Balancing the Future Against Today's Needs

by Paul Michelman

It is a classic leadership challenge of the early twenty-first century: How do you steer your business and motivate your people to pursue breakthrough growth while giving proper attention to executing the here and now with the utmost care and efficiency?

Accomplishing this requires leaders to navigate conflicts both external and internal. Today, more than ever, markets exert continual pressure on organizations to cut costs and return capital to the bottom line, but building value demands that much of that same capital be diverted into long-term investments.

At the same time, leaders must balance internal resources. On the one hand, they need to focus some of their people on continually improving and growing the core business. On the other hand, they must free others to break all the rules in the name of growth and innovation.

To strike this balance successfully, the experts note, leaders must bring to bear a new perspective on how growth efforts are situated in their companies, how they measure and reward executing the present and building the future, and how they align behaviors to their specific growth initiatives.

Planting new trees in an old-growth forest
Perhaps the most critical decision for leaders seeking to strike the right balance between the needs of the core business and the need for growth is how they situate new growth efforts within the company.

Stanford Graduate School of Business professor Charles A. O'Reilly III and Harvard Business School professor Michael L. Tushman outline one approach in their Harvard Business Review article, "The Ambidextrous Organization" (April 2004). They coined the term ambidextrous innovation to describe how mature companies can pursue breakthrough growth through a two-pronged effort in which they "separate their new, exploratory units from their traditional, exploitive ones" while maintaining "tight links across units at the senior executive level."

This separate-yet-connected structure allows leaders to provide freedom to some to blaze a new trail, while protecting the ability of others to stay on the tried-and-true path. "You need to separate out your innovators and let them do crazy and radical things," says former Medtronic CEO Bill George, now a professor of management practice at Harvard Business School. "Innovators need to be able to try things out, fail, correct them, and then bring them back into the organization." You really need to develop two cultures, says George, "one that is driven to satisfy customer needs both today and tomorrow, and the other that is focused on crazy innovation."

Leaders who strike the balance well, note O'Reilly and Tushman, do so by mitigating the effects of separation with a structure that encourages cooperation. "The tight coordination at the managerial level enables the fledgling units to share important resources from the traditional units—cash, talent, expertise, customers, and so on," they write, "but the organizational separation ensures that these new units' distinctive processes, structures, and cultures are not overwhelmed by the forces of 'business as usual.'"

Other leaders, like Alex Urquhart, president and CEO of GE Commercial Finance's Energy Financial Services, take a slightly more tempered approach. "It's always tempting to say, 'You guys do the old stuff, and we'll get a bunch of new guys and let them do the growth,'" he says. But when you remove people from the core, "they lose the chance to grow with the customer. And it's the insights into your assets and markets that give you the new ideas."

But that doesn't mean leaders should always embed new growth opportunities within the traditional business. Indeed, sometimes the inherent conflicts are just too large. At times, says Urquhart, "we'd find that there was a mind shift partway through the year," as people would abandon the most innovative and risky parts of their plans—the ones that called for entering new markets, for instance—and "go back to the core" because they knew they could make their annual numbers that way.

So, when Urquhart recognized an opportunity to grow from underwriting "big-ticket power projects"—the core business—into financing smaller projects and smaller markets, he says, "we built a new team to develop and grow the midmarket because I knew the existing team would want to continue to pursue the big deals" even if they were charged with going after smaller ones as well. He's taking a similar approach in the quest for opportunities in green energy, where the payoffs will be over a much longer term than in the traditional business.

But even when he's creating a new team to pursue breakthrough growth, Urquhart is thinking about how he will consolidate it with the core business. In the case of the midmarket growth effort, for example, Urquhart notes that he now has two separate teams—one from the traditional business and one from the new midmarket segment—calling on some of the same accounts. "Ultimately, that doesn't serve the customer," he says. "You need to make sure the teams are talking and that you have a plan to bring the growth team back in."

Measure and reward the balance you seek
When Tom Curley set about turning USA Today into an ambidextrous organization in which the print, online, and television units would be more closely aligned at the senior executive level, he recognized that the existing measurements of individual and team success would have to be thrown out, O'Reilly and Tushman write. If unit executives were to be tracked on the success of their respective businesses, they would lack motivation to share resources, which Curley knew was necessary. So Curley replaced "unit-specific goals with a common bonus program tied to growth targets across all three media," according to the authors.

To give focus to both growth and core initiatives throughout his organization, PacifiCare Health Systems chairman and CEO Howie Phanstiel took a multifaceted approach to rewards. As PacifiCare launched new ventures aimed to grow the company from its core HMO business into the consumer health organization market, Phanstiel threw out a system in which managers' variable compensation was largely based on overall company performance and tied almost 100 percent of compensation to measures at the unit and individual performance levels. "The new parts of the business still needed to draw on resources from across the company," Phanstiel says, "and everyone had to understand what their role was with respect to supporting this growth. We rewarded people [at the unit level] both on their execution of their core business needs as well as on how well they supported the needs of the new business."

But just as leaders must align behaviors toward common goals, they need to respect the very different paths that core and growth businesses follow. When you drill down, George notes, "if everyone uses the same measurements, you'll kill them."

For the mature side of the business, "you need to reward and encourage employees to do what they've done in the past better," Tushman says. For instance, 10 percent annual growth might be phenomenal in a traditional business, whereas a high-growth business might be aiming for three times that, or more. Also consider the time horizon. Quarter-over-quarter earnings remain highly relevant for many sectors of many companies, but such measures are largely irrelevant to new businesses, and following them could well destroy a young venture's chances of successfully reaching maturity. Indeed, even annual growth measures may be too aggressive for certain opportunities.

Align behaviors to your growth plan
George suggests leaders think of growth along four dimensions. The first is the core business itself. It's easy to take the core for granted and expect nothing more than slow expansion here as you pursue "real" growth elsewhere, but successful firms focus on gaining share "every quarter and reinvigorating the core at all times," George says.

Companies that are successful in driving constant growth from the core reap many benefits, not the least of which is that they deliver returns that satisfy investors while generating the cash they need to invest in more-radical growth and innovation opportunities.

This has been a critical motivational point for Phanstiel at PacifiCare. When the company unveiled its growth plans to employees, people were so enthusiastic that "everyone wanted to work on the new parts of the business," Phanstiel says. To keep people in the core "focused on the hard work of growing the old business, we had to make it clear that everyone's effort mattered." The message was clear: "Your job is to execute superbly to generate the money we need to invest in the growth of our company."

Adds Urquhart, "You don't want the guys in the core part of your business to feel like they're working at the wagon wheel factory after the car has been invented."

It's important that growth teams recognize this as well, Tushman says. "The exploratory crowd needs to know that the exploitive crowd is paying the bills." This helps affirm the message "We're all in this together."

Embracing the long view
In George's growth model, as you build the core, you should also be looking at three longer-term areas of growth: new markets for existing products and services, new products and services for existing customers and markets, and finally, "reinventing your firm," George says, by developing innovative new products for new markets.

Each of these opportunities requires leaders to take a long-term view of growing the business and make investments that will probably not result in payback during their tenure. But the following is among the qualities that distinguish the best leaders, according to George: recognizing that the only way to ensure future success is to forgo some of the short-term reward, no matter what the pressures.

Reframing the mission
The most aggressive form of growth, developing entirely new products for markets you don't yet serve, requires both the longest time horizon and the biggest leap of faith. During George's tenure in the 1990s, Medtronic called this effort the "2010 Exercise." The goal was to address "how we reinvent the business beyond the scope of current technology and market thinking," he says. To do this, George knew that managers needed some direction as to where to focus their energy. So he challenged the organization to generate ideas to "produce lifelong solutions for long-term diseases." This key rephrasing of the company's mission was meant to spur people to stop thinking about shorter-term solutions for disease management and to consider a much longer horizon in terms of patient care.

One result of this effort is the CareLink Network, a remote monitoring service for cardiac device patients, which hit the market well before 2010 (the FDA approved it in January 2002). It was only by thinking in terms of "reinvention," says George, that this could have been conceived. To shift the mindset of your people, "you have to be an engaged leader," he says, "out there with your people all time, spending time with both employees and customers."

When Phanstiel took the reins of PacifiCare, he inherited a slow-growth company in a slow-growth industry. But he also inherited a workforce made up of motivated people who cared deeply about serving their customers. The notion of caring, with a proactive bias toward action, became the building block of Phanstiel's efforts to motivate people to embrace new growth opportunities while still respecting the importance of the core business. "Caring is good," his new mission statement began, "but doing something is better."

Reproduced with permission from "Today vs. Tomorrow: Are You Striking the Right Balance?" Harvard Management Update, July 2005.

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Paul Michelman is the editor of Harvard Management Update.