Generating Growth in the Operationally Driven Company Professor Rebecca Henderson MIT Sloan School of Management Phone: (617) ,

Generating Growth: Understand how customer needs will evolve Understand how customer needs will evolve Understand how technologies will evolve Understand how technologies will evolve –(Both your own and those on which you rely) Develop world class products and services that meet customer needs Develop world class products and services that meet customer needs

But: Real growth requires dealing with some tough strategic issues Real growth requires dealing with some tough strategic issues And with even harder organizational problems And with even harder organizational problems What can be done? What can be done?

Growth: A tough strategic problem?

Problems in recognition Growth opportunities do not arrive with labels on them Growth opportunities do not arrive with labels on them Forecasting the future of technology is hard Forecasting the future of technology is hard Forecasting customer needs and market demands is even harder Forecasting customer needs and market demands is even harder Growth opportunities often look less profitable than the current business Growth opportunities often look less profitable than the current business

Real growth often challenges existing capabilities, business models Performance Time Ferment Takeoff Maturity Growth?

The nature of technical work changes Performance Time Will it work? Exploration, fun, creativity key Can we make 100,000? And service them? We need to be responsive & flexible but controlled Will it work? Exploration, fun, creativity key

The marketing challenge evolves Performance Time Who needs this? Do we have any reference customers? Stay close to your customer – really close Who needs this?

Some new technologies sell to niche markets with less demanding requirements Performance Time Established technology Mainstream customer needs Niche customer needs Invasive Technology Clay Christensen: The Innovator’s Dilemma

Now PDAs sell to customers with different needs: Speed, Power, Memory Weight/cost PCs PDAs

But as PDAs improve they may come to challenge PCs ? Speed, Power, Memory Weight/cost PCs PDAs

Or consumer preferences may change ? Speed, Power, Memory Weight/cost PCs PDAs

Managing the change in customer needs may be a critical task Performance Effort Leading edge customer focused research may be a critical capability And many firms are not organized to execute upon it

A major materials supplier: The Problem $100m Biomaterials work SBU 3 SBU 2 SBU 1 Market ? CR&D ?

The ways in which a firm captures value also evolve dramatically Performance Time Speed, IP Differentiation, Frontier performance key We can sell it, make it, service it, ship it Most of the time We may not be leading edge but you’d rather buy from us because… Speed, IP Differentiation, Frontier performance key

Two key ideas: Uniqueness Uniqueness –Controlling the knowledge generated by an innovation: being the only game in town Complementary Assets Complementary Assets –Controlling the assets necessary to exploit the knowledge generated by innovation

Sources of Uniqueness Intellectual property protection Intellectual property protection –Patents Finite lengthFinite length The right to prohibit “producing”The right to prohibit “producing” –Copyrights The right to prohibit “copying”The right to prohibit “copying” Secrecy Secrecy –Trade secrets & non compete clauses –“Tacit” knowledge Speed Speed

Complementary Assets: Definition Those assets that allow a firm to make money, even if the innovation is not unique: Those assets that allow a firm to make money, even if the innovation is not unique: The answer to the question: The answer to the question: –If our innovations were instantly available to our competitors, would we still make money? Why?

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

Growth: An organizational and operational challenge?

The organizational challenge of growth may be dramatic Performance Time Overload + Competency traps

Is This Your Project Pipeline?

Overload at PreQuip Active Projects (formal development projects by number) Resources Required for Completion (months) Months to Completion (desired) Implied Development Resource Allocation (months) This yearNext yearYear after that (customer support, troubleshooting) All Other Support Activity–– 430 Total Development Requirements–– Available Resources (months)–– 960 Rate of Utilization (percent)––

Overcommitment destroys productivity Average Value-Added Time on Engineering Tasks Number of Projects per Engineer 100% 80% 60% 40% 0% 20% Source: IBM Development Efficiency Study

The Timing and Impact of Management Attention Phases Index of Attention and Influence High Low ACTUAL MANAGEMENT ACTIVITY PROFILE Knowledge Acquisition Concept Investigation Basic Design Prototype Building Pilot Production Manufacturing Ramp-Up ABILITY TO INFLUENCE OUTCOME

Performance Gap Pressure to fix short term problems Pressure to fix the roots of the performance gap Time spent in “next generation” projects Time spent Fire fighting Growth projects available - - DELAY No longer term projects initiated + + DELAY Overload may destroy long term performance:

Why is it so hard to kill project #26? It’s a “good” project! It’s a “good” project! Good managers can meet stretch goals Good managers can meet stretch goals (and I’m a good manager) (and I’m a good manager) Making difficult decisions takes time & energy Making difficult decisions takes time & energy

Competencies evolve over time, creating “competency traps” Performance Time Ferment Takeoff Maturity Growth?

Growth challenges every aspect of an organization Leadership & Strategy Structure & Process Incentives Culture & Mental Models

But strategically, growth must build on existing assets… Ferment Takeoff Maturity Uniqueness Complementary Assets

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

What can be done?

Lead: Lead: –Develop a growth strategy: Communicate it! –Generate energy –Build an “ambidextrous” senior team –Make decisions

Develop a Growth Strategy: Communicate it! How will we Create value? How will we Capture value? How will we Deliver value?

Generate Energy Position the need to move into growth areas as a competitive necessity: Position the need to move into growth areas as a competitive necessity: –Flirt with bankruptcy –Make vivid the idea that the firm might flirt with bankruptcy Position growth as an opportunity Position growth as an opportunity –Generate some small successes: build enthusiasm and “infect” the organization –Leap boldly into the future

Build an Ambidextrous Senior Team Ambidextrous senior teams must manage Ambidextrous senior teams must manage –both more mature, operationally focused businesses –and higher growth, emerging businesses High performing senior teams show: 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 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

Make real decisions: Is spending balanced short vs long term? Low Resource High Resource Moderate Resource ConsumerValue Perception Enabling Technology New Core Product New Benefits Radical Incremental Base Next Generation Derivative Platform Breakthrough No Change Improvement Variant Brand Support Natural

3G is all about general purpose appl’ns 3G is all about specialized vertical appl’ns Open standards Proprietary standards Make real decisions: Is development spend appropriately aligned against possible futures?

What can be done? Lead: Lead: Structure: Structure: –Choose a structure that matches the firm’s strategy and skills –Manage it using every lever that you have

Control & Coordination Choose a structure that fits the firm’s strategic positioning and skills Acquire/ Partner Joint venture/ alliance Entrepreneurial Drive, Freedom from the “old ways” Internal venture Build inside existing unit

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

What can be done? Lead Lead Structure: Structure: Incent Incent –Explain “just what’s in this for me?” –Manage the balance between: Individual outcomes and team/firm outcomesIndividual outcomes and team/firm outcomes “Objective” and “subjective” measures“Objective” and “subjective” measures

Control & Coordination The Incentive problem is an inherently difficult one… Entrepreneurial Drive, Freedom from the “old ways” Startups B as U

Control & Coordination Using “high powered” incentives may reduce coordination Acquire/ Partner Build inside existing units Joint venture/ alliance Entrepreneurial Drive, Freedom from the “old ways” Internal venture Build inside existing unit ?

What can be done? Lead Lead Structure Structure Incent Incent Transform the culture: Transform the culture: –Build on core values –Practice thinking in new ways –Manage from the heart

Summary

Successful growth requires Leadership Leadership The “Right” Structure The “Right” Structure Appropriate Incentives Appropriate Incentives Transforming the Culture