Can well established companies also innovate?

So I am enjoying a break after the finals. Needless to say, this break comes after a grueling couple of months, so it is so very welcome.
Had some thoughts on organization design that we discussed as a part of:

MGMT 850 - 1 Effective Teams and Managerial Excellence

This is about how established organizations can also innovate. It is true that established companies have their advantages in being stable with a positive and steady cash flow. However, often times, these companies are so set in their well-trodden paths that they tend to lose sight of new stuff on the horizon and generally play a catch-up game. So the question is, how does a big well-established firm innovate to effectively play in an ever-changing market?
First of all, What prevents innovation in an established firm?
· Established firms have one or more successful products; the firm’s resources are focused on milking the benefits of the existing product line.
· Every new opportunity is seen in the light of how that opportunity will affect existing product line.
· Culture, as the company ages its resources age as well, and with age comes maturity as well as an attitude of risk-averseness. You may hear a lot of “..from my experience, this can’t be done”

So is there a solution?
Yes, there is a design structure thing called an ambidextrous organization design structure. The image attached shows how the structure of such an organization can look like. Such a design structure can be achieved by separating out a self-contained division for development of new products (Emerging Business Unit) from the division responsible for developing(read ‘milking’ existing products (Existing Business Unit).

The goals and the composition of the two business units are described below:
· Emerging Business Unit:
o Primary goal is to develop new products.
o Should have big Marketing and Product development team:
The Emerging Businesses unit should have experienced resources in big size ‘Marketing’ and ‘Product Development’ team to support its primary goal of investigating new markets and develop new products.
o Should have a small Manufacturing and Sales units.
The ‘Manufacturing’ unit should be oriented towards exploring innovative techniques, with plans to handoff development once the design specs have been finalized. Similarly, the ‘sales’ team should be small and primarily oriented towards experimenting with methods to sell new products.

· Existing Businesses Unit
o Primary goal is to achieve manufacturing operational efficiency.
o Should have a big Manufacturing and Sale subdivision,
To support its primary goal of extracting maximum profits through operational efficiency and producing high quality products using proven manufacturing processes.
o Should have a small size Marketing and Product Development unit to maintain the existing product line.

Finally, there should be a plan to hand-off mature products from the emerging to the existing business units.


· Establish a product hand-off process
New products that are developed by Emerging Business unit should be supported by its sales and production until they start reaching their peak capabilities (this would also be the time when viability of mass producing such a product is assured). At this time, the product should be handed over to the Existing Business unit for further production/and reduction in costs.
Such an organization structure may not be the panacea for innovation in established company but it may be one of the first steps towards one.

The Fat-Cat Effect, Top Dog strategy, the Puppy-Dog Ploy or the Lean and Hungry Look?

Lets try to analyze the following scenario: an enterprise software vendor is trying to decide on the strategy to play in the enterprise software market. Moreover this vendor is a niche player with a popular product and another somewhat less popular enterprise product. What should this vendor do about the less popular product?

Let us use game theory strategies to answer this question. In game theory, we have these four funny sounding so-called ‘taxonomy’ for various strategies. For a quick and dirty (my) definition of these strategies:

Puppy Dog: your competitor will fight back if you fight (play tough), so you do not commit to play tough (be small and look soft)
Top Dog: you play tough and you play hard, you gamble on your competitor to cower in the corner.(be big and look tough)
Fat Cat: You play soft and easy, because you know that your competitor will react by taking it easy as well (be big but look soft)
Lean and hungry Look: You know that your competitor will be at your jugular if you show signs of weakness (play soft) so do not commit to be soft. (Be small but look tough)

To give a slightly academic treatment to these strategies, I am reproducing some stuff from game theory literature (in my own words).

In each of these four strategies, there is an inherent assumption about the way the competitor will react to your actions that is competitor fights backs or steps back. To understand whether your competitor will react in kind or react unkindly we need to understand whether the market calls for so called ‘strategic complement’ or 'strategic supplements’, think of a strategic complement as a strategy wherein the competitors respond in kind. I.e. if player plays tough its competitors will respond by playing tougher or if the player plays soft, its competitors will play soft. On the other hand, strategic supplements imply that competitors respond by giving way if you go in. i.e, when you play tough, your competitor plays soft and vice versa.
Also note that ‘strategic complement’ generally results from pricing or ‘Bertrand game’ where price cuts by one firm results in price matching (equivalent cuts) by its competitor. On the other hand, ‘strategic substitutes’ is generally played in a ‘market share game’ or ‘Cournot game’, i.e. If I capture a large share of the market, the competitor’s share will go down.

Next, we have to decide whether the actions that the player takes, or the commitments that the player makes, makes it tough or soft.
The table above will help us visualise the four scenarios that result from the combination of strategies and the commitments.

The enterprise software market most probably allows ‘strategic substitute’ or Bertrand game. This is why:
1. From the numerous proof-of-concepts (POCs) and discussions with customers that I have been involved in, I have observed that customers do not care much about price. Note: we are talking about big enterprise customers here, not your typical mom-and-pop stores. These products differ from products like Microsoft Windows that are sold to individual customers who are more sensitive to price.
2. Enterprise customers care more about feature set, quality and benefit( than price.)
3. Enterprise customers keep an eye on density of adoption of software in their enterprise; Customers favor software from a vendor who already has a big footprint in their datacenter. I.e, in a datacenter, software from a vendor with a bigger existing footprint keeps expanding its footprint at the cost of software from another vendor. Kind of a market share game.

If we decide that the market for this vendor allows for a Cournot strategic substitutes game, then the two options that this company can chose from are: ‘Top Dog’ or ‘Lean and Hungry Look’. Lets analyze what these two strategies bring to the vendor.

How can such a company play ‘Top Dog’? (or commit to be tough)
· Invest a lot in the development of the new enterprise product to send a clear signal to its competitors.
· Send signals through press releases and advertising campaigns about the intention to play tough.
· Acquire a couple of enterprise software companies to beef up its portfolio and (again) send signals to its competitors.

How can this company play a ‘Lean and Hungry Look’ (or commit not to be Soft)
· Make low-key investments in enterprise software
· Stay clear of head to head competition.
· Reap the benefits accrued out of the popular product to sustain the less popular product.

Which of these strategies have the highest pay off?

The answer to this question requires a long term as well as a short-term perspective. For example, the short-term pay-off of ‘Top Dog’ strategy may be comparatively less than that from ‘Lean And Hungry Look’. ‘Top Dog’ means higher investments and higher all round costs in the near term, however, in the long run, the ‘top dog’ strategy will have higher payoff from increased market share. So, if this vendor is looking for short term pay-off in the enterprise software market, play ‘Lean and Hungry Look’ (stay low-key but do not commit to be soft so that the competitors do not have a free reign, and reap the benefits that accrue out of low losts). For long-term benefits, this vendor should plan to play ‘Top Dog’ and concentrate on expanding its enterprise market penetration