Managing Change and Adaptation MIIC May Prof. Morten Hansen

Disruptive, turbulent worlds 1)Major events and trends in industry out of a company’s control - deregulation, regulatory changes, disruptive technologies, new business models, new consumer tastes, price wars, disasters etc. 2)Significant parts of events unpredictable 3)Impact of events happens relatively quickly 4)Impact of events can really hurt a company in the industry => A world you cannot control and that can doom you

Research: Prevail and thrive in a disruptive world Starting point: all 20,000+ IPOs in U.S. since 1971 At least TRS of 4x stock market in 15 years Turbulent industry 7 companies, matched with a comparison Research in progress. By Morten Hansen and James Collins.

Turbulent industries Airlines Medical devices & implants Biotech Personal computers Semiconductors Auto insurance

8 company pairs: $1 invested in 1972 would yield $746 ($45 for comparisons, $30 for market)

What explains the difference?

Innovation? Cumulative No. Patents

Intel: often late and not best YearIntel introductionCompetitionComment DRAM. Became industry standard and largest selling semiconductor component in the world “Intel wasn’t first with its 1,000-bit chip.” “Advanced Memory Systems (AMS) had started delivery of a similar chip a few months earlier in 1970.” Fortune Nov Established standard through Honeywell. Not success because of technical prowess. “Intel counts on beating T.I. at volume production.” (Fortune nov 1973). Not the best memory chip first 4-bit micro-processor Intel made its 4K chip compatible with TI’s. TI’s seen as more technologically advanced (Fortune, nov 1973). Not the best chip bit for computing Motorola Zilog Z-80 better technicallyNot the best chip , 16-bit Stop gap design. Software for 8080 worked for Texas Instrument first, Motorola better. Thanks to Operation Crush Intel’s microprocessor, acknowledged even by its own engineers as technically inferior to the competition, became the industry standard. Key moment. Intel won through sheer marketing aggression. Intel launched “operation crush” to out-sell the others, and succeeded. This set the stage for IBM selecting the Not the best chip , low-cost Stripped down version of 8086 Stripped down version of “the 8088 wasn’t necessarily the best part out there, but it worked and we could deliver it in quantity.” (David House, Intel, Forbes 16 april 1990). IBM picks this for their pc, and thus the natural monopoly emerged , backward compatible with 8088 Mr. Goldman of Motorla about Intel chips (286 or 8088?): “they will remain strong. Not because the product is good—the product stinks—but because they have a good customer who has made it a standard.” , latecomer to 32- bit market 1 ½ -2 years behind Motorola + Ntl semiconductors. “Intel…is a latecomer to the 32-bit market, following one and a half to two years behind the current leaders, Motorola Inc. and National Semiconductor.” (NYT Oct ). 1 ½ years late! “Intel’s dominance results largely from one fact: IBM ….picked Intel’s 16-bit chip…” (BW Oct ). Intel decides not to 2nd source to anyone, thus grabbing the whole market.

Findings “Dogs that did not bark” Not innovation Not radical change Not luck per se Findings Turbulence an amplifier 20-mile march

Average Growth Company A25% Company B48% Net Income Growth Comparison

Average Growth Company A25% Company B48% Standard Deviation of Growth Company A 7 percentage points Company B323 percentage points Net Income Growth Comparison

Average Growth Company A25% Company B48% Standard Deviation of Growth Company A 7 percentage points Company B323 percentage points Range of Growth Rates Company A -- High44% Company A -- Low20% Company B -- High1288% Company B-- Low-397% Net Income Growth Comparison

Findings “Dogs that did not bark” Not innovation Not radical change Not luck per se Findings Turbulence an amplifier 20-mile march Strategic consistency

Southwest has nearly same business model now as in Remain short-haul, under 2hrs. 2.Utilize 737 for 10 to 12 years. 3.High aircraft utilization (min 10 hrs) and quick turns of 10 min. 4.Passengers, not air freight or mail. 5.Low fares and high frequency. 6.Stay out of food service. 7.No interlining. 8.Retain Texas as priority and only go interstate if high-density short haul markets are available. 9.Keep family and fun atmosphere. 10.Keep it simple. Cash-register tickets, no seat selection, etc. Source: Putnam, CEO, 1979 Herb Kelleher CE Howard Putnam CEO SW ’ s strategy in 1979

Which led to long-term superior growth

Findings “Dogs that did not bark” Not innovation Not radical change Not luck per se Findings Turbulence an amplifier 20-mile march Strategic consistency Conservative financially & discipline Strategy as experiential (vs. analytical) “Not nice” leadership: brute, demanding, no excuse