strategy and entrepreneurship under uncertainty - kpmg · guthrie and datta. ... * see also gulati...

Strategy and Entrepreneurship

under Uncertainty

Freek VermeulenAssociate Professor of Strategy and Entrepreneurship

KPMG Greece

AGENDA

9:30-11:30: Overcoming barriers to change• Why bad practice prevails

• Risk, uncertainty & innovation

12:00-14:00: Creating growth – for the long haul• Innovation & profitable growth

• Change for change’s sake

15:00-17:00: Panel discussion with CEOs• Greece, family firms, succession, etc.

“Efficient firms grow and survive; inefficient firms decline and fail”

Boyan Jovanovic

How bad practice prevails

“The implications of the theory are that over time inefficient institutions are weeded out, efficient ones survive,

and thus there is a gradual evolution of more efficient forms of economic, political, and social organization”.

Douglass North

the Fore people in Papua New Guinea

How bad practice prevails

Benner and Tushman.

Process management and technological innovation: A longitudinal study of the photography and paint industries.

2002. Administrative Science Quarterly

EXAMPLE: ISO9000, efficiency and innovation

How bad practice prevails

Guthrie and Datta.

Dumb and dumber: The impact of downsizing on firm performance as moderated by industry conditions. 2008. Organization Science

EXAMPLE: Downsizing

“lean & lame” instead of “lean & mean”…

How bad practice prevails

low proportion of poor prognosis patients

high proportion of poor prognosis patients

How bad practice prevails

Source: Gordon Stephenson

“The cultural transmission of learned behaviour”

“Detailing” in the pharmaceutical industry

Drug companies spend about 1/3 of revenue on detailing (about 14 percent on R&D)

In 2000, in the US, there were 83,000 representatives (41,800 in 1996)

but, it takes on average 3 visits for one new prescription

it takes an average of 26 free samples

Source: Mizik and Jacobson, 2004

“Efficient firms grow and survive; inefficient firms decline and fail”

Boyan Jovanovic

How bad practice prevails

Freek’s ‘wisdom’ in threes:

1. Bad practices are out there, and they’re looking to spread

2. The invisible hand of the market does not suffice to make things better

3. This can also be an opportunity for you… (i.e., a source of innovation)

AGENDA

9:30-11:30: Overcoming barriers to change• Why bad practice prevails

• Risk, uncertainty & innovation

12:00-14:00: Creating growth – for the long haul• Innovation & profitable growth

• Change for change’s sake

15:00-17:00: Panel discussion with CEOs• Greece, family firms, succession, etc.

What’s a strategist?

Selection Bias

Selection Bias

Selection Bias

prior beliefs about success performance

Number of stars

Team experience

Prior successes

Box office success

Sorenson & Waguespack: Film distributors

Self-perpetuating myths

Number of stars

Team experience

Prior successes

Box office success

Marketing budget

prior beliefs about success performance

Sorenson & Waguespack: Film distributors

Self-perpetuating myths

‘Innovation is the fuel for growth. When a company runs out of innovation, it runs out of growth’.

Gary Hamel

Common wisdom:

“In a fast-changing, uncertain environment, you need to innovate”

I am not so sure…

Common wisdom:

“In a fast-changing, uncertain environment, you need to innovate”

EXAMPLE: Innovation in a fast-changing, uncertain business

Freek’s ‘wisdom’ in threes:

1. “Innovate!” (when in a fast-changing environment) is too simple

2. That the top-performers are innovators does not necessarily mean you should do it too

3. Not innovating is an option; so is external scouting for it

AGENDA

9:30-11:30: Overcoming barriers to change• Why bad practice prevails

• Risk, uncertainty & innovation

12:00-14:00: Creating growth – for the long haul• Innovation & profitable growth

• Change for change’s sake

15:00-17:00: Panel discussion with CEOs• Greece, family firms, succession, etc.

Operation “Market Garden”

Escalation of commitment

the best-performing managers are by definition incompetent

expected return

num

ber o

f man

ager

s

- dumb managers- smart managers

Selection Bias

AGENDA

9:30-11:30: Overcoming barriers to change• Why bad practice prevails

• Risk, uncertainty & innovation

12:00-14:00: Creating growth – for the long haul• Innovation & profitable growth

• Change for change’s sake

15:00-17:00: Panel discussion with CEOs• Greece, family firms, succession, etc.

Freek’s ‘wisdom’ in threes:

1. Seek to innovate in stable businesses

2. Try to innovate at ‘the other side’ of the market

3. Look for analogies; ideas in other businesses

Conformity & inertia

“Eden McCallum … [is] growing quickly and zipping upmarket”Clayton Christensen in “Consulting on the Cusp of Disruption”Harvard Business Review in October 2013.

The new disruption: the other side of the market

The new disruption: the other side of the market

Firm

Mental models

Freek’s ‘wisdom’ in threes:

1. Seek to innovate in stable businesses

2. Try to innovate at ‘the other side’ of the market

3. Look for analogies; ideas in other businesses

No check-in – “kiosks”

Large contemporary communal space

No restaurant; “CanteenM”

Very small, but luxury room

Online booking, variable prices

5 employees + centralisation

Hotel construction

airports

home

kitchen

cruise-ships

low-cost airlines

retail

containers

ANALOGY

Andrew Grove, Robert Noyce, Gordon Moore

Where does innovation come from when resources are limited?

“Le hasard favorise l’esprit prepare”(fortune favours the prepared mind)

- Pasteur

"One sometimes finds what one is not looking for."

- Fleming

“We say we have a top-to-bottom strategy. But don’t act top-to-bottom. You can look at it positively or negatively. Positively, it looks like a Darwinian process: we let the best ideas win; we match evolving skills with evolving opportunities. Negatively, it looks like we don’t have a strategy…”

Andrew Grove

emergent strategy

official strategy

variation

selection

how do you enable experimentation?

how do you organise for selection to happen?

Where does innovation come from when resources are limited?

AGENDA

9:30-11:30: Overcoming barriers to change• Why bad practice prevails

• Risk, uncertainty & innovation

12:00-14:00: Creating growth – for the long haul• Innovation & profitable growth

• Change for change’s sake

15:00-17:00: Panel discussion with CEOs• Greece, family firms, succession, etc.

Change for Change’s Sake

A company periodically needs to shake itself up, regardless of the competitive landscape

1. “The Formation of Silos” – informal networks & culture

2. “The Deadening Impact of Routine” – increasing rigidity

3. “The Emergence of Entrenched Interests” – power escalates

Change for Change’s Sake

A company periodically needs to shake itself up, regardless of the competitive landscape

1. Over time, informal networks start to mirror the formal structure (which is how silos develop)

Most organisations need to coordinate along multiple dimensions (e.g. product, function, geography, customer-type)

engineers marketing product1 product2 product1 product2

t=1 t=2

* See also Nickerson & Zenger, 2002

t=3

1. Over time, informal networks start to mirror the formal structure (which is how silos develop)

Most organisations need to coordinate along multiple dimensions (e.g. product, function, geography, customer-type)

engineers marketing product1 product2 product1 product2

t=1 t=2 t=3

t=4

* See also Nickerson & Zenger, 2002

1. Over time, informal networks start to mirror the formal structure (which is how silos develop)

Most organisations need to coordinate along multiple dimensions (e.g. product, function, geography, customer-type)

“We have been working together for a lot of years, the engineers and the marketers know each other really well…this helps now, and there are a fair number of collaborations that go on across the business unit, even across technology groups. You can always pick up the phone and find someone on a certain project that you might have had a relationship with in the past”.

Cisco reorganised from customer-focus to organisation by technology

* See also Gulati & Puranam, 2009

1. Over time, informal networks start to mirror the formal structure (which is how silos develop)

Most organisations need to coordinate along multiple dimensions (e.g. product, function, geography, customer-type)

“We have been working together for a lot of years, the engineers and the marketers know each other really well…this helps now, and there are a fair number of collaborations that go on across the business unit, even across technology groups. You can always pick up the phone and find someone on a certain project that you might have had a relationship with in the past”.

Cisco reorganised from customer-focus to organisation by technology

* See also Gulati & Puranam, 2009

2. Restructuring disrupts the increasing inertia in an organisation (that stifles innovation and adaptability).

constant small changes allow firms:

- to cope better with unexpected large change when it occurs

- to generate change themselves, pro-actively

structural inertia builds up over time…

exploitation drives out exploration…

over time, firms are inclined to become less innovative…

etc.

Change is a capabililty

2. Restructuring disrupts the increasing inertia in an organisation (that stifles innovation and adaptability).

…it allows “the organization to quickly change strategic direction to seize new opportunities or respond to new threats. In a world in which the business environment can change overnight [it] gives SEI the flexibility and the mindset to transform itself just as quickly”.

Example: SEI

Alfred West

3. Restructuring breaks up the outdated power structures (that are misdirecting a company’s resource allocation)

→ The more resources a particular unit acquires, the more it can acquire.

→ At first, the unit’s power may accurately reflect its importance, but this can escalate.

→ The company may be better off assigning a larger proportion of its budgets elsewhere

SEI reshuffled its three divisions into five competency units

JLL had three divisions organised by type of service (leasing, commercial property management, and services related to the development of new buildings)

Geography-specific activities received insufficient resources

in 2005 they decided to replace the three units with a new structure (organised around clients and markets)

3. Restructuring breaks up the outdated power structures (that are misdirecting a company’s resource allocation)

What’s really good is, we operate better as a division. There is more of a sense of team. There were always bottlenecks, and now there are fewer. The restructuring never would have happened in the past because I wouldn’t have let it. Because everybody is preserving the silos, right? …

When & How to Change

The quality of communication and collaboration

Do employees interact only with people from their own group?Are there strong subcultures?Are there breakdowns caused by the formation of silos? Has collaboration decreased over the past five years?

The capacity to adapt

Are many people uncomfortable with change?Do people operate according to well-established routines?Has it been long since a significant new revenue stream?

Has new revenue decreased over the past five years?

The balance of power among groups

Do influential groups use most of the company’s resources?

Is it difficult outside of the central group to obtain resources?

Do influential groups or individuals impede decision making?Have the groups extended their influence?

When & How to Change – a corporate cholesterol test

The quality of communication and collaboration

Do employees interact only with people from their own group?Are there strong subcultures?Are there breakdowns caused by the formation of silos? Has collaboration decreased over the past five years?

The capacity to adapt

Are many people uncomfortable with change?Do people operate according to well-established routines?Has it been long since a significant new revenue stream?

Has new revenue decreased over the past five years?

The balance of power among groups

Do influential groups use most of the company’s resources?

Is it difficult outside of the central group to obtain resources?

Do influential groups or individuals impede decision making?Have the groups extended their influence?

When & How to Change – a corporate cholesterol test

The quality of communication and collaboration

Do employees interact only with people from their own group?Are there strong subcultures?Are there breakdowns caused by the formation of silos? Has collaboration decreased over the past five years?

The capacity to adapt

Are many people uncomfortable with change?Do people operate according to well-established routines?Has it been long since a significant new revenue stream?

Has new revenue decreased over the past five years?

The balance of power among groups

Do influential groups use most of the company’s resources?

Is it difficult outside of the central group to obtain resources?

Do influential groups or individuals impede decision making?Have the groups extended their influence?

When & How to Change – a corporate cholesterol test

The quality of communication and collaboration

Do employees interact only with people from their own group?Are there strong subcultures?Are there breakdowns caused by the formation of silos? Has collaboration decreased over the past five years?

The capacity to adapt

Are many people uncomfortable with change?Do people operate according to well-established routines?Has it been long since a significant new revenue stream?

Has new revenue decreased over the past five years?

The balance of power among groups

Do influential groups use most of the company’s resources?

Is it difficult outside of the central group to obtain resources?

Do influential groups or individuals impede decision making?Have the groups extended their influence?

When & How to Change – a corporate cholesterol test

Insights and Observations

1. Change is needed even if your environment does not change.

2. Change is a continuous state (for many organisations).

3. The benefits of (internal) misfit.

4. Organisations often struggle by which dimension to organise (product, geography, customer, function?)

Insights and Observations

1. Change is needed even if your environment does not change.

2. Change is a continuous state (for many organisations).

3. The benefits of (internal) misfit.

4. Organisations often struggle by which dimension to organise (product, geography, customer, function?)

Insights and Observations

1. Change is needed even if your environment does not change.

2. Change is a continuous state (for many organisations).

3. The benefits of (internal) misfit.

4. Organisations often struggle by which dimension to organise (product, geography, customer, function?)

“Every six months by design I change the organizational structure. I changed it in January; I’ll change it again in June. We’re growing at 10 percent a month. I feel when a company has grown 50 percent, it is time to change

“... an organizational structure becomes a tool you're using to create a balance between conflicting modes of organizational behavior, such as flexibility and consistency. Each structure emphasizes one type of behavior and de-emphasizes another. By continuing to change, you can balance the needs of the organization”.

CEO of Appex corporation:

“Every six months by design I change the organizational structure. I changed it in January; I’ll change it again in June. We’re growing at 10 percent a month. I feel when a company has grown 50 percent, it is time to change

“... an organizational structure becomes a tool you're using to create a balance between conflicting modes of organizational behavior, such as flexibility and consistency. Each structure emphasizes one type of behavior and de-emphasizes another. By continuing to change, you can balance the needs of the organization”.

CEO of Appex corporation:

AGENDA

9:30-11:30: Overcoming barriers to change• Why bad practice prevails

• Risk, uncertainty & innovation

12:00-14:00: Creating growth – for the long haul• Innovation & profitable growth

• Change for change’s sake

15:00-17:00: Panel discussion with CEOs• Greece, family firms, succession, etc.

The Abilene Paradox

Jerry Harvey the road from Coleman to Abilene