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.
Consider the case of Corning Microarray Technologies (CMT), a biotechnology venture launched by Corning in 1998. At the time, biotechnology researchers had an aggressive agenda to conduct millions of experiments on DNA-a brute force approach to unlocking the secrets of the genetic code. Automation was attractive. If machines could multiply the rate of experimentation and computers could sift through the results, the time to new revolutions in medical therapies could be reduced.
Sales of laboratory equipment were booming. The piece of experimental apparatus that presented a business opportunity to Corning was the DNA microarray-nothing more than a rectangular glass slide, a few inches long, with hundreds of microscopic samples of DNA adhered to it. With micro-arrays plus several other pieces of equipment, researchers could conduct hundreds of experiments at once. But there was no microarray on the market that fully pleased researchers, and many chose to “print” their own microarrays-a great waste of time.
The microarray opportunity attracted Corning because it had world-class expertise in the manufacture of specialty glass. There was a tremendous opportunity to borrow. But what did Corning need to forget?
Reinforcing the Past
The microarray business, however, was different. CMT needed to sell to senior laboratory administrators, an unfamiliar customer. It needed to place greatest emphasis on cost and convenience, not the highest possible quality. It operated in an unfamiliar, emerging scientific field in which patent protection was highly unlikely. It required expertise in the advanced life sciences as much as expertise in glass manufacturing. And, it was much less predictable than the other businesses in Corning’s portfolio.
Despite these well-understood differences, Corning chose to follow the organizational model that had proven effective in its other lines of business. In part, it did so out of convenience- organizational change creates headaches. In part, it did so because managers did not see just how powerful organizational memory can be.
Mirroring the other business units, CMT included its own manufacturing, sales and marketing functions, and linked up with Corning’s centralized R&D groups. CMT also adopted Corning’s detailed and disciplined five-stage innovation process to move from idea to market-along with milestones that were rooted in decades of experience.
There was one variation from Corning norms. Corning departed from its practice of promoting primarily from within by filling a number of technical positions with outside experts in advanced life sciences.
Although CMT achieved some early successes, it soon faced several unanticipated difficulties. For example, CMT reinforced its past by relying too heavily on its existing experts in the physical sciences, not enough on its newly hired experts in the advanced life sciences. The latter disagreed, rightly in retrospect, with decisions to delay product launches to achieve quality standards that were higher than necessary, but they did not have much influence.
Also, CMT adopted Corning’s long-successful routines for rapidly improving new manufacturing processes. But these failed, confounded by peculiarities of DNA fluid and inconsistencies among suppliers of DNA. One day the process would appear to be working fine, but the next day a mysterious new problem would arise.
In addition, following a deeply ingrained discipline of accountability, CMT adhered to a speculative plan for too long. After a few delays, CMT started missing deadlines.
CMT’s leaders felt enormous pressure, because falling short of plan was seen as failing. CMT’s losses put a drag on the profitability of the business unit to which it reported, further heightening tensions. Rather than reexamine fundamental choices, CMT leaders viewed their struggles as minor setbacks, and they simply urged their team to work harder to get back to plan.
As CMT fell further behind plan, the cohesiveness of the leadership team faltered. Demonstrating a common pattern associated with forgetting struggles, CMT began resolving conflicts by reverting to what had worked in the past. Eventually, CMT reached a crisis point, and the senior management team considered major changes.
Everyone involved in CMT understood the differences between Corning’s existing businesses and the new business. But forgetting is not a matter of intellectual recognition alone. Organizations have memories that are more powerful than individuals.
Collective instincts. High-growthpotential but highly uncertain ventures place managers under a great deal of stress, and present a far more ambiguous environment than most managers in established corporations are accustomed to. Under conditions of stress and ambiguity, all people naturally gravitate toward the familiar-that is, rely on instinct- without even being aware of it. When an entire management team shares the same experiences and the same success stories, instincts are reinforced. CMT’s management team came of age within Corning.
Organizations have memories that are more powerful than individuals.
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.
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.
THE AUTHORS, based on their research, concluded that success in forgetting is more likely when companies make the following choices:
- Hire Outsiders. Only outsiders placed in influential positions effectively question orthodoxy every day.
- Have NewCo report to an unconventionally high point. NewCo’s supervisors must be able to think long term. They must not be fully absorbed in CoreCo’s daily business imperatives.
- Rebuild relationships. Working relationships between major functions such as marketing and manufacturing must be reconsidered and rebuilt from scratch.
- Build a new dashboard. CoreCo metrics likely have little to do with NewCo’s performance.
- Focus on learning. Projections for new businesses are just guesses. Evaluate NewCo’s leader based on his/her quality of decision making and speed of learning.
- Create a new culture. Examine deeply held beliefs about what makes CoreCo a success, and recognize that NewCo may need a culture grounded in entirely different success factors.
Common Mistakes When Setting Up a New Company
—— Design: Similar to “CoreCo,” and closely integrated.
—— Problem: “NewCo” can borrow, but cannot forget. NewCo inevitably tries to apply CoreCo’s success formula in an environment where it is unlikely to work.
—— Design: NewCo is distinct from CoreCo, and isolated from it.
—— Problem: NewCo can forget, but cannot borrow. It is unable to benefit from CoreCo’s valuable assets.
—— Design: Distinct from CoreCo, and linked.
—— Problem: Senior management team not engaged in ensuring link is healthy. Cooperation disintegrates. Effort to borrow fails.
—— Design: NewCo distinct and linked in one or two high-leverage areas. Senior executives engaged in keeping links healthy and productive.
—— Result: NewCo forgets and borrows.