KODAK

1. KODAK • Evaluate Kodak’s digital imaging strategy to date • “B+” or “F”? • How would you evaluate the decision to invest in digital imaging: • In the 80s? In the 90s? Now? • Given that they made the decision to invest, how would you evaluate their execution? • What should Kodak do next? • Where should they try to play in the digital value chain? • How should they organize their digital efforts?

2. ManagingOrganizational Competence Professor Rebecca Henderson MIT Sloan School of Management Phone: (617) 253-6618, Email: Rhenders@mit.edu,http://www.mit.edu/people/rhenders/home.html

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

4. Transitions often challenge existing organizations severely

5. But they also create major opportunity • Corning glass • Cookware to optical fiber • HP • Instrumentation to computers • IBM • Mainframes to PCs to Services • Eli Lilly • “Random” drug discovery to genetics and genomics

6. The Issue How can one manage the core business and real growth simultaneously?

7. Discontinuous Innovationas a strategic problem • Genuine uncertainty • It’s not going to happen – certainly not now • Cannibalization • It will compete with our current products • Shifts in the customer base • Our current customers don’t want it • Margin erosion • It will make less money

8. Discontinuous Innovationas an organizational problem • Time horizons & Incentives • Fear of (individual) cannibalization • Overload • Competency Traps

9. Discontinuous Innovation as a Strategic Problem

10. New S curves may be hard to spot in advance

12. The new opportunity doesn’t meet our current customer’s needs

13. Managing customers at momentsof discontinuity Who buys a technology when it is first introduced? Performance New technologies sell to: - New customers - With new needs - Often at lower margins Time

14. Established technology Mainstream customer needs Invasive Technology Niche customer needs The Innovator’s Dilemma: “Disruptive” technologies may threaten established firms Performance Time Clay Christensen: The Innovator’s Dilemma

15. The new opportunity doesn’t offer nearly the same margins and profit opportunity

16. Uniqueness & Complementary Assets over the Life Cycle: Complementary Assets Uniqueness Maturity Takeoff Ferment

17. Discontinuous Innovation as an Organizational Problem

18. Discontinuous Innovationas an organizational problem • Time horizons & Incentives • Fear of (individual) cannibalization • Overload • Competency Traps

19. Overload: Is This Your Project Pipeline?

20. + - - + - Overload can give you “worse before better” No longer term projects initiated DELAY Pressure to Fix short term problems Time spent Fire fighting Performance Gap Time spent in “next generation” projects Pressure to invest in longer term opportunities DELAY Growth projects available

21. Common expectations Average Performance Anticipated performance Change Historical performance Time

22. The reality of “worse before better” Average Performance Anticipated performance The Reality Historical performance Time

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

24. 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

25. The Problem of Mental Models

26. Mental models & the evolution of knowledge: • The Era of Ferment: • A premium on flexible competence: deep integration across functions and boundaries • Dominant design established -- enables… • An Era of Incremental innovation • Allows the fragmentation of knowledge • Component knowledge -- knowledge about the pieces • Architectural knowledge -- knowledge about the relationship between the pieces -- about “what everybody else knows”

27. Architectural knowledge becomes embedded in mental models... • Information channels • “If I have a question about customer needs I can always call Fred..” • Communication filters • “The only thing I need to worry about in this report is Section 8..” • Problem solving strategies • “The easiest way to increase speed while reducing noise is to...”

28. And in the Deep Structure of the Organization Leadership Formal Structure/Process Incentives/Political Structure Culture/Mental Models

29. Where it is a source of STRENGTH! • It allows the organization to get things done! • Minimizes “meeting time” • Allows for clear responsibilities • And quick response • Embedded architectural knowledge is a key organizational competence

30. And of weakness: • Problems in recognition: • Denial • Problems in response: • Panic • Overload & the recreation of old solutions

31. The Organizational Challenge: Successful growth unites entrepreneurial insight with effective coordination Entrepreneurial Drive, Freedom from the “old ways” Startups B as U Control & Coordination

32. In summary: • “I see”, he said, “you’re suggesting that we invest millions of dollars in a market that may or may not exist but that is certainly smaller than our existing market, to develop a product that customers may or may not want, using a business model that will almost certainly give us lower margins than our existing product lines. You’re warning us that we’ll run into serious organizational problems as we make this investment, and our current business is screaming for resources. Tell me again just why we should make this investment?” - Divisional Manager, Telecommunications Equipment Provider

33. What can be done?

34. Make sure you’ve fixed (or are at least aware of)the strategic problem

35. What can be done? • Lead: • Build the “ambidextrous” senior team: communicate the strategy, allocate resources • Structure: • Explore transitional and intermediate forms • Incent: • Explain “just what’s in this for me?” • Build: • Lay the foundations for a new culture, new expectations

36. What can be done? • Lead: • Develop a clear strategy • Generate energy • Build an “ambidextrous” senior team • Make decisions

37. Develop a clear strategy How will we Create value? How will we Capture value? How will we Deliver value?

38. 100% 80% 60% 40% 20% 0% 1 2 3 4 5 6 And allocate resources to it! How will we Create value? How will we Capture value? How will we Deliver value?

39. Generate Energy • Position the discontinuity as an urgent threat: • Flirt with bankruptcy • Make vivid the idea that the firm might flirt with bankruptcy • Position the discontinuity as an opportunity • Generate some small successes: build enthusiasm and “infect” the organization • Leap boldly into the future

40. Build an Ambidextrous Senior Team • Ambidextrous senior teams must manage • both more mature, operationally focused businesses • and higher growth, emerging businesses • High performing senior teams show: • High conflict, high respect decision making capabilities • High levels of trust and truth telling • The ability to manage divergent incentive systems and career paths • Coupled with processes that support the divergent management of quite different business units • E.g. Resource allocation processes that allow for different time horizons, milestones, rates of return

41. Make Decisions 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

42. What can be done? • Lead: • Structure: • Implement appropriately • Choose the right people • Manage linkages

43. Balance entrepreneurial energy and coordination Successful disruptive innovation unites entrepreneurial insight with effective coordination Entrepreneurial Energy Startups B as U Control & Coordination

44. Choose a structure that fits the firm’s strategic positioning and skills Entrepreneurial Energy Acquire/ Partner Joint venture/ alliance Internal venture Build inside existing unit Control & Coordination

45. Manage it using every lever that you have Entrepreneurial Drive, Freedom from the “old ways” Acquire/ Partner ? Joint venture/ alliance Internal venture Build inside existing unit Build inside existing units Control & Coordination

46. Exercise:Best Practice in Building Growth • Choose one of the alternative organizational forms with which you have some experience: • Building growth inside an existing unit • Separate division • Spin off • Joint venture • Acquisition • In retrospect, what are the critical factors that needed to be in place to make it successful?

47. Acquisitions: Pros and Cons • Pros • Brings in a new culture with an established set of skills – a “sure bet”? • Cons • Is the market efficient? – Will the shareholders of the acquired firm capture all the value? • Should you worry about the winner’s curse? Will you pay too much? • Once acquired, will the new firm simply be assimilated into the existing firm?

48. The “Winner’s Curse” may mean that you pay too much No. of firms “Winner’s” valuation “True” value Perceived value

49. Once acquired, acquisitions must be managed Entrepreneurial Drive, Freedom from the “old ways” Buy an Innovative firm ? Assimilate it ? Control & Coordination

50. Startup Startup Asset Asset Supplier Supplier The Promise of Open Innovation