TUM: Strategic Management
of Innovation
Day 2: 9.00-16.00
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
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 Firm’s
strategy
Inertia as a Industry-wide
Innovation Challenge
•
•
•
•
Market, Industry
Value Chain
Ecology
…what is firm competitive arena
performance/cost
Technological Substitution
Digital
35MM
time
From 35MM to Digital Cameras
35MM with FILM
Digital with FLASH CARD
Paradigm
• 35MM
• Digital
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
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
Evolution of Photography
80-85
35MM Cameras
And Early DI (Sony
MAVICA
No Substitution
Paradigm and
its Trajectory
Very “Obvious”
86-90
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
91-95
‘Counter’
Innovations
96-2003
Polaroid Bankrupt
APS
Price-adjusted
Quality full
Match
Convergence
In Full
Swing
Digital sales
Exceeds
Conventional
Sales
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
Key photography elements of
product/service/delivery
Relative
Value
Digital
Price
Resolution Features
Immediate Image
Viewing Sharing
Photographic Process – Digital vs. Film
Paradigm
Traditional Film Image Lifecycle
Slide
Album
Camera
Slides
Image
Taken
Developing
Film
Consumer
Re-purchase
Cycle
Prints
Negatives
Photo
Album
Frequent re-purchases
Digital Image Lifecycle
Ink
.
Memory
Cards
Digital
Camera
Specialty
Batteries
Printed on Home
Printer
Image
Taken
Image Transfer
Software and
Hardware
Viewed on
PC
Photo
Paper
Printer
Consumer Repurchase Cycle
Professionally
Printed On-line
Stored on Home
PC or CD-ROM
Infrequent
re-purchase
CD-ROM
Infrequent repurchase
Imaging / Photography Value Chain
Imaging
Equipment
• Canon
• Nikon
• Kodak
• Olympus
• Minolta
• Polaroid
Imaging
Equipment
• Sony
• H-P
Imaging
Media
Imaging
Transfer
• Kodak film
• Fuji film
• Agfa film
• Kodak Chemicals
Imaging
Media
Imaging
Transfer
• SanDisk
• Sony
• Intel
• Toshiba
• Microsoft Software
• Adobe Software
• Kodak Software
• Dell Software
• H-P Printers / Ink
• Epson Printers / Ink
• Lexmark Printers / Ink
Imaging
Storage
• Kodak Paper
• Fuji Paper
Imaging
Storage
• Ofoto online
• H-P paper
• CVS.com
• AH.com
• CD-ROMs
Imaging
Display
• Various Album
Manufacturers
Imaging
Display
• PC Manufacturers
• Mobile Phones
• Palm Pilots / PDAs
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 ?
Kodak Options
–
–
–
Majority of Kodak’s 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 won’t yield profits for some time to come, how
will this 35MM competency will be supported in lieu
of film sales.
Patents, Strategic Alliances, Joint Ventures…..
Links Among Companies in Photo Subgroup
(Alliances)
40
30
PhotoCentrality
20
Centrality
(mean)
10
0
1980
1985
1990
1995
2000
Kodak’s 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)
Kodak’s Response to Digital
Disruption
Before December 2001:
–Kodak’s 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 Kodak’s
digital strategy, simple funding for R&D efforts
would be divided among the existing segments
–Given this structure, digital imaging was a threat
to the established paradigm and its “owners”
Kodak’s 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
From Industry Inertia to Firm Inertia
• How do firms become trapped in their
learning curve
• Core competencies and core rigidities
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
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 Firm’s
strategy
Overcoming Inertia
• Gunfire at sea: firm-specific obstacles for
shedding the old S curve
• Steps towards a new paradigm
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.
Core Competencies
• Knowledge
– human capital
– social capital
– technical systems
• Managerial systems
– knowledge creation and recycling
• Culture (norms and values)
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
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 Firm’s
strategy
U.S Navy and Continuous Firing
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 Scott’s
• Why did the Navy resist Sims’ efforts?
Identify some core rigidities.
• What remedies?
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
Gunfire at Sea:take-away
• Innovation not due to R&D 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
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 Firm’s
strategy
Basic “Templates of Organization
Design
• Templates, Structure, Governance, Form
• Functional and Divisional
Two Templates
President
President
Sales
Manufacturing
Function
R&D
Project 1
Project 2
Business
Project 3
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
Functional
CEO
Sales Service Finance
Divisional
CEO
NewCars UsedCars Service
“Corrupted” Divisional
CEO
Matrix
CEO
Service
Sales
NewCars
Service
Finance
NewCars UsedCars Trucks
UsedCars
Trucks
Network or Spaghetti
CEO
Network “Theory”: two schools of thought
• 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
• Structural
Equivalence:
– social system
– competition and relative
deprivation within a statusset 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:
Table 1: Examples of social capital among organizations
Mediated by Individuals (Simplex)
Interlocking directorates (Pennings, 1980)
Guest engineers (Dyer, 1996)
Social register (Useem and Karabel, 1986)
Revolving door syndrome (Pennings, Lee
and Witteloostuyn, 1998)
Alumni (McKinsey)
Double agent
Gatekeeper (Tushman, 1978)
Emissary
Mediated by Systems(“Multiplex)
Business groups (Acevedo, et al, 1990)
Chaebol (Kim, 1997)
Keiretzus (Gerlach, 1987)
Investment bank syndicates (Chung, Singh, and
Lee, 1995)
Joint ventures
R&D partnerships
Guanxi-si-sen (Tsui, 1997)
Electronic clearing house (Pennings and Harianto,
1992)
Three Forms of Capital
an MGI Post-script
• Financial Capital ($$$$)
• Human Capital (skills, training, experience,
looks)
• Social Capital (networks, channels,
alliances)
– all three contribute to performance and
innovation
A Communications Network
3
1
2
4
5
7
6
9
8
11
10
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.
Internal Circulation of Knowledge
•
•
•
•
Job Rotation
Boundary-Spanning Roles
Information Technology(email, intranet)
Social Networks
External Circulation of Knowledge
• Strategic alliances
• Equity JVs, licensing, minority
participation, R&D partnerships, etc.
• Consortia
You
Network A’
Strategic Network Expansion
You
You
Network B’
Network C’
The Social Structure of Competition
Redundant contact
A
Non-redundant contact
D
YOU
C
Structural Holes
Structural Holes
Filled by “You”
B
Spider and its Net
Osama Bin Laden and his network?
Network of Countries linked by Footballers Movements
Complete Network
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
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
Random shortcuts
• Often, social contact is not
constrained by physical distance.
– E.g.) Spam mail, Viral marketing,
Internet chat room, & Internet auction
The Watts Strogatz Model

No shortcuts

Lots of Shortcuts
Communication Technologies and
Shortcuts
No or few
shortcuts
Instant
messaging
Lots of
shortcuts
E-mail
Chat room
Cumulative distributions of market
share difference by Entry Time
Cumulative frequency
250
Entry time = 0
200
Entry time =10
150
Entry time = 20
Entry time = 30
100
Entry time = 40
50
Entry time = 50
Tippy market
0
-1.5
-1
-0.5
0
0.5
Market share difference
1
1.5
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
Some other key concepts
• Networking
– Structural Holes
– Network surrounding some individual, an
entrepreneur like Bill Gates, Ellison, Karl
Rove
– Tipping Point
Why Worry about Networks?
• Access to know-how, contacts, resources,
serendipity
• Network ideas operate within and across
organizations
– BA&H
– mcc
• Expand size of radar screen
Internal Circulation of Knowledge
•
•
•
•
Job Rotation
Boundary-Spanning Roles
Information Technology(email, intranet)
Social Networks
External Circulation of Knowledge
• Strategic alliances
• Equity JVs, licensing, minority
participation, R&D partnerships, etc.
• Consortia
Connecters make Links
• What endows a a person, a firm with
Social Capital?
• How do we measure Social Capital?
Networking
• Person, Firm or Market
• Tipping Point in market (craze, fad, herd,
bandwagon) due to:
– Connector> schmoozer, bundler
– Maven> reservoir or pool of know how to be
linked
– Salesperson> motivator
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
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?
Internal Newtorks
• Oticon and Foss
Functional
CEO
Sales Service Finance
Divisional
CEO
NewCars UsedCars Service
“Corrupted” Divisional
CEO
Matrix
CEO
Service
Sales
NewCars
Service
Finance
NewCars UsedCars Trucks
UsedCars
Trucks
Network or “Spaghetti”
CEO
Firm A
Firm B
3
Management
4
6
R&D
5
6
1
Creativity
Marketing
5
Production
5
2
Innovations
Other
departments
3
Management
3
4
6
Management
R&D
5
6
1
Creativity
4
6
Marketing
5
Production
5
2
Innovations
Other
departments
R&D
5
6
1
Creativity
Marketing
5
Production
5
2
Innovations
Other
departments
3
Management
4
6
R&D
5
1
6
Creativity
Marketing
5
Production
5
2
Innovations
Other
departments
Internal or External Hybrid
Oticon
• Manufacturer of hearing aids
• Paradigm shift from behind-the-ear to inthe-ear (innovation with a 1 cm travel)
• Oticon’s miniaturization competencies
were becoming obsolete, locked in a trap.
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?
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
Oticon (2): Spaghetti as
Structure
JV with Firm B
Subcontractors
Project Teams with Cross
Functional Backgrounds
Oticon Story
• Spaghetti structure has “structural
ambiguity”
– Knowledge-centers connected by links in nonhierarchical 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
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
Other Elements of Oticon’s (6) New
Design
• Tasks
– Anything goes
• Informal Arrangements
– Culture (creed, wheeled furniture), chaos
– Networks, job banks
– P&P Oversight, PA
• People
– Computer illiterates
– Paradigm huggers and loose canons
Oticon (7) : Organizational
Change and Results
*
* Dk is approximately €.11
Demant Hldgs (Oticon Owner)
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
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 “P&P” (Project and Product”)
Committee
– Get all the elements to fit at same time
– Return to Matrix structure in 1998
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
Functional
CEO
Divisional
CEO
“Corrupted” Divisional
CEO
Matrix
CEO
S
1986
Oticon
1998
Network or “Spaghetti”
CEO
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 “P&P” (Project and Product”) Committee
– Get all the elements to fit at same time
– Challenge of hierarchy dilemma
– Return to Matrix structure in 1998
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
Selective Intervention and
Internal Hybrids: Interpreting and
Learning from the Rise and
Decline of the Oticon Spaghetti
Organization
Nicolai J. Foss
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
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!)
The Oticon Spaghetti
Organization (cont’d)
• 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???
Where did the designers of the
S.O. fail?
• Oticon only recognized the benefits of this
internal hybrid!
Costs of Markets
Costs of Hierarchy
Total Costs
Market
Hierarchy
Spaghetti O. Matrix O.
JV
Potential problems with the S.O.
• Allocating competence
• Elimination of tournaments
• Sacrificing specialization advantages
• Coordination
• Knowledge sharing
• Leadership
=> All of these may have contributed to the failure,
but not likely to be the main cause
Real Problem
• Selective intervention:
– Managerial meddling with delegated rights
– Managers can overrule « selectively » the decision to
start a project => 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)
Discussion points (cont’d)
• Wasn’t 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 wasn’t the design adapted instead of
abandoned?
• Can this ever work?
• Is selective intervention the real reason for
failure? What about the other problems
mentioned?
Discussion points (cont’d)
• Couldn’t 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?
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
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
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
Second Day
•
•
Industry and Firm Inertia: Kodak, US
Navy
Organization Design and Innovation:
Ambidexterity, Foresight and Hindsight,
Oticon