How to tell when you are on to a winner

New ventures can produce enormous shareholder value - just look at Direct Line, which made millions for the Royal Bank of Scotland, its parent group, before the competition followed suit and ate away at margins. But they can also bring heartache, as the up-and-down story of Mercury, the Cable & Wireless subsidiary, has shown in its attempts to become a serious rival to BT.

With mature markets continuing to slow growth, investors and large corporations are increasingly looking for opportunities. But can they make sure that their ventures follow Direct Line rather than Mercury?

Research by PIMS Associates, a consultancy that specialises in benchmarking, suggests that they can. Drawing on the experience of 200 start-up businesses in consumer and industrial markets in America, continental Europe and Britain, it says that ventures are often stifled in their infancy by banks and parent companies that do not have an understanding of what it calls "start-up dynamics".

It is well known that as many as 80 per cent of businesses fail in the early years, but PIMS maintains that most ventures that become long-term successes do not break even until year four or five, which is some way after most backers lose patience.

This is all very well. But how do you justify sticking with one business this long and not another? PIMS says there are several indicators.

The most important of these is rate-of-market penetration. "The quicker the sales grow and competitive position strengthens, the more margins improve, leading to the maturity position where market share is a key determinant of profitability," it says.

But growth in market share is itself dependent on other factors. In particular, high quality of the product relative to the market is essential to the success of any launch. Conversely, contrary to many people's perception, discounts do not generally work. Prices should be on a par with those charged by competitors. In addition, it is vital to make a marketing impact. Investment in aggressive marketing can deliver four times the expected market share at year four, says PIMS. Orange, the mobile phones operator, is cited as an example to substantiate this claim.

Another factor, which backers may find hard to bear, is that it is not usually enough to provide just one tranche of funding. "Second-wave innovation" is necessary if the entrant is to continue growing and stay ahead of the competition, which will often be seeking to use its extra might to catch up.

But perhaps the most important factor, in terms of the effect it has on management style, is the size of the originators' ambition. "A lot take a tip-toe approach, which minimises the risk but also minimises the potential," says John Hillier, who carried out the research with Tony Clayton, a fellow PIMS consultant. They recommend setting tough goals, since aiming low often results in a miss.

The problem with this, of course, is that it is not always easy for large organisations to find sufficiently entrepreneurial managers within large organisations. "By nature, they are risk-averse," adds Mr Hillier, noting that this may be one of the biggest challenges for corporations.

PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Sport
CSKA Moscow celebrate after equalising with a late penalty
football

Arts and Entertainment
music
Life and Style
tech

Company reveals $542m investment in start-up building 'a rocket ship for the mind'

News
Bourgogne wine maker Laboure-Roi vice president Thibault Garin (L) offers the company's 2013 Beaujolais Nouveau wine to the guest in the wine spa at the Hakone Yunessun spa resort facilities in Hakone town, Kanagawa prefecture, some 100-kilometre west of Tokyo
i100
Arts and Entertainment
James Blunt's debut album Back to Bedlam shot him to fame in 2004
music

Singer says the track was 'force-fed down people's throats'

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Senior Helpdesk Analyst / Service Desk Co-ordinator

£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...

Senior Pensions Administrator

£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Corporate Actions Administrator / Operations Administrator

£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

Day In a Page

Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Let's talk about loss

We need to talk about loss

Secrecy and silence surround stillbirth
Will there be an all-female mission to Mars?

Will there be an all-female mission to Mars?

Women may be better suited to space travel than men are
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album