Strategic Innovation in Established Companies

  • In May 1959, when Harry Cunningham became president of Kresge, the variety store chain (originally founded in 1897) was second only to Woolworth. In the next few years, Cunningham transformed Kresge (with 803 stores in operation) into the largest discount store in the United States and renamed it Kmart. The decision was a particularly difficult one because, as Cunningham explained, “Discounting at the time had a terrible odor. . . . If I had announced my intentions ahead of time, I never would have made president.”1 Yet the move into discounting rejuvenated the company, and by 1976, Kmart had almost twice the sales volume of Woolworth and was only second behind Sears in general merchandise retailers.
  • From 1984 to 1985, Intel decided to exit from the dynamic random access memory (DRAM) business and wholly embrace microchips based on the x86-CISC architecture. The decision completed the company’s transformation from a memory company into a microprocessor company — a move so radical that a mid-level manager commented: “It was kind of like Ford getting out of cars.”2 The move put Intel on an exponential growth curve; in 1996, the company announced record profits of $5.2 billion on sales of $20.8 billion.
  • In 1989, when Denis Cassidy took over as chairman of the Boddington Group plc, the company was a vertically integrated beer producer that owned a brewery, wholesalers, and pubs throughout the United Kingdom. In the next two years, Cassidy set about transforming the company into a “hospitality” organization. He sold the brewery and diversified into restaurants, homes for the elderly, and hotels, while keeping the portfolio of large managed pubs. “The decision to sell the brewery was a painful one, especially since the brewery has been part of us for more than 200 years,” Cassidy explained. But the move resulted in the creation of enormous shareholder value, especially when compared with the strategies of other regional brewers in the United Kingdom.
  • In 1989, Peter Schou, CEO of a small Danish bank called Lan & Spar, set about transforming the bank from a general-purpose, traditional savings bank into a focused, low-cost direct bank. The bank targeted professional retail customers and encouraged them to do their banking via phone, fax, and mail. Within three years, its market share had tripled.

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References

1. “K Mart Has to Open Some New Doors on the Future,” Fortune, July 1977, p. 144.

2. R.A. Burgelman and A.S. Grove, “Strategic Dissonance,” California Management Review, volume 38, Winter 1996, pp. 8–28 (quote from p. 15).

3. The answer, according to Michael Porter, is no. He describes how Continental Airlines tried to play both games by maintaining its position as a full-service airline while creating a new service dubbed Continental Lite to imitate the strategy of Southwest. This venture failed, suggesting that “positioning trade-offs deter straddling or repositioning, because competitors that engage in those approaches undermine their strategies and degrade the value of their existing activities.” See:

M. Porter, “What Is Strategy?,” Harvard Business Review, volume 74, November–December 1996, pp. 61–78 (quote from p. 69).

4. Earlier attempts by IBM to play both games simultaneously (through a direct-sales operation called Ambra) had failed. For a fascinating discussion on how IBM, Compaq, and HP are now trying to imitate Dell’s position (without abandoning their current position), see:

D. Kirkpatrick, “Now Everyone in PCs Wants to Be like Mike,” Fortune, 8 September 1997, pp. 47–48.

5. See C. Markides, Crafting Strategy: A Journey into the Mind of the Strategist (Boston: Harvard Business School Press, forthcoming).

6. See D. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, New Jersey: Prentice-Hall, 1980).

7. Porter (1996).

8. C. Markides, “Strategic Innovation,” Sloan Management Review, volume 38, Spring 1997, pp. 9–23.

9. See, for example:

M. Tushman and P. Anderson, “Technological Discontinuities and Organizational Environments,” Administrative Science Quarterly, volume 31, 1986, pp. 439–465;

R. Henderson and K. Clark, “Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms,” Administrative Science Quarterly, volume 35, 1990, pp. 9–30;

A. Meyer, G. Brooks, and J. Goes, “Environmental Jolts and Industry Revolutions: Organizational Responses to Discontinuous Change,” Strategic Management Journal, volume 11, 1990, pp. 93–110; and

D. Leonard-Barton, “Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development,” Strategic Management Journal, volume 13, 1992, pp. 111–125.

10. The other firms that form the backbone for this article include British Airways, Midlands Bank, Hewlett-Packard, Leclerc Supermarkets (in France), 3M, Royal Bank of Scotland, Tesco, Lan & Spar Bank (in Denmark), Douwe Egberts (in the Netherlands), and Hanes Corporation.

11. For similar concepts, see:

C. Handy, The Empty Raincoat (London: Basic Books, 1994);

C. Markides, “Business Is Good? Time for Change!,” London Business School Alumni News, Spring 1994, p. 15; and

Burgelman and Grove (1996).

12. See “Jack Welch’s Encore,” Business Week, 28 October 1996, pp. 42–50.

13. The importance of monitoring the organization’s strategic health to anticipate (rather than react to) change is also emphasized in:

M. Tushman, W. Newman, and E. Romanelli, “Convergence and Upheaval: Managing the Unsteady Pace of Organizational Evolution,” California Management Review, volume 26, Fall 1986, pp. 29–44; and

C. Markides, “Strategic Management: An Overview,” in S. Crainer, ed., Financial Times Handbook of Management (London: Financial Times Pitman Publishing, 1995), pp. 126–135.

14. See, for example:

G. Hamel and C.K. Prahalad, “Strategic Intent,” Harvard Business Review, volume 67, May–June 1989, pp. 63–76; and

J. Collins and J. Porras, Built to Last: Successful Habits of Visionary Companies (New York: HarperBusiness, 1994).

15. Markides (1997).

16. The notion that the underlying “structure” of the system creates the behavior in that system has been the subject of a large amount of literature in the systems dynamics field. See, for example:

J. Forrester, Principles of Systems, second edition (Portland, Oregon: Productivity Press, 1968); and

A. Van Ackere, E. Larsen, and J. Morecroft, “Systems Thinking and Business Process Redesign,” European Management Journal, volume 11, 1993, pp. 412–423. For a more managerial angle, see:

C. Bartlett and S. Ghoshal, “Rebuilding Behavioral Context: Turn Process Reengineering into People Reengineering,” Sloan Management Review, volume 37, Fall 1995, pp. 11–23.

17. The literature on this topic is huge. As a start, see:

R. Burgelman and L. Sayles, Inside Corporate Innovation: Strategy, Structure, and Managerial Skills (New York: Free Press, 1986);

R.M. Kanter, The Change Masters (New York: Simon & Schuster, 1984);

M. Tushman and W. Moore, eds., Readings in the Management of Innovation, second edition (New York: HarperBusiness, 1988);

D. Miller, “The Icarus Paradox: How Exceptional Companies Bring about Their Own Downfall,” Business Horizons, volume 35, 1992, pp. 24–35; and

S. Ghoshal and C. Bartlett, “Changing the Role of Top Management: Beyond Structure to Processes,” Harvard Business Review, volume 73, January–February 1995, pp. 86–96.

18. Burgelman and Grove (1996), p. 20.

19. R. Nelson, “Capitalism as an Engine of Progress,” Research Policy, volume 19, 1990, pp. 193–214.

20. For a supporting discussion, see:

M. Tushman and C. O’Reilly III, “Ambidextrous Organizations: Managing Evolutionary and Revolutionary Change,” California Management Review, volume 38, Summer 1996, pp. 8–30;

Burgelman and Grove (1996); and

Bartlett and Ghoshal (1995).

21. This same point is also discussed in:

Tushman and O’Reilly (1996); and

Burgelman and Grove (1996).

22. See, for example:

Burgelman and Sayles (1986).

23. See, for example:

S. Ghoshal and C. Bartlett, “Rebuilding Behavioral Context: A Blueprint for Corporate Renewal,” Sloan Management Review, volume 37, Winter 1996, pp. 23–36.