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(originally published by Booz & Company)


The Challenge of Managing Innovation and the Core Business

Principle #2: Hold tension at the top. Successful firms explicitly choose to maintain tension between innovation and core business demands at the highest levels of the company. Otherwise, major decisions about a company’s future are liable to be resolved along parochial lines within individual business units. The researchers identified two “equally successful” ways to ensure that key decisions are made at the top level.

Under the “hub and spoke” approach, the CEO essentially sits at the center of a wheel surrounded by business units, managing each unit separately, often with the assistance of a very small inner circle of senior executives. The semiconductor company Analog Devices has thrived for more than 40 years using this approach, becoming a leader in one chip product after another. While managers of individual units are left to focus on their own products, the CEO and COO make the major decisions about new directions to take. The CEO has even had a soundproof room built for heated discussions with his second-in-command — this is where tensions between what the researchers term exploitative and exploratory initiatives are resolved.

The other approach is a “ring-team” model, in which decisions are made collectively by the senior team, including leaders of the business units. The researchers point to the example of Cray Inc., a company whose legendary supercomputers were performance leaders during the first era of the IT industry, in the 1970s and ’80s. As processing power became a commodity and Cray’s market shrank, a new CEO, Peter Ungaro, and his senior team adopted an overarching identity that shifted the firm’s focus to technology problem solving. The next step was to create a business unit to apply the company’s expertise to solving complex IT problems for specialized businesses. Ungaro’s challenge was to persuade his leaders to make the switch, which would hurt the company’s financial performance in the short term before it paid off. As Ungaro told the researchers: “We had to convince ourselves that spending 50 percent of our time on something that is delivering 5 percent of the company’s revenues was worth the effort.” The move paid off: In 2010, Cray had record revenues of $319.4 million and posted a profit of $15.1 million.

Principle #3: Embrace Inconsistency. Finally, successful companies need to handle multiple and often conflicting agendas. One trap that firms often fall into is holding innovation units to the performance measures of core businesses. Instead, managers should apply different standards to core and innovation units, demanding profit and austerity for some, urging experimentation in others. The key is to look at each unit separately, to see where it is in its growth cycle. This can occasionally make the company’s strategy seem incoherent, because different sections of the business are focusing on different metrics and time horizons. The researchers conclude, however, that “too much consistency in a company’s strategy is a danger signal, indicating that the company has run out of ideas or that it is delegating innovation to lower organizational levels.”

Bottom Line:
The most successful leaders encourage their senior teams to move away from protecting the interests of their individual business units and instead embrace the tension of backing new initiatives. The key to high performance over time is pursuing paradoxical objectives, simultaneously exploring new horizons and exploiting already established markets.

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