Working paper: Theory of conceptualizing the challenge of corporate renewal

Transcription

1 Sari Kola-Nyström Lappeenranta University of Technology Department of Industrial Engineering and Management September 21, 2003 Working paper: Theory of conceptualizing the challenge of corporate renewal Abstract In today s business environment continuous corporate renewal is mandatory. Companies abilities to identify what is changing and proactively respond to that change are key factors underlying success. This study suggests that corporate renewal in the form of separate change programs is ineffective. Instead, it concludes that companies should try to institutionalize change in their strategy processes. This study enhances current theories:?? By introducing a framework for analyzing corporate renewal challenge, it helps to define what is changing and estimate the magnitude of that change.?? By identifying the mechanisms underlying continuous corporate renewal, it helps to analyze a company s current view on change. Introduction Today s business environment is one characterized by constant change. This change relates to complexity and uncertainty of markets and technologies (Tidd et al., 2001) and is driving the need for companies to continuously renew themselves. Ability for continuous corporate renewal is found to be an important determinant of success of a company (Brown & Eisenhardt, 2000, D Aveni, 1994, Hamel, 2000, etc.). The new ideas feeding corporate renewal root in innovation. Companies ability to sustain their innovativeness is dependent on their ability to manage both incremental and discontinuous innovation simultaneously (Tidd et al., 2001). This study summarizes recent theories of strategy, corporate renewal and innovation. It enhances the current view on management of corporate renewal and innovation by:?? Identifying the mechanism of continuous corporate renewal?? Characterizing the innovation challenge along markets, technologies and business model?? Measuring the challenge of corporate renewal related to a given innovation along two dimensions: degree of novelty and degree of complexity related to the three components of innovation The characteristics of change Today, there are three powerful forces shaping the competitive environment and rewriting the rules of the game: globalization of markets and technology supply, the rise of networking as a business model and the emergence of technologies enabling a

2 virtual mode of working (Chesbrough & Teece, 2002, Tidd et al., 2001). The lines separating businesses have become more ambiguous as technologies and markets converge, creating new growth opportunities where traditional businesses intersect (Tapscott et al., 2000, Tidd, 1997, Bartlett & Ghoshal, 1994). To accommodate the change taking place in today s business environment corporate strategy needs to be increasingly dynamic (Brown & Eisenhardt, 1998, D Aveni, 1994, Hamel, 2000, etc.). Strategic imperatives due to the changing environment include increasing strategic clock speed, focusing on portfolios of different business models, shortening product life cycles, creating go-to-market flexibility, enhancing competitive innovation and managing intra-organizational cannibalism (Nadler & Tushman, 1999). This study sees strategy as a combination of deliberate or intended components and an inbuilt capability to take into account the emergent or autonomous strategic initiatives (Mintzberg, 1987a, Burgelman, 1983a). It concludes that rather than aiming at fit (Rumelt, 1980) between the strategy and environment companies should build ability to stretch (Hamel & Prahalad, 1994) to proactively respond to change. Instead of preoccupation with defining defensible product-market positions managers are forced to refocus their attention on developing organizational capability to sense and respond to change (Bartlett & Ghoshal, 1998). How to institutionalize change? The need for corporate renewal is driven by investor expectations for high returns on existing assets and their demand for growth: new assets and entry into new business arenas (Day et al., 2001). Continuous renewal requires annual incremental improvements in both the value and productivity of current operations as well as significant simultaneous investments in next generation systems (Merrifield, 1993). Strategic renewal is a series of actions which affect the very foundations of a company (Meschi & Cremer, 1999). Corporate renewal has fundamental and lasting effect in an organization s character and performance (Hart & Berger, 1994). It may involve changes in organizational structures and systems (Hoffman, 1999, Sharma, 1999). Achieving corporate renewal requires challenging the status quo. The problem with most companies that have failed in their transformation efforts is not that they have tried to change too little, but that they have tried to change too much (Ghoshal & Bartlett, 1996), not that they have changed too slow but that they have changed too fast (Grove & Burgelman, 1996). Changing the formal structures is not enough to achieve fundamental and sustained corporate renewal (Beer & Eisenstat, 1990, Burgelman, 1983a, Hart & Berger, 1994). This implies that corporate culture has an important role in defining corporate renewal capability (Mezias & Glynn, 1993). While corporate renewal may be initiated by a structural revolution, it endures only if supported by a cultural transformation (Bartlett & Ghoshal, 1995). This study challenges the view of corporate renewal as a one time effort aiming at changing the course of an entire organization (Baden-Fuller & Stopford, 1994). Instead, it defines corporate renewal as a continuous action taking place in the strategic context of the corporation (Bartlett & Ghoshal, 1995, Brown & Eisenhardt, 2000). This study

3 suggests that to be continuous, corporate renewal needs to be embedded in the strategy processes of a company. Processes of continuous corporate renewal This study identifies three strategy processes of a company as the processes through which continuous corporate renewal takes place.?? Strategy formulation (table 1) comprises of purposeful attempts to ensure company success in the long terms. Its role in achieving corporate renewal is related to the management ability to recognize and articulate needed changes in the corporate environment and the formalization of strategies emerging through the process of strategy formation.?? Strategy formation (table 2) is concerned with actions taking place as a response to changing conditions. This autonomous strategic behavior emerging in the course of operating business is a major source of corporate renewal (Burgelman, 1983a).?? Strategy implementation (table 3) is concerned with building organizational structures, systems and culture to achieve desired results. Without an effective implementation process, corporate renewal attempts remain ineffective. In real life these three processes take place simultaneously in the corporate context and involve several sub processes. The following tables summarize the sub processes and actions underlying the processes of strategy formulation, strategy formation and strategy implementation.

4 Process Content Source Strategy formulation Deciding what to do while taking into account the Andrews, 1980 opportunity and risk, company resources, values and responsibilities Strategy formation Evaluating current corporate strategy Rumelt, 1980 Strategic analysis Understanding the strategic position of an Johnson & Scholes, 1999 organization Strategic choice Formulation and evaluation of the possible Johnson & Scholes, 1999 courses of action Portfolio Active management of acquisitions and Dranikoff et al., 2002 management divestitures Strategic business Formalizing the autonomous actions leading to a Burgelman, 1994 exit business exit Strategic recognition Recognizing autonomous managerial initiatives Grove & Burgelman, 1996 Complex strategic Formalizing patterns of autonomous strategic Burgelman & Doz, 2001 integration initiatives Pattern recognition Anticipating how and why competitive landscape Slywotzky & Morrison, 2000 is changing Strategic decision Making superior (fast, high quality, widely Eisenhardt, 1999 making supported) decisions by using collective intuition, conflict, timing and defusing politics Time pacing Scheduling change at predictable time intervals Eisenhardt & Brown, 1998 Brown & Eisenhardt, 2000 Event pacing Patching Co-evolution Table 1 Taking strategic action as a response to an external or internal event (new technology, competitor move, etc.) Continuously realigning business with emerging opportunities Changing the collaborate links and relationships among business units to exploit changing market opportunities Processes underlying strategy formulation Eisenhardt & Brown, 1998 Brown & Eisenhardt, 2000 Brown & Eisenhardt, 2000 Martin & Eisenhardt, 2001 Martin & Eisenhardt, 2001 Process Content Source Autonomous Strategy formation through interaction of Burgelman, 1983a strategic behavior strategic behavior, corporate context and the concept of strategy Strategy crafting Strategy formation in a context of an umbrella Minzberg, 1987b strategy and in-built flexibility for strategic evolution Logical Blending analysis, organizational politics and Quinn & Voyer, 1994 incrementalism individual needs into a cohesive new direction Internal selection and retention Intra -organizational evolutionary processes through which autonomous initiatives gain Burgelman, 1994 momentum Strategic dissonance Autonomous adaptation to changing conditions Grove & Burgelman, 1996 Table 2 Processes underlying strategy formation Process Content Source Strategy Designing organizational structures, Andrews, 1980

5 implementation Strategy implementation Strategy integration Rebuilding behavioral context Development of strategic continuous improvement capability Knowledge transfer Table 3 relationships, processes and behavioral and managerial context Translation of strategy into organizational action through organizational structure design, resource planning and the management of strategic change Concentrating on few key thrusts and managing coalition formation Carefully phased transformation through processes of simplification, integration and regeneration A learning process focusing on monitoring the deployment of strategy by monitoring and measurement against strategic objectives Deployment of experience, skills, information and routines Processes underlying strategy implementation Johnson & Scholes, 1999 Quinn & Voyer, 1994 Ghoshal & Bartlett, 1996 Bessant & Francis, 1999 Martin & Eisenhardt, 2001 Continuous corporate renewal roots in innovation Ability for continuous corporate renewal roots in innovation, making management of the innovation context and processes a key activity in a company. In the pursuit of innovation companies may choose between several strategies: in-house R&D, mergers and acquisitions, cooperation and corporate venturing (Christensen, 1997, Tidd et al., 2001). The following picture illustrates the way this study views innovation and processes continuous corporate renewal. THE INNOVATION CONTEXT Existing Business (R&D programs) Corporate Venturing Alliances STRATEGY FORMULATION Mergers and Acquisitions STRATEGY FORMATION STRATEGY IMPLEMENTATION Figure 1 This study identifies R&D programs related to existing business, mergers and acquisitions, cooperation and corporate venturing as strategic options to sustain innovation. Together, they form the innovation context in which continuous corporate renewal processes take place. The chosen strategy roots in the characteristics of innovation, which in turn guides the choice of organizational form. The challenge of and the potential for corporate renewal are different for different types of innovation. Thus identifying the dimensions along

6 which innovation may be characterized helps to estimate an innovation s potential to generate corporate renewal and the degree of difficulty involved in achieving it. Characterizing innovation Innovation is the engine of corporate renewal. Several authors (Hamel, 2000, Tidd et al., 2001, etc.) conclude that innovation is essential for established companies in order to sustain their position in the marketplace and even more important for companies that seek growth by establishing themselves in a new domain: by moving to a new market, by using a new technology or a new business model. An innovation can be a new product or service, a new production process technology, a new structure or administrative system or a new plan or program pertaining to organizational members (Damanpour, 1991). Whilst competitive advantage may come from size and possession of assets, the pattern is increasingly coming to favor those organizations that can mobilize knowledge and technological skills and experience to create new products, processes and services (Ghoshal & Bartlett, 1999). Therefore, the process of innovation is identified as a core management process of a company (Drucker, 1985, Tushman & O Reilly, 1997, Tidd et al, 2001). This study categorizes innovation along three components:?? Markets reflect underlying customer needs. Market orientation has been found to be one of the key factors underlying success of a company (Narver & Slater, 1990, Slater & Narver, 1995, etc.).?? Technologies underlie products for a given market or processes through which they are generated. Like markets, technology s potential for creating competitive advantage has been recognized by several authors (Tidd, 1997, Tidd et al., 2001, Bower & Christensen, 1995, Christensen et al., 2001, etc.).?? Business model describes the process through which technologies are brought to markets. Business model innovation involves the way companies do business (Hamel, 2000, Magretta, 2002, Sandberg, 2002) and can have a fundamental effect on a success of a company. In addition to these three components, this study views innovation along two dimensions:?? Degree of novelty of each component (market, technology and business model) defines renewal challenge related to a given innovation. Degree of novelty has been recognized as an important dimension of innovation (Christensen, 1997, Christensen et al., 2003, Damanpour, 1991, Henderson & Clark, 1990, Norling & Statz, 1998, Tidd et al., 2001). Incremental (continuous, evolutionary, linear) innovation introduces relatively minor changes to the existing product or process and exploits the potential of the established design. It is an important source of competitive advantage and often reinforces the dominance of established firms (Christensen, 1997, Von Hippel, 1988). Discontinuous (radical, disruptive, nonlinear, revolutionary) innovation in contrast, is understood as a sudden appearance or a major breakthrough in technology that can yield entirely new products and services. It is a greater challenge for established companies that are often blinded by their past success. In many cases incumbents offerings in existing markets

7 have been replaced by new entrants using new technologies or business models, or they have failed to identify new markets altogether (Christensen, 1997, Hamel, 2000, Tushman & O Reilly, 1997). This study suggests that the challenge of and the potential for corporate renewal increase when the degree of novelty related to markets, technologies and business models increase.?? Degree of complexity of each component (market, technology and business model) defines business potential related to a given innovation. Complexity has been analyzed by dividing innovations into autonomous and systemic (Chesbrough & Teece, 2002) or into architectural and modular (component) innovation (Henderson & Clark, 1990). Established companies have been found to be more comfortable with autonomous than systemic (architectural) innovation (Christensen 1992a, 1992b, Henderson & Clark, 1990). Architectural innovation may render a firm s existing architectural knowledge useless but preserve the relevance of component technologies (Tidd, 1997). However, competitive advantages that involve more complex systems are likely to be more sustainable and have greater business potential (Chesbrough & Teece, 2002). Therefore ability for systemic innovation is an important element underlying long term success. This study assumes, that business potential related to a given innovation is rooted to a company s ability to decode complexity related to market, technology and business model underlying that innovation. Complexity relates to business potential of an innovation by defining its potential to generate distinctive competencies. Companies that are able to decode complexity related to market, technology or a business model are in a good position to create competitive advantages. The following figures (figure 2 and figure 3) illustrate the concept of innovation along the three components and their dimensions and link it to the concept of corporate renewal. Degree of novelty Incremental innovation (continuous, linear, evolutionary) Discontinuous innovation (radical, disruptive, non-linear, revolutionary) Market (customer need) Challenge of corporate renewal Organizational innovation (structural, systems) Technology (product) Business model (process) Figure 2 Linking the concepts of innovation and corporate renewal along degree of novelty of market, technology and business model illustrate the challenge of corporate renewal

8 (area). Dividing renewal challenge into these three components helps companies to identify what is changing and estimate the magnitude of change. Dividing renewal challenge into three components helps companies to identify opportunities that are within their reach in terms of strategic fit/stretch and current capabilities and to manage the risk of developing new business. Pursuing opportunities with high degree of novelty in all categories is likely to be too risky: high degree of novelty in all categories means high degree of uncertainty. Degree of novelty alone is not enough for a company to decide if an innovation is worth pursuing: degree of complexity is an essential component of defining a business potential of a given innovation. The following figure (figure 3) illustrates how the degree of novelty and degree of complexity of market, technology and business model can be used to define the business potential of a given innovation. Degree of complexity Autonomous (component) Systemic (architectural) Complexity Business potential Market (customer need) Technology (product) Challenge of corporate renewal Business model (process) Figure 3 Linking the concepts of innovation and corporate renewal along degree of novelty and complexity of market, technology and business model illustrate the business potential of a given innovation (volume). It helps to identify innovations that have both potential to generate corporate renewal and still be viable business opportunities. Complexity relates to business potential of an innovation by defining its potential to generate distinctive competencies. Companies that are able to decode complexity related to market, technology or a business model are in a good position to create competitive advantage s. The management of innovation is inherently difficult and risky: most new technologies fail to be translated into products and services, and most new products and services are not commercial successes (Tidd et al., 2001). Mapping innovation along the three components (markets. technologies, business model) and estimating the degree of novelty and degree of complexity related to them allows companies to:?? Estimate the linkages between an opportunity and existing business

9 ?? Define uncertainty related to an opportunity in terms of markets, technologies and?? Define company s competitive position?? Define actions for pursuing an opportunity The greater the degree of novelty (illustrated by area in the figure 2), the further an opportunity is from the existing business and thus the greater the challenge of and the opportunity for corporate renewal. But to be worth pursuing an opportunity has to have business potential. By estimating the degree of complexity (illustrated by volume in the figure 3) a company can define whether it can build and sustain competitive advantage related to an opportunity and identify its position at the market. At hart corporate renewal requires changes in the fundamental way the company operates. It focuses on organization, structures and systems of the company. For any company, an essential element of cor porate renewal is to view the full range of innovation opportunities and to develop appropriate management systems for sustaining corporate renewal without forgetting the underlying business aspect. Summary and discussion This study identifies strategy formulation, strategy formation and strategy implementation as the three core processes through which continuous corporate renewal takes place. It helps companies to assess their readiness for change. Companies choice of innovation strategy depends on the nature of innovation and the underlying strategic direction. The framework introduced in this study helps companies to identify what is changing and estimate the renewal challenge and business potential related to a given innovation. By doing so it helps companies to focus on opportunities that best suit their strategy and manage their innovation context accordingly.

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