Established conventional firms increasingly aim to seize business opportunities in emerging sustainability-related markets. They can do so by developing innovations based on their core competences, for instance in the context of a strategic diversification. While the development of green innovations can open new business opportunities, many firms struggle with seizing opportunities in unknown product-market domains. Yet little is known about how firms actually develop green innovations and what challenges they face. This paper presents the anatomy of a “failed” innovation process of a German engineering firm to shed light on the management challenges of developing green innovations in the context of diversification. The paper draws the attention to five major management challenges: (1) the adoption of an exploration strategy that matches the degree and scope of an innovation, (2) the setup of appropriate organizational structures to separate old from new business, (3) the value of extensive networking and partnerships to access and acquire distant information, (4) the benefits of an entrepreneurial approach to uncertainty involving quick learning and (5) the advantages of business model innovation to widen the innovation space.