The Strategic Management of Organizational Competence

1. The Strategic Management ofOrganizational Competence

2. Course Outline: • First Day: • Why have a strategy? • The Evolution of Technologies and Markets • Making Money from Innovation: Understanding Competition • Second Day: • The Strategic Management of Organizational Competence • Actually Doing Strategy

3. One of three key questions... How will we Create value? How will we Capture value? How will we Deliver value?

4. Outline • Making Research Real • Moving beyond teams • Insights from the Pharmaceutical Industry • Managing Discontinuities • Transforming the organization • Creating a separate unit • Working with outsiders

5. Making Research Real: Moving Beyond TeamsInsights from the Pharmaceutical Industry

6. Our Agenda • Why world class research and leading edge product development are so closely linked • Why this linkage is so difficult to manage • It’s not just cultural resistance • And what can be done • Why teams are not the whole answer

7. Value chain Technical Capabilities Product Attributes Customer values Profits Suppliers/Partners In principle linking research to the business should be straightforward... Simply build capability to optimize value and profits...

8. But in practice there is often a significant gulf between them R&D: Why won’t they use our stuff? Why are they so focused on the short term and the bottom line? Marketing Half the stuff they are working on will never find a market: real ivory tower stuff... Technical Capabilities Product Attributes Customer values ? Profits Product designers: Why are they so slow? Why aren’t they more responsive? Why aren’t they more innovative? Competitive Analysts R&D ‘s important: but why it is so expensive? Can’t we be just a “fast follower”?

9. The ideal organization both develops world class knowledge and communicates it In depth knowledge development within each function Coupled with in depth knowledge transmission across both functional and firm boundaries

10. But in practice it is tough to be excellent at both.... A functional organization focuses on local knowledge generation... A market focused organization focuses on knowledge integration...

11. Centralized Research Often supported by corporate funds “above the bottom line” Focuses on the longer term BUT May become an “ivory tower” -- unresponsive to the needs of the business Decentralized Research Often supported by the business units Work often closely linked to the needs of the business BUT May become “captured” by the businesses -- and fail to prepare the company for the longer term And the organization of research thus tends to oscillate between two models:

12. Functional focus Customer focus Geographic focus The ideal organization offers the best of all worlds:

13. Geographic focus Attempting to do both creates intense pressures inside the organization... Matrix? Focus on disciplinary or functional excellence Teams? Organizational Energy Product or Customer focus

14. Functional focus Customer focus Geographic focus But there may be a fundamental tradeoff

15. In practice firms tend to develop a “center of gravity” Functional focus - Power concentrated for more rapid decision making - Clear reporting relationships - Coherent incentives & expectations - Comfortable cultures Product/Customer focus Geographic focus

16. Geographic focus Change is thus both critical often and wrenchingly difficult Functional or Disciplinary focus Chaos is to be expected Product or Customer focus

17. What must be done? • Leading: Communicating the vision, allocating resources • Structuring: Exploring transitional and intermediate forms • Incenting: Explaining “just what’s in this for me?” • Building: Laying the foundations for a new culture, new expectations

18. The Determinants of Productivity in Pharmaceutical Research: Benchmarking Best Practice Iain Cockburn, UBC Rebecca Henderson, MIT

19. Insights from the Pharmaceutical Industry • An industry undergoing rapid and wrenching change • In which the need to maintain a simultaneous focus on functional (disciplinary) knowledge and on product (therapeutic class) knowledge is absolutely critical

20. Successful research means constantly balancing tension: Knowledge about scientific disciplines Knowledge about therapeutic areas

21. Leading: Communicate the vision Performance Time

22. Leading: Understand the dynamics of overload 100% Average Value-Added Time on Engineering Tasks 80% 60% 40% 20% 0% 1 2 3 4 5 6 Number of Projects per Engineer Source: IBM Development Efficiency Study

23. Leading: Allocate resources for new transitions Average Performance Time

24. Structuring:Continually reorganize? Functional focus Market focus

25. Structuring: Create intermediate structures For example: Heavy weight teams Matrix management Centers of excellence Front/back organizations Other... Functional focus ? Geographic focus Product focus

26. Market Concept Alternative project team structures Functional structure Lightweight team Heavyweight team Autonomous, “tiger” team Market Concept Market Concept Source: Kim Clark and Steven Wheelwright Revolutionizing New Product Development

27. Different team structures represent different tradeoffs “Light weight” teams Functional focus “Heavy weight” teams “Tiger” teams Product/ Customer focus

28. Teams can be extremely powerful... • Performance • Stronger identification with and commitment to projects • Facilitates development of systems solutions in line with customer needs • Efficiency • Products are developed and launched faster, and learning can be incorporated into the next launch • Products are less expensive to develop • Professional Development • Development of general management skills at all levels of the organization

29. But teams must be used with care... • Confusion of roles and responsibilities • Shortage of effective project leaders • Death by a thousand teams • Degradation of key skills • A super project to manage the project?

30. Changing Organizational Structure:Centers of Excellence and Matrices: Matrices: Everyone has “two bosses”: both functions and products/ customers have line authority Functional focus Centers of excellence: Different parts of the firm are organized in different ways: line authority is split Geographic focus Product focus

31. Function 1 Function 2 Function 3 The Matrix Organization

32. Makes the tension between functional expertise and product/customer focus explicit: every individual must deal with it every day Best of both “functional” and “product focused” worlds Confusion of roles and responsibilities Powerful individuals “tip” the balance of power in their direction Worst of both “functional” and “product focused” worlds Matrix Organizations Strengths Weaknesses

33. Hearts Brains Lungs Chemistry Physiology Genetics Case Example: An unbalanced matrix in pharmaceuticals

34. Function 1 Function 2 Function 3 Centers of Excellence

35. Build key expertise centrally -- e.g. central “basic” or “exploratory” research Manage career paths of key individuals to maintain the skill base of the organization Leverage key learning across the firm -- avoid “reinventing the wheel” e.g. central manufacturing groups Centralized groups can degenerate into “ivory towers” Without operating responsibility, functional managers become “staff” -- and it may become difficult to attract top quality people to the role Centers of Excellence Strengths Weaknesses

36. Changing Organizational Structure:The Front/Back Organization: • Strengths • Weaknesses

37. Effective process may also be a solution:... • Manage projects to generate new integrative knowledge: • Invest in multiple approaches • Early prototyping and architectural framing • Maintain a balance of knowledge through carefully individual tracking: • Rotate through integrative assignments • Ensure continued disciplinary excellence • Develop “T shaped” individuals

38. Incentives, Culture and Mental Models Understand the Time Constant Leadership Formal Structure/Process Incentives/Political Structure Culture/Mental Models

39. Building and Incenting: • Reward flexibility, team work, commitment to the whole • Model the new culture • And manage from the heart

40. What can be done? • Leading: • Communicate a clear strategic vision • Make tough choices: allocate time for change • Use high conflict, high respect decision making • Structuring: • Design an organization that can manage “off the diagonal” • Incenting: • Model the new “contracts” • Tell the (whole) truth • Building: • Build new mental models • Manage from the heart

41. Managing Disruptive Innovation

42. Disruptions create problems forestablished firms Performance Maturity Disruption Takeoff Ferment Time

43. Disruptions often challenge existing organizations severely

44. But they also create major opportunity • Corning glass • Cookware to optical fiber • HP • Instrumentation to computers • IBM • Mainframes to PCs to Services • Enron • Natural gas to Energy trading

45. Outline • Why disruptions are so difficult • Strategic problems: uncertainty, cannibalization, a focus on short term returns • Competence traps: organizational inertia and the problem of change • What can be done • A tradeoff between coordination and entrepreneurial energy • A range of solutions

46. Why disruptions are so difficult:Strategic/competitive problems • Genuine uncertainty • Many “disruptions” ultimately fail • A few of cannibalization • The new product/service may compete directly with the old • Margin erosion • Margins on new S curves are often lower than those on older ones • Time horizons • New S curve projects typically take many years to come to fruition, and don’t offer much immediate relief to the bottom line

47. Why disruptions are so difficult: Organizational problems • Competency traps • The problem of mental models

48. Competencies evolve over time,creating “competency traps” Performance Maturity Disruption Takeoff Ferment Time

49. Change challenges every aspect of the organization Individuals become Invested in old approaches Strategic/competitive problems may provide an excuse for inertia Leadership & Strategy Whole scale changes to structure and process are very disruptive: Two years of lost time? Structure & Process Existing incentives often work against significant change, and new incentives take time and work Strong cultures & deeply rooted mental models are extraordinarily resistant to change Incentives Culture & Mental Models

50. Interrelated systems of practice make change tricky Performance How we do things Because attempts to change usually degrade performance