Organizational DNA for sustainable innovation• New business may not survive the established business practices• Established businesses are typically large sized, expected revenue and

profit benchmarks are higher, has already well-honed capabilities, performance evaluation of managers is tied to that size

• The small new venture can not meet those expectations leading to either providing too much resources or pulling the plug, if does not show comparable results. Careers of managers have greater risk

• One conclusion is that they can not co-exist• Therefore separation of two businesses is seen as a solution• New York Time Digital this separation theory to be wrong • The new venture has to explore new ideas and old one should expliot the

old order• It has to forget some lessons and borrow some resources from the

established business• Changes in technology, increased pace of globalization and chnaging

customer preferences , makes it and imperative to explore new opportunities, develop entrepreneurship to create new innovations and design new business models

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Strategic innovations

• Identification of new potential customers- Canon copiers

• Reconceptualization of delivered value- IBM Complete solution

• Design of new value chains, end-to-end- Dell’s direct distribution

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Strategic innovations require experimentation : 10 characteristics

• Departure from base business assumptions and business definition-forgetting some

• They require support of some assets and capabilities from base business- borrowing some

• New businesses are not product extensions, incremental technology, or geographic expansions- they are new businesses

• The address new and poorly defined industries and/ or customers due to non-linear shifts in industry

• They are pioneers, who have no profit making formula• They have very high growth potential like 10x over 3-5 years• Require at least some new knowledge and capabilities• General managers face uncertainties on multiple fronts : functions,

customers, value chains, technologies• May take several unprofitable quarters and too expensive to repeat• Success/ failure unknown for many periods, with poor and ambiguous

feedback

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Organizational DNA• Structure: formal reporting strcuture, decision authority, information. Task flows• Staff: Leadership traits, staffing policies, competencies, promotions, career paths• Systems: Planning, budgeting, controls, evaluation criteria• Culture: valued behavior, norms, business assumptions, biases

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Structure

Systems

StaffCulture

Dual Purpose Organizations

• They are different sub-units with different DNA but within same Corp• Different GMs with different demands• Report to common Executive sponsor- but new interaction between GMs• They are different but not isolated from each other- have links to borrow from

CoreCO

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Sales

Marketing

Manufacturing

R&D

R&D

Manufacturing

Marketing

Sales

Executive sponsor

NewCo GMCoreCo GM

Design for Innovation Initiatives

Spin-offsOr

Pure Financial InvestmentsIBM

Strategic ExperimentsNYTD

Non -Corporate Venture Innovation withinExisting business model

Cisco

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Forg

etting

High

Medium

Low

BorrowingLow Medium High

Forgetting• Replication of CoreCo supports only borrowing- wrong context and wrong

policies• Isolation of NewCo results in lack of support from main business and to

avoid tension between the two- thus loose advantage over independent start-ups by entrepreneurs- advantage of brands, skills, customer relations, supplier networks, manufacturing

• NewCo and CoreCo should be distinct but linked- they should be linked from day one, not later as integration will become more difficult

• NewCo should have its distinct business definition with its own customers, different value proposition, different business model to deliver value, and systems

• Leave behind some core competencies of the CoreCo- in case of NYTD borrows newspaper content, while NYT creates it. And core competence build around IT and software to join multimedia content . Would need new hires, new powerbase and new culture

• Forget about predictability of CoreCo.- vague segments, vague value proposition and process of value delivery is untested- Would advertisement business come to NYTD, What advertisers want or how the technology would evolve, was unknown

• Structure, systems, staff, culture should evolve in respond to market needs

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• Hire outsiders, and create a mix of both at staff level under the insider Executive sponsor

• Insiders would carry orthodoxy of CoreCo. Outsiders can challenge this orthodoxy

• Ne competencies can by accumulated efficiently by outsiders , even though some insiders may be present

• After being run rather unsuccessfully by insiders from 1995, NYTD did not progress much slower until outsiders were brought in large numbers with multimedia skills in 1999 with strong authority, creativity followed. NYTD is in the forefront of its industry in 2004

• Pandesic, JV of Intel and SAP did not succeed with the parents model, instead adopted e-commerce business to ecommerce start-ups as distributors, but CoreCo high growth expectations resulted into its demise mainly because lot of insiders moved in with their orthodoxy

• NewCo should report to a higher authority at least one level above to avoid resource allocation trap- a new business of services was handed over to Marketing division at Polaroid led to its demise .

• NewCo should create its own functional departments- NYTD created ‘product managers’ , requiring cross-functional teams , inconsistent with CoreCo

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• Evaluate NewCo performance based on measures that match its business model, especially profitability measures- should be based on incremental cash flows

• Shift the basis of accountability for NewCo executives from performance against predictions to rigor and speed in testing the assumptions that the predictions are based upon- targets can hasten expectations and can lead to changes in leadership , or will become defensively- no discovery can happen as a consequence- Hasbro interactive ‘s early success led to targets of $1 B but fell short of $200 m, and it chose to exit business

• It must develop a unique culture starting with a balnk slate- the emphasis should be on learning and experimentation rather than efficiency- NYTD later encouraged experimentation, open sharing of information, with open physical work spaces, about 10 blocks way from NYT.

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Borrowing: Creating Links• Select the link between the two businesses• Establish favorable conditions for borrowing• Manage ongoing interactions between the two• The criteria is to borrow link for competitive advantage, nor marginal cost

reductions• The links could include some expertise, manufacturing system, brand, IT

integration, preferential supply of inputs or access to networks• Links should be avoided where conflict can arise , e.g. cannibalize CoreCo

sales. Links like HR, Purchasing or IT may seem convenient but they are unlikely to be critical to NewCo success.

• In fact third part linkages may be better than CoreCo linkages to avoid excessive exposure the CoreCo DNA

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Borrowing: Establishing Favorable conditions• Reinforce a common set of values that inspire both NewCo and CoreCo:

e.g. embracing diversity in both people and organization, the importance of cooperating across organizations, the value of team work, necessity of evaluating the health of overall organization both from short and long term perspectives

• Reconsider incentives built into compensation and promotion policies. Short-term efficiency driven CoreCo performance can be disruptive for the new business, combine long-term outcomes should be rewarded.

• When CoreCo supports NewCo, ensure that CoreCo income statement is properly compensated through fair transfer pricing system. Analysis of business decisions within NewCo must rely primarily on risk-return judgments supported by incremental cash flow analyses

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Borrowing: Managing ongoing inetractions• The Executive Sponsor should be from top management team, and has

experience in both kind of businesses.• Tensions can arise on compensation, resource allocation, promotions

between two businesses , particularly during downturn. The Core may see NewCo being handled politely and CoreCo handled more severely. NewCo may feel marginalized, small and unprofitable guzzling resources

• Ensure that NewCo is sufficiently empowered in its interactions with CoreCo. ES should coach, adjudicate when need arise

• Carefully manage expectations of NewCo’s performance. ES should balance the possibility of a win with reasonable degree of uncertainty

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Six Borrowing Strategies• Physical assets like manufacturing capacity, can lead to cost savings advantage with

reduced capital requirements- ADI and MEMS capacity sharing- short term sacrifices were made

• Brands: Brands are extra-ordinarily costly, risky and time consuming, and thus can confer great advantage to the Corporate venture. Newcomers would take many years of costs and time to build brands. NewCo may be allowed to build a sub-brand to avoid conflict and yet enjoy brand benefits. NYTD borrowed content and brand from NYT, with NYTD providing value added to NYT content

• Expertise: transfer of knowledge and expertise from CoreCo to NewCo can confer a tremendous CA over independent start-ups who need to build competencies from scratch . Transfer knowledge through KM systems, personal interactions, transfer of people who know both businesses so that knowledge can flow both ways. Corning for its CMT products for DNA research put together physical and biological sciences together both from outsiders and insiders

• Process outputs: NewCo can buy output of CoreCo without exposing it to the market with low transfer price. NYTD paid royalties to NYT

• Process coordination: both can share processes, startups may have no Such choice- NYT changed co-selling advertisements for NYTD and NTY

• Joint process development: sometimes both can work on joint new product or process. NYT and NYTD created classified advertisement on both media , ‘Boston Works’ and created new product ‘ DealBook’ which helped finance clients about these deals

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Final word• The CV can be better of in creativity , innovation

without being constrained by the core business, but may not have much advantage over rivals

• This advantage can come via core business which is established and has good resources , assets, knowledge and core competencies , some which can be exploited during experiment implementation

• However, they may also generate tensions of all kind. This need for an experienced powerful Executive Sponsor to help both businesses to benefit from each other. The links must be picked up based on what CA these links can provide to the fledgling business and eventfully to the whole corporation

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