Strategy used to be about protecting existing competitive advantage. Today, it is about finding the next advantage. Thus, the central task of the leaders of an organisation is to balance managing the present with creating the future. For example, Apple must continue to excel at producing personal computers that delight its core customers. But it must also secure its future by launching high-growth-potential, transformative businesses like iPod and iTunes.

It takes years for large organisations to change directions. By comparison, change in the external environment is rapid and non-linear. For instance, nanotechnology and genetic engineering are revolutionising the pharmaceutical and semiconductor industries. Globalisation is opening doors to emerging economies, such as India and China, and billions of customers with vast unmet needs. Once-distinct industries, such as mass-media entertainment, telephony and computing are converging. Rapidly escalating concerns about security and the environment are creating unforeseen markets. And other, more subtle changes are important as well, such as the trend towards more empowered customers, the ageing population in the developed world and the rising middle class in the developing world.

Creating the future requires both breakthrough ideas and breakthrough execution. We have asked hundreds of executives in Fortune 500 companies to assess their organisations’ capabilities on each. On a ten-point scale, companies typically score themselves “five” or “six” on idea generation and only “one” or “two” on execution. Nonetheless, companies that launch innovation initiatives tend to allocate the preponderance of their energies to generating ideas.

Ideas are crucial, but even the best ones are speculative. Thus, rule number one in our book, Ten Rules For Strategic Innovators – from Idea to Execution, is that in any great innovation story, the idea is only Chapter 1.

There are many varieties of innovation, but it is strategic innovations that enable companies to create new futures. Strategic innovations are new business concepts that alter the answers to the fundamental questions that define a business: Who is the customer? What do they value? How do we deliver that value? Such breakthrough ideas require an organisational approach that strikes a delicate balance.

In the next section, we will tell the story of one company that was able to make the transition from breakthrough idea to profitable new business unit – New York Times Digital (NYTD), the internet arm of the New York Times. Then, drawing from several other stories in multiple industries, we explain the remaining nine rules for building breakthrough businesses within established organisations.

New York Times Digital

In 1995, the New York Times began a transformational journey – the creation of New York Times Digital. At first glance, it may not seem such a radical transformation. There are obvious similarities between the newspaper and the website.

However, there are dramatic differences in the underlying business model. The newspaper runs on a routine, 24-hour news cycle; the website is updated continuously throughout the day. The newspaper charges a premium price; most content on the website is free. At the foundation of the newspaper business is excellence in journalism; the website is built around software expertise. The business model for NYTD was not only much different, it was also highly uncertain at launch. Such basic questions as whether the website needed a separate and independent newsroom were up for debate.

The company hired Martin Nisenholtz, who had spent his entire career developing expertise in interactive communications, to lead NYTD. Mr Nisenholtz was put in a senior position – he reported directly to both the general manager and editor of the newspaper. And, he was given a staff that was rich in experience within the New York Times.

As a result, NYTD had ready access to the newspaper’s resources and was off to a fast start. However by 1997, NYTD’s leadership team worried that its operation was not evolving as rapidly as the world of online media. Mr Nisenholtz felt constrained by the assumptions that his newspaper colleagues were making about what it would take to build a successful NYTD. Even outside analysts began to wonder if the company was investing heavily enough in the new technology.

In 1999 Russ Lewis, chief executive of the New York Times, chose to reorganise NYTD as a separate business unit. This was a crucial turning point. Mr Lewis’ decision was consistent with what has become conventional wisdom for managing new ventures – that they must be organised as separate units. But what does separate really mean? Separate how?

The reorganisation of NYTD included several specific changes. First, Mr Nisenholtz was promoted. He reported directly to the corporate president rather than to the newspaper. This is more startling than it may at first appear. NYTD became a peer on the organisation chart with a business unit nearly one hundred times its size. In addition, NYTD hired extensively from outside the company, dismantled and rebuilt the product development process, created a new senior policy team, redesigned planning and explicitly re-evaluated the culture.

These changes initiated an explosion of creativity. The staff created dozens of new features. Revenues handily exceeded expectations for several quarters. Still, the changes were not without side effects. New tensions arose between NYTD and the newspaper. There were numerous sources for this, including competition for resources, concerns over protecting the brand and customer relationships, and even simple jealousy. While NYTD was able to grow at the top line, its efficiency and effectiveness suffered as a result of the strains in its relationship with the newspaper.

When the dotcom bubble burst, NYTD was in a serious jam. Although revenues were growing, profits lagged. As weakness in the core business led to declines in profitability at the corporate level, NYTD’s losses seemed ever more serious. The newspaper’s leadership team almost succeeded in reducing NYTD once again to a simple newspaper.com operation, but Mr Lewis chose a different path, insisting on an immediate concerted drive to profitability. This led to two painful rounds of redundancies, but NYTD achieved profitability in 2001 and has grown its profits since. A crucial part of the solution was implementing teams at the senior management level to improve co-operation and co-ordination – in just a few areas, where it mattered most.

NYTD evolved into a “distinct-but-linked” organisation. “Distinct but linked” means that the new business, or “NewCo,” is a fundamentally different organisation. However, it is not isolated from the core business, or “CoreCo.” We now turn to specific recommendations for making the distinct-but-linked model as effective as possible.

Forget, Borrow, Learn

By comparing the New York Times story to several others, we learned that a distinct-but-linked approach can help NewCo overcome three central challenges of execution for breakthrough new businesses: forgetting, borrowing and learning. 

• NewCo must forget CoreCo’s assumptions about why it wins

• NewCo must borrow CoreCo’s assets

• NewCo must learn how to make a profit in its uncertain market

Note the important distinction between what must be forgotten and learned, and what must be borrowed. What NewCo must forget and learn are mindsets, assumptions and decision biases. On the other hand, what NewCo borrows are assets with concrete value, such as brands, manufacturing capacity, sales relationships or technical expertise.

The only way to forget, borrow and learn is to alter the set of policies that have the greatest influence over behaviour – that is, to alter the organisational DNA (see Figure 1). All organisations have DNA. When small companies get big enough that the leader can no longer make all of the decisions, the leader starts to create DNA – by establishing policies, decision rules, incentives, values and so on.

A strong organisation has a DNA that is consistent with its business model – but this means that the same DNA will get in the way of a new business. An organisation’s weaknesses are just the flip-side of its strengths. Hard-wire an organisation to excel in one business, and it is almost certain to struggle in a different one. 

The remaining nine rules (Figure 2) represent a more specific blueprint for using the distinct-but-linked design to forget, borrow and learn. There are three rules for each challenge.

To forget, NewCo must rebuild its DNA from the ground up. Outside hires play a crucial role because they naturally challenge existing assumptions. Outsiders must be placed in influential positions. For example, when the industrial group Corning launched a new biotechnology business in the late 1990s, it hired outsiders, but only for technical positions, not managerial ones. Two years into the venture’s life, the decision to place two outside experts in managerial positions helped turn the business in a more positive direction.

In addition, NewCo should report at least one level above the general manager of CoreCo. Both Corning and the New York Times learned that having NewCo report to CoreCo gives CoreCo too much influence and makes it difficult for NewCo to overcome entrenched assumptions.

Performance measures are another strong reinforcer of existing behaviours and mindsets. When the electronics manufacturer Analog Devices built a new business to commercialise a new crash sensor that launches automotive airbags, it for some time evaluated NewCo against CoreCo’s standards for gross margin, even though its cost structure was much different. This led to a number of misunderstandings.

The first principle for success at borrowing is to be exceedingly cautious about how much is borrowed. Each link between NewCo and CoreCo makes it more and more difficult for NewCo to forget. For example, when General Motors launched OnStar, a vehicle security and safety system, it took the approach that it should borrow everything possible from the core business. As a result, it adopted several elements of the automotive business model that were not a natural fit for an information technology business.

NewCo should borrow only when doing so gives NewCo a crucial competitive advantage, never just for incremental cost savings. Links must not only be carefully selected, they must be carefully managed. Tensions between NewCo and CoreCo are inevitable, and the senior management team must recognise that monitoring and managing these tensions is the most crucial thing they can do for NewCo once it is launched. Moderate tensions can be productive – they are a signal that people care and that they are engaged. But there are so many natural tensions between NewCo and CoreCo that they can easily escalate to destructive levels.

An important step for ensuring tensions remain healthy is to make borrowing as easy as possible for CoreCo. The general manager of CoreCo is responsible for the business that is at the foundation of the corporation’s ongoing performance, and he or she should not be distracted by an experimental new unit. To make borrowing painless, CoreCo’s resources should be increased when NewCo demands time and attention. Also, CoreCo’s general manager should not be penalised for NewCo’s startup losses, so NewCo’s losses should not affect CoreCo’s income statement. NewCo should compensate CoreCo through a fair internal accounting agreement.

NewCo has a very focused learning challenge: it must learn to predict its own business outcomes. The quicker it gets better at forecasting its own performance, the faster it resolves the critical unknowns in its business model, and the more quickly it will either zero in on a winning formula, or exit a losing business. When NewCo is learning, wild guesses become informed estimates, and informed estimates become reliable forecasts.

Predicting is the activity at the core of the planning process. To improve predictions – that is, to learn – companies must alter their approach to planning. Three of our ten rules apply here. Most crucially, the senior management team must hold NewCo accountable for learning, not for delivering the numbers in the plans. Clearly, by definition, NewCo cannot learn if it cannot alter predictions as it gains more information. Still, this is a difficult shift for senior managers who often connect strong performance with strong accountability. The opposite of accountability to plan, however, is not chaos. It is a disciplined, structured and rigorous approach to learning.

One crucial attribute of a planning process that supports learning is that it iterates more frequently. NewCo’s plans should be revised quarterly, or even monthly. This implies that NewCo’s plans must be less detailed, otherwise planning becomes too great a burden. NewCo’s plans must be simple and focused on just a few critical unknowns that can make or break the business.

Finally, NewCo’s and CoreCo’s planning meetings should be separate. Hasbro’s internet unit, Hasbro Interactive, had both a meteoric rise and a rapid decline. One contributing factor to the decline was a decision to hold monthly meetings in which all business units reported performance on standard metrics. This made it very difficult for Hasbro Interactive to diagnose what was working and what was not – there were too many conflicting interests and assumptions in the room at the same time.

With a distinct-but-linked approach, even the most tradition-bound organisations can get beyond just ideas. They can build new businesses of the future by forgetting, borrowing and learning.

Vijay Govindarajan is the Earn C Daum 1924 professor international business and the founding director of the william F Achtmeyer Center for Global Leadership at the Tuck School of Business at Dartmouth College

Chris Trimble is also on the faculty at the Tuck School of Business at Dartmouth. He is an expert on innovation and execution, and has been published the MIT Sloan Management Review, California Management Review, Across the Board and Fast Company

Mr Govindarajan and Mr Trimble are the authors of Ten Rules for Strategic Innovators: From Idea to Execution (Harvard Business School Press, 2005). This article is adapted from a lengthier article that first appeared in the Ivey Business School