Ongoing innovation — of products, business processes or both — is essential for the success of any company in a competitive industry. In technology-driven industries, as core technologies mature and mainstream customers proliferate, the primary source of customer value inevitably shifts from product innovation to business innovation, which focuses on processes (product development, procurement, manufacturing, sales, distribution or services) and marketing (partnering, segmenting, positioning, packaging or branding). To meet the changing needs of customers, technology-driven companies must effect a corresponding shift in their own competencies. However, attempts to accomplish that through changes in strategy, structure, processes or rewards without changing the company’s underlying cultural assumptions are almost always doomed to failure because culture strongly shapes both the competencies and rigidities of a company.
When culture is aligned with the needs of the market, it can enable very high levels of organizational performance, but when the market changes significantly, the culture may have to change as well. Many senior managers avoid addressing cultural transformation because of culture’s invisible, difficult-to-measure nature and its stubborn resistance to quick fixes. Yet it is precisely because cultural change tends to be slow and difficult that waiting for a crisis to initiate such change is often a recipe for disaster. Consider the case of Digital Equipment Corp. (DEC), which was superb at product innovation and an industry leader for many years, but stumbled and fell when hardware commodi-tized and business innovation became the driving force. Analysis of the DEC situation powerfully illustrates that product innovation and business innovation require two quite different cultural predispositions — or biases — and suggests a model that will help executives guide their companies through the challenging transition from one to the other. (See “About the Research.”)