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The Growth Gamble: When Leaders Should Bet Big on New Businesses and How to Avoid Expensive Failures


by Andrew Campbell & Robert Park, Nicholas Brealey International, 2005.


Most firms fail when they try to create new growth businesses. Managers should be more selective - they should assess new opportunities with a tough set of business criteria and only invest in those that pass a strategic business screen. Two tools will help managers make better decisions. The New Business Traffic Lights Toolkit helps to identify the best new business opportunities. The Confidence Check assesses projects as they progress. There may be times when low growth is the best strategy.

(Summarised by Kevin Barham in November 2005)

(These book summaries aim to represent some of the key aspects of what the author has written. They do not necessarily represent the views of the summariser or of Ashridge. Equally the author of the book summarised must not be held responsible for any misperceptions of the summariser. A summary does not have space for all the illustrative cases which provide the richness of a book and there is no substitute for reading the whole book. There is an element of simplification in a summary so that the message may seem more obvious than it necessarily is, though the most powerful ideas are often simple and obvious in their essence.)


This book, though highly controversial in parts, is bound to make managers think very deeply about the future of their business.

Many companies, say Andrew Campbell and Robert Park, have a growth gap.  Their existing businesses are not growing fast enough to meet their ambition.  The usual solution is to add new legs to their portfolio of businesses.  Yet as many as 99% of firms fail when they try to create new growth businesses.

Andrew Campbell is a Director of Ashridge Strategic Management Centre (ASMC), well known for his research and consulting in corporate strategy.  Robert Park was formerly Head of Group Strategy with the NatWest Group and is an associate of ASMC.  Their book aims to help managers with one of today’s most complex problems – how to find, enter and grow new businesses more successfully without disrupting the profitable core of today.

Based on extensive research, the authors contradict received wisdom in concluding: that corporate venturing units do not generate new growth; most firms have few new opportunities that justify investment; and most companies are spending too much on new businesses and taking too much risk.  Most controversially, they also argue there may be times when low growth is the best strategy.

The overall message is that managers should be much more selective in their approach to new businesses.  Most companies could reduce the number of new businesses they are investing in by half and have a better chance of succeeding.  It is about being smart rather than trying harder.  They should assess opportunities with a tough set of business criteria and only invest in those that pass a strategic business screen.  Campbell and Park provide the tools to do this.  The core tool, the New Business Traffic Lights Toolkit, is a new screening and strategic thinking technique for identifying the best opportunities.  Another tool, the Confidence Check, is recommended for assessing projects as they progress.

The authors emphasise they are talking about new businesses, not new products or new markets that extend the franchise for an existing business.  The focus of the book is the stage in the corporate life cycle when managers are looking for new growth businesses because the core businesses are maturing.

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Six Rules for Developing New Businesses

Campbell and Park give McDonald’s and Intel as examples of businesses that have devoted significant resources to the search for new growth businesses but which have achieved little success to date.  These firms show that the strengths of the core business are often weaknesses when applied to other businesses.  Those strengths and weaknesses are often so ingrained in managers’ minds that they are not easily changed, even if you take the managers out of the company. 

Companies like these can only find significant new businesses under two circumstances – (a) they discover a business that “fits” with their existing businesses and responds to the habits and rules of thumb that apply to the core; or (b) they suffer (or engineer?) a crisis that breaks their commitment to old ways of doing things and brings in new leadership and ideas.  This book aims to help firms with (a).

Although nearly every company tries to do it, 99% of companies fail to create successful new growth platforms.  Finding new businesses is therefore a “growth gamble” where the bet, moreover, is against the odds.

Companies have established habits and mindsets that are well attuned to the needs of existing businesses but which get in the way when they try to enter new businesses.  Success comes when companies select new businesses that respond well to these mindsets; failure is often the result of trying to do things that do not fit.

This shortage of new opportunities explains the low success rate and calls for a different solution than simply becoming more “entrepreneurial” or setting up a corporate venturing unit.  Trying to generate additional ideas and experiment with a portfolio of new ventures are likely to be fruitless.  A screening tool to identify new opportunities will be more helpful than a series of process steps for developing new businesses.  Trying to make dramatic changes to corporate mindsets is also unlikely to succeed.

The authors’ research suggests that it is the shortage of opportunities that fit that is the biggest challenge for new growth. 

Campbell and Park propose six rules for developing new businesses:

  1. Continue to invest in the core.  The real cost of investing in new businesses may be a distraction from the core, rather than money lost from a failed venture.  Also, if there are no new business opportunities that fit, the firm’s future will depend on the performance of the existing business.  Management’s top priority must be to maximise the potential of these businesses or the future challenge will be survival, not growth.  Patience is a virtue; it may take some years for the right opportunities to come along.
  2. Don’t be seduced by “sexy” markets, but recognise “rare games”.  The attention given to growth markets is understandable.  Managers are looking for growth – but so are all their competitors.  To create value, managers should focus on markets where they have an advantage, rather than markets that are growing.  They should look for opportunities where their firm can apply some special resource or competence.  “Rare games” are an exception – typically, new markets where even average competitors can do well as demand exceeds supply.  A firm can enter a rare game without any advantages but, to be sustainable, it must create an advantage in the first few years – these normally come from early-mover benefits. 
  3. Look for advantage, don’t play the numbers game.  It is often assumed that because failure rates are high, multiple tries are necessary and that firms should have corporate venturing units and dedicated new business development processes.  But the numbers game is a losing game.  If the presumption is of many failures and few successes, each new initiative will receive grudging support because it is expected to fail.  The alternative is to invest in opportunities where the firm has a significant advantage – when the firm believes it can serve the market and earn 30% better margins than competitors.  The 30% hurdle requires more than optimism.
  4. Be humble about your skills.  The 30% hurdle is necessary because managers are often overoptimistic about their skills.  Competitors have hidden advantages and there are learning costs in new markets.  Acquisitions are often used to overcome learning costs but they involve premiums, another reason for the 30% hurdle.  Learning costs are an unknown that upsets many business plans.  Managers need to understand the impact of learning costs so they can discover promising new businesses where much of the learning has been done (one possibility is “saplings” - operating units that already exist within the company but which may be currently ignored or unloved).  This also helps avoid potential disasters where the learning cost is likely to be higher than any advantage the firm possesses.
  5. Search for people as much as potential.  Many firms believe that within their pool of talent, managers can be found to lead projects and that the challenge is to find good projects for them to lead.  While this works within the existing business, it does not work for a new business as knowledge of the products, markets and the business model needed to make a profit will be lacking.  A firm may have some advantages in technology or brands but if it does not have the managers with the talent, experience and will to exploit them, no value will be created.  Any process for identifying new business ideas should be complemented by a search for the managers with the experience, talent and passion to lead.  It is often better to start with a search for talent rather than a search for opportunities.  The CEO of AlliedSignal says: “At the end of the day, you do not bet on strategy, you bet on people.”
  6. Be realistic about ambitions.  Set ambitions in the light of opportunities.  Setting stretch goals works in existing business because it makes managers who are stuck in ruts unlock their thinking.  In new businesses, there are no ruts to break out of and stretch goals distract managers from thinking rationally.  Goals should be set only after the opportunities have been screened, not before.  New business units are often under pressure to set targets and define objectives but these are often a hindrance and interfere with objective assessment of opportunities.  The task should be to identify opportunities and see if any of them are worth supporting – to explore the potential rather than fill a growth gap.  This is better done by a project team with a finite time frame than by setting up an organisational unit.  The truth is that most firms have only a few new opportunities that fit their capabilities.  Managers may have to accept that there are no new businesses to invest in.  Giving money back to shareholders may be the right thing to do until a promising opportunity emerges.

[In his foreword to the book, strategy guru Gary Hamel suggests another rule:  Don’t be afraid to partner – your company may not have all the assets and skills necessary to ensure new business success.  Hamel notes that Campbell and Park have not made partnering a central focus of their book but he believes that alliances will become increasingly important in future.]

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The Difficulties of Growing New Legs

There are two reasons, say Campbell and Park, why investments in new businesses often destroy more value than they create.  First, it is inherently risky - each project contains many risks that cannot be managed away.  Many new things need to come together to make a new business a success.  The overall probability of every element coming good is low.

Secondly, the way that managers think about new businesses (and the lack of a robust theoretical framework for doing so) leads them to make mistakes.  The four avoidable causes of failure which arise from this are:

  • The Icarus Pitfall – aiming too high.
  • The Helen of Troy Pitfall – being obsessed by the attractions of a market opportunity while ignoring its risks or appropriateness.
  • The Hubris Pitfall – the inappropriate self-confidence that can develop in successful management teams that leads them to overestimate their capabilities.
  • The Numbers Game Pitfall – the belief that success depends on making many attempts and which leads to the commitment of considerable resources to new venture processes.

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When Low Growth is Better Than Gambling

This is perhaps the most controversial part of the book. The authors suggest there are two arguments for growth: moral and value-driven.

  • The moral argument.  This says that companies have a duty to society to innovate and develop new businesses.  Many management authors presume that companies should seek to survive over the longer term, migrating to new businesses before the existing ones die.  It is not a question of whether but of how?

The authors respond by arguing that a company that starts many new businesses that fail or under-perform is not benefiting society.  Given the odds of creating successful new businesses, a strategy of careful selection rather than ambitious expansion is likely to create more value for society.  Moreover, the existing managers of an existing business are not necessarily the best able to exploit a new opportunity.  Society will benefit more if it encourages managers to select between those battles they can win and those where they will do better to sell existing resources to a third party.  Managers have a responsibility to give such resources back to the market so that others who know what to do with them can use them.

  • The value-driven argument.  This says that the value of a company, in terms of market capitalisation, is affected by its growth rate.  For companies with modest growth rates, each percentage point of growth will add 10% to market capitalisation.  If a decision not to grow reduces expected future growth rates, the value of the firm will decline, sometimes dramatically.  A decision to stop growing may also break the momentum of success, allowing people to lower their sights.  Growing companies attract the best talent because they offer more interesting career opportunities.  But once growth slows down, capable younger managers will often look elsewhere. 

Managers must recognise, say Campbell and Park, that at many points in their history, companies will be able to grow only slowly, if at all.  At some point, a company will screen out all ideas for new businesses and will have to depend on its core business for its rate of growth.  If the core market is growing slowly, the company will probably be low growth.  But low growth is not necessarily a bad thing.  In some circumstances it is acceptable to choose low growth or even not to grow at all.  Low growth companies and even negative-growth companies can still produce acceptable financial results. 

The problem, according to the authors, is that most managers assume low-growth companies are failing companies that cannot generate decent returns for shareholders.  The message that low growth is bad is reinforced by the catastrophic declines in market capitalisation of firms who hit a growth stall.  This fear of low growth, however, is based on a misunderstanding of the way the market anticipates performance.

Campbell and Park argue (convincingly) that the challenge of producing decent returns for shareholders year on year is no different for low-growth companies than for high-growth companies, as long as this is what the market expects.  By way of illustration, the authors provide a worked example which shows how two companies, one slow growth and one fast-growing, produce identical total shareholder returns (TSR is the growth in value of the company over the next year plus the dividends as a percentage of the original market value of the company). 

While this may seem counter-intuitive, the explanation lies in the different starting valuations which occur because the market anticipates performance.

“Companies can only produce a superior total return for shareholders if they outperform shareholder expectations.  If they perform according to shareholder expectations, they will deliver an average total return.  If they perform less well than expected, the return will be below average.  In other words, the problem of low growth is less about the annual performance challenge and more about shifts in market perception.  If a company suddenly moves from high growth to low growth, perceptions will change and the shares may decline by 50% or more.  If, however, a low-growth company remains low-growth but earns returns better than the cost of capital, it will perform better than the average.”

Living with market expectations has different implications for highly rated firms and lowly rated firms.  The main problem for managers in highly rated companies is the shift in value that occurs when expected growth rates change.  A company with a growth track record is likely to be highly rated, perhaps with a price earnings ratio (PE) well over 20, based on an assumption of continued growth.  If management abandons attempts at new business, the market might downgrade its assumptions about growth, leading to a significant fall in the stock price.  Rather than suffer today, managers are tempted to launch additional new businesses to maintain growth and hence (if shareholders believe management’s story) maintain the share price.

The authors demonstrate (again by way of an example) that if the new businesses succeed to such an extent that high earnings expectations are met, then the share price will have been justified and the firm will continue to prosper.  If the new businesses only earn meet the cost of capital, in due course the market will re-rate the company downward.  In terms of cumulative shareholder value, this would be the same as if the firm did not invest in new businesses but instead returned funds to shareholders.  If the new businesses fail to earn the cost of capital, the fall will be more precipitous and the long-term result will be worse than under the less risky policy of returning the cash to shareholders.
This “overvaluation trap” presents a real dilemma for managers who know that growth in their core business is likely to slow down soon.  Should they signal this to the market today and face a significant (and career-threatening) decline in the stock price?  Or, should they invest in new businesses to find new sources of growth and risk a much more disastrous share price fall if the businesses fail?

The rational answer to the trap is to pursue new business projects only if they have a good chance of earning above the cost of capital.

Lowly-rated companies face the “undervaluation” trap whereby managers can feel trapped into low-growth, high-distribution strategies, even though there may be good opportunities to invest in new businesses.  It is harder to criticise managers for choosing such a risk-averse strategy but, if the company does have good new business opportunities, the value lost can be significant.

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Choosing a Growth Policy

Campbell and Park maintain that low growth is the right choice for companies when there are few opportunities for the core business to grow, or when there are few new businesses that have a good chance of outperforming the average company on the stock market.  Under such circumstances, a low-growth strategy minimises the risks of value destruction and increases the chances of value creation.

The following principles should guide the choice of growth policy:

  • Companies can only add to shareholder value if their growth exceeds market expectations.  Just growing is not enough.
  • When new business opportunities earn the cost of capital (roughly the average return on the stock market) shareholders are indifferent as to whether the firm makes the investment or returns the cash to them through dividends and buybacks.  Investments in new businesses therefore need to have a good chance of exceeding average returns to justify management attention.
  • If a company cannot find new business projects that earn more than the cost of capital, surplus funds should be returned to shareholders.
  • So long as there are no tax differences between income and capital gains, shareholders are indifferent between dividends and buybacks.

Highly rated companies (with high PE ratios) face an “overvaluation trap”:

  • In the short term, highly rated companies may do better for their shareholders by making new investments that make quite low returns.  But unless the returns are sufficiently high to justify the original rating, the share price will eventually adjust downward to reflect the returns actually received.
  • So long as the returns from new businesses exceed the cost of capital, shareholders will be better off if the company invests.  Even though the share price may fall, it will fall less than it would without the investments.
  • The fall in share price will be even greater if the new businesses fail to earn the cost of capital.
  • Companies that cannot see ways of maintaining high expectations of growth should therefore pursue new business projects only when they are likely to earn more than the cost of capital and manage a decline in their share price to reflect the appropriate value.

Lowly rated companies (low PEs) face an “undervaluation trap”:

  • In the short term, new business investments will need to earn considerably more than the cost of capital to add to immediate shareholder value.
  • Increasing distributions, whether by dividends or buybacks, is a tempting, low-risk option that can give very good shareholder returns, and could lead to a re-rating upward as a good income stock.
  • However, shareholder value should be increased if the new businesses outperform the average, and exceed the cost of capital.
  • Nevertheless, the low rating will remain if the new businesses fail.
  • Undervalued companies that see good opportunities should therefore pick only those projects that have a high chance of success, recognising that paying back funds to shareholders will be a more attractive alternative to making average investments.

For managers who are unconvinced that low growth can be a winning strategy, the authors offer two case studies (Crown Cork & Seal and IBM) that support their case.

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The New Business Traffic Lights

This is a screening tool for new business ideas, based on a “distillation of good strategic thinking”, which managers can apply to an idea before a business plan has been developed.  The tool is informed by five insights:

  1. Managers do not normally consider the “tradability” of their unique value when assessing new businesses.  To justify the risks and costs of new businesses, we must believe we have a contribution that can only be turned into value by incurring these costs.  If we can get value for our contribution without incurring the costs, we have no reason to enter the new business and should “cash in” our contribution (for example, through licensing or a joint venture).  It is the size of the “non-tradable” portion of our unique contribution that is the reason for going ahead.
  1. Managers do not normally assess the likely costs, at both operating and corporate levels, of learning a new business.  Because learning costs are hard to quantify, they are often left out of the equation.  However, they may amount to 50% of profits for the first few years.
  1. Normally a company will earn above-average returns only when it has competitive advantage.  Hence, analysis of markets should focus on identifying “outliers” - extreme situations that are either so good that even a competitor with disadvantage can earn a good return or so bad that even an advantaged player may earn less than the cost of capital.  The five criteria when looking at the attractiveness of the “profit pool” in the new marketplace are: the business model potential for high margins; the industry structure potential for high margins; the opportunity for us to be a leader in this market; the cost of trying relative to the size of the profit pool; and the vulnerability of our business model.
  1. Managers do not give enough attention to who is going to run a new business and who the new business will report to.  Managers believe their managerial resources are sufficient or that good talent can be hired.  They also presume that they can learn most new businesses.  The relative quality of the leadership of the new business depends on commitment, personal insights into the business, entrepreneurial flexibility, execution skills and influence with the parent.  The status of the sponsor within the main parent depends whether they are a significant line manager who can channel resources to the new business and persuade other businesses and services to give help.  They must be able to protect the business from inappropriate influences from corporate functions, and provide effective oversight and an “understanding home”.
  1. Managers often underestimate the loss of performance in the core businesses that happens when attention shifts to new businesses.  Distraction costs become significantly negative when a new business competes with existing businesses for scarce resources and skills.  (The better managers may, for example, think that new growth businesses offer better career prospects.)

There are four Traffic Lights:

  • The size of the value advantage
  • The attractiveness of the profit pool
  • The quality of the managers running the new ventures and their corporate sponsors
  • The likely impact on existing businesses.

Each element is scored red, yellow or green:

  • Red - implies we have a significant disadvantage, or the market segment has little available profit, or our managers and sponsors are inferior to those of competitors, or there will be a big negative impact on our existing businesses.  Any one red light signals that the probability of success is too low.
  • Green – implies we have a big advantage, or that the market segment is an easy one to make money in, or our managers are better than the competitors’, or there are big benefits for existing businesses.  Any one green light suggests that the probability of success is favourable: the company should invest so long as a viable business plan can be developed.
  • Yellow – where all the lights are yellow, the situation is marginal.  Managers should be asked to reformulate their proposal so that at least one light is green.

Campbell and Park suggest that if this screen is applied to a typical portfolio of new business investments, it will usually result in red lights for many projects.  It means most companies are taking too many risks in search of new growth businesses.  Reducing the amount they gamble on new businesses will give extra resources for improving their existing businesses, and will produce good rewards until better new projects emerge.

While the traffic lights may not always provide clear go/no go decisions, they often give a no go answer where managers would have been inclined to give it a try.  They thus screen out many new projects that would subsequently fail, saving both time and money.

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Searching for New Businesses

Campbell and Park put forward three guiding rules to follow when searching for new businesses:

Manage the flow of new business ideas.  Start with a thorough analysis of the existing businesses – without this, managers do not have a sound platform from which to screen new business projects.   The strategy review should focus not only on the current business model and current product-market segments, but also on adjacent business models and new disruptive competitors.  This provides senior managers with “top-down” insights for new businesses.  Avoid over-stimulating the idea flow as this may encourage managers to launch too many new ventures and may distract them from the one or two that have real potential.  Establish a process for capturing “bottom-up” ideas (for example, a venture board) – it is important that people know such a process exists and that decisions are taken in a timely and rational manner.  A generally accepted and clearly communicated strategic framework will help managers deal with the flow of ideas.  People look to the CEO to explain the corporate strategy in a way that helps them understand which ideas might be welcome and why some are supported and others are rejected.

Use the Traffic Lights “diligently”.  These will help ensure that silly ideas do not get through the screening process.  If the Traffic Lights are widely communicated as a tool for assessing the strategic business case, managers at all levels will feel empowered to propose and reject ideas that do not pass them.  A strong and objective governance process will also be needed to turn down the pet projects of the CEO and other top managers.

Effectively parent each new business initiative.  Once a new business idea passes the Traffic Lights, managers must give a lot of attention to parenting it appropriately.  Processes are needed for assigning a good sponsor, putting them in the right place in the organisation, orchestrating the right amount of support and reviewing progress.  The Emerging Business Opportunities programme at IBM and the New Projects Programme at Philips are good examples.

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Positioning and Supporting a New Business

Campbell and Park advise that when we are considering how to position and support a new business, we should ask four questions:

  • How far should the new business be integrated or separated from the existing businesses?
  • At what level in the organisation should the new business report?
  • What support should be provided to the new business by the management layers above it?
  • How should corporate managers monitor progress?

The degree of integration or separation can be determined by using the four tests of “fit” (market advantage; parenting advantage; people; feasibility) and the five “good design” tests (specialist cultures; co-ordination solutions for difficult links; accountability; redundant hierarchy; and flexibility).  Separate the new venture from the existing businesses unless these nine principles of organisation design suggest otherwise.

The appropriate reporting level (low vs high) depends on four factors.  The new business should report into a layer in the organisation for which it is an important part of the strategy at that layer.  It should report to a manager with the knowledge, skills and time to be a good parent to the business.  There should be a minimum of layers between the manager allocating the money and the manager leading the new business.  The reporting relationships should also provide some process of objectivity to avoid the risk of the manager who is allocating the money becoming its champion.

“Parenting Opportunity Analysis” should be used to decide the degree of support necessary from layers above.  This examines the opportunities that exist for parent managers to help the new business.  Parent managers need to think about each new business individually to decide what support is needed.  The analysis identifies, among other things, major tasks facing the management team of the new business and assesses whether it has the capability to carry them out.

Monitoring the progress of new ventures poses problems.  They are difficult to monitor against plan or budget.  When performance is poor the question arises of whether to “pull the plug”.  Received wisdom says new businesses should be monitored and funded against short-term milestones.  But how do managers decide what the next milestone should be and when should they decide to stop funding the project?  To help with these questions, the authors provide the Confidence Check.

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The Confidence Check

The purpose of this tool is to help managers assess their level of confidence that the new venture will succeed.  It has two sections: confidence about the continuing validity of the judgements in the Traffic Lights, and confidence about execution i.e. the ability to do what is necessary to make the project work.  It can be applied as each milestone is reached.  (There are nine major questions, each of which is broken down into more detailed areas of investigation.)

The four main questions concerning the Traffic Lights are:

Are we confident that:

  • Our value advantage is still large enough to justify this project?
  • The profit pool is still good enough to justify this project?
  • The leaders/sponsors of the business are good enough for the project?
  • The impact on existing businesses still justifies this project?

The main issues about execution concern the degree of confidence we have about sales; technology and operations; partners, suppliers and enablers; support from the core; and funding and governance.  The five major questions here include:

Are we confident that:

  • We will achieve sufficient sales at the price we need?
  • We can develop the technology and deliver our offer at an attractive cost?
  • We can find and retain the support of the partners/suppliers/enablers we need?
  • We will get the support we need from existing businesses?
  • We have or can set up the funding and governance we need?

Projects should be killed when a number of confidence categories have deteriorated or have remained low despite setting “stage gates” to improve them.  The Confidence Check can also, on the other hand, reinforce confidence in further investment.

The book ends with two appendices.  The first summarises advice that other authors might give to McDonald’s.  Campbell and Park chose these two firms as the focus because they faced “particularly interesting” challenges: a very successful core business that had hit some problems, run by an acknowledged management team, but with question marks about the future.  The second appendix provides a database of “success stories” (companies who have successfully created a significant new business) identified by the authors during their research.

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Reviewers have called this book clear, pragmatic, provocative and persuasive.  It certainly is all those.  Campbell and Park look forward to an “age of realism” where managers are comfortable managing businesses through long periods of low growth, but nevertheless “delighting” shareholders with excellent and dependable returns.  There may be even more growth companies in future than today, they say, because managers who have learned the rules of the game will be better at spotting and developing the opportunities that fit.  A lot of society’s wealth will be saved in the process.

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