CFO's Edward Teach has summarized the key concepts in our book Ten Rules for Strategic Innovators: From Idea to Execution.

Teach mentions the three challenges we stress for all would-be strategic innovators:

1. Forgetting. The new business (NewCo) must selectively "forget" the success formula of the most closely related business unit within the company (CoreCo).

2. Borrowing. NewCo must borrow those assets of CoreCo that will give it a competitive advantage, such as manufacturing capacity, or sales relationships, or a brand.

3. Learning. NewCo must learn how to succeed in a new and uncertain environment.

CFOs, who play a central role in planning, business evaluation, and resource allocation, can aid the task of forgetting by taking a couple of key steps:

- develop new performance measures for NewCo
- hold NewCo's managers accountable for learning, not meeting the numbers

Read Teach's article: "First, Forget What Works."

In our book, Chris and I urge executives to assess the degree of difficulty of the learning challenge presented by the strategic experiment they're undertaking. Specifically, we ask executives to examine the range of critical unknowns and pin-point the intensifiers of the learning challenge. We've outlined a step-by-step method to help executives understand how much time they should dedicate to supervision and how best to direct their efforts; see page 182.

Posted by Vijay Govindarajan at 03:25 PM | Permalink | Comments (0) | TrackBacks (0)

My friend Chris Trimble and I have been looking at this issue for quite some time now.

We agree that business is overwhelmingly a force for good. Two reasons far outweigh all the others:

1. Business activity raises the economic standards of living. To compete, companies must constantly find ways to make their businesses more efficient. And the more efficient a society is at producing products and services, the more that society can consume. (If even more economic consumption does not sound wholesome to you, you must be rich. Most of the world is not.)

2. Businesses create innovative products and services that enhance society. As living standards rise, we can afford to fulfill new needs. Businesses research our desires, invest in technology, and deliver the new and improved products and services that we want -- and need.

Thanks to the recent series of corporate scandals, business leaders the world over face the same challenge -- explaining to skeptics what is good about business. But how does our answer compare to those of other leaders? How are companies defining "social performance" in this age of increased public scrutiny?

We conducted a quick -- and admittedly unscientific -- survey by reviewing the annual reports and Web sites of a dozen large and well-known global companies. To assert strong social performance, here are the most common themes that business leaders are stressing:

- We have improved our governance practices, and our operations are transparent. We are not doing anything bad, and we have nothing to hide.

- We comply with and even exceed regulatory standards in areas such as the environment, health, and safety.

- We are philanthropic. We are involved in our communities.

- We provide jobs, and our company is a great place to work.

All of these activities are good. All of these activities help make the world a better place. But the resources dedicated to them is a small fraction of the resources dedicated to innovating and increasing efficiency overall.

So why don't we as business leaders talk about those activities? What message do we send employees? That if you really want to contribute to society, quit working long hours trying to develop that breakthrough product and get involved in some of our community programs?

The way that corporations define social performance reinforces a pervasive but deeply flawed assumption -- that if there is a direct tie between an action and a profit, then there can't be any social benefit.

It is unfortunate that we refer to social sector organizations in the United States as nonprofits.

One company's annual report described how their newly launched medical device led to a radical improvement in post-surgical outcomes -- but only to explain the company's improving business performance. Apparently, medical breakthroughs have nothing to do with social performance.

There are, of course, exceptions. General Electric and Motorola, for example, list innovation as a dimension of social performance. But the message is still diminished by the many less significant ways that these companies contribute.

Not a single company that we looked at made the case that it enhanced society by raising living standards and reducing poverty. Not a single company made the case that a social benefit can, and often does, result directly from the pursuit of profit. Most businesspeople could be better at making that case.

When someone asks, "How's business?" or "What are you working on?" instead of answering in terms of how you are going to make a profit, answer in terms of how you are going to make a difference. Instead of focusing on the race against your competition to expand into China, concentrate on how you will change the lives of millions of Chinese people by making needed products accessible and affordable and raising living standards.

The questions are being asked. Perhaps it's how we answer that's the problem.

Posted by Vijay Govindarajan at 06:06 AM | Permalink | Comments (0) | TrackBacks (0)

The biggest enemy of the corporate entrepreneur is not another person, but a way of defining how an organization works. The enemy is routine and administrative, not dark and dangerous.

The biggest enemy is... the planning process.

Corporations are designed for efficiency, not entrepreneurship. Managers achieve efficiency through planning. They set goals, monitor results, and improve. They are motivated because their CEOs have linked compensation and promotion to performance.

They are also motivated because exceeding goals engenders respect. Go inside any successful corporation and you will find a strong performance-oriented culture. As one finance executive at Thomson Corp. told me, "The basic culture of this corporation is that you make your numbers." Indeed, a strong culture of accountability can take root early in a corporation's life. At the height of the boom at Cisco I was told, "Look around. You'll find that most people here are thinking very short term, worried about making their quarterly targets." A young company that liked to think of itself as a 30,000-person startup was already sounding like a machine geared for reliable and efficient performance.

There is conflict between efficiency and entrepreneurship.

Most CEOs have acted to encourage their coexistence. But where change is most necessary, no change is made. CEOs properly view a disciplined planning process as a critical mechanism for ensuring that managers are eager to deliver, and they are loath to alter it. Yet the most basic premise of the planning process simply does not apply to a new venture.

The premise is reliable predictability. That is, I can predict today what is possible next year -- and I can do it so reliably that it is very reasonable to judge managers' performance based on differences between predictions and outcomes. Everyone in disciplined organizations knows that these are the rules, and everyone lives by them.

Inevitably, however, outcomes for new ventures fall short of expectations. If anything, new ventures are reliably unpredictable. So I ask my students, what will you say when your venture does not deliver? "Well, certainly whoever evaluates me will understand that..."

They do, usually, for a time. Corporate ventures tend to be allowed a grace period. The boss says, in effect, "I understand your business is new, so I'm not going to hold you accountable in the first year. But you better deliver by the second, third, or fourth."

Still, not everyone in the corporation will understand the grace period. Once the numbers are missed, credibility suffers. Other managers become less willing to help. The biggest advantage of the corporation -- its wealth of existing skills and assets -- crumbles. It may get worse as leaders of other divisions attack the viability of the venture to win scarce resources.

These performance pressures have a funny way of influencing venture leaders to escalate commitment to original plans. ("I'll show you that I can succeed...")

Which is another way of saying that venture leaders are driven not to learn from their early mistakes.

CEOs must create a planning environment that emphasizes learning over accountability.

We call the approach we've been working on theory-focused planning, and it diverges from conventional planning in six critical ways:

1. Companies that use it concentrate on a few critical unknowns instead of the usual horde of details in conventional plans;

2. they focus on the theory underlining the predictions rather than the predictions themselves;

3. they look for trends rather than numerical benchmarks;

4. they review the plan often, in response to important new data, instead of annually;

5. in that review, they consider the experiment over time instead of just for the current period;

and

6. they emphasize leading indicators rather than financials.

Companies still hold managers of strategic experiments responsible for performance, but performance is gauged according to how quickly managers learn from new data.

[This post is based on articles written by Chris Trimble and myself. In particular, see "Strategic Innovation and the Science of Learning," MIT Sloan Management Review, Winter 2004.]

Posted by Vijay Govindarajan at 06:32 AM | Permalink | Comments (0) | TrackBacks (0)