HOW to build a breakthrough business within a profitable one? Vijay Govindarajan and Chris Trimble answer this question in, 10 Rules for Strategic Innovators: From Idea to Execution, from Harvard Business School Press (www.HBSPress.org).
Strategic innovation proceeds with strategic experiments, which display `ten common characteristics', beginning with `very high potential for revenue growth' such as `10x over three to five years,' explain the authors. Other features are that the industries are fuzzy, business model is unproven, departures are radical, and value creation is discontinuous rather than incremental.
Though these experiments use some of the existing assets and competencies, they develop `new knowledge and capabilities'. Govindarajan and Trimble remind readers that strategic innovation isn't the same as continuous process improvement (such as that of GE through Six Sigma), process revolution (as in Wal-Mart with the help of RFID tags), and product/service innovation (like what consumer product manufacturers and toy companies often do).
"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," write the authors. "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."
The code for turning breakthrough ideas into breakthrough growth lies in the `middle', which is where companies are usually getting lost. Authors christen it `Code X'. This code addresses "three unique challenges that arise from the unnatural coexistence of a new and a mature business within the same corporation." These are `forget, borrow and learn.' That is: "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 emerging and uncertain market."
Forget, therefore, `assumptions, mind-sets, and biases,' exhorts the book. Borrow assets such as "existing customer relationships, distribution channels, supply networks, brands, credibility, manufacturing capacity, and expertise in various technologies." And "the best indicator that learning is taking place is that predictions improve."
A major problem, as chapter two highlights, is that organisations, like elephants, never forget! "NewCo can fail because it adopts the very habits that have made CoreCo successful." An important source of memory is instincts, because "under conditions of stress and ambiguity, people naturally gravitate toward the familiar that is, they rely on instinct without being aware of it." Essential read is the case of Corning Microarray Technologies that is discussed at length, so you learn all about `taming the elephant' with insights on organisational DNA.
Govindarajan and Trimble study tensions that arise in the `borrowing', through the NYTD (New York Times Digital) example. "NYTD evolved from integrated to isolated to distinct but linked," and by 2004, it was earning "more than $30 million annually on revenues of approximately $100 million." The brand was protected by assigning an experience CoreCo journalist to manage the editorial operations in the NewCo, informs the book.
It may seem heretical, but the authors declare that learning from experience is `an unnatural act'. Similarly, `Being bold, competitive, or demanding can inhibit learning.' The winner is not necessarily the company that starts with the best plan, but the one that learns and adapts the quickest, explain Govindarajan and Trimble. "Even if a strategic experiment is designed to overcome the forgetting and borrowing challenges, it can stumble if it cannot learn." Be accountable to learning, not to plans, advise the authors.
Important lessons to learn are: "Learning requires transparency. Information, especially about surprises and negative outcomes, must be collected and shared with openness and candour. Information must be considered a friend and not an enemy. The dynamic coordinator (DC) must ensure that performance information is viewed rationally and not abused for political jockeying." Find `gold' with TFP or theory-focussed planning, which proceeds through 8 steps such as describing how the business works, identifying metrics and ending with revising the plan.
"Leading a strategic experiment may be general management's triple-flip-with-a-quadruple-twist, but it is well within reach when you design NewCo so that it can forget, borrow, and learn," conclude the authors.