Situation: A service company has developed the capacity to produce and sell a product. The CEO is considering two options for this new opportunity: create a separate entity for the new business or run the businesses in parallel under the current umbrella. How do you best exploit a new opportunity?
Advice from the CEOs:
- Option 1: Create separate entity for the new business while the existing business continues in parallel.
- How big is the potential win? The current company competes successfully for about 10% of the market. The new capability would allow the company to potentially compete for 100% of a larger market.
- How different are the two opportunities? The current business requires specialized talent – it is a low volume, high margin business. The new opportunity is the reverse – high potential volume but lower margin. It is a more generic market with fewer specialized needs.
- The separate entity option provides the most flexibility. The current model already functions well. A spin-off provides an additional option without losing what already exists.
- Bring in another individual to develop and run the new entity. It’s a different game and requires a different focus. However, it will be a great opportunity for the right person.
- The spin-off model will be more sustainable under separate management than under the current company.
- Option 2: Operate both businesses under a single entity.
- This option looks like a double compromise – it alters both the company’s current strengths and the fundamental business model.
- A long-term alternative is to look for a financial acquisition for the current company. It produces good net margins, has good cash flow, a and spins off cash. This can be valuable to a financial buyer.