More than ever before, managers must learn to live under the shadow of real or potential disruption. Every day brings news of catastrophes and setbacks that have been caused by external or internal developments which have shattered the mould, ruined reputations, undermined stock prices.
Â¥At Berkshire Hathaway, the great Warren Buffett has been caught flat-footed by the seismic shift in market sentiment towards technology stocks.
Â¥ At British Airways, rising cut-price competition has led to heavy losses and the removal of the chief executive.
Â¥ At BMW, the continuing drain of resources by the awful Rover purchase has led to embarrassing sell- off and more top-level executive departures.
These and many other of today's alarming corporate developments have disrupted existing strategies and demanded agonizing reappraisal. What they have in common is that the managements concerned, when confronted by radically changed situations, did not attempt to cope by using radically changed approaches. It is basically the same error that professor Clayton M. Christensen discovered in companies that are threatened by disruptive technologies. They rely on what has served them well in the past and are therefore unable to cope with the future.
PATHFINDING WORK
Christensen's The Innovator's Dilemma is one of the few pathfinding management books of the post-war period. He has followed up the book with an article in the Harvard Business Review (March-April 2000), which begins by pointing out that: 'Not one of the mini-computer companies succeeded in the personal computer business'. He might have added that only one mainframe computer company was successful in minis, and only one in PCs: the same company, IBM - which, however, dramatically sacrificed its once huge lead in PCs and took too long to exploit the full potential of its mini, the AS400.
But the HBR article goes far beyond technological disruption. It teaches powerful lessons that no management dare ignore in fast-moving times. The three examples mentioned above show what happens if you confront any new development with old ways. Buffett stuck firmly to the investment principles that made him the world's second richest man. BA tried to protect its old, fat margins when they were no longer defensible. In both those cases, the outside world had altered the name of the game. BMW, however, created its own problems as it sought vainly to integrate Rover into a wholly different culture.
Had they been able to learn the Christensen lessons, and act on them, much grief and many billions would have been saved. Researching with Michael Overdorf, the MIT professor concluded that 'three factors affect what an organisation can and cannot do: its resources, its processes and its values'. It follows that, to know yourself as you really are, you need to answer three questions:
1. What are our key resources - both tangible (people, equipment, technologies, cash) and intangible (product designs, information, brands, current relationships with suppliers, distributors and customers)?
2. What are our key processes - how do the people who we employ interact, coordinate, communicate and make decisions?
3. What are our values? By this the authors do not mean ethical principles, but the standards by which employees set priorities in making their decisions, both large and small.
VALUES IN ACTION
An example of a large decision is Buffett's sustained, costly refusal to invest in high-tech stocks because of an overriding set of values: that he would only buy into companies where he could understand the business and be sure of a continuing demand for its products into the remote future. An example of a small decision is the arbitrary, off-the-cuff decision, of the BMW chief executive to change the front-end of a new Rover car for aesthetic reasons, regardless of cost.
Such value messages are loud and clear. Nobody in Berkshire Hathaway would have bothered to suggest an investment in Cisco Systems, let alone Amazon. Everybody in Rover must have heard (a) that BMW's word was law (b) that perfection of engineering and product came well before expense in the corporate priorities. At BA, likewise, the pursuit of high margins was a value which automatically put lower-fare customers well down in the pecking order.
You should obviously set aside enough time for painstaking, sharp analysis of what resources, processes and values determine the way you do business. Christensen and Overdorf stress that resource analysis (the place where most managers look first) 'doesn't come close to telling the whole story'. Processes, on the other hand, can be decisive - witness the sad example of BMW.
It doesn't matter whether the processes are formally laid down, or are informal 'routines or ways of working that evolve over time'. Nor are disabilities most likely to crop up in the visible processes like logistics, development, manufacture or customer service. Underlying processes 'that support decisions about where to invest resources' are the more likely causes of failure. Investment of resources in other companies often provides especially grisly proofs of this point - as at BMW.
The Germans had never purchased another company before. Only a few really experienced acquirers analyse the resources, processes and values that they are buying and relate the trio to their own. BMW made a basic mistake. It thought that it was buying a resource of trained automotive engineers who were expert at applying processes for designing and producing smaller cars. In fact, Rover had become so dependent on Honda engineering that its own corps of technicians had been run down. Far from adding resources, BMW had to draw heavily on its own engineers and to install its own processes - with very mixed success.
DIGITAL DISTRESSThe HBR article recounts the equally sad case of Digital Equipment, which had all the financial and technical resources needed to compete in PCs, plus a power brand, but entirely lacked the necessary processes. DEC's minis were proprietary products made from proprietary parts and sold direct to corporate customers only. PCs were composed almost entirely of bought-in parts and were sold through distributors to a wide range of customers. PCs had to be designed in a year or less: minis took two to three years.
Even if these process disabilities had been overcome, the low margins on PCs (like those on Rover's smaller cars) were in direct conflict with the corporate values. The same trouble afflicted IBM's non-mainframe businesses. Their low gross margins, compared to the fabulous 80% enjoyed on mainframes, condemned these operations to second-class citizenship. Similarly, BA's programme of buying a larger share of premium traffic by investing heavily in business-class comforts was bound to rule out any plans for appealing more to economy fliers.
As the two authors say, there are only three ways in which 'when an organisation needs new processes and values - because it needs new capabilities - managers [can] create a new organisational space where those capabilities can be developed':
1. Start up a new division within the existing organisation to tackle the innovation
2. Start up a new operation, right outside the existing organisation, and give it real autonomy
3. Buy a business that fits your needs and entrust the innovation to its management
CHOOSING THE APPROACH
All three approaches can work. The article contains a neat matrix which helps you to choose the right one for the task. The conditioning factors are the fit with the existing processes and the fit with the existing values. If both fits are good, you can happily keep the innovation within the organisation. You'll still need a team, but it can be 'lightweight', which cuts across functions in its membership, but whose members are still controlled by their own managers.
That won't do if the fit with processes is poor - that is, you need to do important things that are new to the organisation. You can still keep the innovation inside, but only if the values fit is good: that is, this isn't a disruptive innovation, but a "sustaining" one that improves on your existing technology for the benefit of your existing customers. Give that to a "heavyweight" team. Its members spend all their time on the new project, working in the same place, and accepting full responsibility for successful completion.
You risk failure, however, if you attempt disruptive innovation in-house. By definition it has a poor fit with the existing business values and will almost certainly require new processes. Spin it off, with a team in charge, another genuine heavyweight. If new processes are not required, the heavy fellows may stay in-house, but the authors warn that taking innovations to market will almost always mean spinning them off.
As for acquisition, the rules are simple. If your target's strengths rest on its processes and values, absorbing the buy into your own organisation will kill it stone dead. 'A better strategy is to let the business stand alone and to infuse the parent's resources into the acquired company's processes and values'. If BMW had only heeded this excellent advice, its outlay of its own resources on Rover might well have been lower and the return far greater. If what you really want is the target's resources, though, absorb away.
The effort required to understand your organisation fully and frankly is well worth the trouble even if you are not threatened by disruption - though, in the Age of the Internet, you probably are. Resource analysis, as the HBR article says, is the easier part. Process analysis is tougher, because you may never have thought about processes like decision-making at the top; or you have taken for granted processes lower down like dealing with orders, deliveries and invoicing.
THE VALUES TEST
Do not underestimate the lower processes, though. General Electric found that it was alienating its biggest lighting customer by far, Wal-Mart, because the two corporate accounting systems didn't mesh. Process analysis, IT and investment produced a vast payoff in customer satisfaction and millions of dollars. But it's values that provide the hardest test - even though they sound soft. Bear in mind, though, that a tough manager like Jack Welch, presiding over a hard-nosed company like GE, spent years and involved some 5,000 people in producing a value statement. Can you pass the GE test? Answer TRUE or FALSE. You and the other leaders...
Â¥ have a passion for excellence and hate bureaucracy
Â¥ are open to ideas from anywhere
Â¥ live quality and drive cost and speed for competitive advantage
Â¥ have the self-confidence to involve everyone and to manage across boundaries
Â¥ create a clear, simple, reality-based vision and communicate it to all constituencies
Â¥ have great energy and ability to energise others
Â¥ set aggressive 'stretch' goals, reward progress, yet understand accountability and commitment
Â¥ see change as opportunity, not threat
Â¥ have global brains, and build diverse, global teams
If you have answered TRUE, how do you know? What measures can you apply? Can you use any measures to help you escape from FALSE answers? The essence of the Christensen-Overdorf analysis is that it is hard-headed as well as hard-nosed. Resources, processes and values are facts. Try to live by them.
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