Creating New Capabilities

Creating New Capabilities

The RPV model can be a useful guide for executives who determine that they need to create new capabilities because those that their organization presently has aren’t well suited for building new-growth businesses. This can be framed as a make-or-buy decision. We typically frame make-or-buy decisions as relating to resources, such as training managers internally or hiring them from outside. But processes and values can also be made or bought, as the following discussion describes.

Creating Management Bench Strength

In many ways, building the management bench strength required to launch a sequence of new-growth businesses is a chicken-or-the-egg problem. Maximizing the probabilities of success means identifying managers who are able, here and now, to grapple successfully with the challenges of building new businesses. But to develop managers for the future, organizations need to put up-and-coming managers into situations and responsibilities for which they are not yet qualified. It is the only way they can learn the skills required to succeed. You need to be creating successful businesses in order to have the right curriculum within your internal schools of experience in which next-generation managers can learn. And yet having capable managers in place is a prerequisite to building these growth businesses. Successfully wrestling with these dimensions of the innovator’s dilemma is a critical responsibility of a director of human resources.

By the time a company reaches substantial size, most executives have established processes to identify a set of early-career, high-potential managers who should be prepared, ready and waiting, with the skills to succeed in the situations that will confront the company in the future. In many companies, employees are chosen for this high-potential management track based on early evidence of right-stuff attributes. In these firms, recruiting and promoting up-and-coming leaders entails sifting through lots of people in order to find those few who possess the desired end-state attributes in some nascent form.

The school-of-experience theory, however, says that potential should not be measured by attributes, but rather by the ability to acquire the attributes and skills needed for future situations. The talent to be sought, in other words, is the ability to learn what needs to be learned from the experiences in which the high-potential employee will be schooled in the future. By focusing on ability to learn, it is possible to avoid the trap of assuming that the finite list of competencies important for today are those that will be required in the future. A performance appraisal form targeted at identifying high-potential people would certainly cover basic technical and cognitive requirements, but would not ask for a ranking on right-stuff attributes. It would focus on learning-oriented measures such as “seeks opportunities to learn,” “seeks and uses feedback,” “asks the right questions,” “looks at things from new perspectives,” and “learns from mistakes.” Some attributes of a good learner will show up as achievements, of course, but the quest is to determine whether an employee is willing to learn new skills.

Putting people in positions where they will learn, however, creates its own dilemma. Those who are “ready now,” who are deemed to be fully qualified to handle a given job, by definition have the least to learn by doing it. And those who have the most to learn bring the least experience to the task. McCall notes that, as a result, many managers who are intensely focused on delivering ever-improving results often are the worst at developing next-generation management bench strength. It takes extraordinary discipline and vision on the part of senior executives to balance the tension between deploying fully qualified employees to deliver results now versus giving learning opportunities to high-potential employees who need further development. But strike this balance they must.

Some firms deal with this tension by turning repeatedly to the labor markets, raiding other companies for people with the requisite skills already in full flower. Harkening back to chapters 5 and 6, we believe that one reason why internal management training is becoming more pervasive is because managers don’t yet perform well enough. In-house management development processes in many ways can create an optimized, interdependent interface between the skills of the manager and the processes and values of the company. In situations where management performance is not yet good enough, outsourcing “modular” managers and attempting to plug them into a company’s complex, interdependent system of resources, processes, and values often does not work well.[22]

A company that works to develop a sequence of new-growth businesses can build a virtuous cycle in management development. Launching growth business after growth business creates a set of rigorous, demanding schools in which next-generation executives can learn how to lead disruption. Companies that only sporadically attempt to create new-growth businesses, in contrast, offer to their next-generation executives precious few of the courses they need to successfully sustain growth.

Making New Processes

The right vertical axis in figure 7-1 shows the kind of development team that is required to create appropriate processes for a new-growth business. When different processes need to be created, it requires what Harvard Business School Professors Kim Clark and Steven Wheelwright call a heavyweight team.[23] The term refers to a group of people who are pulled out of their functional organizations and placed in a team structure that allows them to interact over different issues at a different pace and with different organizational groups than they habitually could across the boundaries of functional organizations. Heavyweight teams are tools to create new processes, or new ways of working together. In contrast, lightweight or functional teams are tools to exploit existing processes.

We can use the concepts of interdependence and modularity from chapter 5 to visualize a heavyweight team and understand when it is important to create one. When there is a well-defined interface between the activities of two different people or organizational groups—meaning that you can clearly specify what each is supposed to deliver, you can measure and verify what they deliver, and there are no unanticipated interdependencies between what one does and what the other must do in response—then those people and groups can interface at arm’s length and need not be on the same team. When these conditions are not met, then all unpredictable interdependencies should be incorporated within the boundaries of a heavyweight team. The team’s external boundary can be drawn where there are modular interfaces. New methods of working together can coalesce within this team as it addresses its task. These can then become codified as processes if the team is kept intact and addresses a similar task repeatedly.[24]

To be successful, heavyweight teams should be co-located. Team members bring their functional expertise to the group, but they do not represent their functional group’s “interests” on the team. Their responsibilities are simply to do what needs to be done in order for the project to be successful—even if that course of action is not optimal for their functional group. Many companies have used heavyweight teams successfully as a method for creating new processes. Chrysler, for example, historically structured its product development groups around specific components, such as electrical systems. When the changing basis of competition in its industry forced Chrysler to accelerate the development of new automobiles in the early 1990s, Chrysler organized its development teams around platforms like the minivan, instead of the technical subsystems. The heavyweight teams that Chrysler created were consequently not as good at focusing on component design, but the teams forged new processes that were much faster and more efficient in creating entirely new car designs. This was a critical achievement as the basis of competition changed. Companies as diverse as Medtronic in cardiac pacemakers, IBM in disk dives, and Eli Lilly with its schizophrenia drug Zyprexa have used heavyweight teams as vehicles for creating different, faster processes.[25]

Drawing flow diagrams does not create radically different processes. Rather, executives build processes by giving a group of people in a heavyweight team a new problem that the organization has not confronted before. After the team has successfully addressed the challenge, the team needs to confront a similar problem again, and then again. Ultimately, this new way of working will become ensconced within the team and then can diffuse throughout the organization.

Creating New Values

Companies can create new prioritization criteria, or values, only by setting up new business units with new cost structures. Charles Schwab, for example, set up its disruptive online brokerage venture as a completely autonomous organization. It priced online trades at $29.95, compared with the average price of nearly $70 that Schwab had been charging for trades executed through its telephone and office-based brokers. The separate unit was indeed disruptive to the mainstream. It grew so fast that within eighteen months the company decided to fold what had been the mainstream business into the new disruptive organization. The corporation’s values, which in our model are synonymous with its cost structure, were thereby transformed by launching a successful disruptive enterprise. Schwab’s corporate values changed when the disruptive business displaced the old organization, whose values were incapable of prioritizing the disruptive growth business.

The reason an organization cannot disrupt itself is that successful organizations can only naturally prioritize innovations that promise improved profit margins relative to their current cost structure. For Schwab, therefore, it was far more straightforward to create a new business model that could view $29.95 as a profitable proposition than it would have been to hack enough cost out of the original organization so that it could make money at the disruptive price point. This is the best way to change values because the new, disruptive game almost always must begin while the established business still has substantial, profitable sustaining potential.

What does autonomous mean? Our research suggests that geographical separation from the core business is not a critical dimension of autonomy. Nor is ownership structure. There is no reason why a disruptive venture cannot be wholly owned by its parent. The key dimensions of autonomy relate to processes and values. The disruptive business needs to have the freedom to create new processes and to build a unique cost structure in order to be profitable as it makes and sells even its earliest products. Making the judgment calls about which of the mainstream businesses’ processes and overhead costs the new venture should and should not accept is a key role of the CEO in building new-growth businesses. We will return to this in chapter 10.

[22]An interesting stream of research is coming to this same conclusion. See, for example, Rakesh Khurana, Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs (Princeton, NJ: Princeton University Press, 2003). Khurana has found that bringing into a company high-profile “ superstar” managers—those who in our parlance have many of the most coveted right-stuff attributes in abundance—meets with failure far more frequently than many have supposed.

[23]See Kim B. Clark and Steven C. Wheelwright, “Organizing and Leading Heavyweight Development Teams,” California Management Review 34 (Spring 1992): 9–28. The concepts described in this article are extremely important. We highly recommend that managers interested in these problems study it thoughtfully. Clark and Wheelwright define a heavyweight team as one in which team members typically are dedicated and co-located. The charge of each team member is not to represent his or her functional group on the team, but to act as a general manager—to assume responsibility for the success of the entire project, and to be actively involved in the decisions and work of members who come from each functional area. As they work together to complete their project, they will work out new ways of interacting, coordinating, and decision making that will come to compose the new processes, or new capabilities, that will be needed to succeed in the new enterprise on an ongoing basis. These ways of getting work done then get institutionalized as the new business or product line grows.

[24]The fundamental conceptual breakthrough that leads to the conclusions in this paragraph comes from the seminal study by Rebecca M. Henderson and Kim B. Clark, “Architectural Innovation: The Reconfiguration of Existing Systems and the Failure of Established Firms,” Administrative Science Quarterly 35 (1990): 9–30. This is the research that, in our view, elevated the state of theory building in process research from attribute-based categories to circumstance-based categories. Their essential idea is that over a period of time, the patterns of interaction, communication, and coordination among those responsible for designing a new product (the product development process that a company follows) will come to mirror the pattern in which the components of the product interact within the architecture of the product. In the circumstance in which the architecture is unchanged from one generation to the next, this habitual process will facilitate the kinds of interactions that are necessary for success. But in the circumstance in which the development organization needs to change the architecture significantly, so that different people need to interact with different people about different topics and with different timing, the same habitual process will impede success.
In many ways, the diagnosis and recommendations about process change that are on the vertical axes of figure 7-1 derive from Henderson and Clark’s work. The diagnoses and recommendations on the horizontal axes that relate to the values of the organization derive from The Innovator’s Dilemma, which in turn built on the work of Professors Bower and Burgelman that we have cited elsewhere. This body of research also seems to have lifted the state of theory from attribute-based categorizations to circumstance-based theory.

[25]We have observed a frustrating tendency among managers to seek one-size-fits-all solutions to the challenges they face, rather than to develop a way of applying solutions that are appropriate to the problem. On this particular issue, some managers seem to have concluded in the 1990s that heavyweight teams were the “answer,” and flipped their entire development organizations into using heavyweight development teams for all projects. After a few years, most of them decided that heavyweight teams, while they offered benefits in terms of speed and integration, were too expensive—and they then flipped their entire organizations back into the lightweight mode. Some of the companies cited in the text have suffered these problems, and have not learned how to employ the appropriate types of team in the appropriate circumstance.