It's no secret that many acquisitions fail to achieve the desired benefits.

It's much simpler identifying potential gains on paper than smashing through the barriers necessary to bring two distinctly different organizations together.

And when big buys little and mature buys new, the organizational degree of difficulty becomes particularly high.

Overcoming the challenge of somehow stitching together tradition and invention couldn't be more important in industries facing major transitions. Consider pharmaceuticals, where the dominant model is shifting from the population-based, blockbuster drug model to more targeted therapies tailored to patients' unique genetic makeup. To sustain excellence through the transition, the major pharms will have to build entirely new competencies -- one important mechanism for doing so, being the acquisitions of biotechnology startups.

For the newly-acquired company, "NewCo," to thrive within "CoreCo," there must be a fine balance between separation and integration. It's easy to destroy NewCo, even when both sides join with the best intentions.

Though technology considerations may have led to the acquisition, organizational decisions will make or break the purchase. NewCo comes into the process with an entirely different organizational DNA, and much of that distinctness must be maintained. CoreCo must forget its assumptions about success, and be ready to question second nature assumptions about how it manages its organization. Most likely, NewCo will benefit from different approaches to hiring, promoting, hierarchy, metrics, management processes, culture, and more.

Unfortunately, past merger experiences may lead CoreCo in a different direction -- particularly if such experiences included a major merger with an industry peer. The primary objective of such mergers is usually to achieve economies of scale, one of the most obvious ways involving support functions. But many support functions -- particularly IT, HR, and strategic planning -- have direct and dramatic impacts on organizational DNA. Consolidating here may save a few dollars, but ultimately destroy the organizational fabric that enables NewCo to win in a game much different from CoreCo's.

The acquiring company should be very selective in choosing to integrate its own processes with NewCo's. Where incremental cost saving is the only benefit, NewCo should remain fully independent. But CoreCo likely has at least one or two assets which NewCo could formerly only dream of. Consider the power of an experienced pharmaceutical sales team to a nascent biotech startup.

Giving NewCo the ability to leverage CoreCo's assets is never as easy as drawing a line on an org chart. Building cooperation between two entirely different organizations, with very different priorities, is a touchy proposition.

That's why the most important priority for the senior management team should be ensuring that one or two valuable links between NewCo and CoreCo work. Everywhere else, leave NewCo alone.

Posted by Vijay Govindarajan at 12:04 PM | Permalink | Comments (1) | TrackBacks (0)

Richard Pascale has given us an effective illustration of nonlinear change: the history of the high-jump event at the Olympics.

There have been four distinct “business models” in the high jump. Each enabled athletes to achieve breakout performance.

Early on, the “scissors” style dominated; it was much like hurdling. As all high jumpers were using the scissors approach, the name of the game was being the best at scissors. The high jumpers were operating in Box 1. If they were businesspeople, they would have been competing on cost, market share, and margins.

One day, someone changed the rules of the game by inventing the “western roll.” (High jumpers launched and landed on the same foot and kept their backs to the bar.) The western roll was the style for twenty-five years until someone changed the rules again, introducing the “eastern roll,” a.k.a. the “straddle.” (Now high jumpers launched and landed on opposite feet and faced the bar.) Then, in the 1968 Olympics, former gymnast Dick Fosbury broke the Olympic record by three inches, creating a third discontinuous change. (The “Fosbury flop” involved a straight approach, jumping with both feet and twisting the body 180 degrees, like a gymnast, looking away from the bar.)

These nonlinear shifts exemplify Box 3 thinking. Each transformed the high-jump “industry.” In each case, the inventive high jumpers were not just managing the present, they were creating the future.

Because the future is uncertain, executives cannot predict it. They can only prepare to address its challenges and capture its opportunities.

Some of the key questions executives need to address in this context are:

- How do we identify the non-linear shifts and market discontinuities (e.g., fundamental shifts in technology, customers, competitors, lifestyle/demographics, globalization, regulations, etc.) that could transform our industry?

- How do we analyze the opportunities and risks, as a result of our understanding of market discontinuities?

- How can we create new growth platforms with a view to exploit the market discontinuities?

- What are our core competencies and how can we leverage them in the growth platforms?

- What new competencies do we need? How do we build or acquire them?

- How do we allocate resources to support growth?

- What kind of organizational DNA must we have in order to anticipate and respond to changes on a continual basis?

Don't get caught offguard by your competitor's "Fosbury flop" and, by the same token, make sure you have some foam to cushion your fall if you're going to try one!

Posted by Vijay Govindarajan at 04:33 PM | Permalink | Comments (1) | TrackBacks (1)

Senior executives need simple, but very powerful frameworks that help them to think strategically, and to align people in the organization through the use of a common strategic language.

The three box thinking model is an example of a framework that I use to facilitate strategic thinking and alignment.

Actions companies take belong in one of three boxes:

Box 1 -- manage the present;
Box 2 -- selectively abandon the past; and
Box 3 -- create the future.

Box 1 is about improving current businesses. Box 2 and Box 3 are about breakout performance and growth.

Many organizations restrict their strategic thinking to Box 1. This tendency has been particularly acute in the past two to three years, as most leaders have emphasized reducing costs and improving margins in their current businesses.

But strategy cannot be just about what an organization needs to do to secure profits for the next year. Strategy must encompass Box 2 and Box 3. It must be about what a company needs to do to sustain leadership for the next ten years. In fact, the central task of an organization’s leaders is to balance managing the present with creating the future. Examples of successful Box 2 and Box 3 initiatives include: Dell’s direct model in the PC industry, Wal-Mart’s transformation of the discount retailing industry, Apple’s introduction of iPod, and Southwest Airlines’ revolution in the airline industry.

Organizations that operate within a short timeframe base their actions on the assumption that their industry is stable and static. But it takes years for large organizations to change directions. If you take this into account, change is rapid and nonlinear. For instance, nanotechnology and genetic engineering are revolutionizing the pharmaceutical and semiconductor industries. Globalization is opening doors to emerging economies, such as India and China, and billions of customers with vast unmet needs. Once-distinct industries, such as mass-media entertainment, telephony, and computing, are converging. Rapidly escalating concerns about security and the environment are creating unforeseen markets. And other, more subtle changes are important as well, such as the trend toward more empowered customers, the aging population in the developed world, and the rising middle class in the developing world.

As a result of these forces, companies find their strategies need almost constant reinvention because the old assumptions are no longer valid, or the previous strategy has been imitated and commoditized by competitors, or changes in the industry environment offer unanticipated opportunities. The only way to stay ahead is to innovate.

Part of the job of executives is to make money with the current strategy. That is the challenge in Box 1. Part of their job is to make up for the decay and commoditization of strategy. That is the challenge in Box 2 and Box 3. Too many companies ignore these two boxes until it is too late.

My hope and goal is to help companies transform their industries and reinvent their strategies. In my next post, I'll provide an effective illustration of nonlinear change to help you think about how we identify non-linear shifts and market discontinuities.

Posted by Vijay Govindarajan at 01:16 PM | Permalink | Comments (2) | TrackBacks (1)

Through the cycle of boom and bust, a fundamental truth remains. The world keeps changing. New digital technologies are transforming the services sector. Nanotechnology and genetic engineering are revolutionizing the pharmaceutical and semiconductor industries. Formerly distinct industries such as mass media entertainment, telephony, and computing are converging. Globalization brings new markets, nontraditional competitors, and new sources of uncertainty such as armed conflict in the Middle East and the entry of China into the WTO. More subtle changes are important as well, including the aging of the population in developed economies, and the rise of a new middle class in emerging economies. This dynamic environment affects new industries and old, high tech and low tech, manufacturing and services.

As a result of these forces, companies find that their strategies need almost constant reinvention – either because the old assumptions are no longer valid, or because the previous strategy has been imitated and neutralized by competitors, or because technological developments and globalization offer unanticipated opportunities.

Strategic innovation refers to this process of reinventing strategies. Despite some commonalities, strategic innovation is not synonymous with technological or product innovation. New technologies do not always yield successful products. Similarly, new products are not always strategically salient. There also exist many companies (e.g., Southwest Airlines) whose success appears to be driven by innovative strategies without much innovation in either the underlying technologies or the products and services being sold to customers. Strategic innovation is innovation in the strategy itself.

More concretely, strategic innovation represents the following types of creative departures from historical industry practices:

- Innovations in the design of the end-to-end value chain architecture (e.g., Dell Computer);
- Innovations in the conceptualization of delivered customer value (e.g., IBM’s shift from selling hardware and software products to selling complete solutions);
- Innovations in the identification of potential customers (e.g., Canon’s pioneering focus on the development of photocopiers targeted at small businesses and home offices rather than large corporations).

Thus, your company can innovate strategically without necessarily introducing new products, as Dell has done. You can take the same old product but go to market differently. A company should explore innovation opportunities in every part of the value chain. Strategic innovation, therefore, is not the purview of R&D department alone. Everyone in the company can and should play an important role.

Has your company engaged in strategic innovation, in response to fundamental changes in your industry?

Posted by Vijay Govindarajan at 01:46 PM | Permalink | Comments (1) | TrackBacks (1)