new directions for corporations: conditions for successful renewal

E~iw;xwr Management journal Vol. 11, No. 2, pp. 229-237, 1993. 0263.2373193 $6.00 + 0.00. I’rhred in Great Britain. 0 1993 Pergamon Press Ltd.

New Directions for Corporations: Conditions for Successful Renewal GEORGE DAY, Geoffrey T. Boisi Professor and Director, Huntsman Center-for Global Competition aud Innovation, Wharton School, University of Pennsylvania

Winning companies must renew themselves by growing beyond present markets and products. Each growth path has its own risk/return profile that needs careful management. By reference to companies such as Pitney-Bowes, 3M, Proctor and Gamble, and Campbell Soup, George Day sets out five key success factors that are the clue to the renewal process.

Introduction Successful businesses keep renewing themselves by looking beyond the familiar confines of their present

markets and products for new opportunities. They may elect to simply edge out, by making natural extensions of their base business. Or they can reach out, with further extensions of existing skills and resources, into new markets or technologies. A break out move would take the business into areas unrelated to their existing capabilities. Each growth path or ‘critical turning point’ has its own profile of risks and rewards to be recognized and managed, if the business is to continue to prosper.

If firms need to grow in new directions - as well as innovate in the products and services they offer their present markets - how should they proceed? In this article we look to successful innovators and diversifiers for guidance. The essence of their experience can be captured in the following key success factors.

Key success factors The business stays very close to its market, and especially to lead users, to keep focused on delivering superior customer value. There is a clear strategic direction that specifies where the business will look for opportunities, what amount of growth is expected, and how it will be achieved. The business ‘sticks to its knitting’ by avoiding growth prospects that cannot usefully exploit its distinctive competencies. There is an overriding sense of urgency in the development process. Winning firms know they have to beat their competitors to market. The organization nurtures new products and ventures by supporting committed champions with resources and creates a climate that encourages risk taking.

These key success factors presume the business knows it has to grow, despite the uncertainties and organizational disruption.

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NEW DIRECTIONS FOR CORPORATIONS: CONDITIONS FOR SUCCESSFUL RENEWAL

Why Pursue New Directions? What motivates companies to develop new products, invest in new technologies, enter new markets, or acquire businesses outside their current scope? Very simply, renewing companies perceive that resting on the status quo is a sure way to disaster.

Technology threats Threats can range from evolutionary and predictable shifts from one generation of an existing technology to another, to a complete displacement of an old technology by a new one. Usually, the major changes come quickly and are a surprise to managers who are enjoying profitable success with the old technology. The root of their failure to respond is the comfortable assumption that the future will be much like the past. They act on this belief by putting their efforts into cost improvements and efficiency enhancements. This is often the wrong move as it makes them vulnerable to competitors who better understand the dynamics of technology.

The technology S-curve describes the relationship of the effort put into improving a product or process and the resulting technical performance. Initially, as funds are invested the progress is slow. When all the key knowledge is put in place, improvements come quickly. Finally, a limit is approached and progress becomes increasingly difficult and costly (see Figure l).’

As the limits of one technology are reached, new approaches often emerge to displace the old one - such as the shift from bias-belted to radial tyres, from audio tapes to compact discs, from electromechanical to electronic typesetting, and perhaps from chemical emulsion processes for taking photographs to electronic cameras that put images on magnetic media.

The new approach often demands skills that have not been needed by the leader in the old technology. The impending attack may even go unnoticed by the leader, who is frequently lulled by strong economic performance and buoyed by faith in evolutionary change until it is too late to respond.

Paranoia about competitors Paranoia has its origins in technological change or other discontinuities in market requirements and regulation that reduce the structural attractiveness of the present market. These same changes also work to erode existing competitive advantages. Thus, businesses may have to pursue new directions in order to defend their present position against leapfrogging moves or flank attacks.

There is mounting sensitivity to flank attacks in the wake of evidence of the success of Japanese firms with this approach.2 The logic is drawn from A Book of Five Rings, in which a leading Samurai of Japan advised, ‘It is beneficial to strike at the corners of the enemy’s force. If the corners are overthrown, the spirit of the whole body will be overthrown. To defeat the enemy you must follow up the attack when the corners have fallen.’ Japanese managers view neglected or underserved

Figure 1 Technological S-Curves

market segments as corners to attack and seldom try tc compete head-on with established firms. Sometime they are almost invited. Management of a US tract0 firm once viewed Japanese manufacturers as simpl! filling unprofitable gaps in the firm’s product line fo small-firm and specialized agricultural operations. Nov they cannot be dislodged from their beachhead.

Overcoming slowing growth A further impetus to the search for new directions is the need to maintain growth in the face of the inevitablt slowdown or decline in the presently served markets There are sensible internal reasons for this search growing businesses are more vibrant, they offer greate opportunities to their people, and the necessary commit ment to innovation carries over to all activities and keep: the business renewing. There is no complacency in i fast-growing business! Any lingering complacency i: being further shaken by the compression of life cycles Especially in electronics-related categories, the rate o technological change, plus rapid communications ant distribution, means that new products enter the marke quickly to soak up demand, but are soon superseded

Enhancing shareholder value Investors reward firms that promise continuing growth because they invest heavily in R&D and new products, with high ratios of the market value they are willing tc pay for a share of the equity compared to the book value as recorded on the balance sheet. Any suggestion of ar unexpected slowing of the growth rate results in a rapic fall in the share price. Thus, managers whose priority is increasing shareholder value through appreciation 01 the equity value are under continued pressure to pursue growth opportunities.

Staying Close to the Market No matter what direction a business intends to follow to grow and innovate, it will not be assured success unless it delivers superior customer value. This is noi simply a restatement of the obvious, for when the idez is applied to growth strategies the implications are botl- subtle and challenging to common practice.

Successes versus failures The most compelling evidence of the need to stay close to the market comes from studies that look for differ- ences between matched pairs of successful and unsuc-

230 EUROPEAN MANAGEMENT JOURNAL Vol 11 No 2 June 1993


cessful innovations. The earliest of these was Project SAPPH0,3 which gave results that anticipated similar findings from later studies. They found that five under- lying factors or themes distinguished winners, with the most important being an understanding of customers’ needs, problems and benefits. This result was later confirmed and extended by the Stanford Innovation Project and by Project New Prod.4 The latter study looked at almost 200 new industrial products, half of which were judged successful because their financial return exceeded the company hurdle rate. The distinguishing features of the successes, in order of importance, were:

Offering a superior product that met customers’ needs better than the competition with some com- bination of unique features, superior quality, or ability to perform a unique task for the customer. This was a very strong discriminator; the success rate for unique and superior products was 82 per cent, while ‘me too’ products succeeded only 26 per cent of the time. Strong market orientation, as reflected in extensive market information gathering, and a well-planned and proficiently executed market launch backed by appropriate resources and lots of support from the salesforce and channels. Technological fit and proficiency: successful new products demonstrated a good match between the resource base of the business and the technological needs of the project. Again, the message: you win if you ‘stick to your knitting’.

The role of lead users Another argument for staying close to customers comes from a fascinating stream of research on the sources of innovation.5 This work neatly challenges the conven- tional wisdom that manufacturers do the innovating by having autonomous R&D departments bring out products to meet customer needs as identified by marketing research. To be sure, this does happen, but less frequently than expected. There are many indus- tries where most innovations are developed by lead users or suppliers and only later are they adopted by manufacturers.

Lead users face strong needs that will eventually be widespread in the particular market, but face them months or years before the rest of the market. They are motivated to find their own solution to these needs because they can see how they can gain an advantage and keep it from being quickly copied. In the case of printed circuit board manufacturing equipment, lead users were large electronics firms such as IBM, GE and AT&T. They were responsible for 67 per cent of all innovations, with a further 12 per cent a result of joint work with suppliers. But for scientific instruments, the le,td users were mostly individual researchers in universities. Typically, a scientist with an instrumentation problem built a prototype and spread information about its capabilities through scientific media. When other scientists asked the instrument companies when a

commercial version would be available, a manufacturer would take the idea and eventually launch it as a new product.

The conditions are not always right for lead users to innovate. In markets like construction equipment and plastic additives, they play a minor role in product development. But even here the needs and ongoing problems of users offer valuable inputs to the development process. Yet businesses that are steeped in the belief that innovation starts with the firm are badly equipped to capture these insights.

Service and sales departments should be in the best position to obtain information on promising new ideas or problems and emerging needs of customers because they are in regular contact with them. Unfortunately, they are more likely to be a major impediment than a clear channel. Service people often react negatively when they encounter a customer modification, no matter how useful it may be. Since service people are evaluated on such measures as time spent on a repair, anything that slows them down or requires a follow-up because parts are not readily available is a problem, not an opportunity. Similarly, the salesforce has usually compensated for its sales of existing products and has no incentive to learn about user developments that might lead to commercial innovations.

Some companies overcome these problems by position- ing themselves as problem solvers. Pitney-Bowes gears its entire organization to solving mail and document- handling problems - without requiring customers to take a standard product. One result is that Pitney-Bowes is constantly edging into new markets as customers with unusual problems, who are uncertain whom to call, think of them in that general connection.

Setting the Strategic Direction How do businesses decide where to look for new product market opportunities, how much to spend and whether to use internal development or other growth modes such as joint ventures or acquisitions? Most businesses are inclined toward one of the two polar opposite approaches of top-down or bottom-up.

Bottom-up, incremental and opportunistic This approach to growth is very organic - new directions literally spread out and evolve from the ongoing processes of reaction, experimentation and learning found at all levels of an innovative organization. New products or acquisitions are likely to be either (1) reactive - triggered by an attractive deal presented to management, or a perceived need to match a competitor’s move with superior performance, a new feature, etc.; (2) customer-responsive, in which the customer comes to the company with a problem and, if the solution is work- able, a new product is added to the product range; or (3) technologically driven - the lab has developed a new material, process, etc., so let’s find a market.

EUICOPEAN MANAGEMENT JOURNAL Vol 11 No 2 June 1993 231


I Command- v-7 and M

Change comes in big steps taken to match Continuous change in small Reps in competitors or exploit structural and response to opportunities presented, or technological change new technologies developed

Competitor-centered

Senior management vision prevails

Tightly programmed and controlled

Close to customers

Champions prevail by spawning supportive coalitions

Flexible and adaptive

lgure 2 Contras~ng Approaches to Managlng Growth

‘he merits of this approach are that it is very close to he market and tends to spawn champions who become ieeply committed to their new venture or product. This ; the kind of environment in which products like ‘Post- t’ Notes can flourish (see the following box).

W’s ‘POST-IT’ NOTES

In the early 197Os, a polymer chemist was seeking a super strong latex adhesive. Instead, he stumbled on a super weak adhesive with the unusual property of not transferring from one surface to another.

There was mild interest around the company in using the adhesive as a substitute for cork message boards. But when the adhesive coated boards were hung they collected dust, which meant adhesiveness was lost and the messages fell off. Since the market was small to begin with, any enthusiasm soon waned.

In 1974 another chemist, who sang in a church choir, used some of the adhesive on slips of paper to mark pages in his hymnal. It was then he got the idea of selling note pads smeared with the adhesive. However, an early market survey asking people whether they would pay x-amount for the pads found no interest at all. A test market of some pads, to see if they would sell if the customer had a chance to buy them, was an equal failure.

Despite these rebuffs and setbacks the champion persisted. More pads were made up and given away to a wide circle of possible users. That was when the addictive nature of the pads was discovered. Once the pads got into people’s hands they found a multitude of uses for them.

The drawback of solely bottom-up growth is that it is reactive to market and technological opportunities as Lhey appear. Each opportunity is evaluated only on its 3wn merits - or even pushed despite a lack of merit - for there is no overriding strategic guidance to help

decide whether the opportunity advances the overall strategy.6 While incrementing organizations tend to be energetic and committed, it is not clear that the sum total of the piecemeal and often small-scale efforts adds up to a cohesive competitive strategy. In the absence of compelling leadership or imminent threats, the organization will not take major moves to jump to a new technology S-curve and embark into a major new market.

Predo~antly technology-d~ven new product strategies are especially vulnerable to the drawbacks of bottom-up approaches. One study of 120 industrial product firms found that 26 per cent fit this profile - their programmes were technologically aggressive, at the state-of-the-art, and often in high-risk ventures7 The results were frequently mediocre, with high failure rates and poor profitab~i~ from programmes that survived. One reason was that many were ‘trombone oil projects’ (these yield products that may be the best available anywhere, but the entire world needs only about a pint a year). Worse, there was often little synergy between the new and existing markets, which reduced the advantage over competitors.

Top-down, structured and command-oriented This approach is often caricatured as a year-long, meticulous study - conducted by central staff along with squadrons of consultants - that scans all possible opportunities and employs complex screening criteria to target a few high-growth areas for serious pursuit. Sometimes this caricature is apt and appropriate, especially when the top managers are contemplating a major shift in corporate direction through acquisitions. Such an activity is well outside the confines of the present business scope.



A variant on this command approach occurs when the CEO or president selects a theme area for growth. This choice may be based on conversations with the company, articles, consultants’ proposals, gut feelings, or all of the above - but not on a formal strategic planning exercise. The president of one major chemical company decided with little internal discussion that advanced ceramics w’as a good growth area. He then sent a memo to corporate and business development people to find wsays to get into this new area. The acquisition route was chosen to gain rapid market access. Meanwhile, he told R&D, ‘Within one year I want to be in high-tech ceramics. Go out and hire the best people in the field and get started now.’

Top-down approaches involve the exercise of vision and leadership to seek major ‘break-out’ moves. They act on a breadth of perspective that is usually not encour- aged or required of operating managers at the business level who are close to their customers, processes and technologies. Big moves may be necessary to reposition a multi-business company that is mired down in too many unattractive markets. However, it does not serve as well to send the business units themselves in new growth directions. Top-down mandates are by definition remote from the details of the business, and tend to foster a ‘big move’ mentality that stifles individual initiative and spontaneity. Commitment and enthusiasm may be lacking if the operating managers do not partici- pate in the process of deciding the new growth direction for their business.

Why a growth strategy is needed! The purpose of a growth strategy is to help a business unit steer a middle course between the opportunistic and unguided results of bottom-up initiatives, and the overly restrictive master plan imposed from the top down. Some discipline must be imposed on the growth direction to ensure it is supportive of the overall business strategy. The growth strategy provides guidance to the choice of new product, new market and diversification programmes to pursue, and the magnitude of effort, while at the same time spelling out what the business w,ill not do.

Innovation and growth are highly resistant to formal planning: fortuitous discoveries emerge from the lab, customers propose exciting new products that fit the capabilities of the business, a joint venture is proposed by a supplier who has a new technology but no marketing capability, and an unexpected acquisition candidate materializes when a competitor is forced to restructure. These events are unanticipated and need to be encour- aged - but not necessarily pursued as new business opportunities. To be useful, a growth strategy must be flexible enough to provide a framework for considering these possibilities, while restricting diversions from what the business is competent to do.

Sticking to the Knitting The growth dogma of the eighties was ‘stick to your

knitting’. This was sound advice in light of the excesses of the seventies when many companies haphazardly diversified away from their core business. The reasons seemed compelling at the time: achieve portfolio balance by participating in new markets that promise higher ROIs, reduce the risk of reliance on a single market, or employ superior management talent to turn around troubled businesses. These diversification moves were often justified by the allure of synergies with the existing skills and resources, such as access to technology, channels or marketing skills, depth of financial resources and reputation of brand name. Thus, General Foods bought Burger Chef, a chain of 700 fast-food outlets, because it was a fast-growing market and was ‘food- related’. Quaker Oats bought a clutch of toy companies and restaurants.

The cost of phantom synergies So many diversification efforts fell short of their inflated expectations that the whole notion of synergy as multi- plicative combinations of businesses was called into question. Indeed, many managers still shun the term because of the negative connotations, while others use less emotive terms such as interdependencies.

The evidence on the performance of wide-ranging diversification moves certainly justified the mounting scepticism. A retrospective analysis of the 10 largest mergers of 1971 found a decade later that half the acquirers would have been better off without their acquisition.’ Only 3 of the 10 acquisitions had returns on investment exceeding 10 per cent, compared with the 13.8 per cent median return for the Fortune 500. A broader study of 2,021 acquisitions made in new markets by 33 large, diversified US firms between 1950 and 1980 found that more than half were divested by 1986.9 The divestment rate largely depended on how closely related the acquisition was to the core skills and resources of the acquirer: 74 per cent of the unrelated ones were divested, whereas less than 30 per cent of the related acquisitions came to this end.

The high rate of failure of unrelated takeovers reflects the relative inability of management knowledgeable in one market to even know what questions to ask of a potential acquisition in unfamiliar territory, much less to know how to operate it to mutual advantage. These problems are exacerbated when an excessive premium is paid in the excitement of the negotiation. Even good operating performance cannot overcome the drag from a heavy burden of debt. As these lessons have been absorbed, businesses are becoming less venturesome in their acquisitions and diversifications, to concentrate on those that confer strategic advantage on the core business. Eventually synergy will come back in vogue, with a new meaning derived from the compelling need to build on the existing competencies to assure success.

Innovating Under Time Pressure Time is the newest battleground in the innovation war. lo With shortening life cycles and accelerating

EUROPEAN MANAGEMENT JOURNAL Vol 11 No 2 June 1993


technological change, the business that gets its new products to market fastest enjoys a big advantage:

In autos, Japanese companies can develop new products in two-thirds of the time - and with half as many people - as their counterparts in Europe and the United States. This gives them a lead in new designs, but also means they can freeze their designs closer to the market launch so they respond to up-to-date market information. Slowness can be costly. Although Philips introduced the first practical home videocassette recorder in 1972, three years ahead of the Japanese, they did not bring out the next generation until 1979. Meanwhile, the Japanese launched three generations of VCRs between 1975 and 1979. When Philips did launch their V20~, their North American affiliate refused to sell it because it was not compatible with VI-IS or Beta. By 1988, Philips was losing money, with only 2 per cent of a $16 billion market. In custom plastic injection moulds, Japanese firms are able to develop moulds in one-third of the time of US competitors and at one-third of the cost.

The advantages of speedy development are not limited to pre-empting the competition; there is evidence that quality is superior and inventories are reduced, with consequent cost savings. Production costs are often lower because the designs tend to be more efficient to produce. Speed pays off even when it means going over budget. One recent study’” found that high-technology products that come to market six months late but on budget will earn 33 per cent less profit over five years. In contrast, coming out on time, but exceeding the budget by 50 per cent, will cut profits only 4 per cent.

The widely acclaimed resurgence of Xerox in the copier business has many sources, but a major one is its halving of the time to develop and launch a new machine from six years to three years. At the same time, development costs were shaved by as much as two-thirds, with a saving of more than $100 million a year. Thus, the gains of fast-paced development are not limited to simple products or short-cycle electronics products. Even Boeing was able to shorten its usual 1Zyear cycle of plane development for the 767 in order to beat the European A310 Airbus to market by eight months.

IO accomplish such startling gains in development time, companies have to be prepared to change their mindset and their organizational processes. Doing traditional activities faster will not suffice - breakthrough improvements only come when management is forced to aban- don familiar ways and contemplate dramatic changes. Sheer survival offers a compelling reason for change. When competitors can develop new products twice as fast, there is little alternative to keeping up with them. But this is defensive. Rather than waiting to fall behind, top management can create a climate of urgency by challenging the organization. John Young, CEO of Hewlett-Packard, did this in 1988 with a company-wide

programme called BET (for break-even time) in which he challenged all departments to cut by half the interval between a new product’s conception and profitability, including covering all development costs.

Incremenfing and learning A hallmark of successful development processes is a continuing emphasis on small increments of improve- menP - introduced frequently - to gain experience and learning that is fed back to the next generation of products. This highly adaptive process is guided by an overall sense of strategic direction. Within the Campbell Soup company, a stream of new products has been coming out that appeals to the target market of health- conscious and sophisticated consumers, to reinforce the goal of becoming a well-being company.

Continuous small moves are a big departure from practice for European companies, like Philips, which in the past preferred to make more significant improvements less often. The view was, ‘rather than simply copy the new technology, our challenge is to leapfrog’. There is a growing recognition of the risks of big leaps: there is a bigger risk the product will fail and the odds of a successful start-up are low, while the cost of failure is large because major projects tend to get launched on a large scale. Meanwhile, the competitor has incor- porated a series of smaller improvements, market recognition for them, and moved to new improvements. All this time the competitor is learning from its successes as well as the smaller failures that were killed quickly.

Team organizations Many, if not most, European and American companies use a sequential organizational approach to managing new product programmes. Each function is compart- mentalized and takes over the project after a hand-over from another function in a sequence of steps from concept development - feasibility testing - product design - development - production design and tooling - production - market launch. This is a very time-consuming procedure as functions wait for each other to finish, so project hand-overs are cumulatively late, and the project may have to be passed back for a rerun because of problems such as poor design for manufacturability. Needless to say, relationships between functions are strained, especially if each blames the other for problems.

In the parallel or ‘rugby’ approach, a hand-picked, reasonably autonomous team, representing each key function, works together from start to finish.13 The approach is highly flexible as team members interact closely while ignoring traditional demarcation lines. Many steps overlap, as for example when tooling development is begun well before the design is frozen, which saves both time and later rework.

loaf role for ~la~lning? Paradoxically, the looseness of time-sensitive innovation - with its inherent flexibility, rapid adaption to new insights, and willingness to consider and carry along



several technology options into development - makes planning more important. At the front end an adaptive growth strategy provides the overall framework and imposes broad limits on the development activity. From this plan comes the ‘go-no go’ performance criteria that serve as targets for programme teams. What the plan does not do is attempt to impose a detailed, step-by- step plan of attack on the interwoven stages of the project.

Later, when the project is moving toward the expensive development, scale-up and commercialization phases, formal launch plans are prepared. These are not exer- cises in pin-point forecasting and detailed anticipation of all feasible steps. Instead they are used to force the business managers or project team members to think their projects through, to provide compelling evidence of the scope of the opportunity and the anticipated pay- offs, and to present credible scenarios for retrenchment in case they are wrong.

Ensuring Organizational Support The final ingredient for success is concerted leadership that simultaneously sets the tone and direction for strategic change, so people know where they are supposed to be going and provides a climate that supports and encourages those willing to take sizeable personal risks to pursue opportunities that fit within this strategic envelope. The need for the discipline of a clear strategic direction has already been established. The question now is, how is leadership to be exercised to get the organization to move in the chosen direction? Winning companies have several answers.

Lkmonstrute top management commitment Few organizations can consistently innovate or enthusi- astically seek new ventures in the face of uninvolved, uncertain and unwilling senior managers who would rather nurture the established businesses than pursue unfamiliar and unproven possibilities. Just as an unsup- portive climate can quickly squelch growth strategies and experimentation, a supportive management team that believes new products and new directions are the key to future growth can energize the organization. The perceived impact of this commitment is evident in a survey of senior executives in 179 companies on the

Table 1 Factors Associated with Success in New Product Development (Proportion of 179 Respondents Indicating which Factor was Most Important)

Top management support Enthusiastic product manager New business closely related to old Clear lines of authority Decentralized responsibility Specific screening criteria Monetary incentives Tight control of expenses Large and flexible budget --

85% 78 68 45 39 36 18 16 10

factors they thought most contributed to new product success (see Table 1).i4

Top management has to say it believes in innovation, and then behave as though it believes it. No lip service is permitted, for organizations are adept at reading between the lines for the true message. A visible commitment can be demonstrated in many ways: participation in new product review meetings, regular and spon- taneous visits to labs and development sites, arranging ceremonies to mark the launch of a new product team, and visibly singling out and rewarding the members of a team.

Ensure access to resources New ventures and new products are disruptive because they make unanticipated demands on the organization’s resources. These demands go beyond simply providing a reliable and substantial flow of funds to research and development, although that is a necessary condition for success. What winners seem to do especially well is pull the needed skills and insight from various parts of the organization and focus them on well-defined projects. Rather than fight for good people - and frequently lose - the project leader can expect to get them when they are needed. This does not mean there will not be loud protests from functional managers, but in the end the need for innovation prevails.

The success of Procter & Gamble’s introduction of calcium-enriched Citrus Hill orange juice shows the advantages of access to seemingly diverse resources.‘5 Researchers in the healthcare unit, in the course of development of drugs to treat bone disease, had learned of the extent of calcium deficiency among adults. As a remedy, they proposed adding calcium to the orange juice marketed by the beverage division. Neither group knew how to make the mixture palatable. The answer was found in the detergents group, which had years of experience in sequestering or suspending calcium particles in liquid soap products.

When the skills are not available in the organization they will be sought outside. When Monsanto decided a decade ago to shift its strategic focus to biotechnology, it invested heavily in joint ventures with small start-ups like Genetech to help build experience; similarly, seed money was given to research scientists at leading universities. The payoff has been slow in coming but promises to be sizeable, with products such as proteins to stimulate milk production in cows.

Avoid segmentalism Studies of successful innovation practices find that even large companies can behave like small ventures by eliminating bureaucracy (including the tight controls and extensive reviews and reporting), allowing fast, unfettered communication, and instilling a high level of group identity and loyalty. A carefully balanced venture team will not work unless the conditions satisfy the old truism about innovation: ‘Introducing a new product or process to the world is like raising a healthy



CLEAR STRATEGIC DIRECTION

focused on - building a competitive advantage constrains diversions

TOP-DOWN GUIDANCE AND RESOURCE ALLOCATION - involvement * access to resources - risk syndication

TOP-DOWN

BOTTOM-UP INCREMENTAL

OPPORTUNISTIC

STRUCTURED AND COMMAND-ORIENTED

t

ADAPTIVE DEVELOPMENT PROCESSES l

* team-based - energized by

champions

BOTTOM-UP INPUTS . organization positioned as customer problem solver - open to opportunities - commercially responsive R&D groups

Figure 3 A Balanced Approach to Managing Growth

child - it needs a mother (champion) who loves it, a father (authority figure with resources) to support it, and pediatricians (specialists) to get it through difficult times. It may survive solely in the hands of specialists, but its chances of success are remote.‘lh

Innovative firms of all sizes have a distinctive ‘integrative’ approach to problems. There is a ‘willingness to move beyond received wisdom, to combine ideas from unconnected sources, to embrace change as an opportunity to test limits . . . thus challenging established practices’.i7 Because there is little position consciousness - people do things despite the box on the organization chart they occupy - it is easy to exchange information and ideas across departmental lines and quickly form teams and task forces to pursue opportunities.

The enemy of fast-paced innovation is ‘segmentalism’, a contrasting style that relies on compartmentalizing activities and keeping organizational units separate and distinct. Segmentalist approaches deal with problems as narrowly as possible, and independently of their broader context. The prevailing belief is that problems are best solved by breaking them into pieces that are assigned to specialists working in isolation. Change is resisted because it threatens the established order and comfortable rhythm.

Syndicate risk Champions will not come forward and organizations

will not embark on prudent experimentation if they know that their failures will be punished - unless, of course, the punishment was for sheer incompetence. Some likelihood of failure is always present: the technology may not work as expected, costs may go out of line when the project is scaled up to commercial volumes, competitors may leapfrog, and customers’ needs may change. If the organization is constantly looking over its (collective) shoulder and is unwilling to take calculated risks, little progress is made. The best way to overcome this drag is to syndicate the risks. A derivative of management by consensus, it basically means drawing a wide range of people into any risky decision, including, whenever possible, the senior management. Everyone should feel a shared sense of responsibility for the decision to proceed.

Summary: The Conditions for Success Few companies rely exclusively on either a top- down, command-oriented or a bottom-up, incremental approach to managing growth. Instead they try to combine them to get the best features of each. This means that one is embedded within the other, as in Figure 3.

When growth comes from the bottom up, a lot of possibilities are generated - largely in response to events in the market. Directions for choosing among them, and channelling the organization, have to come from the top,

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without stifling either the initiative of the lower levels or their openness to new opportunities they can put forward as champions.

What, then, are the responsibilities of senior management? (1) To provide a supportive &mate, with suffi- cient investment in critical resources; (2) to structure the organization so it behaves as though it were small; (3) to instil a sense of urgency; and (4) to define a strategy for growth that is clear enough to enable the operating levels to sort op~r~~ty from inanity. Intel‘s engineers, for example, know the company has to continually replace its own products before competitors render them obsolete, while meeting its customers’ demands that succeeding generations of chips retain design continuity. These strategic guidelines are well understood, and almost self-enforcing, since they enable engineers to quickly decide whether an idea fits. This cuts down dramatically on the need for stifling oversight.

Just as superior strategic planning processes rely on informed, multifunctional teams from the business, where operating managers meet under the leadership of a general manager to debate and resolve issues, so does an effective development process rely on teams. Teams have more focused energy because of the presence of a motivated champion that permits them to adapt and develop faster. They also mesh with the trend to decentralization, downsizing and horizontal growth via the addition of small projects and related businesses. Even the very largest companies are reorganizing to focus development work on small teams, amidst a growing recognition that large-scale projects are not always the best way to grow. 3M is a master of turning small projects aimed at small markets into profitable businesses - for no project is too small for considera- tion. But even 3M, with its unparalleled capacity to spawn dozens of new businesses and products each year, imposes a strategic discipline and direction.

Note This article is adapted and updated from the author’s book, Market-Driven Strategy: Processes for Creating Value, New York: Fne Press, 1990.

References Richard N. Foster, ln~ovafion: The Affacker’s Advanfage, New York: Summit Books, 1986. Gary E. Willard and Arun M. Savara, Patterns of Entry: Pathways to New Markets, California Management Review, 3.1, Fall 1987, pp. l-19. They provided the quote from Miyamoto Musaski, A Book of Five Rings, New York: Overlook Press, 1974. Roy Rothwell et al., SAPPHO Updated - Project SAPPHO Phase II, Research Policy, 3, 1974, pp. 258-291. For major studies of new product successes and failures, see M.A. Maidique and B.J. Zirger, A Study of Success and Failure in Product Innovation: The Case of the US Electronics Industry, IEEE Transactions, Engineering Ma~agemenf, EM-31, November 1984, pp. 192-203, and Robert G. Cooper, The Dimensions of Industrial New Product Success and Failure, journal of Marketing, 43, Summer 1979, pp. 93-103.

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Eric von Hippel, The Sources of Innovation, New York: Oxford University Press, 1988. Laurence P. Feldman and Albert L. Page, Principles versus Practice in New Product Planning, Journal of Product inn~uafion Ma~age~renf, January 1984, pp. 43-55. Robert G. Cooper, The Performance Impact of Product Innovation Strategies, European Journal of marketing, 1984, vu. l-54. See also Robert. G. Coouer. Winninp at New Eoducts, Toronto: Gage Publishing, 1987. “ Arthur M. Louis, The Bottom Line on Ten Big Mergers, Fortune, 3 May 1982, pp. 84-89. Michael E. Porter, From Competitive Advantage to Corporate Strategy, hazard Business RetGem, 65, May- June 1987, pp. 43-59. Another influential study was by Richard Rumelt, Diversity, Strategy and Profitability, Strategic Management Journal, 3, 1982, pp. 359-369. Useful sources are George Stalk, Jr, Time - The Next Source of Competitive Advantage, Harvard Business Review, 66, July-August 1988, pp. 41-51, and Christopher Lorenz, Seizing the Initiative in a Struggle for Survival, Financial Times, 17, 19, 26 June and 3 July 1987. Reported in Brian Dumaine, How Managers Can Succeed Through Speed, Forfune, 13 February 1989, pp. 54-59. The study was conducted by McKinsey & Co. James Brian Quinn, Managing Innovation: Controlled Chaos, Harvard Business Review, 63, May-June 1985, pp. 73-84, is a strong advocate in this article where he says, ‘few, if any major innovations result from highly structured pIanning systems’. Hirotaka Takeuchi and Ikujiro Nonaka, The New Product Development Game, Harvard Business Review, 64, January-February 1986, pp. 137-146. Michael G. Duerr, The Commercial Development of New Producfs, New York: The Conference Board, 1986. Kenneth Labick, The Innovators, F~~une, 6 June 1988, pp. 52-64. Quinn, op, cit., p. 79. The distinction between integrative and segmental approaches has been extensively studied by Rosabeth Moss Kanter, The Change Masters: Innovation and Entrepreneurship in the American Corporafion, New York: Simon & Schuster, 1983.

George S. Day is the Geoffrey T. Boisi Professor and Director of the Huntsman Center for Global Competition and innovation at fhe Wharton School, University of Pennsylvania.

Previously he served as Executive Director of the Marketing Science Institute. For some years he has directed a Senior Management Seminar on Managing New Product ~euelo~menf for Ma?~agemenf Centre Europe, where many of his ideas in fhis article zuere developed. He is the author of 90 papers and ten books, the most recent being Marketing-Driven Strategy published by the Free Press in 1990. His research interests are primarily in competitive sfrategies in global and emerging n~rkefs, nav product d~elopmenf, and sfrafegic planning processes and methods.

GEORGE S. DAY, Wharton School, University of Pennsylvania, Philadelphia, PA ~91~-637~, USA


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