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Bain - Engine 2 - A Conversation in Mumbai
Bain - Engine 2 - A Conversation in Mumbai
Engine 2: A Conversation in
Mumbai
Seven lessons can help companies develop next-generation
businesses and capabilities.
By James Allen
I just returned from a trip to India, where I had the opportunity to spend an
afternoon with P.R. Kothari, who leads strategy for Indian conglomerate
Larsen & Toubro (L&T).
Mr. Kothari has been there almost all that time. Having worked at L&T for
45 years, he has one of the longest tenures there, though not as long as L&T
Chairman A.M. Naik, who has served for more than 50 years in the
company. Started by two Danes (you guessed it, Henning Holck-Larsen and
Søren Kristian Toubro) in 1938, L&T holds leading positions across several
strong businesses in technology, engineering, construction, manufacturing
and financial services. With $17 billion in revenue, it has grown by over 15%
annually in the last 10 years. Oh, and one fun fact: L&T’s first bridge was
built for the 1957 movie The Bridge on the River Kwai.
Although most of his businesses are enjoying double-digit growth, Mr.
Kothari is already thinking about next-generation businesses that will take
the company forward for years to come. In other words, he’s thinking about
what we call Engine 2.
As a conglomerate, L&T has repeatedly branched out into new areas during
its history. It started as a representative of Danish manufacturers of dairy
equipment, but today makes everything from boilers and ships to electrical
equipment, and offers services in real estate, construction, IT and financial
services. I was fortunate to be a part of a lively discussion and debate with
Mr. Kothari as I presented Bain’s “Seven Lessons about Engine 2,” which we
captured on L&T’s whiteboards. These lessons are:
3. Even though you’re stuck with it, don’t always assume Engine 1 is
your friend. While most companies expect investments in Engine 2 to
someday help Engine 1, we must note that good old Engine 1 isn’t always
your friend in the journey to build Engine 2. Engine 1 is awesome, big and
amazingly predictable—at least to you. After all, you’re veterans of Engine 1
and your systems are fine-tuned to run it brilliantly. In fact, you’re so good
at running this business that almost all of your systems are run with
tolerances of less than 1%. Your factories run predictably. Your sales
operations generally hit monthly revenue targets. Your Engine 1 leaders are
smooth operators. But those same leaders, with all of their perfect models,
can often be terrible managers of Engine 2. Why? Many Engine 2 businesses
are filled with unknowns. They’re collections of start-ups, new
partnerships, or new-to-the-world products and services. They have no
demand forecasting at all. You can’t run your Engine 2 business with the
tools and capabilities you use with Engine 1. These new capabilities are
hard to build, take time, and challenge current norms. You must build them
with a new mindset—one that’s more like a venture capitalist (VC) than a
corporate leader. But the good news is that these capabilities will help you
expand Engine 1 at some point (more on this in lesson 4). Until that point,
there are three rules of Engine 1 vs. Engine 2 partnership:
Engine 2 is more often than not about building new businesses. In business
building, predicting gross margin and operating margin is often less than
10% of the value that will be created. What really matters is determining a
go-to-market strategy that creates sustainable competitive advantage and
controlling the profit pool of the market (see Figure 2). The modeling of
gross margin assumptions dooms them with false predictability and
distracts you from the far more important task of figuring out how to create
a new market. As we discuss in our book The Founder’s Mentality, when you
rediscover the art of business building, you’re often going back to the first
generation of your company, when your leaders were incredibly disruptive
and committed to building a new and varied business. Business building is
in your DNA—or you would never have become a large, successful
company.
5. Getting back to business building helps you rebalance your activities
between delivering and developing. Building Engine 2 capabilities will
challenge how you manage Engine 1. We know Engine 1 is typically
managed with tight variance and refreshed through narrow product and
service innovations. Now let’s look at the strategic and financial planning
processes. In Engine 1, you primarily focus on what the business can
deliver. You spend huge amounts of time and attention to a set of social
contracts.
This focus on the delivery agenda takes a huge amount of the energy of
Engine 1—and wastes a lot of time (see “Why 97% of Corporate Planning is a
Waste of Time”). It also comes at a cost. The leaders of Engine 1 spend
significantly less time on the development agenda, that is, building new
businesses. As we mentioned, business building doesn’t lend itself to
financial models based on predictable product pricing and revenue
streams. Business building is hard to contract. The actions to develop
businesses are very different from the actions to deliver businesses. The
strategic planning and budgeting processes must be different, too. You
absolutely need development capabilities in Engine 1, because you have to
manage the unknowns. It’s also true that as Engine 2 matures, you’ll need
delivery capabilities in Engine 2. But for our purposes, we want to make a
simpler point: The capabilities built in Engine 2 are all about development,
and once mastered, they can be used in Engine 1. Engine 2 is a terrific place
to get your business-building mojo back and figure out how to hardwire it
into your budgeting and planning. Once sorted, you can bring these
capabilities back to the mother ship.
6. Engine 2 demands that you network and partner with the start-up
community and the VCs that support them. Many corporations
recognize that to create new businesses, they must become better partners
to the start-up world. In fact, many, if not all, of the Global 2000 have had
their leaders take “treks” to Silicon Valley or other start-up centers to meet
with founders and VCs. (Our Bain Innovation Exchange makes multiple
treks a year, bringing hundreds of business leaders into potential start-up
partnerships). We see that the most successful companies view these treks
as opportunities to make deals and start partnerships. The unsuccessful
companies use these treks as out-of-office team-building days—giving their
leaders great stories to tell, but wasting the opportunity to accelerate new
businesses, or more urgently, add immediate capabilities to their core
business.
7. Building Engine 2 really does help build Engine 1. Almost all Engine 2
strategies start with a desire to identify new growth opportunities far from
the core. But rightly, almost all Engine 2 strategies become initiatives to
revitalize the core, by:
With these new capabilities, you can begin to look at your Engine 1 business
differently. Are there investments you’ve made in Engine 1 that you could
use as a revenue opportunity with new customers? (Think Amazon Web
Services.) Are there existing businesses that you’ve run conservatively with
a delivery agenda that you could expand more aggressively with a
development agenda? Are their innovations in products and services that
you could reimagine as new markets?
That was the gist of our discussion with Mr. Kothari, who, after 45 years of
strategy work for L&T, probably can be said to be working on its Engines 5
and 6, having helped the company develop Engines 2 and 3 years ago.