Conceptual Framework

• 14.04.09
• Submitted by Udo Dierk

How can the collective activities of managers, entrepreneurs and leaders best sustain innovation within corporations around the globe? To help classify innovation, we have adopted a typology of commercial development projects devised by Wheelwright and Clark (1992). Each of their three project types requires a unique combination of development resources and management styles.

Derivative projects range from cost-reduced versions of existing products to add-ons or enhancements for an existing production process. Development work on derivative projects typically falls into three areas: incremental product changes, say, new packaging or a new feature, with little or no manufacturing process change; incremental process changes, like a lower cost manufacturing process, improved reliability, or a minor change in materials used, with little or no product change; or incremental changes on both dimensions. Because design changes are usually minor, incremental projects typically are clearly bounded and require substantially fewer development resources than the other categories. Also because derivative projects are completed in a few months, minimal changes are required in ongoing management procedures.

Breakthrough projects are at the other end of the development spectrum because they involve significant changes to existing products and processes. Successful breakthrough projects establish core products and processes that differ fundamentally from previous generations. They create a whole new product category that can define a new market. Because breakthrough products often incorporate revolutionary new technologies or materials, they usually require revolutionary manufacturing and management processes. Executives need to give development teams considerable latitude in designing new processes, rather than force them to work with existing plant and equipment, operating techniques, or supplier networks.

Platform projects are in the middle of the development spectrum and are harder to define. They entail more product and/or process changes than derivatives, but they don’t introduce the untried new technologies or materials that breakthrough products do. Well-planned and well-executed platform products typically offer fundamental improvements in cost, quality and performance over preceding generations. Most importantly, platforms represent a significantly better system solution for the customer. Because of the extent of changes involved, successful platforms require considerable upfront planning and the involvement of not only engineering but the interaction of marketing, manufacturing, senior management and others.

Companies target new platforms to initially meet the needs of a core group of customers but design them for easy modification into derivatives through the addition, substitution, or removal of features. Well-designed platforms also provide a smooth migration path between product generations so neither the customer nor the distribution channel is greatly disrupted. Platforms offer considerable competitive leverage and the potential to increase market penetration, yet many companies systematically under-invest in them. The reasons vary, but the most common is that management lack an awareness of the strategic value of platforms and fail to create well-thought out platform projects (Wheelwright and Clark, 1992). Another way of viewing this is that managers over-emphasize the importance of derivatives as they strive to optimize the efficiency of current practices. But often these products fail because small improvements are not enough to alter customers’ entrenched buying habits (Goldenberg, Horowitz, Levav, and Mazursky, 2003). Increased leadership vision is required to envisage the potential of platform and breakthrough projects and to facilitate the entrepreneurial environment in which they can be pursued. Although the desired mix of projects will vary by industry type and market condition, an allocation of development resources of about 50% platform, 20% derivative and 10% breakthrough projects and partnerships has been recommended for technology-based companies (Wheelwright and Clark, 1992). This is not the allocation in most organizations where in excess of 50% investment is earmarked for derivative improvements. In an excellent recent article, Laurie, Doz and Sheer (2006) report that CEO’s at progressive companies like Boston Scientific and Medtronic spend at least half of their time in the search for new platform growth.

It may be helpful to diagrammatically show our thinking so far. If we represent “innovation type” and “time” on the axes, we can suggest the differential roles of managers, leaders and entrepreneurs in pursuing innovation strategies over varying time horizons. It is postulated that leaders play more of a catalyst role in the identification of platform and breakthrough projects, creating the climate for the entrepreneur to flourish as an activist.

Two further dimensions warrant consideration as we operationalize the concept of the ambidextrous organization. The first is organizational structure – that is, the extent to which personnel seek stability in their roles and responsibilities. The manager, in order to efficiently manage current activities, favors well-defined roles and responsibilities. Leaders and entrepreneurs, in their assumed function as change agents, prefer fluid and informal structures. Such logic is linked to the notion of perceived risk. Mangers, driven by short term objectives and clear metrics, tend to be risk averse. Entrepreneurs, in their obsessive search for opportunities, strongly reflect risk takers. Leaders, it would seem, need to take a middle course. They need to show, through vision and future orientation, a propensity for risk. At the same time, they must carefully search for a balanced portfolio of innovation opportunities. This requires performance of substantial due diligence with a consequent aim of risk minimization. These traits might be represented as follows:

Managers Leaders Entrepreneurs

Risk Averse Risk Taker + Risk Minimizer Risk Taker

One final point is worth making. Most of the literature on change management suggests that change should start at the top and cascade down to lower levels (see below):

Such changes can take a great deal of time as they work slowly down through the often resistant corporate ranks. Moreover, top level jobs are inherently insecure so that it is not uncommon to see many changes start at the top, but peter out when senior management is changed.

An alternative approach is to stimulate opportunity-induced change where leaders can come from any level of the organization. Corporations that do a better-than-average job of identifying leaders put an emphasis, for example, on creating challenging opportunities for relatively young employees (see Kotter, 2001). This entrepreneurial leadership “from the middle” is often successful because actions are focused on change related to a specific opportunity. These changes are generally narrower and more quickly achieved than an overall company-change effort. Because we believe that the continuous and disciplined drive for new business opportunities can originate throughout the company, project participants in our study include not only senior management but also those designated as high potential employees.

We have now identified the dimensions that we feel important in directing the ambidextrous organization – executive archetypes (manager, entrepreneur, leader), types of innovation (derivative, platform, breakthrough), time period (short, medium, long), preferred organizational structure (stable, flexible), and individual risk profiles (averse, taker, minimizer). Additionally, the significance of these variables will be impacted by the moderating influence of business conditions (or “zeitgeist”) facing a decision maker at any point in time. It appears that context matters. Mayo and Nohria (2005) found that the macro-contextual factors of government intervention, global events, demographics, social mores, technology and labor are especially influential in shaping the landscape for business. They noted, for instance, that “entrepreneurs were uniquely skilled at sensing emerging opportunities or the potential of nascent technologies and through perseverance and determination build successful new enterprises.” To these we would add the variables of both corporate and national culture. At a very broad level companies can be categorized, on the one hand, as those where sustainability and survival are the key drivers (that is, profit is a means to the end of satisfying the disparate needs of a wide stakeholder base), and on the other, where aggressive growth is the principal target (driven by the needs of a much narrower owner/investor public). Our experience suggests that there is a greater propensity for companies in Europe to emphasize sustainability and social responsibility while US firms more often focus on rapid market and stock price growth. There is some limited secondary support for this notion with Europeans, on average, less interested than Americans in becoming entrepreneurs (Blanchflower and Oswald, 1998, Global Entrepreneurship Monitor, 2008) and showing a stronger preference for being an employee with a regular fixed income, a stable job and less risk (van Houdt, 2005). We have similar observations regarding the ownership status of the firm. Differences in strategic and operational style exist between family-owned businesses and publicly owned corporations. The family owned businesses – perhaps more prevalent in Europe – lean more towards sustainability and life style as a modus operandi. While not eschewing growth, they do so with a strong emphasis on the welfare of their employees and local community. The public firm sees growth much more as its raison d’être. It is not indifferent to social concern but is much more driven by shareholder considerations of profit, contribution, cash flow and EBITDA.

A final contextual variable that can substantially impact the focus of innovation activity, and therefore the nature of personnel talent sought, is the industry life cycle (see Wheelwright and Clark, 1992). In the early stages of growth, innovative, dynamic companies gain market position with products that have dramatically superior performance on a small number of key dimensions. These companies employ a successful breakthrough-platform strategy, giving full reign to the entrepreneurial spirit. But as the industry develops and the opportunity for breakthrough products decreases – often because the technology is shared more broadly – competitors try to satisfy increasingly sophisticated customers by rapidly making incremental improvements in existing products. Here the sound manager comes into his/her own, adopting a strategy based on derivative products and employing disciplined resource allocation and execution.