ManagingManagingOrganizational CompetenceOrganizational Competence

Professor Rebecca Henderson

MIT Sloan School of Management Phone: (617) 253-6618, Email: Rhenders@mit.edu,

http://www.mit.edu/people/rhenders/home.html

A Pause for Reflection:A Pause for Reflection:

What was the single most important idea you took What was the single most important idea you took away from yesterday’s discussion?away from yesterday’s discussion?

How will it be useful to you when you return to work?How will it be useful to you when you return to work?

The last of three key questions...The last of three key questions...

How will we Create value?

How will weCapture value?

How will weDeliver value?

Transitions often challenge existing Transitions often challenge existing organizations severelyorganizations severely

Cumulate share of sales of photolithographic alignment equipment, 1962-1986, by generation Contact Proximity Scanner S&R (1) S&R (2)

Cobilt 44 <1

Kasper 17 8 7

Canon 67 21 9

P-Elmer 78 10 <1

GCA 55 12

Nikon 70

Total 61 75 99+ 81 82+

But they also create major opportunityBut they also create major opportunity

Corning glassCorning glass– Cookware to optical fiberCookware to optical fiber

HPHP– Instrumentation to computersInstrumentation to computers

IBMIBM– Mainframes to PCs to ServicesMainframes to PCs to Services

Eli LillyEli Lilly– ““Random” drug discovery to genetics and genomicsRandom” drug discovery to genetics and genomics

The IssueThe Issue

How can one manage the core business How can one manage the core business

andand

real growth simultaneously?real growth simultaneously?

Discontinuous InnovationDiscontinuous Innovationas a strategic problemas a strategic problem Genuine uncertaintyGenuine uncertainty

– It’s not going to happen – certainly not nowIt’s not going to happen – certainly not now CannibalizationCannibalization

– It will compete with our current productsIt will compete with our current products Shifts in the customer baseShifts in the customer base

– Our current customers don’t want itOur current customers don’t want it Margin erosionMargin erosion

– It will make less moneyIt will make less money

Discontinuous InnovationDiscontinuous Innovationas an organizational problemas an organizational problem Time horizons & IncentivesTime horizons & Incentives Fear of (individual) cannibalizationFear of (individual) cannibalization OverloadOverload Competency TrapsCompetency Traps

Discontinuous Innovation Discontinuous Innovation as a Strategic Problemas a Strategic Problem

New S curves may be hard New S curves may be hard to spot in advanceto spot in advance

Evaluating alternatives for next generation automobile propulsion systems (Joanne Woestman, SDM Thesis, 1999) Parameter Fuel Cells ICE Hybrids Electrics Value Cost Bad Good Ok Bad Efficiency Good Ok Ok Ok Operating Cost Ok Good Ok Ok Performance 0 to 60 time Ok Good Good Ok Top speed Ok Good Good Ok NVH Good Ok Ok Good Utility Range Ok Good Good Bad All weather reliability Bad Good Ok Bad Capacity Ok Ok Ok Ok Refueling time Ok Good Good Bad Refueling convenience Bad Very good Very Good Bad Safety Emissions Great Ok Good Great Crashworthiness Ok Ok Ok Ok Evaporative Emissions Ok Ok Ok Great

The new opportunity The new opportunity doesn’t meet our current doesn’t meet our current

customer’s needscustomer’s needs

Managing customers at momentsManaging customers at momentsof discontinuityof discontinuity

Performance

Time

Who buys a technologywhen it is firstintroduced?

New technologies sell to:- New customers- With new needs- Often at lower margins

The Innovator’s Dilemma: “Disruptive” The Innovator’s Dilemma: “Disruptive” technologies may threaten established firmstechnologies may threaten established firms

Performance

Time

Established technology

Mainstream customer needs

Niche customer needs

Invasive Technology

Clay Christensen: The Innovator’s Dilemma

The new opportunity The new opportunity doesn’t offer nearly the doesn’t offer nearly the

same margins and profit same margins and profit opportunityopportunity

Uniqueness & Complementary Assets Uniqueness & Complementary Assets over the Life Cycle:over the Life Cycle:

Ferment

Takeoff

Maturity

UniquenessComplementary

Assets

Discontinuous Innovation Discontinuous Innovation as an as an

Organizational ProblemOrganizational Problem

Discontinuous InnovationDiscontinuous Innovationas an organizational problemas an organizational problem Time horizons & IncentivesTime horizons & Incentives Fear of (individual) cannibalizationFear of (individual) cannibalization OverloadOverload Competency TrapsCompetency Traps

Overload: Is This Your Project Pipeline?

Performance Gap

Pressure to Fix short termproblems

Pressure toinvest in longer term opportunities

Time spentin “next generation”projects

Time spentFire fighting

Growth projectsavailable

--

DELAYDELAY

-- ++

--

No longerterm projectsinitiated

++

DELAYDELAY

Overload can give you “worse before better”Overload can give you “worse before better”

Common expectations Common expectations

AveragePerformance

Time

Historicalperformance

Anticipated performance

Change

The reality of “worse before better”The reality of “worse before better”

AveragePerformance

Time

Historicalperformance

Anticipated performance

The Reality

Competencies evolve over time,Competencies evolve over time,creating “competency traps”creating “competency traps”

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity

Change challenges every aspect of the Change challenges every aspect of the organizationorganization

Leadership & Strategy

Structure &Process

Incentives

Culture & Mental Models

Individuals becomeInvested in old approaches

Strategic/competitive problems may provide an

excuse for inertia

Existing incentives often work against significant

change, and new incentives take time and work

Whole scale changes to structure and process are

very disruptive: Two years of lost time?

Strong cultures & deeplyrooted mental models areextraordinarily resistant

to change

The Problem of Mental The Problem of Mental ModelsModels

Mental models & the evolution of Mental models & the evolution of knowledge:knowledge:

The Era of Ferment:The Era of Ferment:– A premium on flexible competence: deep integration A premium on flexible competence: deep integration

across functions and boundariesacross functions and boundaries Dominant design established -- enables…Dominant design established -- enables… An Era of Incremental innovationAn Era of Incremental innovation

– Allows the fragmentation of knowledgeAllows the fragmentation of knowledge– Component knowledgeComponent knowledge -- knowledge about the pieces -- knowledge about the pieces– Architectural knowledgeArchitectural knowledge -- knowledge about the -- knowledge about the

relationship between the pieces -- about “what relationship between the pieces -- about “what everybody else knows”everybody else knows”

Architectural knowledge becomes Architectural knowledge becomes embedded in mental models...embedded in mental models...

Information channelsInformation channels– ““If I have a question about customer needs I If I have a question about customer needs I

can always call Fred..”can always call Fred..” Communication filtersCommunication filters

– ““The only thing I need to worry about in this The only thing I need to worry about in this report is Section 8..report is Section 8..””

Problem solving strategiesProblem solving strategies– ““The easiest way to increase speed while The easiest way to increase speed while

reducing noise is to.reducing noise is to...”..”

And in the And in the Deep StructureDeep Structure of the of the OrganizationOrganization

Leadership

Formal Structure/Process

Incentives/Political Structure

Culture/Mental Models

Where it is a source of STRENGTH!Where it is a source of STRENGTH!

It allows the organization to It allows the organization to get things doneget things done!!– Minimizes “meeting time”Minimizes “meeting time”– Allows for clear responsibilitiesAllows for clear responsibilities– And quick responseAnd quick response

Embedded architectural knowledge is a key Embedded architectural knowledge is a key organizational competenceorganizational competence

And of weakness:And of weakness:

Problems in recognition:Problems in recognition:– DenialDenial

Problems in response:Problems in response:– PanicPanic– Overload & the recreation of old solutionsOverload & the recreation of old solutions

Control & Coordination

The Organizational Challenge:The Organizational Challenge:

EntrepreneurialDrive,Freedom from the “old ways”

Successful growth unites entrepreneurial insight with

effective coordination

StartupsStartups

B as UB as U

In summary:In summary:

““I see”, he said, “you’re suggesting that we invest I see”, he said, “you’re suggesting that we invest millions of dollars in a market that may or may not millions of dollars in a market that may or may not exist but that is certainly smaller than our existing exist but that is certainly smaller than our existing market, to develop a product that customers may or market, to develop a product that customers may or may not want, using a business model that will almost may not want, using a business model that will almost certainly give us lower margins than our existing certainly give us lower margins than our existing product lines. You’re warning us that we’ll run into product lines. You’re warning us that we’ll run into serious organizational problems as we make this serious organizational problems as we make this investment, and our current business is screaming for investment, and our current business is screaming for resources. Tell me again just why we should make this resources. Tell me again just why we should make this investment?”investment?”

- Divisional Manager, Telecommunications Equipment Provider

What can be done?What can be done?

Make sure you’ve fixed Make sure you’ve fixed (or are at least aware of)(or are at least aware of)

the strategic problemthe strategic problem

How will we create and capture value How will we create and capture value over time?over time?

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity

Address the organizational Address the organizational challengeschallenges

What can be done?What can be done? LeadLead::

– Build the “ambidextrous” senior team, Build the “ambidextrous” senior team, communicate the strategy, allocate resources – communicate the strategy, allocate resources – grapple with “worse before better”grapple with “worse before better”

StructureStructure: : – Explore transitional and intermediate formsExplore transitional and intermediate forms

IncentIncent::– Explain “just what’s in this for me?”Explain “just what’s in this for me?”

BuildBuild: : – Lay the foundations for a new culture, new Lay the foundations for a new culture, new

expectationsexpectations

What can be done?What can be done? LeadLead::

– Develop a clear strategyDevelop a clear strategy

– Generate energyGenerate energy

– Build an “ambidextrous” senior teamBuild an “ambidextrous” senior team

– Make decisions: deal with worse before betterMake decisions: deal with worse before better

Develop a clear strategyDevelop a clear strategy

How will we Create value?

How will weCapture value?

How will weDeliver value?

Generate EnergyGenerate Energy

Position the discontinuity as an urgent threat:Position the discontinuity as an urgent threat:– Flirt with bankruptcyFlirt with bankruptcy

– Make vivid the idea that the firm might flirt with Make vivid the idea that the firm might flirt with bankruptcybankruptcy

Position the discontinuity as an opportunityPosition the discontinuity as an opportunity– Generate some small successes: build enthusiasm and Generate some small successes: build enthusiasm and

“infect” the organization“infect” the organization

– Leap boldly into the futureLeap boldly into the future

Build an Ambidextrous Senior TeamBuild an Ambidextrous Senior Team

Ambidextrous senior teams must manage Ambidextrous senior teams must manage – bothboth more mature, operationally focused businesses more mature, operationally focused businesses– andand higher growth, emerging businesses higher growth, emerging businesses

High performing senior teams show:High performing senior teams show:– High conflict, high respect decision making capabilitiesHigh conflict, high respect decision making capabilities– High levels of trust and truth tellingHigh levels of trust and truth telling– The ability to manage divergent incentive systems and The ability to manage divergent incentive systems and

career pathscareer paths Coupled with processes that support the divergent Coupled with processes that support the divergent

management of quite different business unitsmanagement of quite different business units– E.g. Resource allocation processes that allow for E.g. Resource allocation processes that allow for

different time horizons, milestones, rates of returndifferent time horizons, milestones, rates of return

Average

Value-Added

Time on

Engineering

Tasks

Number of Projects per Engineer

100%

80%

60%

40%

0%

20%

65431 2

Source: IBM Development Efficiency Study

Make DecisionsMake Decisions

Deal with “worse before better”Deal with “worse before better”

AveragePerformance

Time

Historicalperformance

Anticipated performance

The Reality

What can be done?What can be done? Lead:Lead: StructureStructure: :

– Implement appropriatelyImplement appropriately

– Choose the right peopleChoose the right people

– Manage linkagesManage linkages

Control & Coordination

Balance entrepreneurial energy and Balance entrepreneurial energy and coordinationcoordination

EntrepreneurialEnergy Successful disruptive

innovation unites entrepreneurial insight with

effective coordination

StartupsStartups

B as UB as U

Control & Coordination

Choose a structure that fits the firm’s Choose a structure that fits the firm’s strategic positioning and skillsstrategic positioning and skills

Jointventure/alliance

EntrepreneurialEnergy

Internalventure

Build insideexisting unit

Acquire/Partner

Control & Coordination

Manage it using every lever that you Manage it using every lever that you havehave

Acquire/Partner

Build inside existing units

Jointventure/alliance

?EntrepreneurialDrive,Freedom from the “old ways”

Internalventure

Build insideexisting unit

Exercise:Exercise:Best Practice in Building GrowthBest Practice in Building Growth Choose one of the alternative organizational forms Choose one of the alternative organizational forms

with which you have some experience:with which you have some experience:– Building growth inside an existing unitBuilding growth inside an existing unit

– Separate divisionSeparate division

– Spin offSpin off

– Joint ventureJoint venture

– Acquisition Acquisition In retrospect, what are the critical factors that needed In retrospect, what are the critical factors that needed

to be in place to make it successful?to be in place to make it successful?

Acquisitions: Pros and ConsAcquisitions: Pros and Cons

ProsPros– Brings in a new culture with an established set of skills – Brings in a new culture with an established set of skills –

a “sure bet”?a “sure bet”? ConsCons

– Is the market efficient? – Will the shareholders of the Is the market efficient? – Will the shareholders of the acquired firm capture all the value?acquired firm capture all the value?

– Should you worry about the winner’s curse? Will you Should you worry about the winner’s curse? Will you pay too much?pay too much?

– Once acquired, will the new firm simply be assimilated Once acquired, will the new firm simply be assimilated into the existing firm?into the existing firm?

What can be done?What can be done? LeadLead Structure: Structure: IncentIncent

– Explain “just what’s in this for me?”Explain “just what’s in this for me?”

– Manage the balance between:Manage the balance between:• Individual outcomes and team/firm outcomesIndividual outcomes and team/firm outcomes• ““Objective” and “subjective” measuresObjective” and “subjective” measures

Control & Coordination

The incentive problem is an inherently The incentive problem is an inherently difficult one…difficult one…

EntrepreneurialDrive,Freedom from the “old ways”

StartupsStartups

B as UB as U

Control & Coordination

Using “high powered” incentives may Using “high powered” incentives may reduce coordinationreduce coordination

Acquire/Partner

Build inside existing units

Jointventure/alliance

EntrepreneurialDrive,Freedom from the “old ways”

Internalventure

Build insideexisting unit

?

What can be done?What can be done? LeadLead Structure Structure IncentIncent Transform the culture:Transform the culture:

– Build on core valuesBuild on core values

– Practice thinking in new waysPractice thinking in new ways

– Manage from the heartManage from the heart

SummarySummary

Remember what you’re dealing with:Remember what you’re dealing with:

““I see”, he said, “you’re suggesting that we invest I see”, he said, “you’re suggesting that we invest millions of dollars in a market that may or may not millions of dollars in a market that may or may not exist but that is certainly smaller than our existing exist but that is certainly smaller than our existing market, to develop a product that customers may or market, to develop a product that customers may or may not want, using a business model that will almost may not want, using a business model that will almost certainly give us lower margins than our existing certainly give us lower margins than our existing product lines. You’re warning us that we’ll run into product lines. You’re warning us that we’ll run into serious organizational problems as we make this serious organizational problems as we make this investment, and our current business is screaming for investment, and our current business is screaming for resources. Tell me again just why we should make this resources. Tell me again just why we should make this investment?”investment?”

- Divisional Manager, Telecommunications Equipment Provider

Make sure you’ve fixed Make sure you’ve fixed (or are at least aware of)(or are at least aware of)

the strategic problemthe strategic problem

Control & Coordination

Manage the organizational issues Manage the organizational issues aggressivelyaggressively

Acquire

Build inside existing units

Jointventure/alliance

?EntrepreneurialDrive,Freedom from the “old ways”

Internalventure

Build insideexisting unit