First, Forget What Works

The success of an innovative new business may depend on forgetting what makes the core business tick.
Edward TeachFebruary 13, 2006

Genius, said Thomas Edison, is composed of 1 percent inspiration and 99 percent perspiration. Yet treatises on innovation often dwell on the 1 percent, offering ways to spark corporate creativity. Vijay Govindarajan and Chris Trimble, professors at Tuck School of Business at Dartmouth College and experts on innovation within large organizations, prefer instead to focus on the 99 percent. Only by mastering the sweaty part of innovation — as they advise in their recent book, Ten Rules for Strategic Innovators: From Idea to Execution (Harvard Business School Press, 2005) — can companies attain “breakthrough” growth.

Govindarajan and Trimble are careful to distinguish their subject, strategic innovation — which involves a new, unproven business model — from product, process, or service innovation. Strategic innovation is essentially an experiment, involving a sizable investment in an unfamiliar new business that may take years to produce a profit. Over the past five years, the professors studied a dozen or so such experiments. Five are profiled in their book: Corning Microarray Technologies, New York Times Digital, Hasbro Interactive, Capston-White (a pseudonym for a computer-printer maker), and Analog Devices.

Not all of the experiments were successful, and no company practiced all of the principles that Govindarajan and Trimble now preach. “We didn’t find a lot of commonalities from one company to the next,” says Trimble, who is also a senior fellow at New York consultancy Katzenbach Partners LLC. “It really shows there’s no conventional wisdom in this area.”

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Hence their book. Beyond the 10 rules of its title (see “10 Rules for Innovators” at the end of this article), the professors emphasize three basic themes — three challenges, that is, that all would-be strategic innovators must overcome. To wit:

  1. Forgetting. The new business (NewCo) must selectively “forget” the success formula of the most closely related business unit within the company (CoreCo).
  2. Borrowing. NewCo must borrow those assets of CoreCo that will give it a competitive advantage, such as manufacturing capacity, or sales relationships, or a brand.
  3. Learning. NewCo must learn how to succeed in a new and uncertain environment.

Each challenge is analyzed at length, but it’s the first one — forgetting — that readers may find especially provocative. If you do not forget some of the key success factors of your core business, the professors contend, those very factors may stand in the way of strategic innovation. “The core competencies and routines you have developed to succeed allow you to innovate in an incremental way around the current business,” says Govindarajan. But, he adds, those same competencies and routines will hamstring entrepreneurial efforts in new businesses. If NewCo cannot forget the old, then it will have trouble learning the new.

Old Stories

Thus, Govindarajan and Trimble recommend that NewCo selectively renounce its parentage — not a simple task. “There are so many reinforcers of the existing way of doing business,” comments Trimble. “Everything from who you know, who you interact with for certain problems, your performance measures — even the stories you tell about your history and why you’ve been a successful company.” NewCo must forge its own formula for success, forgetting the assumptions and mind-sets that pervade CoreCo.

At the same time, what gives NewCo its competitive advantage over start-ups is its ability to draw on the assets of CoreCo. Not surprisingly, there is “great tension” between forgetting and borrowing, says Trimble. The new company must be separate, but not completely isolated; “there has to be a little interaction.”

The relationship, in short, is something like that between a teenager and his parents. But there’s an important difference: NewCo’s general manager should report to a level higher than CoreCo. “It sounds easy to say,” says Trimble, but putting a tiny new unit on the organization chart as the peer of a billion-dollar business unit is “obviously not a natural thing to do.” Nevertheless, it must be done; CoreCo’s chief is a powerful agent for orthodoxy, and could hamper NewCo’s efforts to develop its own identity.

CFOs, who play a central role in planning, business evaluation, and resource allocation, can aid the task of forgetting by taking a couple of key steps, says Trimble. One is to abandon CoreCo’s prevailing performance measures and develop new ones for NewCo. Why? Because NewCo is likely to have a very different cost structure, and different revenue expectations. Companies shouldn’t monitor innovative new ventures with the metrics they use for mature businesses, the professors advise.

The second step is to replace CoreCo’s rigid standards of accountability with flexible ones. Otherwise, NewCo’s managers can’t learn. “The business plan [of NewCo] is full of wild guesses,” Trimble says. “The key is this: How quickly can NewCo get from wild guesses to informed estimates to reliable forecasts? If you’re getting better at forecasting, you’re resolving some of the unknowns of the business, getting closer to a working business model. If it’s a crummy idea, you’re going to exit sooner, and not lose as much money.”

NewCo’s managers need the flexibility to improve their predictions as they learn more, and thus should be held accountable to a learning process, not a number. “You want people to be ambitious and bold rather than conservative,” says Govindarajan. Evaluating NewCo’s managers is a largely subjective exercise, he says, wherein they are judged “by the quality of their thinking.”

New Blood

Should NewCo’s general manager be recruited from outside CoreCo? Probably. Insiders, says Govindarajan, “have a natural tendency to reinforce the status quo,” whereas outsiders are willing to challenge the status quo. The new unit’s workforce should include plenty of outsiders as well, “not only to build new competencies but to erase the memory” of CoreCo.

Govindarajan also says that it’s a mistake for CoreCo’s head of human resources to oversee that function for NewCo as well. Doing so “invariably leads to problems,” he says. CoreCo’s HR chief will tend to recruit the same sort of people that the core business has, and pay them in the same way. Yet the new business may require people with different skills and a more entrepreneurial mind-set, along with a suitable compensation scheme.

NewCo should hire its own CFO, too. “However brilliant [CoreCo’s] CFO may be, it’s very difficult for the same person to move from one planning process to the other,” comments Govindarajan. “The processes are different, because the uncertainties inherent in these businesses are vastly different. It’s best to have planning meetings done separately — to not have general managers and CFOs from both NewCo and CoreCo in the same room at the same time.”

Out of sight, out of mind. Or another familiar saying may be appropriate, with one change: Those who remember the past are condemned to repeat it.

Edward Teach is articles editor of CFO.

10 Rules for Innovators

  1. In all great innovation stories, the great idea is only Chapter 1.
  2. Sources of organizational memory are powerful.
  3. Large, established companies can beat start-ups.
  4. Strategic experiments face critical unknowns.
  5. The NewCo organization must be built from scratch.
  6. Managing tensions is job one for senior management.
  7. NewCo needs its own planning process.
  8. Interest, influence, internal competition, and politics disrupt learning.
  9. Hold NewCo accountable for learning and not results.
  10. Companies can build a capacity for breakthrough growth through strategic innovation.

Source: Ten Rules for Strategic Innovators, Vijay Govindarajan and Chris Trimble (Harvard Business School Press)