HBR Blog Network / HBS Faculty
So far, 2012 has been another banner year for the ‘tyranny of success’ as once great companies slide ever closer to the abyss. Kodak’s bankruptcy, Nokia’s vanishing profits, and the continuing struggles of Blackberry maker Research In Motion to find an answer to the iPhone, show how rapidly heroes lose their edge. Each of these firms is struggling to respond to and lead disruption in their industries. Nokia and RIM have watched as Apple and Android have wiped away their leading position; each attempted to respond, but neither could execute. The question though is, why didn’t they move earlier? Why are companies often left flat-footed when competition strikes?
This is a challenge that has long fascinated me. Last week, I taught an Executive Education program at HBS, with my colleague Bruce Harreld, on “Building New Businesses in Established Organizations.” We addressed the question of how leaders turn great invention into business innovation that generates organic revenue growth. Across the forty or so companies from across the world, there were consistent issues and experiences. How can you adapt management systems that are used to managing short-term performance to become capable of supporting a “test and learn” approach to innovation? How can you scale new businesses within corporations that are organized to support only one mature, core business? How can you align leadership across a corporation to support these new, risky ventures when all of their DNA is committed to driving profits in today’s franchise?
Bruce is familiar with all of these issues from his tenure as Senior Vice-President of Strategy and Marketing for the IBM Corporation. Bruce helped to create IBM’s “Emerging Business Opportunity” (EBO) that is an excellent template for companies looking at long-term disruptions in their industries. It has generated $26B in additional revenue for IBM since its inception and played a vital role in repositioning the company as a business services organization, rather than simply a technology company.
IBM wasn’t always able to take advantage of new opportunities as well as it does today. As it emerged from its famous near-death experience in the 1990s, Lou Gerstner, IBM’s then CEO, noticed that the company wasn’t capitalizing on new technologies and markets as well as it could be. He knew IBM needed to become what we call an “Ambidextrous Organization.” That is a company that pursues breakthrough growth by separating new, exploratory units from traditional, exploitive ones while maintaining tight links across units at the senior executive level.
IBM turned this EBO approach into a recipe for building innovative new businesses. Each had a leader who reported to a business unit head, but also reported to Bruce as the Senior Executive in charge of new growth opportunities. This made sure each initiative got the resources it needed and met each milestone. They also followed several key principles:
- Active and frequent senior-level sponsorship: This ensures that there is clarity of strategy and organizational alignment, and that there is support available.
- Dedicated A-team leadership: Previously, younger, less-experienced leaders were put in charge of EBOs so that the EBO wouldn’t get caught up in the established way of thinking. This didn’t work well. Younger managers often lacked the networks needed to nurture an embryonic business within the larger company.
- Disciplined mechanisms for cross-company alignment: An explicit goal of the EBO process is to address business opportunities across the company to make sure the established businesses provide support to the EBO, even if it runs counter to their short-term interests.
- Resources fenced and monitored to avoid premature cuts: Funds need to be allocated and used according to plan, not re-allocated to existing businesses. Previously, there was a tendency to poach the new business’s resources.
- Actions linked to critical milestones: This is key in making sure the EBO is moving in the direction and at the rate the company needs. Milestones are not necessarily tied to financial metrics and are reviewed in monthly meetings.
- Quick start, quick stop: Speed is essential. If an EBO isn’t meeting its milestones, it needs to be stopped, or morphed into something else that will. Get the idea to market quickly, experiment, learn, and either iterate or stop the venture.
We continue to learn about how other organizations manage this project of “exploring” and “exploiting” simultaneously. I’m interested to hear about your views and experiences. What other well-established companies, in the technology industry or elsewhere, need to follow this recipe or have found their own?