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MGMT 2001
Managing Innovation and Organizational Change
Dr. Jimi Kim
March 5, 2019
+
WEEK 3 Innovation
Today’s Agenda
Disruptive innovations
Break
Creativity and Innovation
Quiz
+ General manager problem
• How to benefit from disruptive innovations.
+ Incumbents vs. Challengers
In Politics:
“Incumbent” = the person who currently holds elected office.
“Challengers” = the "new" people running against them
for their job.
+ Incumbents vs. Challengers
In Business:
“Incumbent” = companies that have a leading market position – i.e. powerful existing players in an arena.
“Challengers” = the new competitors trying to gain
market share.
+ Incumbents vs. Challengers
In Politics:
Incumbents usually have a big advantage over challengers ...
+ In Politics: The “incumbent advantage”:
The incumbents are more likely to be elected due to:
- Better visibility (i.e. name recognition),
- Better access to resources, and
- More experience.
Thus, in politics, it is common to talk about the “incumbent advantage”.
+ Incumbents vs. Challengers
What about in business?
+ In Business:
The incumbents also tend to have:
- Better visibility (i.e. brand recognition),
- Better access to resources, and
- More experience.
+ Incumbents vs. Challengers
A business example ...
+ A tale of 2 businesses: Netflix vs. Blockbuster
+ Who's heard of Blockbuster?
+ What's Blockbuster's business model?
- i.e. What's their product? How do they make money?
+ • Blockbuster was an international company.
• Offered home movie & video game rental, accessible mainly through physical stores.
• At its peak in 2004, Blockbuster consisted of nearly 60,000 employees and over 8,000 stores.
• Revenue = $6 BILLION in 2004
• Blockbuster filed for bankruptcy in 2010.
+ - Who's heard of Netflix?
- What is Netflix’s business model?
Available through Baidu’s iQiyi in China (as of 2018)
+ Netflix:
Early business model: Customers go to a website and make a list of the movies / television they want to watch; 3 DVDs mailed to them; when they were done with a movie, the customer mails it back and gets the next DVD on their list. No late fees.
+ Netflix:
Current business model:
Customers pay fixed rate (~$10-$20 per month) and can stream all the movies/television they want to their devices from Netflix’s list of entertainment.
+ How did this happen?
+ How did this happen?
+
+ Blockbuster had the advantages of:
- Better visibility (i.e. brand recognition),
- Better access to resources, and
- More experience.
+
Blockbuster also had another big advantage ...
+ Blockbuster video
https://www.youtube.com/watch?v=jtSY04_camQ
Time: 2:25 to 3:24
+ Another advantage:
Blockbuster could have bought Netflix for $50 million (which was ~1% of their value at the time).
+ But…
… unlike in politics, it is very common for powerful and successful incumbents to be beaten by challengers in business.
+ The mystery: Given that they have better visibility (i.e. brand recognition), better access to resources, and more experience, why don’t incumbents almost always win over challengers in business?
+ Part of the answer:
• Challengers seem to be better than incumbents at taking advantage of “disruptive innovations”.
• Disruptive innovations = A good (e.g. product or service) that provides a new configuration of features that will eventually take business from an existing product.
+ Clarifying terms
• If an organisation creates a disruptive innovation, that usually means they are drawing on some external “next big thing”.
• If an organisation is disrupted, it usually means that a competitor has taken advantage of some “next big thing”.
+ Disruptive innovation: Most disruptive innovations use new technologies.
Example: Netflix’s early business model took advantage of the invention & spread of the internet and DVD players.
DVDs were lighter and more durable than video-tapes, and thus could be mailed back-and-forth, cutting out the need for video-rental shops.
Then .. the invention and spread of fast-speed internet and fast-computers allowed video streaming, cutting out the need to mail DVDs back and forth.
+ But this suggests another mystery...
•Why are challengers so often better at taking advantage of disruptive innovations?
+
Example: Blockbuster had the capabilities to do everything Netflix did AND they had name-brand recognition, media licence agreements, and millions of copies of DVDs.
So, why did Netflix beat them?
+ 4 explanations for the mystery:
•Awareness
•Risk aversion
•Short-term focus
•Inertia
+ Awareness
• Many incumbents are not aware of the business opportunities created by changing technology until it is too late. Many incumbents are so focused on efficiency that they don’t realise that another way is possible.
• Remember: Focus on efficiency has advantages. Horses have blinders for a reason… so they don’t get distracted.
+ 4 explanations for the mystery:
•Awareness
•Risk aversion
•Short-term focus
•Inertia
+
Potential disruptive innovations are more risky and uncertain than
incremental improvements
(i.e. sustaining innovations).
+ 3 Drivers of risk aversion:
1. Psychological biases:
All else equal, most people want to avoid risk. Psychologists call this “risk aversion”.
Embodied by sayings like “Better to be safe than sorry”; “If you are going a long way, go slowly.”; “Measure twice, cut once.”
+ Imagine this scenario: A friend offers to flip a coin and give you $110 if it lands on heads. If it lands on tails, you give her $100.
Would you take that bet?
The average person is so risk averse that they will not take this bet unless they can win ~$160.
+
2. Business incentives to be risk averse:
• A commonly observed dynamic is that businesses often punish bad action much more than they punish bad INaction. i.e. If you take an unusual position and it fails, you may get punished. If you make the same mistake as everyone else, no one will be punished.
• This principle is embodied by sayings like “There’s safety in numbers”.
3 Drivers of risk aversion:
+ Example: Risk Aversion
From a sales brochure IBM used to sell their computers to IT purchasing agents in the 1980’s:
+ “It’s better to be conventionally wrong than unconventionally right.”
- John Maynard Keynes If you are interested in learning more about this dynamic after class, check out this interview with economist Michelle Baddeley on "herding behaviour" here: http://socialsciencebites.libsyn.com/
+
3. Risk averse budgeting process:
• A common budgeting practice is to fund initiatives with the highest projected Return on Investment (ROI).
Because potential disruptive innovations are so uncertain, it is often impossible to create a valid ROI estimate. So, such projects often go unfunded.
3 Drivers of risk aversion
+
3. Risk averse budgeting process:
• And amount invested in R&D is often a fixed percentage of Revenue or Profits.
3 Drivers of risk aversion
+ 4 explanations for the mystery:
•Awareness
•Risk aversion
•Short-term focus
• Inertia
+
Investing in potential disruptive innovations often means spending resources (money & time) now on something that may pay off in the
future.
+
1. “Hyperbolic discounting” = the psychological tendency to favour a "smaller-sooner" reward over a "larger-later" reward.
2. Capital providers - are sometimes impatient for profits. Even if a manager wants to think long-term, she doesn’t always have the freedom to do it due to demands for profits today.
4 Key drivers of short-term focus:
+
Business processes that create a short-term focus:
3. Career dynamics: Managers want to be able to demonstrate their success in order to get promoted (and avoid getting fired). So, they prefer championing “quick wins” over initiatives that won’t pay off for many years.
4. Budgeting systems - are often based on yearly performance – i.e. your department’s budget is based on your performance last year. So, you can’t afford to invest in something that won’t pays off until years later.
4 Key drivers of short-term focus:
+ 4 explanations for the mystery:
•Awareness
•Risk aversion
•Short-term focus
• Inertia
+ Inertia: A tendency to remain unchanged.
• Change requires revising lots of interdependent elements of the organisation (i.e. changing / aligning Strategy, Staff, Skills, Systems, Shared Values, Style, & Structure)… which is difficult & takes time!
• Many people don’t like change. e.g. Some resist change because they may lose power/position.
+
Example: Think of the employees at Blockbuster. If Blockbuster switched to the Netflix model, most of their employees (e.g. store managers) would lose their jobs. There was a strong motive for most existing employees to not like the change.
Who benefits?
Who loses from this change?
+ In sum: Many reasons
companies don't pursue
disruptive innovations.
+ A final mystery How can incumbents master disruptive innovation? Some key steps:
• Increase awareness of disruptive opportunities (e.g. external research, engaging in trend analysis, bringing in outside consultants).
• Embrace smart risks by allocating greater Research & Development funding to potentially disruptive innovations.
• Longer-term focus by having both a short term and a long-term strategic plans (e.g. 2 year plan and 10 year plan).
• Overcome inertia using organisational change techniques
+
Creativity and Innovation
Where great ideas start
+ What is Creativity?
What is Innovation?
Innovation is the process of implementing new ideas.
Innovation = Creativity + Action
Creativity is generating new and useful ideas
…it’s at the very heart of all work.
+ The Innovator’s DNA by Jeffrey H. Dyer, Hal Gregersen, & Clayton M. Christensen
Harvard Business Review, December 2009
• Innovation springs from five “discovery skills” – Associating
– Questioning
– Observing
– Experimenting
– Networking
+ #1 - Associating • “The more diverse our experience and knowledge, the more
connections the brain can make. Fresh inputs trigger new associations; for some, these lead to novel ideas.”
• Medici Effect – Creative explosion in Florence when the Medici family pulled together artists, poets, scientists, philosophers, etc. , spawning the Renaissance
• Steve Jobs: “Creativity is connecting things.”
MP3 player + iTunes + Music contents iPod + Touch keyboard+ Phone
+ #2 Questioning
• Peter Drucker: “The important and difficult job is never to find the right answers, but to find the right questions.”
• Steve Jobs: “Why does a computer need a fan?”
• Getting to the right questions: – Ask “Why?” and “Why not?” rather than “What if?”
• Instead of focusing on how to make existing processes better, challenge the assumptions underpinning them
– Imagine opposites • Play devil’s advocate – make others (including ourselves) justify
their/our positions
– Embrace constraints – forcing creativity • “What would you do if money were no object?”
+ #3 Observing • Scrutinize common things, particularly the
behavior of potential customers
• Act like an anthropologist or a social scientist
• Why do people do what they do?
Scott Cook – Quicken software:
Wife was frustrated trying to keep track of finances
Friend showed him “Lisa” – Apple computer – before it was launched
Lisa’s user-friendliness inspired Cook to create a user-friendly look and feel for Quicken
Captured 50% of this market in the first year
+ #3 Observing
Ratan Tata was inspired to create world’s cheapest car by observing the plight of a family of four packed onto a single motorized scooter
TATA NANO: $2,500
+ #4 Experimenting
• Thomas Edison: “I haven’t failed. I’ve simply found 10,000 ways that do not work.”
• Great designers observe and try different approaches and test those approaches with users
• International experience (travel, work, school, etc.) greatly increases our ability to innovate
• Howard Schultz (founder of Starbucks) roamed Italy trying out coffee shops
+ #5 Networking • Devote time and energy to finding and testing ideas through a
network of diverse people
• Successful innovators go out of their way to meet people with different ideas, perspectives and from different fields – all to extend their knowledge
• Jobs talked with an Apple Fellow named Alan Kay, who told him to visit Industrial Light & Magic. Jobs bought Industrial Light & Magic for $10 million, renamed it Pixar, and eventually took it public for $1 billion.
+ Innovation: 3M Commit the company to innovation
Company allows all staffs to spend 15% of their time to explore new ideas
Thirty percent rule: 30% of each division’s revenues must come from products introduced in the last four years.
Individual expectations and rewards for outstanding work
Tie research to the customer
Quantify efforts
A rich set of systems to encourage resourcefulness
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+ Barriers to Organizational Creativity
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Resistance to Change: People just get used to doing a particular work in customized manner
Lack of initiative: organizational managers from top to bottom are just opposed to giving initiative to their subordinates fearing that it will undermine their authority
Fear of something going wrong Lack of recognition: failure to recognize or reward creativity acts
as demotivate factor Resource constraints: Creativity demands sufficient availability of
resources
+ Theoretical Approaches to Innovation & Creativity
Four-factor theory of team climate for innovation. West (1990) identified four factors that facilitate innovation:
a. Leader vision – understandable, valued, and accepted
b. Participative safety – group members feel that they can propose new ideas without being judged or criticized
c. Task orientation – stimulating debate and discussion of different possible solutions within the team which are carefully examined
d. Support for innovation
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+ Theoretical Approaches to Innovation & Creativity…
Componential Theory: work environments have an impact on creativity by affecting factors that drive creativity and innovation.
Interactionist Perspective on Creativity: suggests that creativity is a complex interaction between an individual and her/his work situation.
Model of Individual Creative Action: Basic decision that employees have to make: whether to be creative or to undertake routine, habitual actions. Identified three groups of factors that influence this decision
Cultural differences and creativity. Some research has looked at how individuals’ cultural values (e.g., individualism/collectivism, power distance) influence relationships between task and social contexts and creativity.
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+ Creative People & Organizations
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Creative Individual Creative Organization or Department
Conceptual fluency
Open-mindedness
Originality
Less authority
Independence
Self-confidence
Playfulness
Undisciplined exploration
Curiosity
Persistence
Commitment
Focused approach
Open channels of communication Contact with outside sources Overlapping territories Suggestion systems, brainstorming, group techniques
Assigning non-specialists to problems Eccentricity allowed Hiring people who make you uncomfortable
Decentralization, loosely defined positions, loose control Acceptance of mistakes People are encouraged to question their bosses
Freedom to choose and pursue problems Not a tight ship, playful culture, doing the impractical Freedom to discuss ideas, long-term horizon
Resources allocated to creative personnel and projects without immediate payoff Reward system encourages innovation Get rid of peripheral responsibilities
+ Four Roles in Organizational Innovation
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Inventor Champion Sponsor Critic
Develops & understands technical aspects of the idea
Does not know how to win support for the idea or make a business out of it
Believes in the idea
Visualizes benefits
Confronts organizational realities of cost, benefits
Obtains financial and political support
Overcomes obstacles
High-level manager who removes organizational barriers
Approves and protects the idea within the organization
Provides reality test
Looks for shortcomings
Defines hard-nosed criteria that ideas must pass
Championing an idea successfully requires four roles in organizations