chapter 18 Managing Innovation and Change Mc GrawHillIrwin

chapter 18 • Managing Innovation and Change Mc. Graw-Hill/Irwin Principles of Management © 2008 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

18 - 3 Learning Objectives 1. Explain how paradigm shifts occur and describe their consequences. 2. A. Identify the major sources of organizational inertia. 3. Outline what is required to change the strategy and organization of an established enterprise. 4. Explain why many organizational change efforts fail and identify what managers can do to avoid failure. 5. Discuss what managers can do to increase the ability of their organization to produce commercially successful innovations.

18 - 4 Paradigm Shifts • Occurs when a new technology or business model comes along that dramatically alters the nature of demand competition • Disruptive technology – A new technology that gets its start away from the mainstream of a market and then, as its functionality improves, invades the main market • Punctuated equilibrium – A view of industry evolution asserting that long periods of equilibrium are punctured by periods of rapid change when industry structure is revolutionized by innovation

18 - 5 Performance/functionality of desired attributes Technology S-Curves Natural limit of technology Probability of paradigm shift increases as technology approaches natural limit. Diminishing returns Inflection point Increasing returns Accumulated R&D effort

18 - 6 Established technology: horse and cart Paradigm shift Performance/functionality of desired attributes Established and Successor Technologies Successor technology automobiles T 1 T 2 Time

18 - 7 Discontinuity Performance/functionality of desired attributes Swarm of Successor Technologies Swarm of successor technologies Time

Five Steps to a Creative Company 1. Technology and information become commoditized and globalized 2. With commoditization, core advantages can be shipped abroad 3. Design strategy begins to replace Six Sigma as a key organizing principle 4. Creative innovation becomes the key drive of growth 5. The successful Creative Corporation emerges, with new Innovation DNA Source: Business Week, August 1, 2005 18 - 8

Top 5 Innovative Companies in the World • 2005 Poll of 940 senior executives in 68 countries by Boston Consulting Group Company • Apple • 3 M • Microsoft • GE • Sony Source: Business Week, August 1, 2005 Responses 24. 84% 11. 77% 8. 53% 5. 94% 18 - 9

18 - 10 New Business Model • The way in which an enterprise intends to make money - Can rapidly alter the competitive playing field/create a paradigm shift - Can be created due to technological innovation, or the absence of technology all together

Drivers of Change in Business Schools Drivers 1. 2. 3. 4. 5. Doctoral faculty shortage Emergence of new competition Shifts in funding sources Rapid changes in the economy Changes in how business organizations function Source: Biz Ed, March/April, 2002 18 - 11 %Yes 52% 47% 46% 38% 33%

18 - 12 Punctuated Equilibrium Industry structure id l o s n o C a r F d e t a Stable Period Stable of Change Period Industry becomes more consolidates again, but different firms now lead the market. Change is triggered by the emergence of new technology. New entry results in a more fragmented industry. d e t n e m g t 0 t 1 t 2 Time

18 - 13 Organizational Inertia Internal and external forces that make it difficult to change the strategy or organization architecture of an enterprise Cognitive Schemata Internal Political Constraints Commitments & Capabilities Organizational Culture External Institutional Constraints

18 - 14 Question In the 1980 s, International Videos (IV) had major global investments in the video cassette and video cassette recorders (VCR) business. When the market shifted toward CDs and DVDs, IV was stuck with significant assets in the declining VCR business. This is an example of which inertia force? a. Cognitive schemata b. Internal political constraint c. Organizational culture d. Commitments and capabilities

The Process of Organizational Change Leadership committed to change Unfreezing the organization Requires: *Shock therapy *Compelling case for change *Compelling vision 18 - 15 Requires: *Outside or “inside-outsider” *Leading by example Moving the organization Requires: *Decisive action *Committed mgmt team *New strategy *Asset disposals *New org. architect *Cultural change effort *Employee involvement Refreezing the organization Requires: *Multi-year perspective *Constant pressure *Ongoing socialization *Consistent application of new organization architecture

Failed Change Efforts & the Secrets of Success 18 - 16 1. They do not establish a great sense of urgency 2. They do not create a powerful enough coalition to push through the change 3. They lack a compelling vision 4. If they do have a vision, they poorly communicate it to others

Failed Change Efforts & the Secrets of Success 18 - 17 5. They fail to remove obstacles to the change effort 6. They fail to plan for or create short-term wins 7. They declare victory too soon 8. They fail to empower employees and lower-level managers to implement the change

18 - 18 Driving Innovation • Quantum innovations – Innovations that incorporate new technology and disrupt competition, shifting the dominant paradigm • Incremental innovations – innovations that represent improvements in product functionally within an established technology

18 - 19 Always Something New Pepsi. Co and its Frito-Lay unit offer products for every taste and ethnic market Number of new products in Pepsi. Co portfolio last year 200+ Source: Business Week, June 14, 2004 Increase in Pepsi. Co earnings in 2003 over previous year 19%

18 - 20 New Product Failures New products fail because: • The demand for innovations is inherently uncertain • The technology is poorly commercialized • Poor strategy, including inappropriate pricing, weak promotion, or poor distribution strategy • Companies often market a technology for which there is not enough demand

Innovation’s Dismal Success Rate All industry innovation initiative success rate is 4. 5% Industry • Toys • Groceries • Music • Airlines • Mobile telephony Source: Business Week, August 1, 2005 Success Rate >1% >2% 2% 3% 18 - 21

18 - 22 A Formula for Failure 1. 2. 3. 4. 5. 6. Formalize forums for failure Move the Goalposts Share personal stories Bring in outsiders Prove yourself wrong, not right Celebrate smart failures “It’s innovation’s great paradox: Success—that is, true breakthroughs—usually comes through failure. ” Source: Business Week, July 10, 2006

Generating Successful Innovations • Build skills in basic and applied scientific research • Developing a good process for project selection and project management • Using cross-functional integration • Creating product development processes • Implementing partly parallel development processes • Placing a radically new technology in an autonomous organization unit 18 - 23

18 - 24 Phase 2: Project Refinement Gate 2 Phase 1: Idea Generation Gate 1 A Development Funnel Phase 3: Project Execution Market

18 - 25 Cross Functional Integration • Product development projects are driven by customer needs • New products are designed for ease of manufacture • Development costs are kept in check • Time to market is minimized

18 - 26 Product Development Teams To function effectively: 1. A heavyweight project manager should lead the team and be dedicated primarily to the project 2. The team should have at least one member from each key function 3. The team members should be physically collocated to create a sense of camaraderie and facilitate communication 4. Have a clear plan and clear goals , particularly for critical development milestones and development budgets 5. Each team needs to develop processes for communication and conflict resolution

18 - 27 A Sequential Process Opportunity identification Process design Concept development Product design Commercial production

18 - 28 A Partly Parallel Process Opportunity identification Concept development Product design Process design Commercial production

18 - 29 Question When a firm develops a quantum innovation — one that might usher in a technological paradigm shift in the industry — it should not be introduced to the market because of the certainty of self-cannibalization. Do you agree? Explain.