At some point, all companies realize that they need to grow faster to meet their shareholders' expectations and that their core businesses just aren't going to reach those goals. So, senior management begins to think of new ways to create growth outside the core organization. They may decide to set up an "incubator."
What often happens next? In reality, most incubators fail to live up to expectations. Indeed, a survey of 300 firms by Arthur D. Little found that only 47% of companies believe their new ventures satisfy strategic objectives. Worse, only 24% meet financial objectives. When done right, however, new growth businesses can in fact generate massive growth.
IBM's Emerging Business Organization, for example, has produced businesses based on innovative technologies such as Linux, generating over $2 billion in annual revenues. Hewlett-Packard has grown its printing business to be the dominant source of its profits.
In Pictures: Seven Ways to Rev Up Your Company's Growth
How can companies avoid the most common pitfalls and make incubators work? Our experience leads us to recommend a planned, deliberate approach, which may surprise readers familiar with disruptive innovation. However, by starting out defining an incubator's purpose, setting clear rules and laying key building blocks, companies are more likely to succeed with incubators.
The first thing to remember is that failing to define a purpose will result in the incubator team facing many internal--and competing--pressures regarding where to focus efforts and limited resources. For this reason, the incubator needs to have a clear mission and the independence to pursue its goals without undue interference from the core business of the company.
Begin by establishing "goals and bounds" that clearly differentiate the types of opportunities the incubator should prioritize from those it should eschew. Surprisingly, putting such constraints on the incubator's innovation efforts can actually lead to superior results, because the team will have clear guideposts on what is within and what is outside of the scope of the company's goals.
Also, the incubator's mandate, and its rules, must be different from the mandate and rules of the company's main business, so that the incubator's disruptive ventures can start small and go on to success. Unless a very senior executive is a strong advocate, or unless the incubator is created from the beginning with a mandate to be different from the primary business, the incubator may stumble on standard organization rules--that new projects require a full P&L or an explicit internal rate of return, for instance. If these rules apply to the incubator, the company needs to say so upfront. If not, the incubator needs to be free to follow a more fluid approach to exploring disruptive projects.
Defining the incubator's purpose and creating a mandate will focus the development of the proper "portfolio" of innovation projects that the incubator pursues. Without active management, an incubator's portfolio ends up consisting of highly incremental initiatives, with one or two big bets to show that grander purposes are in scope.
Disruptive innovations are uncertain, unpopular and difficult. In a portfolio heavily weighted toward incremental improvements, disruptive projects invariably lose out, even though they tend to create by far the most shareholder value.
The most critical staffing decision is the selection of the incubator's leader. While it is tempting to choose a senior leader, this can, in fact, prove counterproductive. Senior leaders, or even younger rising stars, often cannot dedicate themselves wholly to the incubator. The unit then becomes an "other" bucket for the leader, who does not have the time to focus on the incubator's core mission.
Rather than seeking out people with résumés well suited to the company's main managerial positions, leaders should look for those who have encountered challenges similar to those they will find in the incubator. These experiences include the ability to manage unstructured situations, to test and learn rapidly, and to build external partnerships.
Senior executives also need to take responsibility for staffing a small full-time team to start the incubator. These people should volunteer for the job, as the right outlook is essential, and the types of employees whom the company's main business can easily spare are usually not the sort needed in a fast-moving, relatively unstructured environment. If management views a rotation in the incubator as excellent grooming for broader responsibilities (as it frequently is), then staff will be more willing to sign up. There should be a clear plan for how additional people will be brought on board as initiatives grow.
The seemingly mundane details of how concepts are created, shaped and evaluated frequently hold the keys to the success--or failure--of incubator efforts. Companies recognize the need for some sort of stage-gate process, yet simply copying the process from the core business creates vast problems.
Because the core business works in a world with greater certainties and bigger bets, its evaluation system tends to require buttoned-down business cases at an early stage. Managers must define a wide range of business plan elements for the project to proceed to the next stage, and there is little capability for piloting initiatives and looping back as new learnings emerge. Incubators--if they are reaching for disruptive innovation--work in a world with far less clarity. But they bring discipline to the idea-creating process; finding opportunities is not left to serendipity or management's passing notion.
In Pictures: Seven Ways to Rev Up Your Company's Growth
Adapted from a recent edition of Strategy & Innovation. For more information visit www.forbes.com/strategy&innovation.