The Strategic Management of Organizational Competence

Course Outline: First Day: Second 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 4 85

One of three key questions... How will we Create value? How will we Deliver value? How will we Capture value? 9 3 3

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

Making Research Real: Moving Beyond Teams Insights from the Pharmaceutical Industry 1

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 2

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

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”? 6

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

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...

And the organization of research thus tends to oscillate between two models: 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

The ideal organization offers the best of all worlds: Geographic focus Customer focus Functional This is one of the oldest ideas in management: that there is a tradeoff between “specialization” and “integration” -- an organization cannot have in depth functional knowledge at the same time that it has in depth product knowledge -- (I think of the above as mapping the focus of attention of the firm) -- The “easy” solution is to put in place either teams or the matrix organization. But notice that nothing is for free. Teams will increase coordination, the matrix form will surface conflicts, but choosing to be in an intermediate position will shift the organizations attention. In the worst case, knowledge about one dimension will degrade as key individuals spend all their time on teams. (This seems to have happened to Chrysler, which moved aggressively to adopt a team structure, initially got huge benefits because it was exploiting a strong functional base but which is now experience serious quality problems as functional skills degrade.) 5

Attempting to do both creates intense pressures inside the organization... Matrix? Focus on disciplinary or functional excellence Teams? Organizational Energy This is one of the oldest ideas in management: that there is a tradeoff between “specialization” and “integration” -- an organization cannot have in depth functional knowledge at the same time that it has in depth product knowledge -- (I think of the above as mapping the focus of attention of the firm) -- The “easy” solution is to put in place either teams or the matrix organization. But notice that nothing is for free. Teams will increase coordination, the matrix form will surface conflicts, but choosing to be in an intermediate position will shift the organizations attention. In the worst case, knowledge about one dimension will degrade as key individuals spend all their time on teams. (This seems to have happened to Chrysler, which moved aggressively to adopt a team structure, initially got huge benefits because it was exploiting a strong functional base but which is now experience serious quality problems as functional skills degrade.) Geographic focus Product or Customer focus 17

But there may be a fundamental tradeoff Functional focus Customer focus Geographic This is one of the oldest ideas in management: that there is a tradeoff between “specialization” and “integration” -- an organization cannot have in depth functional knowledge at the same time that it has in depth product knowledge -- (I think of the above as mapping the focus of attention of the firm) -- The “easy” solution is to put in place either teams or the matrix organization. But notice that nothing is for free. Teams will increase coordination, the matrix form will surface conflicts, but choosing to be in an intermediate position will shift the organizations attention. In the worst case, knowledge about one dimension will degrade as key individuals spend all their time on teams. (This seems to have happened to Chrysler, which moved aggressively to adopt a team structure, initially got huge benefits because it was exploiting a strong functional base but which is now experience serious quality problems as functional skills degrade.) 5

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 This is one of the oldest ideas in management: that there is a tradeoff between “specialization” and “integration” -- an organization cannot have in depth functional knowledge at the same time that it has in depth product knowledge -- (I think of the above as mapping the focus of attention of the firm) -- The “easy” solution is to put in place either teams or the matrix organization. But notice that nothing is for free. Teams will increase coordination, the matrix form will surface conflicts, but choosing to be in an intermediate position will shift the organizations attention. In the worst case, knowledge about one dimension will degrade as key individuals spend all their time on teams. (This seems to have happened to Chrysler, which moved aggressively to adopt a team structure, initially got huge benefits because it was exploiting a strong functional base but which is now experience serious quality problems as functional skills degrade.) Product/Customer focus Geographic focus 5

Change is thus both critical often and wrenchingly difficult Functional or Disciplinary focus Chaos is to be expected This is one of the oldest ideas in management: that there is a tradeoff between “specialization” and “integration” -- an organization cannot have in depth functional knowledge at the same time that it has in depth product knowledge -- (I think of the above as mapping the focus of attention of the firm) -- The “easy” solution is to put in place either teams or the matrix organization. But notice that nothing is for free. Teams will increase coordination, the matrix form will surface conflicts, but choosing to be in an intermediate position will shift the organizations attention. In the worst case, knowledge about one dimension will degrade as key individuals spend all their time on teams. (This seems to have happened to Chrysler, which moved aggressively to adopt a team structure, initially got huge benefits because it was exploiting a strong functional base but which is now experience serious quality problems as functional skills degrade.) Geographic focus 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 29 29

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

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

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

Leading: Communicate the vision Performance Time 30 30

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

Leading: Allocate resources for new transitions Average Performance Time 20

Structuring: Continually reorganize? Functional focus This is one of the oldest ideas in management: that there is a tradeoff between “specialization” and “integration” -- an organization cannot have in depth functional knowledge at the same time that it has in depth product knowledge -- (I think of the above as mapping the focus of attention of the firm) -- The “easy” solution is to put in place either teams or the matrix organization. But notice that nothing is for free. Teams will increase coordination, the matrix form will surface conflicts, but choosing to be in an intermediate position will shift the organizations attention. In the worst case, knowledge about one dimension will degrade as key individuals spend all their time on teams. (This seems to have happened to Chrysler, which moved aggressively to adopt a team structure, initially got huge benefits because it was exploiting a strong functional base but which is now experience serious quality problems as functional skills degrade.) Market focus

Structuring: Create intermediate structures For example: Heavy weight teams Matrix management Centers of excellence Front/back organizations Other... Functional focus ? This is one of the oldest ideas in management: that there is a tradeoff between “specialization” and “integration” -- an organization cannot have in depth functional knowledge at the same time that it has in depth product knowledge -- (I think of the above as mapping the focus of attention of the firm) -- The “easy” solution is to put in place either teams or the matrix organization. But notice that nothing is for free. Teams will increase coordination, the matrix form will surface conflicts, but choosing to be in an intermediate position will shift the organizations attention. In the worst case, knowledge about one dimension will degrade as key individuals spend all their time on teams. (This seems to have happened to Chrysler, which moved aggressively to adopt a team structure, initially got huge benefits because it was exploiting a strong functional base but which is now experience serious quality problems as functional skills degrade.) Geographic focus Product focus 35 52 52 36

Alternative project team structures Functional structure Lightweight team Market Concept Heavyweight team Autonomous, “tiger” team Market Concept Market Concept Source: Kim Clark and Steven Wheelwright Revolutionizing New Product Development 36 37 53 53

Different team structures represent different tradeoffs “Light weight” teams Functional focus “Heavy weight” teams “Tiger” teams This is one of the oldest ideas in management: that there is a tradeoff between “specialization” and “integration” -- an organization cannot have in depth functional knowledge at the same time that it has in depth product knowledge -- (I think of the above as mapping the focus of attention of the firm) -- The “easy” solution is to put in place either teams or the matrix organization. But notice that nothing is for free. Teams will increase coordination, the matrix form will surface conflicts, but choosing to be in an intermediate position will shift the organizations attention. In the worst case, knowledge about one dimension will degrade as key individuals spend all their time on teams. (This seems to have happened to Chrysler, which moved aggressively to adopt a team structure, initially got huge benefits because it was exploiting a strong functional base but which is now experience serious quality problems as functional skills degrade.) Product/ Customer focus 37 54 54 38

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 38 31 55 55 39

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? 39 36 56 56 40

Changing Organizational Structure: Centers of Excellence and 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 This is one of the oldest ideas in management: that there is a tradeoff between “specialization” and “integration” -- an organization cannot have in depth functional knowledge at the same time that it has in depth product knowledge -- (I think of the above as mapping the focus of attention of the firm) -- The “easy” solution is to put in place either teams or the matrix organization. But notice that nothing is for free. Teams will increase coordination, the matrix form will surface conflicts, but choosing to be in an intermediate position will shift the organizations attention. In the worst case, knowledge about one dimension will degrade as key individuals spend all their time on teams. (This seems to have happened to Chrysler, which moved aggressively to adopt a team structure, initially got huge benefits because it was exploiting a strong functional base but which is now experience serious quality problems as functional skills degrade.) Geographic focus Product focus 39 41 58 58 42

The Matrix Organization Function 1 Function 2 Function 3

Matrix Organizations Strengths Weaknesses 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 43 44 60 60

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

Centers of Excellence Function 1 Function 2 Function 3

Centers of Excellence Strengths Weaknesses 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 42 43 59 59

Changing Organizational Structure: The Front/Back Organization: Strengths Weaknesses 44 45 61 61

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 45 21 62 62 46

Incentives, Culture and Mental Models Understand the Time Constant Leadership Formal Structure/Process Incentives/Political Structure Culture/Mental Models 46 48

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

What can be done? Leading: Structuring: Incenting: Building: 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

Managing Disruptive Innovation

Disruptions create problems for established firms Performance Maturity Disruption Takeoff Ferment Time 6 17

Disruptions often challenge existing organizations severely

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

Outline Why disruptions are so difficult What can be done 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

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

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

Competencies evolve over time, creating “competency traps” Performance Maturity Disruption Takeoff Ferment Time 6 17

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 18 18

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

The Problem of Mental Models

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” 10 14 14

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...” 12 17 17

And in the Deep Structure of the Organization Leadership Formal Structure/Process Incentives/Political Structure Culture/Mental Models 18 18

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 14 19 19

And of weakness: Problems in recognition: Problems in response: Denial Panic Overload & the recreation of old solutions or Destruction of existing architectural knowledge drastically reduces performance: “I pulled on the levers and nothing happened.” 16 20 20

What can be done?

What can be done? Leading: Building the “ambidextrous” senior team: 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 29 29

Managing Discontinuities: The Role of Leadership & the Senior Team

Communicating a Vision Performance Time 30 30

Managing the Dynamics of Overload Average Value-Added Time on Engineering Tasks 100% 80% 60% 40% 20% 0% 1 2 3 4 5 6 Number of Projects per Engineer Source: IBM Development Efficiency Study

Building the 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 Ability to manage divergent incentive systems and career paths Coupled with processes that support the divergent management of quite different business units Resource allocation processes that allow for different time horizons, milestones, rates of return

Managing Discontinuous Change: Choosing an Appropriate Organizational Structure

There are a Variety of Approaches Parent resource commitment Out-licensing More External funds US Foods Co. Lost ideas Xerox - 3COM, Adobe Less Euro Telecom Incubators Entrepreneurs and professional Xerox XTV venture capital Internal Lucent Tritec External ideas Nortel ideas US Drinks Shell Co. Joint ventures P&G Internal ventures Corporate venture capital Roche - Protodigm Xilinx Ventures Dow Chemical Prudential - egg Siemens SVC Emerson SIP 3M Intel Capital Nokia NVO JJDC Internal funds

Choice between them is constrained by a key tension: Entrepreneurial Drive, Freedom from the “old ways” Successful disruptive innovation unites entrepreneurial insight with effective coordination Control & Coordination

What drives this tension? (1) Finding entrepreneurial drive Freedom from the “old ways” ? Business As usual Control & Coordination

Finding entrepreneurial drive in the established firm Existing modes of behaving are very powerful: The problem of embedded architectural knowledge Change threatens established competencies, comfort for long tenured individuals Internal incentives may not be very “high powered” – while individuals at new entrants may see very considerable upside to their efforts

What drives this tension? (2) Managing Coordination Entrepreneurial Drive, Freedom from the “old ways” Acquire/ Partner ? Control & Coordination

Why is it hard to coordinate across firm boundaries? The interests of your partners may not be your own If lawyers were free, and contracts could be perfectly written and costlessly enforced, this would not be a problem: one could write contracts to enforce alignment But perfect contracts cannot be written, and enforcement is very costly Trust may be a solution

Why may your partner’s interests not be your own? Your partner’s interests may not be your own if: Your partner needs to make investments that are only useful if you work with them You need to make investments that are only useful if you work with your partner Partner Product Firm

Such “specific” investments increase the risk of “hold up” Partner Product Firm Partner threat: “Now that you’ve made that investment -- let’s renegotiate...” Firm threat: “We’ll pay you what you can get elsewhere” A potential lack of coordination!

Choosing a structure thus implies choosing problems Entrepreneurial Drive, Freedom from the “old ways” ? Acquire Joint venture/ alliance Internal venture Build inside existing unit Build inside existing units Control & Coordination

Using Temporary Internal Structures: Best Practice A great team leader Appropriate staffing Clearly defined goals for the team, coupled to well defined milestones & criteria for success Communication, trust between the team leader and the leaders of the current business Incentive structures that support the success of the team within the existing business A culture that supports innovation

Range of Possible Team Models Functional Organization Lightweight/Matrix Project Team Degree of Team Market Functional Leader Influence Manager Product Concept ENGINEERING MFG MKG Team ENGINEERING MFG MKG Leader Some coordination across functions. Program Manager acts as project coordinator and as liaison to functional managers, who are the key decision makers. Work occurs within each function. Cross-functional coordination by superiors. Heavyweight Project Team Autonomous Project Team Degree of Team Market Leader Influence Degree of Team ENGINEERING MFG MKG Leader Influence Market Product Concept Team ENGINEERING MFG MKG Product Concept Leader Team Leader True cross-functional team. Decision-making authority within team. Team members still have functional home, but report to Program Manager on project activities. Individuals are reallocated from functional group and formally assigned to team. Program Manager has full control over resources. Adapted from Wheelwright and Clark, Revolutionizing Product Development

A computer storage manufacturer experimented with a cross functional team approach to learn about a new business model Service Sales Products Storage End-user Service Partners Marketing Sales Professional Services Customer Service Traditional End User Traditional End-user Customer of xSP “Learning Lab” xSP Customer New business group experiment Service Products Storage End-user xSP Product Sell to Sell with/through Business Support Services Service Partners Marketing Sales Professional Services Customer Service Traditional End User

Using Temporary Internal Structures: Pros and Cons Maximizes corporate control, Minimizes necessary coordination with external parties Encourages a culture that can incorporate any type of innovation Provides some freedom from current organizational constraints But plays a role in transformation of the current business Cons: Requires significant cultural change – which is difficult to do Hard to measure success Is ever-evolving – needs constant management

Internal ventures can take many forms Entrepreneurial Drive, Freedom from the “old ways” Spinouts “Pseudo” Venture capital Internal ventures Control & Coordination

Quantum’s Plus Development Co Quantum’s Plus Development Co. was a spin out that transformed the company when reacquired $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 1984: Plus launched as internal venture, 80% owned by Quantum 1988: Plus spun back in to Quantum Quantum Corp. Revenues ($ Millions) 1984 1986 1988 1990 1992 1994 1996 1982 The story of Quantum and Plus: Henry Chesbrough’s has personal experience in structuring and managing this spin-off subsidiary company in the hard disk drive industry. Quantum Corporation, circa 1984: $ 100 M OEM supplier of 8” and 5.25” drives engineer to engineer, direct sales force targeting minicomputer and workstation market Engineers saw opportunity for “disk on a card” to plug into IBM PC slot with a 3.5” drive mounted sideways Opportunity for enormous volume in emerging PC market but different customers, different channels, different business model Plus’ initial charter: Develop a new, end-user business for Quantum utilize retailers and distributors to resell disk drives employ advertising and PR to build awareness, interest, and brand service and support from factory to end customer different gross margin structure much more software design for ease of installation, ease of use, low support costs Access world-class, high volume manufacturing capability to pursue end user business 80% equity held by Quantum 20% held by Plus employees Plus’ venture success Created new end user storage business, Hardcard Established 70% market share Reached almost $ 100M revenue within two years market introduction Achieved 40% gross margins! Established manufacturing relationship with MKE from VCRs to digital electronics products Developed new business processes and capabilities fast ramp, high yield, high quality business teams Plus’ capabilities transformed Quantum’s ability to design and manufacture HDDs Quantum Corp., 1984-88: $100m, OEM hard disk drive supplier Plus launched to exploit huge opportunity to sell “disk on a card” to emerging PC market Plus develops 70% market share, 40% margin, $100m revenue in 2 yrs. Plus develops new business processes and improved production capabilities Quantum Corp., post-1988: Plus’ processes and capabilities transform Quantum’s design and manufacturing Quantum averages over 45% revenue growth per annum from 1988 to 1996 Source: Prof. Henry Chesbrough, Harvard Business School

All forms strike a different balance between incentives and control External Venture/ Acquisition Equity JV/ Alliance Spin out Pseudo Venture Capital Internal venture Internal division inside $, expertise outside $, expertise high low incentives low Coordination, control high

Internal Ventures: Best practice Clearly defined mission, goals coupled to well defined milestones and criteria Appropriate staffing Senior management “buffering” from the rest of the organization Careful management of incentives, both within the new venture and with respect to the rest of the organization Tolerance for (some) failure Flexibility and resilience

Internal Ventures: Common problems Team A vs. Team B: rejection of businesses that are “too close” to existing strategic mission New venture is not really new: old behavioral problems are transferred to the new entity New venture is not coordinated with existing business and existing resources are not made available High risk and low incentives for internal corporate promotion Lack of managerial commitment when signs of success begin to appear. Are often (prematurely?) disbanded

“Pseudo” venture capital: Best practice Appropriate choice of venture personnel Clearly defined governance structure that mimics venture capital – separation from parent corporation, opportunity to bring in external capital Well defined time horizon, milestones, expectations Mechanisms in place to provide benefit to the parent corporation if appropriate Incentive structures that balance giving high powered incentives to venture members with the needs of the parent corporations A culture that supports the use of VC in the context of the current organization

“Pseudo” venture capital: Pros and Cons Provides high powered motivation, clear signal of the need to “do something different” Cons How can one benefit the corporation and yet stay true to the “venture model”? Paying a “fair” price creates issues of internal equity Paying less than a “fair” price betrays the model Very mixed track record. At Xerox, Intel, Exxon programs generally judged to be failures. External venture capital makes money but has little impact on the strategic mission of the firm

Alliances and Joint Ventures: Best Practice Bring together partners with related skills to focus on a common goal Provide JV with clear strategic goals and milestones Build “best of both worlds” culture and approach Develop trust over time to mitigate problems of “hold up”

Alliances and Joint Ventures: Pros and Cons Best of both worlds – real entrepreneurial drive with close coordination Cons Often no clear framework of task at hand or goals Uneven levels of commitment and resources Information asymmetries and lack of information sharing Benefits are often not equally shared Issues of scope and milestones are often not adequately addressed Partner trust and employee loyalties are difficult to manage Corporate politics can affect partners differently Often overestimate partner capabilities

Acquisitions: Best Practice Pay the “right” price: Invest in superior information Create value through combination Manage the acquisition Create the right expectations Nurture the new culture (and people!) Manage the interfaces with the existing organization

Acquisitions: Pros and Cons 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?

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

Once acquired, acquisitions must be managed Entrepreneurial Drive, Freedom from the “old ways” Buy an Innovative firm ? Assimilate it ? Control & Coordination 18 18

Summary

Disruptions Create Problems for Established Firms Performance Maturity Disruption Takeoff Ferment Time 6 17

Crafting a solution requires careful thought and committed leadership Entrepreneurial Drive, Freedom from the “old ways” ? Acquire Joint venture/ alliance Internal venture Build inside existing unit Build inside existing units Control & Coordination

Exercise: This solution works best when: Transform the firm Work with third parties Create a separate group

Summary: Managing disruption requires both vision and organizational sophistication Performance Transform the entire organization? Build an ambidextrous Outsource? Effort 9 15 15