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.¹ Underperforming 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.² Accordingly, 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's core business units, they now also demand growth

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 authors³ have 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.

Separate and integrate

Planning and resource allocation processes designed for established businesses can wither the prospects of a new one. Established businesses have customers, organizational structures, and prejudices that dispose them to stick with the familiar when they decide where to make their investments. Spending on core businesses, where risks are relatively easy to identify and control, can be defended without great difficulty. Investments in the discontinuous innovations that transform industries but pose greater risks are harder to justify, and the business case for these investments is harder to make without ambiguity.⁴

In the fight for corporate capital, talent, and commitment, new ideas often fail to attract managerial attention, particularly in their early stages: compared with an existing business, an idea of unproven worth can seem insubstantial. But by planting new ideas in separate organizational structures, managers can change the scale of comparison and create roles focused on nurturing new ideas rather than minimizing or squelching them.

Of course, leaders of existing businesses know that new initiatives may eventually replace them. Adding insult to injury, cash from core operations finances the challenges. Managers may thus resort to destructive tactics such as acquiring illiquid assets to make their units harder to sell or distorting news about the newcomers' success. For this reason, too, it often makes sense to place new and old businesses in separate entities and to limit the interaction between them, not only to shelter new businesses, but also to let the managers of core ones concentrate on meeting performance targets. Each kind of enterprise can operate under its own resource allocation criteria, performance measurement systems, and reward structures.

One way of increasing the distance between legacy businesses and new opportunities is to spin off or carve out distinct, legally separate units, as American Airlines did with Sabre (a reservations and information system) and Siemens with Infineon (a semiconductor manufacturer).⁵ By contrast, Donaldson, Lufkin & Jenrette kept its e-brokerage subsidiary, DLJdirect, in-house but gave the unit separate responsibilities and authority within a rigorously decentralized structure.⁶ Two-thirds of all established companies setting up Internet-based operations are said to have followed this model.

Although partitioning on either model can take a company a long way toward achieving the goals of growth and performance, it presents a number of problems, primarily because it pushes the recognition and selection tasks involved in innovation and business building up to higher levels of management. In strictly partitioned organizations, very senior executives are responsible for detecting new possibilities and patterns and for bringing new ideas into focus. The chief executive must recognize embryonic ideas wherever they appear, combine them with other ideas and resources, and give them an appropriate organizational form—all without special allegiance to either the old or the new businesses.

Top managers, already struggling with existing customers, markets, and employees, are faced with a growing information overload

Top managers, already struggling to maintain contact with existing customers, markets, and employees, are faced with a growing information overload. In some cases, new ideas are suppressed too quickly; in others, top managers champion projects whose true potential hasn't been assessed accurately. Many observers have attributed Apple Computer's wasteful investment in the failed Newton personal digital assistant to then-CEO John Sculley's early and enthusiastic promotion of the project. Moreover, since partitioning creates new organizational boundaries, it also limits the flow of information and ideas and thereby makes it more likely that they might be lost. Growth opportunities identified in the course of operating a core business can be a rich source of incremental and transforming innovations. Sony's Walkman and Corning's fiber-optic businesses emerged in just this way. In contrast, new businesses segregated from legacy businesses usually lack close contact with key customers, technology providers, and competitors—contacts that often generate promising new opportunities.

Isolated new businesses also have difficulty rejoining the mainstream, especially when they have developed new business models that are supposed to reinvigorate the operations they had left behind. Meanwhile, mature operating units, sealed off from the organization's pockets of innovation, can acquire self-fulfilling labels such as "low growth" or "old economy," particularly when the new units are Internet related. The harder management tries to keep the old apart from the new, the more vociferously will employees of the core business complain that they are being denied their fair share of the new unit's success or fame; few people want to be stuck in a low-growth business when more glamorous opportunities exist under the same corporate roof.

Striking a balance: Nokia

Separation and integration both serve the cause of profitable growth, so companies should drive both simultaneously. Consider the case of Nokia,⁷ the Finnish telecommunications giant. The company is interesting not only because it has apparently succeeded in achieving the seemingly incompatible objectives of performance and growth but also because it uses a wide variety of organizational mechanisms to do so.

Nokia has two major business groups: Nokia Mobile Phones (NMP), the world's largest producer, and Nokia Networks (Net), a leading producer of mobile and fixed-line network equipment. The Nokia Research Center undertakes basic research for the business groups.

New ventures

In 1998, Nokia established the Nokia Ventures Organization (NVO) to test and develop nascent ideas that had the potential to generate revenues of $500 million to $1 billion within four to five years. Pekka Ala-Pietilä, the president of Nokia and of NVO, explains that the company "needed this kind of unit at the corporate level" because some initiatives "didn't fall easily into Nokia's existing organizational structure; they fell somehow in between the existing units, or they took place across these entities. So nobody was the natural owner of these initiatives. Therefore, the purpose of NVO is to look at growth opportunities that are beyond the remit of the existing businesses but within Nokia's overall vision."

At first glance, Nokia's organizational chart tells a partitioning story: truly innovative activities have apparently been separated from the operating business units and moved to NVO. However, a closer look reveals a range of mechanisms that closely link the two (exhibit).

Although NVO includes a venture capital fund that has been chartered to look for ideas originating outside Nokia, NVO's primary purpose is to develop internally generated projects. Some 80 percent of the 17,000 Nokia employees who have innovation-related jobs work for NMP or for Net. Every Nokia unit is expected to search for new ideas, and most new ideas are actually developed within the business groups. NVO deals only with proposals that go beyond Nokia's current technologies and seem likely to create new markets. The internal venture capital fund works in the same way; investments and acquisitions within the scope of the company's current strategy are made by the business groups, not by NVO.

Nascent ideas or young businesses moved into NVO don't stay there indefinitely: the viable ones are eventually integrated into the operating businesses, established as new divisions, or sold. As Markus Lindqvist, NVO's director of business development, says, "NVO does not exist for itself; it exists for Nokia, and that means, in particular, that if we start to do things, we don't regard them as being our own. What we do is up [to] somebody else to take further. Our customer is Nokia." In short, NVO functions as an accelerator: it speeds up the development of ideas. Businesses that can run on their own leave NVO.

Over the past 15 years, Nokia has exited from many businesses that didn't fit into its overall plans, and it exercises the same discipline in reviewing ideas being explored in NVO. One of NVO's undertakings, a health-services unit that developed telecom-based technologies for treating diabetes and other illnesses, was moved from its original home in NMP into NVO in 1998 and then sold a year later because Nokia felt that new owners could add more value.

Decisions about moving businesses between NVO and the business groups are made jointly by managers on both sides. New ideas emerging from day-to-day operations are normally passed on to the business groups and their development managers, who decide which unit has the best position for advancing these projects. If they look particularly promising, they go to the Nokia Ventures Board, which involves people from NVO, the Nokia Research Center, and the mainline businesses. The board decides how to combine ideas from a variety of sources, whether to embody those ideas as new businesses, and where such businesses should fit into the corporate organization. All ventures, whether they are developed in NVO or stay in the business groups, go through the same process.

So that people don’t get overly drawn to pet projects, NVO and the business groups share financial incentives and salary schemes

Incentives

To ensure that people don't get overly attached to pet projects, NVO and the business groups also have the same financial incentives and salary schemes. Performance-related bonuses tend to reward the achievements of teams and of the whole company, not of individuals, and contingent pay forms a relatively small part of overall remuneration. The intention is to encourage Nokia managers, from the start, to concern themselves with the good of the company as a whole.

In the conventional view, managers who have no strong financial incentives won't take risks or make the extra effort needed to develop and promote emerging businesses. Yet these things happen at Nokia. Although some features of its incentive system undoubtedly reflect its unique identity or the egalitarianism of Finnish culture, other companies in other parts of the world should ponder Nokia's ability to move ideas across units and into its underlying fabric.

Keeping ideas mobile

Mechanisms other than incentives also help diffuse ideas throughout Nokia. NVO, for example, is overseen by the Nokia Ventures Board, most of whose 15 members—including the president of NMP (Matti Alahuhta) and of Net (Sari Baldauf)—come from the business groups. The board reviews NVO initiatives as they go through successive funding gates, thereby ensuring that they are accountable to the core business and don't drift from the shared agenda.

The opportunity to develop ideas into businesses inspires engineers and other employees to cross organizational boundaries, and this movement of employees throughout the company also helps diffuse the knowledge that NVO was created to promote. When openings occur, they are posted on a Nokia intranet. Managers are not allowed to prevent their people from transferring to other units, and hiring managers can't go headhunting or give people special inducements to move within the company. Nonetheless, in most cases teams move into NVO along with the ideas they conceive. Once an NVO venture has been developed, the people who worked on it are expected to return to the mainstream. Except for a few managers, NVO has no permanent staff.

Nokia relies heavily on personal networks. One of the main qualifications for membership on an NVO team is credibility in the eyes of the larger company. People build support for ideas by circulating them, since widely known ideas have the best chance of encountering a favorable milieu for development. The result is a system that encourages innovation throughout the company; as Net's Sari Baldauf says, "If you've got a good idea at Nokia, it will be hard to find someone who will stop you from acting on it."

The process at work

The history of Nokia Internet Communications (NIC), NVO's largest initiative by far, illustrates the process at work. NIC began with a group of engineers who moved to NVO to commercialize the Wireless Application Protocol (WAP) technology they had developed at the Nokia Research Center. They were soon joined by staff from Net, and to gain outside expertise, NIC also made several acquisitions. As Markku Rauhamaa, vice president of its Wireless Software Solutions group, explains, NIC cooperates with the main business groups: "We don't have any problem [doing] things for NMP. There is such a high demand for our expertise there. . . . Typically, the challenges come from resource limitations."

Meanwhile, NIC generates several hundred million dollars a year in revenue. Nokia intends to move NIC out of NVO soon, either by integrating NIC with one of the company's existing businesses or by making it a business entity in its own right. The movement of ideas comes full circle.

Lessons

We present the Nokia story as an example neither of a company immune to failure nor of "best practice." In fact, Nokia faces formidable challenges: maturing demand for mobile handsets and increasing competition from Asian groups such as Samsung, as well as uncertainty about competing standards for third-generation (3G) telecom systems and about which data-based services will be the mobile Internet's "killer apps." Explosive growth, particularly beyond Finland, will make it difficult to maintain the egalitarian, nonhierarchical, and informal style that helps keep ideas mobile within the company.

Nonetheless, we believe that general lessons can be drawn from Nokia's search for an organization that integrates new ideas and at the same time separates them from the main business:

1. Nokia's story suggests that new ventures do need their own space to develop. Without their own resources, their own performance metrics, and a distinctive organizational design, they fail to develop the necessary entrepreneurial spirit.

   The operating conditions created for new businesses shouldn't differ substantially from those they would encounter in the open market

2. Even so, the operating conditions that companies create for new businesses shouldn't differ substantially from those they would encounter in the open market. New businesses should be free of undue encroachments by established ones but not of oversight or accountability; there is, for example, no reason to exempt entrepreneurs in established companies from the rigorous scrutiny that venture capitalists apply to their investments. Accordingly, NVO imposes tough controls on venture fund investments, on "venturing units" (small teams exploring ideas that are not ready to inspire NVO business units), and on business units such as NIC.
3. Nokia exemplifies the benefits of integration. Substantial business opportunities can arise when people exchange ideas, information, and experiences across organizational boundaries. Existing operations can be a powerful source of ideas for new businesses, but top management can't serve as the conduit, because well-honed administrative processes filter out ideas that are still in a fuzzy, premature state. Companies therefore need a number of overlapping channels that effectively transmit "soft" information. Nokia relies heavily on these messy, redundant systems. The mobility of its managers and a culture that encourages openness and the sharing of information create marketlike information flows within the company.
4. The experience of Nokia demonstrates the importance of a flexible and adaptable organizational structure. The organizational designs appropriate for business development change as quickly as the business itself. Once a venture can stand on its own, it should be quickly moved to an operational setting similar to those of established lines of business. The decision about whether to keep a new unit separate or to integrate it into an established organization should be based on the synergies or incompatibilities between these entities.⁸ If the company concludes during the development process that the scope of a new unit's activity goes beyond that of the company as a whole, divestiture is the correct course of action.
   
   Employees sometimes pursue their own narrow interests or those of their departments or divisions, even at the expense of corporate goals. But such conflicts of interest are less likely to occur if trainees are exposed to different parts of the company, employees are rotated through it, and reward systems emphasize the greater good. Policies ensuring that both good and bad news must be made public also discourage selfish behavior.

Nokia managers emphasize that NVO is not in itself responsible for Nokia's remarkable balance of performance and growth. NVO is small compared with the rest of the company, and the structural and process innovations that Nokia has created are only part of the story. Human-resources policy and, especially, culture work with Nokia's structure and processes to keep ideas flowing through the company.

Companies that have mastered the balancing act between partitioning and integration will create many paths where ideas, talent, and capital can unite to create thriving new businesses. They will discover unexpected flows of new ideas among different parts of their companies, and when that happens, they will have met the challenge of the coming decade: fast growth without the sacrifice of performance discipline.