Improvisations

The new Summer 2009 issue of MIT Sloan Management Review  includes an interesting article on websites that “morph” — by adjusting their content to the cognitive style of their visitors. For example, people who have a more visual way of thinking could be shown somewhat different content than those who think primarily in words.

Researchers Glen L. Urban, John R. Hauser, Guilherme Liberali, Michael Braun, and Fareena Sultan write:

“The best [salespeople] carefully diagnose how their client thinks and then modify their pitch to match the customer. This sales approach, often instinctive, enables the salesperson to vary the presentation of information depending on the cognitive style of the customer.

Now, through Web site morphing, the Internet is beginning to do the same.

Morphing increases sales. A recent experimental study at MIT demonstrated that Web-originated purchase intentions for a large global telecommunications company’s broadband product could increase 20% after morphing the site to match individual cognitive styles. For example giving analytic potential customers more data and technical detail, reducing the complexity for holistic information processors, giving impulsive users succinct recommendations, and providing engaging learning experiences to deliberative customers made it more likely that these Web site visitors would make a purchase after visiting the site.

You can read more about “Web morphing” — and how it can be implemented — in the authors’ article, “Morph the Web To Build Empathy, Trust and Sales.”

Here’s an interesting thought from Hongwei Zhu and Stuart E. Madnick:

“If your company has put up an extensive Web site, chances are fairly good that, whether you realize it or not, you have made a database available for others to reuse. You may own the database, but it is difficult for you to own its contents completely after you have made them publicly accessible, unless you find innovative ways of using those contents.”

That’s an excerpt from Zhu and Madnick’s article,  “Finding New Uses for Information,” in the new Summer 2009 issue of MIT Sloan Management Review.  Citing examples such as travel site Kayak.com — which draws on data from other travel sites — the authors look at the topic of data reuse on the Internet, from a strategic and legal perspective. 

Vijay Govindarajan

How should companies think about innovation during a downturn like this one? Vijay Govindarajan, an expert on innovation and strategy from the Tuck School of Business at Dartmouth, thinks that businesses should be careful not to  abandon innovation in their quest for efficiency and cost control during a recession — but they may need to reduce their focus on risky breakthrough innovation plans. 

How should a company strike that balance? In  an interview published today  as part of Business Insight, MIT Sloan Management Review’s collaboration with The Wall Street Journal, here’s what Govindarajan suggested:

“I distinguish between two types of innovation: adjacency innovation, which is a little less risky because you are innovating in a business area adjacent to your existing core business, and breakout innovation, where you are going multiple steps outside of your core business. In a normal time, I would say spend about 50% of company resources on the core business and about 50% on adjacency and breakout innovation—perhaps 35% on adjacency innovation and maybe 15% on breakout innovation.

But during times like this, the percentages shift. I would shift to spending more like 70% on the core business and perhaps 25% on adjacency innovations—and maybe 5% on really breakout innovation. The investment in innovation in adjacency areas probably doesn’t change much, but you shrink some of the spending on real breakout innovation. The reason is: Breakout innovations are high-risk and high-payoff. And one thing you cannot afford during this economic crisis is to make a serious mistake.”

You can read more about Govindarajan’s thoughts on innovation and strategy during the downturn in the new edition of Business Insight.

Should established companies even try to launch new ventures regularly? That question was the subject of an interesting discussion between Julian Birkinshaw of London Business School and Andrew Campbell of Ashridge Strategic Management Centre; their discussion was contained in a recent newsletter from MLab, in an article called “Debating Innovation.”

Campbell,in particular, urged established companies to be very conservative in their approach to innovation and pursuing new ventures. He wrote:

Don’t be blindly enthusiastic about doing new things: the cost can easily exceed the benefit. Innovate in a focused pragmatic way in areas where the gains are likely to be bigger than the costs…Don’t set up venturing units or venturing processes unless the opportunities you face are so exciting that you expect to have a continuous stream of new projects that will require processing.

Interestingly, both Birkinshaw and Campbell were coauthors of a 2003 MIT Sloan Management Review article called “The Future of Corporate Venturing.“

BusinessWeek this week highlights a number of companies that are pursuing growth despite the recession –including Inditex (owner of clothing retailer Zara), Procter & Gamble, and small entrepreneurial businesses such as JustAnswer.  For more on the theory behind investing in a downturn, see the new version of  “The Risk of Not Investing in a Recession” by Pankaj Ghemawat. It’s a classic MIT Sloan Management Review article that was updated in the Spring 2009 issue  — and also included in our  “Downturn Manifesto” special report.

Ran across an intriguing article in Sunday’s New York Times. The author, Steve Lohr, raised the question of whether current trends may create a shift in advantage in innovation – from entrepreneurial companies to large ones. The argument is that many of today’s biggest problems are in complex fields such as energy and  the environment — and that solutions will need to be multidisciplinary rather than the work of entrepreneurial inventors. “The pendulum of thinking on innovation does seem to be swinging toward the big guys,”  Lohr wrote.

The article brought to mind for me an interview I conducted with Harvard Business School’s Clayton M. Christensen last fall. An edited version of the interview with Clay Christensen appeared in the Spring 2009 issue of MIT Sloan Management Review – but one point that didn’t make it into the published version (due to space constraints) was a brief observation Christensen made about established companies and disruptive innovation. Christensen noted that he had become ”a lot more optmistic” in the last five years about leading companies’ ability to successfully innovate disruptively, if the management team understands the principles of disruptive innovation.

Still, though, there’s certainly research suggesting that large companies often have difficulty successfully managing corporate venturing programs designed to foster innovative new businesses. As authors Rita Gunther McGrath, Thomas Keil and Taina Tukiainen observed in “Extracting Value From Corporate Venturing,” a 2006 article in MIT Sloan Management Review:

Executives wax and wane in their enthusiasm for launching new ventures outside an organization’s core business. In their more enthusiastic moments, leaders often see corporate venturing initiatives as sources of organic growth and vitally important engines of renewal. However, in their more disenchanted periods executives may see new ventures as high-risk, foolhardy distractions from effectively running the core business. What’s more, such pessimism isn’t wrong. Corporate ventures are risky and they usually do not produce hoped-for results.

What do you think? Are the dynamics of innovation changing in ways that favor larger companies? And are  large companies getting significantly better at managing innovation — or not?

Most executives have probably, at one point or another, sat through a strategic planning session that focused on their organization’s position in the marketplace — its mission and objectives, its strengths and weaknesses, and the opportunities and threats it faces.

But what if there’s another way entirely of thinking about strategy?

I had an interesting conversation recently with MIT Sloan School professor Arnoldo C. Hax, a well-known strategy expert and one of the authors of the book The Delta Project.  We spoke about his approach to strategy, called “The Delta Model” (which, incidentally, is the title of an article he coauthored for MIT Sloan Management Review back in 1999).

Here are a few (edited) highlights of some of Hax’s current thinking about strategy.

Professor Hax, can you tell us a little bit about how the Delta Model differs from traditional strategic planning models?

Conventionally, all of the major frameworks of strategy start by recognizing that the essence of strategy is to achieve superior competitive advantage.  That is what everybody adheres to.  We found that that as a concept and as a mindset is extremely dangerous, because it puts competitors at the center. And if you do that, then there is a tendency to watch your competitors and try to imitate them. 

And that imitation creates sameness.  Sameness will never bring greatness, and, even worse, its final result is something which is the worst thing that could ever happen to a business: commoditization.  Commoditization means a business in which there is nothing that you can claim that differentiates your offering, and therefore, all you can do is to fight for price. That leads to a very aggressive rivalry.  In order for you to win, you have to beat somebody. 

It is like strategy as war, and that, as we know very well, is not really the most effective way to manage a business.  Wars just create complete devastation; they are the worst thing that could happen to mankind, yet we use that as a simile for management!  We felt it was the wrong simile.

Now, if competitors are not at the center of management, then who is at the center?  For us, the answer was obvious.  The customer is.  Therefore, the customer is the driving force.  You have to start deeply understanding what the customer’s requirements are and how you can help the customer in the most effective way. This changes completely the way you figure out what actions to do. 

Now, instead of trying to imitate somebody, you are trying to separate yourself from the rest of the pack.  You try to produce a value proposition which is unique, which is differentiated, which adds value to the customer and expresses a great deal of care and concern for the customer. That value proposition should be based on mutual trust, mutual learning, mutual benefits, and transparency.  And, incidentally, strategy now, with all of this advent of new technology, can be made one customer at a time, in what we call a granular way — understanding each individual and providing that individual with a creative value proposition.

Can you imagine the difference in mindset?  Instead of strategy as war, the Delta Model tells you to think about strategy as love.

In addition to that, in the concept of the Delta Model, you are not alone.  You have to play with what we call the extended enterprise.  What is that?  It is you.  It is your customers.  It is your suppliers, and a very important original player that we call the complementors.  Who are the complementors?  The complementors are firms that are engaged in the delivery of products and services that enhance the delivery of your products and services. 

So, that’s what it is, you see, in a nutshell.  Forget about imitation, congruency, rivalry.  Embrace the customer as a centerpiece of strategy, and play with the extended enterprise. And the Internet facilitates that.

How has your thinking about the Delta Model evolved over time?

It’s interesting.  We wrote our first book in 2001.  Incidentally, I’m about finished with a new book, where now I am the sole author.  In our first book we deliberately tried to just be conceptual.  We wanted to present these ideas.  We thought the ideas were important enough.  But now we have, through the process of consulting and research, developed a lot of phenomenal tools for managers to implement the concepts.

A final comment about a very important trap that many managers fall into: the dangers of commoditization.  At the beginning of my work on the Delta Model, I coined a silly statement, thinking it was a joke: “Commodities only exist in the minds of the inept.” It turns out it isn’t a joke.  Obviously a product could be a commodity. Take copper. The product cannot be differentiated, which makes it a commodity.  I cannot say that the Chilean copper is superior to the American copper. But copper as a business — the way that Siemens uses copper in their power plants, the way that GM uses copper in their cars, the way Carrier uses copper in their air conditioning units – is completely different. 

Therefore, commodities don’t really exist.  The customers are all different, and if you do not understand that, you are commoditizing something — and believe it, there is so much of that happening in business in America.  Typically, when I’m teaching these concepts, I ask the group of executives I teach, “Tell me, among all of you present, how many of you think that a significant percentage of your business comes from commodities?”  And invariably, 100 percent of the hands come up, and I know then that they have come to the right place — because they are not thinking correctly.

There were lots of thought-provoking ideas offered at the World Innovation Forum conference, which concluded yesterday in New York City. But one particularly stands out for me — and it came from a presentation by disruptive innovation expert Clayton Christensen of Harvard Business School. Christensen took issue with the conventional wisdom that understanding your customer is important to successful innovation.

How could that not be the case? Well, according to Christensen, the customer is the wrong unit of analysis for innovators to focus on. Instead, he said, focus on the job  that customers are trying to get done when they use your product or service.

This may sound like a minor distinction, but Christensen went on to discuss a topic he and several coauthors explored in a 2007 article in MIT Sloan Management Review: Finding the Right Job for Your Product. One example? A fast-food company discovered that a significant portion of its customers were “hiring” its milkshakes for an unexpected use: as a food to consume early in the morning, while driving on a long, boring morning commute.

By focusing not on the customer for the product but, more specifically, on what the customer was trying to do – consume a filling food on a boring daily drive – the fast-food company could customize the product for its early-morning milkshake buyers in ways to make it more effective in that function. It also gave the company a greater understanding of its competition — which, in the case of the morning milkshake, ranged from bananas to doughnuts.

In an interesting new interview, Harvard Business School professor Lynda M. Applegate observes that in an economic downturn like this one, every company should — in some sense — think of itself as a new business. “This is a time of unprecedented opportunity to rethink offerings, markets, business processes, and organizational structure,” she notes in a Q&A interview published on the Harvard Business School Working Knowledge site.

One of Applegate’s suggestions? Look for opportunities that result from the disruption and change created by the downturn.

For more ideas about how to guide your business successfully through the recession, see the MIT Sloan Management Review’s special report on leading in a downturn.

Looking for ways to keep the cost of materials low? In an article in the Spring 2009 issue of MIT Sloan Management Review, John A. Pearce II discusses the opportunities represented by product reconstruction —  which can take the form of recycling, refurbishing or remanufacturing.

While Pearce notes that such product reconstruction is not appropriate for every company, he reports that product-reconstruction activities tend to have higher average profit margins than typical manufacturing processes. What’s more, Pearce points out that legislative trends may favor product reconstruction going forward — as some governments start to place restrictions on certain kinds of waste disposal or to promote the purchase of reconstructed products.

Ready for an unsettling interpretation of the financial crisis? MIT Sloan School professor Simon Johnson’s new article in the The Atlantic is titled “The Quiet Coup.” His argument? As a former chief economist for the International Monetary Fund, Johnson observes striking similarities between the current financial crisis in the U.S. and earlier crises that affected emerging markets. One common factor, he indicates, is a too-cozy relationship between a country’s government and its business elites. Writes Johnson:

Elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.

The Role of Financial Innovation

According to Johnson, one of a number of symptoms of the financial sector’s political influence over the last decade was “an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.”  In a speech last week, Federal Reserve Chairman Ben  Bernanke  addressed the  relationship between financial innovation and consumer protection.

In his speech, Bernanke acknowledged that the last two years have shown that financial ”innovation that is inappropriately implemented can be positively harmful.” He later added that “the difficulty of managing financial innovation in the period leading up to the crisis was underestimated.”

Bernanke concluded that, rather than prevent innovation, regulators should allow “responsible innovation” that increases consumer welfare. How to do that? Bernanke suggested that regulators, in effect, weed out harmful financial innovation before it is implemented — by asking more questions upfront. (One example: ”How will the innovative product or practice perform under stressed financial conditions?” ) 

Reflecting on Bernanke’s speech, James Kwak, who blogs with Simon Johnson at The Baseline Scenario website, draws a distinction between two different types of financial innovations: those that make consumers’ lives easier — such as ATMs — and those that increase access to credit — which may or may not be beneficial, depending on the circumstances.

On the other hand, Kwak notes, many innovations — not just financial ones — have a “double-edged” quality – in that they offer both benefits and drawbacks. For example, he points out that the development of plastics has had great benefits — but has also led to problems such as “ an enormous amount of garbage that is now collecting in giant pools in the middle of our oceans.”  (For more on that topic, see MIT Sloan Management Review‘s sustainability blog.)

How is innovation faring during the economic downturn? The answer depends on whom you ask. Recently, we have seen interesting, but somewhat conflicting, reports on the state of innovation in the U.S. economy.

First, The Wall Street Journal reported some surprising good news last week: Despite the economy, large U.S. companies spent almost as much on R&D in the fourth quarter of 2008 as they did a year prior. Write Justin Scheck and Paul Glader of The Wall Street Journal: “Big R&D spenders say they’ve learned from past downturns that they must invest through tough times if they hope to compete when the economy improves.” 

But Scott Anthony, president of Innosight, worries in a blog item on the Harvard Business Publishing site that, in this difficult economy, companies could focus too much of their R&D on improving existing products — rather than on bigger innovation opportunities.

And Sramana Mitra, in a column for Forbes.com, suggests that we need to address  systemic economic problems that inhibit innovation – such as a focus on short-term speculation. One key, she thinks: Government funding of technology research at universities.  She cites the Internet as an example of a technological breakthrough that emerged out of “a sustained R&D effort over a long period of time. ”

Similarly, diverging views on the future of innovation are represented in the Spring 2009 issue  of the MIT Sloan Management Review: Clayton M. Christensen of Harvard Business School predicts that the downturn will be good for innovation, whiles Joshua Gans of Melbourne Business School expresses concern about the effect of the financial crisis on technology start-ups.

What do you think? Are these auspicious or inauspicious times for innovation?

Could mass customization work for your business?

The idea of mass customization — cost-effectively manufacturing products that nonetheless have enough variety that customers can get products tailored to their needs — may sound like an ideal only a few companies, such as Dell, have obtained. But a new article in MIT Sloan Management Review argues that, in fact, mass customization could make sense for most businesses.

Fabrizio Salvador, Pablo Martin de Holan and Frank Piller report that their research suggests that “mass customization is not some exotic approach with limited application. Instead, it is a strategic mechanism that is applicable to most businesses, provided that it is appropriately understood and deployed.” One key: Seeing mass customization as a process rather than as some “ideal state” that sounds impossible to obtain.

In their article in the Spring 2009 issue of MIT Sloan Management Review, the authors discuss the capabilities needed to make mass customization work –and they describe a variety of tactics that can be used to make mass customization practical. For example , in some cases “innovation tool kits”  can allow customers to use a software design tool to express their product preferences.

Don’t have all the resources you’d like due to the economic downturn? Fear not: Resource constraints can spark creativity, according to a new online essay by Michael Gibbert, Liisa Välikangas, and Martin Hoegl.

Gibbert, Hoegl, and Välikangas first wrote on the link between resource scarcity and innovation for MIT Sloan Management Review in 2007, in an essay called “In Praise of Resource Constraints.” Now they’ve revisited the topic — in light of the current recession. They observe in their new essay:

In times when you may not be able to afford the tool or service that was designed for the purpose you have in mind, look into other assets that you already have “at hand.” Engage in (playful) bricolage — tinkering with and reusing whatever assets are available. Remember, as a child, using mere wooden sticks as perfectly good dolls or soldiers?

What helps managers think in that kind of creative way? “We believe constraints, especially resource constraints (of which there are plenty in a downturn) are key,” the authors state. “Think of them as boundaries that incite creativity.” 

In other words, if your budget is tighter than it was, don’t think of it as a budget crunch; think of it as a catalyst for creative thinking!

Is innovation in financial markets a good thing? Is this a good time to innovate? And what kind of innovation could help the troubled U.S. health care system? Clayton M. Christensen of Harvard Business School, a leading expert on disruptive innovation, tackles all three of those topics in an interview with MIT Sloan Management Review.

The interview with Christensen appears in the Spring 2009 issue of MIT Sloan Management Review.

Right now, fans of U.S. college basketball are focused on the final game of the NCAA men’s Division I basketball tournament. What many fans may not realize is that there may be management lessons to be gleaned from NCAA  basketball — or at least from NCAA coach employment patterns. An article in the new Spring 2009 issue of MIT Sloan Management Review looks at Daniel Halgin’s research into the role that professional social networks play in the career moves of college basketball coaches. 

This week, we asked Halgin to comment on his research and current basketball events. Here is his response:

“In addition to the excitement taking place on the court there will be a great deal of activity taking place off the court, with the annual flurry of coaches accepting jobs with new employers.  Most notable is John Calipari, formerly the head coach at the University of Memphis, who…[this week] formally accepted the head coaching position at the University of Kentucky.  This move, sparked by the firing of former Kentucky coach Billy Gillispie, will likely create a long vacancy chain of coaches switching employers to accept newly vacated positions.  But what determines which coaches are hired for newly vacated positions?  And what determines whether a fired coach will be rehired at another institution?

In addition to performance and social network ties, I suggest that a particular kind of social network — ones in which people have a shared sense of belonging and identity that they retain through different career moves — influences which coaches receive which jobs. Similar to former high-level managers of General Electric Co. who are often referred to as ‘graduates of Welch U’ (referring to ex-CEO Jack Welch), there are groupings of coaches with former working relationships who are referred to as members of ‘coaching families’ throughout their careers. 

For example, a collection of coaches with ties to Louisville head coach Rick Pitino are recognized as members of the ‘Pitino coaching family,’ those with ties to retired North Carolina Coach Dean Smith are recognized as members of the ‘Tar Heel family,’ and those with ties to newly hired Kentucky coach John Calipari are recognized as members of the ‘Calipari coaching family.’  I find that recognized members of these ‘families’ receive more prestigious jobs, and are more likely to find employment if fired, than nonmembers.  These benefits exist above and beyond actual performance. 

As the coaching carousel continues to spin and as Memphis and other schools look to fill open positions, keep an eye out for how ‘coaching family’ membership influences hiring decisions.”

 You can read more about Halgin’s research in “What Can Managers Learn From College Basketball?” in the Spring 2009 issue of MIT Sloan Management Review.

“While governments deliberate responses to the financial crisis of 2008 and its aftermath, one important question should not be overlooked: What will be the long-term impact of the crisis on technological innovation?” So writes economist Joshua Gans in the new Spring 2009 issue of MIT Sloan Management Review.

In particular, Gans raises concerns about how the downturn will effect technology start-ups that collaborate with larger companies. You can read Gans’ article and others in MIT Sloan Management Review’s Downturn Manifesto special report.

What in your organization needs fixing or rethinking? Here’s an interesting idea: Now may be an opportune time to perform repair work within your organization. Writes Pankaj Ghemawat in an update to his classic MIT Sloan Management Review article “The Risk of Not  Investing in a Recession”:

“Downturns are a good time to perform physical and organizational repair work that simply isn’t practical when a company is running flat out trying to meet demand. ”

Ghemawhat’s original article, republished with new annotations by the author, is part of MIT Sloan Management Review’s Downturn Manifesto special report.

“In an unpredictable world, trying to be right can lead managers terribly astray.” So write Rita Gunther McGrath and Ian C. MacMillan in their new article in MIT Sloan Management Review.

An interesting idea — but what’s the alternative to trying to be right? According to McGrath and MacMillan it’s a “discovery-driven approach” that encourages managers to test assumptions and compare strategic alternatives. Read the full article: “How to Rethink Your Business During Uncertainty,”

Last week I blogged about an executive who thinks that environmental sustainability initiatives helped his company survive the last recession. Now, this week, here’s another example of a company reporting economic benefits from environmentally sustainable practices.

The new edition of Business Insight, which MIT Sloan Management Review produces in collaboration with The Wall Street Journal, contains a fascinating case study of a Subaru plant in Indiana that has found that reducing its environmental impact saves money.  For example,  the company says that it has reduced electricity-per-car consumption 14% since 2000. (Researchers Alan G. Robinson and Dean M. Schroeder report that they confirmed the company’s claims.)

The article goes into interesting detail — including a passage about how Subaru employees explored the contents of the company’s dumpsters to figure out ways to reduce waste. The most substantial cost-saving impacts, according to Subaru? “Where the biggest savings have been achieved, in descending order: reducing waste by revising processes, conserving energy; and working with suppliers.”