a dilemma that every CEO faces at some stage of his company's
growth: How to maintain excellence in existing businesses while
building those that will drive growth tomorrow. The obvious answer
to the paradox is to innovate-to think up ways in which this delicate
balance can be struck. But the problem for managers is that while
there are dozens of books available on how to innovate, there
are few that tell you how to go from idea to execution. In 10
Rules for Strategic Innovators, Vijay Govindarajan, the Earl C.
Daum 1924 professor of international business at the Tuck School
of Business at Dartmouth, and his colleague and co-author Chris
Trimble, do just that. Based on their study of innovative initiatives
at 10 large corporations, the authors offer practical guidance
for strategic innovators. Slated for launch in the us in mid-December,
followed by India early next year, the book has already catapulted
Govindarajan to the top 30 of the world's 50 most influential
management thinkers as ranked by Suntop Media, a UK-based training
and consulting firm. Here's an exclusive excerpt from the book's
Why Strategic Innovators Need a different
approach to execution
Here is a sequence of events that is familiar
to us from our research and may be familiar to you as well: a
CEO announces that the strategic imperative for next year is breakthrough
growth. Incremental growth from incremental initiatives is no
longer enough. To continue to thrive, the company must do new
things. It must break all the rules. It must redefine the industry...The
company establishes a committee to review preliminary ideas for
new growth opportunities. Dozens are submitted, and a handful
are selected for further research. Business plans are written.
One plan in particular looks most promising.
The CEO examines the chosen project from
every angle. Many reasonable proposals are competing for the firm's
capital, but none has the chance to reinvigorate growth like this
one. The CEO hires an outside expert and receives confirmation
that the high-growth-potential business looks like a winner. Now
it's a done deal. The CEO commits to the plan, assigns the best
available general manager to lead the strategic experiment, and
asks a member of the senior corporate staff to shepherd it. Then
the CEO makes a big mistake. The CEO moves on to other matters.
The new business, after all, is only a tiny fraction of a multibillion-dollar
To Fail At Strategic Innovation
Asked to think about the challenges of innovation,
most managers think first of the creative, brilliant, and inspired
soul who sees the future in a different way-a rebel on a mission.
This romance is deeply embedded in our business culture. The CEO's
mistake lies in buying in to the romance. The error is in assuming
that the company has already hurdled the most difficult barriers
to innovation: finding a great idea and a great leader. In fact,
the biggest challenges are still to come. Our research has shown
that strategic experiments face their stiffest resistance once
they are showing signs of success, consuming more resources, and
clashing with the organisation at multiple levels.
Ideas get you only so far. Consider companies
that have struggled when their competitors have redefined the
industry. Why did Xerox and Sears continue to struggle even after
the genius behind Canon's personal copiers and Wal-Mart's new
everyday-low-price discount retailing format was apparent to everyone;
It's because the leaders of any groundbreaking new business must
not only identify the big idea but also (1) attract funding, (2)
learn quickly from success and failure, (3) rally people around
a fuzzy view of the future, (4) reorganise to leverage the lessons
learned, and (5) manage expectations of performance amid chaos.
Tendencies within established organisations
present additional barriers. In addition to the five challenges
just mentioned, the leader must also (1) protect funding for NewCo
regardless of the performance of CoreCo, (2) establish new organisational
norms and policies that make sense for NewCo, (3) overcome tensions
between NewCo and CoreCo when those norms and policies conflict,
(4) effect changes in the existing power structure required to
support NewCo, (5) engage CoreCo employees in supporting NewCo,
and (6) recruit talented CoreCo managers to work within NewCo.
The degree of managerial difficulty is very high.
Simply put, strategic experiments are likely
to fail if the company relies solely on the heroism of a hypertalented
individual, even one who has a great idea, is backed by a gifted
senior executive champion, and faithfully follows 10 commandments
of intrapreneurship. Instead, companies need to build organisations
based on the 10 rules we develop in this book.
| INTERVIEW: VIJAY GOVINDARAJAN
"Ideation Is Not An Issue, Execution
between his consulting assignments and book promotion, Vijay
Govindarajan, or VG, took time off to speak over the
phone with BT's .
There is a lot of management literature already available
on innovation. How is your book different?
There are two big differences. The books that you already
have on innovation are more about continuous improvement,
and not breakthrough innovation. Even the latter sort tell
you how to come up with breakthrough innovations, but they
don't tell you how to go from innovation to execution. Our
book is about how to execute on strategic ideas. Execution
is critical because breakthroughs take place in entrepreneurial
space. How to take fuzzy business models-which is what all
strategic ideas are in the beginning-and turn them into
growth engines. I am not saying that other kinds of innovation
are not important. It's just that strategic innovation is
more important for a company from a long-term perspective.
What are the typical problems large companies run into
when managing strategic innovation?
Large companies typically have a strong focus on accountability.
Their internal performance system measures and rewards continuing
businesses, whereas strategic innovation is about managing
uncertainty. Results are rarely immediate. The second problem
is the silo mentality. The departments and executives have
a strong sense of individuality, there is no collaboration.
But to successfully execute on strategic ideas, the new
division (called NewCo in the book) must borrow resources
from the parent (called CoreCo). This is what we call the
borrowing challenge-gaining access to concrete value, but
forgetting (losing) assumptions and biases.
Innovation is often romanticised as skunkworks.
To me that is bologna. We need to move away from creativity
to execution. Ideation is not an issue, execution is.
How come your book doesn't look at companies like Nokia
or Apple that have literally reinvented themselves?
In the case of Nokia, there was no threat of cannibalisation
it faced when it went from paper to telecommunication. Similar
is the case with Apple. Its iPod hasn't made obsolete its
PCs. But consider the risk that the New York Times (one
of the case studies in the book) ran when it decided to
set up an Internet division: Putting the newspaper online
could have killed the offline product. And that's what the
challenge for most large corporations is: How to create
new businesses while not losing focus on the existing ones.
Finally, why 10 rules, not 9 or 11?
10 is a nice round number.
Creativity And Execution
Many companies have attempted to alter their
organisational codes to accelerate innovation. But in doing so,
they have focussed mostly on creativity-generating ideas-and little
on execution-converting ideas to results. We asked hundreds of
executives in Fortune 500 companies to rate their companies' innovation
skills on a scale of 1 to 10, where 1 represents minimal skill
and 10 represents mastery. Survey participants overwhelmingly
believe that their companies are far better at generating good
ideas (giving this skill a score of at least 5 or 6) than they
are at determining what to do with them (giving scores as low
as 1 or 2).
We think of an organisation's capacity for
innovation as the product of creativity and execution. We say
"product" and not "sum," because if either
creativity or execution is zero, then capacity for innovation
is also zero. Some quick math: which is more effective-lifting
your creativity score from 6 to 7, or doubling your execution
score from 1 to 2? Nonetheless, most companies, when hoping to
improve innovation, focus on generating ideas. Managers obsess
over the front end of the innovation process. But the real leverage
is in the back end-in execution.
|Newco can compete against start-ups only
by borrowing coreco's assets
The Mystery Of The Middle
If ideas are only a beginning and if organisations
are more powerful than people, then what is the organisational
code that enables a company to excel at turning breakthrough ideas
into breakthrough growth?
Companies that focus on creativity often
adopt an anticode: they break all the rules in the belief that
creative organisations have little in common with disciplined,
efficient ones. There is some validity to this notion.
To be efficient (code A)
- You stick to your knitting.
- You exploit what you know.
- You meet current customer needs.
- You plan.
- You demand accountability.
- You impose process and structure.
To be creative (code B)
- You think outside the box.
- You explore what you don't know.
- You anticipate future customer needs.
- You let things emerge.
- You allow freedom and flexibility.
- You avoid process and encourage unstructured
Code A encourages discipline. Code B encourages
creativity. In most companies, code A is mainstream, and code
B is counterculture. In our observations of breakthrough new businesses,
clashes between the two were pervasive. Inevitably, CoreCo believes
that code A delivers results and that NewCo must soon deliver
results, too. NewCo, on the other hand, sees that it needed code
B to get started and wants to stick with it. Both sides are passionate.
The debate dominates meetings and defines the agenda.
Such struggles are unproductive. To see why,
consider that every innovation story has a beginning, a middle,
and an end. Great companies are masters of efficiency-code A.
That helps, but efficiency is not needed until the end of the
innovation process. Most companies also understand that creativity
is in many ways the opposite of efficiency. That is also good,
but creativity is the dominant priority only at the beginning
of the innovation process.
In the middle, most companies are lost. They
do not understand the code for turning breakthrough ideas into
breakthrough growth. Because they are lost, they gnash their teeth
over the stark contrasts of the two organisational codes that
they understand: A and B, code and anticode. But during NewCo's
awkward adolescence, neither creativity nor efficiency is the
dominant priority. The need for creativity declines after you
have a business plan, and focussing on efficiency is premature
until the business is proven and stable.
So the question is, what is the nature of
the journey from business plan to profitability? From creativity
to efficiency? What kind of organisation can excel in the middle
of the innovation process? Let's call it code X. We dedicate the
rest of this book to revealing the 10 rules of code X that will
help you turn mere concepts into breakthrough growth. First, recognise
that code X is not simply a mix of A and B; code A may be black,
and code B white, but code X is not gray.
|In creating Newco, CEOs must be prepared
to make unpopular choices
Code X must address the three unique challenges
that arise from the unnatural coexistence of a new and a mature
business within the same corporation: a forgetting challenge,
a borrowing challenge, and a learning challenge. NewCo must forget
some of what made CoreCo successful. It must borrow some of CoreCo's
assets-the greatest advantage NewCo has over independent start-ups.
And it must be prepared to learn how to succeed in an uncertain
The Forgetting Challenge
Why must NewCo forget? Executives usually
repeat actions that they believe have produced success. If success
continues, then not only individual executives but also entire
organisations shift from consciously repeating these actions to
unconsciously accepting them as correct. Even when organisations
face failure, it is a struggle for them to reassess these deeply
entrenched assumptions. They become orthodoxy.
NewCo must forget three things. First, it
must forget CoreCo's business definition. Strategy itself can
become an orthodoxy, as answers to the basic questions that define
a business-Who are our customers? What value do we provide? How
do we deliver that value?-become second nature. NewCo must have
the freedom to answer these questions differently and even to
pursue options that may cannibalise CoreCo revenues. Second, NewCo
must recognise that a different business model requires different
competencies. CoreCo's areas of expertise will not matter as much
to NewCo as will the new competencies it must develop. Third,
NewCo must forget CoreCo's focus on exploitation of a proven business
model and shift to exploration of new possibilities.
For example, when GM created OnStar-its integrated
automobile information, safety, and communications system-it had
to forget all three. It had to adapt to a new business model;
the communications services market demanded a much different value
proposition and a much shorter product development process than
did automaking. It had to build a new competency in information
technology. And it had to systematically identify and eliminate
unknowns rather than exploit a proven business.
The Borrowing Challenge
Consider the advantages that independent
start-ups have over existing corporations. They can offer the
possibility of tremendous wealth to the management team. They
can move quickly, unhindered by the bureaucratic decision-making
processes that sometimes debilitate large corporations. They also
benefit from the advice of professional investors who understand
the needs of new ventures. Further, they have no entrenched mindsets
to overcome. Independent start-ups have nothing to forget. NewCo
can compete effectively against start-ups only by borrowing CoreCo's
assets: existing customer relationships, distribution channels,
supply networks, brands, credibility, manufacturing capacity...resources
that start-up ventures can only dream of.
In every strategic experiment we studied,
part of the justification for making a risky investment was that
there was some unique asset or capability that CoreCo could offer
NewCo. Corning could help Corning Microarray Technologies (CMT)
by sharing its existing facilities and its expertise in manufacturing
processes that required precise control of tiny quantities of
fluids. The New York Times Company offered New York Times Digital
(NYTD), its Internet division, a well-respected brand in addition
to the journalistic content it produced for the newspaper. Analog
Devices lent its expertise in semiconductor manufacturing methods
to its strategic experiment to commercialise a new technology
for automotive crash sensors. In each case, NewCo had little chance
if it failed to borrow.
Note that there is an important distinction
between forgetting and borrowing. NewCo must forget assumptions,
mindsets, and biases. NewCo must borrow assets. That is, forgetting
is about what goes on in your head. Borrowing is gaining access
to resources with concrete value.
The Learning Challenge
In addition to forgetting and borrowing,
NewCo must learn. The notion of organisational learning is a broad
one, but in the context of strategic innovation its meaning is
specific. One learning curve matters more than any other for NewCo:
improvement in its predictions of its business performance.
In learning to predict performance, NewCo
proves or disproves theories about what can work. Initial theories
are usually wrong. For example, Corning anticipated that mastering
the steps in specialty glass manufacturing would be the most challenging
part of manufacturing dna microarrays, but it found much bigger
challenges elsewhere. New York Times Digital initially expected
to build a separate and independent newsroom for the new online
medium but eventually found it unnecessary. Analog Devices anticipated
that its new semiconductor technology would lead to the development
of new markets in addition to automotive crash sensors, but only
the automotive market proved economically viable. The faster these
kinds of uncertainties are resolved, the sooner NewCo can put
itself on a clear path to success.
Note that a failure to forget cripples the
learning effort. If NewCo cannot let go of CoreCo's success formula,
it cannot discover its own.
Organisational DNA And The Three Challenges
In analysing each strategic experiment that
we researched, we focussed on the ability of NewCo to overcome
the forgetting, borrowing, and learning challenges. Ultimate success
for NewCo also depends on several other factors, but most of them
are not controllable. For example, because strategy formulation
in any nascent market involves a great deal of guesswork, luck
plays a role. Among the controllable factors, however, we believe
that organisational DNA is by far the most important.
When initiating a strategic experiment, executives
must make difficult choices to give NewCo the DNA it needs. Because
of everything that must be forgotten, NewCo's DNA must be very
different from CoreCo's. For example, NewCo may need external
hires to build new areas of expertise, whereas CoreCo emphasises
internal promotion. NewCo may use a flat organisational structure
and encourage unstructured interaction, whereas CoreCo prefers
more hierarchy and formal reporting. NewCo may emphasise experimenting
and learning, while CoreCo demands accountability to plans. NewCo
may encourage risk taking, whereas CoreCo seeks a more conservative
But giving NewCo a unique DNA can lead to
resistance. Corporate executives who have played by the rules
to work their way up a career ladder in CoreCo will resent changes
in routines for such things as establishing organisational hierarchy,
assigning staff, granting promotions, allocating resources, providing
incentive compensation, or evaluating business performance. Therefore,
in creating NewCo, CEOs must be prepared to make unpopular choices,
and they must avoid making the choices that are easiest and most
CEOs who aren't willing to make difficult
choices will simply replicate CoreCo's DNA for NewCo. This makes
it hard for NewCo to surmount the forgetting challenge, because
it remains immersed in CoreCo's assumptions, values, and decision
biases. It also makes it difficult to learn, because CoreCo's
culture and management systems are designed to exploit a proven
business and not to experiment with a new one. When NewCo's DNA
is the same as CoreCo's, NewCo is effective only at borrowing.
It overcomes only one of the three challenges.
Other CEOs may be willing to create a unique
DNA for NewCo but become preoccupied with the conflicts and tensions
that result at points of interaction between NewCo and CoreCo.
For example, CoreCo understands existing customers, but NewCo
must be attentive to emerging customers. CoreCo is focussed on
efficiency, often through rigorous definition of processes, while
NewCo must remain flexible and emphasise learning. And CoreCo
is loath to prioritise the long-term needs of tiny NewCo over
the immediate needs of its own, much bigger business. Not surprisingly,
many of the executives we spoke to cited points of interaction
between NewCo and CoreCo as critical trouble spots.
These conflicts lead to an urge to isolate
NewCo from CoreCo, a step that some researchers have suggested.
But we maintain that this is an overreaction to legitimate concerns.
An isolated NewCo may succeed at forgetting and learning but will
not be able to borrow from CoreCo, because borrowing requires
interaction. As mentioned earlier, an ability to borrow existing
assets is the most important advantage that corporations have
over independent start-ups.
Neither replication nor isolation works.
Replication facilitates borrowing, but not forgetting or learning.
Isolation may allow forgetting and learning, but not borrowing.
Note that for other kinds of innovation initiatives
(and not strategic experiments), replication or isolation can
work. For example, a new product launch that does not alter the
business model may succeed through replication; it need not forget.
An investment in a new business that is unrelated to the core
business may succeed through isolation; it need not borrow. But
a strategic experiment must both forget and borrow.
Indeed, strategic innovation demands a design
that overcomes all three challenges. NewCo can forget only by
departing from CoreCo's organisational norms. NewCo must have
its own DNA. Forgetting, however, is about changing behavior.
It is easy for NewCo to talk like NewCo but act like CoreCo. As
you will see, there are powerful sources of organisational memory
at work. For NewCo to borrow, CEOs must establish a limited number
of links between CoreCo and NewCo. They must then foster favorable
conditions for cooperation between the two entities and carefully
monitor their interactions.
Finally, for NewCo to learn, it needs unconventional
planning systems tailored to the dynamic environment faced by
strategic experiments. (It) must value learning over accountability,
and it must ensure that disparities between predictions and outcomes
are analysed quickly and dispassionately. If NewCo struggles to
forget, it will inevitably struggle to learn. It cannot find its
own success formula if it remains bound to CoreCo's.
As part of its Knowledge Management Forum,
Business Today is bringing Vijay Govindarajan to India
for a two-city seminar on "Innnovative Strategies for Creating
the Future: From Idea to Execution". The first seminar will
be held in Delhi on January 23, followed by Mumbai on January
25. For more details, email us at email@example.com.