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.

VIDEO

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.

Case Study

• Kodak & the Digital Revolution

Kodak in Rochester

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?

Changes from the Outside

Firm

Changes from the Outside

Firm

Changes from the Outside

Adaptation &

Reorientation

Inertia

Changes from the Outside

Learning Myopia

Efforts in Short Term Success

Inertia in Long Term Failure

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

How do these two tables compare in size and shape?

(Shepard, 1990)

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)

Map of London showing V-1 rocket strikes (Gilovich, 1991)

River Thames

Regent’s Park

Cumberland

Map of London showing V-1 rocket strikes (Gilovich, 1991)

River Thames

Regent’s Park

Cumberland

Map of London showing V-1 rocket strikes (Gilovich, 1991)

River Thames

Regent’s Park

Cumberland

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

The Problem of Mental Models

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?

Make sure you’ve fixed (or are at least aware of) the strategic problem

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

Summary

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

Make sure you’ve fixed (or are at least aware of) the strategic problem

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