Innovation Streams And Dynamic Capabilities

Innovation Streams and Dynamic Capabilities SLA-NY

March 2009

Professor Michael Tushman Harvard Business School

What Do These Firms Have In Common?

Levi Strauss

ATT

Kirin

Kodak

Marks & Spencer

Boeing

SSIH/Asaug

Bausch & Lomb

Philips

Roche

Ciba-Geigy

U.S.Steel

DEC

NYPD

Polaroid

Siebel

Kidder Peabody

IBM

Xerox

Pan Am

ICI/Nike

What Do These Firms Have In Common?

Levi Strauss

ATT

Kirin

Kodak

Marks & Spencer

Boeing

SSIH/Asaug

Bausch & Lomb

Philips

Roche

Ciba-Geigy

U.S.Steel

DEC

NYPD

Polaroid

Siebel

Kidder Peabody

ICI/Nike

Xerox

VMware?

IBM China?

Turk Telecom?

Seagate?

AMP 175?

Worldwide Watch Production Number of Firms and Workers in the Swiss Watch Industry, 1950-1985

Export of Watch Movements and Completed Watches, 1951-1980 (thousands of units)

Year

Number of Firms

Employees

Year

Japan

1945

2,500

80,000

1951

31

33,549

1950

1,863

60,239

1955

19

33,742

1955

2,316

70,026

1960

145

40,981

1960

2,167

74,216

1965

4,860

53,164

1965

1,927

83,922

1970

11,339

71,437

1970

1,618

89,448

1975

17,017

65,798

1975

1,169

62,567

1980*

68,300

50,986

1976

1,083

55,182

1977

1,021

54,825

1978

979

52,669

1979

867

46,716

1980

861

46,998

1982

730

38,200

1985

600

32,000

*Includes movements

Switzerland

Percentage of Tires Shipped by Construction Type: 1961-1989

Sources: Rubber Manufacturers Association, “Tire Shipments by Construction,” Tire Industry Facts (Akron, Ohio, 1990); Firestone Tire & Rubber Company, “Sales Forecasts,” Corporate Archives (Akron, Ohio, 1980). Citation: Sull, Donald. “The Dynamics of Standing Still: Firestone Tire & Rubber and the Radial Revolution,” Business History Review, 1999, pp. 430-464.

Disk Drive Industry Evolution 146 firms founded; 125 failures (From Christensen, 1997) 2.5”

Market Size

Prairietek, Quantum, Conner, Western Digital

3.5”

Conner, Quantum, Maxtor, Western Digital, Seagate

5.25”

Seagate, Miniscribe, Maxtor, Micropolis, Computer Memories

8” Shugart, Micropolis, Priam, Quantum

14”

1976

Control Data, IBM, Memorex, Diablo, DEC, Ampex

1981

1986

1991

1996

Kirin and Asahi share of Japanese Beer Market: 1949 – 2001

Source: Timothy James, Resource development in firms: New product development and organizational change in the Japanese brewing industry, University of Washington, 1992: table 5.8. Nikko Weekly.

The Sears’ Tower looking south in 1970 2004

August 1, 2006

© 2006, The New York Times Co.

Expected years in S&P 500 90

Many Pathologies…

45 30 22 15 1935

1955

1975

1995

2005E

– Cultural lock-in – Blindness to disruptive technologies – Strategic-operational imbalance – Limitations of operating organization – Low genetic diversity

Oliver Engert McKinsey 2005

Adapted from Business Week, Oct. 30, 2000, pp. 80-81

Ball Corporation $5B $4B

During Duringthese these126 126years, years,the the company companyhas hasmade madefour four distinct distincttransformations. transformations.

1998

Plastic

Metal

$3B

Aerospace

$2B 1996

$1B

Glass Wooden 1880

1910

John Fisher “42

1940

1960

1970

1980

1990

2000

General Radio / Gen Rad

1915 – 1972

1973 – 1980

($44 Million)

($168 Million)

• High Price, High Quality • Wide, Specialized Product Line

• Narrow Product Line (20– 3)

• Slow Growth, Harmony

• Growth Oriented

• Engineering Dominated

• Marketing and Production Dominated

• Functional Structure • Internal Promotion • Human Resource Oriented • Loose Controls

• Divisional Structure • External Recruitment • Formal Planning & Control • Go Public in 1978

Prime Computer

1971 – 1975

1975 – 1981

($11 Million)

($267 Million)

• Founders from Honeywell • New Senior Management from • High Price & Quality Honeywell • OEM Sales • Lower Priced • Engineering Dominated Computers and Systems • Sell Through Distributors • Functional Structure

• OEM/END Users • Sales Dominated • Multiple Markets • Differentiated Functional Structure

1981 – • New Senior Management from IBM • Broader Product Line • Diversity • Marketing Dominated • Product Structure

General Automation

1967 – 1974

1974 – 1978

1981 – 1982

($30 Million)

($116 Million)

($130 Million)

• Founders from Varian

• New Senior Team

• Industrial Automation

• SOS Technology

• Selected Industries

• Diversity – Customized – New Industries – Acquisitions

• Engineering Dominated • Functional Structure

• Sales & Engineering • Divisional Structure • Variable Performance

• CEO Replaced, New Management Team • Back to Basics Strategy • Divest • Engineering Dominated with Marketing Emphasis • Functional Structure • More Consistent Performance

“It is not the strongest of the species that survive, nor the most intelligent, but the one that is most responsive to change.” “Those who live by the sword… will be shot by those who don’t.”

The Innovation Paradox:

Why Do Winners Become Losers? •

Not A New Phenomenon

•

Common Across Industries

•

Seen Around The World

Why Do Successful Firms Often Fail? •

WRONG STRATEGY?

•

WRONG TECHNOLOGY?

•

STUNTED EXECUTION?

•

BAD LUCK?

Gunfire GunfireatatSea Sea Elting EltingMorison Morison

The young Assistant Secretary of the Navy stands with Admirals McKean, left, and Sims in 1919. Photo courtesy of Franklin D. Roosevelt Library.

Median Revenue Growth Rate Of S&P 1200 Companies Compound Annual Growth Rate (CAGR), 1994–2003 16% 14% 12% 10%

Median 8.5%

8% 6% 4% 2%

Source: IBM BCS analysis of 1240 companies

a

rm El a ec tr on Fi na ic s nc ia lM kt s Te le co m

Ph a

M ed i

R et ai l B an ki ng

A & D

tie s U til i

ur an ce

ic al

In s

C he m

T& T

A ut o

C PG

0%

Revenue Growth : Median & Range S&P 1200 Companies Revenue CAGR %, 1994–2003 200%

200%

Industry

Te le

tro n

Ele c

Ba nk in

Ins ur

-100%

Ch em ica

-50%

co m

0% ics

0% Ph ar ma

50%

g

50%

Ut ilit ies

100%

an ce

100%

l

150%

CP G

150%

Geography

-50% Americas

EMEA

Asia

Japan

-100%

Strong performers outgrow their peers by wide margins Median Revenue Growth

Range of Revenue Growth

Innovation and Organizational Effectiveness: Learning Mode Leadership Strategy

Execution

Marketplace Insight

Talent

Market Results

Critical Tasks/ Business Design

Strategic Intent

Interdependenc ies

Formal Organization

Gap Innovation Focus

Culture

Performance  Opportunity 

Values Strategic Insight

Strategic Execution

osing the gap requires both strategy to assess the opportunities d design the business to address them—and execution to assess d build the organizational capabilities to deliver market results. Bruce Harreld SVP Strategy - IBM

Performance/Opportunity Gaps • Performance Gap: Our revenue growth over the past 10 years has lagged the market (4% vs. 8%). Our goal is to break out of this pattern of low growth and achieve 10% profitable revenue growth in the next 24 months. Achieving this will result in an estimated $5 billion in top line growth. • Business Owner: VP of Line of Business • Performance Gap: The firm has grown dramatically over the past 5 years. During this period the quality of our products has declined. Our attempts at introducing six sigma have failed and we have lost 5 points in market share in the past 12 months. Each point lost represents roughly $500 million in revenue. • Business Owner: VP Quality • Opportunity Gap: Current revenue growth per customer in our existing markets is growing only slowly (5% per annum) and customer expectations are increasing. If we are able to move up the stack and provide solutions rather than point products, we should be able to increase revenues and profits by 20% over the next 3 years. • Business Owner: Division GM

Congruence/Alignment

Culture

Strategy

Formal Organization

Critical Tasks/ Interdepende nce People

Fit

Performance

CULTURE EATS STRATEGY FOR BREAKFAST Sign on the wall of the war room where the newly announced turnaround effort at Ford is being managed. Wall Street Journal January 23, 2006

Informal Informal Organization Organization

Describe Culture:

ms . . . dress, working late, conflict resolution

es

mmunication and influence patterns

ate . . . collaborative, teamwork, standards

e beliefs . . . what we believe in

er/politics

roles

Conduct multiple levels of analysis—e.g., unit interunit, organization

The young Assistant Secretary of the Navy stands with Admirals McKean, left, and Sims in 1919. Photo courtesy of Franklin D. Roosevelt Library.

Innovation Streams

Markets

New

Fashion Lens (Ciba) Ciba/Tilt (Wheat)

Vysodine (Ciba Vision) Knitting (HP) USAToday.com

Analog Devices USAToday ASIC/IBM

Existing

Disk Drives

Analog Devices (MEMS, DSP)

Network Chip/IBM Continuous Aim Gunfire HP/Lobo,Condor

Analog Devices(DSP) Firestone/ Radial Analog Devices (IC)

Ciba/Tilt (Corn)

Ciba / Seeds

Ciba Vision (Soft Lens)

Disposable & Extended Wear Lens (Ciba Vision) Radical

Flat Bed Scanners (HP) Incremental

Architectural / Modular

Technology

Executive Team Multiple strategies Single vision Few Core Values Ciba Vision / Vysodyne, Daily Disposables Seiko/Quartz USAToday.com IBM Network Tech/Transport HP Scanner/Zorro Tasks

Individuals

Tasks Individuals

Mgmt. Team

Mgmt. Team

Informal

Organization Arrangements Exploration: Multiple failures, experiments, variants

Strategic Re-orientations, Discontinuous Change

Mgmt. Team

Informal

Organization Ciba Vision/Conv. Arrangements Lens, Seiko/Mechanical , USAToday IBM Network/ ASIC HP Flat Bed Scanner Exploitation: Consistency, incremental change, and continuous improvements

mbidextrous Designs, Innovation Streams and Dynamic Capabilit

Organizational Evolution How do organizations evolve? • Through incremental change in exploitative unit • As well as proactive discontinuous change in exploratory unit • Or, periods of convergence with increasing congruence punctuated by re-orientations, often requiring new top management teams. Examples:

Patterns in Organizational Evolutio Magnitude of Change

Discontinuous Change

Incremental Change

Time nization Evolution: Incremental and punctuated change or Periods of incremental change punctuated by discontinuous

utive team succession often associated with discontinuous organizational change

ging discontinuous change fundamentally different than managing incremental c

Extreme Toyota: A state of disequilibrium where radical contradictions coexist, propelling Toyota away from its comfort zone and creating healthy tension and instability within the organization

Key words to understand the inner workings of Toyota: Contradictions Opposites Paradoxes

Toyota tries to remain a “green tomato” - always growing, always incomplete -

TOYOTA’s Contradictions • Cultivating frugality while spending huge sums • Operational efficiency as well as redundancy • Cultivating stability and a mindset of paranoia • Bureaucratic hierarchy and freedom to dissent • Moving gradually and also taking big leaps • Relatively low executive pay but selfactualization