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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Organizational DNA for sustainable innovation

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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-toend- Dells direct distribution

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

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Strategic innovations require experimentation : 10

characteristics

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Organizational DNA

Structure: formal reporting strcuture, decision authority,

information. Task flows

Staf: Leadership traits, staffing policies, competencies,

promotions, career paths

Systems: Planning, budgeting, controls, evaluation criteria

Culture: valued behavior, norms, business assumptions, biases
Structure

Culture

Staf

Systems
4

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Dual Purpose Organizations

Executive
sponsor
CoreCo GM

Sa
le
s

M
ar
ke
tin
g

M
an
uf
ac
tu
rin
g

NewCo GM

R
&
D

Sa
le
s

M
ar
ke
tin
g

M
an
uf
ac
tu
rin
g

R
&
D

They are diferent sub-units with diferent DNA but within same Corp
Diferent GMs with diferent demands
Report to common Executive sponsor- but new interaction between
GMs
They are diferent but not isolated from each other- have links to
borrow from CoreCO
5

Forgetting

High
Mediu
m

Spin-offs
Or
Pure Financial
Investments
IBM
Non -Corporate
Venture

Low
Low

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Design for Innovation Initiatives

Strategic
Experiments
NYTD

Innovation within
Existing business
model
Cisco
Medium

Borrowing

High
6

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, diferent value proposition, diferent 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, staf, culture should evolve in respond to
market needs

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Forgetting

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Hire outsiders, and create a mix of both at staf 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 startups 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 measuresshould 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 slatethe 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

10

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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

11

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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 NewCos performance. ES
should balance the possibility of a win with reasonable
degree of uncertainty

12

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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
13
clients about these deals

 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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Final word

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