Dealing with Disruption. Professor Charles O Reilly Graduate School of Business Stanford University

Transcription

1 Dealing with Disruption Professor Charles O Reilly Graduate School of Business Stanford University coreilly@stanford.edu

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3 What is common across these? Watches Automobiles Cameras Computers Health Care Insurance Media Services Machine Tools Hospitality Airlines Financial Services Retail Stores Industrial Robots Stereo Equipment Athletic Equipment Consulting Services Optical Equipment Medical Instruments Semiconductors Newspapers

4 The pace of change is increasing For Flip Video Camera: Four years from hot start-up to obsolete Source: IBM s Global Innovation Outlook, Joseph Jacobsen, Organizational and Individual Innovation Diffusion, 2004

5 and defenders eventually lose Expected years in S&P Many Pathologies Cultural lock-in Blindness to disruptive technologies Strategic-operational imbalance Limitations of operating organization 15 Low genetic diversity E Only 37% of Fortune 500 firms survived between

6 Why do successful firms fail?

7 VS In 2002, Blockbuster was a $5B firm with more than 5000 stores. Netflix went public with $78M in revenue. Blockbuster executives watched Netflix revenues grow for 58 straight months before responding. By the end of 2008, Netflix s value was 10X Blockbuster In 2010, Blockbuster filed for bankruptcy and has been liquidated. Netflix is closing distribution centers and today more than 80% of their revenue comes from video streaming.

8 I was obsessed with not getting trapped by DVDs the way AOL got trapped, the way Kodak did, the way Blockbuster did Every business we could think of died because they got too cautious. Reed Hastings Founder & CEO Netflix 8

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10 Healthcare Functional materials (film--<1%) Document solutions (optical devices) 2015 Revenues $20.8B $2.2B

11 At Fujifilm we have many leadingedge, proprietary technologies in a variety of business areas, and together these serve as the foundation for our diversification. These areas include fine chemistry, including the control of elaborate chemical reactions, mechatronics, optics, electronics, software and a wide array of manufacturing technologies. Shigetaka Komori CEO Fuifilm 11

12 Success comes from alignment Strategy What business are we in? How will we compete? What s our vision? Executive Leadership Behavior Information Symbolic action Key Success Factors What specific tasks have to get done to implement the strategy? How do we need people to behave in order to successfully execute our strategy? Human Resources Do people have the necessary competencies? Are they motivated? Culture What are the norms, values, attitudes, and behaviors needed? Formal Organization Structure? Controls? Rewards? Careers? Fit Performance

13 Solving a Mystery If alignment and culture are so important, why do we see the organizational failures that we described at the beginning of our discussion?

14 The Success Syndrome FIT SUCCESS Success SIZE and AGE INERTIA Structural Cultural FAILURE (Unless the market is stable) 14

15 The toxic effects of success Strategy/Vision What business are we in? How will we compete? What s our vision? Executive Leadership Behavior Information Symbolic action Key Success Factors What specific tasks have to get done to implement the strategy? Human Resources Do people have the necessary competencies? Are they motivated? Culture What are the norms, values, attitudes, and behaviors needed? Formal Organization Structure? Controls? Rewards? Careers? Fit Performance Inertia

16 Organizational Evolution Search Speed Autonomy Flexibility Discovery Variance enhancement Strategy Talent Key Success Factors Formal Organization [Growth] Culture [Exploitation] Predictability Stability Efficiency Variance reduction Control [Exploration] Innovation Differentiation Cost Over time, the fit among business unit strategy, structure, skills, and culture evolve to reflect changing markets and technology.

17 Growth Potential How do companies evolve? Horizons of Growth EXPLORE OPPORTUNITIES Horizon 2 Horizon 3 GROWTH BUSINESS Horizon 1 CORE BUSINESS Uncertainty Core businesses are the current mature products, services and markets. They are managed for profit and cash performance they also require investment, though innovation is likely to be incremental. Growth businesses take robust offerings and scale them to maximize share and revenue. Metrics focus on customer acquisition, market share, and market awareness/preference Exploratory businesses validate new business concepts through pilots with potential customers. High priority on learning and iterating the offer to maximize market adoption. Metrics are about execution.

18 Innovation Streams New Existing Existing Organizational Capabilities New Change Logic

19 Innovation Streams Fashion Lenses Walmart Express Low Cost Airline Quartz Watches On-line gaming New Existing Mechanical Watches In-store DVD rental Printed Checks Camera Film Major Airlines Bias Ply Tires Newspapers Casinos Contact Lenses Walmart Superstore Transistors Electronic Funds Digital imaging Web-based News Radial Tires Video Streaming Daily Disposable Lenses Existing Organizational Capabilities New

20 When is ambidexterity needed? Ideate generate new business concepts and select ones with potential to generate growth. Incubate invest based on learning, using evidence from running business experiments Scale Convert an experiment into revenue generating business that matches a firm s ambition 1. IDEATE Identify potential business concepts 2. INCUBATE Prove you have a viable business 3. SCALE Create an ambidextrous business

21 New Product Market / Customers Existing Photo Film X-ray Film Optical lenses Digital cameras Existing New Organizational Capabilities

22 Given our current technologies are there further applications for new markets? With new technologies, are there additional applications for current markets? With new technologies, are there new applications for new markets?

23 New 1. Current technologies, new markets Polarizer Protective Film Solar Cell Backsheets Semiconductor Materials Mobile Phone Lenses 3. New markets, new technologies Pharmaceuticals Cosmetics Semiconductor Materials Regenerative Medicine Product Market / Customers Existing Photo Film X-ray Film Optical lenses Digital cameras 2. Current markets, new technologies Laser Endoscope Medical Imaging System Multifunction Copiers Inkjet Printers Existing New Organizational Capabilities

24 Emerging Business Organization (EBO) General Manager Growth Exploitation [Horizon 1] Adaptation, learning, innovation, risk taking Execution, speed, customer acquisition, flexibility Cost, efficiency, customer intimacy, incremental improvement Exploration [Horizon 2] [Horizon 3] Variation Selection Retention

25 Emerging Business Organization (EBO) A new EBO initiative should: Be aligned with the larger IBM strategy Provide for cross-ibm leverage Offer a new source of customer value Promise $1B in revenue over 5 years Provide the opportunity for market leadership Offer sustained profit (not be commoditized)

26 Revenues The EBO Lifecycle EBO Lifecycle US $1 B SELECTION CRITERIA Strategic alignment Cross IBM leverage New source of customer value $1B+ revenue potential Market leadership Sustained profit GRADUATION CRITERIA Strong leadership team in place Clearly articulated strategy for profit contribution Early market success Proven customer value proposition Selection Cultivation Graduation

27 Ambidextrous Organization General Manager Exploitation Growth Hardware Exploration Consulting Services Life Sciences Variation Selection Retention Examples: J&J H-P CibaVision USA Today IBM P&G Fujifilm Cisco Mettler- Toledo Flextronics DaVita JSR Axel Springer

28 EBO Management Leadership Experienced leaders, respected across the organization, supported by a small staff Selection, career path and performance evaluation follow normal processes with different criteria as needed.

29 The Ambidextrous Organization IBM Leadership Training Manage a portfolio of related experiments, projects Initiate activities that are directionally correct Play a major communication role inside and outside Establish and communicate a clear vision Create an extended team for advice and counsel Balance opposing factors to imagine future possibilities that are currently unrecognized market needs Market and technical sophistication Sustain interest in as-yet unprofitable projects Recognize when to continue and when to abandon an idea Understand the organizational politics Adopt an affiliative leadership style Coach/mentor selected employees Thoroughly understand customer s business

30 EBO Management Leadership Experienced leaders, respected across the organization, supported by a small staff Selection, career path and performance evaluation follow normal processes with different criteria as needed. Performance Measurement Monthly evaluation with Bruce Harreld Milestones based on business case objectives Financial review against business case funding Funding Central control of investment decisions (go/no go) based on formal (but qualitative) evaluation. Funds allocated through the business unit but exclusively dependent on EBO objectives and insulated from business unit performance.

31 What it takes Active and frequent senior management sponsorship Dedicated A-Team leadership Disciplined mechanisms for cross-company alignment Resources fenced and monitored to avoid premature cuts Actions linked to critical milestones Quick start, quick stop Disciplined graduation process Strong leadership team in place Clear strategy for profit contribution Proven customer value proposition Demonstrated market success

32 EBO Performance: Between , 22 EBOs were established. 14 of these graduated and several failed. There are now 180 EBOs across the whole of IBM. By 2006, EBO initiatives have contributed over $15B in revenue far superior to acquisitiondriven growth EBOs are used to extend capabilities into new domains and scale business models.

33 Ambidextrous Organization General Manager Growth Exploitation Core Technologies Exploration Advanced Technologies Emerging Technologies Variation Selection Retention

34 Councils and Boards How to generate $5-10B in new revenue each year? 9 Councils and 30 Boards, 750 executives. Councils responsible for markets that could generate $10B over the next decade Council headed by an EVP and SVP (2-in-a-box) with 51% of the vote. Boards responsible for $1B opportunity ( adjacencies ) over the next 5 years 70% of compensation based on peer assessment of collaboration Supported by Working Groups composed of subject matter experts created as needed Disciplined Vision, Strategy, Execution (VSE) process

35 Ambidextrous Leadership 1. Senior team that explicitly owns the ambidextrous strategy, with shared goals and incentives. 2. Vision and values that promote a common identity but separate cultures. 3. Separate units for scaling explore businesses, with remit to be different. 4. Integration points so the explore business can leverage assets of the company. 5. Leadership with the ability to resolve conflicts and allocate resources in line with goals.

36 ambidextrous leadership Not many companies have what I call ambidextrous leadership which is growth and cost consciousness and sustained excellence at both. ~ Jeff Immelt CEO, General Electric 36

37 charles darwin It is not the strongest of the species that survive, nor the most intelligent, but the one that is most responsive to change. Those who live by the sword will be shot by those who don t. 37