Building successful new businesses within established firms

Citation

Leavy, B. (2006), "Building successful new businesses within established firms", Strategy & Leadership, Vol. 34 No. 2. https://doi.org/10.1108/sl.2006.26134bae.001

Building successful new businesses within established firms

Building successful new businesses within established firms

10 Rules for Strategic Innovators

Vijay Govindarajan and Chris TrimbleHarvard Business School Press, 2005, 198 pp.

Boosting growth remains a most difficult challenge, particularly for well-established companies with dominant positions in their core businesses. As evidence, companies like Intel, Microsoft and Coca Cola, which were once Wall Street’s ideal growth stocks, now have to try to keep their investors happy with annual dividends while they desperately search for fresh opportunities to re-ignite shareholder excitement. The challenge of growing by acquisition or from within has not suddenly grown more difficult. Almost twenty years ago, Michael Porter found the growth-by-acquisition track records of leading US companies to be pretty “dismal,” and more recent experience offers little in the way of additional comfort. Building new businesses from within is even tougher, and failure just as prevalent, as recent books such as The Growth Gamble by Andrew Campbell and Robert Park and Beyond the Core by Chris Zook conclude.

Yet, the challenge of how to build successful new growth businesses within the established firm is just what the authors of 10 Rules for Strategic Innovators take on, and it is one that they have few illusions about. Their insights come from four years of intensive research into the innovative efforts of companies like Analog Devices, Cisco, Corning, Hasbro, New York Times, Nucor, Stora Enso, Thomson and Unilever that span a range of industries and product categories. Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth, while Chris Trimble is an adjunct associate professor there and a senior fellow at Katzenbach Partners, LLC. Together they direct the William F. Achtmeyer Center for Global Leadership.

The authors set out to “learn how to design an organization that could build a breakthrough business while maintaining excellence in its existing one,” and recognize that this is an endeavor “fraught with contradictions.” Creativity and idea generation are not their central focus. Other authors, such as Robert Sutton in Weird Ideas that Work, Andrew Hargadon in How Breakthroughs Happen and Henry Chesbrough in Open Innovation, have already examined the brainstorming-for-breakthrough-ideas part of the growth puzzle from a number of different angles. For their part, Govindarajan and Trimble are primarily concerned with the more confounding two-step challenge of moving from creativity to execution and then to learning from the marketplace. In their words, strategic innovation typically proceeds by means of the strategic experiments needed to “test the viability of unproven business models,” and the authors go in search of the “organizational code that enables a company to excel at turning breakthrough ideas into breakthrough growth.” Many of the companies featured in their research, including Corning, the New York Times, Hasbro and Analog Devices, came very close to fumbling this transition.

The main lesson drawn from such examples is that companies hoping to improve their capacities to turn breakthrough ideas into breakthrough growth need to be able to overcome three main organizational challenges – “a forgetting challenge, a borrowing challenge and a learning challenge.” The book is organized primarily around a detailed examination of all three and how these challenges affect the new and core business units. The authors apply the labels “NewCo” to the startup and “CoreCo” to the established business model.

According to Govindarajan and Trimble, to make the transition to breakthrough execution NewCo must first address the need to “forget” – to distinguish itself in organizational terms from CoreCo’s business definition (customers, value attributes, business processes), key competencies and appropriate performance metrics. All four major elements of NewCo’s organizational code, structure, systems, staff and culture, typically need to differ from those of the core business. However, the gravitational pull of CoreCo’s organizational code is not to be underestimated.

Corning Microarray Technologies: failing to “forget”

Take the case of Corning’s breakthrough business CMT (Corning Microarray Technologies) in its Life Sciences division. By the mid-to-late 1990s, intensive research into the human genome had generated huge demand for laboratory technologies to facilitate the simultaneous testing of a large number of DNA micro-samples. Corning, with expertise in coatings, liquid flow and glass manufacturing at the microscopic level, seemed well positioned to become a leading player in this new area. The authors describe how, in setting up the new business and making the crucial organizational choices for CMT, Corning senior executives initially ended up strongly replicating the organizational code of the core business. In doing this they almost ruined CMT’s chance of success before they saw their mistake and got the project back on track. One of their biggest mistakes was the failure to organize CMT around the basic features of its new business model, which differed sharply from those of the core business. For example, most of Corning’s existing businesses sold to industrial manufacturers, whereas CMT’s customers were senior laboratory administrators, and the attributes that they valued were different – with more emphasis on cost and convenience, and less on exacting quality standards. CMT also needed to be focused on different key competences – such as, a greater level of expertise, both technical and managerial, in the life science area than the rest of Corning. And the startup needed different performance expectations than Corning. The core business’s traditional emphasis on target-setting and accountability were not appropriate to CMT’s stage of development and did not provide the early latitude it needed to experiment and learn its way towards a viable business model.

It is tempting to conclude from all of this that the “forgetting challenge” might best be addressed by setting up NewCo as a totally independent business unit. However, that would be to ignore the second major challenge that Govindarajan and Trimble have identified – the “borrowing challenge.” Privileged access to the complimentary assets and competencies of the core business is what gives a NewCo its major advantage over an independent start-up. The key here is to focus on just a few of the most strategically significant linkages and to select them with care.

New York Times Digital: balancing “forgetting” and “borrowing”

When it first set up its NYTD (New York Times Digital) venture, the Times made the same mistake as Corning, keeping the new business too closely integrated with the core operation. This constrained NYTD to being little more than an online newspaper, far from ready to fully exploit the opportunities presented by a totally new medium. After the Times corrected this error, an “explosion in creativity” followed. In giving NYTD more independence, however, the company went to the opposite extreme and cut it off from access to the most important complimentary assets of the core business, the newspaper’s “branded content” and its existing base of advertisers. Not until a better balance was established between the needs to “forget” and to “borrow” was the new business primed to grow to its full potential.

The “learning challenge”

The final challenge the authors highlight is learning of a particular kind. Strategic experiments, by their nature, involve many critical unknowns at the outset. The “learning challenge” they identify is to resolve these unknowns quickly. Early predictions of business outcomes in any such experiments are likely to be wide of the mark, and need to be viewed more as theories to be tested and revised in the light of experience rather than performance targets in the more conventional sense. The quicker a company can learn to improve its predictions, the sooner it will zone in on a workable business model and pre-empt the competition. The best way to do this, the authors argue, is to keep the initial measures of outcome streamlined and speed up the planning-feedback cycle.

The Hasbro case

Govindarajan and Trimble see the learning challenge as the most difficult, and the company they use for illustration ultimately failed to master it. In 1995, Hasbro, with such iconic products as Scrabble and Monopoly in its portfolio, decided to set up a new venture to both help mitigate the threat posed to its core business by masters of technology such as Sony and Nintendo and to seek new opportunities for growth. Hasbro Interactive was established with its own distinct organizational code and limited, carefully selected, links to the core business. In theory these would enable the new unit to meet the “forgetting” and “borrowing” challenges successfully. The “learning challenge” is where Hasbro Interactive came unstuck. Buoyed up by early success, based mainly on converting existing products to an interactive format, the new venture then made two significant blunders when it eventually faced the need for real strategic innovation to bring its growth to the next level. By then, its charismatic leader had become fixated on the goal of reaching $1 billion in revenues, a target that took on a life of its own, impervious to the light of experience. The authors believe that he also failed to take planning seriously, adapting himself merely to the form and ritual of Hasbro’s annual planning cycle, with little effort to establish a more appropriate predict-plan-learn cycle for the new business that would have helped speed up the resolution of the critical unknowns. In the end, Hasbro Interactive fell far short of its $1 billion target and was sold in late 2000 “at a disappointing price.”

Overall, the issue of converting breakthrough ideas into long-term growth that Govindarajan and Trimble address remains a formidable one, and the insights that they offer here will be of interest to the many corporate leaders who continue to struggle with this intractable issue. The primary focus of the authors is on execution, and their concern throughout is not only with identifying the three most important challenges facing strategic innovators – forgetting, borrowing and learning – but also with developing guidelines on how to meet them.

Govindarajan and Trimble end by offering a useful tool to address the particular strategy formulation needs of new ventures – a tool they call “theory-focused planning,” to reflect their emphasis that predictions in strategic innovation should be seen as theories to be tested, rather than targets for performance – and by drawing the insights offered in their book into “ten rules for strategy innovators” as a useful summary for the busy executive.

Brian LeavyAIB Professor of Strategic Management at Dublin City University Business School (brian.leavy@dcu.ie), is the author of three books – Strategy and Leadership, co-written with David Wilson; Strategy and General Management, co-edited with James S. Walsh; and Key Processes in Strategy.