Managing Organizational Competence

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ManagingOrganizational Competence
Professor Rebecca Henderson MIT Sloan School of
Management Phone [phone], Email
Rhenders_at_mit.edu,http//www.mit.edu/people/rhende
rs/home.html
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A Pause for Reflection

• What was the single most important idea you took
  away from yesterdays discussion?
• How will it be useful to you when you return to
  work?

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KODAK

• Evaluate Kodaks digital imaging strategy to date
• A? B? C? F?
• How would you evaluate the decision to invest in
  digital imaging
• In the 80s? In the 90s? Now?
• Given that they made the decision to invest, how
  would you evaluate their execution?
• What should Kodak do next?
• Where should they try to play in the digital
  value chain?
• How should they organize their digital efforts?

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The last of three key questions...
How will we Create value?
How will we Capture value?
How will we Deliver value?
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Transitions often challenge existing
organizations severely
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But they also create major opportunity

• Corning glass
• Cookware to optical fiber
• HP
• Instrumentation to computers
• IBM
• Mainframes to PCs to Services
• Eli Lilly
• Random drug discovery to genetics and genomics

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The Issue

• How can one manage the core business
• and
• real growth simultaneously?

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Discontinuous Innovationas a strategic problem

• Genuine uncertainty
• Its not going to happen certainly not now
• Cannibalization
• It will compete with our current products
• Shifts in the customer base
• Our current customers dont want it
• Margin erosion
• It will make less money

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Discontinuous Innovationas an organizational
problem

• Time horizons Incentives
• Fear of (individual) cannibalization
• Overload
• Competency Traps

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Discontinuous Innovation as a Strategic Problem
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New S curves may be hard to spot in advance
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(No Transcript)
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The new opportunity doesnt meet our current
customers needs
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Managing customers at momentsof discontinuity
Who buys a technology when it is first introduced?
Performance
New technologies sell to - New customers - With
new needs - Often at lower margins
Time
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The Innovators Dilemma Disruptive
technologies may threaten established firms
Performance
Time
Clay Christensen The Innovators Dilemma
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The new opportunity doesnt offer nearly the same
margins and profit opportunity
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Uniqueness Complementary Assets over the Life
Cycle
Complementary Assets
Uniqueness
Maturity
Takeoff
Ferment
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Discontinuous Innovation as an Organizational
Problem
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Discontinuous Innovationas an organizational
problem

• Time horizons Incentives
• Fear of (individual) cannibalization
• Overload
• Competency Traps

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Overload Is This Your Project Pipeline?
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Overload can give you worse before better
No longer term projects initiated
DELAY
Pressure to Fix short term problems
Time spent Fire fighting
Performance Gap
Time spent in next generation projects
Pressure to invest in longer term opportunities
DELAY
Growth projects available
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Common expectations
Average Performance
Anticipated performance
Change
Historical performance
Time
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The reality of worse before better
Average Performance
Anticipated performance
The Reality
Historical performance
Time
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Competencies evolve over time,creating
competency traps
Performance
Maturity
Discontinuity
Takeoff
Ferment
Time
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Change challenges every aspect of the
organization
Individuals become Invested in old
approaches Strategic/competitive problems may
provide an excuse for inertia
Leadership Strategy
Whole scale changes to structure and process
are very disruptive Two years of lost time?
Structure Process
Existing incentives often work against
significant change, and new incentives take time
and work
Strong cultures deeply rooted mental models
are extraordinarily resistant to change
Incentives
Culture Mental Models
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The Problem of Mental Models
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Mental models the evolution of knowledge

• The Era of Ferment
• A premium on flexible competence deep
  integration across functions and boundaries
• Dominant design established -- enables
• An Era of Incremental innovation
• Allows the fragmentation of knowledge
• Component knowledge -- knowledge about the pieces
• Architectural knowledge -- knowledge about the
  relationship between the pieces -- about what
  everybody else knows

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Architectural knowledge becomes embedded in
mental models...

• Information channels
• If I have a question about customer needs I can
  always call Fred..
• Communication filters
• The only thing I need to worry about in this
  report is Section 8..
• Problem solving strategies
• The easiest way to increase speed while reducing
  noise is to...

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And in the Deep Structure of the Organization
Leadership
Formal Structure/Process
Incentives/Political Structure
Culture/Mental Models
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Where it is a source of STRENGTH!

• It allows the organization to get things done!
• Minimizes meeting time
• Allows for clear responsibilities
• And quick response
• Embedded architectural knowledge is a key
  organizational competence

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And of weakness

• Problems in recognition
• Denial
• Problems in response
• Panic
• Overload the recreation of old solutions

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The Organizational Challenge
Successful growth unites entrepreneurial insight
with effective coordination
Entrepreneurial Drive, Freedom from the old
ways
Startups
B as U
Control Coordination
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In summary

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

- Divisional Manager, Telecommunications
Equipment Provider
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What can be done?
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Make sure youve fixed (or are at least aware
of)the strategic problem
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How will we create and capture value over time?
Performance
Maturity
Discontinuity
Takeoff
Ferment
Time
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Address the organizational challenges
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What can be done?

• Lead
• Build the ambidextrous senior team,
  communicate the strategy, allocate resources
  grapple with worse before better
• Structure
• Explore transitional and intermediate forms
• Incent
• Explain just whats in this for me?
• Build
• Lay the foundations for a new culture, new
  expectations

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What can be done?

• Lead
• Develop a clear strategy
• Generate energy
• Build an ambidextrous senior team
• Make decisions deal with worse before better

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Develop a clear strategy
How will we Create value?
How will we Capture value?
How will we Deliver value?
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Generate Energy

• Position the discontinuity as an urgent threat
• Flirt with bankruptcy
• Make vivid the idea that the firm might flirt
  with bankruptcy
• Position the discontinuity as an opportunity
• Generate some small successes build enthusiasm
  and infect the organization
• Leap boldly into the future

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Build an Ambidextrous Senior Team

• Ambidextrous senior teams must manage
• both more mature, operationally focused
  businesses
• and higher growth, emerging businesses
• High performing senior teams show
• High conflict, high respect decision making
  capabilities
• High levels of trust and truth telling
• The ability to manage divergent incentive systems
  and career paths
• Coupled with processes that support the divergent
  management of quite different business units
• E.g. Resource allocation processes that allow for
  different time horizons, milestones, rates of
  return

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Make Decisions
100
Average Value-Added Time on Engineering Tasks
80
60
40
20
0
6
5
4
3
1
2
Number of Projects per Engineer
Source IBM Development Efficiency Study
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Deal with worse before better
Average Performance
Anticipated performance
The Reality
Historical performance
Time
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What can be done?

• Lead
• Structure
• Implement appropriately
• Choose the right people
• Manage linkages

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Balance entrepreneurial energy and coordination
Successful disruptive innovation unites
entrepreneurial insight with effective
coordination
Entrepreneurial Energy
Startups
B as U
Control Coordination
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Choose a structure that fits the firms strategic
positioning and skills
Entrepreneurial Energy
Acquire/ Partner
Joint venture/ alliance
Internal venture
Build inside existing unit
Control Coordination
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Manage it using every lever that you have
Entrepreneurial Drive, Freedom from the old
ways
Acquire/ Partner
?
Joint venture/ alliance
Internal venture
Build inside existing unit
Build inside existing units
Control Coordination
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ExerciseBest Practice in Building Growth

• Choose one of the alternative organizational
  forms with which you have some experience
• Building growth inside an existing unit
• Separate division
• Spin off
• Joint venture
• Acquisition
• In retrospect, what are the critical factors that
  needed to be in place to make it successful?

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Acquisitions Pros and Cons

• Pros
• Brings in a new culture with an established set
  of skills a sure bet?
• Cons
• Is the market efficient? Will the shareholders
  of the acquired firm capture all the value?
• Should you worry about the winners curse? Will
  you pay too much?
• Once acquired, will the new firm simply be
  assimilated into the existing firm?

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What can be done?

• Lead
• Structure
• Incent
• Explain just whats in this for me?
• Manage the balance between
• Individual outcomes and team/firm outcomes
• Objective and subjective measures

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The incentive problem is an inherently difficult
one
Entrepreneurial Drive, Freedom from the old
ways
Startups
B as U
Control Coordination
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Using high powered incentives may reduce
coordination
Entrepreneurial Drive, Freedom from the old
ways
?
Acquire/ Partner
Joint venture/ alliance
Internal venture
Build inside existing unit
Build inside existing units
Control Coordination
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What can be done?

• Lead
• Structure
• Incent
• Transform the culture
• Build on core values
• Practice thinking in new ways
• Manage from the heart

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Summary
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Remember what youre dealing with

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

- Divisional Manager, Telecommunications
Equipment Provider
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Make sure youve fixed (or are at least aware
of)the strategic problem
58
Manage the organizational issues aggressively
Entrepreneurial Drive, Freedom from the old
ways
?
Acquire
Joint venture/ alliance
Internal venture
Build inside existing unit
Build inside existing units
Control Coordination