Organization Capabilities and Team Structures

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Chapter 8 of the HarperBusiness Edition of Clayton Christensen’s book The Innovator’s Dilemma is titled “How to Appraise Your Organization’s Capabilities and Disabilities”. In this chapter he outlines the Resources-Processes-Values (RPV) capabilities framework and then discusses creating capabilities to deal with change. He describes several options:

  • Creating Capabilities Through Acquisition
  • Creating New Capabilities Internally
  • Creating Capabilities Through a Spin-out Organization

The second section discusses why it is difficult to evolve processes within mature organizations and in the third section that Christensen discusses the relationship between the RPV framework and team structure. These two sections, and the chapter summary are reproduced here.

Creating New Capabilities Internally

Companies that have tried to develop new capabilities within established organizational units also have a spotty track record, unfortunately. Assembling a beefed-up set of resources as a means of changing what an existing organization can do is relatively straightforward. People with new skills can be hired, technology can be licensed, capital can be raised, and product lines, brands, and information can be acquired. Too often, however, resources such as these are then plugged into fundamentally unchanged processes – and little change results. For example, through the 1970s and 1980s Toyota upended the world automobile industry through its innovation in development, manufacturing, and supply-chain processes – without investing aggressively in resources such as advanced manufacturing or information-processing technology. General Motors responded by investing nearly $60 billion in manufacturing resources – computer-automated equipment that was designed to reduce cost and improve quality. Using state-of-the-art resources in antiquated processes, however, made little difference in General Motors’ performance, because it is in its processes and values that the organization’s most fundamental capabilities lie. Processes and values define how resources – many of which can be bought and sold, hired and fired – are combined to create value.

Unfortunately, processes are very hard to change – for two reasons. The first is that organizational boundaries are often drawn to facilitate the operation of present processes. Those boundaries can impede the creation of new processes that cut across those boundaries. When new challenges require different people or groups to interact differently than they habitually have done – addressing different challenges with different timing than historically had been required – managers need to pull the relevant people out of the existing organization and draw a new boundary around a new group. New team boundaries enable or facilitate new patterns of working together that ultimately can coalesce as new processes – new capabilities for transforming inputs into outputs. Professors Steven C. Wheelwright and Kim B. Clark have called these structures heavyweight teams.

The second reason new process capabilities are hard to develop is that, in some cases, managers don’t want to throw the existing processes out – the methods work perfectly well in doing what they were designed to do. As noted above, while resources tend to be flexible and can be used in a variety of situations, processes and values are by their very nature inflexible. Their very raison d’être is to cause the same thing to be done consistently, over and over again. Processes are meant not to change.

When disruptive change appears on the horizon, managers need to assemble the capabilities to confront the change before it has affected the mainstream business. In other words, they need an organization that is geared toward the new challenge before the old one, whose processes are tuned to the existing business model, has reached a crisis that demands fundamental change.

Because of its task-specific nature, it is impossible to ask one process to do two fundamentally different things. Consider the examples presented in chapter 7, for instance. The market research and planning processes that are appropriate for the launch of new products into existing markets simply aren’t capable of guiding a company into emerging, poorly defined markets. And the process by which a company would experimentally and intuitively feel its way into emerging markets would constitute suicide if employed in a well-defined existing business. If a company needs to do both types of tasks simultaneously, then it needs two very different processes. And it is very difficult for a single organizational unit to employ fundamentally different, opposing processes. As shown below, this is why managers need to create different teams, within which different processes to address new problems can be defined and refined.

Creating Capabilities Through a Spin-out Organization

The third mechanism for new capability creation – spawning them within spin-out ventures – is currently en vogue among many managers as they wrestle with how to address the Internet. When are spin-outs a crucial step in building new capabilities to exploit change, and what are the guidelines by which they should be managed? A separate organization is required when the mainstream organization’s values would render it incapable of focusing resources on the innovation project. Large organizations cannot be expected to allocate freely the critical financial and human resources needed to build a strong position in small, emerging markets. And it is very difficult for a company whose cost structure is tailored to compete in high-end markets to be profitable in low-end markets as well. When a threatening disruptive technology requires a different cost structure in order to be profitable and competitive, or when the current size of the opportunity is insignificant relative to the growth needs of the mainstream organization, then – and only then – is a spin-out organization a required part of the solution.

How separate does the effort need to be? The primary requirement is that the project cannot be forced to compete with projects in the mainstream organization for resources. Because values are the criteria by which prioritization decisions are made, projects that are inconsistent with a company’s mainstream values will naturally be accorded lowest priority. Whether the independent organization is physically separate is less important than is its independence from the normal resource allocation process.

In our studies of this challenge, we have never seen a company succeed in addressing a change that disrupts its mainstream values absent the personal, attentive oversight of the CEO – precisely because of the power of processes and values and particularly the logic of the normal resource allocation process. Only the CEO can ensure that the new organization gets the required resources and is free to create processes and values that are appropriate to the new challenge. CEOs who view spin-outs as a tool to get disruptive threats off of their personal agendas are almost certain to meet with failure. We have seen no exceptions to this rule.

OrganizationCapabilitiesAndTeams.gif

The framework summarized in Figure 8.1 can help managers exploit the capabilities that reside in their current processes and values when that is possible, and to create new ones, when the present organization is incapable. The left axis in Figure 8.1 measures the extent to which the existing processes – the patterns of interaction, communication, coordination, and decision-making currently used in the organization – are the ones that will get the new job done effectively. If the answer is yes (toward the lower end of the scale), the project manager can exploit the organization’s existing processes and organizational structure to succeed. As depicted in the corresponding position on the right axis, functional or lightweight teams, as described by Clark and Wheelwright, are useful structures for exploiting existing capabilities. In such teams, the role of the project manager is to facilitate and coordinate work that is largely done within functional organizations.

On the other hand, if the ways of getting work done and of decision-making in the mainstream business would impede rather than facilitate the work of the new team – because different people need to interact with different people about different subjects and with different timing than has habitually been necessary – then a heavyweight team structure is necessary. Heavyweight teams are tools to create new processes – new ways of working together that constitute new capabilities. In these teams, members do not simply represent the interests and skills of their function. They are charged to act like general managers, and reach decisions and make trade-offs for the good of the project. They typically are dedicated and collocated.

The horizontal axis of Figure 8.1 asks managers to assess whether the organization’s values will allocate to the new initiative the resources it will need in order to become successful. If there is a poor, disruptive fit, then the mainstream organization’s values will accord low priority to the project. Therefore, setting up an autonomous organization within which development and commercialization can occur will be absolutely essential to success. At the other extreme, however, if there is a strong, sustaining fit, then the manager can expect that the energy and resources of the mainstream organization will coalesce behind it. There is no reason for a skunk works or a spin-out in such cases.

Region A in Figure 8.1 depicts a situation in which a manager is faced with a breakthrough but sustaining technological change – it fits the organization’s values. But it presents the organization with different types of problems to solve and therefore requires new types of interaction and coordination among groups and individuals. The manager needs a heavy-weight development team to tackle the new task, but the project can be executed within the mainstream company. This is how Chrysler, Eli Lilly, and Medtronic accelerated their product development cycles so dramatically. Heavyweight teams are the organizational mechanism that the managers of IBM’s disk drive division used to learn how to integrate components more effectively in their product designs, in order to wring 50 percent higher performance out of the components they used. Microsoft’s project to develop and launch its Internet browser was located in the Region A corner of this framework. It represented an extraordinary, difficult managerial achievement that required different people to work together in patterns different than any ever used before within Microsoft. But it was a sustaining technology to the company. Its customers wanted the product, and it strengthened the company’s integral business model. There was, therefore, no need to spin the project out into a completely different organization.

When in Region B, where the project fits the company’s processes and values, a lightweight development team can be successful. In such teams coordination across functional boundaries occurs within the mainstream organization.

Region C denotes an area in which a manager is faced with a disruptive technological change that doesn’t fit the organization’s existing processes and values. To ensure success in such instances, managers should create an autonomous organization and commission a heavyweight development team to tackle the challenge. In addition to the examples cited in chapters 5, 6, and 7, many companies’ efforts to address the distribution channel conflicts created by the internet should be managed in this manner. In 1999 Compaq Computer, for example, launched a business to market its computers direct to customers over the Internet, so that it could compete more effectively with Dell Computer. Within a few weeks its retailers had protested so loudly that Compaq had to back away from the strategy. This was very disruptive to the values, or profit model, of the company and its retailers. The only way it could manage this conflict would be to launch the direct business through an independent company. It might even need a different brand in order to manage the tension.

Some have suggested that Wal-Mart’s strategy of managing its on-line retailing operation through a independent organization in Silicon Valley is foolhardy, because the spin-out organization can’t leverage Wal-Mart’s extraordinary logistics management processes and infrastructure. I believe the spin-out was wise, however, based upon Figure 8.1. The on-line venture actually needs very different logistics processes than those of its bricks-and-mortar operations. Those operations transport goods by the truckload. On-line retailers need to pick individual items from inventory and ship small packages to diverse locations. The venture is not only disruptive to Wal-Mart’s values, but it need to create its own logistics processes as well. It needed to be spun out separately.

Region D typifies projects in which products or services similar to those in the mainstream need to be sold within a fundamentally lower overhead cost business model. Wal-Mart’s Sam’s Clubs would fit in this region. These, in fact, can leverage similar logistics management processes as the main company; but budgeting, management, and P&L responsibility needs to be different.

Functional and lightweight teams are appropriate vehicles for exploiting established capabilities, whereas heavyweight teams are tools for creating new ones. Spin-out organizations, similarly, are tools for forging new values. Unfortunately, most companies employ a one-size-fits-all organizing strategy, using lightweight teams for programs of every size and character. Among those few firms that have accepted the “heavyweight gospel,” many have attempted to organize all of their development teams in a heavyweight fashion. Ideally, each company should tailor the team structure and organizational location to the process and values required by each project.

In many ways, the disruptive technologies model is a theory of relativity, because what is disruptive to one company might have a sustaining impact on another. For example, Dell Computer began by selling computers over the telephone. For Dell, the initiative to begin selling and accepting orders over the Internet was a sustaining innovation. It helped it make more money in the way it was already structured. For Compaq, Hewlett-Packard, and IBM, however, marketing direct to customers over the Internet would have a powerfully disruptive impact. The same is true in stock brokerage. For discount brokers such as Ameritrade and Charles Schwab, which accepted most of their orders by telephone, trading securities on-line simply helped them discount more cost-effectively – and even offer enhanced service relative to their former capabilities. For full-service firms with commissioned brokers such as Merrill Lynch, however, on-line trading represents a powerful disruptive threat.

Summary

Managers whose organizations are confronting change must first determine that they have the resources required to succeed. They then need to ask a separate question: does the organization have the processes and values to succeed? Asking this second question is not as instinctive for most managers because the processes by which work is done and the values by which employees make their decisions have served them well. What I hope this framework adds to managers’ thinking, however, is that the very capabilities of their organizations also define their disabilities. A little time spent soul-searching for honest answers to this issue will pay off handsomely. Are the processes by which work habitually gets done in the organization appropriate for this new problem? And will the values of the organization cause this initiative to get high priority, or to languish?

If the answer to these questions is no, it’s okay. Understanding problems is the most crucial step in solving them. Wishful thinking about this issue can set teams charged with developing and implementing an innovation on a course fraught with roadblocks, second-guessing, and frustration. The reasons why innovation often seems to be so difficult for established firms is that they employ highly capable people, and then set them to work within processes and values that weren’t designed to facilitate success with the task at hand. Ensuring that capable people are ensconced in capable organizations is a major management responsibility in an age such as ours, when the ability to cope with accelerating change has become so critical.

Christensen, Clayton M. The Innovator’s Dilemma. New York, NY: HarperBusiness Publishers, 2000.

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