by Marshall Goldsmith
My good friend Dr. Vijay Govindarajan is a professor at Dartmouth’s Tuck School and a world authority on strategic innovation. He is also one of the best executive educators and business-school professors in the world. He and I recently spoke about innovation in older businesses. Edited excerpts of our conversation follow:
How prevalent is the trend to launch new businesses within older ones?
Today, for the first time since the dot-com bubble, we are seeing innovation rise to the No. 1 slot on CEOs’ agendas. Innovation is important whether you are in products or services, durables or consumables, high-tech manufacturing, or low-tech. I’ve received calls from companies launching entirely new businesses in industries as diverse as health care, banking, consumer products, and telecommunications.
Will large, established companies ever be able to compete with nimble startups at the innovation game?
They are currently better at thwarting nimble startups than they are at beating them at the innovation game. But they should be able to win by playing offense, not defense. Corporations have advantages that independent entrepreneurs can only dream of: assets like brands, customer relationships, expertise, manufacturing capacity, and more. These are things that independent entrepreneurs might spend years building from scratch. The trick for large companies is to lend new businesses these assets without stymieing them with irrelevant thinking.
What is the hardest part of executing innovation?
For a breakthrough idea to have a chance, there must be a careful approach to building the new business unit .The new business must be designed in such a way that they can forget, borrow, and learn. They are the three fundamentals. They must forget the parent company’s success formula, borrow the parent’s resources, and learn how to succeed in a new environment. It’s kind of like when you leave home to go to college. You forget your parent’s rules, borrow their laundry facilities, and learn how to succeed on your own terms.
What is the most common mistake that gets made when companies try to innovate?
They underestimate just how hard it is for an organization to shake itself loose from its past. Organizations understandably become very complex machines – machines hard-wired to excel in the current game. As a company gets bigger and bigger, employees get more and more specialized, and the number of people who understand how the machine works as a whole gets smaller and smaller.
And then along comes an idea for an innovative new business. Step 1 in building it is to destroy the hard-wiring. In creating the new business unit, you must be questioning every assumption about the way the core business works. That’s a tall task that we call “forgetting.”
Why do you say that “forgetting” is one of the most important steps for innovation?
I once had a baseball coach who told me that he couldn’t teach me how to hit until he managed to get me to forget all of the bad habits that I picked up on the elementary school playground. This coach understood that forgetting is often a prerequisite for learning. Forgetting is crucial for innovation because at its core, innovation is an experiment-and-learn process. When a company clings to established mindsets and assumptions – when it fails to forget – it cannot learn.
So how do you get an organization to “forget”?
To get an organization to forget, you have to change the underlying rules that control how an organization behaves – things like how it hires and promotes, how it confers status, how it plans, how it evaluates business performance, how it awards bonuses, the core values to which it aspires, and more.
What are some of the most successful new businesses that have been launched from within an old one?
The iPod, and now Apple’s (AAPL) plans for an iPod cell phone, are great examples. There’s also GM’s (GM) OnStar, Microsoft’s (MSFT) Xbox, and Google’s (GOOG) Earth mapping and navigation system.
Can you choose one of your favorite examples and explain how they did it?
You know, we have yet to find a perfect example of absolute success.
That said, one of our favorite success stories is that of New York Times Digital. It evolved through three different organizational designs before reaching profitability. In the first phase the new business was too closely integrated with the core business. They had beneficial access to resources, but the business did not easily evolve beyond what might be described as a simple “newspaper.com” operation.
In the second phase, it was too isolated. NYTD rebuilt itself from scratch – hiring a gaggle of outsiders and completely redefining the way it worked. This enabled a burst of creativity – and revenue growth. But because it became so different from the newspaper, tensions between the new business and the parent were a problem and hindered NYTD’s drive to profitability. Finally, it evolved to what we call a “distinct but linked” design that is working very successfully.
What is the difference between innovation and strategic innovation?
An innovation is strategic when there is a substantial change to one or more of the fundamental questions that define a business: Who are the customers, what value do we provide, and by what processes, and through what areas of expertise do we provide that value?
Is one type better than another?
All types of innovation are important. Plain-vanilla innovation makes you a winner in today’s business. Strategic innovation creates the business of the future. Back in Henry Ford’s time, plain-vanilla innovation was figuring out how to breed a faster horse. Strategic innovation was inventing the automobile.
What is the most common cause of tension that arises when old companies start new businesses and how should this tension be overcome?
The most common cause of tension are fights over a scarce resource, such as access to customers, or space in a fully-loaded manufacturing facility. The problem for the new and innovative company is that organizations generally settle such fights by calculating where the resource is likely to give the highest financial return in the short term.
That’s why it’s so crucial for senior executives to identify one or two critical resources that the new company cannot live without, and ensure that they get those resources – even though they can only justify them with vague long-term hopes for what their business might become.
What are the consequences for companies that fail to launch successful new businesses or fail to even try?
All businesses eventually hit a limit to growth. At that point, an ability to launch new businesses is the only way to sustain growth and keep your stock price high. In most cases, the consequence of failing to try to launch new businesses is simply sustained mediocrity and stagnation. In certain industries, those particularly prone to rapid technological change, the consequence can be death.