TUM: Strategic Management of Innovation

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TUM Strategic Management of Innovation

• Day 2 9.00-16.00

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Day 1

• Strategy as Internal and External perspective
• Innovation as (creation of) knowledge platform
  fits better the Internal, Learning Perpsetive
• Path dependency, Asset Legacy
• Review of Watch Industry, GM and Seafax to
  highlight the dilemma of old vs new

3
Strategy and Innovation

• Part I, Day 2
• Kodak, Polaroid
• Industry, Sector Evolution and Inertia
• Part II, Day 2
• Core Rigidities and Competencies
• Firm Inertia
• Gunfire at Sea
• Part III, Day 2
• Ab und Aufbauen or
• Reinventing the Firms strategy

4
Inertia as a Industry-wide Innovation Challenge

• Market, Industry
• Value Chain
• Ecology
• what is firm competitive arena

5
Technological Substitution
Digital
35MM
6
From 35MM to Digital Cameras
Digital with FLASH CARD
35MM with FILM
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Paradigm

• 35MM

• Digital

8
Key Players, Value Chain

• Players
• Kodak, Canon, Minolta, Fuji, Agfa-Gevaert, Sony,
  Zeiss Ikon, Polaroid (bankrupt in 2002), Casio
• Value Chain
• (1) Housing, (2)Shutter mechanism, (3) Optics,
  (4) Flash and Power source, (5) Development, (6)
  Printing, (7) Wholesale and (8) Retail

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Evolution in this ecology

• ! 80-85.2 86-90.3 91-95.. 4 96-03
• Photography Group
• Adjacent Groups (Computer HW and SW)
• Development Infrastructure

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Evolution of Photography
86-90
91-95
96-2003
80-85
PC Revolution Internet and Email limited
to Universities Photo CD with CD Player 1.
Complementary technologies And 2. Firms with NE
Strategies, hugging Aging Paradigms
Polaroid Bankrupt Price-adjusted Quality
full Match Digital sales Exceeds
Conventional Sales
35MM Cameras And Early DI (Sony MAVICA No
Substitution Paradigm and its Trajectory Very
Obvious
Counter Innovations APS Convergence In
Full Swing
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Paradigm

• 35MM
• Complements are development, paper
• 50Mn plus pixels
• Limited duplication, transmission
• Analog
• Hard, Real
• Key Players Kodak, Agfa, Fuji, also Canon
• Companion Paradigms Film and film reels, Movie
  Production, Projection

• Digital
• Complements are PC, WWW, Email
• Number of pixels growing
• Duplication
• Digital
• Soft, Virtual
• Key Players Canon, Sony, Minolta, and perhaps
  Kodak
• Companion Paradigms Editing, Visual arts, Movie
  Production

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Key photography elements of product/service/delive
ry
Relative Value
Digital
Immediate Viewing
Image Sharing
Price
Resolution
Features
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Photographic Process Digital vs. Film Paradigm
Traditional Film Image Lifecycle
Slide
Album
Camera
Slides
Consumer
Image
Re
-
purchase
Developing
Prints
Taken
Cycle
Film
Negatives
Photo
Album
Frequent re
-
purchases

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Imaging / Photography Value Chain
Imaging Equipment
Imaging Media
Imaging Transfer
Imaging Storage
Imaging Display
Traditional Industry Players

• Canon
• Nikon
• Kodak
• Olympus
• Minolta
• Polaroid

• Kodak film
• Fuji film
• Agfa film

• Kodak Paper
• Fuji Paper

• Various Album Manufacturers

• Kodak Chemicals

Imaging Equipment
Imaging Media
Imaging Transfer
Imaging Storage
Imaging Display
Digital Industry New Players

• Microsoft Software
• Adobe Software
• Kodak Software
• Dell Software
• H-P Printers / Ink
• Epson Printers / Ink
• Lexmark Printers / Ink

• Ofoto online
• H-P paper
• CVS.com
• AH.com
• CD-ROMs

• SanDisk
• Sony
• Intel
• Toshiba

• PC Manufacturers
• Mobile Phones
• Palm Pilots / PDAs

• Sony
• H-P

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Cameras

• Old versus New Paradigm
• Razor Blade
• Polaroid Dead and Kodak out of the Dow (DJIA)
• Movie Theaters and Hollywood next?
• Film, Paper and Album replaced by Digital
• ..and WWW and Email
• What is Next ?

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Kodak Options

• Majority of Kodaks revenues come from sales of
  films not 35MM cameras, and digital cameras do
  not use any film. How difficult for Kodak to give
  up its cash cow product.
• The economics of traditional photography are much
  more attractive for 35MM producers than those of
  digital. A constraint on Kodak?
• Finally, given that Kodak supports a vast
  organization on the basis of film sales, and that
  digital wont yield profits for some time to
  come, how will this 35MM competency will be
  supported in lieu of film sales.

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Patents, Strategic Alliances, Joint Ventures..
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Kodaks Response to Digital Disruption

• Approached digital photography as a threat to its
  core business
• Saw cannibalization of existing film-based
  business
• Focused on current consumer behavior vs. emergent
  technologies (Paradigm Hugging)
• Focused on traditional film competitors (e.g.
  Fuji)

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Kodaks Response to Digital Disruption

• Before December 2001
• Kodaks organization was organized by end-user
  market
• The work of digital champions had to be divided
  among the various segments rather than as a
  unified strategy
• Besides having the difficulty of charging one
  group with the responsibility to develop Kodaks
  digital strategy, simple funding for RD efforts
  would be divided among the existing segments
• Given this structure, digital imaging was a
  threat to the established paradigm and its
  owners

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Kodaks Prospects

• Kodak is not the leader it once was its core
  competencies in paper and film have become core
  rigidities
• The photography market is likely to be much more
  fragmented
• As we will see on June 13, we need a dedicated
  integrated business unit for new paradigm to
  overcome core rigidities

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From Industry Inertia to Firm Inertia

• How do firms become trapped in their learning
  curve
• Core competencies and core rigidities

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So far lessons

• 1. Death of Dominant Design
• Firm versus its environment
• Innovations
• Inertia and Paradigm Huggers
• 2. Unlocking the Firm or Industry from Old
  Paradigm
• Photography Industry

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Strategy and Innovation

• Part I, Day 2
• Kodak, Polaroid
• Industry, Sector Evolution and Inertia
• Part II, Day 2
• Core Rigidities and Competencies
• Firm Inertia
• Gunfire at Sea
• Part III, Day 2
• Ab und Aufbauen or
• Reinventing the Firms strategy

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Overcoming Inertia

• Gunfire at sea firm-specific obstacles for
  shedding the old S curve
• Steps towards a new paradigm

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Established firms and Innovation

• Firms are locked into a dominant design
• Its departments, career paths, customer base and
  suppliers share in the dominant design that has
  become the standard
• Dilemma of being entrapped by tangible and
  intangible, mindsets and values, whose platform
  you need to move on.

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Core Competencies

• Knowledge
• human capital
• social capital
• technical systems
• Managerial systems
• knowledge creation and recycling
• Culture (norms and values)

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Core Rigidities (as distinct from core
competencies)

• Competency Traps
• NE Strategy
• Disruptive Technology
• Forgetting Difficulties
• Old skills get in the way (Cobol vs C)
• Learning Mandarin while you speak already
  Cantonese
• Competencies to create New Competencies
• Dynamic capabilities

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Strategy and Innovation

• Part I, Day 2
• Kodak, Polaroid
• Industry, Sector Evolution and Inertia
• Part II, Day 2
• Core Rigidities and Competencies
• Firm Inertia
• Gunfire at Sea
• Part III, Day 2
• Ab und Aufbauen or
• Reinventing the Firms strategy

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U.S Navy and Continuous Firing
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Gunfire at Sea

• What is meant by They are holding the horses?
  Why gunnery as case study?
• What is that gunnery innovation?
• What was Sims motivation? How did this
  motivation differ from Scotts
• Why did the Navy resist Sims efforts? Identify
  some core rigidities.
• What remedies?

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What is here the Innovation

• Old Paradigm
• Close proximity
• Poor hit rate
• Risk of black eye

• New Paradigm
• Telescope mounted on sleeve such that it could
  move
• Gear ratio
• 3000 Improvement

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Gunfire at Seatake-away

• Innovation not due to RD but creative use of
  existing technology
• Continuous aim gunfire due to a chance event and
  a driven person who was maverick, prepared to
  break rules
• Tyranny of past success entraps the organization
  (core rigidities)
• Resistance to change is society-wide
• Role of leadership in unlocking system

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Strategy and Innovation

• Part I, Day 2
• Kodak, Polaroid
• Industry, Sector Evolution and Inertia
• Part II, Day 2
• Core Rigidities and Competencies
• Firm Inertia
• Gunfire at Sea
• Part III, Day 2
• Ab und Aufbauen or
• Reinventing the Firms strategy

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Basic Templates of Organization Design

• Templates, Structure, Governance, Form
• Functional and Divisional

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Two Templates
Business
Function
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Organization Structure

• Functional (F-form) is attractive
• ease of supervision
• maximum specialization in occupational skills
• But, has drawbacks
• conflict prone
• free ridership
• performance responsibility difficult to define
• do not produce general manager

• Divisional (M-form) is attractive
• simplifies coordination
• creates client responsiveness
• accountability of performance
• do-ers decide
• But has also drawbacks
• duplication of effort
• creates superficial skills
• competition between business units

Note Newer Types such as Matrix, Corrupted
Divisional and Network
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Functional
Divisional
CEO
CEO
NewCars
Service
UsedCars
Sales
Service
Finance
Corrupted Divisional
Matrix
CEO
CEO
Service
Finance
Service
Sales
NewCars
Trucks
UsedCars
NewCars
UsedCars
Network or Spaghetti
Trucks
CEO
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Network Theory two schools of thought

• Structural Equivalence
• social system
• competition and relative deprivation within a
  status-set with the nearest rival compare a
  menage a trois, the laughing third
• physical proximity providing alters for whose
  evaluation affection etc. ego competes
• similarity due to effort to eliminate relative
  deprivation
• Burt adoption to avoid embarrassment, to acquire
  legitimacy

• Cohesion
• dyad
• communication with the primary group and its
  closest confidants, attraction
• social proximity due to physical proximity
  inducing similarity
• Sherif, Schachter, Festinger reduction of
  ambiguity Lazarsfeld voting

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Three Forms of Capitalan MGI Post-script

• Financial Capital ()
• Human Capital (skills, training, experience,
  looks)
• Social Capital (networks, channels, alliances)
• all three contribute to performance and innovation

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A Communications Network
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Why Worry about Networks?

• Access to know-how, contacts, resources
• Unique combinations of network benefits yield
  opportunity
• Network ideas operate within and across
  organizations
• Expand size of radar screen and make you detect
  technological discontinuities, emergent markets,
  new designs.

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Internal Circulation of Knowledge

• Job Rotation
• Boundary-Spanning Roles
• Information Technology(email, intranet)
• Social Networks

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External Circulation of Knowledge

• Strategic alliances
• Equity JVs, licensing, minority participation,
  RD partnerships, etc.
• Consortia

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Network B
Network C
Strategic Network Expansion
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The Social Structure of Competition
Redundant contact
Non-redundant contact
D
Structural Holes Filled by You
YOU
B
C
Structural Holes
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Spider and its Net
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Osama Bin Laden and his network?
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Network of Countries linked by Footballers
Movements
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Complete Network
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Smallness due to Hub in this vast network we
sense our own little world

• WWW
• The Internet
• Airline networks
• Mobile phone networks
• Sexual-contact networks
• Food web

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Smallness due to shortcut

• Social networks
• E.g.) A flight attendant for Air Canada played a
  key role in spreading AIDS among homosexuals who
  were locally isolated in several regions.
• Neural networks

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Random shortcuts

• Often, social contact is not constrained by
  physical distance.
• E.g.) Spam mail, Viral marketing, Internet chat
  room, Internet auction

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The Watts Strogatz Model
No shortcuts
Lots of Shortcuts
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Communication Technologies and Shortcuts
No or few shortcuts
Lots of shortcuts

• Instant messaging

E-mail
Chat room
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Cumulative distributions of market share
difference by Entry Time
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Strategic Implications for Innovation and Change

• Networks with few or no shortcuts
• An entrant with large resources can attempt to
  win the market by offering an incompatible
  paradigm
• Change agents in a firm can seek to break away
  the firm form legacy

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Some other key concepts

• Networking
• Structural Holes
• Network surrounding some individual, an
  entrepreneur like Bill Gates, Ellison, Karl Rove
• Tipping Point

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Why Worry about Networks?

• Access to know-how, contacts, resources,
  serendipity
• Network ideas operate within and across
  organizations
• BAH
• mcc
• Expand size of radar screen

60
Internal Circulation of Knowledge

• Job Rotation
• Boundary-Spanning Roles
• Information Technology(email, intranet)
• Social Networks

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External Circulation of Knowledge

• Strategic alliances
• Equity JVs, licensing, minority participation,
  RD partnerships, etc.
• Consortia

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Connecters make Links

• What endows a a person, a firm with Social
  Capital?
• How do we measure Social Capital?

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Networking

• Person, Firm or Market
• Tipping Point in market (craze, fad, herd,
  bandwagon) due to
• Connectorgt schmoozer, bundler
• Mavengt reservoir or pool of know how to be linked
  
• Salespersongt motivator

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Joint ventures are beneficial, but some are more
beneficial!
Chemical Patents (chemical firms only)
Firms with non-redundant joint ventures
Firms with redundant joint ventures
Networking, based on joint ventures
65
Groups

• What is the New Structure of Oticon?
• Firm drop the Matrix Structure and Adopts a
  Spaghetti Structure
• Do you like what you see?
• Why would that noodle structure fail?

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Internal Newtorks

• Oticon and Foss

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Functional
Divisional
CEO
CEO
NewCars
Service
UsedCars
Sales
Service
Finance
Corrupted Divisional
Matrix
CEO
CEO
Service
Finance
Service
Sales
NewCars
Trucks
UsedCars
NewCars
UsedCars
Network or Spaghetti
Trucks
CEO
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Firm A
Firm B
Internal or External Hybrid
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Oticon

• Manufacturer of hearing aids
• Paradigm shift from behind-the-ear to in-the-ear
  (innovation with a 1 cm travel)
• Oticons miniaturization competencies were
  becoming obsolete, locked in a trap.

70
Discussion Questions READ Oticon

• Oticon Strategy involves a 1 cm journey (moving
  from Out to In-the- Ear hearing aids) by crafting
  the spaghetti design what is that new
  organization?
• Do you like what Kollind, the CEO accomplished?
• Would the spaghetti design work for EPCD?
• Why do you think did Oticon abandon the spaghetti
  structure in 1998 and move back to a matrix
  design?

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Spaghetti Structure at Oticon (1)

• What idea behind this structure?
• Where would this structure work well?
• Where would this structure not work well?
• Firms with strong cost control needs
• Large Firms
• Firms whose employees do not share strategic
  vision

72
Oticon (2) Spaghetti as Structure
JV with Firm B
Subcontractors
Project Teams with Cross Functional Backgrounds
73
Oticon Story

• Spaghetti structure has structural ambiguity
• Knowledge-centers connected by links in
  non-hierarchical way
• Jobs fit the persons
• Free market forces
• New building, no walls
• Paperweight (only two layers), flat project
  organization
• Multi-job (multi projects and skills) with
  knowledge transfer
• Delegation of rights to make decisions

74
Oticon Story

• Balance chaos of skill mixing and coherence of
  projects
• Project organization
• New ICT system (hypertext)
• Physical walls, fixed workplace eliminated
• Corporate values of responsibility and freedom
• Produced effects
• Old ideas returned, new ideas emerged

75
Other Elements of Oticons (6) New Design

• Tasks
• Anything goes
• Informal Arrangements
• Culture (creed, wheeled furniture), chaos
• Networks, job banks
• PP Oversight, PA
• People
• Computer illiterates
• Paradigm huggers and loose canons

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Oticon (7) Organizational Change and Results

Dk is approximately .11
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Demant Hldgs (Oticon Owner)
78
Oticon Story(Post Mortem2) contrasting ways to
produce innovation and profits

• Market versus Hierarchy (or Firm)
• Capitalism vs Socialism
• Transaction versus Coordination Costs
• Haggling, (bargaining) versus Shirking and Free
  Ridership
• Hierarchy dilemma of delegation too much or too
  little empowerment

79
Oticon Story (PostMortem3)

• Co-location of knowledge with decision and income
  rights
• Transparency
• Major AGENCY problem
• Decision rights (begin, ratify implement or track
  projects) and PP (Project and Product)
  Committee
• Get all the elements to fit at same time
• Return to Matrix structure in 1998

80
Oticon Story (PostMortem4)

• Failure of Spaghetti structure
• Mis-Allocation of competencies
• Get rid of promotion ladders
• Get rid of special skills
• Coordination problems
• Knowledge hoarding
• Politicking
• Impossibility of selective intervention by boss

81
Functional
Divisional
CEO
CEO
Corrupted Divisional
Matrix
CEO
CEO
S
1986
Oticon
Network or Spaghetti
CEO
1998
82
Oticon Story(final 1)

• Co-location of knowledge with decision and income
  rights
• Transparency
• Major AGENCY problem
• Decision rights (begin, ratify implement or track
  projects) and PP (Project and Product)
  Committee
• Get all the elements to fit at same time
• Challenge of hierarchy dilemma
• Return to Matrix structure in 1998

83
Oticon Story(final 2)

• Failure of Spaghetti structure
• Allocation of competencies
• Get rid of promotion ladders
• Get rid of special skills
• Coordination problems
• Knowledge hoarding
• Politicking
• Impossibility of selective intervention by boss

84
Selective Intervention and Internal Hybrids
Interpreting and Learning from the Rise and
Decline of the Oticon Spaghetti Organization

• Nicolai J. Foss

85
External Hybrids Internal Hybrids

• Market exchanges infused with elements of
  hierarchical control
• Relative Benefits
• Fewer incentive problems

• Hierarchical forms infused with elements of
  market control
• Relative Benefits
• Fewer layoffs needed

86
The Oticon Spaghetti Organization

• Internal Hybrid introduced to allow radical
  changes
• Only 2 layers left in hierarchy
• Managerial team
• Projects
• Decision rights widely allocated (or so it
  seems!)
• Any individual can start a project and work on as
  many projects as he/she wants (at least 3!)

87
The Oticon Spaghetti Organization (contd)

• New high powered incentives introduced (Stock
  ownership plan)
• Lead to increase in innovatiness
• ? new products introduced
• ? product development time 50 reduced
• Still, the S.O was abandoned after a few years.
  Why???

88
Where did the designers of the S.O. fail?

• Oticon only recognized the benefits of this
  internal hybrid!

89
Costs of Markets Costs of Hierarchy Total Costs
Market
Hierarchy
Spaghetti O.
Matrix O.
JV
90
Potential problems with the S.O.

• Allocating competence
• Elimination of tournaments
• Sacrificing specialization advantages
• Coordination
• Knowledge sharing
• Leadership
• gt All of these may have contributed to the
  failure, but not likely to be the main cause

91
Real Problem

• Selective intervention
• Managerial meddling with delegated rights
• Managers can overrule  selectively  the
  decision to start a project gt loss of motivation
• Present in all hierarchies but especially in very
  flat organizations
• How could this have been avoided?
• Credible commitment to non-interference
• (by being rationally ignorant or making it
  harmful to themselves to intervene)

92
Discussion points (contd)

• Wasnt a spin-off a viable option?
• Was the success caused by the implementation of
  the S.O. or by the  shake-up  it caused?
• Was the S.O. a failure?
• Why wasnt the design adapted instead of
  abandoned?
• Can this ever work?
• Is selective intervention the real reason for
  failure? What about the other problems mentioned?

93
Discussion points (contd)

• Couldnt selective intervention be avoided by
  putting a different system in place to initiate
  or ratificate a project?
• What alternatives were there to get out of the
  competence trap the organization was in?

94
Wrap Up

• Firms want to introduce market like conditions
  within the firm (e.g., incentive compensation,
  and project autonomy) to stir up the innovation
  pot
• Firms often reach out to other firms to combine
  their assets with those of others for
  innovation(e.g. joint venture, outsourcing) yet
  maintain managerial oversight

95
Oticon Postscript and Move into Day 3

• Spaghetti Structure failed
• Matrix was re-instated
• Other possible hybrids?
• Internal Matrix, or Parallel Structures
• External JV
• Ambidexterity the paradox of overcoming inertia
  and joining the new thing

96
TUM Strategic Management of Innovation Day 3

• Ambidexterity
• Three Examples of Internal Structure, Strategy
  and Innovation
• Ely Lilly Matrix
• 3M Intrapreneurs as strategy makers
• Hermes Systems Create New Departments
• Do you like Hermes Entrepreneurial Subsidiaries
• Before the buy-out
• After the buy-out
• Booz Allen
• How to dismantle old structure, cretae new
  networks, to implement innovations
• Prepare in Groups for Day 4

97
Second Day

• Industry and Firm Inertia Kodak, US Navy
• Organization Design and Innovation
  Ambidexterity, Foresight and Hindsight, Oticon