Monday 12 th April 2010
Stephen Spring sfspring@mac.com
1

Puzzle: What do these companies have in common?
• Polaroid
• Sears
• Xerox
• US Steel
• Intel
• Levi Strauss
• USPS
• Kodak
• IBM
• ATT
• Bausch & Lomb
• Roche
• Ciba Geigy
• DEC
Ref Mike Tushman HBS
2

Solution:
They all created industries. They were all industry leaders and they all crashed.
Why?
It is the job of leaders to make sure that their companies remains successful.
Ref Mike Tushman HBS
3

Swiss Watch Industry
• 1970
– 1,600 small & entrepreneurial firms
– 90,000 employees
– Focus on mechanical watches
– Control of watch industry
– Good profits
• 1980
– 45,000 employees retrenched
– Swiss watch industry is bankrupt
What happened?
Ref Mike Tushman HBS
4

Evolution of Watch Industry 1970 - 1980
New
Quartz
Markets
Existing
Mechanical
Incremental Architectural Discontinuous
Type of Innovation
Ref Mike Tushman HBS
5

Evolution of Watch Industry 1980 - 1985
New
Swatch
Markets
Existing
Quartz
Incremental Architectural Discontinuous
Type of Innovation
Ref Mike Tushman HBS
6

New
Fashion Lenses Smaller Disk Drives Quartz Watches
Markets
Existing
Mechanical Watches
Disk Drives
Bias Ply Tyres
Printed Newspapers
Hard Contact Lenses
Web-based News
Radial Tyres
Daily Disposable Lenses
Incremental Architectural Discontinuous
Type of Innovation
Ref Mike Tushman HBS
7

8

Evolution of US Steel Industry
Ref Mike Tushman HBS
9

Vienna 1911
“Entrepreneurs blow gales of creative destruction – creating new products, new companies, and new industries”
Schumpeter
10

An Economy Driven by Entrepreneurship
The implementation of change is through innovation that takes market share from existing companies”
Schumpeter
11

Setting up a new productive function:
• The introduction of a new good;
• The introduction of a new method of production;
• The opening of a new market;
• The conquest of a new source of supply of new materials;
• The carrying out of a new organization of an industry
Schumpeter 1939
12

Economics 101
In classical markets competition depends on continuity and leads to squeezed profits & operational effectiveness
Supply Demand
Equilibrium
But Turbulence brings new products
13

Ubiquity of Creative Destruction
“…it is not (price and output) competition which counts, but the competition from the new commodity, the new technology, the new source of supply, the new type of organisation.”
Joseph Schumpeter, 1939
14

Businesses under threat
• Print newspapers vs online advertising vs onlline newspapers
• Corner stores vs big box stores vs online stores
• Phone directories vs Google
• Free to air vs cable vs Internet TV
• Post Office vs Fedex vs UPS
• Full service airlines vs discount airlines
• Phone companies vs Skype
• Theatre vs Movies vs DVD vs iTunes vs iTV
• Music Shops vs iTunes
• Borders vs Amazon
• Walmart vs Amazon . . . . . . etc.
15

The Entrepreneurship Process
Entrepreneurial Environment
Framing the
Entrepreneurial
Vision ada
Fashioning the
Opportunity
Initiating the
Business
Capturing the
Opportunity adaptation
Regeneration punctuated equilibrium dynamic capabilities
Managing the
Entrepreneurial
Process evolution
Revitalisation Stagnation Bureaucratisation
16

Dominant Innovation Types over Product
Life Cycles
•
Innovators create new markets by introducing new products
• Earn substantial margins
• Generate new jobs to satisfy demand
Growth
Dominant
Design
Mature
Dominant innovation types
Learning
Requirements
Emergence
Major Product
Minor process
High
Major Process
Minor Product
High
Product Process
Substitution
Minor Product
Minor Process
Major Product
Minor Process
High High
17

Long-Term Survivor Performance
(1917-1987, 61 defunct)
Q: Why do financial markets outperform corporations?
Survivors did not perform. As a group, long term return to investors during 1917 – 1987 period was 20% less than of the overall market
Foster and Kaplan
18

Long-lived Firms that Have Changed Industries
Company
Goodrich
Nokia
3M
Amex
J & J
Black&Decker
Sunbeam
Marriot
Nucor
Tandy
Est.
1870
1865
1902
1850
1885
1910
1890
1927
1897
1899
Original Current
Fire Hose Aerospace
Lumber
Mining
Mobiles
Office Supplies
Express Delivery Financial Services
BandagesPharmaceuticals
Bottle Cap Mach Power Tools
Horse Clippers
Root Beer
Automobiles
Leather
Appliances
Hotels
Mini-mill Steel
Retail Stores
19

• Markets, including Capital Markets , are “informal aggregations of buyers, sellers, their owners, and other intermediaries who come together for the purpose of economic change.”
• Capital Markets are markets where capital is exchanged - money for equities/debt.
• Capital Markets have rules for entrance, conduct and exit.
• They are designed for admission of new competitors and elimination of weak ones
• Efficient Capital Markets eliminate the old without reflection or remorse.
Markets lack culture, leadership, and emotion, do not experience the bursts of desperation, depression, denial and hope that corporations face.
Foster and Kaplan
20

• Corporations have a “cognitive superstructure”
• Have a Chairman and Board of Directors
• They plan and they control
• Their staff take their responsibilities seriously
• Executives are trained/selected for positions
• The are not administered by distant committees
(unlike capital markets)
• Corporate planning aims to minimise surprise & risk
Foster and Kaplan
21

• Central purpose of the corporation has been production, logistics, selling, and billing.
• Aided by structure – systems of information, decision making, and measurement and control.
• Expected to run smoothly, anticipate problems, and avoid risks
• It is an operational system based on the presumption of rational thought – deterministic. Analytic.
• “If these things are done the results will be expected”
In reality! Systems stumble. Operational Excellence?
22

Intel Case Study
• Founded 1968
• Semi conductor memory product new “gale of destruction” in core memory products industry
• 1972 – 1-kilobit 1103 DRAM, largest selling integrated circuit in world- 90% of $23.4M sales
• As first mover – nearly 100% of memory chip market.
• Late 70’s Andy Grove, President, says “Intel still stands for memories; memories mean Intel.”
( DRAM - Dynamic Random Access Memory)
23

Intel 1980’s
• Early ’80s – Large Japanese DRAM produces (Fujitsu,
NEC, etc) entered US market with high-volume, highquality, low-cost products
• Technology still maturing
• Intel forced to keep ahead by investment in R&D
• DRAM approaching commodity status, prices collapsed and return to shareholders collapsed
• Pure oversupply
• July 1984 – price of DRAMs fell 40%, industry
• Intel slipped due to its dependence on DRAMs
24

Intel: 1968 - 1985
Customers
New
Existing
Memory
Incremental Architectural Discontinuous
Nature of Change
25

Computer Hardware
7-Year TRS vs Economy
Foster and Kaplan
26

Hewlett-Packard Co vs.
Computer Hardware
Foster and Kaplan
27

Semiconductors: Return on Invested
Capital vs Economy
Foster and Kaplan
28

Intel’s TRS, 1972-1984
Foster and Kaplan
29

The Innovators?
• Jan. 1983 Exit – 17 workers in new applications team
(new microprocessors) left because INTEL still obsessed with DRAMs & not supplying resources for new development
• New application was parallel processing
• Formed “Sequent Computer Systems”
30

Intel’s Soul Searching
Grove’s recollections Fall 1984:
“As the debates raged, we just went on losing money and more money. It was a grim and frustrating year.
During that time, we worked hard without a clear notion of how things were ever going to get better. We had lost our bearings. We were wandering in the valley of death.”
31

Intel’s Soul Searching
Grove’s recollections 1985 - I:
“Intel equaled memories in all our minds. How could we give up our identity? How could we exist as a company that was not in the memory business? Saying it to Gordon (Gordon Moore was CEO) was one thing; talking it to other people and implementing it was another.”
32

Intel’s Soul Searching
Grove’s recollections 1985 – II:
The company had a couple of beliefs that were as strong as religious dogmas. Both of them had to do with the importance of memories as the backbone of our manufacturing and sales activities.
– The first belief was that memories were our “technology drivers,” which meant that we always developed and refined our technologies on our memory products first because they were easier to test.
– The other belief was that the “full-product-line” dogma. According to this (belief), our salesmen needed a full product line to do a good job in front of our customers; if they didn’t have a full product line, the customer would prefer to do business with our competitors who did.
33

Crunch Time:
CEO Moore and President grove were standing in Grove’s office…Grove turned to Moore and asked him point-blank: “ If we got kicked out and the Board brought in a new CEO, what do you think
he would do?
”
To which Moore unhesitatingly replied: “ He would get us out of memories .”
After a few moments of silence, Grove asked Moore: “ Why shouldn’t
you and I walk out that door, come back in and do it ourselves?
”
34

Decision: Kill DRAM Business
• Gradual and incremental reduction in capital investment
• Middle managers put up a fight – suggested breakup of company into two entities (DRAMs & microprocessors)
• Compromise – no R&D on new memory products but
R&D on products in “the works”
• Mid 1985 – General Manager proposes acquisition of advanced DRAM “fabrication facility” in Japan
• Finally Grove took charge of implementing exit
• “People who have no emotional stake in in a decision can see what needs to be done sooner” e.g. markets
35

Intel 1985
New
Customers
Existing
Memory
Incremental
Micro-Processors
Architectural Discontinuous
Nature of Change
36

Intel’s Transformational Innovation
• The microprocessor – designed to power original IBM PC. Sales outpaced DRAM sales
• 1992 – largest semiconductor company in world, even larger than Japanese companies who took over DRAMs
• This performance enhanced health of entire semiconductor industry
• 1996 Danger of cultural lock-in
37

Semiconductors
Return on Invested Capital vs Economy
Foster and Kaplan
38

Intel’s TRS: 1972-1998
Foster and Kaplan
39

• 1996 - Response to challenge, Intel added a fourth strategic objective .
• “Encapsulating all the things that are necessary to mobilize our efforts in connection with the
Internet.”
– Built several funds that invested some $1 billion in new non-Intel start-ups
– First Q2000 sales of these investments had added materially to Intel’s reported results
40

Intel 1996
New
Customers
?
Existing
Micro-Processors
Incremental Architectural
Nature of Change
Discontinuous
41

Escaping from Old Ideas
• Keynes: “The difficulty lies not in the ideas, but in escaping from the old ones…”
• Koestler: “We learn by assimilating experience and grouping them in an ordered schemata, into stable patterns of unity in variety. The matrices which pattern our perceptions, thoughts and activities are condensations of learning into habit.”
42

How do we manage conflict between exploitation and exploration
Markets
New
Exploration
Existing
Exploitation
Incremental Architectural Discontinuous
Nature of Innovation
43