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
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...
How will we
Create value?
How will we
How will we
Deliver value? Capture value?
Transitions often challenge existing
organizations severely
Cumulate share of sales of photolithographic alignment
equipment, 1962-1986, by generation
Contact
Cobilt
44
Kasper 17
Canon
P-Elmer
GCA
Nikon
Total
61
Proximity Scanner S&R (1)
S&R (2)
<1
8
67
75
21
78
7
9
10
55
99+
81
<1
12
70
82+
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
How can one manage the core business
and
real growth simultaneously?
Discontinuous Innovation
as 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




Time horizons & Incentives
Fear of (individual) cannibalization
Overload
Competency Traps
Discontinuous Innovation
as a Strategic Problem
New S curves may be hard
to spot in advance
Evaluating alternatives for next generation automobile propulsion systems
(Joanne Woestman, SDM Thesis, 1999)
Parameter
Value
Cost
Efficiency
Operating Cost
Performance
0 to 60 time
Top speed
NVH
Utility
Range
All weather reliability
Capacity
Refueling time
Refueling convenience
Safety
Emissions
Crashworthiness
Evaporative Emissions
Fuel Cells
ICE
Hybrids
Electrics
Bad
Good
Ok
Good
Ok
Good
Ok
Ok
Ok
Bad
Ok
Ok
Ok
Ok
Good
Good
Good
Ok
Good
Good
Ok
Ok
Ok
Good
Ok
Bad
Ok
Ok
Bad
Good
Good
Ok
Good
Very good
Good
Ok
Ok
Good
Very Good
Bad
Bad
Ok
Bad
Bad
Great
Ok
Ok
Ok
Ok
Ok
Good
Ok
Ok
Great
Ok
Great
The new opportunity
doesn’t meet our current
customer’s needs
Managing customers at moments
of 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
Performance
Mainstream customer needs
Invasive Technology
Niche customer needs
Time
Clay Christensen: The Innovator’s Dilemma
The new opportunity
doesn’t offer nearly the
same margins and profit
opportunity
Uniqueness & Complementary Assets
over the Life Cycle:
Uniqueness
Maturity
Takeoff
Ferment
Complementary
Assets
Discontinuous Innovation
as an
Organizational Problem
Discontinuous Innovation
as an organizational problem




Time horizons & Incentives
Fear of (individual) cannibalization
Overload
Competency Traps
Overload: Is This Your Project Pipeline?
Overload can give you “worse before better”
No longer
term projects
initiated
+
-
Pressure to
Fix short term
problems
Performance Gap
-
Time spent
Fire fighting
-
Pressure to
invest in longer
term opportunities
DELAY
DELAY
+
Time spent
in “next generation”
projects
Growth projects
available
Common expectations
Average
Performance
Change
Anticipated
performance
Historical
performance
Time
The reality of “worse before better”
Average
Performance
Anticipated
performance
The Reality
Historical
performance
Time
Competencies evolve over time,
creating “competency traps”
Performance
Maturity
Discontinuity
Takeoff
Ferment
Time
Change challenges every aspect of the
organization
Whole scale changes to
structure and process are
very disruptive:
Two years of lost time?
Leadership
& Strategy
Structure &
Process
Strong cultures & deeply
rooted mental models are
extraordinarily resistant
to change
Incentives
Culture &
Mental Models
Individuals become
Invested in old approaches
Strategic/competitive
problems may provide an
excuse for inertia
Existing incentives often
work against significant
change, and new incentives
take time and work
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”
Architectural knowledge becomes
embedded in mental models...

Information channels
–

Communication filters
–

“If I have a question about customer needs I
can always call Fred..”
“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
Leadership
Formal Structure/Process
Incentives/Political Structure
Culture/Mental Models
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:

Problems in recognition:
–

Denial
Problems in response:
–
–
Panic
Overload & the recreation of old solutions
The Organizational Challenge:
Entrepreneurial
Drive,
Freedom from
the “old ways”
Startups
Successful growth unites
entrepreneurial insight with
effective coordination
B as U
Control & Coordination
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 done?
Make sure you’ve fixed
(or are at least aware of)
the strategic problem
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 done?

Lead:
–
–
–
–
Develop a clear strategy
Generate energy
Build an “ambidextrous” senior team
Make decisions
Develop a clear strategy
How will we
Create value?
How will we
How will we
Deliver value? Capture value?
And allocate resources to it!
100%
How will we
Create value?
80%
60%
40%
20%
How will we
How will we
Deliver value? Capture value?
0%
1
2
3
4
5
6
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

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
100%
Average
Value-Added
Time on
80%
Engineering
Tasks
60%
40%
20%
0%
1
2
3
Source: IBM Development Efficiency Study
4
5
6
Number of Projects per Engineer
What can be done?


Lead:
Structure:
– Implement appropriately
– Choose the right people
– Manage linkages
Balance entrepreneurial energy and
coordination
Entrepreneurial
Energy
Startups
Successful disruptive
innovation unites
entrepreneurial insight with
effective coordination
B as U
Control & Coordination
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
Entrepreneurial
Drive,
Freedom from
the “old ways”
Acquire/
Partner
?
Joint
venture/
alliance
Internal
venture
Build inside
existing
existing units
unit
Control & Coordination
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

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
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
The Promise of Open Innovation
Startup
Startup
Asset
Asset
Supplier
Supplier
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 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…
Entrepreneurial
Drive,
Freedom from
the “old ways”
Startups
B as U
Control & 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
existing units
unit
Control & Coordination
What can be done?




Lead
Structure
Incent
Transform the culture:
– Build on core values
– Practice thinking in new ways
– Manage from the heart
Summary
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
Make sure you’ve fixed
(or are at least aware of)
the strategic problem
Manage the organizational issues
aggressively
Entrepreneurial
Drive,
Freedom from
the “old ways”
?
Acquire
Joint
venture/
alliance
Internal
venture
Build inside
existing
existing units
unit
Control & Coordination