prototype its initial concept, get it into the hands of users, assess their reactions, and then repeat the process until it comes up with an acceptable version. IBM calls these efforts “in-market experiments”; scholars call them “probe-and-learn processes.”

6 New businesses proceed through distinct stages, each requiring a different management approach.

Experimentation is only the first step in an extended, multistage process of business development. Each stage introduces a different set of questions and challenges. (See the exhibit “The Right Questions.”)

Each stage also demands different talents and perspectives, and new leaders usually have to be brought in as businesses progress. The visionary who is well suited to leading a new business through its early experimental stages is often poorly equipped to guide the venture through the expansion and integration stages, when sales and organizational skills become more important than bold thinking and creativity. Nor can performance measures remain immutable. Because new businesses are seldom profitable in their early, formative years, financial metrics make little sense as a starting point for evaluation. Instead, milestones of various sorts—the number of prototypes in customers’ hands; the number of times analysts mention a hot, new technology; the number of salespeople bringing in leads—are more useful indicators of early progress. During expansion, measures of market penetration and market share become important; as the business becomes established, traditional financial measures can be installed.

7 New business creation takes time—a lot of time.

In most cases, the three stages of business creation take years to unfold. Experimentation, in particular, is extremely time-consuming. New concepts are difficult to validate, and customers’ first reactions are not always good predictors of long-term sustainability. Home Depot opened its first Expo Design Center in 1991, built seven additional stores over the next few years to explore different formats and layouts, and didn’t roll the concept out on a large scale until late in 1998. Managers hoping for quick returns are certain to be disappointed. The best study on the subject, which examined nearly 70 corporate ventures in the 1960s and 1970s, found that new businesses took an average of seven years to become profitable. None of the businesses had a positive cash flow in its first two years.

8 New businesses need help fitting in with established systems and structures.

Probably the greatest concern of new-business leaders is that they and their ventures will become organizational orphans. Especially when they combine offerings from several divisions or target markets that fall into the white spaces of the organization chart, ventures find it difficult to secure an organizational home. They frequently find themselves shunted from one division head to another, as reporting relationships constantly change. The trick, says one experienced venturer, is “to achieve the right balance between identity and integration.” Too much independence, and the business will be an orphan; too tight a link to established divisions, and the business will fail to differentiate itself.

On other occasions, support fails to materialize because of a perception that the new business will never become big enough to “move the needle” and make a substantial contribution to revenues or profits. The problem is, financial predictions are tricky because of high levels of uncertainty. Large forecast errors are common—in one study, first-year sales forecasts were off 80% and first-year profit forecasts were off 116%—making new businesses easy targets for critics. Go/no-go decisions should seldom be based on whether a new business has large initial returns or has met its budget targets.

9 The best predictors of success are market knowledge and demand-driven products and services.

When you launch a new venture, pick a product or service close to the ones you already offer. Success rates rise substantially when new businesses target familiar customers and are staffed by people well acquainted with the market. New businesses launched simply to commercialize research findings rather than meet market needs are best avoided. Unfortunately, most engineers prefer working on the latest and greatest technology. It’s therefore wise to ask: “What’s the pain point for customers, and how does our offering overcome that pain?” Without such discipline, new ventures are likely to end up as solutions looking for problems.

10 An open mind is hard to find.

The biggest hurdle for new businesses is mental—the way senior managers think about products, services, technologies, customers, and competitors. Every established company is based on an implicit theory—a largely unstated view of how the business works and money is made.


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