How Forgetting Leads to Innovation

Those who most readily capture imaginations are entrepreneurs-innovators with a vision who create something from nothing. Large corporations, by contrast, are easily cast as the villains. They thwart aspiring entrepre­neurs in every possible way-by blocking distribution channels, by filing lawsuits, or even by giv­ing away something of similar value for free.

What prevents corporations from winning with offense? After all, chief executives of large organizations have an enormous advantage in the innovation game. Their organizations contain mammoth resources such as established brands, technical expertise and strong cus­tomer relationships, just to name a few. These are advan­tages independent entrepreneurs can only dream of. Yet large organizations often struggle to innovate.

Since 2000, we’ve studied best practices for manag­ing high-growth-potential new businesses within estab­lished organizations. We compiled detailed multi-year case companies, including Corning, The New York Times and Hasbro. In every case, leaders were well aware of the opportunity for the new company (“NewCo”) to leverage valuable resources from the core business (“CoreCo”).

Indeed, NewCo must be able to borrow, but borrow­ing alone is not sufficient. Equally important is a com­peting need for NewCo to forget. The new business unit must forget because NewCo is fundamentally different from CoreCo, either because it has a different customer base, a different value proposition, a different value chain, a grounding in a different set of core competen­cies, or all of the above. It also carries much greater lev­els of uncertainty.

These differences in business definition are easy to understand. Every executive we interviewed could ex­plain in great detail how NewCo’s business model was different from CoreCo’s. Nonetheless, to NewCo’s detri­ment, CoreCo’s behaviors often persisted. There were powerful forces at work.

Reporting structures. NewCo often reports to functional or gener­al managers within CoreCo. An alternative, having NewCo and CoreCo appear as peers on the orga­nizational chart, seems awkward, since NewCo may be only one-hun­dredth the size of CoreCo. But hav­ing NewCo report within CoreCo is worse than awkward. Doing so vests power in a leader that is dedi­cated to excellence in the existing business. It creates one more rein forcer of organizational memory. CMT reported directly to an estab­lished business unit.

Relationships between managers. Relationships inside organizations develop in ways that are consistent with what makes the organization successful. Move the same man­agers to the new business, and the relationships persist. Established patterns of interaction continue. For example, once a balance of power and authority between two individ­uals is agreed upon, even implicit­ly, it is very hard to change it. Once a pattern for dividing and conquer­ing tasks is established, it is not easy to change it. Once people become accustomed to calling on specific individuals for technical advice, they will likely continue to draw on that network, even when the busi­ness challenge changes. Corning needed to shake up CMT to encourage managers to build new relationships consistent with its new business.

Trusted Measures of Performance. Once there is a history of evaluating business performance based on set standards, it is difficult to change it. Doing so seems unfair and inconsis­tent. It seems to be conferring spe­cial treatment to the new kid on the block, NewCo, and can be resented by the senior team. But emphasiz­ing CoreCo’s performance measures within NewCo serves to reinforce CoreCo’s business model, easily leading to misperceptions and mis­steps. CMT leaders hoped to achieve standards of quality that were proven to be achievable for other products, but not when work­ing with DNA.

Planning systems. Large, estab­lished companies deliver consistent earnings to investors when they are disciplined about holding managers accountable to plan. Planning process­es are designed to create and reinforce this discipline, highlighting outcomes against predictions with the expecta­tion that shortfalls are due to manage­ment underperformance. This mind-set is damaging for NewCo, however, because NewCo needs a learning agenda. Plans should identify the most critical unknowns, and the methods for resolving them. By contrast, once CMT made a commitment, it pro­ceeded as though its plan was achiev­able as written, and redoubled efforts to execute when reevaluating funda­mental assumptions was called for instead.

Norms about status. Most organiza­tions naturally confer status upon cer­tain areas of expertise. At a consumer products company, it may be market­ing experts. At a commodities trading company, it may be financial experts. Such implicit social hierarchies are not easily disrupted. Without careful orchestration, norms of organizational status persist. NewCo may end up dominated by people with expertise that is valuable for CoreCo, but less so for NewCo. CMT’s management team was full of experts in the materials sci­ences; the advanced life sciences were underrepresented.

Redesigning CMT

All of these changes took many months, but the impact was remark­able. Because Corning appointed a single leader responsible for the entire business and had him report directly to the senior staff, the pressures and norms of the traditional core business were avoided. Because CMT hired external experts in biotechnology to influential positions within CMT, there were consistent voices establish­ing reasonable standards for quality. Because CMT was no longer tightly integrated with centralized R&D groups, it was freed from a structured product development process and made progress by following a more iterative path. Because the manage­ment team treated projections appro­priately -as though they were guesses, not as though they were a non-nego­tiable basis for judging performance- the team regularly questioned the fundamental assumptions underlying its business and learned quickly.