Failure of Technology Oriented Firms - sjbae / Sung Joo...
Transcript of Failure of Technology Oriented Firms - sjbae / Sung Joo...
Failure of Technology Oriented Firms
Sung Joo Bae
Associate Professor
Operations and Technology Management
School of Business Yonsei University
Project plan meeting
• Select a technology oriented firm
• Select a target product
• Come up with key agenda for final project
Quiz:
The following video shows 6 people making passes (3 in white shirts and 3 in black shirts). • Your task is to count the total number of AIR PASSES that people wearing WHITE shirts pass. - Do NOT count passes by the players in black. - Do not count the bounce passes – only direct air passes.
Inattentional Blindness
• When people are engaged in an attention-demanding task
they often fail to notice unexpected objects or events.
• In an experiment setting, 50% have failed to notice the gorilla.
Q: These companies have something in common. What is it?
ICI (chemicals) IBM (personal computers) Kodak (photography) Sears (retailing) General Motors (automobiles) Ampex (video recorders) Winchester (disk drives) US Steel (steel) Syntex (pharmaceuticals) Philips (electronics) SSIH (watches) Polaroid (photography) Fuji Xerox (copiers) Zenith (TVs)
ICI (chemicals) IBM (personal computers) Kodak (photography) Sears (retailing) General Motors (automobiles) Ampex (video recorders) Winchester (disk drives) US Steel (steel) Syntex (pharmaceuticals) Philips (electronics) SSIH (watches) Polaroid (photography) Fuji Xerox (copiers) Zenith (TVs)
They are the product class winners who fall victims to their success.
….then, what in the world has happened to them?
Inertia in Organizational Mechanisms
• Resource Dependence – in this case, customers
• Resource Allocation
Competence-enhancing vs. competence-destroying
Competence-destroying Innovation; Innovations which render the existing resources and capabilities of the firm obsolete Competence-enhancing Innovation; Innovations which are compatible with the existing resources and capabilities of the firm obsolete
Quiz:
QUICKLY answer the following questions.
1. A bat and ball cost $1.10 in total. The bat costs
$1.00 more than the ball. How much does the ball
cost?
2. If it takes 5 machines 5 minutes to make 5
widgets, how long would it take 100 machines to
make 100 widgets?
Two Cognitive Systems - Automatic & Reflective
Automatic
• Uncontrolled
• Effortless
• Associative
• Fast
• Unconscious
• Skilled
Reflective
• Controlled
• Effortful
• Deductive
• Slow
• Self-aware
• Rule-following
Source: Thaler & Sunstein (2009)
Automatic System – Rules of Thumb
• Very effective in time-constrained situation But very often systemically-biased
• Systematic biases
– Anchoring : Start from the known (familiar) fact and adjust in the direction that seems right (e.g. Size of Hong Kong Island)
– Availability: Assess the likelihood of events based on how readily examples come to mind (e.g. insurance surge after earthquakes)
– Representativeness: Stereotype based on personal experience (e.g. Hot Hands, Bombs on Thames)
Source: Thaler & Sunstein (2009)
Automatic System – Rules of Thumb
• Optimism & Over-confidence: People are over-confident in their abilities
– e.g. Entrepreneur’s answers to two questions –
1) Chance of success of businesses like yours: 50%
2) Chance of success of your business: 90%
• Loss Aversion: People do not assign specific values to objects. When they give up something, they hurt more than they are pleased when they acquire the same thing
– e.g. Heads to win $X, tails to lose $100 Usually X is about
$200.
• Status Quo Bias: People tends to stick with their current situation
– E.g. Same seat for every class? Opt-out much more effective
than Opt-in in subscription-based business
Cognitive Inertia vs. Action Inertia
Cognitive Inertia
• Locking into habitual ways of thinking about their industry and firm’s position
– Framing lock-ins
– Dangerous analogies
– Emotional traps
Action Inertia
• Resistance that a given strategic option is likely to meet when it is executed
• Will discuss this in detail..
Framing (Mental model) lock-ins
• Rationality is constrained
• Managers develop and use simplified representations of their strategic problems – Three things matter in this business: A,B, & C
– This business is all about the relationship between X & Y
– We are a technology company!
– Yahoo is in the media business! (Then CEO Tim Koogle) pervasive consequences for Yahoo’s Strategy and organization
• Stickiness and resistance to negative feedback (confirmation bias) – look for evidence to support current thinking
Polaroid
•Far superior digital camera technology in 1991 Filed for bankruptcy
“Before we start, let me premise that there is one thing about photography that not everyone understands but that is crucial to it. In the photography business, all the money is in the software, in the consumables. There is no money in the hardware. This has been and will always be a fundamental truth.”
- Former Polaroid CEO
Similarity
Mapping
Dangerous Analogies
• Most powerful form of reasoning in high complex and ambiguous decision setting
• Intel’s Celeron Processor, Circuit City’s CarMax
• Enron’s (gas & electricity) attempts in broadband industry: Analogy fragmented demand, capital intensive distribution, rapid change by deregulation and technical change
Target
Problem
Source
Problem
Candidate
solution Transfer
Emotions
• Emotional attachment to a certain way of thinking
– Usually come from years of experience, culture, identification of oneself with it (Polaroid, Kodak, etc.)
• Results
– Threat looks way larger!
– Escalation of Commitment
– Familiar patterns of thinking replicated
• Think about Kodak’s response to the Sony’s first digital camera – fear, enormous R&D with razor/blade model in mind
A Way Out of the Cognitive Inertia
• Mapping assumptions: what assumptions am I making?
• Generating alternatives: what alternatives are there?
• Analysis: Lay out the alternatives and compare to choose the best one.
A Way Out of the Cognitive Inertia
• From Mental Models to Transformation (Reading)
– Bringing in the radicals
– Challenge assumptions
– Explore new ideas (traveling)
– Zoon in and zoom out
– Destroy your brand
– Create interdisciplinary diversity
– Idealized design
– Scenario planning
– Experimentation
– What else?
Cognitive Inertia vs. Action Inertia
Cognitive Inertia
• Locking into habitual ways of thinking about their industry and firm’s position
– Framing lock-ins
– Dangerous analogies
– Emotional traps
Action Inertia
• Resistance that a given strategic option is likely to meet when it is executed
• Will discuss this in detail..
Action Inertia
• Sticky Routines: McDonald’s success in Standard Operating Procedures (Manual) Difficult to change into more customized, diverse menus according to the preference change
• Ingrained Culture: A system of values (what really matters to the firm, priorities) & norms (appropriate behaviors)
• Leadership Failures: Take care of misalignment between desired behavior and incentives, attachment to the status quo, and ego-involvement
Change challenges every aspect of the organization
Leadership
& Strategy
Structure &
Process
Incentives
Culture &
Mental Models
Individuals become
Invested in old approaches
Strategic/competitive
problems may provide an
excuse for inertia
Existing incentives often
work against significant
change, and new incentives
take time and work
Whole scale changes to
structure and process are
very disruptive:
Two years of lost time?
Strong cultures & deeply
rooted mental models are
extraordinarily resistant
to change
Mental models & the evolution of knowledge: • The Era of Ferment:
– A premium on flexible competence: deep integration across functions and boundaries
• Dominant design established -- enables…
• An Era of Incremental innovation
– Allows the fragmentation of knowledge
– Component knowledge -- knowledge about the pieces
– Architectural knowledge -- knowledge about the relationship between the pieces -- about “what everybody else knows”
Architectural knowledge becomes embedded in mental models...
• Information channels
– “If I have a question about customer needs I can always call Fred..”
• Communication filters
– “The only thing I need to worry about in this report is Section 8..”
• Problem solving strategies
– “The easiest way to increase speed while reducing noise is to...”
And in the Deep Structure of the Organization
Leadership
Formal Structure/Process
Incentives/Political Structure
Culture/Mental Models
Where it is a source of STRENGTH! • It allows the organization to get things
done!
– Minimizes “meeting time”
– Allows for clear responsibilities
– And quick response
• Embedded architectural knowledge is a key organizational competence
And of weakness: • Problems in recognition:
– Denial
• Problems in response:
– Panic
– Overload & the recreation of old solutions
Control & Coordination
The Organizational Challenge:
Entrepreneurial
Drive,
Freedom from
the “old ways”
Successful growth unites
entrepreneurial insight with
effective coordination
Startups
B as U
In summary: • “I see”, he said, “you’re suggesting that we invest
millions of dollars in a market that may or may not exist but that is certainly smaller than our existing market, to develop a product that customers may or may not want, using a business model that will almost certainly give us lower margins than our existing product lines. You’re warning us that we’ll run into serious organizational problems as we make this investment, and our current business is screaming for resources. Tell me again just why we should make this investment?”
- Divisional Manager, Telecommunications Equipment Provider
What can be done? • Lead:
– Build the “ambidextrous” senior team: communicate the strategy, allocate resources
• Structure:
– Explore transitional and intermediate forms
• Incent:
– Explain “just what’s in this for me?”
• Build:
– Lay the foundations for a new culture, new expectations
What can be done? • Lead:
– Develop a clear strategy
– Generate energy
– Build an “ambidextrous” senior team
– Make decisions
Develop a clear strategy
How will we
Create value?
How will we
Capture value? How will we
Deliver value?
And allocate resources to it!
How will we
Create value?
How will we
Capture value? How will we
Deliver value?
100%
80%
60%
40%
0%
20%
6 5 4 3 1 2
Generate Energy
• Position the discontinuity as an urgent threat:
– Flirt with bankruptcy
– Make vivid the idea that the firm might flirt with bankruptcy
• Position the discontinuity as an opportunity
– Generate some small successes: build enthusiasm and “infect” the organization
– Leap boldly into the future
Build an Ambidextrous Senior Team • Ambidextrous senior teams must manage
– both more mature, operationally focused businesses
– and higher growth, emerging businesses
• High performing senior teams show:
– High conflict, high respect decision making capabilities
– High levels of trust and truth telling
– The ability to manage divergent incentive systems and career paths
• Coupled with processes that support the divergent management of quite different business units
– E.g. Resource allocation processes that allow for different time horizons, milestones, rates of return
Average
Value-Added
Time on
Engineering
Tasks
Number of Projects per Engineer
100%
80%
60%
40%
0%
20%
6 5 4 3 1 2
Source: IBM Development Efficiency Study
Make Decisions
What can be done? • Lead:
• Structure:
– Implement appropriately
– Choose the right people
– Manage linkages
Control & Coordination
Balance entrepreneurial energy and coordination
Entrepreneurial
Energy Successful disruptive
innovation unites
entrepreneurial insight with
effective coordination
Startups
B as U
Control & Coordination
Choose a structure that fits the firm’s strategic positioning and skills
Joint
venture/
alliance
Entrepreneurial
Energy
Internal
venture
Build inside
existing unit
Acquire/
Partner
Control & Coordination
Manage it using every lever that you have
Acquire/
Partner
Build inside
existing units
Joint
venture/
alliance
?
Entrepreneurial
Drive,
Freedom from
the “old ways”
Internal
venture
Build inside
existing unit
Exercise: Best Practice in Building Growth
• Choose one of the alternative organizational forms with which you have some experience:
– Building growth inside an existing unit
– Separate division
– Spin off
– Joint venture
– Acquisition
• In retrospect, what are the critical factors that needed to be in place to make it successful?
Acquisitions: Pros and Cons
• Pros
– Brings in a new culture with an established set of skills – a “sure bet”?
• Cons
– Is the market efficient? – Will the shareholders of the acquired firm capture all the value?
– Should you worry about the winner’s curse? Will you pay too much?
– Once acquired, will the new firm simply be assimilated into the existing firm?
The “Winner’s Curse” may mean that you pay too much
Perceived
value
No. of
firms
“True” value
“Winner’s” valuation
Once acquired, acquisitions must be managed
Control & Coordination
Buy an
Innovative
firm ?
Entrepreneurial
Drive,
Freedom from
the “old ways”
Assimilate it ?
Key Considerations:
• How easy is it to write contracts?
– How tight is the IP regime?
– How much uncertainty is there?
– “Specificity” of the asset – how “thick” is the market?
• What will happen to “entrepreneurial energy”?
• What will be the key complementary assets going forward?
What can be done? • Lead
• Structure:
• Incent
– Explain “just what’s in this for me?”
– Manage the balance between:
• Individual outcomes and team/firm outcomes
• “Objective” and “subjective” measures
Control & Coordination
The incentive problem is an inherently difficult one…
Entrepreneurial
Drive,
Freedom from
the “old ways”
Startups
B as U
Control & Coordination
Using “high powered” incentives may reduce coordination
Acquire/
Partner
Build inside
existing units
Joint
venture/
alliance
Entrepreneurial
Drive,
Freedom from
the “old ways”
Internal
venture
Build inside
existing unit
?
What can be done? • Lead
• Structure
• Incent
• Transform the culture:
– Build on core values
– Practice thinking in new ways
– Manage from the heart
Remember what you’re dealing with:
• “I see”, he said, “you’re suggesting that we invest millions of dollars in a market that may or may not exist but that is certainly smaller than our existing market, to develop a product that customers may or may not want, using a business model that will almost certainly give us lower margins than our existing product lines. You’re warning us that we’ll run into serious organizational problems as we make this investment, and our current business is screaming for resources. Tell me again just why we should make this investment?”
- Divisional Manager, Telecommunications Equipment Provider
Control & Coordination
Manage the organizational issues aggressively
Acquire
Build inside
existing units
Joint
venture/
alliance
?
Entrepreneurial
Drive,
Freedom from
the “old ways”
Internal
venture
Build inside
existing unit
Takeaways
• When the technological change comes, there are different types of cognitive inertia and action inertia to overcome.
• We should be fully aware of the cognitive biases we may face. understand the nature of these biases and try to counteract.
• Open-minded about generating and accepting new models
Generating New Models
• Bring in the radicals
• Challenge assumptions
• Travel and explore new ideas
• Zoom in and zoom out
• Destroy your brand
• Create interdisciplinary diversity
• Idealized designs: reinvent from the blank state – eBay and Craigslist
• Scenario planning
• Experimentation: 20% time?
Source: HBR piece, Wind & Crook