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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?

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kodak
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?
managing organizational competence

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

the last of three key questions
The last of three key questions...

How will we

Create value?

How will we

Capture value?

How will we

Deliver value?

but they also create major opportunity
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
the issue

The Issue

How can one manage the core business

and

real growth simultaneously?

discontinuous innovation as a strategic problem
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
discontinuous innovation as an organizational problem
Discontinuous Innovationas an organizational problem
  • Time horizons & Incentives
  • Fear of (individual) cannibalization
  • Overload
  • Competency Traps
managing customers at moments of discontinuity
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

the innovator s dilemma disruptive technologies may threaten established firms

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

uniqueness complementary assets over the life cycle
Uniqueness & Complementary Assets over the Life Cycle:

Complementary

Assets

Uniqueness

Maturity

Takeoff

Ferment

discontinuous innovation as an organizational problem18
Discontinuous Innovationas an organizational problem
  • Time horizons & Incentives
  • Fear of (individual) cannibalization
  • Overload
  • Competency Traps
overload can give you worse before better

+

-

-

+

-

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

common expectations
Common expectations

Average

Performance

Anticipated

performance

Change

Historical

performance

Time

the reality of worse before better
The reality of “worse before better”

Average

Performance

Anticipated

performance

The Reality

Historical

performance

Time

competencies evolve over time creating competency traps
Competencies evolve over time,creating “competency traps”

Performance

Maturity

Discontinuity

Takeoff

Ferment

Time

change challenges every aspect of the organization
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

mental models the evolution of knowledge
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”
architectural knowledge becomes embedded in mental models
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...”
and in the deep structure of the organization
And in the Deep Structure of the Organization

Leadership

Formal Structure/Process

Incentives/Political Structure

Culture/Mental Models

where it is a source of strength
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
and of weakness
And of weakness:
  • Problems in recognition:
    • Denial
  • Problems in response:
    • Panic
    • Overload & the recreation of old solutions
the organizational challenge
The Organizational Challenge:

Successful growth unites

entrepreneurial insight with

effective coordination

Entrepreneurial

Drive,

Freedom from

the “old ways”

Startups

B as U

Control & Coordination

in summary
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

what can be done35
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
what can be done36
What can be done?
  • Lead:
    • Develop a clear strategy
    • Generate energy
    • Build an “ambidextrous” senior team
    • Make decisions
develop a clear strategy
Develop a clear strategy

How will we

Create value?

How will we

Capture value?

How will we

Deliver value?

and allocate resources to it

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?

generate energy
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
build an ambidextrous senior team
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
make decisions
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

what can be done42
What can be done?
  • Lead:
  • Structure:
    • Implement appropriately
    • Choose the right people
    • Manage linkages
balance entrepreneurial energy and coordination
Balance entrepreneurial energy and coordination

Successful disruptive

innovation unites

entrepreneurial insight with

effective coordination

Entrepreneurial

Energy

Startups

B as U

Control & Coordination

choose a structure that fits the firm s strategic positioning and skills
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

manage it using every lever that you have
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

exercise best practice in building growth
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?
acquisitions pros and cons
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?
the winner s curse may mean that you pay too much
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
Once acquired, acquisitions must be managed

Entrepreneurial

Drive,

Freedom from

the “old ways”

Buy an

Innovative

firm

?

Assimilate it

?

Control & Coordination

the promise of open innovation

Startup

Startup

Asset

Asset

Supplier

Supplier

The Promise of Open Innovation
key considerations
Key Considerations:
  • How easy is it to write contracts?
    • How tight is the IP regime?
    • How much uncertainty is there?
    • “Specificity” of the asset – how “thick” is the market?
  • What will happen to “entrepreneurial energy”?
  • What will be the key complementary assets going forward?
what can be done52
What can be done?
  • Lead
  • Structure:
  • Incent
    • Explain “just what’s in this for me?”
    • Manage the balance between:
      • Individual outcomes and team/firm outcomes
      • “Objective” and “subjective” measures
the incentive problem is an inherently difficult one
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
Using “high powered” incentives may reduce coordination

Entrepreneurial

Drive,

Freedom from

the “old ways”

?

Acquire/

Partner

Joint

venture/

alliance

Internal

venture

Build inside

existing unit

Build inside

existing units

Control & Coordination

what can be done55
What can be done?
  • Lead
  • Structure
  • Incent
  • Transform the culture:
    • Build on core values
    • Practice thinking in new ways
    • Manage from the heart
remember what you re dealing with
Remember what you’re dealing with:
  • “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

manage the organizational issues aggressively
Manage the organizational issues aggressively

Entrepreneurial

Drive,

Freedom from

the “old ways”

?

Acquire

Joint

venture/

alliance

Internal

venture

Build inside

existing unit

Build inside

existing units

Control & Coordination