Curley Report

Managing the Twin Challenges of Innovation: Promoting Emerging Businesses while

Achieving Performance Goals

Kathleen Foley Curley Research Professor, Boston University, Institute for Global Work

Christopher E. Newell

Psy. D. Research Fellow Boston University Institute for Global Work

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Project Background and Findings

Focus of the project:

The Economist, Joseph Schumpeter is credited for having popularized the phrase “creative destruction” which refers to the phenomenon that as a healthy economy grows and technological changes take place, there is an inevitable decline of some businesses and the growth of others. The challenge for businesses is to determine how to successfully migrate from a profitable life cycle curve into a new emerging technology or market which takes advantage of existing skills or customer relationships but also provides a path for the older business to continue to prosper while transforming itself for success in the new environment. As succinctly stated by Levinthal and March, “The basic problem confronting an organization is to engage in sufficient exploitation to ensure its current viability and at the same time, to devote enough energy to exploration to ensure its future viability”1

For the purpose of classification we have adopted the product description language from IBM to refer to core and emerging businesses. Horizon 1 businesses are those current core businesses that primarily feed the organization’s current profitability. The time horizon for these businesses is the present and focus is principally on profits, margins and costs. Horizon 2 businesses are growth businesses which may not have realized their profit potential but have demonstrated market acceptance. The time horizon for these businesses is 1‐2 years and the focus is on market share and growth. Horizon 3 businesses are those which have yet to demonstrate market or profit viability but have either exploited a promising new technology or business model. The time horizon for these businesses is 2‐4 years and the focus is on achieving certain technical performance metrics and the demonstration of a real market need.2

This project has focused on the question of how organizations structure themselves to handle the twin challenges of promoting innovation and the emergence of new products while maintaining the management focus necessary to drive performance in the company’s ongoing core business. Academics have studied this problem and developed a theory commonly known as the “ambidextrous” organization which suggests that emerging products are fragile and like newborns need a protected environment for their early growth and development but eventually must grow up and get strong enough to be integrated into the company’s core business activity or become their own separate business. In theory, organizations therefore, need to develop the “ambidexterity” to provide both a nurturing environment for new businesses while also maintaining the efficient organizational structures needed to successfully compete in the core business.

While the theory is intuitively appealing, there are many practical details around the implementation of this idea that remain largely unreported. The focus of this study was to examine 10 companies in the software and related industries and to learn firsthand through personal interviews with executives of these companies how their organizations meet these twin challenges. We examined 7 companies in the

1 “The Myopia of Learning”, D. A. Levinthal, J. G. March, STRATEGIC MANAGEMENT JOURNAl NO. 14 1993. Pg. 105 2 “Organizational Ambidexterity: IBM AND EMERGINGBUSINESS OPPORTUNITIES Charles A. O’Reilly III, J. Bruce Harreld, Michael L. Tushman CALIFORNIA MANAGEMENT REVIEW VOL. 51, NO. 4 SUMMER 2009 CMR.BERKELEY.EDU

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The goal of this study has been to identify the specific actions that companies in fast paced technology industries take to insure current profitability while also creating the capacity to effectively evolve into new markets. To examine the strategies of the above mentioned firms we asked the following research questions.

1. Please give us a general overview of your business and the markets you compete in. 2. What is your organizational structure and how does this support your innovation and core

business strategies? 3. What is your strategy for innovation? 4. What is your strategy for re‐integrating acquisitions and emerging products into your core

business? 5. What are some of the lessons you have learned as you have pursued your particular innovation

strategy?

Findings

1. Overview of the business and competitive environment

To address the first question we gathered data for each company with respect to yearly sales (2009), year over year growth of sales; description of their primary markets, and identification of an overall key industry trend likely to affect the business going forward. We also classified the firm’s business strategy as either broad or narrow in scope. “Strategic scope is a demand‐side dimension and looks at the size and composition of the market you intend to target”4. Those firms with a narrower strategic scope tend to compete by highly differentiating their products and focusing on a smaller group of target customers. Those who have chosen a broader scope and definition of their market compete with a broader range of rivals and frequently have more than one defined competitive marketplace.

While 2009 was a challenging year for most businesses due to the world wide recession, the companies we examined weathered it well and almost all experienced some year over year growth in top line sales which is a testimony to the robustness of the industry sector.

4 “The Five Competitive Forces that Shape Strategy”, Michael E. Porter, HARVARD BUSINESS REVIEW, January 2008, pgs.79‐93.

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Sales (2009) YoY Sales Growth Rate

Market Focus Industry Trend

Software Companies

Autodesk $1.7 billion 7% 2D, 3D design software (Broad)

Use of product across multiple industries. E.g., media, architecture, mfgr.

Avid $628 million ‐30% (sales decline due to shedding some businesses: Improved profit

Video/Audio creation and editing (Broad)

Spread of high quality video and audio to home audiences

Citrix $1.6 billion 5% Virtualization (Broad)

Growth of Cloud Computing makes virtualization more acceptable; but more competitors

Kronos $700 million N/A privately held Workforce scheduling and management (Narrow)

SaaS model growing. Competition from ERP vendors

McAfee $2 billion 5% Software for providing security technologies (Broad)

Healthy growth rate for the overall Market

Mentor Graphics $800 million 2% Electronic Design Automation (Narrow)

Moore’s Law; EDA market growth rate stable at <2%

Synopsys $1.3 billion 1% EDA (Narrow)

Moore’s Law; EDA market growth rate stable at <2%

Large Companies IBM 95.8 Billion ‐6% (Broad) Growth of outside

competitors such as Google

Microsoft 58.4 ‐2% (Broad) Same threat as faced by IBM

Raytheon. $25 billion 1% Defense contractor in high tech products and services (Broad)

Increasing technological complexity; continued growth

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Among the software companies that we examined one of the critical differences was the market focus chosen by the company. For example, Autodesk, Avid, Citrix and McAfee have chosen a broad market scope such as “all technology security” in the case of McAfee or all “video and audio creation and editing software” in the case of Avid. The large companies, Microsoft, IBM and Raytheon also embrace a broad market definition as they each offer multiple products in multiple market segments. For these companies, their broad market definition enables them to pursue a wide range of potential acquisitions or technology investments which would add to their core products. However, integration of the different products or entry into different market segments becomes both an opportunity and a challenge to growth. Avid underwent substantial reorganization in 2009 to become more focused on key growth markets; centralize its sales force and create one product and marketing organization and reduce costs by almost $100 million. Integration becomes the key challenge when strategic scope is broad. We will address how these companies accomplish the integration task in Section 4 “Strategy for Re‐integration”

Kronos, Mentor Graphics and Synopsys have pursued a narrower strategic scope and definition of their market. The benefits of this approach are a clearly focused strategy on the target customer which has enabled each of these companies to create very valuable and highly customized solutions for their specific markets. Integration of new products or acquisitions runs smoothly in these companies, as only innovation that is focused on the core capabilities of the company is pursued. The key challenge for these companies is to explore beyond their market niche particularly if that market is in the later stages of its life cycle. We will examine how these companies move into new markets in Section 3, “Strategy for Innovation”

2. Description of Organizational Structure

Our second question specifically addressed how companies organized themselves to carry out their competitive strategy and how that organizational structure supported the company’s innovation strategy. Alfred D. Chandler famously wrote in his 1962 study of organizations that “Structure follows strategy”. 5 He defined the terms in the following way:

“Strategy can be defined as the determination of the basic long term goals and objectives of an enterprise, and the adoption of courses of action and allocation of resources necessary for carrying out these goals….Structure can be defined as the design of organization through which the enterprise is administered. ….it includes lines of authority and communication as well as the information and data that flow through these lines of communication and authority (Chandler, op.cit)

In this section of the research we asked companies to describe their organizational structure and go‐to‐market strategies. We discovered a range of organizational structures employed by the companies we interviewed. One organizational structure described as the “West Coast Technology Company” structure was pioneered by HP. Its key feature is the use of product groups to focus on specific technologies and their continuous improvement, married with a more centralized sales organization

5 Strategy and Structure: Chapters in the History of the American Industrial Enterprise, Alfred D. Chandler, Jr. MIT Press, 1962

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that is responsible for bringing a broad range of products to specific market segments. Other companies retained a more classic functional organization with their expertise embedded in centralized groups such as “Engineering”, “Marketing” etc.

Customer Facing

HP’s Organizational Structure in 2000‐01

Product Facing

For the very large companies, IBM and Microsoft, a modified business unit organizational structure is used but supported by centralized administrative functions and a sales force that goes to market with a client account model. This approach is necessary when a company is selling a broad range of products into an enterprise account and multiple sales reps need to be managed or at least coordinated by someone familiar with all of the buyers in the customer organization. Many of the “broad” market definition companies also employed a matrixed reporting structure to organize across geographies, functions or products.

Raytheon maintains a more classical strategic business unit (SBU) organizational structure with administrative functions such as IT, HR and legal contained within these business units. This is an approach which facilitates the allocation of overhead costs to a particular business group such as “Missile Systems” and supports the cost plus pricing strategy used by Raytheon’s Government customers.

One of the recurring themes among our interviewees was the importance of having a centralized sales and service organization. In all but the three largest companies, IBM, Microsoft and Raytheon , management of the sales organization was centralized. In Avid’s case a recent restructuring from separate divisions with their own sales organizations saved the company over $100 million. The main rationale for a centralized sales organization is to reduce the cost of sales. While we will see later, that some companies will keep an overlay sales group that focuses on a particular product after an acquisition, this is viewed as a temporary situation until the knowledge about the acquired product is

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transferred to the organization. Even McAfee which has a highly matrixed business to accommodate 3 customer segments, 5 geographies and 4 product business units has a centralized sales and marketing function. Regardless of whether a company has a broad or narrow market focus, the centralized management of sales was seen as a critical factor in cost containment. To refer back to Chandler’s definition of structure as “includes lines of authority and communication as well as the information and data that flow through these lines of communication” the centralized sales organization was the preferred method of handling the vital communication and decision making with respect to sales information.

Another interesting finding was the use of the HP structural model. This approach enables a company to build technical expertise which is focused on a particular product line while gaining the cost benefit of the centralized sales organization and the market benefit of one face to the customer.

Other characteristics of organizational structure such as the highly matrixed McAfee or the client account sales organizations of Microsoft and IBM seem to be mostly a reflection of size. As a company grows past a certain size and perhaps within the software industry that size may be some number greater than $1.5 billion, a matrixed reporting structure of some kind seems inevitable. Similarly, as a company begins selling a broad range of products to enterprise customers, a client account structure to coordinate the sales process throughout the client organization seems to make the most sense.

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Dominant Org. Structure

Go to Market Strategy

Software Companies

Autodesk HP Model Centralized Sales Channel sales with 80% of sales from re‐sellers and partners.

Avid Functional Matrix Unified Sales force with Product specialists

Citrix Functional Centralized Sales 100% Channel Sales

Kronos HP Model Centralized Sales, with the exception of WorkForce Central Product

McAfee Highly Matrixed Centralized Sales Direct Sales to larger accounts; on‐line sales to consumers

Mentor Graphics HP Model Centralized Sales Synopsys. HP Model Centralized Sales Large Companies IBM Modified SBU Client Account

Management of multiple sales teams for enterprise accounts

Microsoft Modified SBU Client Account Management for enterprise accounts; Channel partners for consumer products

Raytheon. SBU Sales Team from each SBU

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3. Strategy for Innovation

In this section we asked companies to identify their innovation strategy. Specifically we inquired about acquisitions versus internally developed innovations. We also looked at whether companies pursued innovations with longer term time horizons such as the Horizon 3 businesses described earlier. All companies we investigated were interested in Horizon 1 and 2 businesses. Finally, we attempted to gauge where the focus of their innovative activity was directed. For example, in the case of the firms competing in the EDA market, the rapid changes in the underlying semiconductor technology drive the focus of their innovative activity to the continuous improvement of their existing products. While some academics might describe this as incremental innovation, the fundamental changes in the underlying technology are so substantial and fast paced that innovations in this industry are closer to the radical product changes seen in other industries. In this case the principle focus of innovative activity is on continuous improvement of existing products to meet rapidly changing customer needs.

Not surprisingly, the large companies dominate the category of H3 businesses. All of these companies have substantial investments in internal R&D driven by the competitive nature of their markets as well as the underlying changes in the core technologies that support their products. Citrix and McAfee’s interest in H3 businesses is driven both by the broad market segments they compete in, e.g. “security” and “virtualization” and the need to anticipate future developments in their respective industries either from outside competitors or in the case of McAfee, competitors plus sophisticated outside threats.

All the companies we interviewed pursued acquisition as a part of their innovation strategy. This is not surprising particularly in the software industry where start up firms proliferate and where roughly 1/3 of venture capital funding in 2009 was directed to IT related businesses6.

3.1 The dilemma for firms with narrow strategic scope

As noted earlier, those firms with a narrow strategic scope can target innovations to support their existing products and avoid some of the challenges of integrating emerging technologies into their existing product and sales organizations. However, the trap for these firms is to become stuck in their particular industries without a way to evolve into new businesses or to gain new customers. The EDA market is dominated by three players with Mentor Graphics and Synopsys two of these players. Both firms are very innovative and succeed in meeting customer needs in a rapidly changing market. This is the classic benefit of a narrow strategic scope. However, it is difficult for them, given investor expectations and the need for constant vigilance in their own market to diversify into other markets. They are good at selling new products within their market to existing customers but less able to divert resources including management attention to gaining new customers.

Kronos provides a good example of how a company in a narrowly defined market can begin to acquire new customers and move into an adjacent market. Kronos acquired a Canadian company with three divisions. Two of the divisions were folded into the core product. The third division specialized in

6“ Health Care, Not Tech, Wore Venture‐Funding Crown In 2009” Wall Street Journal Blogs, Brian Gormley, January 22, 2010,

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delivering airline and cruise scheduling solutions for pilots and stewardesses etc. It was a semi custom solution with different characteristics from the core product including a very different go to market strategy, characterized by a small number of large deals per year, each with a semi customized solution. Kronos kept this new business, “Workforce Central” separate from its core business and also kept its own small sales force calling on this particular market segment. This proved to be a particularly well suited acquisition for Kronos, because not only did they push beyond their existing business to acquire new customers, but they were able to apply their in house technical expertise to strengthen the product and thus give it a competitive advantage in this new market.

For companies with a narrow strategic scope, acquisition would seem to be the preferred method for moving beyond their existing market boundaries. This appears to be the preferred innovation strategy for moving beyond the exploitation of their core competency to explore new areas of revenue growth. Certainly companies with a broad market definition also make acquisitions but these typically add to the existing core product. In fact, for companies with broader market focus, acquisitions that do not add to the existing product line can prove to be a distraction and drain on resources. However, for narrow focus companies their survival past the existing market would seem to require that they, like Kronos, discover ways to acquire their way into an adjacent market. The cautionary tale that organizations with deep technological expertise are more likely to be trapped in their existing technological trajectory means that companies in this situation need to pursue an explicit strategy of acquisition to not get locked into their existing market.

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Innovation Strategy Innovation Focus H3 Business

Software Companies

Autodesk Primarily Small Scale Acquisition

Enhance Current products

No

Avid Primarily Small Scale Acquisition

Enhance Current Products

No

Citrix Mostly Acquisition

Some Internal $

Mostly Current Products; Acquisitions fit with Sales Model

Yes

Kronos Balanced Internal and Acquisition

Both existing products and new products brought in by acquisition

No

McAfee Balanced Internal and Acquisition

Both existing products and anticipation of future security threats

Yes

Mentor Graphics

Balanced Internal and Acquisition

Continuous Improvement of existing Products

No

Synopsys Mostly Acquisition

Some Internal $

Continuous Improvement of existing Products

No

Large Companies

IBM Balanced/More Internal

Continuous Improvement of existing Products; New Products

Yes

Microsoft Balanced/More Internal

Continuous Improvement of existing Products; New Products

Yes

Raytheon. Balanced/More Internal

Improvement of existing Products; New Products

Yes

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4. Strategy for ReIntegrating Acquisitions and Emerging Products

As noted earlier integration of acquisitions or internally developed products appears to be more of a challenge for those companies with a broader strategic scope. This is due in part to the fact that there are more opportunities than investment dollars available to these firms. The challenge here is not one of pushing out into new markets or gaining new customers but rather deciding which of the many market opportunities available is likely to provide the most long term return and enable the firm to evolve and remain competitive in the future.

In our interviews we specifically asked how the organizational processes worked to integrate a new product either from acquisition or internally developed sources. Most of the firms we interviewed said that within 12 ‐24 months an acquired product had to become part of the core. Some firms used a short period of double compensating the sales force for selling the new product or provided other incentives to bring the emerging product into the core. In most cases the acquired or new product was an H1 or H2 product.

Two of the smaller firms, Citrix and McAfee, who invested in H3 businesses also encouraged a horizontal sharing of innovations across business units. The Kronos example cited earlier of bringing existing technological expertise to a new acquisition is a good example of this type of horizontal integration. Raytheon also fostered collaboration across units and the sharing of innovations across different market segments (see Raytheon write up for more detail on how SBUs interact with market segments) In cases where Raytheon had developed a technology that they were not going to commercialize themselves, they would license the technology to other firms who would then bring it to market. In this way Raytheon was able to earn revenue from its invention but at the same time not distract attention from its core markets or strategy. Similarly, Citrix engages in a policy of technology spin‐off for those products that it feels cannot be integrated into its core offerings. In some cases the product or technology is sold outright, in other cases a joint venture might be formed with a commercializing partner where Citrix retains some ownership interest but not the day to day running of the business.

Most of the firms that we interviewed had a standard or at least guided process of integrating those acquisitions or new products that fit closely with the firm’s core products. Much rarer was the firm that had an explicit process for nurturing H3 businesses and integrating them into the core offerings of the company.

The case study on IBM provides the best example of a managed innovation process that provides an organizational structure, the Emerging Business Organization (EBO), a process for timely review of emerging products and the accompanying management incentives and rewards to develop new products and bring them to market.

IBM had traditionally invested heavily in R&D and had worldwide recognition for the number of patents its scientists and laboratories turned out on a regular basis. Yet when a 1999 internal report to then CEO Lou Gerstner showed that “the company had failed to capture value from 29 separate technologies

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and businesses that the company had developed but failed to commercialize” 7he and other senior leaders within IBM made specific changes within the organization to help IBM do a better job of bringing emerging products to market. (see the attached IBM write up for more details).

They targeted 7 root causes for the failures in a presentation to Gerstner:

1. The management system rewarded execution directed at short‐term results and did not place enough value on strategic business building.

2. Management was preoccupied with current markets and existing offerings.

3. The business model emphasized sustained profit and EPS improvement rather than actions to drive higher P/E's.

4. The approach to gathering and using market insights was inadequate for embryonic markets.

5. The company lacked established disciplines for selecting, experimenting, funding, and terminating new growth businesses.

6. Once selected, many ventures failed in execution.

7. Finally and most importantly senior management didn’t spend time on new growth opportunities (they also found that Gerstner had only dedicated about 3.7% of his time on these new initiatives)

This last point was the most important insight from their analysis.

The EBO was designed to reinforce the following:

1. Declare/communicate strategic intent to pursue new growth opportunities 2. Identify a highly visible short list of emerging business initiatives 3. House them in the appropriate group/business unit, but give them special treatment by

providing a first year of funding from corporate resources 4. Active sponsorship for each by a SVP who met regularly with the corporate funding

sponsor to review the progress of the project 5. Create strategic milestones appropriate to an emerging business and review progress

towards these regularly 6. Nurture and graduate or kill this short list, and continuously identify new candidates 7. Make it clear that promotion to senior executive levels is not possible without having

taken on one of these emerging businesses

Over a 6 year period IBM grew Horizon3 business opportunities to 24% of the overall revenue for the company. At the same time they found that revenue from acquisition during that same timeframe was 11% of total revenue.

7 “Organizational Ambidexterity: IBM and Emerging Business Opportunities” Charles A. O’Reilly III J. Bruce Harreld Michael L. Tushman, CALIFORNIA MANAGEMENT REVIEW VOL. 51, NO. 4 SUMMER 2009 pg.75-99.

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4.1 The dilemma for firms with broad strategic scope

The survival of any organism requires minimizing risk. For those firms who have a broad strategic scope the main risk to their survival is lack of focus and the diversion of management attention. As one of our interviewees noted, “It’s hard enough to succeed one way, five multiple ways is death by a thousand clubs” (Transcript quote). The experience of Avid highlights this challenge. The company grew rapidly by acquiring different businesses but initially failed to integrate them into a coherent go to market strategy. This resulted in a rising cost of sales and some confusion in the market place among Avid customers. The company has now consolidated its five different businesses and created a unified sales force and one product and marketing organization.

In the short term failure to integrate emerging products into the core business is the main threat to survival for the broadly focused firm. In the long run however, the exclusive focus on current products robs the firm of its ability to evolve and sustain its survival.

Summary:

We began this project with the goal of gaining a greater understanding of how organizations create structures and processes that enable them to handle the twin challenges of promoting innovation while maintaining the management focus necessary to drive performance in the company’s ongoing core business. We analyzed ten firms in the software and related industries to address the question of how these organizations navigate towards the future while maintaining current profitability. There are some overall recommendations that apply to all of the firms that we researched. First, all of the firms that we studied used an acquisition strategy to bring new products or customers into their existing business. For some companies, this was their primary or only innovation strategy. These companies have determined that it is easier to go out and find new ideas than to invest scarce dollars to build new products internally. This requires confidence that the timing and selection of acquisitions can be done with a high degree of accuracy and that acquired firms and their personnel can be integrated successfully into the business. The software industry with its relatively low capital requirements for startup may offer a unique opportunity to established firms to pursue this strategy. Still, while acquisition may in some cases be a more cost effective strategy for bringing emerging products into an established business, the challenge of re‐integration remains.

In the course of our research we also re‐examined the metaphor of the ambidextrous organization. We found that for the companies we studied, the challenge was not so much how to nurture new businesses at the same time as growing existing ones, but rather how to integrate these new businesses into the core product line of the company. We thought that perhaps a biological metaphor would be more useful to describe the phenomenon that we observed. Consider the healthy adult in his or her twenties or thirties. The healthy young person knows that their vitality will ebb over time and at some point may require a transplant of some sort to inject new life into the aging body. The transplanted organ or other biological material must be screened for acceptance into the host body. Not all prospective organs will pass the test. The screening process and ultimate surgical procedure must be

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able to bring in the new while not being rejected by the host. While there are always risks in such a procedure, the screening process is used to improve the probability of success.

Our research revealed that the lack of an effective screening process for the effective transplant of new businesses is much more of a challenge for organizations than a lack of attention to emerging opportunities. Most organizations, while deeply involved in the day to day running of their businesses are acutely aware of threats from new entrants, new technologies or simply the overall decline of demand as a market becomes saturated. It isn’t so much that they need to become ambidextrous; good at nurturing new ideas while competing in existing businesses, as is the need to get the right emerging businesses successfully brought into the core. Polaroid and Kodak could hardly have been unaware of digital photography. In fact Kodak was a pioneer in the technology. Arguably, what these firms lacked was a mechanism for integrating the new digital photography into the existing business. In both cases, the existing host business rejected it.

We found it useful to categorize the firms we studied based on their strategic scope since we found in this characterization some common elements of organizational structure as well as common risks associated with their long term sustainability. For broadly focused firms the immediate challenge is not to over reach but rather focus on integrating products into your core. However the continued focus on short term profitability and integration means that without a specific process such as the one detailed in the IBM case study, new products will not have a chance of making it into the firm’s future strategy. This was highlighted recently in the now famous Dick Brass New York Times piece detailing the failure of Microsoft to continue to innovate.

“Internal competition is common at great companies. It can be wisely encouraged to force ideas to compete. The problem comes when the competition becomes uncontrolled and destructive. At Microsoft, it has created a dysfunctional corporate culture in which the big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources, and over time hector them out of existence. It’s not an accident that almost all the executives in charge of Microsoft’s music, e‐books, phone, online, search and tablet efforts over the past decade have left.”8

For the narrowly focused firms, their organizational structure supports tight focus which can leave them open to failure to move into new markets when their existing one declines. In essence, they need to clone themselves. That is, find an adjacent market with a new group of customers who can benefit from their existing core strengths. Narrowly focused firms are experts in understanding the needs of their existing customers and at least in the sample of companies we studied, extremely adept at meeting those needs even when it requires substantial technological innovation. What they lack is the ability to take their existing competencies and gain new customers. For narrow focus firms, their screening process should be focused on finding new opportunities beyond their existing customers where their core capabilities can be utilized. In the case of the EDA firms that we studied, their goal should be to

8 “Microsoft’s Creative Destruction” Dick Brass, New York Times, Op. Ed. Feb. 4, 2010.

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find other algorithm based businesses which offer new customers and opportunities to grow beyond their existing space.

Recommendations

1. Senior management needs to devote attention to the future. As the IBM case study notes senior managers must allocate some amount of attention to how the business will grow in the future. All firms must focus on their immediate survival, but senior leaders have the responsibility for determining how the company will move forward from its current market.

2. Bringing emerging products into the business core is not for kids. While many companies use the opportunity to bring a new product to market as a management development strategy there needs to be a strong signal that this is the responsibility of senior leaders. In the IBM case, there is a clear message that advancement to senior executive levels requires a track record of working with the EBO. The corollary to this is that failure of a new product to meet the standards required to move beyond an initial stage will not negatively impact the career of the executive who has championed the product but for legitimate business reasons not moved it forward.

3. Leaders must put in place realistic incentives and rewards for championing new and emerging products. People like organizations are risk averse and if an organizational culture fails to provide some incentive for risk taking, future sustainability will simply not be on anybody’s radar screen. Organizations which foster an environment of exclusive focus on short term gains run the risk of planting the seeds of future destruction.

For firms with a narrow strategic scope, acquisition probably provides the safest migration path forward. For firms with a broad strategic focus, the challenge is to balance the short term requirement of integration with the long term need to look into the future for the next source of wealth. This is accomplished largely through management commitment to emerging products and the creation of an organizational process which fosters the development and ultimate integration of these new products into the firm’s core.

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Autodesk

Overview of the Company

Autodesk is focused on 2D and 3D design software for use in architecture, engineering and building construction, manufacturing, and media and entertainment. Autodesk was founded in 1982 by John Walker, a co‐author of early versions of the company's flagship CAD software product AutoCAD, and twelve others. They have 7800 Employees. It is headquartered in San Rafael, California.

Autodesk’s flagship product is a computer‐aided design software AutoCAD. In addition to AutoCAD, Autodesk develops Digital Prototyping solutions to visualize, simulate, and analyze real‐world performance using a digital model during the design process. The company also develops Building Information Modeling software to generate and manage building data using a three‐dimensional building model. Autodesk also provides digital media creation and management software from film and television visual effects, color grading, and editing to animation, game development, and design visualization.

They believe that their ability to make technology available to mainstream markets is one of their competitive advantages. By innovating in existing technology categories, they bring powerful design products to volume markets. Their products enable customers to improve their design innovation and productivity capabilities. They are designed to be easy to learn and use, and provide customers with a low cost of deployment, low total cost of ownership and rapid return on investment. The software architectures allow for extensibility and integration with other products.

Autodesk is organized into four reportable operating segments.

• Platform Solutions and Emerging Businesses (PSEB)

• Architecture, Engineering, and Construction (AEC)

• Manufacturing Solutions (MSD)

• Media and Entertainment (M&E)

PESB, AEC and MSD segments derive revenue from sale of licenses for software products and services to customers who design, build, manage or own building, manufacturing and infrastructure projects. Each of these divisions derives additional revenue from consulting, support & training services.

M&E is internally divided into two product groups: Animation (including design visualization) and Advanced Systems.

Animation: Tools for 3D modeling, animation, rendering, design visualization and visual effects.

Advanced Systems: Color grading, editing, finishing effects, visual effects, media mastering, and encoding technology.

Autodesk’s revenues last year were 2.32B with 75% of its revenue coming from International, 25% Domestic. 86% of sales are through resellers, 14% direct.

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Revenue 2009 $ Revenue (‘000)

Percentage Contribution

Platform Solutions and Emerging Business 1002 44%

Architecture Engineering and Construction 525 23%

Manufacturing Solutions 488 21%

Media and Entertainment 262 11%

TOTAL 2320 100%

Organizational Structure and how they run the business

Autodesk is organized in a functional structure. New products or acquisitions are nestled inside the development organization. Autodesk products have significant life cycles and very high margins (92%). Their approach is to enhance the current products and maintain the price points and to date they have been successful in that strategy.

They do have a very strong reseller/partner network which supports 86% of the sales and expect the same percentage to be derived through this channel strategy. There are 3,400 third‐party developers who develop and sell their own products that further enhance the range of integrated solutions available to Autodesk customers.

They maintain a very small consulting and services organization which is about 50M in revenue. They have a very large education network of about 1900 authorized education centers

Their general belief is captured in the following quote from the CEO “We tend not to like new products – they are too expensive to develop and take too long to get into the market” (Transcript quote)

Strategy for Innovation

Autodesk’s strategy includes improving product functionality and expanding their product offerings through internal development as well as through the acquisition of products, technology and businesses. Acquisitions are made to increase the speed at which they can deliver product functionality to customers, but may create some integration challenges. They review these trade‐offs in making our decisions of whether to make acquisitions.

So they primary innovate through small acquisitions which are technologies which expand the capability of a current product. In a few cases where it is a disruptive technology, they find a temporary home to keep it separate. They avoid large acquisitions and rarely do medium ones. Finally, they feel they are very deliberate about only nurturing innovative ideas that they help them maintain technology

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leadership in their current products. When they innovate internally it tends to be a relatively small team assigned to the product.

Strategy for Reintegrating Acquisitions and Emerging Products

Since most of the innovation is to expand the capability of a current product, they keep the team in the R&D group and look to the market to determine the speed of adoption. In terms of revenue expectations for new products – they feel that they have become much more realistic about what it takes to bring new products to market. The CEO says “We are more patient, we know it takes 3 years or so – but since our products have a long cycle we can live with that.”(Transcript quote)

Typically in year one Autodesk hopes to attract a new customer or two. In year two they look to broaden to more customers and in year three they look to generate more volume.

Lessons Learned By Autodesk

Autodesk is very disciplined maintaining focus on their core products and innovation is primarily to enhance the core products and to remain a technology leader. They believe that since the new products have a long life cycle they have learned to be patient and have a phased market adoption. They use their channel and partner network very effectively to gain new geographical footholds and maintain current margins. They appear to have designed a very lean organization that is very careful about the right timing, cost and type of acquisitions.

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Avid


Avid is a $628M company with roughly a 50/50 split of domestic and international revenue. Avid was started in 1987 when they discovered a way to copy videotape footage in real‐time to digital hard disks. Today, the company’s flagship digital video editing system, Media Composer, is used by the majority of the world’s professional film and television editors. Seeing an increased convergence between digital video and audio, Avid acquired Digidesign in 1995, paving the way for Avid’s leadership position in its core audio and video segments. Today, Pro Tools software is used among professionals using digital audio workstations, and it has been instrumental in the creation of the world’s most recognizable recordings in popular music, movies, television shows and radio broadcasts.

REVENUE (2009) $ Revenue (‘000) Percentage Contribution

Product 509.215 81

Service 119.755 19

Total 628.970 100%

Organizational Structure and Running the Business

Avid is currently organized by function and operates in what they call a functional matrix. Previously, they were very technology and product driven with a limited overarching strategy to grow the revenue in their accounts or cross sell new products. Two years ago they were organized behind five business units and the company was in serious financial trouble. The business unit structure created confusion for the customers and a cost burden to support the five distinct businesses.

Beginning in 2009, the Company transitioned to a new organizational structure that combined the former Professional Video and Consumer Video business units into a single consolidated Video segment with its sales and marketing teams reporting into a single customer‐facing organization. Part of their challenge is to design a go to market strategy which supports the selling of a $49 piece of equipment all the way up to products selling for multi‐millions of dollars. As a result of the successful rationalization of their products and a consolidation of functions over the past 18 months they have reduced their costs by$ 83M. Avid currently serves 6 segments: Education, Home Enthusiasts, Artists and Creative Pros, Picture and Sound Facilities, Broadcast, and Corporate/Government/Non‐Profit.

As part of the restructuring process Avid refined their channel strategy to become clearer on when to do direct and when to sell through the channel. Avid views their sales channels as falling into three categories: consumer, professional, enterprise. The company also eliminated low performing channel

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partners to allow for greater focus and discipline in the channel. Finally, they hired a new sales leadership team to restart the selling strategy and become more customer centric. The early results for the alignment of sales are encouraging.


Avid has shifted their strategy for innovation over the past few years. Until 2 years ago they relied heavily on acquisition for innovation, but found that the last five acquisitions were unsuccessful in part because they did not find effective ways to integrate them into the company. Since that time their new CEO has focused on rationalizing their portfolio and selling off what was not core to their strategy. Recently, they began making small acquisitions which were a better fit for the new strategy. In one case they immediately integrated the new company because the technology was a close fit to a current product and in another case incubated it until the technology was more mature. The approach of determining how a new disruptive technology or a mature product is to be integrated into the core of the business is now the basis for the acquisition decision. . Avid also has ongoing organic innovation, but has built that process up slowly as they have just begun to stabilize the company.

Strategy for ReIntegrating Acquisitions and Emerging Products

As stated previously, Avid first determines how a new product or technology will be integrated into the core business before making an acquisition. In addition, it appears that the focused sales and marketing organization can now invest more time in bringing the expanded capabilities of the product to market and in cross selling these capabilities across their newly defined market segments.

Lessons Learned By Avid

Avid’s previous strategy to remain a technology leader seemed to be the driving force to maintain five separate divisions and all of the functional support required to execute on that strategy. They learned that this structure did not support cross‐selling and created a cost burden that was unsustainable. They made bold moves to shift to a more customer‐centric model and a more integrated/matrixed organization; this required a significant cultural shift and, new leadership. The company is currently developing a new set of metrics to allow them to track progress against the new structure and strategy. Thus far results are encouraging, but the transition is still ongoing and the results of this shift have yet to be fully realized.

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Citrix

Overview of the Company.

Citrix is a $1.6 billion dollar (2009 sales) software company that designs, develops and markets technology solutions that allow applications to be delivered, supported, and shared on‐demand over the Internet or internal company networks. A forerunner of Cloud computing, Citrix was started by ex‐IBM (IBM) staffers in 1989, when companies were moving from mainframes to personal computers. Citrix made its reputation with software that would deliver applications to end users over the network. (“Citrix’s Vision for the Virtualized Enterprise”, Joab Jackson, CIO Magazine, Wed, February 24, 2010). Its products span all dimensions of application, server and desktop virtualization as well as application and network optimization under the product brand Citrix Delivery Center™.

Citrix is best known for XenApp, its application virtualization software. The company also offers popular load balancing, online meeting and remote support tools. Many end users know it for its Go To Meeting or Go To My PC products. The Company markets and licenses its products through multiple channels such as value‐added resellers, or VARs, channel distributors, system integrators, or SIs, independent software vendors, or ISVs, their own Websites and original equipment manufacturers, or OEMs. As with many software companies, revenues are derived from the sale of new licenses or the renewal of existing licenses.


Application Virtualization revenues 1,045,969 65% Online Services division revenues 308,177 19% Application Networking revenues 241,218 15% Other* 18,724 1% Consolidated 1,614,088 100%

*“Other” includes technical support, consulting, education & certification for Citrix customers.


Citrix is organized principally by function. The company has centralized Sales and Marketing functions as well as centralized R&D and Engineering functions. The functional organization structure is well suited to support the company’s single product focus of virtualization services and its 100% channel selling strategy described above. The company’s go to market strategy emphasizes a low cost of sales and a low customer touch regardless of the specific target market segment or geography. Citrix’s core business is bringing virtualization to its customers through a variety of product offerings. Although the company has made significant acquisitions, the core of its business remains selling virtualization services across multiple market segments with a common go to market strategy and channel sales focus.

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Citrix Functional Organizational Structure

R&DEngineering


Citrix has used acquisition as its chief source of new products and is careful to identify targets that can fit within the company’s overall strategy, markets and distribution channels. To break through the $1 billion dollar mark in revenue Citrix made 4 or 5 large acquisitions while still retaining its “monolithic” (transcript) product focus. In 2007, Citrix bought XenSource and its commercial version of the open‐source server virtualization software Xen (now XenServer). In the competitive and fast changing world of virtualization products, growth is often faster through acquisition. This is also an industry that has seen many start‐up firms enter the market with the expressed strategy of trying to be acquired by larger firms.

Citrix also invests in internal product development and maintains an R&D budget that is commensurate with others in its industry and of its size. New products developed internally are given the opportunity to blossom within the R&D organization for brief period of time. That time horizon is usually about 2 years. This “skunk works” approach helps the company create an environment for innovation while retaining focus as a commercial and not a research entity. The key piece of this strategy has been to keep the number of people involved in the new product development effort fairly low and to limit the amount of time that the small group is allowed to work on an idea before they are required to produce a product with market potential.


Citrix acquires primarily “Horizon 2” and “Horizon 1” companies. That is, companies who have a proven product, market and profit potential. These companies are quickly integrated into the Citrix organizational structure. Redundancies in functions such as Finance, HR, Legal, and Marketing etc. are

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quickly identified and with rare exception personnel from the acquired firm are let go. A typical acquisition will retain its sales force for one year, but after that period these sales people will either be identified as having potential to sell across Citrix’s whole product line, or they will leave the company to pursue sales opportunities in another start up. After the initial knowledge transfer, the newly acquired product is quickly and decisively brought into the portfolio of the existing sales and customer support function. Citrix is careful to retain the expertise of the acquired company by making an effort to reward and welcome the new people into the team. “Customer Service will come in and say, “Hey, you are from the new company. You are the real expert here. Let me promote you in the hierarchy and make you feel good about your business. It’s a tiny fraction of ours, but you are the expert” (Transcript quote)”

Home grown innovations as with acquisitions must be integrated into the company’s overall business or a decision will be made to spin off the new entity either through outright sale or in some cases through Citrix retaining an ownership but not an operating role in the spun‐off company. Skunk works that fail to develop a revenue producing product within a roughly two year time frame are disbanded.

Citrix uses two key performance measures to determine success in integrating an acquisition or emerging product. The first is revenue. Acquired companies and new products must demonstrate the ability to grow revenue. Profitability is principally garnered from the core business, but the objective of the new products is to show revenue growth. The second measure is something that Citrix refers to as “attach rate”. That is, how easy is it to attach the new product to the existing portfolio of core products? “Unless the sales team can just say, “Would you like some fries with that burger?” it’s not going to work. If it requires a whole separate sales cycle and separate proofs and contacts the sales guys will get frustrated that it is not going to work…then it’s not going to work”. (Transcript quote)

Lessons Learned by Citrix

Citrix has maintained its revenue growth and new product innovations through a monolithic focus on a single core product offering; the virtualization platform. Acquisition has been the principle source of innovation and extension to the company’s product offerings. “We have had a lot of success because we have multiple products that are all IP, of course, with a common sales team that gives us the lowest cost distribution” (Transcript quote)

Another key lesson for Citrix is its strict enforcement of a 1 year time horizon for the integration of any acquisition into its existing organizational structure and go to market strategy. The time horizon for internally developed products is a bit longer, but investment in these endeavors is purposely kept small and not allowed to extend past a two year time horizon. Products that cannot be swiftly integrated into the core of the business and meet expectations for revenue growth are spun off in some fashion.

Citrix is a good example of how a highly focused business strategy on a specific core product can enable rapid decisions and actions. By “sticking to its knitting” Citrix has been able to choose the right acquisition targets, integrate them quickly into the company and maintain profitability even while expanding its core offerings into different market segments.

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IBM


International Business Machines Corporation (IBM) develops and manufactures information technology (IT) products and services worldwide. Revenue was 95.76B in 2009 and the market cap is 166.8B. IBM has 407,000 employees and has offices in 170 countries. It has eight research laboratories worldwide. The company has scientists, engineers, consultants, and sales professionals in over 200 countries.

The company’s major operations are comprised of:

• Global Technology Services segment: Global Technology Services (GTS) primarily provides IT infrastructure services and business process services, delivering business value through the company’s global scale, standardization and automation.

• Global Business Services segment: Global business Services (GBS) primarily provides professional services and application outsourcing services, delivering business value and innovation to clients through solutions which leverage industry and business process expertise.

• Software segment: Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform. Operating systems are the software engines that run computers.

• Systems and Technology segment: Systems and technology provides clients with business solutions requiring advanced computing power and storage capabilities. Approximately 55 percent of Systems and Technology’s server and storage sales transactions are through the company’s business partners; approximately 45 percent are direct to end‐user clients.

• Global Financing segment: o Client Financing: Lease and loan financing to end users and internal clients for terms

generally between two and seven years o Commercial Financing: Short‐term inventory and accounts receivable financing to

dealers and remarketers of IT products o Remarketing: The sale and lease of used equipment (primarily sourced from the

conclusion of lease transactions) to new or existing clients

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TOTAL REVENUE (2009) $ Revenue

(‘000)


Global Technology Services 37.3 36%

Global Business Services 17.7 18%

Software 21.4 21%

Systems and Technology 16.2 21%

Global Financing 3.2 4%

Total 95.8 100%

Organizational structure and running the Company:

IBM has a very sophisticated account management sales group and specialists within each business unit and geography. This is one of their greatest strengths and has set an industry standard for account management processes.

IBM’s believes its R&D operations differentiate the company from its competitors. IBM annually invests approximately $6 billion for R&D, focusing on high‐growth, high‐value opportunities. As a result of innovations in these and other areas, IBM had more U.S. patents in 2009 than any other company, the 17th consecutive year IBM has been the patent leader.

The following worldwide organizations play key roles in IBM’s delivery of value to its clients: Sales and Distribution, Research, Development and Intellectual Property, and Integrated Supply Chain

By combining global expertise with local experience, IBM’s geographic structure enables dedicated management focus for local clients, speed in addressing new market opportunities and timely investments in emerging opportunities. The geographic units align industry‐skilled resources to serve clients’ agendas. IBM extends capabilities to mid‐market client segments by leveraging industry skills with marketing, ibm.com and local Business Partner resources.

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Strategy for Innovation:

Despite the investments in the labs and the leadership in patents, IBM was continually frustrated with its inability to bring new innovations to market. In 1992 IBM made an attempt to bring a process centered approach to innovation, but the combination of the economic downturn and lack of Senior Leadership they were unsuccessful. Another attempt was made in 1995 using a funding centric approach to innovation. That approach also failed because it reinforced the wrong sets of behaviors. The groups used this as a way to “bowl for dollars” (Transcript quote) and it never had a leadership sponsorship required. The CEO, Lou Gerstner was quoted as saying that they were the leaders in new patents and last at getting the most out of the patients or commercializing them.

Finally in 1999, as IBM Leadership noticed that new product ideas were being generating virtually no new revenue, they created a new organization to support the development and launching of new product ideas. It was called the “Emerging Business Organization.” This organization was created after they conducted an analysis of 25 new investments were made in technologies or products but were never successfully bought to market.

They targeted 7 root causes for the failures in a presentation to Leadership:

1. The management system rewarded execution directed at short‐term results and did not place enough value on strategic business building.

2. They were preoccupied with our current served markets and existing offerings.

3. Their business model emphasized sustained profit and EPS improvement rather than actions to drive higher P/E's.

4. Their approach to gathering and using market insights was inadequate for embryonic markets.

5. They lacked established disciplines for selecting, experimenting, funding, and terminating new growth businesses.

6. Once selected, many ventures failed in execution.

7. Finally and most importantly senior management didn’t spend time on new growth opportunities (they also found that Gerstner had only dedicated about 3.7% of his time on these new initiatives)

The EBO was carefully designed to reinforce the following:

1. Declare/communicate strategic intent to pursue new growth opportunities

2. Identify highly visible short list of emerging business initiatives

3. House them in the appropriate group/business unit, but give them special treatment:

‐Active sponsorship for each by a SVP

‐A dedicated A‐team for each opportunity

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‐ Special support structure

‐Protected funding

‐Disciplined mechanisms for cross company alignment

‐Measured differently, strategic milestones

‐Regular review and oversight

‐Nurture and graduate or kill this short list, and continuously identify new candidates

Over a 6 year period IBM grew new businesses (they termed Horizon 3 business opportunities) to 24% of the overall revenue for the company. At the same time they found that revenue from acquisition during that same timeframe was 11% of total revenue.

As the EBO evolved, IBM’s SVP of Strategy, Bruce Harreld, led the organization and created a process to test both the ideas and the sponsorship support. It began with taking a concept or idea and developing a series of educational presentations in an effort to see who might be interested in picking up the idea. The process also included carefully identifying an executive who was seasoned and had a strong internal network. Again, they believed that the key to success was not the financial investment, but the sponsorship right from the beginning and the ongoing visibility of the innovation so it could not be killed by another party.

Early in the process each innovation had to be identified with a future “home room” so that the sponsoring executive could plan for the new product to join their group. The EBO office met monthly with the Sr. Executive of the homeroom organization. The Emerging Business Organization served as the first year funding mechanism for new ideas and required the funding beyond year one to come from the existing business group. One of the group’s primary goals was to provide optimal visibility and air cover for the new products until such time that they joined the business unit. They also carefully tracked the use of the start‐up money to ensure it was not appropriated to other products in that new business line.

Another critical learning from IBM was the strategy to engage the finance organization early in each and every innovation. Over time the finance organization became champions of the new innovation and monitored the budget in each product group to ensure they did not re‐allocate the investment dollars to another part of the group

As some new product emerged and the leaders of those products were promoted it soon became clear to the seasoned executives that they must be willing to lead one of the new product efforts in order to be promoted within IBM. In addition, if the product was abandoned, the executive was not punished, but typically selected to attempt a new product or was promoted. This was a huge cultural shift in IBM and it was confirmed when the most respected leaders approached the EBO group to request a leadership role in a new product.

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33

Kronos

Business Overview

Kronos, headquartered in Chelmsford Ma., was founded in 1977 and has revenues of roughly $700M and 3,000 employees. Kronos went public in 1992 and went private again in 2007, bought by a private equity firm for 1.8B. They have a presence in 60 countries although the majority of the workforce is centered in the United States. The flagship product is the Workforce Management Solution which has grown into a suite of products covering time and attendance, scheduling, employee absence, HR and Payroll and labor analytics. Its second major product is Hiring Solutions software targeted to high volume companies such as Best Buy, Target who experience high labor turnover. Its third product group, Workforce Central specializes in airline‐cruise scheduling solutions. Workforce Central was acquired and is run independently since it offers a highly customized solution for a small niche of customers. The company’s major product, Workforce Management Solution is sold directly, and revenue is derived from an onsite license business model while the Hiring Solutions product also sold directly is offered only as a SaaS .

Kronos views itself as a best of breed enterprise application– mid size level suite – not like an ERP. Their main competition is ADP (although Kronos licenses some of its software to ADP as an OEM) as well as Oracle and SAP. Examples of typical customers would be the County of Guilford, the third‐largest county in North Carolina, who chose Kronos to automate time and attendance, scheduling, and absence management for 2,700 employees in all departments. Kronos has also expanded its global footprint and enjoyed success in overseas markets despite the recent recession.


The company has recently reorganized. “We’ve always managed the company based on markets. The market might be geographical or industry based but about a year and half ago we also began to complement that view with a product view so that we could focus energy on being successful from both dimensions” (Transcript Quote)

Because of this reorganization the Kronos organizational structure now resembles the classic West Coast technology company structure pioneered by HP. In addition, Kronos has created a 50 person organization, “Product Management and Marketing” responsible for bringing insight back from customers and other market sources to the product development organization. They are also responsible for bringing the products forward to market.

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Centralized Groups

Kronos Organizational Structure

Product Groups

Kronos uses a centralized sales force to sell all but its Workforce Central product. “The general rule is that we have a single sales force and we have a direct go‐to‐market strategy. Our sales force sort of carries a bag with everything in it. There are a couple of small examples where we have two or three sales reps dealing with a very specialized group of customers, but basically we have a centralized sales force.” (Transcript quote)


Kronos has grown both through internal innovation and through acquisition. At times these two approaches have been brought together to create a more competitive product. The Hiring Solutions product came from folding 2 acquisitions together – the latter was made when management realized the first acquisition was not as technically advanced as they had thought. Their own development group created the final bridge product between the 2 to create a very competitive offering within a new market space and based on the new business model of SaaS.

Kronos’s acquisition strategy has evolved over the life of the company. The first wave was focused on gaining a dealer network and access to customers. Early in the history of the company they did not have a direct sales force and as the product evolved and became more sophisticated, management realized that it needed to develop a direct sales force who would be motivated to gain the technical skill necessary to sell the product. Kronos hired dealers and where possible acquired groups of dealers. The second wave of acquisitions focused on buying small competitors as a way to gain their customer base and migrate the customers to their product line. In most of these acquisitions, Kronos did not keep any of the sales force except the stars once customers were migrated to the Kronos platform. The 3rd wave

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of acquisition is now product based and focused on identifying technologies that can enhance the core products of the company or help them expand into new markets.

The acquisition of Workforce Central represents something of a departure from a strategy focused on acquiring technology that can be brought into the core product and sold by the centralized sales force. However, this cruise and airline scheduling product is similar in core capability to the company’s main offering and it also provides a unique and new set of customers for the company. The Hiring Solutions product offers an extension to the core product line and provides a new offering to existing customers which can be sold through the existing sales force.


The establishment of separate product groups has enabled Kronos to build technical expertise in these particular product lines while the use of a centralized sales force enables the customer to have access to the full product line offerings of Kronos. For internal innovation, R&D is already attached to the product group so integration into the core product is not as challenging as bringing in a new technology offering from a centralized R&D group. For acquisitions, a challenge remains in motivating the sales force to give enough attention to newly acquired products or capabilities. In most cases, sales reps from the acquired company are only brought into Kronos if they show real talent for selling the entire product line.

The biggest challenge is finding the right incentives for the sales force to sell the new solutions. They have tried a number of different incentives (overlay credit, premium on the product, but have not found the one right formula). Time seems to be the best solution. However, the newly established roles within the product management and marketing group may help Kronos to form a strong bond between product managers and the sales force.

Lessons learned by Kronos

Kronos has been a successful software company that has grown both through acquisitions and internal product development. Recent acquisitions have enabled Kronos to expand its product line beyond the original Workforce Management offering. The recent establishment of product groups will undoubtedly help support the company’s focus on improving the underlying technology of each of its offerings.

The continued use of a centralized sales force does enable the company to have a cost effective direct sales approach. However, as with any centralized sales group there are inevitably difficulties in prioritizing sales efforts while supporting the introduction of new solutions. One of Kronos’s learnings has been to be patient with the sales force in learning how to sell the new solution. Patience, combined with strong pre‐sales support from the Product Management and Marketing group is the strategy Kronos has chosen to address this challenge.

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McAfee


McAfee, Inc. is a $2 billion (2009) software company dedicated to providing security technologies that empower home users, businesses, the public sector and service providers by enabling them to comply with regulations, protect data, prevent disruptions, shop the web safely, identify vulnerabilities and continuously monitor and improve their security. McAfee was incorporated in 1992 and has grown to its current size through organic growth, partnerships and acquisition. McAfee sells to the largest government and corporate organizations down to the smallest enterprises and also directly to consumers.

According to the Gartner Group, (IT Facts website 3/13/2010) the worldwide security software market is expected to increase from nearly $8.3 billion in 2006 to more than $13.5 billion in 2011. This represents a compound annual growth rate of 10.4% from 2006 through 2011.


The company has one business and operates in one industry segmented by client size, geography and product. The company characterizes customers as: 1. Home and home office; 2.Small business; 3.Mid‐market; 4. Corporate and Enterprise. McAfee develops products and services specific to each customer group and delivers these solutions through various routes to markets based on customer group requirements.

The business has been organized along a 3 X 5 X 4 model.

3 Customer Segments: Consumer and Small Business; Mid‐market and Enterprise

5 Geographies: North America, Europe‐Middle East‐Africa, Japan, Asia‐Pacific, and Latin America

4 Product Business Units: Endpoint Protection, Network Protection, Content, and Risk & Compliance

Endpoint Protection: Endpoint protection encompasses security solutions for consumer and corporate computer systems, including servers, desktop and laptop computers, handheld voice and data phones, and other devices that are connected to corporate systems and networks and home PCs.

Network Security: Products in this area defend and protect corporate networks from unauthorized intrusion. Network protection encompasses firewall, intrusion detection and prevention, and network access control solutions.

Content: Products in this area include network gateway and Software as a Service (SAAS) offerings designed to ensure that all content (email, web, and other data) coming into a corporation is free from malware and spam. These solutions also allow corporations to establish and enforce policies around web usage, web security as well as the prevention of unauthorized or accidental loss of corporate data.

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Vulnerability & Risk Management: Products in this area allow corporations to identify security risks in their computing environments and conduct compliance audits. Following the audit these products then allow organizations to remediate shortcomings, implement required policies, and monitor for continuous compliance.

The company’s overall revenue is principally derived from subscriptions and service & support.


Service, Support & Subscriptions 1,739,081 90% Product 188,251 10% Consolidated 1,927,332 100%

McAfee has a matrixed organizational structure. There is a corporate R&D center focused on researching and anticipating the next wave of security threats and developing products to combat them. Within each of the product/business units there is also a focus on incremental product improvement as specialists work closely with customers to refine and improve specific security products.

While the sales and marketing functions are centralized, sales activities are further segmented by customer group; followed by geographic region. Within each geography and customer segment there are individual business units focused on a specific product line such as such as Network Protection Offerings. The reporting structure for each of these business units varies somewhat. “Some business units will be organized such that all of the executives within that unit report to the General Manager (of that business unit) and a straight line into functional leads or geographic leads. Sometimes they’ll be straight line into the GM and dotted line into the functional and geographic leads” (Interview transcript)

The key to this organizational structure is a philosophy called the “AAA”: Autonomy; Accountability and Alignment. The challenge is to balance all three of these goals while pursuing maximum business growth and profitability. Executives are encouraged to take independent action to drive their businesses forward. That is autonomy. The tradeoff for this autonomy is accountability for meeting specific goals. Finally alignment is driven through the bonus structure where most executives will have bonuses tied to corporate goals as well as business unit and/or product goals.


McAfee has pursued a balanced strategy for innovation using both acquisition and organic growth. Typically acquired companies will have a special product geared to a specific market. Acquisition allows McAfee to gain expertise in a given area, but also enables the acquired company to access a global market through McAfee’s established channels.

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McAfee does invest in internal R&D principally to anticipate security threats in the future. The McAfee product development organization focuses on combating both existing and potential threats. As cybercrime has been on the rise over the past decade, McAfee must continue to invest in research to head off these threats. The result of this research is then integrated into existing product lines. In addition, product managers and engineers within the product groups continuously work with customers to better understand their security requirements and compliance challenges.


The ideal acquisition for McAfee is usually a company with about $15‐30 million in revenues with a proven set of customers and proven deployments. The following excerpt is taken from the Interview transcript:

“To accelerate the growth of the acquired company, a near term tradeoff is frequently made to increase the cost of sales in order to deliver broader adoption and know‐how within our organization. For example, we have a Corporate and Enterprise sales organization that has unique territories and unique quotas. We might do certain things to incent them to drive new initiatives by adding a particular type of product into their compensation plans. For the acquired company we would have a specialist sales organization. We avoid calling them an overlay. A key part of this is that they do not have to ask permission to enter an account that a McAfee field rep owns. If you are a specialist you are a product sales guy and generally what that means is you will also have a territory. You will only be quota‐ed and paid on the product that you’re responsible for, not the full suite. For a period of time we will double comp so that the line rep gets paid and the specialist also gets paid.” (Transcript quote)

McAfee uses the double‐compensation approach to foster collaboration between the acquired sales force and the existing sales force. There is also a knowledge transfer between the acquired company and the customer service function. As the knowledge transfer is taking place, McAfee will scale back the size of the specialist sales organization. While there is no hard and fast rule about the timing of scale back, McAfee keeps close track of the knowledge transfer and in general the acquired company will have been fully integrated with the centralized sales and support functions within 1‐3 years.

The Customer service function remains centralized so that customers have one number to call and one global experience of consistent service regardless of geography or customer segment.

Lessons Learned by McAfee

McAfee is a fast growing company is a fast growing industry. Their matrixed organizational structure enables them to integrate acquired companies utilizing their “Autonomy, Accountability, Alignment” philosophy. The period of sales overlay for the acquired company insures the transfer of knowledge to the centralized sales and service group while maintaining the customer focus and revenue growth rates that the acquired company was targeted for in the first place.

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As McAfee grows beyond the $2billion mark another axis of complexity; that of multiple products may move the company toward an account manager model of sales organization. This is an expensive sales model and the company is not quite there yet. However, as the product line grows, the top global accounts have been assigned a client account executive who is in charge of bringing in all of McAfee’s products to the client.

McAfee has pursued a balanced strategy for innovation which includes acquisition, incremental R&D investment within the product lines and longer horizon R&D through its investment in new product development.

Mentor Graphics Business Overview

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Mentor Graphics

Business Overview

Mentor Graphics® is an $800 million company (2009) that is a leader in electronic design automation (EDA). The company is a leading supplier of products and services used by companies worldwide in the design of the electronic content of their products. The company’s strength lies in helping engineers conquer design challenges in the increasingly complex worlds of board and chip design.

(Company Annual Report, 2009)

The company is organized into six groupings of products and services. These categories include Integrated System Design, IC Design to Silicon, Functional Verification, New and Emerging Products, Services and Other, and Finance Fees. Each category, with the exception of Finance Fees, includes both product and support revenues.


IC Design to Silicon 286,250 36%

Functional Verification 192,128 24% Integrated System Design 180,554 22% New & Emerging Products 93,210 12% Services & Other 50,585 6% Consolidated 802,727 100%

The EDA industry is dominated by three large companies, Synopsys, Cadence and Mentor Graphics. The three together own about 75‐80% of the global market share.

Mentor Graphics could be described as an algorithm‐driven company because its products are new formulae rather than new products. “Electronic Design Automation, which is the application of computer‐aided design to electronic design, is heavily focused on semiconductor design and, therefore, we have to deal with Moore’s law of consequences; and what Moore’s law has been predicting is that every 12‐18 months the number of transistors double in an IC…so what we find is that our customers are forever discovering new issues that require us to create new products that deal with issues that haven’t been seen before.” (Transcript quote) Moore’s Law and the implications of getting more and more integrated circuits onto a single chip define the challenges and opportunities faced by Mentor Graphics’ customers. To respond to these challenges, Mentor Graphics must continually innovate. To do this, the company focuses on providing narrow but deep expertise to its customers in different industries.

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Mentor Graphics uses the classic west coast technology company organizational structure pioneered by HP. That is, the company has 18 business units run by general managers who are responsible for product marketing and engineering. They are paid to tightly focus on their specific product category. A product category is typically focused on an industry such as automotive and within that industry category a further breakdown focuses on specific systems. For example, within the automotive industry Mentor Graphics has three separate business units; a networking group, a place and route group and a software group that focuses on the interaction of electronic and mechanical systems. These business units are supported by a centralized sales team and a centralized customer service team.

The centralized sales team is charged with booking business across the various product groups for the next twelve months. “Within the sales organization are application engineers who are technical and whose job it is to introduce technology to customers. In addition, we have account managers whose job it is to close business. They are under the tyranny of the quota system. Within the product groups, however, are technical marketing engineers who are responsible for identifying and building relationships with strategic customers whose actual business may be more than 12 months out into the future.” (Transcript quote)

Customer Facing

HP’s Organizational Structure in 2000‐01

Product Facing

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Centralized Groups

Mentor Graphics Organizational Structure(example groups)

Product Focused Business Units


Mentor Graphics pursues both acquisition and internal development strategies for innovation. Because of the rapid changes in the underlying technology of its customers’ products, its product‐focused business unit structure enables Mentor Graphics to continually update and improve its products by maintaining a close relationship to its customers and by empowering the technical marketing engineers to look out beyond 12 months in identifying sales opportunities. The company’s strategy is to develop deep but narrow expertise within product categories. Our interviewee compared Mentor Graphics to Synopsys in the following way: “Synopsys is more like Microsoft Office bringing a set of integrated products to the market. Mentor Graphics’ strategy is to organize around Excel, Word etc. The tradeoff is that Mentor Graphics products don’t work as well together but since there is less of a requirement for integration and coordination, the company feels that it can respond more quickly to specific customer needs and provide a more granular solution to their challenges.” (Transcript quote)


As with most companies that we studied, their strategy for re‐integration of acquisitions begins by eliminating redundancies in the functional areas. However, each of the product business units will have a general manager and a core group of engineers who will remain in that unit. Sales for the new unit will be done by the central sales organization with the business unit focused on developing future sales within its product category. Mentor Graphics typical acquisitions tend to be small, in that the company is acquiring the talent and market knowledge of a small group of engineers.

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Lessons Learned by Mentor Graphics

Survival in the EDA industry requires constant innovation. No one in the industry has the luxury of long product life cycles and stable designs over a period of years. The product business unit structure enables Mentor Graphics to continually innovate with laser‐like focus on the distinct needs of highly targeted customer groups. The presence of the technical marketing engineers enables the company to specifically focus on growing new business opportunities and longer term product deployment without taking the focus off of the short term (12 month) need to meet revenue goals. The centralized sales force is focused on the revenue goals while the engineers in the business units have the specific task of looking out further for sales revenue.

Because of the algorithm nature of their business, the business units can remain small. The largest product team that Mentor Graphics has is only 100 people. A product‐focused business unit could be made up of 12‐20 people or fewer. Because of the nature of their business, this structure enables the company to continuously innovate within its product /market business units while maintaining focus on short term sales and profitability goals with its centralized sales and marketing group.

Microsoft


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Microsoft


Microsoft Corporation, which was founded in 1975, provides software and hardware products and solutions worldwide. The Client segment offers Windows Vista comprising Home Basic, Home Premium, Ultimate, Business, Enterprise, and Starter editions; and Windows XP, including Professional, Home, Media Center, and Tablet PC editions. The Server and Tools segment develops software server products, as well as software developer tools, services, and solutions consisting of Microsoft SQL Server, Visual Studio, Silverlight, System Center products, Forefront security products, Biz Talk Server, Microsoft Consulting Services, and Premier product support services.

Revenue in 2009 was 58.4B with income of 20.36B. Microsoft has 93,000 employees.

TOTAL REVENUE 2009 $ Revenue

(‘000)

Percentage Revenue

Microsoft Business Division 18.115 31%

Windows & Windows Live Division 15.783 27%

Server and Tools 12.856 22%

Entertainment and Devices Division 8.181 14%

Online Services Business 2.921 5%

Unallocated and other .584 1%

Consolidated 58.437 100%

Organization Structure and Running the Business

Microsoft is organized into five major divisions each containing R&D, domain expertise, customer support and sales as well as other corporate functions,. The divisions are supported by the overall corporate functions of Finance, HR, Legal, Partnerships and the centralized Sales and Marketing organization.

The five major divisions are:

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• Windows & Windows Live Division: Includes the Windows product family and is responsible for our relationships with personal computer manufacturers as well as online software and services through Windows Live.

• Server and Tools Division: Software server products, services and solutions, including: Windows Server operating system, Microsoft SQL Server, Visual Studio, Silverlight, System Center products, Forefront security products, Biz Talk Server, and Microsoft Consulting Services.

• Online Services Division: Consists of an online advertising platform with offerings for publishers and advertisers, and online information offerings such as Bing and the MSN portals and channels.

• Microsoft Business Division: Includes the Microsoft Office suites, desktop programs, servers, and services and solutions; Microsoft Dynamics; and Unified Communications business solutions.

Entertainment and Devices Division: Consists of the Xbox video game system, including consoles and accessories, Xbox Live operations, Zune digital music and entertainment device; Mediaroom, mobile and embedded device platforms, Surface computing platform, and Windows Automotive.


Microsoft invests heavily in internal R&D and will spend more than $9‐1/2 billion during 2010 on R&D. Investment dollars are allocated to both near term and long term opportunities. However, the vast majority of the spending is done by the product groups on innovations that are very close to the market.

“We are more balanced that Cisco or oracle when it comes to acquisitions. We are more biased toward organic innovation” (Transcript Quote)

The acquisition strategy is primarily used to reduce time to market. The acquisitions are viewed as more costly and higher risk than growing new ideas internally. 95% of the acquisitions they explore are not pursued because Microsoft has determined they can develop the technology more efficiently themselves without taking on the associated personnel and other risks of an acquisition. . They believe that they are very successful at acquisitions because they have a very structured way of assessing and integrating acquisitions that most companies do not have.

For internal innovation Microsoft has a 3 pronged strategy. The slide below lays out their strategy beginning with the investment in the product groups looking at new technology enhancements to their core products from the present out 2 years. Microsoft Labs (Ray Ozzie) are focused on 2‐4 years out and the Microsoft Research Group (Craig Mundee) focuses 5‐10 years out.

The labs are increasingly filling a key role, and they're expected to build bridges of vision and bridges of code between what's possible using cutting edge technologies, and what might be done with that technology to improve real customer solutions.

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Microsoft has also set up an organization in headquarters called incubation sales which works with various groups within different geographies to help them integrate new technologies into their sales strategies.

However, there is a belief that as new products are competing for visibility and support with some of the core products, the new products are minimized and are eventually not successful. In a recent NYT Dick Brass former Microsoft executive said the following “big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources, and over time hector them out of existence. It’s not an accident that almost all the executives in charge of Microsoft’s music, e‐books, phone, online, search and tablet efforts over the past decade have left.”

This article made its way around Microsoft and there was general agreement that most of the innovation occurred at a distance from the large established groups and it was a significant cultural challenge for them.

Strategy for Reintegrating Acquisitions and Emerging products

Microsoft recognizes that in the case where they have a very mature product in a division that is generating 90% of the revenue; it is highly unlikely that new products will get the attention of the sales force. To address this problem, the company has developed a hybrid model where they dedicate a small workforce within the division to be the “go to” people on the new product. When a new product is less that 100M in sales they maintain that “ring of security” around key new product people until it hits 1B.

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Once it is big enough to be on the “scorecard” of the GM, they back off the strategy of funding the specialist from corporate.

There is a unique corporate group called “Incubation Sales” which makes sure there is a review process to determine if a new product is going to make it or not. They help with the transition from incubation to mainstream and it helps keep the sales force from being overwhelmed. They track all of the new incubations to time the release into the mainstream. When they complete an acquisition they normally will keep the sales force for about 2 years.

Lessons learned by Microsoft

Microsoft has a made a huge investment in R&D and has an interesting three tier time horizon for their research. They realized that getting global sales attention is an ongoing challenge and they have created a unique Incubation Sales Group. They have also identified that here appears to be too many products that do not survive the challenges of the large established product groups and are still struggling to solve that challenge.

Raytheon

Business Overview:

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Raytheon

Business Overview:

Raytheon Company, together with its subsidiaries, is an industry leader in defense and government electronics, space, information technology and technical services. The company acts as prime contractor on numerous defense and related programs for the U.S. Government, which accounted for 87% of sales in 2008. Founded in 1922 by two former college roommates Laurence K. Marshall and Vannevar Bush, along with scientist Charles G. Smith, the company began as the American Appliance Company in Cambridge Massachusetts. From its early days as a maker of radio tubes, its adaptation of World War II radar technology to invent microwave cooking, and its development of the first guided missile, Raytheon has successfully built upon its pioneering tradition to become a global technology leader. Revenues are now at $25 billion (2009) and the company has divested its commercial business operations to focus exclusively on the defense market.

REVENUE (2009) $ Revenue (Millions)


Missile Systems 5,561 22%

Integrated Defense Systems 5,525 22%

Network Centric Systems 4,822 19%

Space and Airborne Systems 4,582 18%

Intelligence and Information Systems 3,204 13%

Technical Services 3,161 13%

Corporate & Eliminations (1974) ‐8%

Consolidated 24,881 100%


Raytheon has 6 strategic Business Units with each unit containing its own engineering, HR, legal and contracts staff, and sales specialists. While the organization does have centralized corporate functions such as Legal, HR, Supply Chain, Engineering and Quality which provide oversight and support, these functions mainly set guidelines and policy objectives for the operating functional groups within the business units. Each of the following business units are about $4‐6B in size.

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1. Missile Systems (Tucson, AZ): Capabilities in guidance & navigation systems and high resolution sensors for missile systems

2. Integrated Defense Systems (Tewksbury, MA): Global capabilities integrator for space, air, surface and subsurface

3. Network Centric Systems (McKinney, TX): Mission solutions for networking, command & control, battle space awareness and transportation management.

4. Space and Airborne Systems (El Segundo, CA): Leader in design and development of integrated systems and solutions for advanced missions.

5. Intelligence and Information Systems (Garland, TX): Capabilities in signal processing to provide intelligence & information services

6. Technical Services (Reston, VA): Full spectrum of training services and outsourcing for defense, federal and commercial customers worldwide

Business Units

StrategicMarkets

Customers

The business units contain specific technical expertise which the company then maps onto its strategic market segments as shown above. This allows Raytheon to draw from its technical product organizations to fulfill requirements in particular markets. “Let me give you an example. So if we are doing a project that involves sensing for a smart highway, that’s probably coming out of Network Centric Systems in terms of the actual system itself. The program management of that project may come from Raytheon Technical Services” (Transcript Quote).

Because of the very technical nature of its products, sales capability is generally located within each of the strategic business units but is coordinated by a Washington D.C. office that focuses on strategic markets. The ability of Raytheon to maintain product expertise, while drawing from these product

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oriented business units to meet the needs of its strategic markets has strengthened the company’s position within the defense industry. By shedding its commercial lines, Raytheon has also honed its focus on the defense industry and its unique needs.


The Raytheon strategy for innovation is primarily organic although the company augments its organic innovation with small acquisitions of leading edge technologies which enhance their core products. Significant innovation is increasingly coming from the application of new technologies or components which can be used in another part of the business, such as sensing technology in warfare, which can also be used to provide surveillance for homeland security to protect oil fields. Raytheon believes that one of its greatest strengths is in adapting new technologies that emerge from the business units to serve the needs of multiple strategic markets. They have put an increased focus on innovation in the Intelligence and Information Business, because of the growth of that market and the future market potential.

Strategy for ReIntegrating the Acquisition and the Business

Both internally developed innovations and new technologies gained through acquisition are almost immediately assigned to a specific business unit and integrated into that unit’s core product offerings. Technologies or patentable processes which do not fit with the core products of existing business units, but which might provide value in a commercial application, are licensed to other manufacturers or distributors who will then take on the responsibility of developing the commercial market for the product. In this way, Raytheon can gain a revenue stream from its discovery, but leaves the actual commercialization to other companies better suited to developing the market. Raytheon is very disciplined in this way as it now focuses exclusively on the defense marketplace and only nurtures those innovations which will augment its core product offerings and meet the needs of its strategic markets.

Lessons Learned by Raytheon

Raytheon has undergone several changes since its early beginnings as an appliance manufacturer. The company has become very profitable and successful by shedding its commercial ventures and focusing exclusively on the defense industry as its key customer. Raytheon’s innovation strategy also supports this very disciplined focus by only incorporating those innovations which add to its core products and meet the needs of its core customer.

At the same time, Raytheon has substantial engineering expertise and often develops very leading edge technologies. The practice of licensing these technologies to appropriate commercial partners also supports the company’s disciplined focus while providing a source of revenue from its discoveries. At the moment, Raytheon’s most profitable innovations are those that can be adapted from one application to serve the needs of multiple strategic markets. This re‐deployment strategy is perhaps the company’s most valuable innovation. (2009)

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Synopsys

Overview of the Company (2009)

Synopsys began in 1986 as a one‐product startup co‐founded by CEO Dr. Aart J. de Geus. Over the last 24 years, Synopsys has evolved into a diverse company with a complete suite of products spanning the entire design flow. The company’s products enable designers to create and verify complex integrated circuits designs from concept to silicon. Synopsys provides a complete front‐to‐back design and test environment, system‐level to silicon‐level verification, design reuse technology and professional services to help its customers get their silicon working quickly and accurately. The company's products enable semiconductor, manufacturing, computer, communications, consumer electronics and other companies that develop electronic products to improve performance, increase productivity and achieve predictable success from systems to silicon.

Synopsys is organized into four groups of products/services:

• Core EDA (Galaxy™ Design Platform and Discovery™ Verification Platform)

• Intellectual Property (IP) and System‐Level Solutions

• Manufacturing Solutions

• Professional Services

REVENUE (2009) $ Revenue (‘000)


Core EDA 1,006,433 74%

Intellectual Property and System‐Level Solutions 136,005 10%

Manufacturing Solutions 163,205 12%

Professional Services and Other 54,402 4%

TOTAL 1,360,045 100%

Core EDA: Single / integrated IC design solutions, comprehensive portfolio of functional, analog / mixed‐signal, formal and low‐power verification solutions

IP & System Level Solutions: Connectivity IP solutions, analog IP solutions, virtual platforms that are fully functional software models of embedded systems.

Manufacturing Solutions: Yield enhancement of miniature ICs, high‐level modeling within ICs.

Professional Services and Other: Consulting and design services to address project‐specific & long‐term needs of customers.

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Synopsys has a rather unique software licensing model. More than 80% of its revenue is derived from

Technology Subscription Licenses (TSLs) which are time‐based licenses for a finite term, and generally provide the customer limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. These licenses are bundled with no‐charge post‐contract customer support (maintenance) for the term of the license. This licensing model enables customers to buy a piece of the future with the re‐configuration benefits that this implies. At the same time, from Synopsys’s point of view the subscription model enables the company to establish long term relationships with customers who in turn provide the company with an annuity stream of revenue.

Synopsys competes in the industry by focusing on integration of EDA components from design through testing and manufacturing.


Synopsys focuses its core business on a very specific niche of the software industry: Electronic Design Automation. Its customers are typically the large semiconductor manufacturers of the world. Synopsys therefore focuses on one overall market segment. At the present time the world market for electronic product design is estimated to be $4‐5 billion. Through more efficient use of products like those produced by Synopsys, the semi‐conductor manufacturers have become more efficient and as a result the rate of growth for the EDA industry has stabilized at around 2‐4%.

In terms of organizational structure, Synopsys is similar to its competitor Mentor Graphics and uses the classic west coast technology company organizational structure pioneered by HP. That is, the company has business units that are basically composed of R&D engineers who are highly focused on their specific product category. Because of Synopsys’s licensing model these engineers also work closely with customers to perform a kind of second level R&D to anticipate customer needs and incorporate new requirements into the customer’s license. These business units are supported by a centralized sales team and a centralized customer service team. “Customer service for us is a pretty complicated process because the technology always has to be at the cutting edge. We do have a centralized application engineer force where we have super specialists and application engineers who know the issues with specific products. We have multiple levels of customer support” (Transcript quote). Other functions, such as corporate strategy, finance and admin etc. are also centralized.

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Centralized Groups

Synopsys Organizational Structure

Product Focused Business Units


Synopsys’s principle strategy for innovation has been acquisition and the company has been an aggressive acquirer almost since its founding in 1986. Below is a partial list taken from the company press releases.

1994: Acquired Cadis, Aachen, Germany. Studio.

1997: acquired EPIC Design Technology Inc., US

1997: acquired Viewlogic Systems, Inc., USA

June 6, 2002: merger with Avanti Corporation,

September 12, 2002: acquired Co‐Design Automation, Inc. USA.

March 3, 2003: acquired Numerical Technologies, Inc. USA.

February 23, 2004: acquired Accelerant Networks, USA

February 26, 2004: acquired technology assets of Analog Design Automation, Inc., USA

October 2004: acquired assets of Monterey Design Systems, Inc., USA

December 7, 2005: Acquired HPL Technologies,

August 16, 2006: Acquired Sigma‐C Munich

June 18, 2007: Acquired ArchPro Design Automation Inc.

July 30, 2007: Completes Acquisition of MOSAID Semiconductor IP Assets

October 2, 2007: Acquired Sandwork Design

May 2008: Acquired Synplicity

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December 18, 2008: Acquired ChipIT Business Unit from ProDesign Electronic GmbH, Germany

May 8, 2009: Acquired Analog Business Group (Chipidea) from MIPS Technologies

Feb 2, 2010: Acquires VaST Systems Technology Corporation.

Feb 8, 2010: Announces an acquisition of CoWare Inc.

While most of the company’s innovation has come from aggressive acquisitions, Synopsys continues to

invest in internal R&D. Most of the internal R&D spending is devoted to product improvement and

keeping pace with the rapid pace of change within the company’s overall business. The placement of

R&D engineers in small customer facing business units is a strategy for maintaining ongoing but

incremental product improvement. Nevertheless, the fast pace of change that is characteristic of this

industry has meant that the company frequently makes as many as four updates per year to its

software.


Synopsys has grown rapidly over the past few decades and maintained a healthy profit margin. Their strategy for re‐integration of acquisitions has largely been to consolidate the new companies by eliminating redundancies in the functional areas and maintaining very small and lean business units with a core group of engineers focused on incremental product improvement driven by customer needs.

Internally funded R&D is not done in separate skunkworks with the goal of developing new products for a new market, but rather is highly focused on improving the current product line. Because of this focus on extending and improving current products, the challenge of re‐integration of a new product line is not an issue.

One could argue that Synopsys will be faced in the future with the challenge of expanding its product line to create new businesses particularly in the face of a slow growing market for EDA. Also, as the market consolidates to 2‐3 large manufacturers, the pressure is likely to grow on Synopsys to leverage its substantial engineering talent by innovating in adjacent markets and creating new business opportunities.

Lessons Learned by Synopsys

Synopsys competes in a slow growth market driven by scientific advances and technological change. One of the strengths of Synopsys’s organizational structure has been the use of customer facing business units staffed with R&D engineers who can work closely with customers to improve products.

The licensing business model used by Synopsys enables customers to receive, or to exchange certain quantities of licensed software for, unspecified future technology. This creates an almost joint R&D effort between the customer and Synopsys engineers. In this way, Synopsys is able to continue to develop a stream of new products while at the same time not creating separate emerging business units that then have to be re‐integrated into the overall corporate structure.

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Synopsys has been very successful at selling products to its existing customer base and maintaining healthy profit margins in a dynamic and competitive industry. As the market for EDA continues to experience zero to slow growth, Synopsys will be faced with the challenge of finding new customers and ultimately leveraging its considerable engineering talent to develop new products for these customers.

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Kathleen Foley Curley

Kathleen Foley Curley is a professor, businessperson, corporate director and thought leader in the areas of collaborative software, knowledge management and technology strategies that contribute to business value. Currently she is a Research Professor at Boston University’s School of Management. Prior to accepting her current position, Dr. Curley was Senior Vice President and Chief Community Builder at CommuniSpace Corporation, where she was responsible for the implementation of 35 virtual communities at client sites generating 100% year over year revenue growth. Before joining CommuniSpace, she was Chief Knowledge Management strategist for the IBM Software Group, responsible for articulating and integrating the KM and eBusiness strategies for this $14 billion division of IBM. Prior to that position, Dr. Curley was Executive Director of the Lotus Institute, an action research arm of the company which worked with customers to launch such products as TeamRoom, Lotus LearningSpace and Raven, Lotus’s KM platform. She is also a Director of Courier Corp. a 182 year old full service printing and specialty publishing company. Dr. Curley began her career as an academic and was a tenured Professor at Northeastern University for 12 years prior to returning to industry. She has published in many academic and professional journals including MIS Quarterly, Sloan Management Review and the Journal of Global Information Systems. She received her AB with Honors in Economics from Smith College and both her MBA and DBA degrees from Harvard Graduate School of Business Administration.

Chris Newell

Dr. Chris Newell is the Director of Learning and Development at Children’s Hospital Boston. He is also a Senior Research Fellow at Boston University School of Management and the Institute for Global Work, which he founded in 2007. Prior to Children’s, Chris was the Chief Collaboration Officer at Keane Inc. Chris has also held positions as SVP of Customer Education at Parametric Technology Corporation, Chief Knowledge Officer at Viant Corporation, and Director of Organizational Development at both Prime Computer and Lotus Development.

Chris has extensive experience in knowledge management, leadership development and coaching, talent management, virtual team collaboration, and workgroup technology. While at Lotus Development, Chris also the founder and Executive Director of the Lotus Institute, an action research center that developed virtual teaming and distance learning, virtual community, and expertise location solutions. Two of his solutions; Teamroom, (an earlier version of Workplace) and LearningSpace were commercialized by IBM and Lotus. Chris was also Co‐Founder and Co‐Director of the IBM Institute for Knowledge Management, a customer‐sponsored consortium that researched a wide array of social and technical knowledge management issues.

Chris holds a doctorate in Psychology from the Massachusetts School of Professional Psychology.

75CALIFORNIA MANAGEMENT REVIEW VOL. 51, NO. 4 SUMMER 2009 CMR.BERKELEY.EDU

OrganizationalAmbidexterity:IBM AND EMERGING

BUSINESS OPPORTUNITIES

Charles A. O’Reilly IIIJ. Bruce HarreldMichael L. Tushman

“It is not the strongest of the species that survive, nor the most intelligent, but the one that is most responsive to change.”—Charles Darwin

A lthough Darwin was writing about biological species 150 years ago, his logic applies to organizations today. In 1959, Fortunemagazine ranked General Motors as the largest, and arguably the strongest, manufacturing firm in the United States. Fifty years

later it has filed for bankruptcy. In his 2000 book entitled Leading the Revolution,Gary Hamel praised Enron as one of the smartest companies in the world.1 By 2001, it was out of business and the subject of a book with the ironic title of The Smartest Guys in the Room.2 The hedge firm Long Term Capital management included two Nobel Laureates among its founders but collapsed in 1998, almost bringing the U.S. financial markets to ruin.3 Darwin was right, neither strength nor intelligence guarantees survival. Only adaptation can do that, whether for firms or flora and fauna.

In a comprehensive study of the more than six million U.S. firms, Stub-bart and Knight note that only a tiny fraction of firms live to age 40, probably less than 0.1%.4 For example, for firms founded in 1976, only 10% survived 10 years later, leading them to conclude that “Despite their size, their vast finan-cial and human resources, average large firms do not ‘live’ as long as ordinary Americans.”5 Underscoring the fragility of organizational life, Foster and Kaplan followed the performance of 1000 large firms across 4 decades; only 160 of 1008 survived from 1962 to 1998.6 One-third of the firms in the Fortune 500 in 1970 no longer existed in 1983. Studies of organizational mortality have estimated that large firms have an estimated residual life expectancy from 5.8 to 14.6 years.7 Faced with these sobering figures, Stubbart and Knight conclude their

Organizational Ambidexterity: IBM and Emerging Business Opportunities

UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 51, NO. 4 SUMMER 2009 CMR.BERKELEY.EDU76

survey on a plaintive note, posing the question: “Given large firms’ experience, their financial muscle, their vast core competencies, giant strategic assets, and so forth—why aren’t large firms more successful.”8

Of course, some firms do survive. GKN is today a $5 billion 250-year old aerospace and automotive firm that began mining coal. Goodrich, another aero-space company began in 1870 as a maker of fire hose. Johnson & Johnson was founded in 1886 as a maker of sterile bandages and today is a global firm with a product portfolio that includes pharmaceuticals, medical devices, and consumer goods. Toyota began making looms in 1867, Nokia as a lumber company in 1867, Nucor in automobiles in 1897, and W.R. Grace in 1854 mining and ship-ping bat guano. What separates these companies from the thousands that fail? Luck has to be a part of it, but so does management and the ability of the firm to adapt.

Underlying the question of organizational evolution and adaptation is a rich and interesting debate among organizational scholars. On one side of the dispute are the organizational ecologists who argue that individual organizations are largely inert, like bacteria or birds, and change occurs in the population as a whole as old forms are replaced by new ones that better fit the changed con-text.9 On the other side are adaptationists of a variety of flavors who argue that organizations can and do change—and that it is the role of senior management to anticipate changes and reconfigure organizational assets to help the firm sur-vive.10 What makes this debate particularly interesting is that both sides invoke the same underlying theoretical arguments (evolutionary theory) for their explanations and both present empirical evidence to support their position.

In this article, we suggest how both sides may be right. First, we provide a brief overview of some recent advances in evolutionary thinking (multi-level selection) that have not yet been applied to organizations. We then illustrate how these ideas can enrich current thinking about organizational ambidexterity and dynamic capabilities and help explain organizational adaptation.11 Finally, using these ideas we illustrate how IBM has been able to compete in mature businesses and technologies through exploitation and to enter new, emerging businesses and technologies through exploration using the IBM Emerging Busi-ness Organization (EBO) process.12 This process corresponds to the evolutionary ideas of multi-level selection and permits IBM to adapt to changing environ-ments. We conclude with some suggestions for how multi-level selection may be used to increase the likelihood of organizational adaptation and survival.

Evolutionary Thinking—An Overview

Figure 1 provides a framework for organizing evolutionary research. Earlier formulations of evolutionary theories focused on individual selection as the process by which evolution operated. In this view, individual organisms (or organizations) do not adapt. Rather, natural selection works against those that do not fit the current environment. Change occurred over generations as new organisms evolved to better fit the environment. In the case of organisms,


CALIFORNIA MANAGEMENT REVIEW VOL. 51, NO. 4 SUMMER 2009 CMR.BERKELEY.EDU 77

selection occurred at the level of the genotype while at the organizational level, selection was based on “form.”13 Although organizational research has focused largely on evolution through selection, Darwinian thinking also acknowledges that change can occur through adaptation as well, although this mechanism has been largely discounted until recently.14 Recent advances in theories of evolution have begun to illustrate how adaptation and development can foster change—especially in more complex organisms like groups and organizations. However, as Wilson and Sober observe, “The most recent developments in biol-ogy have not yet reached the human behavioral sciences, which still know group selection as the bogey man of the 60’s and 70’s.”15

At its heart, evolution refers to change or transformation over time. “Nat-ural selection is based on the relationship between an organism and its envi-ronment, regardless of its taxonomic identity” and is based on relative fit-ness within and across groups.16 Thus, it can readily apply to organizations as well as birds, insects, slime mold, and humans. The three underpinnings of evolutionary theory are variation(organisms of a species differ on traits), selection (these differences sometimes make a difference in the organisms ability to survive), and retention (traits can be passed from one generation to another). Over time, as environments change, the variation in traits can make organisms more or less fit such that the former are more likely to survive.

Charles A. O’Reilly III is the Frank Buck Professor of Management at the Graduate School of Business at Stanford University. <[email protected]>

J. Bruce Harreld is a Senior Lecturer of Business Administration at the Harvard Business School. <[email protected]>

Michael L. Tushman is the Paul Lawrence MBA Class of 1942 Professor of Business Administration at the Harvard Business School. <[email protected]>

FIGURE 1. A Framework for Organizing Evolutionary Research

Mechanismof Action

Selection

Adaptation

Level of Analysis

Individual Organization

Population ecologybased on form

Multi-level selection based on competencies

Individual selection based on genotype

X



This winnowing process occurs in two fundamental ways—natural selec-tion and adaptation. Natural selection refers to the process where, over suc-ceeding generations, favorable traits (or traits that are useful for survival and reproduction) that are heritable become more common and unfavorable traits become less prevalent. This selection process acts on phenotypes, or the observ-able characteristics of an organism. This process selects not so much for favorable traits but against those that are disadvantageous. Less fit organisms die.

For example, in pre-industrial Great Britain, Gypsy Moths were predomi-nantly light gray in color, which helped them blend in with their forest habitat. Over time, industrial pollution from factories killed the lichen on tree trunks and trees became darker from the pollution. In this changed environment, light gray moths were more visible to predators and dark gray moths survived at higher rates. By 1895, 95 percent of the moths near Manchester England were mostly black. In recent times, as pollution has decreased and the lichen has grown back, the population of moths has become light colored again.

In its early form, evolutionary theory was dominated by a form of what Wilson characterizes as “naïve group selectionism” in which changes were thought to evolve for the good of the individual or species.17 This perspective emphasized that organisms were designed to maximize their own fitness and insensitive to group welfare—the so-called “selfish gene.”18 More recently, how-ever, this view has been broadened to see groups as adaptive in their own right, such that across groups, some may have more relative fitness and be selected accordingly. This newer view acknowledges that social organizations may evolve by both genetic and cultural group selection, with more cooperative groups better able to compete against groups that are less cooperative.19 Group-level adaptation emphasizes the importance of cultural selection—the passing of ideas from person to person. “The primary human adaptation, however, is for our behaviors to be acquired less and less directly from our genes and more and more from other people.”20 This is not the blind variation-selection-retention of genes but a more regulated set of social actions that pass information across generations. This is about group-level adaptation—not individual-level—and is likely to be more important in the study of organizations than the earlier theo-ries and reflects more accurately the behavioral flexibility of humans.

While Darwin believed that evolution was a glacially slow process, more recent research suggests that this is not always the case. In the earlier view, the cumulative heritable consequences of relative fitness on differences in survival and reproduction could be seen only after many generations. However, under some circumstances evolution may occur rapidly, especially human adaptation where “a fast mental process may accomplish the same thing as the slow genera-tional process of natural selection.”21 The growing recognition of the importance of group-level adaptation may help reconcile the debate among organizational theorists over whether organizations are largely inert or can adapt and change over time.



Organizational Inertia or Organizational Adaptation?

In support of the “organizations don’t change” position are data showing that the majority of firms founded in an industry do not survive over long peri-ods.22 While it is empirically the case that the majority of organizations founded do not survive for very long, it is also the case that these are mainly very small firms. From a management perspective, this is neither surprising nor very inter-esting. “Small size is almost always correlated with high failure rates . . . A vast majority of small firms . . . operate at undersized, inefficient scale—and they fail (exit) at a prodigious rate.”23 Taken uncritically, these high mortality rates have led some researchers to question the efficacy of management. Dew, Goldfarb, and Sarasvarthy conclude that “the strategic manager’s job is in fact futile in the face of environmental disruptions.”24 Evolution, in this view, is about the replacement of existing forms by those more suited to the changed environment.

The adaptationists, however, note that some firms do survive and prosper over long periods of time. DeGeus describes a sizeable number of firms that are more than 200 years old.25 Tripsas recounts the history of Mergenthaler Lino-type, a firm founded in 1886 that has survived three technological revolutions.26

As mentioned earlier, GKN is a 250 year-old company that has morphed from iron ore to steel to automotive parts to aerospace and today is an industrial ser-vices company for firms like Boeing. In this optimistic view, evolution occurs as organizations that are out of kilter with their environment reallocate and recon-figure resources to allow the firm to simultaneously exploit existing markets and technologies and explore new ones.27 Evolution, in this view, operates not as blind variation-selection-retention but with what March refers to as “evolution-ary engineering” in which organizational experience and memory are used to strengthen exploitation and exploration processes and adapt to changed envi-ronmental conditions.28 Unlike the organizational ecologist’s approach, which focuses primarily on individual-level selection and structural inertia or on the inability of firms to change, the adaptationist view focuses on large organizations and emphasizes group-level selection in which changes in relative fitness help organizations survive.

How can the same theory lead two groups of interested scholars to justify opposing positions? Both views accept the Darwinian principles of variation, selection, and retention. Both embrace the idea of evolution as natural selection or “descent with modification”—that is, in Darwin’s words, “any variation in the least degree injurious would be rigidly destroyed. This preservation of favorable variations and the rejection of injurious variations, I call Natural Selection.”29

Both views emphasize the importance of the environment in shaping the organ-ism. To understand how evolutionary theory can be used to support seemingly contradictory positions requires a brief digression into the evolution of evolu-tionary thinking—and how recent advances can reconcile the two perspectives.

Multi-Level Selection and Adaptation

The important difference between the two positions stems from an emphasis by each side on different parts of the evolutionary story. As shown in



Figure 1, evolutionary change can occur in two ways and at two levels. It occurs through natural selection in which organisms that don’t fit the environment are selected against (e.g., eaten by predators or driven into bankruptcy) or through adaptation (e.g., the newts’ ability to adjust coloration to blend into an environ-ment or a firm’s ability to explore and exploit). Wilson and Sober note: “Human adaptations can evolve along two major pathways: a) by increasing fitness of individuals relative to others within the same social group, and b) by increasing the fitness of social groups as collectives relative to other groups.”30 Therefore, change can occur at two levels: at the individual level (typically the genotype or organizational form) on which selection acts; and at the group level where adap-tation may occur through cultural learning.31

Much of the standard research in evolutionary biology and organiza-tional ecology is predicated on selection occurring within populations at the individual organism (or organization) level. The central focus in these studies is on structural inertia. Because of this, ecologists have not devoted much atten-tion to whether evolution operates through replacement or through mutation of one organizational form into another.32 Organisms, or organizations, that lack the characteristics needed to survive in a particular environment are selected against. The creation of new forms is seen as resulting from a slow multi-genera-tional process in which unfavorable traits are selected against. “The conceptual underpinnings of organizational ecology (inertia and the population perspective) direct the attention of researchers away from organization-level changes because they are judged to be infrequent events of secondary importance.”33 In this view, population change occurs as new forms enter, not as existing firms transform themselves. Differences in fitness at the organizational level are not central in studies of organizational ecology. Amburgey and Rao call attention to this over-emphasis on selection, “There is a dearth of research on how organization- and population-level learning processes facilitate learning and diminish mortality.”34

From this perspective, studies of evolution have been dominated by a form of individualism that sees groups as little more than collections of self-interested individuals. This methodological individualism dominates econom-ics and sociology and has led to an interpretation of evolution predicated on assumptions that “people are innately self-interested, that the concept of self-interest can be reduced to something like the utility maximization of economic theory, and that self-interest robustly leads to well-functioning societies.”35 In this view, social organization emerges as a by-product of self-interest and social groups are seen as having no ontological reality and are seen simply as conve-nient summaries of individual behavior. Although this rational choice argument may be true in some cases, it need not be true in all instances—especially where the costs are concentrated in some individuals and the benefits in others.

How well does this perspective, built as it is on genetic evolution, describe organizational evolution? More recent studies of human adaptation have observed that humans have a capacity for thought exceeding that of other spe-cies. Humans are clearly capable of transmitting vast quantities of information by imitation, instruction, and verbal communication. Much of our extraordinary



behavioral variation stems not from genetic variation but from differences in cultural traditions. Indeed, there is little evidence of specific behaviors having a genetic origin, but there is wide variation in behavior across cultures. Culture, in this sense, may be both causal and adaptive because populations of human minds can store the best efforts of previous generations of minds. Richerson and Boyd argue that “Humans can live in a wider range of environments than other primates because culture allows the relatively rapid accumulation of better strat-egies for exploiting local environments compared with genetic inheritance.”36

The combination of cognition, cooperation, and culture that character-ize human evolution has speeded up the evolutionary process. In this view, the emphasis is on adaptation with behaviors acquired less directly from genes and more from other people.37 A fast mental process may accomplish the same thing as a slow generational process. For instance, in his Pulitzer Prize winning book, Jared Diamond illustrates how the slow wisdom of natural selection fol-lowed by the fast wisdom of human intelligence made the difference in cultures that tended livestock.38 The impact of social learning or cultural transmission becomes particularly important if selection occurs at the group as well as the individual level. An experiment in chicken breeding offers a nice illustration of group-level selection.39

In commercial egg production, 9-12 chickens are placed in cages. In an attempt to increase egg production, two methods were compared. In the first, the most productive individual hens were identified to breed and placed in a common cage. In the second, all the hens from the most productive cage were chosen to breed. Since it is the individual hen that lays eggs, the expectation was that the first condition should be more productive. After six generations, it was discovered that with the first method (individual selection) egg production plummeted. Even though the most productive hens had been chosen, the most productive individuals had achieved their success by suppressing the produc-tivity of the others in their cage. This had produced the chicken equivalent of psychopaths. The second method (group selection), however, increased egg pro-duction by 160 percent and created a harmonious group.

Building on this insight, Wilson observes that multi-level selection can work when “Groups can evolve into adaptive units that are designed to maxi-mize their contribution to the total gene pool to the extent that selection among groups prevails against selection within groups.”40 When selection within groups is suppressed (for example, through the provision of rewards and punishments promoting cooperation), selection between groups becomes the primary evo-lutionary force. The group is egalitarian, not because everyone is virtuous, but because they collectively have the means to detect and punish would-be cheat-ers and free-riders. If punishment is effective, then cooperation will pay. It is social control, rather than sacrificial altruism that makes group-level adapta-tion possible and gives rise to culturally transmitted group-oriented norms and systems of rewards and punishments to ensure that such norms are obeyed. In social environments in which pro-social norms are enforced, individual selection should favor psychological predispositions that make individuals more likely to



gain social rewards, avoid social sanctions, and predispose individuals to cooper-ate and identify with the larger social grouping.

Cultural evolution involves the passing of ideas from person to person—or group to group. Culture is adaptive because it can do things that genes can-not do for themselves. Simple forms of social learning cut the cost of individual learning by allowing individuals to use environmental cues selectively. Without social learning, everybody would have to learn everything for themselves.41

When environments are variable and learning is difficult or costly, such a system can be a big advantage. However, to a large extent, the creation, retention, and selection of behaviors take place beneath conscious awareness. Many current behaviors exist not because someone decided that they were useful but because they out-survived competing behaviors. Cumulative cultural evolution gives rise to complex adaptations much more rapidly than natural selection. In Wilson’s view, “Human mentality is fundamentally predicated on sharing.”42 This has become so genetically inculcated that we don’t recognize it as sharing until we study it scientifically. Think of teamwork as the hallmark of human evolution rather than some kind of generic intelligence.

Such a process characterizes human evolution. At the individual level of selection (within group selection), it is the case that selection will favor defec-tors, because defectors will always do better than the others in the group. How-ever, at the group level, selection will favor those groups with more helpers, since each additional helper increases the fitness of the group. It follows that larger, more cooperative groups should be able to out-compete smaller and less-cooperative groups.43 For this reason, many evolutionary scientists believe that evolution would not favor a psychological system that led to the spread of selfish cultural variants.44 Wilson argues this strongly, claiming that individual, utility maximizing logics are “deeply flawed on the basis of elementary evolutionary principles that are very unlikely to be wrong.”45

With multi-level selection, evolutionary biologists have moved from the earlier view that implied an inability of organisms to change, and the futility of environmental intervention, to one in which evolution is seen as a set of if-then rules that can promote change. “Far from denying the potential for change, evolutionary theory can provide a detailed recipe for change.”46 Studies of multi-level selection from experimental genetics have demonstrated that group selection has resulted in lasting evolutionary change.47

Multi-Level Selection and Organizational Adaptation

Darwin argued that three conditions are necessary for adaptation by nat-ural selection:

there must be a struggle for existence so that not all individuals survive;

there must be variation such that some types are more likely to survive than others; and

the variation must be heritable so that the advantage can be passed on.48



Although Darwin was focused on individual organisms, these same pos-tulates apply to any entity that reproduces over time. Organizations compete and struggle for existence. They clearly vary in ways that make some more competitive than others; and, as they set up new businesses and divisions, they pass on these attributes to the new units. Fitness in this case is not reproductive success but the ability to attract resources (physical, financial, and intellectual). However, what is heritable in organizations? What organizational character-istics would be fitness enhancing or decreasing? If the logic of evolution is to be useful in explaining organizational adaptation, the first step is to specify the heritable characteristics on which organizations vary; that is, what characteris-tics of an organization would be likely to make it more or less adaptable to its environment?

Two criteria need to be fulfilled for multi-level selection to occur. First, the various organizational sub-units (or genes) need to share a common fate. Second, the group must be, in some sense, superior to what can be accomplished by the individuals when they are left to pursue their own interests. This is trivi-ally true in the case of humans. Clearly our bodies and genes share a common fate and no separate gene could do better without the whole. It is also true for eusocial insect colonies like ants and honeybees. It is, under many conditions, also true for organizations. For most organizations, the members share a com-mon fate and would not be better off pursuing their own interests, otherwise they would have left. Organizations, like other organisms, are also designed in ways to make pro-social behavior advantageous. They do this through shared value systems, selection, socialization, and reward systems—all calculated to make it difficult to benefit oneself at the expense of others. When successful, these processes help individuals subsume their own interests and identify with the organism itself. Conceptually, organizations fit the definition and criteria for multi-level selection to operate.

Since adaptation can occur at any level of the biological hierarchy, the question then becomes “what traits evolve through within-group selection and what traits might evolve through across-group selection?” To survive, organi-zations need to be able to compete for resources across a variety of economic and technical landscapes.49 This requires that firms be able to exploit existing resources and capabilities under stable economic conditions and, in the face of environmental change, are able to explore into new spaces by reconfiguring existing resources and developing new capabilities. This suggests that the proxi-mal or phenotypic characteristic for selection is a firm’s relative competitiveness against others, but the genotypic basis for success is the firm’s underlying capa-bilities that permit it to explore and exploit.

Across business units, there is variance in competencies and capabilities. Some units are better adapted to exploitation and emphasize efficiency, con-trol, and the reduction in variance (e.g., businesses focused on mature products and technologies). Others are focused on exploration and excel at adaptability, innovation, and are variance increasing (e.g., in new technologies and markets). As environments shift, the relative fitness of the subunits rises and falls and



resources are reallocated by senior managers to reconfigure the organization to adapt to these changes. If this is the case, then the unit of selection becomes the business unit within the larger organization.

This approach, referred to as dynamic capabilities, emphasizes the key role of strategic leadership in appropriately adapting, integrating, and reconfiguring organizational skills and resources to match changing environments.50 Dynamic capabilities are reflected in the organization’s ability to maintain ecological fit-ness and, when necessary, to reconfigure existing assets and develop the new skills needed to address emerging threats and opportunities

O’Reilly and Tushman extend this logic and argue that the ability of senior leaders to reconfigure assets to compete in emerging and mature busi-nesses, to be ambidextrous, is a critical element in sustainable competitive advantage.51 Central to the adaptive process are the notions of a firm’s ability to exploit existing assets and positions in a profit-producing way and simultane-ously to explore new technologies and markets—to configure and reconfigure organizational resources to capture existing as well as new opportunities. In March’s terms, this is the fundamental tension at the heart of an enterprise’s long-run survival. “The basic problem confronting an organization is to engage in sufficient exploitation to ensure its current viability and, at the same time, devote enough energy to exploration to ensure its future viability.”52

Thus, adaptation at the organizational level is a function of the variation-selection- retention process occurring across business units—and the ability of senior management to regulate this process in a way that maintains the ecologi-cal fitness of the organization with its environment. While selection is based on phenotypic (or observable) characteristics (i.e., business units), these are, in turn, a reflection of the organization’s capabilities—or the underlying organiza-tional genotype.53 This process does not imply random variation but a deliberate approach to variation-selection-retention that uses existing firm assets and capa-bilities and reconfigures them to address new opportunities. When done explic-itly, this involves deliberate investments and promotes organizational learning that results in a repeatable process that has been characterized as the firm’s abil-ity “to learn how to learn.”54 It embodies a complex set of routines includingdecentralization, differentiation, targeted integration, and the ability of senior leadership to orchestrate the complex trade-offs that ambidexterity requires.

The processes of variation-selection-retention and multi-level selection have been explicitly designed and implemented by IBM to develop new busi-nesses. This is a deliberate, repeatable process that the company uses to ensure ecological fitness in changing markets and technologies. New businesses are designed to maximize their contribution to the organization’s gene pool by developing and extending dynamic capabilities.

Emerging Business Opportunities at IBM

In September of 1999, Lou Gerstner, then CEO of IBM, was reading a monthly report that indicated that current financial pressures had forced a



business unit to discontinue funding of a promising new initiative. Gerstner was incensed and demanded to know “Why do we consistently miss the emergence of new industries?” Underscoring this question were the results of a study by the IBM strategy group documenting how the company had failed to capture value from 29 separate technologies and businesses that the company had developed but failed to commercialize. For example, IBM developed the first commercial router but Cisco dominated that market. As early as 1996, IBM had developed technologies to accelerate the performance of the web, but Akamai, a second-mover, had the product vision to capture this market. Early on, IBM developed speech recognition software but was eclipsed by Nuance. Technologies in RFID, Business Intelligence, e-Sourcing, and Pervasive Computing all represented disturbing examples of missed opportunities for the company. In each instance, the conclusion was that IBM had the potential to win in these markets but had failed to take advantage of the opportunity. The question was “why” this happened?

A detailed internal analysis of why the company missed these markets revealed six major reasons IBM routinely missed new technology and market opportunities. These included:

The existing management system rewards execution directed at short-term results and does not value strategic business building. IBM is driven by process. The dominant leadership style rewarded within the company was to execute flawlessly on immediate opportunities, not to pioneer into new area. “Breakthrough thinking” was not a valued leadership capability.

The company is preoccupied with current served markets and existing offerings.Processes were designed to listen intently to existing customers and to focus on traditional markets. This makes IBM slow to recognize disruptive technologies and to recognize new markets.

The business model emphasizes sustained profit and EPS improvement rather than actions oriented towards higher price/earnings. The emphasis was on improv-ing profitability of a stable portfolio of businesses rather than accelerating innovation. The unrealistic expectation was that new businesses needed to break even within a year or two.

The firm’s approach to gathering and using market insight is inadequate for embryonic markets. The insistence on “fact-based financial analysis” hinders IBM’s ability to generate market intelligence for new and ambiguous mar-kets. Market insights that lack this analysis are often ignored or dismissed.

The company lacks established disciplines for selecting, experimenting, funding, and terminating new growth businesses. Even when new growth business opportunities are identified, IBM’s existing management systems fail to provide funding or restrict its ability to develop creative new businesses. Worse, the company applies its mature business processes to growth opportunities with the result that it often starves these new ventures.

Once selected, many new ventures fail in execution. IBM lacks the entrepre-neurial leadership skills for designing new business models and building



growth businesses. It also lacks the patience and persistence that new start-ups require.

Interestingly, the first three root causes were directly related to much of IBM’s success in mature markets—that is, the maniacal focus on short-term results, careful attention to major customers and markets, and an emphasis on improving profitability all contributed to the firm’s ability to exploit mature mar-kets—and made it difficult to explore into new spaces. The alignment that made the company a “disciplined machine” when competing in mature businesses was directly opposite to that needed to be successful in emerging markets and tech-nologies.

As a result of this analysis and the discussions it generated among senior management, a series of recommendations were made to permit the company to succeed at both exploitation in mature markets and exploration in growth areas. These decisions resulted in the development of the Emerging Business Organiza-tion (EBO) initiative in 2000. Between 2000 and 2005, EBOs added $15.2B to IBM’s top line. While acquisitions over this period added 9 percent to IBM’s top line, EBOs added 19 percent. This process has enabled the company to explore and exploit—to both enter new businesses and to remain competitive in mature ones.

Organizational Evolution and Adaptation: The EBO Process

Rooted in the company’s failure to meet its revenue growth goals, the EBO project team was formed to explicitly address IBM’s chronic failure to rap-idly and successfully pursue new market opportunities. A foundational insight of the team was the recognition that a company’s portfolio of businesses could be divided into three horizons: current core businesses; growth businesses; and future growth businesses—with each type of business having unique challenges and requiring a different organizational architecture (see Figure 2).55 IBM’s mis-take had been an unwitting focus on Horizon 1 and 2 businesses to the exclu-sion of Horizon 3. Interviews with senior managers reinforced this conclusion, with comments about how corporate staff had become “an army of bureaucrats” who inhibited rather than facilitated new growth.

Armed with this understanding, the team realized that what was needed was an explicit system that provided for the founding, development, and lead-ership of new growth businesses. This process needed to acknowledge that the primary business model that made IBM’s mature businesses successful was stifling the formation of new growth opportunities. Instead, what was needed was an explicit, replicable process with clear senior executive ownership for generating new businesses and processes that would permit the company to systematically explore new growth opportunities. In July of 2000, CEO Lou Ger-stner announced the appointment of John Thompson, then head of the software group, as Vice Chairman and head of the new EBO initiative. Thompson, a 34-year veteran of the company, was widely respected throughout the company for his skills as an operating manager and a strategist.



With a limited staff, Thompson began by working with groups to develop an EBO management and funding process and disciplined mechanisms for cross-company alignment. To be a candidate for an EBO, each potential business must meet the following clear selection criteria:

Strategic Alignment with the IBM corporate strategy—As Gary Cohen, VP of Strategy says, “Often we get ideas that are very promising, but we can’t find a way to turn them into a business with revenues and profits.” Other ideas may be great business opportunities but don’t fit within the compa-ny’s strategic direction, so these are offered to venture capitalists.

Cross-IBM Leverage—The EBO corporate process is focused on generating new businesses that cut across the IBM organization. For instance, the opportunity in the Life Sciences EBO was to sell hardware, software, and consulting to businesses affected by the need to deal with the informa-tion-intensive demands resulting from personalized medicine. Although a similar process can and does work to stimulate new businesses within

FIGURE 2. The EBO Model

Defend and increase theprofitability of existingbusinesses

Annual budgets andoperating plans

Cost, efficiency,customer intimacy,incremental innovation

Profit, margins, costs

Resources to expandand build new businesses

Investments, businessplans for growth

Customer acquisition,speed, execution,flexibility

Market share, growth

Discover options andplace selected bets onemerging opportunities

Market insight data,initial project plans

Learning, adaptation,risk taking, businessmodel innovation

Milestones

Focus

Outputs

KeySuccessFactors

Metrics

Horizon 1

Horizon 2

Horizon 3

Time / Uncertainty

Pro

fit

Mature Businesses

Growth Businesses

Future Businesses



lines-of-business, the corporate effort is explicitly aimed at cross-business opportunities.

New Source of Customer Value—An explicit goal of the use of EBOs is to explore and scale new business models and capabilities. Ideas that allow the company to move into new domains and test new business models are preferred over better understood models.

$1 Billion plus revenue potential—Since an explicit goal of the EBO initiative is top line growth, ideas need to hold out the potential of growing into a billion dollar market within three to five years.

Market Leadership—New business ideas must also provide the opportunity for IBM to emerge as the market leader. For instance, in deciding to enter the Life Sciences market, there was a recognition that early success could result in the establishment of industry standards and protocols that could offer network externalities.

Sustained Profit—Some ideas hold out the promise of rapid revenue growth but also the likelihood that new competitors will rapidly commoditize the business. Therefore, new ideas are screened to ensure that there is a good chance for the business to sustain profitability.

Bruce Harreld, SVP of strategy who replaced Thompson as head of the EBO effort, makes clear that “these aren’t product upgrades or just technical opportunities; they’re business opportunities [that] we believe that we can com-mercialize and turn into revenue-producing businesses . . . they are emerging because they are somehow changing the dynamics in the marketplace.”

Each EBO leader reports to a business unit head, such as hardware, soft-ware, or global services, but also reports to the senior executive responsible for new growth opportunities. This dual reporting provides corporate oversight to ensure that milestones are being met and resources allocated as well as provides for collaboration across businesses and the opportunity to quickly resolve issues as they arise.

In 2000 there were seven EBOs, including Linux, Life Sciences, Pervasive Computing, Digital Media, Network Processors, and e-Markets. Four of these have become successful businesses and “graduated” from their EBO status to become growth businesses and two failed. Figure 3 shows the growth and finan-cial performance of EBOs between 2000 and 2005.

Variation: Establishing a New EBO

To identify new emerging business opportunities that warrant the atten-tion of senior management, twice a year there is a formal process in which ideas are solicited from both within the company (IBM Fellows and Distinguished Engineers, R&D, Marketing, and Sales) and from others outside (e.g., customers, venture capitalists, and external experts). These suggestions help identify disrup-tive technologies, new business models, and attractive new markets. This effort typically results in more than 150 ideas.



These are scrutinized and reduced to 20 or so and small teams are formed to do a more detailed strategic analysis. Based on these findings, Harreld then begins to socialize promising ideas among senior executives and customers to determine acceptance. Once ideas have passed this test, the strategy group then does a “deep dive” to properly vet the market opportunity. In evaluating ideas, Harreld is blunt, “I’m not interested in new technologies. I’m interested in build-ing new billion dollar businesses. Betting on the right new business venture comes down to linking great ideas to real customer benefits—that is, to clear commercial opportunities” Of the 150 plus ideas generated each year, only a few are chosen as new EBOs.

Selection: Running the Experiment

Once formed, Harreld and the corporate strategy group act as the agent and partner for the EBO. They meet with them monthly to review progress, refine strategy, and help them get the right people and alignment to ensure execution. They also make sure that their funding is protected and going in the right places. However, Harreld is quick to point out that “we don’t run these ventures from corporate. They belong to the business units . . . Together we help the managers figure out what’s going well, what’s not, and what to try next.” The key principles established for the success of an EBO are:

FIGURE 3. EBO Revenue as a Percent of Total IBM Revenue

0

5

10

15

20

25

2006*200520042003200220012000

Perc

ent

of

Tota

l Rev

enue

Year

1%3%

6%

10%

14%

19%

24%



Active and Frequent Senior-Level Sponsorship

One of the lessons learned in the strategy group study of IBM’s failures to enter new businesses was the lack of senior management attention paid to new ventures. Understandably, high-level executives are often preoccupied with ensuring the success of the large businesses that provide today’s profit and growth. However, without senior management support, new ventures can eas-ily be overlooked or starved of resources. To solve this problem, all EBOs are required to have active sponsorship from a Senior Vice President in the line of business and with Harreld in the Strategy Group. Bruce meets monthly with both the EBO leader and the person in the line of business to whom the EBO reports. These 2-4 hour meetings with Harreld and his staff are to review mile-stones, ensure that there is clarity of strategy and organizational alignment, and provide the support needed when initiating new ventures. From the EBO lead-er’s perspective, these frequent meetings can be equivalent to a “root canal,” but they ensure active senior oversight and support.

Dedicated A-Team Leadership

Historically, when IBM chose leaders for new growth initiatives, the ten-dency was to select younger, less-experienced people to manage the projects. The logic was that younger leaders would be less imbued with the “IBM way”

and more likely to try new approaches. These leaders often failed. What the company learned was younger manag-ers often lacked the networks needed to nurture an embryonic business within the larger company. “We were not put-ting the best and brightest” on these proj-ects, says Harreld. Today, the approach is just the opposite. “We bring in very experienced people, who have built big businesses, have learned a lot along the way, who understand IBM, and are com-fortable knowing what to change and what to test,” says Harreld. However, running emerging businesses is very dif-ferent from mature ones, so new lead-ers are selected and trained in the skills needed for the emerging opportunities (see Figure 4). Harreld points out that “in established business it’s all about keeping things under control. These guys are so buttoned up. You bring them into a new business area, and it’s almost hilarious . . . With an EBO, there’s a lot you don’t know and you have to discover, learn, and adjust.” The challenge, unlike in

FIGURE 4. Leadership Principles for EBOs

• Manage a portfolio of related experiments and projects

• Initiate activities that are directionally correct

• Play a major communication role inside and outside

• Establish and communicate a clear vision• Create an extended team for advice and

counsel• Balance opposing factors to imagine future

possibilities that are currently unrecognized market needs– Market and technical sophistication– Sustain interest in as-yet unprofitable

projects– Recognize when to continue and when

to abandon an idea– Understand the organizational politics– Adopt an affiliative leadership style– Coach/mentor selected employees– Thoroughly understand customer's

business



mature businesses, is not to empire build and staff up quickly but to get strategic clarity.

For example, Rod Adkins was a star within the company who was run-ning the thriving UNIX business with 35,000 employees and $4 billion in sales. When he was chosen in 2000 to run the new pervasive computing EBO, a busi-ness with zero revenues, his first thought was that he had been fired. It was only after Sam Palmisano, the CEO, explained how important this new initiative was, and why Adkin’s skills were critical, that he understood the importance of the business to the future of the company.56 Over time, the success of the EBO effort has made running an EBO a desirable job, with people volunteering to run them.

Disciplined Mechanisms for Cross-Company Alignment

Since an explicit goal of the EBO process is to address business oppor-tunities across the company, careful attention is paid to ensuring that the line businesses provide the requisite support, even when it may run counter to their short-term interests. For example, early in building one of the EBOs it became clear that it was necessary to build a consulting team to support clients. How-ever, doing so would negatively impact the consulting group’s utilization and profits. To overcome this short-term obstacle, the EBO team agreed to fund the staffing while the consulting group did the actual hiring and training. This assured timely building of the consulting team without compromising the lon-ger-term integration of these consultants into the larger consulting group.

Resources Fenced—and Monitored—to Avoid Premature Cuts

It is one thing to allocate funds for a new initiative and another to ensure that the funds are spent according to plan. Too often, mature businesses, in the face of competition, will “re-allocate” funds to existing businesses. For instance, H-P struggled for years to enter a new technology for scanning, but allocated funds were routinely siphoned off to fund the mature flat-bed business.57 To prevent this, EBOs are funded through their line of business, but the process is carefully monitored to make sure that the new business receives its full fund-ing—and, when needed, they can receive further injections of resources from corporate.

Actions Linked to Critical Milestones

Many companies have been unsuccessful in their attempts at internal ventures. One reason for this is that emerging businesses often limp along for years, never achieving success. A key lesson from the EBO experience has been the need to carefully define and monitor progress in meeting milestones. Busi-nesses are measured against these milestones and not the financial metrics of their line of business. This protects embryonic ventures from being killed too early for a failure to achieve mature business targets. Milestones are reviewed in the monthly meeting with Bruce Harreld.



Quick Start, Quick Stop

Harreld has learned that speed is often essential in establishing new ven-tures. Therefore, if the new business doesn’t meet its milestones and connect with customers, it needs to be stopped or morphed into something else. The intent is to get into the market quickly with an experiment, learn from it, and adjust accordingly or stop the effort.

Retention: Moving from a Horizon 3 to Horizon 2 Business

By 2003, the original 7 EBOs and grown to 18. Since the routine was to meet monthly with each EBO and business unit leader, Harreld found himself spending more and more time managing existing EBOs. He realized that he was becoming a bottleneck to the EBO process. If IBM were to really leverage the EBO methodology, they would have to “graduate” businesses as they grew and the process would have to become more decentralized within the corpora-tion. With CEO Palmisano’s encouragement, Harreld created a set of criteria to ascertain when an EBO would be graduated to become a growth business and absorbed into the line of business. These include:

a strong leadership team in place;

a clearly articulated strategy for profit contribution;

early market success; and

a proven customer value proposition.

If the EBOs met these criteria, they would be large enough to be success-ful on their own and not to be undermined by the existing business. In 2003 15 of the EBOs graduated. Two of the original EBOs, Linux and Pervasive Com-puting, are now critical parts in growth business units. Since their inception in 2000, 25 EBOs have been launched. Three of these have failed and been closed, but the remaining 22 now produce well more than 15% of IBM’s revenue. The EBO process has also been decentralized so that separate lines of business (e.g., software or hardware) now develop their own EBOs. Throughout the company, these are used to extend capabilities into new domains and to scale business models. Current corporate EBOs include Sensors and Actuators, Information-Based Medicine, Retail on Demand, WebFountain, and new business models for emerging economies. In Harreld’s view, these corporate EBOs are often about the cannibalization of existing businesses—the very initiatives that are likely to be killed if not pushed by corporate leadership. Ginni Rometty, head of IBM’s consulting business, echoes this sentiment, observing that “if you don’t innovate you get commoditized” and acknowledging that new businesses that are a threat to the existing business model “are either dumbed down or starved” by the larger business.

An Illustration: The Life Sciences EBO

In 1999, Carol Kovac was running a 700-person business within IBM’s research organization. In 2000, she was asked to start a new Life Sciences busi-ness with one person reporting to her. Market studies suggested there were



significant scientific and market opportunities in applying high-performance computing and information technology to the emerging areas of biotechnology and personalized medicine, but an earlier IBM effort in this area had recently failed. Carol, who had been agitating for the company to move into this domain, was asked to head the new Life Sciences EBO.

For Carol, the opportunity was to help customers in academia, gov-ernment, pharmaceuticals, and hospitals integrate the massive amounts of information the new chemistry and biology generated. Harreld noted that the opportunities were enormous, so it was hard to figure out where to start. Although the initial instinct was to target a half dozen potential opportunities, the decision was made to focus on only a couple. “Otherwise,” Harreld said, “you end up chasing everything and you end up with nothing.” To succeed would require IBM not to sell existing products but to help customers develop integrated solutions. This required both thought leadership and integration across four major IBM silos. Worse, from the perspective of the head of each of these silos, any life science business would be seen as a small increment in sales—probably not worth the effort. However, from IBM’s perspective, this new market represented a potential $1 billion market within 3-4 years.

Between April 2000 when she began and November 2006 when she left, the Life Science business grew to a $5 billion business with hundreds of Ph.D.s in life sciences. In managing this process, Carol graduated some of her early businesses and has generated a new EBO in information-based medi-cine. To accomplish this required her to establish an organization with different people, systems, structures, rewards, and culture from the larger line of business through which she reported. This happened only because of the EBO process, which provided her with the support necessary to leverage across the four silos. For example, when she needed the server group to provide support for the high performance computing, John Thompson ensured that it happened. When she formed new partnerships and caused friction with the part of IBM in charge of developer relationships, senior support was critical. When she needed consulting and sales support from the consulting arm of the company, Thompson and Har-reld brokered that. Carol Kovac pointed out that the short-term goals of mature (Horizon 1) businesses seldom align with those of horizon 3 businesses. They typically have little incentive to participate with what are seen as “dinky little businesses.” Worse, the H3 business may actually threaten the mature business, especially if it is exploring disruptive technologies and business models.

In reflecting on what the leadership challenges were, Carol noted that “One of the key jobs of the ambidextrous leader is to protect the EBO and take away some of the constraints. You need to protect the group so they can be mostly external in what they do.” Over time, she observed, discipline and a more internal focus becomes more necessary. However, if you graduate too early, you risk getting evaluated as a mature business. “It’s like becoming a teen-ager—old enough to function but facing a mess of rules you may not want to deal with.” It’s fundamentally a balancing act.



Although the market opportunity in Life Sciences was recognized in 1998, several early attempts to enter this market failed. Funding from the lines of business wasn’t forthcoming, there was a lack of entrepreneurial leader-ship, and the IBM processes and metrics that helped mature businesses actively worked against the establishment of the new venture. It was only with the development of the EBO process that these barriers were removed. The combi-nation of a clear strategic intent, guaranteed funding, senior-level sponsorship, entrepreneurial leaders, and an aligned organization were required for the ven-ture to succeed.

Without the senior-level support and faced with the opposition Carol encountered, many entrepreneurial leaders might have quit and taken their ideas elsewhere. The same issues have led some firms to isolate their new ven-tures. However, upon reflection, this approach fails to leverage the capabilities and resources of the larger company. It ignores the critical issues of integration, sharing and leveraging of resources, and fails to infuse entrepreneurial leader-ship into the larger company. As Harreld says, “We want to integrate, not insu-late” our new ventures. They belong to the business units and need to be close to the market. “Cross-IBM execution has to be a part of the basic fabric of the corporation if we are to succeed with our growth initiatives.”

Discussion

We began with an empirical puzzle: Why is it that many large, success-ful organizations fail, but some are able to adapt and survive? Unlike biological organisms in which cell senescence resulting from repeated cell division leads to damage to cells and subsequent death, organizations have no such obvious cause of death. To the contrary, large organizations typically have the resources needed to continue to prosper. To explain how some organizations are able to survive over long periods, we have described some recent advances in evo-lutionary theory (multi-level or group selection) to show how organizational adaptation might occur.58 Unlike population ecology approaches that see orga-nizational change as occurring through generational selection and replacement, we have argued that some organizations do adapt through a process of variation, selection, and retention at the group level. Organizational ambidexterity, or the dynamic capability of an organization to simultaneously explore and exploit, accounts for this ability to adapt. The EBO process at IBM in which new busi-ness units are systematically created, tested, and either grown or killed illustrates how multi-level selection can help an organization adapt to new markets.

The process of natural selection is based on the relationship between an organism and its environment regardless of its taxonomic identity. For multi-level selection to operate, the parts that make up the organism (e.g., the genes or sub-units) must share a common fate, be in competition with other organ-isms, have mechanisms that suppress within-group competition, and be in some sense superior to what can be accomplished by individuals pursuing their own self-interest.59 Organizations fit this definition completely. If adaptations evolve



by differential survival, it makes sense that group-level adaptations evolve by the differential survival and reproduction of groups. Thus, organizations that are able to repeatably explore and exploit are more likely to survive than those organizations that do not. Long-lived organizations morph by adding new groups (or subunits).

The IBM EBO process is simply one illustrative example for how multi-level selection can operate to help an organization adapt over time. Other long-lived companies such as GKN, J&J, and Goodrich have accomplished similar feats using variants of multi-level selection. For example, Corning, founded in 1851, relies on its capabilities in glass and optical physics to provide it with a competitive advantage. Similar to the IBM EBO process, they use an “innovation recipe” to identify and develop new, profitable business opportunities. For Corn-ing, a new business opportunity should have the potential of growing to $500 million, be a key component in a larger system (e.g., automobile catalytic con-verters), have sufficient intellectual property to offer some strategic control, and be difficult to manufacture such that Corning has an edge over its competitors. The Ball Company was founded in 1880 as a maker of wooden buckets. Today they are a dominant player in metal and plastic containers for companies like Pepsi and Budweiser. Their history is one of exploration and exploitation as their leaders have moved from one technology to another, all the while focused on the container business. Multi-level selection through ambidexterity and acquisi-tions accounts for their survival.60

In a famous passage, Darwin underscored the importance of group selec-tion observing that “it must not be forgotten that although a high standard of morality gives but a slight or no advantage to each individual man and his children over other men of the same tribe, yet that an increase in the num-ber of well-endowed men and the advancement in the standard of morality will certainly give an immense advantage to one tribe over another.”61 Selfish individuals out-compete altruists within a single group, but groups of altruists out-compete groups of selfish individuals. Importantly, evolutionary biologists have noted that even very small changes in a trait can lead to big differences in fitness. Again, in Darwin’s words, “What counted was not perfection but being better than one’s competitors.”62

What is heritable in organizations? We have argued that dynamic capa-bilities, defined as the ability of senior leaders to reconfigure assets to compete in emerging and mature businesses, to be ambidextrous, is the vehicle for selec-tion—the organizational equivalent of the genome. To be useful, however, this capability must be repeatable; that is, the underlying processes are explicitly learned and managed by senior leaders. It is the set of routines and processes orchestrated by the senior team that defines ambidexterity as a dynamic capabil-ity.63 Organizations that are able to both explore and exploit are more likely to adapt than organizations that can do only one or the other.

Interestingly, the size of an organization may itself be a group-level adaptation that provides a survival advantage. Burgelman builds a persuasive case that, when managed effectively, large organizations have the luxury of



internalizing the variation-selection-retention process of markets to create an internal selection environment that permits experimentation and exploration.64

Unlike the harsh discipline of the market in which new firms must place a life-or-death bet on a single experiment, larger companies can run multiple experi-ments in which failure does not jeopardize the enterprise and may increase learning. As we noted earlier, the causes of death in small firms are myriad (e.g., undercapitalization, wrong technology, poor strategy, and predatory actions by larger firms) and relate to a general lack of resources. Large firms, when prop-erly managed, do not face the same binding constraints.

In this sense, it is large firms with multiple business units that have the biggest opportunity to survive. Interestingly, population ecology research with its emphasis on vital rates (entrances and exits) has focused on changes in the entire populations of organizations and largely ignores the question of organi-zational success or efficiency.65 The extent to which individual organizational change is adaptive or selective is a secondary question.

Our focus here has been the opposite, with an emphasis on adaptation among large firms. In 2004, the Bureau of the Census reported that there were roughly 6 million employer firms in the United States. Only 3,500 of these had more than 2,500 employees. Yet, firms with more than 1,000 employees account for approximately 50 percent of all paid employment.66 Large firms, although statistically rare, are practically very important. In this sense, what we are pro-posing here is a theory of extreme cases; that is, although large firms, whether by revenues or numbers of employees, are statistically rare, they are practically important. Said differently, when large firms fail to adapt the economic conse-quences can be dire. Although there is some evidence that firm failure may gen-erate positive externalities and reduce industry costs, this logic seems to apply to smaller firms and those that lack complementary assets that can be redeployed in efficient ways.67

A number of researchers have noted the dangers inherent in biased sam-pling. Denrell, for instance, has observed that most studies in organizational theory are retrospective and rely on historical data that can overemphasize successful practices and under-sample failure.68 Older firms, like IBM, are the survivors of a selection process that has eliminated a large fraction of their com-petitors. Focusing on only successful firms (or survivors) can lead to potentially misleading conclusions. We are appreciative of this bias. However, if one wants to study old people or old organizations, one must of necessity focus on the sur-vivors. In this sense, selective sampling may be less of a problem if the studies are representative on the phenomenon of interest. That said, we have simply proposed a potential theoretical explanation for how organizational adaptation can occur and provided a qualitative illustration for how this might work in practice.

In describing biological evolution, Richerson and Boyd note that “you don’t have to choose between simple abstract models and rich historical expla-nation—the modes of explanation are complementary, not competing . . . Evolu-tionary trajectories are so complicated that they rarely allow an exact elucidation



for how and why things happen.”69 This is true of organizations as well. While the evidence suggests that the majority of organizations do not survive for long periods, some clearly do. Multi-level selection processes offer one way through which firms, especially large ones like IBM, are able to adapt to shifts in markets and technologies.

Notes

1. G. Hamel, Leading the Revolution (Boston, MA: Harvard Business School Press, 2000).2. B. McClean and P. Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall

of Enron (New York, NY: Penguin Books, 2003).3. R. Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New

York, NY: Random House, 2000).4. Charles I. Stubbart and Michael B. Knight, “The Case of the Disappearing Firms: Empirical

Evidence and Implications,” Journal of Organizational Behavior, 27/1 (February 2006): 79-100.5. Ibid., p. 96.6. R. Foster and S. Kaplan, Creative Destruction (New York, NY: Currency, 2001).7. R. Agarwal and M. Gort “The Evolution of Markets and Entry, Exit, and Survival of Firms,”

Review of Economics and Statistics, 78/3 (August 1996): 489-498.8. Stubbart and Knight, op. cit.9. There is an impressive literature in population ecology demonstrating how the evolutionary

process of selection applies to organizations. For examples, see M. Hannan and G. Carroll, Dynamics of Organizational Populations (Oxford: Oxford University Press, 1992); J. Baum and J. Singh, Evolutionary Dynamics of Organizations (Oxford: Oxford University Press, 1994).

10. Illustrative examples of adaptationist views can be seen in work by K.M. Eisenhardt and J.A. Martin, “Dynamic Capabilities: What Are They?” Strategic Management Journal, 21/10-11 (October/November 2000): 1105–1121; C. O’Reilly and M. Tushman, “Ambidexterity as a Dynamic Capability: Resolving the Innovator’s Dilemma,” Research in Organizational Behavior, 28 (2008): 185-206; D.J. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strate-gic Management,” Strategic Management Journal, 18/7 (August 1997): 509–533.

11. J. Harreld, C. O’Reilly, and M. Tushman, “Dynamic Capabilities at IBM: Driving Strategy into Action,” California Management Review, 49/4 (Summer 2007): 21-43

12. Harreld, O’Reilly, and Tushman, op. cit.; O’Reilly and Tushman, op. cit.13. M.T. Hannan and J.H. Freeman, “Structural Inertia and Organizational Change,” American

Sociological Review, 49 (1984): 149–164. “Form” is defined as the organization’s mission, form of authority, basic technology, and market strategy.

14. The rejection of group selection was based on a widespread misunderstanding of the math-ematics of changes in frequencies versus proportions; that is, local changes in frequencies do not always predict global changes. See S. Thompson, “Re-Introducing ‘Re-Introduc-ing Group Selection to the Human Behavioral Sciences’,” Behavioral and Brain Sciences, 21(1998): 304-306. Also see Rudolf A. Raff, “Evo-Devo: The Evolution of a New Discipline,” Nature Reviews, 1 (2000): 74-79; D. Wilson and E. Sober, “Re-Introducing Group Selection to the Human Behavioral Sciences,” Behavioral and Brain Sciences, 17 (1994): 585-654,; G. Von Dassow and E. Munro, “Modularity in Animal Development and Evolution: Elements for a Conceptual Framework for EvoDevo,” Molecular and Developmental Evolution, 285 (1999): 307-325.

15. Wilson and Sober, op. cit.16. D.S. Wilson, Evolution for Everyone (New York, NY: Delacorte Press, 2007), p. 19.17. Ibid.18. R. Dawkins, The Selfish Gene (Oxford: Oxford University Press, 1996).19. There is an ongoing debate about group or multi-level selection. See, for example, D. Wil-

son, Darwin’s Cathedral: Evolution, Religion, and the Nature of Society (Chicago, IL: University of Chicago Press, 2002); D. Wilson, “Human Groups as Adaptive Units: Toward a Permanent Consensus,” in P. Carruthers, S. Laurence, and S. Strich, The Innate Mind: Culture and Cogni-tion (Oxford: Oxford University Press, 2003); D. Wilson, “Introduction: Multi-Level Selection Theory Comes of Age,” The American Naturalist, 150 (1997): S1-S4; E .Sober and D. Wilson, “A Critical Review of Philosophical Work on the Unit of Selection Problem,” Philosophy of Science, 61 (1994): 534-555; C. Goodnight and L. Stevens, “Experimental Studies of Group



Selection: What Do They Tell Us about Group Selection in Nature,” The American Naturalist, 150 (1997): S59-S79.

20. Wilson (2007), op. cit., p. 159.21. Wilson (2007), op. cit., p. 54.22. T.L. Amburgey, D. Kelly, and W.P. Barnett, “Resetting the Clock: The Dynamics of Organi-

zational Change and Failure,” Administrative Science Quarterly, 38/1 (March 1993): 51-73; F. Louca and S. Mendonca, “Steady Change: The 200 Largest US Manufacturing Firms throughout the 20th Century,” Industrial and Corporate Change, 11/4 (August 2002): 817-845.

23. Stubbart and Knight, op. cit., p. 94.24. N. Dew, B. Goldfarb, and S. Sarasvathy, “Optimal Inertia: When Organizations Should Fail,”

Ecology and Strategy, 23 (2006): 73–99, at p. 79.25. A. DeGeus, The Living Company: Habits for Survival in a Turbulent Business Environment (Boston,

MA: Harvard Business School Press, 1997).26. M. Tripsas, “Surviving Radical Technological Change through Dynamic Capability: Evidence

from the Typesetter Industry,” Industrial and Corporate Change, 6/2 (March 1997): 341–377.27. J.G. March, “Exploration and Exploitation in Organizational Learning,” Organization Science,

2/1 (February 1991): 71–87; O’Reilly and Tushman (2008), op. cit.; D. Teece, “Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Perfor-mance,” Strategic Management Journal, 28/13 (December 2007): 1319-1350.

28. J. March, “The Evolution of Evolution,” in J. Baum and J. Singh, eds., Evolutionary Dynamics of Organizations (New York, NY: Oxford University Press, 1994), pp. 39-52.

29. C. Darwin, On the Origin of Species [J. Carroll, ed.] (Toronto: Broadview Books, 1853).30. Wilson and Sober, op. cit., p. 600.31. P. Richerson and R. Boyd, Not By Genes Alone (Chicago, IL: University of Chicago Press,

2005).32. T. Amburgey and H. Rao, “Organizational Ecology: Past, Present, and Future Directions,”

Academy of Management Journal, 39/5 (October 1996): 1265-1286.33. J. Usher and M. Evans, “Life and Death along Gasoline Alley: Darwinian and Lamarckian

Processes in a Differentiating Population,” Academy of Management Journal, 39/5 (October 1996): 1428-1466, at p. 1429.

34. Amburgey and Rao, op. cit., p. 1275.35. Wilson (2007), op. cit., p. 288.36. Richerson and Boyd, op. cit., p. 129.37. Wilson (2003), op. cit.38. J. Diamond, Guns, Germs, and Steel (New York, NY: W.W. Norton, 1997).39. W.M. Muir, “Group Selection for Adaptation to Multiple-Hen Cages: Selection Program and

Direct Responses,” Poultry Science, 75 (1996): 447-458.40. Wilson (2007), op. cit., p. 3.41. Lefebvre and Palameta document 97 cases of socially learned variations among bird, fish and

animal species. L. Lefebvre and B. Palameta, “Mechanisms, Ecology, and Population Diffu-sion of Socially-Learned, Food Finding Behavior in Feral Pigeons,” in T. Zentall and J. Galef, eds., Social Learning, Psychological and Biological Perspectives (Hillsdale, NJ: Lawrence Erlbaum Associates, 1988).

42. Wilson (2007), op. cit., p. 198.43. Diamond, op. cit.44. Richerson and Boyd, op. cit.45. Wilson (2007), op. cit., p. 288.46. Wilson (2007), op. cit., p. 32.47. For a review of experimental studies see Goodnight and Stevens, op. cit.48. Richerson and Boyd, op. cit., p. 206.49. In their seminal article on population ecology, Hannan and Freeman characterize these

differences in terms of specialists and generalists. Hannan and Freeman, op. cit.50. For an overview, see C. Helfat et al., Dynamic Capabilities: Understanding Strategic Change in

Organizations (Malden, MA: Blackwell Publishing, 2007).51. O’Reilly and Tushman, op. cit.52. March (1991), op. cit., p. 105.53. S. Winter, “Survival, Selection and Inheritance in Evolutionary Theories of Organizations,”

in J. Singh, ed., Organizational Evolution (Newbury Park, CT: Sage Publications, 1990), pp. 269-297.



54. Erwin Danneels, “The Dynamics of Product Innovation and Firm Competences,” StrategicManagement Journal, 23/12 (December 2002): 1095-1121.

55. M. Baqhai, S. Coley, and D. White, The Alchemy of Growth (London: Orion Business, 1999).56. Between 2000 and 2003, Atkins grew the unit from zero revenue to $2.5 billion.

A. Deutschman, “Building a Better Skunk Works” Fast Company, December 19, 2007.57. D. Radov and M. Tushman, “Greely Hard Copy Portable Scanner,” Harvard Business School

Case # 9-401-003, 2003.58. “The same theory that explains human groups as adaptive units also explains social insect

colonies, individual organisms, and even the origin of life itself as unified groups of interact-ing molecules that evolved by group selection. Wilson (2002), op. cit., p. 222.

59. “Groups become unified by a regulatory apparatus that promotes the welfare of the group as a whole without necessarily requiring extreme self-sacrifice of its members.” Wilson (2002), op. cit., p. 22.

60. See, for example, J. Anand and H. Singh, “Asset Redeployment, Acquisitions, and Corporate Strategy in Declining Industries,” Strategic Management Journal, 18 (Summer 1997): 99-118; P. Puranam, H. Singh, and M. Zollo, “Organizing for Innovation: Managing the Coordina-tion-Autonomy Dilemma in Technology Acquisitions,” Academy of Management Journal, 49/2 (April 2006): 263–280; Robert Burgelman, “Corning Incorporated (A): Reinventing New Business Development,” Stanford Graduate School of Business Case #167A, 2008.

61. C. Darwin, The Descent of Man and Selection in Relation to Sex (New York, NY: Appleton, 1871).62. Ibid.63. Harreld, O’Reilly, and Tushman, op. cit.64. R. Burgelman, “Intraorganizational Ecology of Strategy Making and Organizational Adapta-

tion: Theory and Field Research,” Organization Science, 2/3 (August 1991): 239-262.65. G. Carroll, “A Sociological View on Why Firms Differ,” Strategic Management Journal, 14/4

(May 1993): 237-249.66. <www.census.gov/epcd/smallbus.html>.67. A.M. Knott and H.E. Posen, “Is Failure Good?” Strategic Management Journal, 26/7 (July

2005): 617–641.68. J. Denrell and B. Kovacs, “Selective Sampling of Empirical Settings in Organizational Stud-

ies,” Administrative Science Quarterly, 53/1 (March 2008): 109-144; J. Denrell, “Vicarious Learning, Undersampling of Failure, and the Myths of Management,” Organizational Science, 14/3 (May/June 2003): 227-243.

69. Richerson and Boyd, op. cit., p. 94.

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POTLIGHT

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Stop the Innovation Wars

by Vijay Govindarajan and Chris Trimble

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Included with this full-text

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Idea in Brief—the core idea

1

Article Summary

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Tensions between your

innovation team and core

operations can derail your

company’s growth initiatives.

Here’s how to end those

battles.

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An innovation initiative is best organized as a partnership between a dedicated team and the group that handles ongoing opera-tions, the performance engine. Although conflicts between partners are inevitable, they can be managed, by following three steps:

Divide the labor. The performance engine should take on only tasks that flow in paral-lel with ongoing operations—along the same path, at the same pace, and with the same people in charge. All other tasks should be assigned to the dedicated team.

Assemble the dedicated team. Leaders must approach the dedicated team as if they were building a new company— from scratch. Breaking down existing work rela-tionships and creating new ones is an es-sential task, which outside hires can help expedite.

Mitigate the conflicts. The innovation leader must take a positive and collabora-tive approach to working with the perfor-mance engine and must be supported by an executive senior enough to prioritize the company’s long-term interests and adjudi-cate contests for resources.

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by Vijay Govindarajan and Chris Trimble

harvard business review • july–august 2010 page 2

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Tensions between your innovation team and core operations can derail

your company’s growth initiatives. Here’s how to end those battles.

It was just an innocent comment. While work-ing with a client at a

Fortune

500 company, weproposed the formation of a special group toexecute a new growth strategy. “For now, let’sjust refer to the group as the innovation team,”we suggested.

The client rolled his eyes. “Let’s call it any-thing but that,” he said. “What is this so-calledinnovation team going to do? Brainstorm? Sitaround being creative all day? Talk conde-scendingly about a superior organizational cul-ture? All of this while operating with neitherdiscipline nor accountability? All of this whilethe rest of us get the real work done?”

Wow. All it took was two words: innovationteam.

In our experience, innovation teams feel ahostility toward the people responsible for day-to-day operations that is just as biting. The richvocabulary of disdain includes bureaucratic, ro-botic, rigid, ossified, staid, dull, decaying, control-ling, patronizing...and just plain old. Such ani-mosity explains why most executives believethat any significant innovation initiative re-

quires a team that is separate and isolatedfrom the rest of the company.

But that conventional wisdom is worsethan simpleminded. It is flat wrong. Isolationmay neutralize infighting, but it also neutersinnovation.

The reality is that an innovation initiativemust be executed by a partnership that some-how bridges the hostilities—a partnership be-tween a dedicated team and what we call theperformance engine, the unit responsible forsustaining excellence in ongoing operations.Granted, such an arrangement seems, at firstglance, improbable. But to give up on it is togive up on innovation itself. Almost all innova-tion initiatives build directly upon a company’sexisting resources and know-how—brands, cus-tomer relationships, manufacturing capabili-ties, technical expertise, and so forth. So whena large corporation asks a group to innovate inisolation, it not only ends up duplicating thingsit already has but also forfeits its primary ad-vantage over smaller, nimbler rivals—its mam-moth asset base.

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Over the past decade, we have examined doz-ens of innovation initiatives and identifiedsome best practices. In the process we builtupon foundational management theories suchas Jim March’s ideas about balancing explora-tion with exploitation, and Paul Lawrence andJay Lorsch’s argument that firms need to bothintegrate and differentiate corporate units. Wecame to the conclusion that the organizationalmodel we prescribe—a partnership between adedicated team and the performance engine—is surprisingly versatile. It can be adapted to ini-tiatives that span many innovation categories—sustaining and disruptive; incremental and radi-cal; competence enhancing and competencedestroying; new processes, new products, newbusinesses, and high-risk new ventures.

This article will show how to make the un-likeliest partnership work. There are threesteps. First, decide which tasks the perfor-mance engine can handle and which you’llneed to hand off to a dedicated team. Second,assemble the right dedicated team. Third, an-ticipate and mitigate strains in the partnership.Once you have taken these steps, you’ll be in agood position to actually execute on your greatideas.

How One Company Organized for Growth

In most law offices, even in the internet era,you’ll find libraries full of weighty and majes-tic-looking books. The books contain rulingsfrom past cases. With each verdict, judges con-tribute to a massive body of precedents thatshape future decisions. (This is the system, atleast, in the United States and many othercountries.) Law students spend countlesshours mastering the intricacies and subtletiesof researching precedents.

West, a 135-year-old business, is one of sev-eral publishing houses whose mission is tomake legal research easier. After it was ac-quired by the Thomson Corporation, nowThomson Reuters, in 1996, West experiencedfive years of double-digit growth, as the indus-try made a rapid transition from printed booksto online databases. But in 2001 a major prob-lem arose. Once nearly all of West’s customershad converted to Westlaw, the company’s on-line offering, West’s growth plummeted tonear zero.

To restart growth, West set its sights on ex-panding its product line. By studying its cus-

tomers—law firms, corporate law offices, andlaw schools, among others—and how theyworked, West saw that lawyers had no conve-nient access to many key sources of informa-tion. For example, to examine legal strategiesin past cases, law firms were sending runnersto courthouses to dig through dusty archivesand photocopy old briefs—documents writtenby lawyers for judges, often to summarize theirarguments.

Starting with an online database of briefs,West proceeded to launch a series of new digi-tal products. By 2007, West had restored its or-ganic growth to nearly 7% annually—quite anaccomplishment since its customer base wasgrowing much more slowly.

An expansion into databases for differentkinds of documents does not seem, at firstglance, as if it would have been a stretch forWest. But Mike Wilens, then the CEO, and hishead of product development, Erv Barbre, im-mediately saw that the briefs project, becauseof its size, complexity, and unfamiliarity, wasbeyond the capabilities of West’s performanceengine. Some kind of special team was needed.At the same time, Wilens and Barbre were con-fident that portions of the project could betackled by West’s existing staff. They just hadto make sure the two groups worked well to-gether. Ultimately, the new briefs offering suc-ceeded because Wilens and Barbre built an ef-fective partnership between a dedicated teamand the performance engine, following thethree steps we’ve outlined.

Divide the Labor

Step one in forming the partnership is to de-fine the responsibilities of each partner. Natu-rally, you want to assign as much as you can tothe performance engine. It already exists andworks well. But caution is due. You need to re-alistically assess what the performance enginecan handle while it maintains excellence in on-going operations.

The proper division of labor can span a widerange—from 10/90, to 50/50, to 90/10 splits. Itdepends on the nature of the initiative and theperformance engine’s capabilities. So how doyou decide?

The performance engine has two essentiallimitations. The first is straightforward. Anytask that is beyond the capabilities of the indi-viduals within the performance engine mustbe assigned to the dedicated team. The second

Vijay Govindarajan

([email protected]) is the Earl C. Daum 1924 Professor of International Business and founding director of the Center for Global Lead-ership at Dartmouth’s Tuck School of Business. He was General Electric’s first professor in residence and chief inno-vation consultant. Chris Trimble ([email protected]) is on the faculty at Tuck and is an expert on innovation within established organi-zations. Govindarajan and Trimble are the authors of The Other Side of Innova-tion—Solving the Execution Challenge (Harvard Business Review Press, 2010).

mailto:[email protected]



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limitation is less obvious. It involves work rela-tionships. What Person A and Person B can dotogether is not just a function of A’s skills andB’s skills. It is also a function of the way A andB are accustomed to working together. As longas A and B are working inside the performanceengine, their work relationship is extremelydifficult to change. It is reinforced daily by thedemands of ongoing operations. BMW wasconfronted with this second limitation when itdesigned its first hybrid vehicle. (See the side-bar “Why BMW Didn’t Reinvent the Wheel.”)

Therefore, the performance engine shouldtake on only tasks that flow along the samepath from person to person that ongoing op-erations do—at the same pace and with thesame people in charge. To ask more of theperformance engine is too disruptive. It em-beds conflicts between innovation and ongo-ing operations so deeply within the perfor-mance engine that they become impossible tomanage.

At West, Wilens and Barbre recognized thatalthough product development staffers haddeep expertise in judicial decisions—such asMiranda v. Arizona, Brown v. Board of Educa-tion, Roe v. Wade, and thousands more—theyhad no experience in gathering briefs, whichwere scattered throughout countless court-houses and were much harder to track and or-ganize than decisions were. A complicatingfactor was scale. There can be dozens of briefsfor every judicial decision. The dedicatedteam, at the very least, had to take responsi-bility for locating and acquiring the briefs—

and would need a few outside experts to beeffective.

More critically, Wilens and Barbre saw thatthe briefs project as a whole would be inconsis-tent with the work relationships within West’sproduct development group. Composed ofabout 50 legal experts, the group worked on afew dozen small initiatives at a time. The typi-cal project was an improvement to the West-law database that involved only two or threepeople for up to a few weeks. The group wasnonhierarchical, and the individuals within itdid not depend heavily on one another. In fact,during a given project, a product developer’smost important work relationship was likely tobe cross-functional, with a peer in the informa-tion technology group.

The briefs project was much larger. At itspeak, it involved 30 people full-time. The prod-uct developers needed to work together in anunfamiliar manner. Each needed to take on aspecialized role as part of a tightly structured,close-knit project team. Asking the developersto operate in both modes at once would havebeen disruptive and confusing for all involved.Therefore Wilens and Barbre assigned nearlythe entire product development task to a dedi-cated team.

However, they assigned the marketing andsales tasks to the performance engine. Market-ing and selling briefs was not much differentfrom marketing and selling Westlaw. The buy-ers were the same, and the value propositionwas easy to explain. The work could simply beadded to West’s existing marketing and salesprocesses. It would flow along the same path,at the same pace, and with the same people incharge. The sales and marketing teams were acomponent of the performance engine thatcould do double duty—a subset we refer to asthe shared staff.

Assemble the Dedicated Team

Once the labor has been divided and the re-quired skill sets have been identified, the prin-ciples for assembling the dedicated team areuncomplicated. First, choose the best peopleyou can get, from any source (internal trans-fers, external hires, even small acquisitions).Then, organize the team in a way that makesthe most sense for the task at hand. Tackle theprocess as if you were building a new companyfrom the ground up. This was the approachLucent took in launching a new unit that

Questions to Ask

When Dividing the Labor

1. Does my company already have the needed skills for all aspects of the project?2. What portions of the innovation initiative are consistent with the existing work relationships in the performance engine?

When Assembling the Dedicated Team

1. What is the right mix of insiders and outsiders?2. How should the team be structured differently from the performance engine?3. How should the team be measured and incentivized?

As You Manage the Strains on the Partnership

1. Is there a tone of mutual respect?2. Are resource conflicts resolved proactively?3. Is the shared staff giving sufficient attention to the innovation initiative?

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quickly grew to $2 billion in annual revenues.(See the sidebar “Why Lucent Engineered aService Business from Scratch.”)

Alas, these principles are easy to state but ex-tremely difficult to follow. Companies have apernicious habit of creating subunits that be-have just like the rest of the company, asthough a genetic code has been passed fromparent to offspring. We think of such subunitsas little performance engines, and they quicklybring innovation initiatives to a standstill.

The most frequent source of the problem isthe instinct to populate dedicated teams en-tirely with insiders. This is understandable. It’snatural to think about who you know beforethinking about skills you need. Insiders areeasy to find, often cheaper to “hire,” and seemless risky because they’re known commodities.They also offer a critical benefit: Because oftheir familiarity with the organization andcredibility within it, they can help mitigateconflicts between the dedicated team and theperformance engine.

The trouble is that a dedicated team com-posed entirely of insiders is practically guaran-teed to act like a little performance engine. Forone thing, everyone has the same biases andinstincts, grounded in the history of a singlecompany. Furthermore, work relationships aresticky. As noted earlier, employees who have

worked together for years have a hard time al-tering the way they interact.

Building an effective dedicated team re-quires breaking down existing work relation-ships and creating new ones. Including someoutsiders, even just one in three, is a powerfulexpedient. Outsiders have no existing work re-lationships to break down. They must formnew ones from scratch. As a bonus, outsidersnaturally challenge assumptions because theirbiases and instincts are rooted in the experi-ences of other companies.

Managers can also accelerate the process ofbreaking down and re-creating work relation-ships by writing new job descriptions, invent-ing new and unfamiliar titles, and explicitlyshifting the balance of power within the team.Shifting that balance is important because it israrely the case that a company’s traditionalpower center (say, engineering) should alsodominate the dedicated team (if, for example,customers for the innovation initiative willcare more about a new product’s look than itsperformance).

Selecting the right people and forming newwork relationships are the foundational stepsin building an effective dedicated team, but itis also important to pay attention to otherforces that shape behaviors. Beyond new workrelationships, dedicated teams frequently re-quire performance metrics, incentives, and cul-tural norms that differ from those of the per-formance engine.

West built a dedicated team that was distinctfrom its existing product development staff,choosing a roughly 50/50 mix of insiders andoutsiders. The company acquired a small busi-ness that had assembled on microfiche a collec-tion of valuable briefs, including the very firstbrief filed before the U.S. Supreme Court. Withit, West brought on board about a dozen peo-ple who knew a great deal about briefs andhad no work relationships with the West team.

The leader of the briefs effort, Steve Ander-son, treated the process of turning the mix ofinsiders and outsiders into a structured team asa zero-based effort. Rather than drawing onany of West’s norms for how work gets done(who’s responsible for what, who has what de-cision rights, and so forth), he simply gatheredeveryone and said, “Here we are. This is ourtask. How should we make it happen?” Ofcourse, the way to organize the effort was notobvious on day one. Innovation initiatives are

Case Study: Why BMW Didn’t Reinvent the Wheel

At the heart of every hybrid automobile lies a regenerative brake. Traditional brakes dissipate the energy produced by a vehicle’s motion, generating friction and useless heat. Regenerative brakes, by contrast, capture the energy and put it back to work. An electrical generator built into the brake recharges the hy-brid’s massive batteries as the car slows.

Chris Bangle, then chief of design at BMW, was discouraged by slow progress early in the company’s first effort to de-sign a hybrid vehicle, launched in 2007. The source of the problem, Bangle saw, had nothing to do with engineering prowess; BMW employed the right ex-perts. The problem lay in the company’s formal structure and processes. Under its

well-established design procedures, there was no reason for battery specialists to speak with brake specialists. There was no routine work flow between them.

Bangle ultimately decided to create a dedicated team to enable the deep collab-oration that was necessary among all component specialists involved in the re-generative brake design. He named it the “energy chain” team, and it succeeded in moving the project forward quickly. Al-though a dedicated team was required for this one aspect of vehicle design, all other aspects of BMW’s first hybrid launch—design, engineering, sales, mar-keting, distribution, and so forth—were handled by its performance engine.

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ambiguous. As Anderson’s team gained experi-ence, its structure evolved. It’s not essentialthat the dedicated team’s structure be per-fectly clear at the outset—only that it be un-constrained by the parent company’s past.

Working on Anderson’s dedicated team feltmuch different to the insiders who were partof it. They had less autonomy. They had to col-laborate with peers much more closely. Andthey knew that if they stumbled, they would beletting down not just themselves but theirteammates and their company. Some struggledwith the transition and chose to return to theperformance engine. While this may seem un-fortunate, it was actually a mark of Anderson’ssuccess. As a general rule, if all the insiders onthe dedicated team are comfortable, it must bea little performance engine. (Note that it’s alsoimportant for insiders to have a clear path toget back to the performance engine. Innova-tion initiatives frequently fail, and the individ-uals working on them sometimes don’t suc-ceed in their assignments. Companies thatcreate an out for insiders will find that they canmore easily motivate people to join a dedi-cated team.)

To further shape his dedicated team, Ander-son drew clear distinctions between its stan-dards and cultural values and those of the per-formance engine. West had long maintained

extremely high quality standards. For judicialdecisions—literally, the law itself—customersdemanded infallible information. Therefore,West had implemented multistep checks andsafeguards in loading documents into its data-base, a process that often started with scanninga physical document. With briefs, however,West needed to relax, slightly, from being ob-sessive about quality to being diligent. Thedauntingly high number of briefs made ex-haustive precautions impractical. Besides, cus-tomers cared more about convenience andavailability than perfection.

Anticipate and Mitigate the Strains

Make no mistake, nurturing a healthy partner-ship is challenging. Conflicts between innova-tion initiatives and ongoing operations are nor-mal and can easily escalate. Tensions becomerivalries, rivalries become hostilities, and hostil-ities become all-out wars in which the com-pany’s long-term viability is the clearest loser.

Differences between the two groups rundeep. Managers of the performance engineseek to be efficient, accountable, on time, onbudget, and on spec. In every company, theirbasic approach is the same. It is to make everytask, process, and activity as repeatable andpredictable as possible. An innovation initia-tive, of course, is exactly the opposite. It is, bynature, nonroutine and uncertain. These in-compatibilities create a natural us-versus-themdynamic.

Leaders must counter conflicts by con-stantly reinforcing a relationship of mutual re-spect. Dedicated team leaders must rememberthat profits from the performance engine payfor innovation, and that their success dependson their ability to leverage its assets. They mustalso remember that pushback from the perfor-mance engine does not arise from laziness orfrom an instinctive resistance to change. Quitethe contrary—it arises from the efforts of goodpeople doing good work, trying to run ongoingoperations as effectively as possible. For theirpart, performance engine leaders must recog-nize that no performance engine lasts forever.To dismiss innovation leaders as reckless rebelsintent on undermining discipline in the pur-suit of an esoteric dream is to write off thecompany’s future.

For the partnership to work, the leader ofthe innovation initiative must set the righttone—positive and collaborative. Antagoniz-

Case Study: Why Lucent Engineered a Service Business from Scratch

In 2006, Lucent signed a deal to help a major telecommunications company transform its network. Four years earlier, such a huge service deal would have been hard to imagine.

Lucent’s historical strength was in products and in making technological breakthroughs in telecommunications hardware. But after the dot-com bust, Lu-cent needed a new source of growth and looked to services.

While the company had the necessary technical skills for services, it hardly had the organizational DNA. Technologists, not client relationship managers, held most of the power. And the pace of ser-vice operations was week to week, a stark departure from telecom hardware pur-

chasing cycles, which lasted years. As such, Lucent recognized that nearly the entire project needed to be executed by a dedicated team.

Lucent assembled that team as if it were building a new company. It hired an outside leader, a veteran of services from EDS, and several experienced service ex-ecutives. It adopted new HR policies that mimicked those of service companies. And it created a new performance score-card, one that emphasized workforce uti-lization, not product line ROI. It even tied compensation for service deliverers di-rectly to their utilization rates. The re-sult? In four years’ time, Lucent’s service group was generating more than $2 bil-lion in revenues.

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ing the performance engine is a

really bad

idea. The performance engine always wins inan all-out fight. It is, quite simply, bigger andstronger.

In fact, for precisely that reason, even thebest innovation leaders need help from highplaces. They must be directly supported by anexecutive senior enough to act in the long-term interests of the company, overriding theperformance engine’s short-term demandswhen necessary. This typically means that theinnovation leader must report two or more

levels higher up than managers with budgetsof a similar size. At WD-40, for example, aninnovation initiative relied on the direct in-volvement of the CEO. (See “How WD-40Minimized Frictions.”)

The senior executive to whom the innova-tion leader reports must be careful not to be acheerleader only for innovation. He or shemust also extol the virtues and importance ofthe performance engine and emphasize that along-run victory for the company requires thatboth sides win.

Together, the innovation leader and the se-nior executive must anticipate and proactivelyresolve conflicts. The clashes can be intense,but if the labor is properly divided betweenthe performance engine and the dedicatedteam, they’ll be manageable. The most com-mon conflict is over scarce resources. When thesum of activities, innovation plus ongoing op-erations, pushes the performance engine be-yond its resource constraints, choices must bemade.

Sometimes, this competition for scarce re-sources takes place through formal budgetingprocesses. Innovation leaders often find them-selves seeking explicit commitments from mul-tiple performance engine leaders. These nego-tiations are best resolved through a single planand budgeting process for the entire innova-tion initiative, with conflicts directly adjudi-cated by the senior executive.

In other cases, the competition is for the at-tention of the shared staff. It’s tempting for theinnovation leader to think that once the bud-get for an initiative is approved, the fight forresources is over. It is not. Each shared staffmember chooses how much energy to devoteto the new initiative every day. The innovationleader’s powers of persuasion are critical butmay not be adequate. Some companies createspecial incentives and targets for shared staffmembers to spur them to keep up with the de-mands of both innovation and ongoing opera-tions. Others charge the innovation initiativefor the shared staff’s time. That way, theshared staff treats the innovation leader morelike a customer than a distraction.

Emotional conflicts must also be managed.Sometimes resentments are grounded in sub-stantive business conflicts, like the possibilitythat the innovation initiative may cannibalizethe existing business. Senior executives mustargue clearly and consistently that the innova-

Case Study: How WD-40 Minimized Frictions

To spur organic growth, Garry Ridge, CEO of WD-40, created a team to de-velop breakthrough products. He called it Team Tomorrow. It included newly hired research scientists and new outside partners. One of its first endeavors was developing the No Mess Pen, which made it easy to dispense small quantities of WD-40 in tight spaces. Though it doesn’t sound like a radical innovation, the technological challenges were steep, and the product took months to develop.

Historically, WD-40’s marketing team had handled product development, which generally entailed routine efforts to improve, renew, or repackage existing products. Now marketing took on the re-sponsibility of partnering with Team To-morrow to commercialize its offerings.

The sources of conflict in this partner-ship are not hard to identify. First, some marketing staffers felt that the attractive challenge of developing breakthrough products should have been theirs. Then there was a resource constraint. Would the marketing team expend its limited time and resources on experimental products or proven performers? Finally, marketing worried that Team Tomor-row’s new offerings would cannibalize ex-isting products.

Graham Milner and Stephanie Barry, the leaders of Team Tomorrow, overcame these conflicts by taking a collaborative

approach, particularly with the head of marketing. They shared information, es-tablished an open-door policy, and coor-dinated plans carefully with marketing, anticipating bottlenecks and resource conflicts. Knowing that such conflicts could be resolved only by the CEO, Mil-ner and Barry made sure Ridge was aware of them early, so that he could set priorities. When Ridge saw that it was necessary, he added staff to the market-ing team to make sure that it had suffi-cient bandwidth.

To signal the importance of the long term, Ridge carried a prototype of the pen with him wherever he went. This gave Team Tomorrow the attention it needed, but it also, at least initially, exac-erbated feelings among some in the mar-keting team that they had been left out. Ridge, Milner, and Barry all quickly saw just how important it was to celebrate the accomplishments of the core busi-ness’s team as well.

Ridge took other steps that contrib-uted to WD-40’s success. He made it clear that he would evaluate all involved em-ployees on their effectiveness in collabo-rating across organizational boundaries. And he was able to lessen the anxiety about cannibalization by collecting data and sharing analyses that showed that the No Mess Pen generated purely incre-mental sales.

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tion initiative is nonetheless in the company’slong-term best interest and do as much as pos-sible to allay fears about job security.

At other times, resentments amount to sim-ple jealousy. The performance engine may feeldisenfranchised if the innovation initiative isviewed as the company’s most critical project.Or the dedicated team may feel marginalizedas pursuers of a quirky experiment. Some com-panies have countered the effects of envy bymaking “ability to work productively with in-ternal partners” a key assessment in individualperformance reviews.

The briefs project at West faced multiplekinds of conflict but overcame them. SteveAnderson provided the right type of leader-ship. He viewed the performance engine as hispartner, not his enemy. And he received con-stant support from two senior leaders, MikeWilens and Erv Barbre.

Wilens and Barbre paid close attention to re-source conflicts. When Barbre asked membersof the shared staff to make contributions to thebriefs effort, he also explicitly discussed whatwas on their plates and what could be deferred.In some cases, he hired contract labor to helpwith routine tasks, such as loading documents,to ensure that the priorities of both innovationand ongoing operations could be met.

Meanwhile, Anderson recognized the im-portance of galvanizing the shared staff. Heand his team got people on board by, amongother things, creating a skit based on thePerry Mason television series. It showed whata lawyer’s life was really like and why a prod-uct like a briefs database would be enor-mously valuable. Wilens and Barbre backedup his effort, in part by creating a special in-centive for the sales force to push the new of-fering. All three leaders monitored emotionaltensions. As the briefs project started to showsigns of success, they saw that some in theperformance engine felt as though they hadbeen left out of a real “glamour project.” Theleaders countered by reinforcing the impor-tance of the core business and by holdingevents at which they spread credit as widely

as possible, within both the dedicated teamand the performance engine.

The Unlikeliest Partnership Is Manageable

The reception of West’s briefs database ex-ceeded expectations. In fact, the company wasdeluged with queries about how quickly thedatabase would be expanded to include addi-tional legal specialties and jurisdictions. Thecompany followed with many more initiativeslike it, such as new databases of expert testi-mony and court dockets.

The organizational formula was not alwaysthe same for those initiatives. For example,when West pursued a product called PeerMon-itor, it assigned almost the entire job—devel-opment and commercialization—to the dedi-cated team. PeerMonitor provided data thatenabled law firms to benchmark their businessperformance against that of rivals. West choseto assign sales and marketing to the dedicatedteam because selling PeerMonitor required adifferent skill set and a longer cycle. The targetcustomer was also different: West sold most ofits offerings to law librarians, but PeerMonitorwas sold directly to managing partners. ThePeerMonitor sales force collaborated with theperformance engine’s sales force to coordinatean overall approach.

West’s example is one worthy of study. Thecompany succeeded where others have stum-bled because it saw that innovation is notsomething that happens either inside or out-side the existing organization, and that innova-tion does not require that an upstart fight theestablishment. Instead, innovation requires apartnership between a newly formed team andthe long-standing one.

While such partnerships are challenging,they are manageable. And they are indispens-able. Indeed, without them, innovation goesnowhere.

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