7. This is often true in sustaining situations—it is important to invest aggressively ahead of product launch to ensure that channels are filled and capacity exists to meet expected demand. But this is not the case in disruptive situations.
8. See Corporate Strategy Board, Stall Points (Washington, DC: The Corporate Strategy Board, 1998).
9. This is the theme of an important stream of work by Professor Robert Kaplan and his colleagues that has led them to advocate the use of a tool called the Balanced Scorecard, rather than financial statements, as a measure of an organization’s long-term strategic health. See, for example, Robert S. Kaplan and David P. Norton, The Strategy-Focused Organization (Boston: Harvard Business School Press, 2001).
10. In asserting that managers ought to let theory guide their actions and not wait until convincing data have become available, we certainly hope that readers do not construe that we are advising managers to fly by the seat of their pants without numbers. Measuring in detail the operating performance of established lines of business, and making decisions based on such data, is crucial to profitable movement up the sustaining trajectory. When engaging in discovery-driven planning for a new disruptive business, the pro forma financial modeling of possible outcomes helps planners understand which assumptions are most important. Our case for theory-driven decisions is grounded in a belief that sound theory can help executives assign strategic meaning to numbers that otherwise might appear to be inconclusive, and to sort the signal from the noise as the data come in.
11. As explored in chapter 6, we would expect that on-the-job management education, as a new-market disruption, will be a modular, nonintegrated industry where the ability to make attractive profits is unlikely to reside in the design and assembly of courses. And yet most of the business schools are attempting to compete in this market by designing and delivering custom executive education courses for large corporations. In our view, the business schools need a major dose of theory. Instead of simply selling cases and articles, a better strategy for them would be to create value-added curriculum modules that would enable tens of thousands of corporate training people to quickly slap together compelling content that helps employees learn exactly what they need to learn, when and where they need to learn it. It would also be critical to enable these trainers to teach these materials in such compelling and interesting ways that none of these on-the-job students has any desire ever to sit through a business school professor’s class again. If history were any guide, if the publishing divisions of the business schools did this, they would ultimately have a far broader impact, and be far more profitable, than their existing on-campus teaching organizations.
12. The literature assessing the performance implications of merger and acquisition activity is enormous, and surprisingly unambiguous. Many studies have revealed that many, and perhaps even most, mergers destroy value in the acquiring firm; see, for example, Michael Porter “From Competitive Advantage to Competitive Strategy,” Harvard Business Review 65, no. 3 (1987), 43–59, and J. B. Young, “A Conclusive Investigation into the Causative Elements of Failure in Acquisitions and Mergers,” in Handbook of Mergers, Acquisitions, and Buyouts, ed. S. J. Lee and R. D. Colman (Englewood Cliffs, NJ: Prentice-Hall, 1981), 605–628. At best, the only winners appear to be the sellers; see, for example, G. A. Jarrell, J. A. Brickley, and J. M. Netter, “The Market for Corporate Control: The Empirical Evidence Since 1980,” Journal of Economic Perspectives 2 (1988): 21–48, and M. C. Jensen and R. S. Ruback, “The Market for Corporate Control: The Scientific Evidence,” Journal of Financial Economics 11 (1983): 5–50. Even if acquisition targets are “well-selected” from a conventional strategic point of view, there is significant evidence to suggest that implementation difficulties can derail the realization of any putative benefits; see, for example, Anthony B. Buono and James L. Bowditch, The Human Side of Mergers and Acquisitions: Managing Collisions Between People, Cultures, and Organizations (San Francisco: Jossey-Bass, 1988), and D. J. Ravenscraft and F. M. Scherer, “The Profitabiliy of Mergers,” International Journal of Industrial Organization 7 (1989): 101–116.
13. We wish to emphasize that our message is not that acquisitions can solve a company’s growth problems. As we note in the text, even the successful acquisition of mature businesses does not change the growth trajectory of a corporation—it just places corporate revenues on a higher but flat plateau. In the late 1990s Cisco followed a very different acquisition strategy from the one we have described at J&J’s MDD business. Cisco’s packet-switching routers had created a powerful wave of disruption versus Lucent and Nortel, which made circuit-switching equipment for voice telephony. Most of Cisco’s acquisitions were sustaining relative to its business model and market position, in that they helped the company move up-market better and faster. They did not constitute platforms for new disruptive growth businesses.
14. This is one of the conclusions of Professor Donald N. Sull’s recent book, Revival of the Fittest (Boston: Harvard Business School Press, 2003).
15. We worry, in fact, that exactly this sort of reasoning has caused Hewlett-Packard’s senior executives to combine the company’s business units into a few massive organizations. The reorganization facilitated cost cutting, no doubt. But in our view, it can only exacerbate the company’s battle with its values at a time when reigniting growth is very important. At the same time—and this is why good theory is so important—“smallness” versus “bigness” is not the right categorization scheme when thinking about the benefits of these kinds of mergers or the advantages of smallness achieved by organizational separation or spin-outs. Consolidation can yield important cost savings, but as we point out in this chapter, it can corrupt the values needed to pursue potential disruptive opportunities. Smaller organizations—or big organizations that are blown apart into a series of smaller organizations—might have an easier time dealing with the challenges of embracing disruption-friendly values, but as we point out in chapters 5 and 6, organizations must also cope with the demands of architectural interdependencies, which can often require larger, more integrated organizations. In our view, it’s not so much about making trade-offs; that is, accepting inevitable compromises, as it is about recognizing the circumstances one is in and adopting the appropriate solution to the most pressing problem.
16. We have often been asked how much money a venture should be allowed to lose, and how much time it should take until profits should be expected. There can, of course, be no rigid rules, because the fixed-cost intensity of each business will vary. Mobile telephony was a disruptive growth business that entailed large fixed-cost investments, and hence more significant losses than would many others. In making these recommendations, we simply hope to offer to executives the guiding principle that losing less is more.
17. Honda’s experience is summarized on pages 153 to 156 of The Innovator’s Dilemma. That account has been condensed from a case study by Evelyn Tatum Christensen and Richard Tanner Pascale, “Honda (B),” Case 9-384-050 (Boston: Harvard Business School, 1983).
18. Searching for unanticipated successes, rather than seeking to correct deviations from a plan, is one of the most important principles that Peter F. Drucker taught in his classic book Innovation and Entrepreneurship (New York: Harper & Row, 1985).
19. This tendency to refocus immediately on the core when things get bad, even at the expense of the long-term solutions to the problem that caused the core to get sick, is known among behavioral psychologists as “threat rigidity.” See chapter 4 for more on this.
20. Fiore’s experiences are detailed in Clayton M. Christensen and Tara Donovan, “Nick Fiore: Healer or Hitman? (A)” Case 9-601-062 (Boston: Harvard Business School, 2000).
21. Presentation by Dr. Nick Fiore to Harvard Business School students, 26 February 2003.
22. Professor William Sahlman of the Harvard Business School has studied the phenomenon of venture capital “bubble” investing for two decades. He observes that when many venture investors con
clude that they need to have strong investment positions in a “category,” investors develop “capital market myopia”—a view that does not consider the impact that other firms’ investments will have on the probability that their individual investment will succeed. When massive amounts of available venture capital are focused on an industry where investors perceive steep scale economies and strong network effects, the funds and the companies in which they invest are compelled to engage in “racing” behavior. Firms seek to dramatically outspend the competition, because it is a company’s relative spending rate and its relative execution capability that drive success. Sahlman notes that once a race like this has started, venture funds have no option but to engage in that behavior if they want to participate in that investment category. Sahlman has observed that between the mid-1980s and the early 1990s—the period following the first of these investment bubbles—the returns to venture capital were zero. We have seen a similar decline in venture returns in the years following the dot-com and telecommunications investment bubble in the late 1990s.
23. Big-ticket investing of money that is impatient for profit and growth is very appropriate in later stages of step 1 of the spiral, when the company needs to focus deliberately on a winning strategy that has become clear. Interestingly, Bain Capital, which has been one of the most successful investment firms over the past decade, made this transition very effectively. Bain started out making rather small venture investments. It provided the start-up funding for Staples, the office superstore, for example. It was so successful with its first fund that investors simply poured as much money into subsequent funds as Bain would let them. This meant that the firm’s values changed, and it could no longer prioritize small investments. In contrast to the behavior of the venture funds in the bubble, however, Bain stopped making early-stage investments as it got bigger. It became a later-stage private equity investor, and continued to perform magnificently. In the parlance of the model of theory building we presented in the introduction, as these investment funds grow, they find themselves in different circumstances. The strategies that led to success in one circumstance can lead to disaster in another. Bain Capital changed strategy as its circumstances changed. Many of the venture capital funds did not.
CHAPTER TEN
THE ROLE OF SENIOR EXECUTIVES
IN LEADING NEW GROWTH
How should senior executives allocate their time and energy across all of the businesses and initiatives that demand their attention? How should their oversight of sustaining innovations differ from their mode of management in disruptive situations? Is the creation of new growth businesses inherently an idiosyncratic, ad hoc undertaking, or might it be possible to create a repeatable process that successfully generates wave after wave of disruptive growth?
The senior executives of a company that seeks repeatedly to create new waves of disruptive growth have three jobs. The first is a near-term assignment: personally to stand astride the interface between disruptive growth businesses and the mainstream businesses to determine through judgment which of the corporation’s resources and processes should be imposed on the new business, and which should not. The second is a longer-term responsibility: to shepherd the creation of a process that we call a “disruptive growth engine,” which capably and repeatedly launches successful growth businesses. The third responsibility is perpetual: to sense when the circumstances are changing, and to keep teaching others to recognize these signals. Because the effectiveness of any strategy is contingent on the circumstance, senior executives need to look to the horizon (which often is at the low end of the market or in nonconsumption) for evidence that the basis of competition is changing, and then initiate projects and acquisitions to ensure that the corporation responds to the changing circumstance as an opportunity for growth and not as a threat to be defended against.1
Standing Astride the Sustaining–Disruptive Interface
Because processes begin to coalesce within a group that is confronted repeatedly with doing the same task, the engine that propels accomplishment in well-run companies gradually becomes less dependent on the capabilities of individual people, and becomes instead embedded in processes, as we described in chapter 7. After successful companies find their initial disruptive foothold, the task that recurs repeatedly is sustaining innovation, not disruption. Well-oiled, capable processes for successfully addressing sustaining opportunities have therefore coalesced in most successful companies. We know of no companies, however, that as yet have built processes for dealing with disruption—because launching disruptive businesses has not yet been a recurrent task.2
At present, therefore, the ability to create growth businesses through disruption resides in companies’ resources, and for reasons we’ll explore in this chapter, the most critical of these resources is the CEO or another very senior executive with comparable influence. We say “at present” because it does not always need to be so. If a company tackles the task of creating disruptive growth again and again, the ability to create successful disruptive growth businesses can become ensconced in a process as well—a process that this chapter calls a disruptive growth engine. Although we know of no company that has yet developed such an engine, we believe it is possible and propose four critical steps that senior executives can take to do so. A company that succeeds in creating a disruptive growth engine will place itself on a predictable path to profitable growth, consistently skating to the money-making opportunities of the future.
A Theory of Senior Executive Involvement
Until processes that can competently manage disruptive innovation have coalesced, the personal oversight of a senior executive is one of the most crucial resources that disruptive businesses need to reach success. One of the most discouraging dimensions of senior executives’ lives is the refrain by writers of many management books that they must be involved in order to fix whatever problem the book is about. Corporate ethics, shareholder value, business and product development, acquisitions, corporate citizenship, corporate culture, management development, and process improvement programs are all squeaky wheels that demand executive grease. Senior managers must pay close attention to managing the top line, the bottom line, and all the lines in between. Confronting such cacophony, executives need a good circumstance-based theory of executive involvement—a way to discern the circumstances in which their direct involvement actually is critical to success, and the circumstances in which they should delegate.
One of the most common theories of when senior executives should get involved in a decision and when they should not is based on an attribute of the decision, namely, the magnitude of money at stake. The theory asserts that lower-level managers can make small decisions or ones that involve minor changes, but that only senior executives have sufficient wisdom to make the big calls correctly. Almost every company enacts this theory through policies that give decision-making approval for smaller investments to lower-level executives and elevate big-ticket items for the scrutiny of the senior-most team.
Sometimes this theory accurately predicts the quality of decisions, but sometimes it doesn’t.3 One problem with systems that reflect the send-the-big-decisions-to-the-big-people theory is that the data are in the divisions: There is an asymmetry of information along the vertical dimension of every organization. Reporting systems can indeed elevate the information that senior managers ask for, but the problem is that sometimes senior management doesn’t know what questions need to be asked.4 Senior people in large organizations therefore typically can’t know much beyond what the managers below them choose to divulge. Worse, when midlevel managers have been through a few senior management decision cycles, they learn what the numbers must look like in order for senior management to approve proposals, and they learn what information ought not be presented to senior management because it might “confuse” them. Hence, a good portion of middle managers’ effort is spent winnowing the full amount of information into the particular subset that is required to win senior approval for projects th
at middle managers already have decided are important. Initiatives that don’t make sense to the middle managers rarely get packaged for the senior people’s consideration. Senior executives envision themselves as making the big decisions, but in fact they most often do not.
Because the senior-most executives in reality cannot participate when and where these decisions actually get made, decision-making processes that work well without senior attention are critical to success in circumstances of sustaining innovation. In the sustaining circumstance when capable processes exist—even in many big-ticket decisions—senior executives typically cannot improve the quality of the decision because of the asymmetry of information that exists.5 This is when the gospel of “driving decisions down to the lowest level” and of “making the lowest level competent” is in fact good news.
Another version of the “size theory” states that large businesses require more active senior management involvement, whereas lower-level managers can cope with the demands of smaller organizational units. Fewer people and fewer assets, the belief goes, mean that less managerial skill is required. Sometimes this is the case, but sometimes it isn’t. Potentially disruptive businesses are small. But with their ill-defined strategies and demanding profitability targets, make-or-break decisions arise with alarming frequency, and such businesses have no processes for making these decisions correctly. In contrast, larger businesses in successful organizations typically have established customers with clearly articulated needs, and have finely honed resource allocation and production processes to serve those needs. The decision-making requirements of these organizations typically transcend the involvement of any given individual, and are typically—and appropriately—met by the orderly functioning of established processes.
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