The Strategic Management of Organizational Competence.

The Strategic Management ofThe Strategic Management ofOrganizational CompetenceOrganizational Competence

Course Outline:Course Outline:

First Day:First Day: Why have a strategy?Why have a strategy? The Evolution of Technologies and Markets The Evolution of Technologies and Markets Making Money from Innovation: Understanding CompetitionMaking Money from Innovation: Understanding Competition

Second Day:Second Day: The Strategic Management of Organizational CompetenceThe Strategic Management of Organizational Competence Actually Actually DoingDoing Strategy Strategy

One of three key questions...One of three key questions...

How will we Create value?

How will weCapture value?

How will weDeliver value?

OutlineOutline

Making Research RealMaking Research Real Moving beyond teamsMoving beyond teams Insights from the Pharmaceutical IndustryInsights from the Pharmaceutical Industry

Managing DiscontinuitiesManaging Discontinuities Transforming the organizationTransforming the organization Creating a separate unitCreating a separate unit Working with outsidersWorking with outsiders

Making Research Real: Making Research Real: Moving Beyond TeamsMoving Beyond Teams

Insights from the Insights from the Pharmaceutical IndustryPharmaceutical Industry

Our AgendaOur Agenda

Why world class research and leading edge Why world class research and leading edge product development are so closely linkedproduct development are so closely linked

Why this linkage is so difficult to manageWhy this linkage is so difficult to manage It’s not just cultural resistanceIt’s not just cultural resistance

And what can be doneAnd what can be done Why teams are not the whole answerWhy teams are not the whole answer

In principle linking research to the In principle linking research to the business should be business should be straightforward...straightforward...

Simply build capability to optimize value and profits...

TechnicalCapabilities

ProductAttributes

Customervalues

Profits

Value chain

Suppliers/Partners

But in practice there is often a But in practice there is often a significant gulf between themsignificant gulf between them

TechnicalCapabilities

ProductAttributes

Customervalues

Profits

R&D:Why won’t they use our stuff? Why are they so focused on the short term and the bottom line?

MarketingHalf the stuff they are working on will never find a market: real ivory tower stuff...

Product designers:Why are they so slow?Why aren’t they more responsive?Why aren’t they more innovative?

Competitive AnalystsR&D ‘s important: but why it is soexpensive? Can’t we be just a “fast follower”?

?

The ideal organization both develops The ideal organization both develops world class knowledge and world class knowledge and communicates itcommunicates it

In depth knowledge developmentwithin each function

Coupled with in depth knowledge transmission across both functional and firm boundaries

But in practice it is tough to be But in practice it is tough to be excellent at both....excellent at both....

A functional organization focuses on local knowledge generation...

A market focused organization focuses on knowledge integration...

And the organization of research And the organization of research thus tends to oscillate between two thus tends to oscillate between two models:models:

Centralized ResearchCentralized Research

Often supported by Often supported by corporate funds “above corporate funds “above the bottom line” the bottom line”

Focuses on the longer Focuses on the longer termterm

BUTBUT

May become an “ivory May become an “ivory tower” -- unresponsive tower” -- unresponsive to the needs of the to the needs of the businessbusiness

Decentralized ResearchDecentralized Research

Often supported by the Often supported by the business units business units

Work often closely Work often closely linked to the needs of linked to the needs of the businessthe business

BUTBUT

May become “captured” May become “captured” by the businesses -- and by the businesses -- and fail to prepare the fail to prepare the company for the longer company for the longer term term

The ideal organization offers the The ideal organization offers the best of all worlds:best of all worlds:

Geographicfocus

Customer focus

Functional focus

Attempting to do both creates Attempting to do both creates intense pressures inside the intense pressures inside the organization...organization...

Focus ondisciplinaryor functionalexcellence

Product or Customer focusGeographicfocus

Matrix?

Teams?

OrganizationalEnergy

But there may be a fundamental But there may be a fundamental tradeofftradeoff

Functional focus

Customer focus

Geographic focus

In practice firms tend to In practice firms tend to develop a “center of gravity”develop a “center of gravity”

Geographic focus

Product/Customer focus

Functional focus

- Power concentrated for more rapid decision making- Clear reporting relationships- Coherent incentives & expectations- Comfortable cultures

Change is thus both critical often Change is thus both critical often and wrenchingly difficultand wrenchingly difficult

Functional orDisciplinaryfocus

Product or Customer focusGeographicfocus

Chaos is to be expected

What must be done?What must be done?

LeadingLeading: Communicating the : Communicating the vision, allocating resourcesvision, allocating resources

StructuringStructuring: Exploring transitional : Exploring transitional and intermediate formsand intermediate forms

IncentingIncenting: Explaining “just what’s : Explaining “just what’s in this for me?”in this for me?”

BuildingBuilding: Laying the foundations : Laying the foundations for a new culture, new expectationsfor a new culture, new expectations

The Determinants of The Determinants of Productivity in Productivity in

Pharmaceutical Research: Pharmaceutical Research:

Benchmarking Best Benchmarking Best PracticePractice

Iain Cockburn, UBCIain Cockburn, UBC

Rebecca Henderson, MITRebecca Henderson, MIT

Insights from the Pharmaceutical Insights from the Pharmaceutical IndustryIndustry

An industry undergoing rapid and wrenching An industry undergoing rapid and wrenching changechange

In which the need to maintain a In which the need to maintain a simultaneoussimultaneous focus on functional (disciplinary) knowledge focus on functional (disciplinary) knowledge and on product (therapeutic class) and on product (therapeutic class) knowledge is absolutely criticalknowledge is absolutely critical

Successful research means Successful research means constantly balancing tension:constantly balancing tension:

Knowledge about scientific disciplines

Knowledge about therapeutic areas

LeadingLeading: Communicate the vision: Communicate the vision

Performance

Time

Average

Value-Added

Time on

Engineering

Tasks

Number of Projects per Engineer

100%

80%

60%

40%

0%

20%

65431 2

Source: IBM Development Efficiency Study

Leading: Leading: Understand Understand the dynamics of overloadthe dynamics of overload

LeadingLeading: : Allocate resources for new Allocate resources for new transitionstransitions

AveragePerformance

Time

StructuringStructuring::Continually reorganize?Continually reorganize?

Functional focus

Market focus

StructuringStructuring: Create intermediate : Create intermediate structuresstructures

Functional focus

Product focus

For example:

Heavy weight teamsMatrix managementCenters of excellenceFront/back organizationsOther...

Geographicfocus

?

Alternative project team structuresAlternative project team structures

Functional structure Lightweight team

Heavyweight team Autonomous, “tiger” team

MarketConcept

MarketConcept

MarketConcept

Source: Kim Clark and Steven Wheelwright Revolutionizing New Product Development

Different team structures represent Different team structures represent different tradeoffsdifferent tradeoffs

Functional focus

Product/Customerfocus

“Heavy weight” teams

“Tiger” teams

“Light weight” teams

Teams can be extremely powerful...Teams can be extremely powerful...

PerformancePerformance Stronger identification with and commitment to Stronger identification with and commitment to

projectsprojects Facilitates development of systems solutions in Facilitates development of systems solutions in

line with customer needsline with customer needs

EfficiencyEfficiency Products are developed and launched faster, and Products are developed and launched faster, and

learning can be incorporated into the next launchlearning can be incorporated into the next launch Products are less expensive to developProducts are less expensive to develop

Professional DevelopmentProfessional Development Development of general management skills at all Development of general management skills at all

levels of the organizationlevels of the organization

But teams must be used with care...But teams must be used with care...

Confusion of roles and responsibilitiesConfusion of roles and responsibilities

Shortage of effective project leadersShortage of effective project leaders

Death by a thousand teamsDeath by a thousand teams

Degradation of key skillsDegradation of key skills

A super project to manage the project?A super project to manage the project?

Changing Organizational Structure:Changing Organizational Structure:Centers of Excellence and Matrices:Centers of Excellence and Matrices:

Functional focus

Product focusGeographicfocus

Centers of excellence:Different parts of the firmare organized in differentways: line authority issplit

Matrices:Everyone has “two bosses”:both functions and products/customers have line authority

The Matrix OrganizationThe Matrix Organization

M arke t A M arke t B M arke t C

C eoC E O

Function 1

Function 2

Function 3

Matrix OrganizationsMatrix Organizations

Makes the tension Makes the tension between functional between functional expertise and expertise and product/customer focus product/customer focus explicit: every individual explicit: every individual must deal with it every daymust deal with it every day

Best of both “functional” Best of both “functional” and “product focused” and “product focused” worldsworlds

Confusion of roles and Confusion of roles and responsibilitiesresponsibilities

Powerful individuals “tip” Powerful individuals “tip” the balance of power in the balance of power in their direction their direction

Worst of both “functional” Worst of both “functional” and “product focused” and “product focused” worldsworlds

Strengths Weaknesses

Case Example: An unbalanced Case Example: An unbalanced matrix in pharmaceuticalsmatrix in pharmaceuticals

Genetics

Physiology

Chemistry

LungsBrainsHearts

Centers of ExcellenceCenters of Excellence

Function 1

Function 2

Function 3

M arke t A M arke t B M arke t C

C eoC E O

Centers of ExcellenceCenters of Excellence

Build key expertise Build key expertise centrally -- e.g. central centrally -- e.g. central “basic” or “exploratory” “basic” or “exploratory” researchresearch

Manage career paths of Manage career paths of key individuals to maintain key individuals to maintain the skill base of the the skill base of the organization organization

Leverage key learning Leverage key learning across the firm -- avoid across the firm -- avoid “reinventing the wheel” “reinventing the wheel” e.g. central manufacturing e.g. central manufacturing groupsgroups

Centralized groups can Centralized groups can degenerate into “ivory degenerate into “ivory towers”towers”

Without operating Without operating responsibility, functional responsibility, functional managers become “staff” -- managers become “staff” -- and it may become difficult to and it may become difficult to attract top quality people to attract top quality people to the rolethe role

Strengths Weaknesses

Changing Organizational Structure:Changing Organizational Structure:The Front/Back OrganizationThe Front/Back Organization::

StrengthsStrengths

WeaknessesWeaknesses

Effective process may also be a Effective process may also be a solution:...solution:...

Manage projects to generate new integrative Manage projects to generate new integrative knowledge:knowledge: Invest in multiple approachesInvest in multiple approaches Early prototyping and architectural framingEarly prototyping and architectural framing

Maintain a balance of knowledge through Maintain a balance of knowledge through carefully individual tracking:carefully individual tracking: Rotate through integrative assignmentsRotate through integrative assignments Ensure continued disciplinary excellenceEnsure continued disciplinary excellence Develop “T shaped” individualsDevelop “T shaped” individuals

Incentives, Culture and Mental Incentives, Culture and Mental ModelsModels

Leadership

Formal Structure/Process

Incentives/Political Structure

Culture/Mental Models

Understand theTime Constant

Building and IncentingBuilding and Incenting::

Reward flexibility, team work, Reward flexibility, team work, commitment to the wholecommitment to the whole

Model the new cultureModel the new culture

And And manage from the heartmanage from the heart

What can be done?What can be done?

Leading:Leading: Communicate a clear strategic visionCommunicate a clear strategic vision Make tough choices: allocate time for changeMake tough choices: allocate time for change Use high conflict, high respect decision makingUse high conflict, high respect decision making

Structuring:Structuring: Design an organization that can manage “off the Design an organization that can manage “off the

diagonal”diagonal”

Incenting:Incenting: Model the new “contracts”Model the new “contracts” Tell the (whole) truthTell the (whole) truth

Building:Building: Build new mental modelsBuild new mental models Manage from the heartManage from the heart

Managing Disruptive Managing Disruptive InnovationInnovation

Disruptions create problems forDisruptions create problems forestablished firmsestablished firms

Performance

Time

Ferment

Takeoff

Maturity

Disruption

Disruptions often challenge existing Disruptions often challenge existing organizations severelyorganizations severely

Cumulate share of sales of photolithographic alignment equipment, 1962-1986, by generation

Contact Proximity Scanners S&R (1) S&R (2)

Cobilt 44 <1

Kasper 17 8 7

Canon 67 21 9

P-Elmer 78 10 <1

GCA 55 12

Nikon 70

Total 61 75 99+ 81 82+

But they also create major But they also create major opportunityopportunity

Corning glassCorning glass Cookware to optical fiberCookware to optical fiber

HPHP Instrumentation to computersInstrumentation to computers

IBMIBM Mainframes to PCs to ServicesMainframes to PCs to Services

EnronEnron Natural gas to Energy tradingNatural gas to Energy trading

OutlineOutline

Why disruptions are so difficultWhy disruptions are so difficult Strategic problems: uncertainty, cannibalization, a Strategic problems: uncertainty, cannibalization, a

focus on short term returnsfocus on short term returns Competence traps: organizational inertia and the Competence traps: organizational inertia and the

problem of changeproblem of change

What can be doneWhat can be done A tradeoff between coordination and A tradeoff between coordination and

entrepreneurial energyentrepreneurial energy A range of solutionsA range of solutions

Why disruptions are so difficult:Why disruptions are so difficult:Strategic/competitive problemsStrategic/competitive problems

Genuine uncertaintyGenuine uncertainty Many “disruptions” ultimately failMany “disruptions” ultimately fail

A few of cannibalizationA few of cannibalization The new product/service may compete directly The new product/service may compete directly

with the oldwith the old

Margin erosionMargin erosion Margins on new S curves are often lower than Margins on new S curves are often lower than

those on older onesthose on older ones

Time horizonsTime horizons New S curve projects typically take many years to New S curve projects typically take many years to

come to fruition, and don’t offer much immediate come to fruition, and don’t offer much immediate relief to the bottom linerelief to the bottom line

Why disruptions are so difficult: Why disruptions are so difficult: Organizational problemsOrganizational problems

Competency trapsCompetency traps

The problem of mental modelsThe problem of mental models

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

Performance

Time

Ferment

Takeoff

Maturity

Disruption

Change challenges every aspect of Change challenges every aspect of the organizationthe organization

Leadership & Strategy

Structure &Process

Incentives

Culture & Mental Models

Individuals becomeInvested in old approaches

Strategic/competitive problems may provide an

excuse for inertia

Existing incentives often work against significant

change, and new incentives take time and work

Whole scale changes to structure and process are

very disruptive: Two years of lost time?

Strong cultures & deeplyrooted mental models areextraordinarily resistant

to change

Interrelated systems of practice Interrelated systems of practice make change trickymake change tricky

Performance

How we do things

Because attempts to change usually degrade performance

The Problem of Mental The Problem of Mental ModelsModels

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

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

integration across functions and boundariesintegration across functions and boundaries

Dominant design established -- enables…Dominant design established -- enables…

An Era of Incremental innovationAn Era of Incremental innovation Allows the fragmentation of knowledgeAllows the fragmentation of knowledge Component knowledgeComponent knowledge -- knowledge about the -- knowledge about the

piecespieces Architectural knowledgeArchitectural knowledge -- knowledge about the -- knowledge about the

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

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

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

I can always call Fred..”I can always call Fred..”

Communication filtersCommunication filters ““The only thing I need to worry about in The only thing I need to worry about in

this report is Section 8..this report is Section 8..””

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

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

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

Leadership

Formal Structure/Process

Incentives/Political Structure

Culture/Mental Models

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

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

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

And of weakness:And of weakness:

Problems in recognition:Problems in recognition: DenialDenial

Problems in response:Problems in response: PanicPanic Overload & the recreation of old solutionsOverload & the recreation of old solutionsoror Destruction of existing architectural knowledge Destruction of existing architectural knowledge

drastically reduces performance: “I pulled on the drastically reduces performance: “I pulled on the levers and nothing happened.”levers and nothing happened.”

What can be done?What can be done?

What can be done?What can be done?

LeadingLeading: Building the : Building the “ambidextrous” senior team: “ambidextrous” senior team: communicating the vision, communicating the vision, allocating resourcesallocating resources

StructuringStructuring: Exploring transitional : Exploring transitional and intermediate formsand intermediate forms

IncentingIncenting: Explaining “just what’s : Explaining “just what’s in this for me?”in this for me?”

BuildingBuilding: Laying the foundations : Laying the foundations for a new culture, new expectationsfor a new culture, new expectations

Managing Discontinuities:Managing Discontinuities:The Role of Leadership & The Role of Leadership & the Senior Teamthe Senior Team

Communicating a VisionCommunicating a Vision

Performance

Time

Average

Value-Added

Time on

Engineering

Tasks

Number of Projects per Engineer

100%

80%

60%

40%

0%

20%

65431 2

Source: IBM Development Efficiency Study

Managing the Dynamics of OverloadManaging the Dynamics of Overload

Building the Ambidextrous Senior Building the Ambidextrous Senior TeamTeam

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

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

career pathscareer paths

Coupled with processes that support the divergent Coupled with processes that support the divergent management of quite different business unitsmanagement of quite different business units Resource allocation processes that allow for different Resource allocation processes that allow for different

time horizons, milestones, rates of returntime horizons, milestones, rates of return

Managing Managing Discontinuous Change:Discontinuous Change:Choosing an Appropriate Choosing an Appropriate Organizational StructureOrganizational Structure

There are a Variety of ApproachesThere are a Variety of Approaches

Externalideas

External funds

Internal funds

US DrinksCo.

Lucent

Shell

Roche - Protodigm

Prudential - egg

Tritec

3M

P&G

Xerox - 3COM, Adobe

Nokia NVOIntel Capital

Xerox XTV

JJDC

Dow Chemical

Emerson SIPSiemens SVC

Euro Telecom

US Foods Co.

Internalideas

Corporate venture capitalInternal ventures

Joint ventures

Entrepreneursand professionalventure capital

Incubators

Out-licensing

Lost ideas

Parent resource commitment

More

Less

Xilinx Ventures

NortelNortel

Control & Coordination

Choice between them is constrained Choice between them is constrained by a key tension:by a key tension:

EntrepreneurialDrive,Freedom from the “old ways”

Successful disruptive innovation unites

entrepreneurial insight with effective coordination

Control & Coordination

What drives this tension?What drives this tension?(1) Finding entrepreneurial drive(1) Finding entrepreneurial drive

EntrepreneurialDrive,Freedom from the “old ways”

BusinessAs usual

?

Finding entrepreneurial drive in the Finding entrepreneurial drive in the established firmestablished firm

Existing modes of behaving are very Existing modes of behaving are very powerful: powerful: The problem of embedded architectural knowledgeThe problem of embedded architectural knowledge

Change threatens established competencies, Change threatens established competencies, comfort for long tenured individualscomfort for long tenured individuals

Internal incentives may not be very “high Internal incentives may not be very “high powered” – while individuals at new entrants powered” – while individuals at new entrants may see very considerable upside to their may see very considerable upside to their effortsefforts

Control & Coordination

What drives this tension?What drives this tension?(2) Managing Coordination(2) Managing Coordination

EntrepreneurialDrive,Freedom from the “old ways”

Acquire/Partner ?

Why is it hard to coordinate across Why is it hard to coordinate across firm boundaries?firm boundaries?

The interests of your partners may not be The interests of your partners may not be your ownyour own

If lawyers were free, and contracts could be If lawyers were free, and contracts could be perfectly written and costlessly enforced, perfectly written and costlessly enforced, this would not be a problem: one could write this would not be a problem: one could write contracts to enforce alignmentcontracts to enforce alignment

But perfect contracts cannot be written, and But perfect contracts cannot be written, and enforcement is very costlyenforcement is very costly

Trust may be a solutionTrust may be a solution

Why may your partner’s interests not be Why may your partner’s interests not be your own?your own?

Partner

Product

Firm

Your partner’s interests Your partner’s interests may not be your own if:may not be your own if:

Your partner needs to Your partner needs to make investments that make investments that are only useful if you are only useful if you work with themwork with them

You need to make You need to make investments that are investments that are only useful if you work only useful if you work with your partnerwith your partner

Such “specific” investments Such “specific” investments increase the risk of “hold up”increase the risk of “hold up”

Firm threat: “We’ll pay you

what you can get elsewhere”

Partner threat: “Now that you’ve made

that investment -- let’s renegotiate...”

A potential lack of coordination!

Partner

Product

Firm

Control & Coordination

Choosing a structure thus implies Choosing a structure thus implies choosing problemschoosing problems

Acquire

Build inside existing units

Jointventure/alliance

?EntrepreneurialDrive,Freedom from the “old ways”

Internalventure

Build insideexisting unit

Using Temporary Internal Using Temporary Internal Structures: Best PracticeStructures: Best Practice

A great team leader A great team leader Appropriate staffing Appropriate staffing Clearly defined goals for the team, coupled to Clearly defined goals for the team, coupled to

well defined milestones & criteria for successwell defined milestones & criteria for success Communication, trust between the team Communication, trust between the team

leader and the leaders of the current businessleader and the leaders of the current business Incentive structures that support the success Incentive structures that support the success

of the team within the existing businessof the team within the existing business A culture that supports innovationA culture that supports innovation

Range of Possible Team ModelsRange of Possible Team Models

Functional Organization

FunctionalManager

MFG MKG ENGINEERING

Work occurs within each function. Cross-functional coordination by superiors.

Heavyweight Project Team

Market

MFG MKG ENGINEERING

Degree of TeamLeader Influence

TeamLeader

True cross-functional team. Decision-making authority within team. Team members still have functional home, but report to Program Manager on project activities.

Lightweight/Matrix Project Team

Degree of TeamLeader Influence

TeamLeader

Market

MFG MKG ENGINEERING

Product Concept

Some coordination across functions. Program Manager acts as project coordinator and as liaison to functional managers, who are the key decision makers.

Autonomous Project Team

Market MFG MKG ENGINEERINGDegree of TeamLeader Influence

TeamLeader

Individuals are reallocated from functional group and formally assigned to team. Program Manager has full control over resources.

Product Concept

Product Concept

Adapted from Wheelwright and Clark, Revolutionizing Product Development

A computer storage manufacturer experimented with a cross functional team A computer storage manufacturer experimented with a cross functional team approach to learn about a new business modelapproach to learn about a new business model

Service

Sales

Products

Storage End-user

Se

rvic

e P

artn

ers

Ma

rke

ting

SalesProfessional

ServicesCustomerService

Traditional End User

Se

rvic

e P

artn

ers

Ma

rke

ting

SalesProfessional

ServicesCustomerService

Traditional End User

Traditional End-user

Customer of xSP

“Learning Lab”

xSP Customer

New business group experiment

Service

Sales

Products

Storage End-user

Storage xSP End-user

Product

Sell to Sell with/through

Service Business Support Services

Using Temporary Internal Using Temporary Internal Structures: Pros and ConsStructures: Pros and Cons

Pros:Pros: Maximizes corporate control, Maximizes corporate control, Minimizes necessary coordination with external partiesMinimizes necessary coordination with external parties Encourages a culture that can incorporate any type of Encourages a culture that can incorporate any type of

innovationinnovation Provides some freedom from current organizational Provides some freedom from current organizational

constraintsconstraints But plays a role in transformation of the current But plays a role in transformation of the current

businessbusiness

Cons:Cons: Requires significant cultural change – which is difficult Requires significant cultural change – which is difficult

to doto do Hard to measure successHard to measure success Is ever-evolving – needs constant managementIs ever-evolving – needs constant management

Control & Coordination

Internal ventures can take many Internal ventures can take many formsforms

EntrepreneurialDrive,Freedom from the “old ways”

Internal ventures

Spinouts

“Pseudo”Venture capital

1984 1986 1988 1990 1992 1994 19961982

1988: Plus spun back in to Quantum

1988: Plus spun back in to Quantum

1984: Plus launched as internal venture, 80% owned by Quantum

1984: Plus launched as internal venture, 80% owned by Quantum

Qu

an

tum

Co

rp.

Re

ve

nu

es

($

Mil

lio

ns

)

Source: Prof. Henry Chesbrough, Harvard Business School

$4,500

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0

Quantum’s Plus Development Co. was a spin out that Quantum’s Plus Development Co. was a spin out that transformed the company when reacquiredtransformed the company when reacquired

Quantum Corp., 1984-88:

• $100m, OEM hard disk drive supplier

• Plus launched to exploit huge opportunity to sell “disk on a card” to emerging PC market

• Plus develops 70% market share, 40% margin, $100m revenue in 2 yrs.

• Plus develops new business processes and improved production capabilities

Quantum Corp., 1984-88:

• $100m, OEM hard disk drive supplier

• Plus launched to exploit huge opportunity to sell “disk on a card” to emerging PC market

• Plus develops 70% market share, 40% margin, $100m revenue in 2 yrs.

• Plus develops new business processes and improved production capabilities

Quantum Corp., post-1988:

• Plus’ processes and capabilities transform Quantum’s design and manufacturing

• Quantum averages over 45% revenue growth per annum from 1988 to 1996

Quantum Corp., post-1988:

• Plus’ processes and capabilities transform Quantum’s design and manufacturing

• Quantum averages over 45% revenue growth per annum from 1988 to 1996

All forms strike a different balance All forms strike a different balance between incentives and controlbetween incentives and control

ExternalVenture/Acquisition

Equity JV/Alliance

Spin out PseudoVentureCapital

Internalventure

Internaldivision

incentives

Coordination, control highlow

high low

outside $, expertiseinside $, expertise

Internal Ventures: Best practiceInternal Ventures: Best practice

Clearly defined mission, goals coupled to Clearly defined mission, goals coupled to well defined milestones and criteriawell defined milestones and criteria

Appropriate staffingAppropriate staffing Senior management “buffering” from the rest Senior management “buffering” from the rest

of the organizationof the organization Careful management of incentives, both Careful management of incentives, both

within the new venture and with respect to within the new venture and with respect to the rest of the organizationthe rest of the organization

Tolerance for (some) failureTolerance for (some) failure Flexibility and resilienceFlexibility and resilience

Internal Ventures: Internal Ventures: Common problemsCommon problems

Team A vs. Team B: rejection of businesses that are Team A vs. Team B: rejection of businesses that are “too close” to existing strategic mission“too close” to existing strategic mission

New venture is not really new: old behavioral New venture is not really new: old behavioral problems are transferred to the new entityproblems are transferred to the new entity

New venture is not coordinated with existing business New venture is not coordinated with existing business and existing resources are not made availableand existing resources are not made available

High risk and low incentives for internal corporate High risk and low incentives for internal corporate promotion promotion

Lack of managerial commitment when signs of Lack of managerial commitment when signs of success begin to appear. Are often (prematurely?) success begin to appear. Are often (prematurely?) disbandeddisbanded

““Pseudo” venture capital: Pseudo” venture capital: Best practiceBest practice

Appropriate choice of venture personnelAppropriate choice of venture personnel Clearly defined governance structure that mimics Clearly defined governance structure that mimics

venture capital – separation from parent corporation, venture capital – separation from parent corporation, opportunity to bring in external capitalopportunity to bring in external capital

Well defined time horizon, milestones, expectationsWell defined time horizon, milestones, expectations Mechanisms in place to provide benefit to the parent Mechanisms in place to provide benefit to the parent

corporation if appropriatecorporation if appropriate Incentive structures that balance giving high powered Incentive structures that balance giving high powered

incentives to venture members with the needs of the incentives to venture members with the needs of the parent corporationsparent corporations

A culture that supports the use of VC in the context of A culture that supports the use of VC in the context of the current organizationthe current organization

““Pseudo” venture capital: Pseudo” venture capital: Pros and ConsPros and Cons

ProsPros Provides high powered motivation, clear signal of Provides high powered motivation, clear signal of

the need to “do something different”the need to “do something different”

ConsCons How can one benefit the corporation and yet stay How can one benefit the corporation and yet stay

true to the “venture model”?true to the “venture model”?Paying a “fair” price creates issues of internal equityPaying a “fair” price creates issues of internal equityPaying less than a “fair” price betrays the modelPaying less than a “fair” price betrays the model

Very mixed track record. At Xerox, Intel, Exxon Very mixed track record. At Xerox, Intel, Exxon programs generally judged to be failures.programs generally judged to be failures.

External venture capital makes money but has little External venture capital makes money but has little impact on the strategic mission of the firmimpact on the strategic mission of the firm

Alliances and Joint Ventures: Alliances and Joint Ventures: Best PracticeBest Practice

Bring together partners with related skills to Bring together partners with related skills to focus on a common goalfocus on a common goal

Provide JV with clear strategic goals and Provide JV with clear strategic goals and milestonesmilestones

Build “best of both worlds” culture and Build “best of both worlds” culture and approachapproach

Develop trust over time to mitigate problems Develop trust over time to mitigate problems of “hold up”of “hold up”

Alliances and Joint Ventures: Alliances and Joint Ventures: Pros and ConsPros and Cons

ProsPros Best of both worlds – real entrepreneurial drive with Best of both worlds – real entrepreneurial drive with

close coordinationclose coordination

ConsCons Often no clear framework of task at hand or goalsOften no clear framework of task at hand or goals Uneven levels of commitment and resources Uneven levels of commitment and resources Information asymmetries and lack of information sharingInformation asymmetries and lack of information sharing Benefits are often not equally shared Benefits are often not equally shared Issues of scope and milestones are often not adequately Issues of scope and milestones are often not adequately

addressedaddressed Partner trust and employee loyalties are difficult to Partner trust and employee loyalties are difficult to

managemanage Corporate politics can affect partners differentlyCorporate politics can affect partners differently Often overestimate partner capabilities Often overestimate partner capabilities

Acquisitions: Acquisitions: Best PracticeBest Practice

Pay the “right” price:Pay the “right” price: Invest in superior informationInvest in superior information Create value through combinationCreate value through combination

Manage the acquisitionManage the acquisition Create the right expectationsCreate the right expectations Nurture the new culture (and people!)Nurture the new culture (and people!) Manage the interfaces with the existing Manage the interfaces with the existing

organizationorganization

Acquisitions: Acquisitions: Pros and ConsPros and Cons

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

skills – a “sure bet”?skills – a “sure bet”?

ConsCons Is the market efficient? – Will the shareholders of Is the market efficient? – Will the shareholders of

the acquired firm capture all the value?the acquired firm capture all the value? Should you worry about the winner’s curse? Will Should you worry about the winner’s curse? Will

you pay too much?you pay too much? Once acquired, will the new firm simply be Once acquired, will the new firm simply be

assimilated into the existing firm?assimilated into the existing firm?

The “Winner’s Curse” may mean The “Winner’s Curse” may mean that you pay too muchthat you pay too much

Perceivedvalue

No. of firms

“True” value

“Winner’s” valuation

Once acquired, acquisitions must be Once acquired, acquisitions must be managedmanaged

Control & Coordination

Buy anInnovative

firm?

EntrepreneurialDrive,Freedom from the “old ways”

Assimilate it ?

SummarySummary

Disruptions Create Problems forDisruptions Create Problems forEstablished FirmsEstablished Firms

Performance

Time

Ferment

Takeoff

Maturity

Disruption

Control & Coordination

Crafting a solution requires careful Crafting a solution requires careful thought and committed leadershipthought and committed leadership

Acquire

Build inside existing units

Jointventure/alliance

?EntrepreneurialDrive,Freedom from the “old ways”

Internalventure

Build insideexisting unit

Exercise:Exercise:

This solution works best when:This solution works best when:

TransformTransform

the firmthe firm

Work with Work with

third partiesthird parties

Create a Create a

separate groupseparate group

Summary: Managing disruption requires Summary: Managing disruption requires both vision and organizational both vision and organizational sophisticationsophistication

Performance

Effort

•Transform the entire organization?•Build an ambidextrous organization?•Outsource?