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Strategic innovation 22-23 LS Strategic innovation 1 Strategic innovation 22-23 LS INDICE: Week 1: introduction to strategic innovation → 3 Week 2: overcoming inertia and adaption for SI → 7 Week 3: overcoming inertia and adaption for SI → 11 Week 4: Learning and venturing for SI→ 20 Week 5: learning and venturing for SI → 28 Week 8: culture & SI → 32 Week 9: Goal and SI → 39 Week 10: Identity, branding & strategic innovation → 46 Week 11: strategy implementation & strategic innovation → 51 Case study: “The birth of Swatch” → 56 Case study: “FIAT Open innovation in a downturn” → 62 Case study: “Corning microarray technologies” → 66 Case study: “Robert Bosch” → 71 Case study: “Microsoft under the CEO Nadella” → 76 2 Strategic innovation 22-23 LS Strategic innovation and growth → Besides being critical for long-term survival, strategic innovation is the only way to maintain growth over time. The growth potential of any business model eventually decays, and growth by acquisition is often plagued with failures and value dissipation (more than 80% of M&As don’t delivered the promised results in terms of growth) Example of successful SI: apple and iTunes, nestle and Nespresso Example of failed SI: polaroid and digital photography, Nokia and smartphone Why is SI so difficult → Finding an idea and a great leader for strategic innovation is not enough. On top of identifying a great idea, to succeed in strategic innovation leaders of incumbent companies have to: • Attract and protect funding for the strategic innovation • Learn quickly from success and failure • Rally people around a fuzzy idea of the future • Reorganize to leverage on the lessons learnt • Manage expectations of performance amidst chaos • Establish new organizational norms and culture • Overcome tensions between the established business and the strategic innovation Innovations are found to fail (not meeting the established targets) in the 70-80% of the cases. We can expect this failure rate to be even higher with strategic innovations, for the reasons we have seen before. SI entails a huge consumption of resources, it becomes a priority to invest our energies in a way that increases our chances of success and give meaning to our efforts. Are all strategically sound innovations worth pursuing? We believe that SI worth pursuing requires leaders who ask themselves are conscious of share, with their teams, and communicate the deep purpose that the SI they want to pursue aims to achieve. We have seen that SI is critical for long-term survival and to ensure sustained growth over time. But we can (and should) consciously search for higher, more elevated purpose for the SI our company engages in (and this is what companies are increasingly requested to do). Only by doing so companies can: - Generate extraordinary energy and commitment in our teams - Fulfill our (and very often our colleagues’) reasons for working and even for being - And, ultimately, contribute to the creation of a more equal, inclusive, and sustainable society To do so, leaders need to be aware of what purpose really is, from where it originates, how it is created, how to work with it in strategic innovation. Strategic innovation has a very deep human component A framework for managing SI → How we prepare for strategic innovation: Create the conditions for strategic innovation to flourish Choose the path: Ideate the right strategic innovation to pursue What and how we do: Design and implement the strategic innovation 5 Strategie innovation 22-23 LS CHOOSE THE PATH: IDEATE THE RIGH STRATEGIC INNOVATION TO PURSUE WHAT AND HOW WE DO: THE STRATEGIC COMPASS: - STRATEGY IMPLEMENTATION - IDENTITY & BRAND - GOALS - CULTURE Î î HOW WE PREPARE FOR STRATEGIC INNOVATION: (CREATE THE CONDITIONS FOR STRATEGIC INNOVATION TO FLOURISH OVERCOMING INERTIA AND ADAPTATION LEARNING AND VENTURING: FOR STRATEGIC INNOVATION FOR STRATEGIC INNOVATION UNDERSTANDING AND LEADING PEOPLE FOR STRATEGIC INNOVATION Strategic innovation 22-23 LS WEEK 2: OVERCOMING INERTIA AND ADAPTION FOR SI → Case discussed: “the birth of swatch”, “Polaroid”, “Liz Claiborne” and “RCA”. Strategic innovation and change → strategic innovation entails deep changes in those organisations that embark in it, which become manifest at many different levels: • Processes • Culture • Knowledge SI is characterized by: - Change in the whole organization, not just a subset of it - Deploying a new technological trajectory - Developing a new business model or new capabilities - A change process that leads to a new way of organizing and making strategy Adaptation: intentional decision making undertaken by organizational members, leading to observable actions that aims. To reduce the distance between an organization and its economic and institutional environment. Case history: change at Liz Claiborne → In 1976, the fashion designer Liz Claiborne founded a design clothing company. Its value proposition was to offer lower-end designer sportswear for professional women. In 1981, the company makes an IPO, entering the Fortune 500 list. Revenues in 1981 are equal to 116 mln $, ten years later, in 1991, revenues are more than 2 bln $. The market value of the company in May 1991 had grown 61x from the IPO. Key Success Factors of Liz Claiborne (until late 1980s): • Use of mix-and-match collections, which required specific presentation formats to department stores (main buyer) • Contracting Far East suppliers, in order to cut costs and lower the final price • Inflexible ordering policy: only complete collections could be bought Business model is tightly coupled, activities reinforce each other. In the late 1980s … - Technological changes: reordering becomes economically feasible, inventory management systems become a reality - Social changes: customers are beginning to ask for casual clothes - Buyer’s side changes: saturation of department stores market makes them less inclined to grant discounts to suppliers, and to give special conditions to some of them. Reinforcing activities makes it hard for Liz Claiborne to adapt to the changes! 1991: quick response by Liz Claiborne, enabling stores buyers to submit their orders electronically, with the promise to fulfill them in two weeks, but the company started to decline: lead times become longer, orders get lost or not fulfilled, etcetera. In 1995, Charron becomes CEO. Three directions of strategic innovation restored competitiveness: • Innovations in design, sales and marketing: improvement of in-store presentation, investments in training for salespeople, synergies between different collections • Innovation in the product portfolio: creating brands for each retail channel and each price segment • Innovation in production and distribution: refocus on less but larger suppliers, located in the West and willing to invest in process innovation; introduction of vendor-based restocking system. A radical change in several interdependent activities of the business model was needed to face the radical changes in the external environment. This case is very useful because it shows that is not enough a strategic change that means an organizational change, but you also need to change the business model to fit the ecosystem A framework of fit → Strategic fit: how can fit be achieved among the focal firm’s (new) business model, its competitive strategy and its corporate strategy (degree of diversification, scope and boundary decisions, market timing decisions)? External fit: how should the focal firm, and its new business model, be embedded into its ecosystem? For example, which specific external stakeholders (e.g., customers, partners, suppliers) should be enlisted, and how can positive relationships with them be created, managed, and maintained? 7 Strategic innovation 22-23 LS Organizational routines and managerial overconfidence: Organizational routines are strengthened (and become more difficult to adapt and change) also due to managerial overconfidence. Managerial overconfidence refers to the leader’s perception that she can predict the future easily, alter the status quo easily and quickly, and overcome any resistance to required changes. This leads to underestimating the problems of changing existing routines to support strategic innovation Example RCA: was company that invents consumer's technology (radio, televisions…), because they had the patent for the vacuum tube. They were making high quality, high performance and high price electrodomestics, they sold piece of furniture with the television. Then Sony took the patent of the transistor in 1995 from the company that invented it ATNT, making small portable radio and smaller television with a cheaper price. When RCA saw that Sony bought the license for the transistor they bought it also. They saw that some of the other competitor start producing with the new technology so RCA said that they were a good society and could wait before introducing the transistor, this is an example of overconfidence. The top manager understood that this could be their new S-Curve, but they thought that they could face this new kind of technology, so in 1996 when the first portable radio came out on the market by Sony, RCA tried to buy them, but Sony refused. They wait 6 years to introduce the transistor, but the technology was growing too fast to catch it so after 6 years they were bought by others and now it doesn’t exist anymore. This is a typical example of overconfidence, because they had the people, the knowledge and the technology, but they decided to not continue on that path. POLITICAL SYSTEMS: One cause of inertia comes from the political nature of organizations. Directors and managers are resistant to alter the status quo, because this might change the checks and balances of power within the company. The threat of altering the equilibrium triggers pushback by the top management team. Contestable political issues during strategic innovation: • managerial compensation • distribution of resources within the company (especially in large, multinational companies) • relationships with specific stakeholders 10 Strategic innovation 22-23 LS WEEK 3: OVERCOMING INERTIA AND ADAPTION FOR SI → Case discussed: Fiat: “Open innovation”, “Oticon”, “Pringles”, “Enel”, “Temporal search in Aboca”, “KUKA and ST”, “Circuit city and Intel” . FIAT CASE: Why is this an example of strategic innovation? Autonomy for the project, entry into new market, higher risks, new value proposition and business model. What are the challenge/issue in pursuing a strategic innovation of this type? New identity for the company, adapting the organization: 1. To enable the pursuing of SI (structural ambidexterity) → multilevel change 2. New skills and capabilities to be acquired → adaptation 3. Different culture / attitude → a new fit 4. New goals / meaning KPIs CONFORMITY: Companies do not operate rationally at any given point in time, but they are affected by the social and cultural norms in a society, as well as by their peers. While the mantra of strategic management (since Michael Porter) is “differentiation”, most of the time companies try to be similar to other companies that they consider their peers. The reason behind this is that conformity (and not differentiation!) Brings legitimacy to the company. Behind this idea of conformity there is the concept of institutional isomorphism, which prescribes that, due to external or internal pressures, companies in a social system tend to imitate each other and become similar to one another over time. LOCAL SEARCH: A fourth source of inertia is local search. Even when companies are not extremely rigid, they tend to search around the position they are in, meaning that incremental, non-competence-threatening innovation is more common than radical, competence-threatening change. A consequence of local search is that companies are likely to search around their core business. Local search is also bounded by the history of company, by the market position the company occupies, and the technological trajectory that a company has committed to follow. Local search rests on the assumption that managers are characterized by bounded rationality, which means (1) they do not have perfect knowledge, (2) they do not maximize their utility, but they will continue to search until they reach a satisfying (not Pareto-optimal) outcome. Local search can trigger different strategic behaviors which might hurt the company in strategic innovation: • fear of cannibalization of the core business • focus on the core business as only driver of success • specialization by function (not seeing the bigger picture) • radical ideas are discarded from the company Local search is not considered as a process that grants success in strategic innovation because it often entails solutions that are familiar to the company. The renewal of capabilities and resources in strategic innovation requires a more distant search. Example: Oticon → they create a new kind of market, the with the instrument of hearing aid, they started to sell this problem convincing doctor to directly sell their product to the patient. Then a Stanford research team found out a new kind of this technology with the inside your ear technology. The performance of this new technology were worst than the Oticon one, but they were using a different kind of business model, because they don’t purse the performance, but the idea of an hide technology for an aesthetic advantage. When Oticon saw this new tech, they didn’t think that this could be a threat, keeping thinking that their was better and that their strategy of selling their product to the doctor, but the customers preferred the new one that can’t be seen. So they were almost in bankrupt and the top manager was substituted and now they still sell their product with Amplifon. This was an example of inertia, overconfidence and Local search, because they had to watch with a wider view inside their market and thinking that their business has only that kind of channel and they don’t have to change it, without seeing that there were some other competitors that could be considered as a threat. Types of inertia: cognitive vs action → There are two types of inertia based on its locus: cognitive inertia and action inertia. COGNITIVE INERTIA shows about when the strategy-makers think about strategic aspects of the company, such as its competitive position, its industry membership, its core capabilities, the most important factors that will affect the future of the company, and so on. In particular, this happens when strategists are in the option 11 Strategic innovation 22-23 LS generation phase of the strategy process. Cognitive inertia might take three-forms, linked to cognitive biases: A. Framing lock-ins B. Incorrect analogies C. Emotional traps → they came from some fears of the decision maker that can create a barrier for the strategic innovation Strategic innovators need to be aware of such biases and try to curb them. Inability to recognize cognitive inertia inhibits the perception of the need of strategic innovation. ACTION INERTIA involves resistance to the implementation of a new strategy, thus it occurs during the strategy implementation phase of the strategy process Action inertia might take 3 forms: A. Sticky routines B. Ingrained culture C. Leadership failure The inertia play out at the 3 level of the fit: strategic fit, internal fit and external fit. Innovation streams → innovation stream are portfolios of innovation that include incremental innovations in a firm’s existing products as well as more substantial innovations that extend a firms’ existing technical trajectory and/or move it into different markets.We can think of strategic innovation as an endeavor in grafting a new innovation stream within the existing portfolio of companies that entails: new capabilities and/or new markets non-incremental change in how the company works. The problem with strategic innovation is not just “jumping” from one S-curve to the other, but being able to manage both of them at the same time, even though they pose radically different, and seemingly irreconcilable, strategic demands and problems. 12 Strategic innovation 22-23 LS Search and SI → At its very core, strategic innovation is a process of search. In pursuing strategic innovation, companies search for: A. novel and unexploited market opportunities B. new customer segments C. novel knowledge and new applications of their knowledge basis D. new geographical markets E. new business models Searching is critical because it directs what the company chooses to do and what the company chooses not to do. Search is also a problem-solving activity: companies engage in search when they identify issues that need to be addressed, such as the imperative of growth or long-term survival, or the pursuit of a certain purpose. SEARCH is the controlled and proactive process of: Finding, examining, and evaluating new knowledge and information elements across multiple domains and Identifying novel combinations of these new knew knowledge and information elements. 3 aspects qualify the search process which underlies SI: 1. The direction of the search process 2. The search strategy 3. How to search Directions: local and distant search: the search processes can be more or less distant. The “distance” is interpreted in three ways: I. MARKET RELATEDNESS: distant search might look for opportunities that are loosely related with the customer targets that are currently served by the company II. TECHNOLOGICAL RELATEDNESS: distant search might look for opportunities that are loosely related with the technological base and the technological trajectory of the company III.TEMPORAL RELATEDNESS: distant search might look for opportunities that are placed in a future characterized by uncertainty and ambiguity In each case, distant search emphasizes elements of novelty and discovery, while local search emphasizes the exploitation of existing resources and technologies. Why local search is not enough? Most companies do fine with local search, performing incremental forms of innovations, exploiting a core niche market, etc... However, in contexts of strategic innovation, local search is not enough. In fact, while companies are comfortable with local search, the outcomes of it are unlikely to be: novel, uncontested by competitors, a big departure from the status quo The closed innovation model → in closed innovation, a company generates, develops and commercializes its own knowledge, ideas and technologies. Closed innovation emphasizes control over knowledge and technology and their future development trajectory This philosophy of self- reliance dominated knowledge generation and innovation processes of many leading industrial corporations for most of the 20th century. The open innovation model → In the open innovation model, a company: Leverages both its own knowledge, ideas and technologies as well as those from other organizations. Seeks ways to bring its in-house knowledge, ideas and technologies to market by deploying pathways outside its current businesses. A company that adopts an Open Innovation model: Seeks knowledge (not just ready-to-use technologies) from outside the company: • Buy technology licenses, buy entire companies 15 Strategic innovation 22-23 LS • Joint development • Tap into the knowledge of community of solvers Transfers some good knowledge and ideas out of the company: • License out to start-up companies or other firms, thereby make return-on-R&D-investment while maintaining business focus (and hedging risk) • Seller company aims to achieve greatest return (which requires win-win license that aids success of the buyer firm, as well) • Know-where becomes a distinctive capability in SI Search strategy → search strategy distinguishes between search breadth and search depth. • SEARCH BREADTH refers to the number of diverse external stakeholders a firm seeks knowledge from. A firm with a broad search strategy seeks to access a wide range of external knowledge, for example, about customers, universities, start- ups, etc... • SEARCH DEPTH refers to how intensively a firm draws from each external stakeholder. Firms with a deep search strategy intensely explore fewer external sources that they consider to offer important knowledge inputs. Example: ENEL innovation Hubs → To broaden and make bigger the search process for the startups, Enel created the innovation hubs, which is an organizational structure that permits to screen the startup all around the world, finding 10.000 of them. With an hundred of them they decided to collaborate and create some innovation process with Enel. How to search: I. Experiential search: is guided by a desire for direct feedback from trials. An important element of experiential search is the “on-line” evaluation of alternatives, and the subsequent action on immediate feedback from current actions without reflecting on their causes through the implementation of a “learning by doing process”. II. Cognitive search: involves the use of representations and abstractions in the search for solutions. Cognitive search employs “off-line” evaluation, and learning-before-doing. Such representations contribute to the development of heuristics of variable. Rather than allowing environmental stimuli to feedback directly into action, cognitive search allows for the feed-forward of information into existing or nascent representations. These off-line representations can be studied and then later enacted. Time: an often overlooked dimension of search: temporal search is defined as the process through which firms search for knowledge that has been developed in the past. Conventional assumptions in management: Old knowledge is obsolete for current environmental needs and expectations The past is a source of resistance The past generates inertia, liability of senescence, core-rigidity, path dependency This view is being challenged by organizations that radically innovate making use of knowledge, technologies and ideas from the past, very old, and/or dismissed. Someone calls this process innovation through tradition Case history: temporal search in Aboca: Aboca adopts a fully vertically integrated biological production process, from planting to packaging of the finished product, as well as to its distribution to medical practitioners, pharmacies and herbalists. Specifically, the firm directly cultivates 77 different types of plants according to the organic farming principles in an area of 1,400 hectares of land, originating 68 different product lines. Aboca’s research includes both technological and historical activities. The former refers to phytochemical, clinical, botanical, pharmacological, genomic and proteomic, while the latter is based upon the analysis of 1,790 printed volumes dated 15th – 16th century about the therapeutic use of plants, 28,835 digitalized and archived ancient medical remedies, 10,356 digitalized botanical charts, and 121,076 pages of digitalized historical archives. In the case of Aboca, historical knowledge is searched in books that recall common-sense practices, rituals and 16 Strategic innovation 22-23 LS accepted wisdom on botany, herbal remedies and ancient medicine as well as healing treatments and well-being practices from the past. This kind of search is commonly random and anticipatory, meaning that it is not driven by the need of solving a specific problem. Instead, it is conducted in anticipation of yet undefined problems among historical sources of past memories and knowledge elements that might help define and address some existing problems. In Aboca search can be therefore directed at corroborating current knowledge (a sort of confirmatory search) or at challenging current knowledge (what we can call “exploratory search”). In the latter, elements of “ancient” knowledge is paired with elements from highly novel bodies of science (biotechnology) to create new products. This is accomplished by mapping cause-effect relationships in current knowledge, and then replacing such cause- effect logic (A is a cause of B) with condition/consequence (if X, Y, Z, then B) logic. Searching for applications of knowledge and technologies outside the core business: this search process requires «de-linking» the technology from its current product/business model application and then «re-linking» it to new applications: • Characterize the technology • Identify potential applications • Select from among the identified applications • Choose the best entry mode Example: KUKA & ST → KUKA created the technology for the Wii motion and ST using a research program that started from the inside and not from the outside. They patented this kind of technology that can catch the movement from your body and transform it into data. They started a search process starting from this kind of technology and find a new possible market and they found the gaming sector and from that they started the Wii gaming console, with this kind of search process with an inside-out process, leveling their technology and going out. Searching for opportunities and analogy: when leaders are faced with the necessity to interpret and make sense of the market, they use strategic mental models, i.e., cognitive representations of the core features of the market and the technology, its potential evolution, and how the company can create and capture value from it. Strategic mental models are fundamental in strategic innovation because they inform every phase of the strategic decision-making process. As for resources, having uncommon and valuable strategic mental models can give an edge to the company vis-à-vis other competitors. One way to use strategic mental models to search for (distant) opportunities is analogical reasoning. Two situations are analogous if “they share a common pattern of relationships among their constituent elements even though the elements themselves differ across the two situations.” (Holyoak). 1. Understanding the source problem (the apparently similar problem as yours but from another context) and why a certain candidate solution is a good solution: • historical internal strategy analysis • historical external strategy analysis • complete analysis of causal relationships and contextual factors 2. Assess the similarity between the source problem and your problem: • analyze superficial and deep differences and similarities • beware of cognitive biases (confirmation bias and anchoring) 3. Apply the analogy to the strategic problem you are facing: • adjust it to the market features • monitor it over time: a strategic move has long term consequences 17 Strategic innovation 22-23 LS WEEK 4: LEARNING AND VENTURING FOR SI→ Case discussed: “Corning”, Ciba Vision, Toyota AI ventures, Bosch. Corning: 1. Is this a SI? Performance of the project itself: - new providers/suppliers - New market - New value proposition for the customers - Completely different providers for corning - Different targets - Leveraging existing capabilities - Change in organic structure and role - Long term profitability expectation (tension) - Done in search of significant growth 2. What are the reasons behind the complexities and ultimate failure of this strategic innovation project? Connect the answer with the ambidexterity concept? - Leadership joint established and SI (export vs import) - Communication of the strategy/purpose/mission - Cultural issue → old culture doesn’t fit with the new one - Knowledge renewal not effective → local search and closed innovation - overconfidence 3. What is the lesson learnt? And what would you have done? - Mr brown early involvement - Different teams / developing almost autonomous unity one for exploration and one for exploitation - Focus on one new product after the order Structural ambidexterity → in general terms, ambidexterity occurs when instances of exploration and exploitation are coupled together. One solution for managing the contradictory pressures from explorative and exploitative innovation streams is to develop structural ambidexterity. Structural ambidexterity uses organizational design as a way to solve these pressures. In a structurally ambidextrous organization, exploration and exploitation occur simultaneously in structurally separated units. However, separation is not just structural: it usually also requires competencies, organizational processes, incentives, systems and cultures, that are aligned within the unit but (radically) different between the exploratory and the exploitative units. Integration occurs at the level of the senior executive team, which uses its power to shelter the exploratory unit and works to remove the resistance to change due to the presence of misalignment between units. Ambidextrous leadership → a Successful ambidextrous leadership has four components: 1. A clear strategic intent that justifies the need for exploitation and exploration, including the explicit identification of those organizational assets and capabilities that can be used for competitive advantage by the exploratory unit (resource-sharing) 2. Senior management commitment and oversight to nurture and fund the new venture and protect it from those who would kill it → integration 3. Sufficient separation from the exploitative business so the new venture can develop its own architectural alignment and the careful design of the organizational interfaces needed to leverage the critical assets and capabilities from the mature side of the enterprise, including clear criteria to decide when to either drop the exploratory unit or integrate it back into the organization 4. Purpose, values, and a culture that provide for a common identity across the explore-and- exploit units that helps all involved see that they are on the same team. 20 Strategic innovation 22-23 LS Structural ambidexterity and other organizational design solutions → structural ambidexterity is not the only solution to this problem. Companies can use different designs to tackle strategic innovation issues. Compared to structural ambidexterity: I. SPIN-OUTS present even more separation between exploration and exploitation, are to be preferred when there are little to zero market or technology synergies with other units of the company II. CROSS-FUNCTIONAL TEAMS are embedded in the existing functional organization, and are to be preferred when the resistance to change (inertia) is low. The main cause for failure of cross-functional teams is cultural, political (e.g., status, allocation of resources) and community resistance, as it is embedded within the existing organization. Example: Ciba vision → one of the example of a ambidextrous ambidexterity from a structural point of view is Ciba vision, because at a certain moment during their history, they decided to enter in the contact lenses market and their business model was to build the best contact lenses on the market, being the leader in the market. At a certain moment they understand that the best option was to build disposal contact lenses and there they decided to follow the ambidexterity creating more new Business unit, with new people, leaving to the new leader all the freedom to move on with them. One of the thing they did was to change their purpose moving from creating the best lenses to creating the lenses useful for the customer. During the years their market grew always more, so they started as separate and then they become big. Case history: USA Today → in the late 1990s, USA Today was a thriving business, but it faced an uncertain future. After losing more than half a billion dollars during its first decade, the paper turned its first profit in 1992 and continued to expand rapidly, becoming by the late 1990s the most widely read daily newspaper in the United States. But as the 1990s progressed, USA Today faced a series of challenges: • Newspaper readership was falling steadily, particularly among young people. • Competition was increasing, as customers looked to television and Internet media outlets for news • Newsprint costs were rising rapidly. The CEO Curley had articulated his “network strategy”—a clear focus on the generation of content that would be distributed via the paper, TV, and online, but he became frustrated with his senior team that, after all his attention to the network strategy, had only “a nickel deep” understanding of his strategic intent. Curley in 1995 chose Lorraine Cichowski, USA Today’s general manager of media projects and former editor of the paper’s Money section, to launch an online news service, USAToday.com. He gave her free rein to operate independent of the print business, and she set up a kind of skunk- works operation, bringing in people from outside USA Today and housing them on a different floor from the newspaper. She built a fundamentally different kind of organization, with roles and incentives suited to the instantaneous delivery of news and to an entrepreneurial, highly collaborative culture. But results were disappointing. Although USAToday.com was making a small profit by the end of the decade, its growth was sluggish. The problem were many: • The new unit was isolated from the main business (print operations), and thus it was failing to capitalize on the newspaper’s vast resources. • Cichowski had scant support from other members of the executive team, as they viewed her unit as a competitor with the print business Soon, USAToday.com found itself starved of cash as the newspaper continued to consume most of the available capital and the online unit began losing talented staff. Cichowski pushed to have her business spun out entirely from the newspaper, as other peers were doing, but Curley had a very different view. In spite of the paper’s success, he realized that if the paper was to continue to attract advertisers and younger readers, it would both have to have an online presence and be capable of supplying video to Gannett’s thirty-six local television stations. In 1999, Curley launched a network strategy that aimed to share news stories and images across three platforms: the once-a-day newspaper, constantly updated on- line news via USA Today.com, and television. Curley described his vision: “We’re no longer in the newspaper business—we’re in the news information space.” Curley identified a success factors for his new strategy in the role that reporters had. Reporters should be capable of writing for the paper, reporting on television when needed, and sharing their 21 Strategic innovation 22-23 LS stories with the producers of web-based news. However, print reporters typically had little respect for the talking heads of TV reporting and were skeptical of sharing breaking stories with the news aggregators of USA Today online. Curley believed that the new unit required not greater separation but greater integration. Indeed, because of the leverage he hoped to get from the USA Today brand and from his organization’s ability to source and curate content, Curley had no intention of spinning off his dot-com unit. So in 2000, he replaced the leader of USAToday.com with another internal executive, Jeff Webber, a strong supporter of the network strategy. Curley also brought in an outsider, Dick Moore, to create a television operation, USA Today Direct. Both the online and television organizations remained separate from the newspaper, maintaining distinctive processes, structures, and cultures, but Curley demanded that the senior leadership of all three businesses be tightly integrated. To provide this integration, Curley and Karen Jurgenson, then the editor of the print operation of USA Today, implemented a set of changes: I. They reinforced the USA Today values of fairness, accuracy, and trust and ensured that II. They would apply across platforms even though the cultures in the different units varied. III.They instituted daily editorial meetings with the heads of the online and television units to review stories and assignments, share ideas, and identify other potential synergies. This provided high-level integration through the daily editorial meetings, and low-level integration was dictated by a specific story IV. They jointly decided to train the print reporters in television and web broadcasting and outfit them with video cameras so they could file stories simultaneously in different media V. They let go a number of senior executives who did not share his commitment to the network strategy, and tying promotion and compensation incentives to organization-wide results. The three units remained structurally and professionally independent. Contextual ambidexterity → is the behavioral capacity to simultaneously demonstrate alignment (i.e., exploitation) and adaptability (i.e., exploration) across an entire business unit. It focuses on the design of a cultural context characterized by an interaction of stretch, discipline, and trust. It is centered on the individuals rather than on the organizational unit. It requires a supportive organizational context that encourages individuals to make their own judgements as to how to best divide their time between the demands for exploitation and exploration. Ambidexterity and business models → The reason for this is countering, reactively or proactively, those companies, often new entrants, that are attacking established companies by means of disruptive business model innovation (Christensen), which starts through gaining market share from unattended, secondary demand, and gaining customer traction rapidly. The success of disruptive new entrants relies on the radical difference between their business models and established companies’ business models. As strategic innovation by large incumbents very often involves exploitation (sustaining profits through the core business) and exploration (venturing into new areas for the long-term survival of the company), such companies need to adopt multiple business models at the same time. How can established companies manage this conflict between business models? Separation strategy is appropriate when conflicts between the business models are high and the two models have low possibility of synergy. In this case, the new business model is hosted in a new unit, separate 22 Strategic innovation 22-23 LS • renewing the technological base (Mercedes Benz investment in Sila Nanotechnologies, which became its supplier of batteries for Mercedes’ electric fleet). Pursuing SI through CVC (most used by ENABLING)→ through CVC investments in innovative startups, an incumbent can also explore new, future businesses by: • experimenting new capabilities (Siemens investment in autonomous driving startup Deepscale) • developing innovative technologies (E.ON investment in smart thermostat startup Tado) • exploring strategic whitespace and sensing emerging technological trends (GV investment in Agritech) Enabling: it helps you to achieve and look for strategic innovation Challenge of venturing in established companies → Uncertainty: New businesses are fraught with uncertainty: you don’t know how the product/service will come out, forecasts and timetables are difficult and often unrealistic, standard planning is not coherent with the needs of the venture. Intensity: Entrepreneurship is a very intense activity that requires some level of continuity. As a business starts to form, it needs stability and collaboration to support its growth. 25 Strategic innovation 22-23 LS Autonomy: Case history: The multiunit back-end problem in Banque Populaire Caisse d’Epargne (BPCE) → in 2009, the French government required the banks Banque Populaire (BP) and Caisse d’Epargne (CE) to merge to become BPCE Group. BPCE opted to keep the two distinctive BP and CE brands separated, and to keep them as different BUs. At the operational level, BP and CE work in silos; each one is an independent business unit that maintains many aspects of autonomy, and, to some extent, rivalry. It comes from three overlaps: - market overlap - fight for resource allocation - Startup program overlap (BP and CE retained their own startup program also after the merger, called respectively Next Innov and Néo Business) In order to push forward digital innovation and face technological disruptions (see Fintech), BPCE created the 89C3, an internal strategic innovation task force to drive digital transformation and engagement with external digital startups. These startups were scouted and then accelerated in order to develop scalable solutions to be implemented in BPCE. However, this task force had to operate in the context of rivalry between the two BUs, which was creating serious obstacles to the innovation objectives of 89C3. The rivalry between BP and CE business units manifested in different ways: I. Hampering raw-data collecting and sharing between local banks on customers behaviors, which led to difficulties in letting the incubated digital startups use that data for testing, and eventually scaling, their solutions in the local banks. II. Neither BP nor CE wanted to openly disclose their digital and innovation needs, even if they were aware that it could ensure the strategic fit between their needs and the digital solutions offered by the startups. Therefore, it became much more difficult to select the startups and guide their evolution. III. BP and CE refused to collaborate with any acquired digital startup or startups supported by 89C3 due to fears of jeopardizing any innovations coming from their own respective startups program. The long-term risk, from their perspective, was that BPCE Group’s task force would replace their respective startup initiatives with centralized startup initiatives. initiatives. BP and CE used their startup initiatives strategically to identify promising startups to receive credit from senior management and increase their reputation relative to the other local bank. This phenomenon is called multiunit back-end problem, that is the problem of connecting and engaging not just any internal business unit with startups (1st tier engagement) but rather multiple rival internal business units (2nd tier engagement) to a corporation’s open-innovation initiative with startups. 89S3 managed to solve the multiunit back-end problem by: • Making the local banks anonymize their raw data, in order to avoid the preoccupations of stealing raw data by the other BU, and creation of an independent, third-party, data lake • Making BP and CE local banks develop autonomous local digital innovations with startups, with the support of 89S3, which acted as a third-party support, and creating an internal market for innovation • Making the local banks compete to be the pilot local bank, and the winner would be the first to access and use the startup’s digital innovation. 89C3 decided to respect the competition among local banks and delay the distribution of a successful solution as a reward for a local bank agreeing to be a pilot bank. As a result, the pilot bank develops a solution that can be useful to all other local banks. 26 Strategic innovation 22-23 LS Other corporate venturing tools: A. Skunk-works: quasi-autonomous units that focus only on explorative innovation activities (“moonshots”) that will hopefully enable strategic innovation → example of ambidexterity B. Corporate Accelerators: like corporate incubators, but focused on startups that have a proven business model C. Internal Idea Contests: challenges open to employees that collaborate in teams to propose solutions to complex innovation problems → focus on inside out or spin-offs D. Hackathons and Innovation Prizes: collaborative competitions taking place in a limited amount of time, where small groups of external, selected people develop a solution to an issue proposed by the corporate Case history: The innovation ecosystem in Siemens In the last decades, Siemens has become an extremely diversified B2B business. The competitiveness of each business line hinges upon the innovation ecosystem that Siemens has nurtured over the years. Siemens uses an integrated approach to venturing, where multiple structures and programs operate simultaneously. The innovation ecosystem of Siemens is composed of many structures and programs, among which there are: • next47 (CVC arm and external incubator) • Siemens Technology Accelerator • Siemens Energy Incubator (CVC arm and internal incubator) next47 is the corporate venture capital arm of Siemens, and it is present in the major startup ecosystems in the world (Palo Alto, Boston, Herzliya, Munich, ...). next47 does not simply provide capital to the startup, but acts as a value-adding partner in fostering the commercialization and scalability of the solution. On one side, the startup can use the machinery across Siemens BUs to test and prototype, as well as seeking support from Siemens professionals. One the other side, there are catalyst teams, formed by Siemens employees, that function as a bridge between the startup and the corporate. Plus, each startup is assigned a Siemens “champion”, who monitors the growth of the startup, communicates with top management teams, and seeks the best opportunities for commercialization within the Siemens network of buyers. next47 also runs the next47 Accelerator program, where internal spinoffs are selected to start a 3 months program to nurture the startup teams’ entrepreneurial skills and develop a commercially viable solution that could be profitable for Siemens. In this program, startup mentors come from both inside and outside Siemens. Siemens Technology Accelerator, founded in 2001, has the objective of creating new spin-off businesses out of inventions made by Siemens employees. Siemens Energy Incubator is the incubator of the SE BU that targets both internal entrepreneurs and external entrepreneurs that provide innovative energy solutions and applications. It provides ongoing mentorship, funding and network. In Siemens Energy there is also Siemens Energy Ventures, which functions as corporate venture capital arm of the BU. Siemens programs fostering employee entrepreneurship: • 3i program • Kick-box • Intrapreneurs Bootcamp Main features of Siemens corporate venturing and innovation ecosystem: • ability to leverage on highly heterogeneous and highly specialized technical skills of Siemens employees (engineers, developers, etc...), and on the high-tech machinery and technologies • being the gatekeeper to a wide market for innovative technological solutions: partners, buyers from different industries, suppliers → this is a complementary resource as of the startup! • importance of mediating actors that establish an effective relationship between the startup at the corporate, across different hierarchical levels. 27 Strategic innovation 22-23 LS STARTUPS: Temporary organizations in search of a scalable, repeatable, profitable business model. As opposed to incumbent companies, startups operate under the condition of extreme uncertainty (cannot do quantifiable predictions (probability, risk) about the future). They are always looking for: • What should be build? For whom? What are the markets that we can enter successfully? • How can we create, deliver and capture value? The activities of a startup are directed at diminishing uncertainty of the product-market fit by testing and refining the tentative business model on the market. SI and validated learning: today, also established companies recognize the importance of validated learning, pivoting and experimenting, which were neglected by them for a long period of time, because of the classical, established view of strategy according to which: • Strategy is about planning, and then executing. • Strategy is about committing all resources upfront irreversibly (risk of escalation of commitment) In strategic innovation, characterized by high uncertainty and ambiguity, experimenting new strategies through incremental and reversible actions is helpful for probing into a market or a particular customer target. Discovery-driven planning: Discovery-driven planning de facto incorporates some of the concepts of “validated learning”. It is a systematic learning process, which gradually reduces uncertainty and increases knowledge about the key elements of a business model (or of a strategic innovation in general). At every learning point (called “milestone”), the manager needs to ask herself a number of questions about the assumptions of the strategic innovation: its components, the feasibility of its evident and less evident revenues and costs, its timing, and so on. Case history: Pivoting and learning in the early automobile industry In 1909 I announced one morning, without any previous warning, that in the future we were going to build only one model, that the model was going to be ‘Model T’, and that the chassis would be exactly the same for all cars, and I remarked: Any customer can have a car painted any color that he wants so long as it is black. (Henry Ford). The US car industry started in 1895, way before the Model T. The switch from horse-led carriages to “horseless carriages” was not the invention of one single company at a specific point in time, but the result of many market experiments made by car manufacturers. These experiments were made in order to learn about something completely new and unsettled (the “car”), whose technical production, customer recognition and commercialization were extremely uncertain and new-to-the- world. Sources of uncertainty and complexity: • Recognizable success factors in an industry are not known ex ante by the market participants (car manufacturers, suppliers, etc...): what should be the source of power for the horseless carriage? What should be the general shape of the automobiles (choice between runabouts, high wheelers, and French designs)? Should cars be privately owned or be managed by fleet operators? • High coordination costs with suppliers (Ford had 6,000 suppliers at one point in time) • High novelty for customers (until the car gained traction between the 1900s and the 1910s, customers did not have a concept, or image, of a “car”) • Technical challenges derived from architectural and modular complexity • Inexistence of prior capabilities (developing a car is way different from developing a horse carriage) In order to learn about the characteristics of a market for cars, car manufacturers had no option than materially developing new models over time, in order to test key strategic elements, such as the composition of the market and the economic feasibility of producing car engines with different sources of energy (steam, electric, and gasoline). Over time, between 1895 and 1910, companies in the car industry learn to strategize: • price sensitivity and market segmentation • viable number of cylinders and horsepower • user experience (e.g., introduction of electric starter instead of hand cranking) 30 Strategic innovation 22-23 LS • car design of the chassis (to respond to not-that-good American roads) • Research has shown that the more the car companies could experiment different models (often radically different from one another), the higher the likelihood of survival! VICARIOUS LEARNING: In the context of strategic innovation, learning from others is often difficult/ impossible when the company enters new, nascent markets, with highly novel strategies and business model. When this is feasible, learning from others requires deep adaptations and transformation of the acquired knowledge (this process is also called “vicarious learning”). When this is not feasible, learning from direct experience is the only way. But, again, very often companies do not have valuable experience to leverage when they do strategic innovation. We need a new form of learning then, called “validated learning”. Difficult to perform benchmark: the company need deep adaptation of the knowledge from other companies before introduce it into the company 1. Identification → Process by which a group identifies another group with prior related experiences 2. Translation → Process by which a group translates knowledge developed by another group to reach a judgement about its value 3. Adoption → Process by which a group embeds knowledge developed by another group in an existing routine, resulting in a changed routine 4. Continuation → Process which determines whether a group continues to rely on a changed routine 31 Strategic innovation 22-23 LS WEEK 8: CULTURE & SI → The importance of culture (vis-a-vis strategy): you can have the best strategy in the world, but culture will kill strategy (Launi Skinner, CEO First West Credit Union) The No. 1 thing is culture. It allows us to move very quickly and react very quickly in making business decisions (Bill Emerson, CEO Quicken Loans). Culture eats strategy for breakfast (Peter Drucker). What is culture in companies? There are many definitions: - the collective programming of the mind which distinguished the member of one human group from another (Hofstede) - The set of shared, taken for granted, implicit assumption that a group holds and determines how it perceives, think about and reacts to its various environments (Schein) - A pattern of beliefs and expectations shared by the organization’s members (Louis) The attributes of organizational culture are: sharedness, stability, taken for grantedness (to some extent), tacit, expressivity (meanings are associated to actions and decisions), being grounded in history and tradition, transmission to new members, being a source of order and rules, being a source of collective identity and commitment, uniqueness Culture in companies becomes manifest in, among the others: organizational stories and legends, organizational language and communication, rituals and ceremonies and physical structures and symbols. Schein three-level model → 1. Observable behaviors: visible and reelable structures and processes and difficult to decipher 2. Espoused beliefs and values: ideals, goals, values, aspirations, ideologies, rationalizations and may or may not be congruent with behaviors 3. Basic underlying assumptions: unconscious, taken-for-granted beliefs, values and purpose and determine behavior, perception, thought and feeling. The more you go down on these levels, the more is difficult to change Mapping culture: the case of Ciba-Ceigy → Observable behaviors: • Large, gray stone buildings, heavy doors that were always closed, stiff uniformed guards in the main lobby → evidence of formality • Food is not a convivial activity but has symoblic meaning which reinforces the status and the rank within the organization • Use of formal titles, not names • Managers are very serious, thoughtful, deliberate, well prepared, formal, and concerned about protocol. Importance of punctuality. • Managerial ranks were based on length of service, overall performance, and the personal background of the individual. Less emphasis on the actual performance of the individual tasks. Espoused beliefs and values • Work is highly valued. • Meetings are a “necessary evil”, “real work” gets done by thinking things out and requires quiet and concentration. • Authority is highly respected. Information coming from the boss has higher value than information coming from peers. • The use of formal titles symbolizes the respect of Ciba-Geigy for the knowledge that education bestowed on people – especially technical education (chemistry, physics, engineering). • Individual effort and contribution are important, but no one goes outside the chain of command and does things that are not in line with the suggestions of the boss. • Unsolicited ideas are not well respected. Managers form a strong sense of “turf ”: “giving someone unsolicited information was like walking into their home uninvited” • Pride in product elegance and quality: “product significance” Functions of organizational culture: has 2 main functions for organizations: Internal integration means that members develop a collective identity and know how to work together effectively. Culture guides day-to-day working relationships and determines how people communicate within the organization, what behavior is acceptable or not acceptable, and how power and status are allocated 32 Strategic innovation 22-23 LS Culture strength → culture plays a strong role in hampering or promoting change. One of the reasons is culture strength, that is the degree of acceptance of organizational culture. It has four dimensions: • Sociological penetration: the extent to which the culture is shared across the members of the organization as a whole, including across various groups or subcultures in the organization (horizontal penetration) and across layers of the organizational hierarchy (vertical integration). • Psychological penetration: how deeply individuals in the organization hold the assumptions, values, and beliefs that make up their organization’s culture. • Historical penetration: how long the culture has consistently existed within the organization (socialization). • Artifactual penetration: the extent to which the more deeply held assumptions values are manifested in the outer layers of the organization’s culture (i.e., in its artifacts). The attraction-selection.attrition (ASA) model → The ASA model states that organizations have a natural tendency to attract, select, and retain people with values and personality characteristics that are consistent with the organization’s character, resulting in a more homogeneous organization and a stronger culture. • Attraction. Job applicants engage in self-selection by avoiding prospective employers whose values seem incompatible with their own values. They look for subtle artifacts during interviews and through public information that communicate the company’s culture. • Selection. How well the person “fits in” with the company’s culture is often a factor in deciding which job applicants to hire • Attrition. People are motivated to seek environments that are sufficiently congruent with their personal values and to leave environments that are a poor fit. This occurs because person–organization values congruence supports their social identity and minimizes internal role conflict. Can culture be a source of competitive advantage? A VRIN analysis → is organizational culture valuable? Can culture positively affect the value creation and capture mechanisms in companies? Yes, but this does not occur in every company: there are companies where culture enables value creation and capture (and strategic innovation), but there are other companies where culture constrains performance. Is organizational culture rare? Sometimes they are. Companies are imprinted by the founders’ unique ideas and vision, and have a unique history, but, while the antecedents might be unique to one specific company, the final outcome (company culture) can be similar to other companies. Furthermore, cultures are not only top-down, but also bottom-up, increasing the difficulty of finding many similar cultures content wise. Is organizational culture imperfectly imitable, or not imitable at all? Since company culture has great deal of taken-for-grantedness and unawareness, it is hard for competitors to understand it and imitate it. Incentives and formal structures and processes are important, but their observation is not exhaustive for understanding, and even less exhaustive for actually replicating, a company culture to its full extent in another company. The more the culture is tacit and hard to codify (plus valuable and rare), the harder it is for competitors to replicate it in their company. Does culture benefit performance? 1. When there is alignment between company culture and the external environment → Companies require an employee-centric culture in environments where business success depends mainly on employee talent, whereas an efficiency-focused culture may be more critical for companies in environments with strong competition and standardized products. If the dominant values are congruent with the environment, then employees are more likely to engage in decisions and behaviors that improve the organization’s interaction with that environment. But when the dominant values are misaligned with the environment, a strong culture encourages decisions and behaviors that can undermine the organization’s connection with its stakeholders. 2. When culture is moderately strong → Very strong company cultures lock people into mental models, which can blind them to new opportunities and unique problems. The effect of these very strong cultures is that people overlook or incorrectly define subtle misalignments between the organization’s activities and the changing environment. Very strong company cultures can suppress dissenting subcultures. The challenge for organizational leaders is to maintain not only a strong culture but one that allows subcultural diversity. Subcultures encourage task-oriented conflict, which improves creative thinking and 35 Strategic innovation 22-23 LS offers some level of ethical vigilance over the dominant culture. In the long run, a subculture’s nascent values could become important dominant values as the environment changes. Corporate cults suppress subcultures, thereby undermining these benefits. 3. When culture is an adaptive culture → An adaptive culture is an organizational culture in which employees are receptive to change, including the ongoing alignment of the organization to its environment and continuous improvement of internal processes. Adaptive company cultures have a strong learning orientation because being receptive to change necessarily means that the company also supports action-oriented discovery. Attributes of an adaptive culture: Willingness to make changes in culturally ingrained behaviors, Emphasis on identifying problems before they occur and rapidly implementing workable solutions, Focus on innovation, Shared feelings of confidence about managing problems and opportunities, Emphasis on trust, Willingness to take risks, Spirit of enthusiasm, Candor, Internal flexibility in response to external demands, Consistency in word and action, Long-term focus A model of culture changing → Stage 1: Transformative change implies that the person or group that is the target of change must unlearn something as well as learning something new. Most of the difficulties of such change have to do with the unlearning because what we have learned has become embedded in various routines and may have become part of our personal and group identity Disconfirmation is any information that shows the organization that some of its goals are not being met or that some of its processes are not accomplishing what they are supposed to. There is something wrong in this organization, and it is not something ordinary. Disconfirming information can be economic, political, social, or personal. Survival anxiety is an individual state where the need for change is made urgent because of the occurrence of something negative in case change does not happen. Survival anxiety does not, by itself, automatically produce a motivation to change because members of the organization can deny the validity of the information or rationalize that it is irrelevant. We must change. Learning anxiety instead is an individual state where the individual feels that learning new attitudes or behaviors is interlinked with the loss of self-esteem or group membership. It can have different sources: Fear of loss of power or position, Fear of temporary incompetence, Fear of punishment for incompetence, Fear of loss of personal identity, Fear of loss of group membership Psychological safety refers to perceptions of the consequences of taking interpersonal risks in a particular context (Edmondson). How to create psychological safety? A compelling positive vision, Formal training, Involvement of the learner, Informal training of relevant “ family ”groups, and teams, Practice fields, coaches, and feedback, Positive role models, Support groups in which learning problems can be aired and discussed, Systems and structures that are consistent with the new way of thinking and working Stage 2: Transformative change implies that the person or group that is the target of change must unlearn something as well as learning something new. Most of the difficulties of such change have to do with the 36 Strategic innovation 22-23 LS unlearning because what we have learned has become embedded in various routines and may have become part of our personal and group identity. The new concepts, meanings and judgements need a fundamental cognitive restructuring. There are two main mechanisms through which such cognitive restructuring can occur: - by imitation and identification with a leader, or a group - by scanning the environment and develop our own solution Stage 3: Most organizations focus on the second stage, making the change without paying enough attention to preparing the organization either for the change or to the last phase, freezing. In the last phase of change, the newly learned behaviors and freshly implemented practices are encouraged and supported to become pail of the employees' routine activities. The leader’s role in this stage is providing resources, coaching, training, and using appropriate reward systems to help solidify the changes that have been implemented. The first works best when it is clear what the new way of working is to be, and when the concepts to be taught are themselves clear. The second requires not to overcomplicate the structural incentives and rewards, as they might thwart the individual effort to make the new norms and behaviors consistent with individual’s own personality. The change goal must be defined concretely in terms of the specific problem you are trying to fix, not as “ culture change”. Culture change is too vague to be understood. Specific behaviors or norms need to be defined as object of change. Changing the whole culture (see the map of Ciba-Geigy basic underlying assumptions) altogether might not be necessary. Some parts of the culture can be reinforced and used to contrast other parts of the culture which need to change. It is important to assess the core characteristics of organizational culture while the organization is changing. Dimensions of culture: A. Intangible: culture made of behavioral norms, incentives and routines B. “Material” culture, made of artifacts, such as logos, mottos, texts, objects, and so on. If carefully managed, the components of the “material” culture of a company can be helpful for distinguishing the company from its competitors, and to develop new products and services. Why? Company artifacts have symbolic meaning, beyond their functional use: they are the observable symbols and signs of the company culture. Case history: Innovation and Culture in Carlsberg → Carlsberg is a Danish brewing company founded in 1847 by J.C. Jacobsen. In 1901, the son of the founder, Carl Jacobsen, prompted the carving of the corporate motto, “Semper Ardens” (“Always Burning”), on the entrance of the corporate headquarters in Copenhagen. Carlsberg used the historical motto to perform strategic innovation in two occasions, in particular by: • re-positioning away from industrial brewing • tightening the culture of different brands and different regions In 1998, a small team of Carlsberg’s younger master brewers and some colleagues from marketing, led by the master brewer responsible for Carlsberg’s innovation development, formed the Master Brewers Dream Project. The project was founded upon the belief that brewing a high- quality handcrafted beer was a means to demonstrate the superiority of the Carlsberg Laboratory, and by extension themselves as master brewers. The project was intended to continue a proud tradition of innovation that included Carlsberg’s 1883 invention of clean yeast. The Master Brewers Dream team used the motto Semper Ardens as the name of their project, and it was finally authorized by the headquarters. The “Semper Ardens” beer was meant to enter the specialty brewing market, and it was launched in niche events at restaurants. Even though the Semper Ardens line grew a lot in the first years after market launch, efforts to cut costs and pressures to increase sales ultimately led to the discontinuation of the line in 2005. The second occasion where the motto “Semper Ardens” was used is within a corporate identity renewal program started in 2009. Carlsberg was facing cultural misalignments among different brands and different subsidiaries, which increased due to the intense M&A activity of Carlsberg. The motto “Semper Ardens” was re-used in the new identity statement, and understood as “always burning for more”, a new group ambition that could be applicable to every brand and every geography, tying them together. Bottom-up projects from different subsidiaries developed grassroot projects informed by Semper Ardens, like the “Brewing Greatness” team-building program. 37 Strategic innovation 22-23 LS • Feedback leads to higher performance than the absence of feedback, and self- generated feedback, where employees are able to track and monitor their task performance, is more powerful in motivating than externally-generated feedback Three personal factors influence the goals–performance relationship: goal commitment, task characteristics, and national culture. • Goal Commitment. Goal-setting theory assumes an individual is committed to the goal and determined not to lower or abandon it. The individual (1) believes he or she can achieve the goal and (2) wants to achieve it. Goal commitment is most likely to occur when goals are made public, when the individual has an internal locus of control, when the goals are self-set rather than assigned, and when they are based at least partially on individual ability. • Task Characteristics. Goals themselves seem to affect performance more strongly when tasks are simple rather than complex, well learned rather than novel, independent rather than interdependent, and on the high end of achievable. On interdependent tasks, group goals are preferable. Paradoxically, goal abandonment following an initial failure is more likely for individuals who self-affirm their core values, possibly because they more strongly internalize the implications of failure than others. • National Culture. Setting specific, difficult, individual goals may have different effects in different cultures. In collectivistic and high-power-distance cultures, achievable moderate goals can be more motivating than difficult ones. Finally, assigned goals appear to generate greater goal commitment in high than in low power-distance cultures. Although goal-setting has positive outcomes, it’s not unequivocally beneficial. For example, some goals may be too effective. When learning something is important, goals related to performance undermine adaptation and creativity because people become too focused on outcomes and ignore the learning process. Nor are all goals equally effective. For rote tasks with quantifiable standards of productivity, goals that reward quantity can be highly motivating. For other jobs that require complex thinking and personal investment, goals and rewards for quantity may not be effective. Finally, individuals may fail to give up on an unattainable goal even when it might be beneficial to do so. Viktor Frankl theory of meaning seeking: one important critique of Maslow’s need pyramid comes from the psychologist Viktor Frankl. According to him, self-actualization (the summit of Maslow’s pyramid) can be achieved through engaging in a process of meaning seeking and self-transcendence (going beyond our interest and do things for the sake of others). Self-transcendence is part of intrinsic motivation, and is relational: it is not possible to transcend ourselves without having social ties and preoccupations for making humanity flourish. Self-transcending meaningfulness can be reached if it is consistent with three time-proven types of values: • creative value: meaning is experienced when doing something for others • experiential value: meaning is experienced when relating to others • attitudinal value: meaning is experienced when suffering There are different types of goals and we can classify them according to different criteria: • Level of construal: abstract, superordinate goal vs. concrete goal • Temporal orientation: long-term oriented vs. short-term oriented • Locus: internally-sourced vs externally-sourced (see UN SDGs, societal trends like diversity & inclusion, corporate statesmanship, ...) • Content: financial, environmental, social, ... • Independence: the extent to which goals’ outcomes affect other goals Goals and SI → issues in setting goals for strategic innovation: 1. Use stretch goals property 2. Reconciling purpose, firm-level goals and individual-level goals Stretch goals → are goals that are intentionally set to be hardly attainable, or completely impossible to be attained, whose performance levels are so high that the great majority of attempts to achieve them inevitably end in failure. They can occur at different levels in a company, it can be a goal set at the overall strategic level 40 Strategic innovation 22-23 LS (e.g., turnover, profit, ...) or set at the functional or departmental level. Common strategic thinking claims that organizations should have stretch goals, because: • They lead to thinking for out-of-the-box and novel solutions, stimulating imagination, creativity, playfulness, experimentation, exploration • They create unique company cultures that lead to competitive advantage, what Collins and Porras call “Big Hairy Audacious Goals” (BHAG) Negative effects of stretch goals: While stretch goals are generally believed to be positive, theoretical and practical reasons hint at the opposite: setting stretch goals are not always beneficial for companies. According to Locke’s goal setting theory, individuals regulate the intensity of effort towards the goal based on the performance level that the goal calls for. However, if the goal is believed not be attainable by any means by the individual, he/she will lose motivation, leading to disengagement, demoralization, burnout, loss of security. Stretch goals: it’s not about achievement, its about learning: how do we reconcile the two views? The problem is not about stretch goals per se, but how they are conceived, designed and implemented in companies. The real purpose of stretch goals is not their attainment, but to stimulate a culture of long-term-oriented “disciplined creativity” Beware: Stretch goals MUST NOT replace attainable goals: the latter ones need to be always present! Moreover, stretch goals have to be generated in State 2, to produce energy and commitment (and avoid impossibility) Are stretch goals program effective for everyone? Case history: Jack Welch at General Electric → Jack Welch became CEO of General Electric (GE) in 1981. At that time, GE was a highly diversified conglomerate that operated in many industries. However, the climate of GE at that time was the typical highly formalized large corporation, and Jack Welch knew that, since he had been working there since 1960. The high formalization did create a good operational efficiency (till then), but also created costs for the company, exemplified in the lengthy decision process that was occurring in GE BUs. Until Welch tenure, GE had a fairly standard approach to goal setting. GE taught its new managers to adhere to the “SMART” model when setting and evaluating their goals. As a way to ensure that goals were attainable, GE told its managers to use the following questions as guidelines: “Is the goal realistic? Is it feasible? Can it be completed within the time allowed with the available resources?” One of the first moves of Jack Welch in terms of goal setting and performance measurement in GE was the quarterly reporting of three different types of metrics by senior managers. These metrics included: 1. Metrics that were considered to be permanent, critical indicators of the health and success of the company, and transversal to every different GE business (operating margin, earnings growth, market share, customer satisfaction) 2. Metrics to track the progress of the company’s “initiatives”, such as Work-Out (employee empowerment), Change Acceleration, and Six Sigma 41 Strategic innovation 22-23 LS 3. Metrics that were considered to be permanent indicators of a business’s stability and growth, but were specific to one business or set of businesses (inventory turns, TV ratings, loan defaults, and cycle time). One goal setting method that informed Jack Welch strategic decisions at GE is the «bullet train» method of goal setting. It underscores the importance of stretch goals, which were aimed, in Welch mind, to catalyze creative thinking and stimulate unconventional solutions. The bullet train method: It used to take more than six hours to travel by train from Tokyo to Osaka. If he Japanese executives had said to their engineers “I want you to reduce the time to six hours,” the engineers would have instinctively thought in terms of incremental improvements. But instead, the Japanese executives set out a challenge to reduce the time of the journey to three and a half hours. Faced with such an “impossible” goal, the engineers and designers were forced to reexamine the most fundamental assumptions governing rail travel in Japan. The result of this reexamination was the bullet train. As the use of stretch goals became increasingly prevalent in GE, they were not employed as substitutes for the “regular” goals that GE managers absolutely had to meet, or risk losing their jobs. Traditional goal setting leads to high performance today, stretch goals have the purpose of ensuring high performance tomorrow. Reconciling purpose, firm-level goals and individual-level goals → a big managerial challenge is the alignment between organizational goals and individual goals. Goal alignment has been treated through two interdependent points of view: I. the first way talks about goal alignment as a matter of setting the right control mechanisms and incentive structure that aligns the goal of the company with the ones of the individual II. the second way looks at the psychological aspect of goal setting for individuals in the organization, highlighting the importance of strategic leadership. In strategic innovation, both aspects must be actively considered and managed Management by objective (MBO): management by objectives (MBO) is a program encompasses specific goals, participatively set, for an explicit time period, with feedback on goal progress. The common elements of a MBO program are: • goal specificity • participation in decision making (including the setting of goals or objectives) • an explicit time period • performance feedback The organization’s overall objectives are translated into specific cascading objectives for each level (divisional, departmental, individual). But because lower-unit managers jointly participate in setting their own goals, MBO works from the bottom up as well as from the top down. The result is a hierarchy that links objectives at one level to those at the next. For the individual employee, MBO provides specific personal performance objectives. Every company has abstract (mission statement, vision statement, ...) and specific goals (revenue target for the next semester, ...). In organizations, goals are hierarchically distributed: more concrete and specific goals descend from more abstract and long-term goals. the ideal process of MBO would be: 1. individual discussion with the superior of the subordinate’s own job description 2. establishment of the employee’s short-term performance targets 3. meetings with the superior to discuss the employee’s progress toward targets 4. establishment of checkpoints to measure progress 42 Strategic innovation 22-23 LS • the goal of Apollo was to build all remaining capabilities needed to land on the moon Challenge: because the objective was at the same time concrete and so difficult to reach, there did not at first appear to be a credible connection between day-to-day work and the moon, which causes a decrease in how much employees give meaning to their tasks. Solutions: • NASA leaders diffused three major milestones that employees should focus their attention on, even though they could be broken down in thousands in smaller milestones. However, the small number of milestones heightened meaningfulness, also through rhetorical visual metaphors (“road to the moon”, “stepping stones”, ...). • Individuals then pieced together how various employees worked on different activities in parallel to fulfill a common objective - even if different people’s work seemed, on the surface, to be unrelated. 45 Strategic innovation 22-23 LS WEEK 10: IDENTITY, BRANDING & STRATEGIC INNOVATION → What is an organization’s identity? Organizational identity is the character and the essence of the company. It is made by the core, enduring and distinctive claims and understandings around the question “Who are we as an organization?” a company identity has many sources: founders, industry, history Identity & competitive advantage: • Identification of employees in the company (higher loyalty, higher performance, etcetera) Sense of authenticity and commitment (the company stands for something that is clearly acknowledged) • Identification of customers in the company and reputation (through branding), which creates loyalty and trust • It is a guide for decision making, a “simple rule” that can be applied when evaluating choices (“We are a motorcycle-manufacturing company, thus we will not enter in the market of cars”) Case history: Steve Jobs and Apple’s identity → Steve Jobs co-founded Apple in 1976 and left in July 1985. In that period, Apple grew immensely by developing two products: Apple I, aiming for personal computing enthusiasts, and Apple II, aiming for the mass consumer market. In 1981, IBM, the arch-enemy of Apple, launched its first PC, and it eroded sales of Apple II. In 1983, the LISA personal computer was launched by Apple. It was a flop, even though it was the first personal computer with a graphical user interface. Eventually, tensions between Jobs and Sculley (Apple CEO) led Jobs to resign. However, Apple failure progressed. Sculley strategy made Apple revenues grow ninefold, however it embarked in a spiral of failure, as the wedge between the declining Apple stock price and the stock market amplified. The CEO after Sculley departure, Michael Spindler (1993-1996), tried to sell the company to IBM, Sun Microsystems and other companies, without success. The policy of maintaining high profit margins did not change as technology evolved, thus Apple started to face serious competition from low-cost computers with similar functionalities. The downward spiral lasted until 1997, when Steve Jobs returned to be Apple CEO. Jobs brought Apple back from the brink of disaster by reconciling the firm with its innovation roots and aligning its technology and business strategies with its historical identity. Jobs seized every communication opportunity to reinforce this theme, like the launch of the iMac in 1998... Identity and innovation → there are 3 types of innovations based on how they related to identity: • identity-enforcing innovations • identity-stretching innovations • identity-challenging innovations (strategic innovations are typically of this kind) Business ad usual: identity-enforcing innovations → In identity-enhancing innovations, organizational identity and innovative activities are consistent with each other, resulting in a self re-enforcing positive feedback loop. Organizational members all “know” what actions are acceptable or appropriate based on 46 Strategic innovation 22-23 LS a shared understanding of what the organization represents. This knowledge becomes codified in a set of heuristics, which guide the selection of dismissal of innovative activities Identity stretching innovations → In identity-stretching innovations, organizational identity and innovative activities incrementally broaden or shift as a result of feedback dynamics. Managers can proactively encourage and facilitate a broader range of innovative activities by making incremental, fluid changes to identity, and innovation can, in turn, stretch the organizational identity. Example: Alessi → in the late 1960s, Alessi was the technological and market leader in the tableware segment of the Italian metal household industry, because of its advanced skills in cold-pressed steel production. In 1970, the founder’s grandson, Alberto Alessi, joined the head of the organization, steering it towards a radically different direction: using industrial production methods to make art objects in steel. Alessi innovated the design, production and marketing functions by introducing ideas and practices from modern art, and then from anthropology and psychoanalysis, founding the renowned Alessi research center and becoming a leader in Italian industrial design. At Alessi, the relationship between organizational identity and innovation went through cycles of “enhancing” and “stretching” phases. Innovative activities across product development, production, nd marketing stemmed from new cultural resources in the organization’s environment. These activities informed the redefinition of Alessi identity. Activities such as using artists to design and comment on products, as well as altering both production and distribution channels to incorporate galleries and museums were reflected in Alessi’s shifting organizational identity. As such, Alessi identity evolved from “artistic mediator” to “crafts workshop” to “dream factory”. These changes in turn, enabled ongoing innovative activities that allowed Alessi to grow and stay profitable over time. Rigidities coming from identity → Identity can be a barrier to strategic innovation. The pursuit of a strong, coherent identity might cause the failure of exploration activities (venturing, skunk works, ...), as they are not consistent with the core identity of the company. The nurturing of an identity that is consistent over time might create rigidities when the company needs to change to adapt to strategic innovation. The company can be trapped in its own past. Example: Lego → the realignment mechanisms in LEGO were driven by the potential threat of digital innovation in the competitive landscape of the toy market (Game Boy, Playstation). How can LEGO adapt to a digitalization of products while being a producer of physical goods? Initially LEGO took several measures to adapt to this shifting competitive landscape, including creating a separate business unit to develop computer games (LEGO Media, based in London). Yet digital innovations 47 Strategic innovation 22-23 LS expected to pursue. Ford’s defining a new “mobility” category is an attempt to highlight positive interdependencies among these activities, likely directed at employees and investors. Salesforce.com pioneered a new enterprise software model that required clients to relinquish control and trust outside vendors with valuable data. Combining this “outsourced” activity with enterprise software was more efficient, but was suspect at the time. This combination of activities ran counter to normative expectations that responsible clients maintained their most important information technology systems in house. Salesforce.com used a category strategy that drew from social movement activism to mainstream their outsourced model as part of the new SaaS category. Another prominent example is Apple’s turnaround. When Steve Jobs returned to Apple in 1997, it appeared to be succumbing to industry forces outside its control. Apple reversed its trajectory not by outcompeting in the personal computer market category, but by creating, defining, and then dominating new market categories for smartphones and tablets. Design, ease of use, compatibility with the ecosystem of products, and signaling a cultural identity became key criteria for purchasing decisions. Important elements when designing a category strategy: 1. Choosing a label: labels are the way people communicate about categories. They facilitate processes of categorization. The simple act of choosing the same or a different label as a competitor influences others to see the firms as more similar or more different. 2. Identifying rivals, Firms should consider what rivals form the best backdrop to showcase the firm’s strengths. Then, category strategy should include organizing industry associations, conferences, or festivals with the chosen group of competitors and excluding others, to define the category boundary. This is especially important if there is another adjacent market where competitive forces are not favorable. 3. Connecting with activists: Many domains have activists —influencers, evangelists, or enthusiasts— who become genuinely excited about a new category and talk up its virtues. Activists are difficult to directly control, but they are useful in category strategy if firms take the right approach. Finding an authentic message and a constituency where the message resonates is crucial to leveraging activists for category strategy In contexts of strategic innovation, companies often innovate their product lines within the same brand, creating so-called brand extension. The positive effects are: • Brand extensions can help clarify the meaning of a brand and its core values or improve consumer loyalty to the company behind the extension. • Brand extensions can renew interest and liking for the brand and benefit the parent brand by expanding the served market, or even creating radically new markets (e.g., iPod) • Consumers form expectations about a new product based on what they know about the parent brand and the extent to which they feel this information is relevant, reducing reduce risk and launch costs. The risk of brand dilution → however, brand extension has the risk of brand dilution, blurring the connection between the brand and the product and ultimately reducing brand equity. Brand dilution occurs when consumers no longer associate a brand with a specific or highly similar set of products and start thinking less of the brand. If a firm launches extensions consumers deem inappropriate, they may question the integrity of the brand or become confused or even frustrated: Which version of the product is the “right one” for them? Do they know the brand as well as they thought they did? The worst possible scenario is for an extension not only to fail, but to harm the parent brand in the process. Even if sales of a brand extension are high and meet targets, the revenue may be coming from consumers switching to the extension from existing parent-brand offerings - in effect cannibalizing the parent brand. 50 Strategic innovation 22-23 LS WEEK 11: STRATEGY IMPLEMENTATION & STRATEGIC INNOVATION → Implementing strategy: One of the great challenges that companies have is how to effectively implement strategy and the strategic decisions it is based upon. While in theory the process of strategy implementation (which we will call “strategy process”) seems swift and easy, in reality it is way more complex and messier. Some issues associated with the strategy process are: • trickling down (from the top management to the lower levels) and trickling up (from the lower levels to the top management) of information • detection and correct interpretation of information and weak signals • infusing organizational agility and winning inertia (especially critical in case of strategic innovation) Strategy process vs strategy content → STRATEGY CONTENT: concerns the content (or nature) of different strategies (therefore also of strategic innovation) and their probability of success. The focus is on the consequences of choosing different strategic options on strategic outcomes, of which the most important one is performance (long-term survival or growth in case of strategic innovation) Some questions associated with strategy content: Does related diversification have a positive impact on company performance? Is the positive impact stronger than unrelated diversification? What are the risks associated with internationalizing through greenfield foreign direct investments in psychically distant countries? What are the risks that conducting strategic innovation (e.g., entering new, nascent markets, or changing business model) produces in the short term? STRATEGY PROCESS: concerns how strategy is formulated, developed and implemented in companies. The focus is on the interactions and decisions that are behind the behaviors of the company by a number of actors, such as top managers, middle managers, board directors, consultants, and so on. Some questions associated with the strategy process: How do innovation prototypes get accepted by top managers in a divisional structure company? What is the role of middle managers in influencing top managers’ decisions to engage in strategic innovation? How do top managers make decisions? How does the use of Powerpoint in decision-making processes influence how decision are taken in the company? The emphasis is not on the performance, but on the “patterns in a stream of decisions” (Mintzberg) made by strategists (literally “those who do strategy”) in a company. Issues in organizing for strategic innovation: • Design and carefully manage the “strategy process” • Find the right balance between “deliberate” and “emergent” strategy • Recognize and involve top and middle managers in the “strategy process” properly • Align the organization to the requirements of the strategic innovation (this can be done through ambidextrous organizations) Deliberated strategy: involves intentional formulation or planning by the directors of the company, who trickle down the company overarching aspirations to lower hierarchical levels. Such intentionality may take different forms: • It could be the command or the (entrepreneurial) vision of a strategic leader, for example a CEO or the founder of a firm. • It could be through a process of strategic planning involving many managers. • It might be experienced as the external imposition of strategy formulated elsewhere. Jeff Bezos and deliberate strategy → “Amazon.com is a famously unprofitable company. And the question is: Are we concerned about it? The answer is, in the short term, no; and in the long term, of course. Every company needs to be profitable at some point in time. Our strategy, and we’ve consistently articulated this, is that we believe that this opportunity is so large that it would be a mistake for any management team not to invest in it very aggressively at this kind of critical category formation stage. 51 Strategic innovation 22-23 LS We don’t claim it’s the right strategy. We just claim it’s ours. But we do think it’s right. And that it would be a mistake to try to optimize for short-term profitability.” Paul Polman and deliberate strategy → In order to solve issues like food security or climate change, you need to have longer-term solutions. You cannot do that on a quarterly basis. So, we stopped giving guidance. We stopped doing quarterly reporting. We changed the compensation for the long term......I felt we had to do this to be a long-term viable concern. I don’t call it courage. I just call it leadership, which is doing these harder right things versus the easier wrong. It’s easy to make a lot of these [short term] decisions, but they are ultimately wrong for the long term......I also made it very clear that certain shareholders were not welcome in this company. That created quite some noise. potential pitfalls of planning → • Planning is not strategy: strategy is also much more. • Planning might be distant from what market reality actually is • The production of huge amount of data and information can overload the attentional capacity of managers, hampering the quality and the speed of strategic decision making • Planning might be very complex, which in turn reduces the agility of the company and the ability to respond quickly to emerging technological or market trends. • High formalization and rigidity of planning constrains the capacity of the company to develop and commercialize innovation, especially strategic innovations. Emergent strategy: is the outcome of a series of decisions, which forms a pattern that becomes clear over time. The strategy of the company is not entirely planned ex ante, but it emerges as a developing ‘pattern in a stream of decisions’ where top managers draw together emerging themes of strategy from various decisions and directions. The extent to which a strategy can be called “emergent” can be interpreted through different lenses: • Logical incrementalism: strategy is developed by partial commitments (similar to the real option reasoning), often in order to respond to radical market uncertainty or to leverage emergent strategic pathways • Political processes: strategy is the ultimate outcome of political bargaining processes between interest groups within the company and outside the company, which often focuses on the internal allocation of capital and resources Case history: Strategy at Honda → In 1984, Richard Pascale published a paper that described the success Honda had experienced with the launch of its motorcycles, smaller than Harley Davidson’s, in the US market in the 1960s. His explanation of Honda’s growth and expansion in the US market was focused on: • growth of their domestic market during the 1950s • highly competitive cost position • high productivity as a result of process innovation and introduction of cost-reducing manufacturing techniques Honda’s strategy was narrated as having a cost advantage based on volume, which ramp up Honda market share in foreign markets and created barriers to market entry. Years later, Pascale published a second paper on the same Honda’s growth in 1960s, based on interviews with the Japanese executives who launched the motorcycles in the USA. This article demonstrates how the 52 Strategic innovation 22-23 LS several years (especially with regards to the operating system). Fearing that Nokia would lose its world dominance and post weak financial results, top managers exerted pressure on middle managers to deliver a touchscreen phone even more quickly. Organizational processes could not keep up with the increased complexity of a growing company. Technology became more and more specialized and siloed, the matrix structure created heavy coordination costs, and the product development processes and softwares were not apt to sustain it. 55 Strategic innovation 22-23 LS CASE STUDY: “THE BIRTH OF SWATCH” → The case study is about an established organization with a long legacy in the Swiss watch manufacturing industry finding room for surviving and for growing into a sector that in the beginning of the 80s, was really disrupted by the coming up of a new technology. You remember that the historical layers in the Swiss manufacturing watch manufacturing sector were two companies as well. ASUAG and SSIH, if I remember correctly, they were owning most of the well known mechanical watches brands that we all know omega, Pizza, Rado and many others. They went close to failure, and they were merged into a new company that was called SMH. With the CEO, Mr. HAyek. Mr. Hayek was in the position to find a strategic innovation opportunity to really turn these companies the other way around, renounce them and provide a viable, profitable response to a technological discontinuity, which was the quartz technology applied to the manufacturing of watches. You remember that these players of the Zwiss watch industry were already, I would say, struck by newcomers like SIMEX from US, which were offering mechanical watches based on different architecture, manufacturing processes, so with very low cost. But a few years later, the threat coming from Japanese watchmakers like Seiko and Citizen really cut their market share, make them lose profitability. A lot of people employees were laid off, and the entire Swiss watch manufacturing industry went into a deep crisis. So the CEO of this company, after the merge, was really in a position to rethink how to compete. And the way he found was to launch this watch product that we all know perfectly, which was a deep change in the meaning that we attach to watches. And it was completely against the established ways of making business in the Swiss watch manufacturing industry as well, was a deep change into the business model, into the way of working into the established routines of the two companies that were into SMH. Okay, so the case study tells you the decisions that Mr. Hayek took, the challenges that he faced in pursuing this strategic innovation, the key elements of their business model. Yes. So as for every good strategy analysis, it is always nice to start with an understanding of which are the main trends that are occurring in an industry or in a market in a specific moment of time. Okay, so the so called external analysis in strategic management. So the first question was about developing a test analysis of what is of the trend that the watchmaking, the Swiss watchmaking industry SMH was facing in that period of time. So PESTEL analysis is a way to frame the different types of trends that are occurring in a market or in an industry or in a geographical segment. So PESTEL, does it mean start with a P, political, economic, social, technological, environmental, and legal. Perfect. I want the test. It's important, the environment. So shall we start with some ideas regarding which are the trends that were affecting the Swiss watchmaking industry in, let's say, Ten or the 70s, even before? Let's start with the you remember you were very little at that time. So why we start from here? Because any strategic innovation project or decision to go in a certain direction should be consistent with the broader context in which it takes place. What were the transformations, the trends on these five axis dimensions that may be suggested to the CEO of SFH to try these strategic innovation projects? So the story occurs within the, let's say late 80s, which is the time frame where, let's say the mechanical which making industry was starting to shape so in that period of time. So right after World War II, I think that one key element was that the markets for trade and technology exchange were growing and were way more interdependent than before. Which means the broader term for this trend is globalization. Between the interdependence of markets that were led by the decrease in regulations that obstacle trade between countries was extremely important for the emergence of a sort of global competition. Right. So who is doing international business or anything related to multinational enterprises? There's a master of science business. No one is attending that. No, okay. So obviously in multinational enterprises, which now again are everywhere in the were starting to emerge as important players that were affecting the economic development and economic growth of entire economies. So one of the most important economists that started to study these companies was called Steven Heimer in the 60s started to realize that these companies were so important because they had a massive effect on the employment of countries. And with that, they had also a lot of political influence over the political choices of the host countries. So he realized that these companies were starting to grow and expand in different countries, were radically different from the small and medium enterprises that were using economies of scale to compete in the local market. So they were becoming multinational enterprises who could exploit different advantages that being in a home country and in a host country or countries more often could bring to them. Okay, so what does it bring to this making companies as 56 Strategic innovation 22-23 LS a platform, as an opportunity, any of that to them? What do you think? So markets become less insulated, industries become less insulated, I guess you want to call it. In the case study, the Swiss watchmaking industry was at least in the was a sort of yield system of production. There were many different companies who were making watches, but their market strategy, as well as their prices, as well as the broader social, economic, technological and political trends made them powerful, even though and probably because of they were essentially insulated from global competition. Right. So there was no need to innovate for them. They were making their mechanical watches. They were selling them at a very high price, and no one could compete with them. Can you spot trends? We can say that this belongs to the second e of the model. It will be the most important economic factor, creating a new challenge for the closed insulated. Players of the Swiss watchmaking industry was relying on craft, essentially, right. Where the ability to make watches was not relying on extremely big factories and automated manufacturing. Instead, it was relying on the almost technical manual ability of the watchmakers to deal with a very high number of components, which oftentimes were so small and microscopic that it was very difficult for other competitors to acquire the same kind of capabilities to produce this kind of watches. Other ideas about the trends, which is the other technological trend? Yes. Okay. Social national parade. Yes, absolutely. So the important thing about this industry was that, as your colleague remarked, was that this industry embedded Swissness. So being able to produce very high quality and very high price mechanical watches was a pride for Swiss people and for the Swiss industry. Okay. What is the sign of Swiss? In the case study, the author keeps on saying Swiss, but using this word for something else. High quality. High quality, high price. If you recall also when the competitors or Hayek himself speaks about Swiss or Swissness, what he really means is that this national identity was really reflected on specific characteristics of the value proposition and the business models of this kind of industry. Right. Other ideas. There was another technological trend which was quite important and actually yes, exactly. The quote technology. Right. Which is one of the main characters of this story, a technological discontinuity comes into a very established, mature and insulated industry, and things start to change. So the key success factors that govern an industry or a market. So the things you need to do in order to be successful in a market start to change. Can I ask which are the consequences of the technology for the competitive advantage of established incumbents with watchmaking firms? What were the consequences? Any idea who lowered the price? The competitors. Yes. Before the Japanese, there was yes, there was an American company, which was called Timex, and they were the first to use, quote, technology to produce watches. Okay. In the 50s, actually. And it's very interesting because we will see it in a bit, which was the response to Timex by the Swiss watchmakers. So there is some kind of competition. Right? So technological discontinuity comes in, new competitor, new competitors come to come in. Which are the competitive reactions to this defining income to them, because they were exactly. And they were raising their prices as a reaction to that threat. So moving upward in the more, let's say, high-quality, high price segments of their overall market share. Who is familiar with disruptive innovation? Raise your hands. Good. This is a clear trend of disruptive innovation. Established companies, let's say occupy, let's say mid dollar segment of customers, unnoticed, companies, oftentimes from with a distant value proposition, come in and start to tackle with a new business model the lower tiers of the market, of the market, which are not covered and served by the core company because they're not profitable. Right? But what happens is that these new Entrants, as they get traction with selling their products to these unserved part of the market, they start to get traction very fast and very quickly. So they start to threaten the established company. Right. And oftentimes the key strategic reaction is higher in the price, which is almost so in the logic of an established company is perfectly fine. Right. There's some we have some competitors, but we have a strong branch, so we do not take it seriously. And we hire the price so we can stick to at least the same level of profitability, but with a lower market share. That was what happened with the Swiss making industry. And as they higher the price, the new entrants start to gain more and more market share, right? So they start to become profitable. They scale up very quickly, which, as you know, it ends up with established company moving up of the market, basically, or just occupying a small niche in a very small portion of the market. And the newer entrance. The arrival of a disruptive innovation into a sector triggers reactions of strategic innovation. Sometimes the reaction is what Luca was saying. So focusing on higher price, higher quality, reducing the market share at the end, very often this brings you to become a niche player and you lose a lot of market share. The other time is finding a strategic innovation to regain, say, input market share and competitiveness like SMHD. Do you see something about the social trends that connects very much with watch product? What was one reason of success of this watch product linked with a change in society? Like then it became fashion. The 57 Strategic innovation 22-23 LS other capabilities? So this is more your capacity to envision and to put yourself in the shoes of Nicolas when he's thinking about the future of this company. He arrived in a moment in time where the Swiss watch making industry was on the brink of the structure. The industry was failing and the industry there was very tangible possibility that most of the Swiss makers were going bankrupt. He managed, he arrived and sort of renewed the whole industry. What do you think that should be? The resources and capabilities or the changes that he needed to envision for the long run for making SMH successful for the future? Not just now, for the future, yes, I do think that these business models will be sustainable in the long run. So material size and can I ask you radical innovation in which areas? Materials? Very good point. Yes. And they actually did with the tagoria Smartwatch, which was the first example of a smartwatch launched by a brand inside the SMH company. Yes, this was made a few years ago and it was a very tough decision. Can you imagine company with the legacy of mechanical craftsmanship and let's say all the established values venturing into a digital watch. You change the business model, you change the technology, you change the competitors, you change the customer radically. You venture into from a physical product to a mix of physical and digital products which connected together our an ecosystem. One of your basis for competitive advantage is based on brand values and some message that you want to convey with your watches. And you start to venture in something else that has completely different values, or you don't communicate them coherently enough or good enough, you are in deep trouble. Anything else that you envision as a threat? Yes. The components are totally different. Yes. So they would need to buy or develop software for smartness. And many other companies already have experience in this area. They have been focusing on digital transportation and the impact of digital technologies on the mobility industry. Today, more than one third of the value created on the value chain of a car is related to the software and electronic components. So at the end, these firms had to develop a strong capabilities in software engineering, system integration, human machine interface, user experience, and all things like that. So probably the capabilities of producing the software, maybe they would not internalize them. But how would that make sense with developing a product within an ecosystem of applications, which are the partners, which are the capabilities that they internalize and the ones that they externalize, they outsource. So maybe we can say that. The case study tells about a radical shift. Look at this picture that SMH with this watch product data at the beginning of the 80s, which allowed them not to fall into the cousin between the mechanical watch s curve and the fashion watch curve that Watch created now for 20 years or more 40. They were very good at making incremental innovations to improve over time. And so, to go along this s-curve, the question is, how much are we close to maturity and how quickly SMH, to remain competitive, to survive, to continue growth, will need another deep transformation and jump on another score. We don't know yet what it is. Maybe it's a smartwatch, but we don't know exactly. So strategic innovation is better viewed not as an innovation project, but as a stream of innovations. So at the end, Watch success was a radical shift in the meaning in the value proposition, followed by several more incremental improvements that have been doing over time. This is how innovation unfolds over time with deeper, more radical new product, service and business models, followed by a period of incremental improvements before we get closer to the maturity and we try to jump on the next escort. This is why in the literature, we often speak about innovation streams as a set of innovation, some more radical, some less radical, that are the transformation that we call strategic innovation. SMH (Swatch Group) is the parent company of the Swatch brand and several other luxury watch brands. The core resources and capabilities of SMH include: • Manufacturing: SMH has extensive manufacturing capabilities, including the ability to produce high- quality watches using a wide range of materials and technologies. • Distribution: SMH has a global distribution network that allows it to reach customers in a wide range of markets. • Branding: SMH has a strong portfolio of luxury watch brands, including the Swatch brand, which allows it to appeal to a wide range of customers. • Marketing: SMH has a strong marketing and advertising capability, which it uses to promote its brands and watches. • R&D: SMH has a strong R&D capability, which allows it to develop new products and technologies. In my opinion, SMH's core resources and capabilities are sufficient for competing in the long run. However, as the market evolves, SMH may need to renew some of its existing capabilities in order to stay ahead of the competition. For example, in order to keep up with the fast-changing fashion trends, it may need to invest in design and marketing capabilities. Additionally, as technology continues to advance, SMH may need to invest in technology capabilities in order to develop new products and technologies. 60 Strategic innovation 22-23 LS Furthermore, since the industry is highly competitive and changing, the company could consider other capabilities to stay competitive such as: • Digital capabilities: to enhance the customer experience and create new sales channels • Sustainability and environmental awareness: to align with the growing environmental awareness of consumers and to differentiate itself from the competition • After-sales service: to strengthen customer loyalty and increase customer retention. 61 Strategic innovation 22-23 LS CASE STUDY: “FIAT OPEN INNOVATION IN A DOWNTURN” → is a case study that examines how the Italian car manufacturer, Fiat, used open innovation as a strategy to overcome a period of economic downturn in the 1990s. During this period, the company was facing serious financial difficulties and its market share was declining. To address these challenges, Fiat adopted an open innovation strategy, which involved collaborating with external partners to develop new products and technologies. This allowed the company to access new ideas and expertise, which helped it to improve its products and reduce costs. Fiat's open innovation strategy was particularly successful in the area of powertrain development. The company collaborated with suppliers to develop new, fuel-efficient engines, which helped to improve the fuel efficiency of its vehicles and reduce costs. Additionally, the company also collaborated with universities to develop new materials and technologies that could be used in the production of its vehicles. This allowed the company to access new technologies, expertise and ideas that improved the performance of its vehicles, reduced costs and helped to maintain its competitiveness. The company also leveraged partnerships with other companies to create new business models and revenue streams. For example, it created a car-sharing service which was a new revenue stream for the company. This allowed the company to diversify its revenue streams, reduce its dependence on a single market and to create new opportunities for growth. The open innovation approach adopted by Fiat helped the company to improve its products and reduce costs. This allowed the company to stay competitive during a difficult economic period. Additionally, by collaborating with external partners, the company was able to access new ideas and expertise, which helped it to overcome the challenges it was facing. This allowed the company to improve its products, reduce costs and increase its competitiveness. The article illustrates the importance of open innovation as a strategy for companies facing economic downturns. It shows how by collaborating with external partners, companies can access new ideas and expertise, which can help them to improve their products and reduce costs. Additionally, it highlights how open innovation can help companies to diversify their revenue streams and create new business models, which can help them to become more resilient in the face of economic challenges. The case of Fiat demonstrates how open innovation can be a powerful tool for companies looking to overcome economic downturns and improve their competitiveness in the market. Open innovation can be defined as the process of collaborating with external partners to develop new products, technologies and business models. This process allows companies to access new ideas, expertise and technologies that they may not have access to otherwise. This can be particularly beneficial for companies facing economic downturns, as it allows them to improve their products, reduce costs and increase their competitiveness. In the case of Fiat, the company faced serious financial difficulties and its market share was declining. To address these challenges, the company adopted an open innovation strategy, which involved collaborating with external partners to develop new products and technologies. This allowed the company to access new ideas and expertise, which helped it to improve its products and reduce costs. This allowed the company to stay competitive during a difficult economic period. Fiat's open innovation strategy was particularly successful in the area of powertrain development. The company collaborated with suppliers to develop new, fuel-efficient engines, which helped to improve the fuel efficiency of its vehicles and reduce costs. Additionally, the company also collaborated with universities to develop new materials and technologies that could be used in the production of its vehicles. This allowed the company to access new technologies, expertise and ideas that improved the performance of its vehicles, reduced costs and helped to maintain its competitiveness. Today we move into a different case study which is about an established car maker that of course doesn't exist any longer with this name. It's a Fiat Group that back in the 90s was searching for opportunities to counterbalance the decline of the European automotive market that was taking place in 1993. If you remember from the case study, the Fiat Group was very much strong in terms of market share. On the Italian market, they had something like 40/43% of the market share. And also the European market was a very important one for them, with around 15% of the market share there. It was the European market that was struck by a recession with more or less a decrease in the volume of sales of around 30% year on year. And so the CEO and the top management team of Theater was taking on one side complex decisions to lay off a significant number of employees and to reduce the overall spending of the group to protect their income 62 Strategic innovation 22-23 LS with a positive stance to these ideas for strategic innovation. But then at the end of very much the DNA of the leader and its ability to speak strategically, not financially, not in terms of numbers when it comes to get fraction for this type of project. And what you said is an example of inertia caused by the political systems. So there are governance structures like board and management team which have vested interest in maintaining. How can you convince them if you can convince them, you can overcome inertia. But of course inertia is there and we know that inertia is not easy to overcome. So this is a real burden, a real issue for companies, but also to some extent also for less large companies. I think that in this last year we are starting to realize that also the type of owner matters for the strategic survival of the company. For example, I'm going to recent example about Patagonia. They divided, they changed the ownership structure as a way to the one hand to develop a succession plan for the family of the owners. But the new ownership structure is also a way to make sure that the owners do not get into the way of accomplishing and pursuing the original mission of the company and thus the strategic long term direction of the company. While other type of owners such as private equity funds, not all of them, or venture capital funds, again, not all of them are more interested in the earnings that the company is going to make after five or seven years. One thing that we saw in the article really characteristic of that communication was that they use the ideal assets. For example, shared project makes them profitable. So can we say that it's a case of communication? It depends on how you define platforms. You know that there are different types of platform, transaction on transactional. But from this exactly standpoint, the fact that they take assets and they find new ways to extract value from that, it's an example of platform. So sharing one asset across multiple vendor generation channels. So I agree with you if we speak about transactional platforms in the stricter certain things, of course this is not the case, but I understand what you mean. You talk about idle assets. Yes, of course. I'm not sure that platforms are only about idol asset and everything that is idle assets are about platforms. But we can discuss about microsoft had a very similar strategy. There is a very nice book by Tim Cookson which is called Burning Ships which explains his journey in making Microsoft an open company where the idol patents and the Idol IPRs that were not used on the day to day Microsoft were put into a new use, a new source of revenues. One thing that could have been done differently is to have a more comprehensive and long-term open innovation strategy in place. While the open innovation strategy that Fiat adopted in the 1990s helped the company to overcome the challenges it was facing, it may have been more beneficial for the company to have a more comprehensive and long-term open innovation strategy in place that would have helped it to continue to improve its products, reduce costs and increase its competitiveness in the market over the long-term. Additionally, the company could have benefited from having a more formalized process for identifying, evaluating and selecting potential partners, as well as for tracking the progress and results of the partnerships. This could have helped the company to make better decisions about which partners to work with and how to maximize the benefits of the partnerships. 65 Strategic innovation 22-23 LS CASE STUDY: “CORNING MICROARRAY TECHNOLOGIES” → Corning Microarray Technologies has a long history dating back to the early days of microarray technology. The company was originally established as a division of Corning Inc. in the late 1990s, with the goal of developing and commercializing microarray-based products for the life science research market. Corning Microarray Technologies initially focused on developing glass slides for DNA microarray applications, but later expanded its product offerings to include reagents and other products for both DNA and protein microarray applications. The company also began to develop products for use in clinical applications, such as diagnostic tests and personalized medicine. Throughout its history, Corning Microarray Technologies has had a strong focus on innovation, and has been recognized with numerous awards and patents for its contributions to the field of microarray technology. The company has also formed partnerships with major life science companies such as Illumina and Roche to further enhance its product offerings and capabilities. In recent years, Corning Microarray Technologies has been working to expand its reach globally, with a focus on growing its business in the Asia-Pacific region. The company has also been investing in new technologies and product development to keep pace with the rapidly evolving field of microarray technology. Transcript Corning has been pioneering over the take and has several new technologies, both in the field of consumer products like PRX technology for cookware, then they built a big business around fiber optic cables for telecommunications. We would say that this still is the main business unit business area of Corning. And the case study is about their attempt to develop a new growth factor for the company back in the mid of the 90s by entering a very fast growing sector at that time, because the sector of genomics testing, if you remember, in the lot of development took place in understanding the genomics of humans. In 2000, all the genome of humans was discovered. And throughout those years in both company arm villas, but also hospital and university labs, there was a huge exponential growth of testing processes in the search for new drugs and treatments based on the genomics technology. And if you remember, Cording was suggested by a consulting team to explore and then try to exploit this business opportunity by launching what they called a DNA microwave, which was basically a little piece of glass on which some samples of yeast and the human DNA were layered for testing in clinical labs, ideally on top of the big market. This project leveraged one core competence of Corning, which was linked with very sophisticated capabilities, linked with manufacturing glasses and layering different kinds of materials onto the surface of glasses, which was one of the core capabilities piece of knowledge that carving also leveraged in the other more established businesses. The case study is all about winning inertia toward a project of strategic innovation. It's about what happened in the company across those years and at the end these things led to the failure of that strategic innovation project. So it's another, I guess, very good example of discussion around the challenges and problems that leading a strategic innovation project creates for established organization. And so, after the watch case study, the PSK study, this one will allow us to get a little bit more depth into some concepts that we will see later on after this open discussion. So the first question was why can DNA microarray can be considered as a strategic innovation for coding? Again, we go back to the basics and refine our ability to spot and identify projects that have and share the features of the typical strategic innovation challenges that can be. So let's start discussing about whether and to what extent the innovation project linked with creating and then selling DNA microarray for carving is an example of strategic innovation. So a new value proposition for the company, for the customers this is related more to the component of the business model of the full company. They were like continuing to innovate different target segments. Also using existing capabilities to help continuous innovation, changing the organization searcher. So radical change in how the roles and the flow of information went vertically as well as a result. So different rules, different responsibility, different tasks. And we can say also a nascent industry. You remember that basically there were two options for them to do this kind of testing or rely on the Optometrix closed system, which sold the entire ecosystem of machines to print the DNA microwave. The DNA microwave themselves as the layer on which the printing took place, which was a closed non interoperable system sold by Optimetrics. And the second was a self printing. So organizing internally a process of printing the DNA micro rate value. As you remember, it was not very well seen by researchers in 66 Strategic innovation 22-23 LS labs because it took 20% of their time and it was very ordinary activity, not really added value activities for researchers in the field. So radical shift in a part of the business model. So not just the position, but also the supplier and how they manage the supplier. Not just a switch between different suppliers without switching cost that were cost because they needed to develop a specific position, a specific role to manage this shift from suppliers to credit suppliers. So expectations of profitability, maybe in the long run, but not in the short term → This is a very important characteristic of a strategic innovation. Do you remember the tensions in terms of setting the right goals for the project? That came from the usual fiber optic cable business, which delivered a lot of growth, a lot of profits in the short run. And lowering down these expectations for the new project was challenging. So everyone, although it was a strategic innovation project, was demanding for this kind of return. So setting the right goals for the strategic innovation project is a key step. It's clear how many tensions there were. So are pushing for more ambitious goals on the strategic innovation in the short term because that's the typical way the company was used to plan for new initiatives and for innovation targets. You remember that they started with 100 million revenues in the year. Then they even raised it to 250 million revenues annually in a context where they didn't know anything, to be honest, in terms of how the market worked, how it could be growing and so on. So expectations and goals play the critical components in the failure of this project. And in fact they talk about this strategic innovation project as a two step project. Remember the generation 1 DNA micro rate based on yeast DNA samples and then the human DNA sample project but at the end they were late. Even with the first generation product, you remember they came later. Technically it was a super product, but in the meantime the market was already flooded by other technologies and so they came late, which is just a reflection on this. THE TIMING OF STRATEGIC INNOVATION IS ALWAYS CORE COMPONENT OF THE SUCCESS OF THE STRATEGIC INNOVATION ITSELF. You know from your past strategy courses that timing is always an important element, for example in market entry. So there is always a lot of thought that strategists need to deploy when they want to plan a market entry, plan a strategic innovation project. At the same time, how many strategic innovations can be deployed from start to the end without any change in the plan? Right? But if you develop strategic planning that does not take into account the potential uncertainties that are associated with strategic innovation project, you might end up developing a very nice project, a very nice product or service, but without a market to serve. Right? Because the Corning example is very important on this. Might develop a product, but the momentum has gone, right. So at the end you will have a nice various product, but a product without a market. Which goes to the second question that you were asked to answer if you want to make a diagnosis, I think you can look at two aspects. One is the features of the project itself and you mentioned several things. It's a project with longterm profitability expectations, not short term results. It's a project that requires a big change in the current business model of coordinating in terms of target markets, relationship with the suppliers, new value proposition. It's a project that leads the company into a different market, very often a nascent market. It's a project started in this case not to respond to a threat to a disruptive innovation and so not to survive, but to find exceptionally potentially high revenues for growth. You remember the starting point for pursuing this strategic innovation was we need additional sources of growth on top of our fiber optic cable business which was getting close to maturity. So these features position this project as a typical strategic innovation project. The other thing is analyzing and making a diagnosis of the challenges that the project creates in the organization. So you spoke about setting the right expectations. You see the tensions between the usual way with which goals and KPIs were set and the need for more long term uncertainty based planning. Do you see the political system at place in this case study? You remember where they said it was very complex for the top managers to accept to jump on the new project. They wanted to stay in the fiber cable business because it was more secure, more stable. So they didn't want to challenge themselves, their position, their authority by jumping on the new project. So one issue was finding the right interns that could lead the new project. You remember the stage gate, five step new product development project. Corbin over the years created a procedure, how we call this an organizational routine, that became in the core of their way of working. When we develop new products, we follow these steps and each step has to be completed successfully before we move to the other one. Okay? So it's a typical stage region development process. It's clear that adapting this NPD process neoproduct development process to the Corning DNA microwave project was not working because the goal was not getting it right the first time, but learning fast. So if you want to get it right the first 67 Strategic innovation 22-23 LS clearly said that Mr. Brown was doing a very good job. But it came later, a few months before the telecommunication market crept down, which clearly points to the strong dependency of this project on the funding of the parent company. I'm pretty sure that if they created a spin out, even if the telecommunication business worked out, they would not suffer the problems that they had in terms of dependency on that budget because maybe together with corning there would be another financial partner and industrial partner joining the spin off. And when you structure the spin off, you can establish the conditions whereby you will in a few years have your chance to buy back the company at three defined conditions, not at the market value of the spinoff. Real option as well, real option thinking. So it's a way of spinning out the new venture, bringing even further the approach of separating the exploration and exploration unit. The exploration one can even go out to be more independent, less subject to the problems of routines, political system, knowledge clashes and even dependent on internal funding. If you look at the annual report of Corning today, it's basically 2% 3% the life science division of the company. So glasses for science health applications. So they didn't really enter into the biological genetic labs market and they were lucky that after the burst they were able to survive due to their higher cash availability and lost debt to equity ratio. But then over time this became a very important growth opportunity in itself because the market then expanded a lot. So they are still working mostly in the telecommunications sector for all the applications that came. 70 Strategic innovation 22-23 LS CASE STUDY: “ROBERT BOSCH” → The Robert Bosch case studies about a corporate venturing process established by a big traditional tech- intensive firm to, I would say, keep the pace with a number of technology discontinuities that were hitting their core market and business model. You remember that Bosch was and still is very active in the car automotive sector, which accounts for around 60% of their overall revenues. And as we all know, this sector as well as the other energy transportation in which Bosch is active are subject to trends coming from IoT, connected car and several other technology discontinuities. So Robert Bosch decided to structure a process to encourage the identification and pursuit of new business opportunities that hopefully over the mid to long run can generate opportunities for strategic innovation. And the case study tells you about how this corporate venturing process is done, the phase that it goes through, the tools that in each phase support the corporate venturing process. And it's about a checkup of these framework because at the end they discover that it was not really delivering on its promises, which means that okay, several ventures were created, but at the end was not still there. So the first question is what are the tools that Bosch currently uses in its innovation management? How well are the individual initiatives aligned? We have seen that Bosch is a big company who has been very innovative in the past, but is facing important challenges ahead of the future. And one of the challenges is given by the digital transformation. And the digital transformation basically of the value chain and of the industries that it serves. So Bosch is trying to shift from being an OEM, so a component manufacturer for other companies, to a company that seeks to support these companies by integrating analog and digital products and services. So the integration of a whole completely new business model and technical capabilities. In order to do that, Bosch and Simmons has started to develop a portfolio of activities that were going into this direction. Which are these initiatives that the Bosch developed?These were the two, probably the two main ones → So they started with accelerators and incubators for external startups. So the technology and the capabilities that are coming from independent startups that are founded outside Bosch out there. And they also tried to harness the entrepreneurial mindset of the employees and trying to stimulate it by developing the so called entrepreneurship programs. So stimulating employees and Bosch managers to create projects and to create ventures that could be either integrated in Bosch or spin out other activities. So Accelerator Incubator. Corporate Venture Capital. Right, so incentives to stimulate these activities. Yes, but in terms of activities, of corporate entrepreneurship activities, they just did the incubator accelerator and the governmental capital unit. So we can say that Bosch developed an ecosystem of activities that we're trying to harness on the one end the internal capabilities and internal efforts of employees to develop new ventures as well as to develop to harness the external knowledge and innovation coming from external startups. What was the core issue that Bosch was facing? So they developed a series of activities and were they successful or not after a while that they didn't start ups and stuff like that? That was the crucial issue that Simmons was facing. They created a lot of startups internally and gave a lot of resources to confidential capital, to the venture capital Armand of Robert Bosch. So they were creating a starting a series of startups but these startups were blocked in a certain sense, they could not scale up, so to say, okay, so they remained in the ideation and startup phase but there was a problem in making them scale up and becoming real components. Or if I can add this problem, detention clearly became evident when Robert Bosch identified a startup which was potentially useful for triggering growth of the company itself. And when this happened, they try to integrate it into existing operations. This is where most of the new ventures that they created from inside or identified from inside. So the big problem that they faced is how to integrate this new venture into the existing operations and business model of the company. Do you understand the tension? So the tension is between leaving the start up and your ventures free to grow by themselves as separate entity or try to bring them back to the core operations of the company. When this happened, some problems clearly become evident. The intent of Bosch was to develop innovations that could renew the core business and that could bring in new capabilities. But when Bosch had to face budget decision and the resource allocation decisions and they were faced between giving resources to the exploitative innovation stream or to the explorative innovation stream, most of the times the decision was made for the exploitative innovation streams. So when the senior management faces these decisions, the core business was prioritized over the exploration unit and exploration innovation streets. 71 Strategic innovation 22-23 LS The Robert Bosch Group uses a variety of tools and methods for its innovation management, including: 1. Open Innovation: The company actively seeks out partnerships and collaborations with external partners, such as startups and universities, to access new technologies and ideas. 2. Innovation Networks: Bosch has set up internal networks of experts across different departments to encourage cross-functional collaboration and idea sharing. 3. Bosch Research and Technology Centers: The company has several R&D centers around the world where it conducts research and development in key technologies such as autonomous driving, IoT, and artificial intelligence. 4. Innovation Contests and Hackathons: Bosch regularly holds internal and external innovation contests and hackathons to generate new ideas and solutions. 5. Stage-Gate Process: Bosch uses a stage-gate process to manage the development of new products and technologies, which includes a rigorous evaluation and approval process at different stages of development. With all these initiatives it's likely that Bosch is continuously aligning and integrating its innovation management efforts to ensure maximum effectiveness and efficiency. we can move to the second question. How do you evaluate Bosch current approach and what are its strengths and weaknesses. What are the strengths and weaknesses that the current innovation approach of Bosch was having? Let's start with the strength. Had so many organizations. So the ability to leverage on the scope of the firm. So they had a set of activities that tried to capture the most knowledge and the most capabilities both outside and inside the company. Yes. And also they designed the stages for each of these designs. They were perfectly so the design and the planning of these comprehensive ownership activities were not held back by some kind of backwardness in conceiving that exploratory activities and exploration is necessary for Bosch. The senior management knew that they had to develop radical innovation or disruptive innovation to stay ahead. And this was the stakeholders goal of the company. So we can say that maybe the problem was not really well, the major part of the problem was not cognitive inertia. The senior management was very clear that Bosch had to be open to be attentive and receptive to knowledge from a side that the advantage is not eternal. So they had to renew themselves and so on. The problem probably wasn't actually inertia. So we can say that from the HR perspective, from a union sources perspective, bosch did mostly the right things. Things were working. They had a culture that was supportive. They developed specific sandboxes for employees to develop their creativity and their entrepreneurial mindset. They were attracting talent because of these emails of being an innovative company. So this was definitely a strength. I would also say that the innovation programs were also based on customer feedback. So they implemented a strategy that was not just relying on just the development of the technology per se, but the development of technology was integrated in customer feedback. So they managed to test this technology. What are the weaknesses.You remember when Simon said maybe it's just a matter of giving them time at the end of the case study? So why are we hiring so much in integrating the ventures back into Bosch? And why do we evaluate the outcome of these projects only after a few years time? If they are real disruptive or strategic new ventures, maybe on one side it's okay that most of them fail, and on the other side, to see signs of positive impact, you may need a longer time horizon. So it's like they at the end were over balancing toward exploitation and not giving enough room to exploration for all these activities to deliver a real tangible benefit. Other weaknesses? Yeah, I think that at a certain point most programs have metal in it where they Japanese, like they don't have enough time to develop a proper idea or product and once then they step apart, they were bring to the company and we are the same transition. Right. So to order the problem for internal startups, no clear metrics and too much financial and time pressure. So only eight weeks to graduate from the accelerator and then they had to be integrated with this integration trade because they were not ready to do it. And on the other hand, there was the integration of external startups which creates a cultural mismatch sometimes. Yes, exploitation. Although they created a big machine to balance exploitation and exploration. Yeah, the managers were so they said that they wanted to develop radical innovation and disruptive innovation. But at the same time when that innovation was about to be developed, there was a sort of lack of managerial commitment to that innovation. So this innovation is often across departmental and cross functional. So they had to overcome the variance between departments, functions and teams. But at the same time there had to be a manager that was in charge, that had the responsibility to bring this to evolution. Right? And of course, this is for every disruptive innovation or radical innovation, this is a risky project. So it was like they started to develop the innovation or the technology, but when they had to scale it up and to get 72 Strategic innovation 22-23 LS 1. Encourage and empower employees to take ownership of their ideas: By providing employees with the necessary resources, tools and support, they can take on more ownership of their ideas, and develop them more effectively. 2. Increase the speed of decision-making: Speed is crucial for success in innovation, and by implementing a more agile decision-making process, the company can quickly evaluate and implement new ideas. 3. Foster a culture of experimentation and risk-taking: Encouraging employees to experiment and take risks can lead to more innovative solutions and a greater willingness to try new things. 4. Focus on external partnerships and collaborations: By working with external partners, such as startups and universities, the company can access new technologies and ideas that might not be developed internally. 5. Measure and track progress: Establishing key performance indicators (KPIs) and tracking progress on a regular basis can help ensure that the company is on track to achieve its innovation goals. When making decisions, I would consider the company's overall strategic objectives, the current market trends and competitors, and the company's strengths and weaknesses in terms of innovation. I would also consult with key stakeholders, such as employees, customers, and partners to gain a deeper understanding of the company's current capabilities and areas for improvement. Additionally, I would consider external factors such as government regulations, legal restrictions and societal trends to make sure the company is aligned with them. 75 Strategic innovation 22-23 LS CASE STUDY: “MICROSOFT UNDER THE CEO NADELLA” → The case study of innovation through organizational learning in Microsoft under CEO Satya Nadella highlights the ways in which the company has transformed its culture and processes to drive innovation. Since becoming CEO in 2014, Nadella has implemented several key strategies to foster a culture of experimentation, encourage knowledge sharing, and create an inclusive and diverse workplace. One of the major changes Nadella has made is to shift the company's focus from a product-centric to a cloud-centric and AI-centric approach. This has led to the development of new products and services, such as Azure, Microsoft 365, and LinkedIn, which are now major contributors to the company's revenue. Nadella has also emphasized the importance of experimentation, encouraging employees to take risks and try new ideas. This has led to the development of new technologies, such as HoloLens, a mixed reality headset, and the creation of the Microsoft Garage, a program that allows employees to work on side projects and share their ideas with the rest of the company. In addition to these changes, Nadella has also invested in tools and processes to facilitate the sharing of knowledge and best practices across the company. For example, the company created the Microsoft Technical Community, which allows employees to connect with experts in various fields and share their own expertise. This has helped to create a more collaborative and innovative work environment. Finally, Nadella has focused on creating an inclusive and diverse workplace, recognizing that different perspectives and backgrounds can lead to new and innovative ideas. This has led to a more open and inclusive culture at Microsoft, where all employees feel valued and empowered to contribute their ideas. Overall, Nadella's leadership has fostered an environment where learning and experimentation are valued and supported, leading to increased innovation at Microsoft. The company's shift to cloud and AI-centric approach has resulted in the company's growth and innovation in these areas. Microsoft has become a leading provider of cloud and AI services, and has diversified its revenue stream in the process. Question 1: Which are the organizational elements that did not enable learning under CEO Ballmer? A. A focus on short-term financial results: Ballmer's leadership style placed a heavy emphasis on achieving short-term financial results, which may have discouraged employees from taking risks or experimenting with new ideas that could have long-term benefits for the company. B. Lack of emphasis on innovation: Under Ballmer, Microsoft was criticized for not investing enough in research and development and for not being as innovative as its competitors. This may have led to a lack of motivation for employees to think creatively and come up with new ideas. C. Bureaucratic decision-making: Microsoft was known for having a bureaucratic decision-making process, which could have made it difficult for employees to share their ideas or get new projects approved. D. Limited opportunities for employee development: Ballmer's leadership may not have provided enough opportunities for employee development and growth, which could have limited their ability to learn and take on new challenges. E. Lack of a clear strategy for future growth: Microsoft under Ballmer was criticized for not having a clear strategy for future growth, particularly in the areas of mobile and cloud computing, which could have made it difficult for employees to understand the company's direction and make decisions that aligned with it. F. A rigid hierarchical structure, where the top executives had a strong decision-making power, which could have made it difficult for new ideas to come from lower levels of the organization, and for employees to have a sense of ownership over their projects. Question 2: How would you evaluate the progress and renewal success at Microsoft? What did CEO Nadella do well? What are the potential barriers to the success of Microsoft renewal? It can be argued that under CEO Satya Nadella, Microsoft has made significant progress in renewing and revitalizing the company. Some of the key areas where Nadella has been successful include: A. Shift to cloud and AI-centric approach: Nadella has led the company's transition from a product-centric company to a cloud-centric and AI-centric company, which has resulted in the development of new products and services, such as Azure and Microsoft 365, that are now major contributors to the company's revenue. B. Emphasis on experimentation and innovation: Nadella has fostered a culture of experimentation and encouraged employees to take risks and try new ideas, resulting in the development of new technologies, such as HoloLens, a mixed reality headset. 76 Strategic innovation 22-23 LS C. Investment in tools and processes for knowledge sharing: Nadella has implemented processes such as the Microsoft Technical Community to facilitate the sharing of knowledge and best practices across the company, creating a more collaborative and innovative work environment. D. Strong financial performance: Under Nadella's leadership, Microsoft has seen strong financial performance, with revenue and profits consistently increasing. However, there are also potential barriers to the success of Microsoft's renewal. Some of these include: 1. Competition in the cloud and AI markets: Microsoft faces intense competition from other tech giants, such as Amazon and Google, in the cloud and AI markets, which could make it difficult for the company to maintain its market position. 2. Difficulty in attracting and retaining top talent: As a company that has been around for decades, Microsoft may have difficulty in attracting and retaining top talent, particularly in the areas of AI and cloud computing, where the competition for talent is fierce. 3. Resistance to change: Despite Nadella's efforts to renew and revitalize the company, there may still be pockets of resistance to change within the organization, which could make it difficult for new initiatives and projects to be implemented successfully. 4. Difficulty in managing the company's diverse product portfolio: Microsoft has a wide range of products and services, and it may be challenging to ensure that all of them are aligned with the company's overall strategy, and resources are allocated to the most promising areas. Overall, it can be said that Nadella's leadership has been successful in renewing and revitalizing Microsoft, but the company still faces challenges in the future, and it will be important for the company to continue to adapt and evolve in order to stay competitive. Question 3: What suggestions would you provide to CEO Nadella to improve the odds of renewal and innovation at Microsoft? 1. Encourage more experimentation: Encourage employees to take more risks and try new ideas, even if they may not have a guaranteed outcome, by creating an environment that rewards experimentation and learning from failures. 2. Invest in employee development: Provide more opportunities for employee development, such as training programs, mentoring, and rotational assignments to help employees acquire new skills and stay up-to- date with the latest technologies. 3. Foster collaboration and cross-functional teams: Create more opportunities for employees to collaborate across functions and departments to encourage the sharing of knowledge and best practices, and to foster a more innovative culture. 4. Emphasize the importance of diversity and inclusion: Make sure that the company's culture promotes diversity and inclusion and that all employees feel valued and empowered to contribute their ideas. 5. Stay focused on the long-term: Remain focused on the company's long-term goals and vision, even when faced with short-term challenges, as this will help to ensure that the company stays on track to achieve its goals. 6. Continuously adapt and evolve: Stay aware of the industry trends, and continuously evaluate the company's strategy and product portfolio to ensure that it is aligned with the market, and resources are allocated to the most promising areas. 7. Encourage open communication: Encourage open communication, both horizontally and vertically, to ensure that employees feel heard and valued, and that new ideas can flow freely throughout the organization. 8. Leverage external partnerships and collaborations: Look for opportunities to collaborate with other companies, research institutions, and start-ups to access new technologies, ideas and talent. 77