The Innovative Organization

Abstract

Why new ventures need more than a room of their own Companies can grow quickly without sacrificing performance discipline. The trick is to balance partitioning and integration. The idea that new businesses prosper best when separated from their corporate parents has become a commonplace. Separation is no doubt the model of choice when the new and the old differ greatly--for example, an Internet start-up launched by an industrial company. But the simple injunction to cordon off new businesses is too narrow. Although ventures do need space to develop, strict separation can prevent them from obtaining invaluable resources and rob their parents of the vitality they can generate. Two-way relationships are needed, though only a few companies have developed organizations in which such relationships thrive. Yet a delicate blend of separation and cooperation is a prerequisite for satisfying the twin demands of today's investors: focused performance and faster growth. The 1980s were mostly concerned with performance. [1] Under-performing assets were to be fixed--or sold. Diversification was viewed at best with suspicion and, when it took companies outside their areas of competence, regarded as a managerial crime. [2] Accordingly, the decade witnessed a wave of bust-up takeovers as acquirers split conglomerates into focused components and sold them to buyers in related industries. The past few years have told a different story. Investors still expect top performance from a company's core business and high returns on existing assets. But they also demand growth: new assets and entry into new business arenas. Mergers increasingly aim to generate horizontal synergies, creating corporate behemoths of unprecedented size and strategic diversity. How can companies deliver this combination of focus and flexibility, performance and growth? The conventional advice has been to plant the seeds of foreign businesses, acquired or developed internally, in walled gardens so that established businesses can't trample them. Citing the experiences of companies that have failed to take advantage of opportunities to innovate, a number of authors [3] have argued that greenfield units should be kept far away from operating businesses, even to the extent of physically separating their headquarters. We believe that partitioning is desirable but can easily go too far. A company that seeks both performance and growth should give entrepreneurial activities plenty of space but also connect them, from the outset, to its parent's resources, knowledge, and goals. Achieving this balance of separation and integration calls for the full range of organizational and leadership interventions: structure as well as management processes, human-resources policies, and corporate culture. Separate and integrate Planning and resource allocation processes designed for established businesses can wither the prospects of a new one. Established businesses have customers, organizational structures, and prejudices that dispose them to stick with the familiar when they decide where to make their investments. Spending on core businesses, where risks are relatively easy to identify and control, can be defended without great difficulty. Investments in the discontinuous innovations that transform industries but pose greater risks are harder to justify, and the business case for these investments is harder to make without ambiguity. [4] In the fight for corporate capital, talent, and commitment, new ideas often fail to attract managerial attention, particularly in their early stages: compared with an existing business, an idea of unproven worth can seem insubstantial. But by planting new ideas in separate organizational structures, managers can change the scale of comparison and create roles focused on nurturing new ideas rather than minimizing or squelching them. Of course, leaders of existing businesses know that new initiatives may eventually replace them. …