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SIM Organizing for innovation Chapter 10. Presentatie titel. Rotterdam, 00 januari 2007. Rotterdam, 2011. Weekly overview. Planning exam and report. Week 6: Hand in draft (hard copy) Week 7: Hand in final report (hard copy) Week 8/9: Group presentations Case exam

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  1. SIMOrganizing for innovation Chapter 10 Presentatie titel Rotterdam, 00 januari 2007 Rotterdam, 2011

  2. Weekly overview

  3. Planning exam and report • Week 6: Hand in draft (hard copy) • Week 7: Hand in final report (hard copy) • Week 8/9: • Group presentations • Case exam • Resits: in case final grade < 5,5: • Week 10: Re-sit exam if exam grade is < 5,5 • Week 10: Re-sit report if report grade < 5,5 hand in revised report

  4. Learning Outcomes of “Organizing for innovation” Understand the influence of firm size Understand structural dimensions Organizing for innovation Understand the influence of culture How to manage innovation across borders

  5. Procter & Gamble’s “Organization 2005” • In 2003 Procter & Gamble was the world’s largest household and personal products company, with $43.4 billion in net revenues. • It had almost 7,500 scientists working in 20 technical centers on four continents.

  6. Procter & Gamble’s “Organization 2005” • In 1999, P&G’s CEO Durk Jager had initiated a major reorganization, “Organization 2005,” intended to accelerate innovation. • New product development would be more decentralized, conducted in both U.S. and foreign markets. • Products would be tested in U.S. and foreign markets simultaneously. • Regional business units were replaced with global business units based on product lines. • Business services would be centralized. • By 2000, stockholders had become impatient for results, and Jager was pressured to step down.

  7. Procter & Gamble’s “Organization 2005” Discussion Questions: • What are some of the advantages and disadvantages of replacing P&G’s regional divisions with global product divisions? And of decentralizing R&D? • What are some of the challenges of changing the culture of a company as big as P&G? • Was Organization 2005 a good idea? Should P&G’s board of directors have given Jager more time?

  8. Procter & Gamble’s “Organization 2005” Let’s take a look at innovation at P&G nowadays: CEO De Jager, the driving force behind Organization 2005, was forced to step down after 18 months as the company’s earnings showed a flat line instead of double digit growth as promised.

  9. Procter & Gamble’s “Organization 2005” De Jager was replaced by Lafley. P&G stuck with the new organization design, but clearer focused the business strategy: 4 core businesses, 10 big brands, top 10 countries, 1/3 of innovation projects & introduced the concept of open innovation. Lafley on innovation:http://www.youtube.com/watch?v=_7mMToRlAxs Read the article of Mr. Lafley in the online SIM library for more information about open innovation at P&G!

  10. Procter & Gamble’s “Organization 2005”

  11. Procter & Gamble’s “Organization 2005” • Global Business Units (GBUs) focus solely on consumers, brands and competitors around the world. They are responsible for the innovation pipeline, profitability and shareholder returns. • Market Development Organizations (MDOs) are charged with knowing consumers and retailers in each market where P&G competes and integrating the innovations flowing from the GBUs into business plans that work in each country. • Global Business Services (GBS) utilizes P&G talent and expert partners to provide best-in-class business support services at the lowest possible costs to leverage P&G’s scale for a winning advantage. • Lean Corporate Functions ensure ongoing functional innovation and capability improvement.

  12. Size of the Firm • Size: is bigger better? • Are there particular types of innovation activities for which large firms are likely to outperform small firms? • Are there types for which small firms are likely to outperform large firms?

  13. Size of the Firm • Size: Is Bigger Better? • In 1940s, Schumpeter argued that large firms would be more effective innovators • Better able to obtain financing • Better able to spread costs of R&D over large volume • Large size may also enable… • Greater economies of scale and learning effects • Taking on large scale or risky projects

  14. Size of the Firm • Size versus Structure • Many advantages and disadvantages of firm size are actually due to structural dimensions of formalization, standardization, and centralization. • The Ambidextrous Organization: The Best of Both Worlds? • Some divisions (e.g. R&D) may be small and organic. • Other divisions (e.g. manufacturing) may be larger and more mechanistic. • Can also alternate through different structures over time.

  15. Size of the Firm • However, large firms might also be disadvantaged at innovation because… • R&D efficiency might decrease due to loss of managerial control • Large firms have more bureaucratic inertia • More strategic commitments tie firm to current technologies • Small firms often more flexible and entrepreneurial • Many big firms have found ways of “feeling small” • Break overall firm into several subunits • Can utilize different culture and controls in different units

  16. Theory In Action Xerox and the Icarus Paradox • In Greek mythology, Icarus was so enthralled with his exceptional wax wings that he flew close to the sun, melting his wings and crashing to his death. Icarus Paradox: That which you excel at can be your undoing. • Similarly, in 1960s and 70s, Xerox had such a stranglehold on the photocopier market, it did not pay attention to new Japanese competitors making inexpensive copiers. • By the mid-1970s, Xerox was losing market share to the Japanese at an alarming rate and had to engage in a major restructuring and turnaround.

  17. Structural Dimensions of the Firm • Structural Dimensions of the Firm • Formalization: The degree to which the firm utilizes rules and procedures to structure the behavior of employees. • Trade-off: can substitute for managerial oversight, but can also make firm rigid. • Standardization: The degree to which activities are performed in a uniform manner. • Trade-off: facilitates smooth and reliable outcomes, but can stifle innovation.

  18. Structural Dimensions of the Firm How do: - formalization (rules and procedures to structure the behavior of employees) and - standardization (degree to which activities are performed in a uniform manner) relate to: Open and closed innovation models Collaboration with partners ?

  19. Structural Dimensions of the Firm • Mechanistic versus Organic Structures • Mechanistic Structures:high formalization and standardization. • Good for operational efficiency, reliability. • Minimizes variation  may stifle creativity • Organic structures:low formalization and standardization; described as “free flowing” • Encourages creativity and experimentation • May yield low consistency and reliability in manufacturing.

  20. Structural Dimensions of the Firm • Centralization: the degree to which decision-making authority is kept at top levels of the firm OR the degree to which activities are performed at a central location. • Centralized authority ensures projects match firm-wide objectives, and may be better at making bold changes in overall direction. • Centralized activities avoid redundancy, maximize economies of scale, and facilitate firm-wide deployment of innovations, quality standards; accepting lower response to local consumer needs.

  21. Structural Dimensions of the Firm • Centralized and Decentralized R&D Activities

  22. Managing Innovation Across Borders • Centralization versus decentralization is a particularly important issue for multinational firms. • Foreign markets offer diverse resources, and have diverse needs. • Innovation tailored to local markets might not be leveraged into other markets. • Customization might make them poor fit for other markets. • Divisions may be reluctant to share their innovations. • Other divisions may have “not invented here” syndrome.

  23. Managing Innovation Across Borders: Theories Bartlett and Ghoshal identify four strategies of multinational innovation • Center-for-global: all R&D activities centralized a single hub • Local-for-local: each division does own R&D for local market • Locally leveraged: each division does own R&D, but firm attempts to leverage most creative ideas across company. • Globally linked: decentralized R&D labs but with different roles in firm’s strategy and are coordinated centrally.

  24. Managing Innovation Across Borders: Theories • Bartlett and Ghoshal encourage transnational approach: resources and skills anywhere in firm can be leveraged to exploit opportunities in any geographic market (Ericsson) • Requires: • Reciprocal interdependence among divisions • Strong integrating mechanisms such as personnel rotation, division-spanning teams, etc. • Balance in organizational identity between national brands and global image

  25. Managing Innovation Across Borders:Theories Prahalad & Bhattacharyya encourage a business model which treats decentralization, centralization, current practices and potential disruptions not as trade-offs but as complements. Global corporate structure with no headquarters but core office “hubs” in max. 20 gateway countries. Adapt a business model that integrate 3 strategies: Customizes products and services in hubs Unites around a platform of proprietary knowledge and building competencies Arbitrages operational models (gain cost-effectiveness, productivity and efficiency)

  26. Discussion questions: “How to be a truly global company” Explain the 3 strategies multinational companies have to integrate: Customization Competencies Arbitrage Give an example of each strategy Explain why companies must “leverage the diversity of a decentralized structure”. How can the hub system facilitate this? Explain how this business model might increase the success rate of innovation in a company

  27. Cases groupwork Spend the time left to discuss which content of this lecture you can use in your group cases: Relevance of organizational structure: which structural dimensions did you describe so far? Which ones do you recommend/implement and why? Organic versus mechanistic Centralization versus decentralization Degrees of formalization and standardization Which lessons can you learn from the strategies explained in the article even though your companies might not operate internationally? How to overcome the challenges related to organizational change?

  28. Cases groupwork Address the following issues related to change in general in your report: Levels of the change ladder: Ethos = set of beliefs; values and culture Desire = motivation which drives people Capability = skills & competencies Blueprint = methods; processes/plans/procedures etc. Assets = tools, people etc. necessary to deliver the service Head/heart/hand type change: Head = cognition-based shift Heart = affective-based shift Hand = behavioral component

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