The innovative organization: Why new ventures need more than a room of their own

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.


McKinsey quarterly

The Innovative Organization


Companiescangrow quickly without sacrificing performance discipline. The trick is to balance partitioning and integration.

Jonathan D. Day, Paul Y. Mang, Ansgar Richter, and John Roberts

The McKinsey Quarterly, 2001 Number 2

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.1Underperforming assets were to be fixed or sold. Diversification was viewed at best with suspicion and, when it took companies outside their areas of “core competence,” regarded as a managerial crime.2Accordingly, the decade witnessed a wave of “bust-up” takeovers as acquirers split conglomerates into focused components and sold them to buyers in related industries.Although investors still expect top performance and high returns from a company

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 authors3have 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.

 


1The dates in this article apply to the United States, where a wave of takeovers started in the early 1980s after the Reagan administration decided that it would do little to deter takeover bids. The takeover phenomenon took off in the United Kingdom during the late 1980s and in Continental Europe during the mid-1990s.SeeAnsgar Richter,Restructuring or Restrukturierung? Corporate Restructuring in Britain and Germany, London: London School of Economics: Centre for Economic Performance, 1997.

2
SeeMichael C. Jensen, “Agency costs of free cash flow, corporate finance, and takeovers,”American Economic Review, 1986, Volume 76, Number 2, pp. 323-9; and Michael C. Jensen, “Eclipse of the public corporation,”Harvard Business Review, September-October 1989, pp. 61-75.

3
SeeClayton M. Christensen,The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Boston, Massachusetts: Harvard Business School Press, 1997; and Mehrdad Baghai, Stephen Coley, and David White,The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise, Reading, Massachusetts: Perseus Press, 1999.

 

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