HBS Embracing Paradox

8/11/2019 HBS Embracing Paradox

1/11

Embracing Paradox

Michael L. TushmanWendy K. SmithAndy Binns

Working Paper

11-110


2/11

DRAFT 6.2

Working

title:

Embracing

Paradox

ByMichael

L.

Tushman,

Wendy

K.

Smith,

and

Andy

Binns

Trying

to

resolve

the

paradox

between

innovation

and

the

core

business

only

weakens

the

CEO

and

dooms

the

company.

Exceptional

leaders

embracetensionsassociatedwithexploitingpriorstrategiesevenasthey

exploreintothefuture.

Authorsbio:MichaelL.Tushman([email protected])isaProfessorofBusiness

AdministrationatHarvardBusinessSchool,WendyK.Smith([email protected])is

AssistantProfessorofOrganizationalBehaviorattheAlfredLernerSchoolofBusiness,

UniversityofDelaware.AndyBinns([email protected])isManaging

Principal

of

Change

Logic

LLC,

a

consulting

firm

based

in

Boston.

Inthefallof2008MikeLawrie,CEOofthefinancialservicesand

healthcarefocusedsoftwareandservicesfirmMisysPLC,askedhissenior

executivestoprepareaplanforweatheringthefinancialandeconomiccrisis.

Whentheycameback,topoftheirlistwasarecommendationtocutthe

companysannual$3millioninvestmentinMisysOpenSourceSystems,a

ventureinto

apotentially

disruptive

technology

in

healthcare

software.

Itisafamiliarstory. Althoughmostseniorexecutivespublicly

acknowledgetheneedtoexplorenewbusinessandmarkets,theyalmostalways

havemorepressingclaimsonthecompanysresources,especiallywhentimes

arehard. InnovationslikeMisysOpenSourcefaceanuphillbattletosecurea

shareofthefirmscapital. Theylackscaleandresourcesandareoften

underrepresentedatthetoptable. Atbest,theleadersoftheestablishedbusiness

unitsdismiss

them

as

irrelevancies.

At

worst,

they

see

the

new

businesses

as

threatstothefirmscoreidentityandvalues.

Often,theonlyfriendtheinnovationbusinesshasistheCEO. Butmany

CEOsinthispositiontendtoviewthetensionbetweenthedemandsofthecore

businessesandtheneedsofthenewbusinessesasatradeofftoberesolved. As


3/11

DRAFT 6.2

Thisisarecipeforlongtermfailure. Ourresearchsuggeststhatfirms

onlythrivewhenseniorteamsleadparadoxicallywhentheyembracethe

tensionbetween

old

and

new

to

create

astate

of

constant

creative

conflict

at

the

topoftheorganization. Thisresearchdrawsonanindepthstudyof12top

managementteamsatMisys,ZensarTechnologies,LexisNexis,IBM,Hewlett

Packard,CrayComputers,andothermajorcompaniesastheyattemptedtoboth

exploitexistingstrategiesevenastheyattemptedtoexploreintonewdomains.

Weinducethreebasicleadershipprinciplesguidingfirmsthatsucceedin

growing

the

profits

and

market

share

of

their

core

businesses

even

as

they

use

theirnewbusinessestoreshapetheirindustries. Thesethreeprinciples

discriminatedbetweenthosefirmsthatweresuccessfulinexecutingthese

paradoxicalstrategiesfromthosethatwerenot.Thosesuccessfulfirmsengaged

theseniorteamaroundaforwardlookingandintegrativestrategicaspiration

thatsetsambitioustargetsbothforinnovationandcorebusinessgrowth. They

choseexplicitlytoholdthetensionbetweeninnovationunitdemandsandcore

businessdemands

at

the

top

of

the

organization.

And

finally

they

embraced

inconsistency maintainingaconsistentlyinconsistentstrategythathadmultiple

andoftenconflictingagendas.

LetsbeginbylookingatwhathappenedatMisys.

OpenSource:TheNewSharkintheWater

In2006,incomingCEOMikeLawrierecruitedanewmanagementteamto

turnaroundMisyssthenstrugglingcorebusinessesinfinancialservicesandhealthcare. Thecompanyhadstruggledwithqualityissuesandwaslosing

customersatanalarmingrate.

Despitethepressuretofocusontheexistingbusiness,oneofLawriesfirst

moveswasthecreationoftheOpenSourceunit,whichwasakeycomponentof

hisvisionforthecompanysfuture.Heknewopensourcewasemergingasa

seriousdisruptive

threat

in

the

software

industry,

especially

in

healthcare

applicationswhereitheldoutthepromiseofseamlessdataexchangebetween

thedifferentplayersinhealthcaredelivery. Hewantedtogetoutinfrontofthis

trendandfeltthatMisyshadanopportunitytobethedisruptor.

Thatinvestmentsecured,Lawrieandhisteamturnedtomoreimmediate

B 2007 th h d t d th tid f t d f ti d


4/11

DRAFT 6.2

billionofstimulusmoneyintoupgradingITsystemsfordoctorsandhospitals

nationwide.

Thepost

crash

outlook

was

alot

less

rosy

for

the

financial

services

businesses,however,andLawriesteamneededtogenerateasmuchcashflow

fromcostsavingsastheycouldiftheyweretobothkeepfinancialservicesgoing

andputthenecessarycapitalbehindtheirplansfortheAllsciptshealthcareunit.

Againstthisbackground,theOpenSourceunitseemedtobemoretrouble

thanitwasworth,andtheleadersofthecoreunitsadvisedLawrietounlock

capital

from

a

quick

sale

of

the

investment.

Cut

it

now

one

executive

told

him,

youcantaffordthedistraction.

ManyCEOswouldhaveagreed. ButnotLawrie.Infact,hedidmorethan

justprotecttheinvestment.Attheheightofthefinancialcrisisheactuallygaveit

anevenstrongerorganizationalvoice;OpenSourcewastheonlyMisys

healthcareassetnotfoldedintothecoreAllscriptsunit.ThispermittedOpen

SourcetocompetewithAllscriptsevenastheysataroundthesamesenior

leadershiptable

together.

It

was

uncomfortable

for

Lawries

senior

team

as

everystrategicissueinvolvedtradeoffsbetweenmoreimmediatereturnsin

AllscriptsversusthemoredistantreturnsofOpenSource.Thesetensionsalso

wererootedinthreatstopowerandfirmidentity.Forexample,Allscriptschief

GlenTullmanwantedhisproprietarysoftwaretodominateandhesawOpen

Sourceasadirectthreat.Hisfearsprovedwellfounded;OpenSourcesoon

startedtobeatoutAllscriptsforcontracts.

Nevertheless,Lawrie

held

this

tension

in

his

senior

team.

He

has

seen

his

strategypaydividends.Allscriptsrevenuesgrewmorethan30%in2009evenas

MisysOpenSourcewonimportantcontractsthatopenuptheprospectof

hospitals,physicians,andinsurersallbeingabletoviewandexchangecritical

data.ThepotentialforintegrateddatacouldhaveradicalimplicationsfortheUS

healthcaresystemsabilitytomanagecostsandpatientoutcomes. Atthesame

time,

Open

Source

has

triggered

innovation

into

other

Misys

units

a

new

bankingproducthaslargeopensourcecomponents,andtheMisyswebsiteis

completelyopensource.

Tullmanandhisfellowbusinessunitleadershavealsostartedto

recognizethatOpenSourceisnottheirritatingdrainonresourcestheyhad

d b t it l i t i d t i Mi l t f t I


5/11

DRAFT 6.2

ThepatternsweobservedatMisyswererepeatedinourothersuccessful

cases;theywerenotinourlesssuccessfulones.Letsnowlookattheleadership

principlesthat

made

this

happen.

Principle

#1:

Develop

an

Overarching

Identity

Theimpactofthewayyouframeyourorganizationsidentityiswell

known. Inhisseminal1960HBRarticle,MarketingMyopia,TedLevittargued

thatthefailureoftheUSrailwaycompaniestosurvivetheriseofthemotorcar

and

the

passenger

jet

in

the

1950s

was

in

large

part

because

they

defined

themselvestoonarrowlybytheassetstheyhadbuiltupratherthanbywhatthey

didwiththoseassetstheywererailwaycompaniesratherthantransportation

companies.

Itsamistakecompaniesstillrepeat. Inthe1990s,Polaroidhad

developedtheworldsmostadvanceddigitalcamera.Butthecompanywas

weddedtoanidentityasaselleroffilm;theycouldnotseewhyconsumers

wouldwant

acamera

without

ahard

copy

image.

Polaroid

went

bankrupt,

whileKodak,whoseidentityspokeofbeingtheleadingimagingcompany,

prosperedfromthetechnologychange. Overarchingidentitiesprovide

permissioninthefirmtoengageinparadoxicalstrategies;toexploitexisting

productsand/orservicesevenastheyexploreintonewproductsorservices.

SimilarlyattheBallCompany,itsabilitytobeinnovativeovermorethan100

yearsinwoodenbuckets,glassjars,metalcans,andplasticbottleswasinpart

rootedin

their

overarching

aspiration

to

be

the

worlds

best

container

company

MikeLawrietookasimilarapproachatMisys. Misyshadgrownby

acquiringsoftwareassetsandbuildingalargecustomerbasetiedtoproprietary

products.Lawrierefocusedthecompanyonitscustomersmissioncritical

problemsandembracedopensourceasanewwaytohelpcustomerssolvethem.

As

they

began

to

think

of

Misys

as

a

company

that

solved

industry

wide

problems,notasavendorofsoftwareapplications,newareasofinnovation

emerged.InBanking,theBankFusionsolutionisenablingretailbankstobring

productstomarketfaster,bychallengingsomeofthesoftwareindustrys

standardapproaches.

At L i N i M ti d l H bb ll b i CEO Phil Li i t f d


6/11

DRAFT 6.2

Principle

2#:

Hold

Tension

at

the

Top

Inmanycompanies,innovationunitsareembeddedinthecorebusinesses

andnegotiations

for

capital

and

resources

take

place

under

the

radar

screen

of

thetopteam. In1996,HewlettPackardscannerdivisionfacedthisexact

situation.Ithadbuiltasuccessfulfranchiseinthemarketforflatbedscannersfor

businessesandconsumers.Butasthebusinesswasrapidlyscalingtomeet

burgeoningdemand,anewpossibilityemerged:theportablehandheldscanner.

Herewastheabilitytodoeverythingaflatbedcoulddo,butonthego.

A

small

team,

several

layers

down

within

the

Scanners

business

unit,

developedtheprototypethattheyfeltwouldrevolutionizethemarket.However,

theycouldnotgetattentionfrommanagerswhosefocuswaswinningmaximum

shareinthefastgrowingFlatbedbusiness.AlthoughseniorHPexecutive

AntonioPerezintervenedwith$10Moffundingtovalidatethebusiness,within

monthstheScannersbusinessunithaddivertedthefundstoplugawholeinthe

flatbedbusinesssdevelopmentbudget.ThePortablesR&Dteamwasleftwith

noauthority

and

no

funds;

all

they

could

do

was

to

shout.

Pushingdowntheconflictlikethisisacommonpathology. Itshieldsthe

topleadershipteamfromthepainofmakingtoughchoicesabouthowtofund

innovationwhilemaintainingtheircorebusiness. Becausenobodyatsenior

teamlevelcarriestheresponsibilityforinnovating,seniormanagementtimeis

dominatedbyoperationalproblemsolving,withonlyoccasionalflashesof

interestinthefuture. Meanwhile,thetensiongetsresolved,asinourHP

Scannerexample,

when

the

new

unit

starves

or

is

suffocated

by

the

core

business.

Anotherfrequentresultofpushinginnovationdownintothebusiness

unitisalackofcoordination. BritishTelecomin2002wasacollectionof

powerfulcustomerdefinedtelephonyfocusedbusinessunits,nominallyheld

togetherbyBTstwentyfivepersonManagementCommittee. AllBTs

innovation

businesses,

however,

were

housed

within

the

units.

Since

the

ManagementCommitteedidnotdiscusscrossBTinnovations,debatearound

emergingtrendswascededtolowerlevelmanagementlevels. Theresultofthis

seniorteamabdicationwasthatBTlaunchedtwounderfundedcompeting

broadbandproducts.

Th ff ti CEO k it l th t d i i i t d ith th


7/11

DRAFT 6.2

hasthrivedover40yearsthroughmanagingthisway.Evenastheywereleaders

inanalogintegratedchips,theycreatedanewdigitalsignalprocessingchip.As

theybecame

leaders

in

this

chip,

they

began

working

simultaneously

on

amicro

electromechanicalchip.

Eachtimetheorganizationdevelopedanewstreamofrevenue,they

createdanewunitwithitsownleaders,engineers,andlocalculture. CEORay

Statatookpersonalresponsibilityfortheintegrationacrosstheserevenue

streamssothathisotherleaderscouldfocusontheirownproductsandassociate

time

frames.

That

didnt

mean

that

Stata

made

decisions

alone.

Key

to

his

model

wasaCOOwhosharedresponsibilityfortheintegration;Stataevenhada

soundproofroombuilt,offtheCEOsoffice,forhisfightingmatcheswithhis

COO. ManyHubandSpokeseniorteamsmanagethroughtheseinnercircles

oftwoorthreeindividuals. Althoughunitleadersinteractextensivelywiththis

innercircletolearn,advocate,andreportprogress,theyrarelydealwithother

unitleadersandteammeetingsaremoreinformationalupdates. Resolution

betweenthe

firms

exploitative

and

exploratory

strategies

takes

place

in

the

seniorleadersoffice.

IncontrasttoHubandSpokeapproach,PeteUngaroatCrayComputers

adoptedaRingTeammodel,wheredecisionsaremadecollectivelyinhis

seniorteamonhowtoallocateresourcesandmaketradeoffsbetweenthe

presentandthefuture.Crayslegendarysupercomputersofthe1970sand80s

haddefinedthefirsteraoftheITindustry.However,asprocessingpower

commoditized,their

market

shrank

and

Ungaro

was

hired

to

lead

aturnaround.

Asafirststep,Ungaroandhisteamarticulatedanewidentitythatembracednot

engineeringexcellence,buttechnologysolutions. Fromthisoverarchingidentity,

UngarogrewtheCustomEngineeringbusinessunit,whichusesthefirms

technicalexpertisetosolvecomplexITproblemsforspecializedusersofhigh

performancecomputing. Heknewthatscalingthebusinesswouldfaceamajor

barrier

in

a

sales

team

well

drilled

in

selling

computer

hardware,

not

in

the

art

of

solutionsales. So,Ungaroconvenedhisteamandproposedacreatinganew

unit. Theteamdecidedtobitethebullettocreateaseparatebusinessunit

organization,whichwasaprettybigdecisionforusandweknewwasgoingto

hurtourshorttermfinancialperformance.

Ri T l d lik U th t t tt d t th t i


8/11

DRAFT 6.2

RingTeammembersshareanobligationtodissentovercriticalissues,

withleadersunfailinglyidentifyingproblemsandcallingthemoutina

transparentmanner.

Ben

Verwaayen,

then

CEO

of

British

Telecom,

told

us

that

shortlyafterhejoinedBThechallengedanexecutivewhohadcometopresentto

thetopteam,WhenIpressedhimonwhathesaid,thepresentersaidthathe

didntagreewithanythingthathehadpresented,hewasjustpresentingwhathe

wastoldtopresent.Atthatpoint,Itoldtheteamthatiftheycanttalkaboutthe

businessbetweenthem,itwasnotimportantformetolisten.Thisisaclassic

Ring

Team

approach

get

the

issues

onto

the

table

and

hammer

them

out.

This

isnotasearchforcompromise,butratherasharedsearchfortherightwayto

advancethecompanysshortandlongertermagendas.

Intheseringteams,givingtheinnovationunitssuchapowerfulvoicein

theseniorteamandsuchasubstantialclaimintimeandresourcesisstressful.As

CraysUngarorecalled,wehadtoconvinceourselvesthatspendingfifty

percentofourtimeonsomethingthatisdeliveringfivepercentofthecompanys

revenueswas

worth

the

effort.

Nonetheless,

the

results

speak

for

themselves.

Fromneardeath,Crayhasreemerged;returningtoprofitabilityandgrowing

revenuesatmorethan6%in2010.

Principle#3:EmbraceInconsistency

Inmanycompaniesinnovationbusinessesfindthemselvessubjecttothe

performancedisciplinesandmeasuresofthecorebusiness. Thisholdsthe

innovationunit

captive

to

the

past;

it

struggles

to

match

up

to

abusiness

that

has

provenitselfandiswellestablished.

Thesuccessfultopteamswestudieddidnotfallintothistrap. Theyheld

coreandinnovationunitstodifferentstandards,demandingprofitand

disciplineforsome,encouragingexperimentationinothers. Theylookatthe

needsofeachunitinisolationsotheycanfocusonwhatsimportantfora

business

at

its

particular

point

in

its

growth

cycle.

Take

former

USA

Today

CEO

TomCurleywhogrewhiscompanysonlinebusiness,evenashescaledthe

newspaperintoapublishingphenomenon.Curleysexpectationsforeverything

fromperformancetodressweremarkedlydifferentbetweenthetwomedia

channels. Inthenewspaper,deadlinesweredailyandprofessionaljournalists

b k f h t t b d th i ll t d d I t t i C l


9/11

DRAFT 6.2

strategyinonepartofthebusinessyettoseektocannibalizeitinanother. For

example,RayStatacontinuedtobuildoutandinvestinafabformanufacturing

analogchips,

even

as

he

was

aggressively

investing

in

research

for

digital

chips.

AtCray,Ungarorecalledthatthecorebusinesswasmanagedtightlyon

revenuesandprofit,butintheexploratorybusinesswewouldcelebrateif

somebodywentforacupofcoffeefortheirpartnerinanexploratorybusiness.

SimilarlyatZensarTechnologies,amidsizedIndianITservicesfirm,becausehis

productorientedgeneralmanagerswereignoringapotentiallydisruptive

software

solution,

Ganesh

Natarajan,

Zensars

CEO,

built

a

distinct

business

unit

reportingtohim.In2005,Nataraganpushedhisseniorteamtoattendtothe

tensionsbetweentheirknowntechnologiesandthisnewplatform.By2010,

muchofZensarsgrowthisrootedinthisnewsolutionsplatform

ButleaderslikeStata,Lawrie,Natarajan,Livingston,CurleyandUngaro

understandthatsupportingcorebusinessessimultaneouslywithinnovation

businessesrequiresaleadertobeconsistentlyinconsistent,thatistosaythey

livewith

adual

agenda,

an

approach

at

odds

with

conventional

thinking

on

leadership. Indeed,webelievethattoomuchconsistencyinacompanys

strategyisadangersignal,indicatingthatthecompanyhasrunoutofideasor

thatitisdelegatinginnovationtolowerorganizationallevels,aswesawearlier

withBritishTelecom.

Ofcourse,resourcesarescarceanditisnotalwayspossibletogiveboth

innovationandcoreunitseverythingtheyneed. Successfultopteams,therefore,

arefrequently

moving

resources

between

businesses

depending

on

shifting

needs. Theywilltiltcapitalinvestmentsinfavorofspecificcorebusinessneeds

atonemomentandsoonafterringfencingfundsfortheinnovationunit. HR

talentwillalsoflexiblymovebetweentheunitstomakesurethebesttalentis

whereitismostneeded. Forexample,inIBMssoftwaregroup,theycreated

salesSWATteamstosellanewcontentmanagementsystem. GeneralManager

Janet

Perna

saw

this

as

a

way

to

focus

resources

for

a

short

period

of

time

on

new

areas,beforepullingthembackintoanintegratedsalesteam.

***

I l t 2010 C l t USA T d D id H k d


10/11

DRAFT 6.2

paradoxandtensionusingtheleadershipprinciplesoutlinedhere.Incontrast,

thoselesssuccessfulfirmshadseniorleaderswhoeitheravoidedorcouldnot

holdthe

tension

between

their

firms

past

and

its

future.

Those

most

successful

leadersenabledtheirseniorteamstomovefromanegotiationoffeudalinterests

toanexplicit,ongoing,andforwardmovingdebateaboutthetensionsatthe

heartofthebusiness.Theircapacityforembracingandtakingadvantageofthe

paradoxicalobjectives,needs,andconstraintsofbusinessesthatexplorenew

horizonandbusinessesthatexploitrichterritorieshasenabledthemtodeliver

extraordinary

performance,

time

and

again.


11/11

DRAFT 6.2

10

Sidebar:AreYouEmbracingParadox?

Ifyouwanttogetahandleonwhetheryourcompanyisdoingagoodjoboffosteringinnovationwhilesupportingthe

corebusiness,askyourselftheseeightquestions:

DevelopanOverarchingIdentity

1. IdentityDoyouhaveanemotionallycompellingidentitythatencompassesyourexistingproductsand/or

services(likeBallsaspirationtobetheworldsbestcontainercompany)?

2. Doesyouridentityfastenyoutocustomergroupsorsolutionsthatmaybedisruptedinthefuture?Ifso,youneed

toarticulate

an

identity

that

enables

you

to

attend

to

the

present

while

aspiring

to

the

future.

HoldTensionattheTop

3. ReportinglinesDoinnovationbusinessunitsreportdirectlytoaCEOoraBUGeneralManager?Ifnot,youmay

beallowingyourcurrentbusinesstostarveyourinnovationlowerintheorganization.

4. OwnershipDoessomeoneintheleadershipteamowntheinnovation?Iftheansweriseveryone,yourcurrent,

cashgenerative

businesses

may

continuously

trump

speculative

innovation

units.

5. LocusofDebateArethefierceststrategybattlesbeingfoughtinsidethetopexecutivesroom?Ifnot,thetensions

betweentheexistingproductandinnovationmayfesteranddestroytheinnovationratherthanallowcreativity.

Ringteamsfightthesebattlestogether.HubandSpokesteamsfightthesebattlesamongthesmallinnercircles.

Eitherway,thesebattlesneedtobefoughtatthetop.

6.

CoordinationDoyouknowwhattheinnovationunitsneedfromthecorebusinesstobesuccessful?Ifnot,you

may

be

losing

the

integrative

value

of

attending

to

these

contrasting

agendas.

EmbraceInconsistency

7.

ManagementSystemIsyourinnovativebusinessesmeasuredandrewardedagainstthesamemetricsas

establishedones?Ifso,youareprobablysettingyourselfupforfailureintheinnovativebusiness.

8. DecisionMakingAreyouconsistentlyshiftingresources(financialinvestments,HRtalent)betweentheexisting

productandinnovation?Ifnot,youmaybelimitingthevalueofyourresourcesbykeepingthemstableandlocked

intoone

investment.

HBS Embracing Paradox

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