Wharton Chapters 8 and 9

Chapter 8
Chapter 8 is a short but useful chapter entitled Commercializing Emerging Technologies Through Complimentary Assets. The Mergenthaler Linotype (M-L from here on) company is used as an example throughout the chapter. The M-L company was a dominant player in the typeset industry for over 100 years. What is extraordinary is that they were able to stay dominant through 3 waves of radical technology change. As discussed in earlier chapters, incumbent companies can be at a disadvantage to newcomers when emerging technologies come into play. But incumbents do have other advantages sometimes. If used properly these other advantages can still allow incumbents to succeed when commercializing an emerging technology even if their technology was not first or is not the best.

According to chapter 8 emerging technologies (ET from here on) can change more than required technological skill sets, ET can change relevant complementary assets, relevant competitors and relevant customers. Proper management of these other 3 areas can help incumbents to overcome any deficiencies they may have when it comes to the new ET.

As stated in the book companies must poses complimentary assets to benefit from an innovation. These resources can include distribution chains, service skills, relationships with customers and suppliers and complementary products. Sometimes these complimentary assets provide a barrier to entry as in the case of M-L's type faces. Other times, when there is a technology shift, the relevant complimentary assets don't change much which gives an advantage to incumbents. When evaluating a change in complimentary assets a company should ask itself the following questions; What complimentary assets are currently valuable to the firm? Which assets will retain their value in the new technological regime? What new complimentary assets are required? What proprietary architectural standards can the firm control? With what complimentary product does the firm’s product now interface? What complimentary product areas should the firm enter?

Changes caused by ET impact not only the companies that produce them; they also impact the consumers that purchase them. New technologies can create new markets that have new needs. Incumbents ignore these new areas at times because they seem to have nothing to do with the current customer base. Serving the needs of a new customer segment can be tricky. Often times the customer doesn't even know what they want or need. Incumbents that help to smooth this transition will be in a more advantageous position. When evaluating a change in customers a company should ask itself the following questions; what new customer segments emerge with the new technology? How do the needs of those customers differ from traditional customers? How does the new technology affect the capabilities of existing customers? Is there a way to ease the transition for existing customers and keep them tied in?

The changes caused by ET can reshape the competitive landscape. New firms may enter the market and existing firm's may decide that an ET is a good entry point into the market. These new entrants mean that incumbents need to not only keep an eye on the old competitors but the new ones as well. One way to learn about new competitors is through trade shows and industry meetings. When evaluating changes to competition due to an ET a company should ask itself; What new competitors from different industries are likely to enter the market? How do their capabilities differ from those of traditional competitors? How do their incentives differ from those of traditional competitors?

The book then goes on to look at the changes that took place in the recent transition from traditional photography to digital imaging. Not only was the technology changing but that was causing changes to complimentary assets, customer and the competition. There were significant changes to complimentary assets in the form of new distribution channels (computer stores), film manufacturing had less value, and new complimentary products like software were needed. There were also significant changes in relevant customers who were Internet users with new needs like electronic transmission and storage, software for editing and compatibility with computers and printers. Lastly there were significant changes to the competitive landscape with strong competition from non traditional companies that made electronic, computers and new entrants as well.

There are 3 hurdles of ET according to the book. The first is should a firm invest in developing a new technology? The second hurdle is the organizational challenge of actually developing or acquiring the new technology. The third hurdle is commercializing the new technology. The first 2 hurdles can be hard for incumbent firms to overcome and can actually place them at a technological disadvantage. However carefully and cleverly commercializing a new technology can help to overcome any technological disadvantages and allow the incumbent firm to thrive.

Chapter 9
I see a theme running through most of the chapters in this book. That theme is, when dealing with ET you will have to operate in an environment in which you have limited information. Chapter 9 is called Disciplined Imagination: Strategy Making in Uncertain Environments. We are switching gears into the making strategy section of the book. The authors argue that in today's fast paced and changing business environment the old methods of strategy making are no longer effective. Weekend retreats and elaborate planning methods no longer work.

Strategy making is an art, according to the authors, and I would tend to agree with them. Producing a business strategy is a lot like making an educated guess since you can’t know exactly what the environment will be like, what your full capabilities are, or what the future will bring. The only way to know for sure if a strategy will work is to put it to the test. Strategy making can be thought of as a set of mental experiments whereby many strategies are created and one is chosen to be implemented. You can increase your chances of formulating a successful strategy by using disciplined imagination. Disciplined imagination ‘deliberate diversity’ in formulation of the problem, the generation of alternatives and the variety of rules used to evaluate the alternatives.

The twin pillars of strategy are discipline and imagination. Over the years the dominant form strategy making has swung between the two extremes if discipline on one side and imagination on the other. According to chapter 9 both schools of thought have merit but the limitations inherent in both suggest that they should be used together for high quality strategy making.

Discipline is the consistent application of rules to evaluate a set of alternatives. The ‘rational actor’ model says that all alternatives must be known in advance and then the actor collects information, develops alternatives and selects that one that maximizes value. Discipline is exemplified by consistency, may or may not require formal planning and should work in stable or chaotic environments. The discipline school of thought led to the strategic planning movement and made many improvements including helping to identify avoidable errors and achieving broader consensus. However a strictly discipline approach can be slow and unwieldy in fast paced and swiftly changing environments.

Imagination is associated with the concepts of synthesis, vision, foresight, creativity and intuition. Strategy making exhibits imagination when there is ‘deliberate diversity’ in the definition of problems and in the manner that alternatives are generated and selected. Alternatives should be varied and distinct rather than variations on a theme. Problems statements should be diverse as well. There should also be diversity in the number of rules used to select alternatives. If the same alternative scores highly under different sets of evaluation criteria then the possibility of that alternative being the best one is increase. I liked the idea of imagining a future for the company and working back to the present from there. At the far end of the imagination camp there are those that suggest using a hierarchy of imagination as opposed the more traditional hierarchy of experience.

Discipline and imagination have their limitations as well. Discipline rarely generates original insight or creative alternatives. Imagination can lead to chaos, losing touch with reality and under valuing the past. Too much imagination can actually dilute creativity and slow the strategy making process.

The limitations of discipline include:

• Analysis rather than synthesis – rut of automatic thinking
• Selection at the expense of generation – Where do options come from?
• Extrapolation from the past – Not useful with ET, there may not be a past
• Overconfidence in the power of analysis – information often limited or outdated

The limitations of imagination include:

• Chaos – too many people involved, who makes the decision?
• Losing touch with reality – distracted from present activities
• Undervaluing the past – no foundation for learning and repeat past mistakes
• Diluting individual creativity – group think, Anderson Androids?
• Slowing the process – more people can mean more time

Discipline and imagination are both useful in strategy making but they also both have limitations. The use of disciplined imagination is a way to capitalize on the strengths of both while limiting their weaknesses. Strategy making can be compared to the artistic process of creation. Even in art some rules are followed like staying in rhythm during a jazz improvisation. Disciplined imagination combines the process of generating diverse options with another for evaluating them consistently.

• Generate imaginative options – problem statements should be diverse allowing many alternatives but keeping the number manageable, alternatives need to distinct not variations on a theme
• Evaluate the options consistently – use discipline by consistently applying rules to select alternatives, the more and varied rules an alternative survives the more plausible it is