Managing Technilogical Change: A Box of Cigars for Brad
Case study: will attach
-company, people, marketplace
Managing Technological Change: A Box of Cigars for Brad
Frederick W. Gluck
• Richard N. Foster
From the September 1975 Issue
Brad Youngman, brash young vice president for corporate development at Diversified Manufacturing Corporation, handed his boss, Miles Atkinson, a lengthy memo just as the CEO was about to board a jet for a welcome vacation in Jamaica. The memo from the troubleshooter essentially asked, “Who the hell is running this business?” Youngman’s analysis of what constitutes the strategic direction of a technology-based company leads to a reexamination by Atkinson and his top management group of their roles in the operation of the company. The lesson that Atkinson learns is a valuable one for any high executive.
I don’t think I’ve ever been so glad to get on an airplane in my life, thought Miles. Another 15 minutes with Brad and I probably would have fired him.
Miles Atkinson settled into his seat on the 747 flight to Jamaica. He was on his way to join his wife, Moira, at their villa in Montego Bay for their first real vacation since he had become president and chief executive of Diversified Manufacturing Corporation five years before. It had been a tremendous but demanding five years for the manufacturer of construction, medical, and (now) oil-drilling equipment: sales up 120%, profits up 80%, some successes, and some failures. Moira had really been after him lately. She said he had begun to stew about his problems and needed a rest.
She’s probably right, he thought. Look at how frustrated I am with Brad. But goddamn it, I know he’s a good man.
The immediate cause of his frustration was the lunch he’d just had with Bradford Youngman, his vice president for corporate development. Brad was a real tiger. DMC had picked him up three years before when it acquired Dynamic Controls, a small, high-technology company that Brad and two partners had built from scratch. Six months ago Miles had persuaded Brad to leave the subsidiary, which was clearly too small to test him rigorously, and give him a hand with strategy at corporate headquarters.
Miles admitted to himself that he didn’t have quite the same handle on the business that he’d had five years before when he’d stepped up from executive VP of manufacturing to the presidency. So he wanted Brad to develop a corporate planning system that would pull things together and help him set a clear strategic direction for Diversified. It had been quite a struggle persuading Brad that the move made sense for him.
Now, ironically, the question was whether it had made sense for the company—Brad was turning out to be bad news. Instead of working on a planning system, he was minding everybody else’s business. In particular, he was constantly second-guessing the technical people on technical decisions. Cutler Sims, VP for finance, and Jim Pasinaro, VP for R&D, were livid over Brad’s nit-picking at one of the most sophisticated R&D project evaluation systems in the industry. And two hours ago at lunch Brad had implied none too subtly that top management—that is, Miles himself—wasn’t providing the leadership that DMC needed. To top it off, Brad had dropped another of his memos on Miles and insisted that he take it along on his vacation.
Could the guy possibly have his eye on my job? thought Miles. If he does, he’s sure telegraphing his punches. Well, the hell with him and his memo. I’ll look at it later.
Two weeks later, on the flight back to New York, Miles reflected that Moira had been right again. I really needed that vacation; I was getting paranoid. Imagine seeing a threat in Brad’s criticism. Why, the guy was only—oh, Lord, that memo of his. I’d better look at it or he’ll be all over me.
Shaking Up the CEO
To: Miles Atkinson, President, Diversified Manufacturing Corporation
Bradford Youngman, Vice President, Corporate Development
It’s been six months since you sweet-talked me into this boondoggle at headquarters, and I’ll bet you’re sitting there at 35,000 feet wondering whether it was the right thing to do. I know I’ve been a royal pain you know where, and some people think I’ve been sticking my nose in places where it doesn’t belong. Well, if these six months have been difficult for you, they haven’t been exactly comfortable for me. But I think all the snooping I’ve done may turn out to be worthwhile.
To get at the substance of our problems, as you asked me to do, I had to dig into the business. Since we’re a technology-based company, that meant digging into the technology, and specifically into our key product and process design decisions. If I learned one thing at Dynamic, it’s that a superior product line and superior cost structure are one hell of a leg up in the marketplace. And in technology-based businesses like Dynamic and Diversified, the only way to get those advantages in the long run is by effectively managing technological advances in the product lines—a very different thing from calculating possible returns from R&D. In fact, the more I dug and the more I thought about it, the more I realized that the way we manage technological development is the heart of our whole strategic planning. You could call it the “strategic control of technology.”
Nice phrase, thought Miles. So what else is new?
Once I’d gotten that far, things really began to fall into place. It was obvious that the leverage to influence the outcome of a product design is way up front—not months before you go into production, but even before you start the design. We’re damned effective at manufacturing cost reduction, but if we’re cost-reducing a design that’s inherently more expensive than a competitor’s, we’re playing catch-up ball. And I don’t have to tell you that if the design misses the market or challenges the regulations, we’re really in the soup.
Touché. We spent a small fortune on dust-proofing those ore conveyors after we put them on the market.
By the way, Miles, do you recall the last time you had a hand in deciding the performance characteristics of a new design, or really understood why we needed it? I went through your appointment books for last year—the ones you asked me to look at to become familiar with your modus operandi. Take a look at the first chart that I prepared [see Exhibit I]. You spend, at most, 5% of your time on the substance of the major product and process decisions that not only establish our technological strategy but also largely define our business strategy. Fire fighting and other operating problems take up 60% of your time, and you devote 35% to legal, financial, personnel, and other matters.
Exhibit I Miles Atkinson’s Activity Profile
In the second chart that I made [Exhibit II], I’ve applied your time profile to a diagram showing how our flexibility to set the strategic direction of DMC decreases as an idea moves through concept and design and into the marketplace. It looks like you’re apportioning your time in roughly inverse relation to the strategic importance of each phase. This suggests a rather basic question: Who the hell is running the business?
Exhibit II Miles’s Time Allocation, Showing his Ability to Influence Strategy
Brad, old buddy, thought Miles grimly, if you don’t know, rest easy. You’ll find out.
As I mentioned before, we’re intervening in the wrong spots. At the top level of the company we’re primarily exercising operational, not strategic, control because we’ve become so far removed from the substance of technological decisions. Sure, that’s the nuts and bolts, in a sense; but in a company like ours the nuts and bolts are strategy. The technological options are so diverse and the market needs are so much in flux that the strategic performance parameters of every product and line—the features that make us or break us—are constantly shifting. And I don’t believe that you or anyone else at the decision-making level is systematically analyzing these shifts and modifying our technical strategies to reflect them. Most of the time we’re content to rubber-stamp the technical guys’ decisions quite a while after design gets under way and when the strategic direction has long since been cast in concrete.
Rubber-stamp, hell. I go over those things with a fine-toothed comb. Sure, maybe the R&D reviews could be advanced a bit, but it wouldn’t change the outcome much. Our evaluation system weeds out the losers long before they reach me. Or is that what he’s driving at?
Five years ago, when you were made CEO, I’ll bet you could have told me the important design parameters of every one of our major products and exactly why they were the way they were. But can you tell me now why we still have electromechanical controls on our heavy earthmovers? That’s not an idle question, Miles. Five years ago our controls for this equipment were the best and most reliable on the market, and everyone knew it. That gave us a clean competitive edge. On top of that, over the years we’d cost-reduced them to the point where we could price them very competitively and still throw off loads of cash. But over the past five years, as you know, our edge has been eroding as our competitors put solid-state devices into their controls.
And next fall, of course, Focused Industries is introducing integrated circuits on all its heavy equipment control systems. Meanwhile, our study team is still trying to decide which supplier to work with. Pasinaro says our electromechanical systems have done the trick for seven years and the new ones still have some bugs in them. I’ve looked into it and I’m not persuaded. Meanwhile, Sid Rogers and half of his sales guys are saying that the market for electromechanical controls will dry up so fast it won’t be funny once FI’s new line comes out. Personally, I don’t think Sid is just preparing an alibi; I think there’s a very good chance he’s right. Remember what happened to Mechanical Cash Register?
I remember, all right. They stuck to their last and kept producing better and better mechanical machines while their competitors went electronic—and mopped up the floor with MCR. But hell, calculators aren’t earthmovers.
For somebody in your position, there’s a natural but extremely dangerous temptation to focus on financial and mathematical abstractions instead of coming to grips with the realities of our business economics and competitive product-line position. The literature is full of sophisticated analytical and mathematical procedures for R&D management: DCF analysis, project-ranking procedures, experience curves, nonlinear programming for project selection under uncertainty, multidimensional scaling techniques for determining desirable product characteristics, industrial dynamics simulations of entire companies, and so on, ad infinitum.
We’ve invested a good deal of money in systems and procedures based on these techniques, which gives us a comfortable feeling that we’ve reduced our problems to hard, reliable figures. So we don’t worry nearly as much as we should about all those subtle, elusive, qualitative factors that the figures don’t reflect. We forget that our job as top managers is to manage product lines, not financial abstractions. Sure, we need to reduce a lot of data to sophisticated digests, but to do the job we’re paid for we also need plenty of unabstracted information, with all the fuzziness of reality in it.
There’s no substitute for fact-founded judgment on technological issues. And while these techniques and the financial analyses are useful and have their place, they simply don’t tell the whole story. That’s the nature of the beast.
Agreed, Brad, agreed—you can’t have too much information. But where am I supposed to get the time to dig down to that level of detail? Who’s going to mind the store?
I think we’ve lost strategic control of the company because we’ve let a group of guys about three levels below Pasinaro make our basic technical and business decisions. And they don’t have the perspective needed to handle them. We hardly ever tell them what to do; they tell us what they’re doing. At the most, we judge whether what they’ve got in the works will fly in the marketplace. We’ve become overdependent on management by exception, but I doubt we’re even very effective at that. When was the last time, Miles, that you shut off a project as a result of an R&D review?
Maybe four years ago. Well, not shut off exactly; I didn’t approve the A-300 until they’d redesigned it to a higher level of maintainability.
Look at the way we’ve been depending on the R&D people and the marketing people to set priorities for our technology. Most of the time we haven’t even defined the missions to be accomplished, except in financial terms. Sometimes, when it comes to reviewing our alternatives, we pass the buck to a committee or task force. Nine times out of ten they follow some variation of the Chinese menu approach. You get three options—Option A boils down to doing nothing, Option B is radical and terrifyingly risky, and Option C is a nice, safe, well-balanced compromise with something for everybody, backed up with lots of reassuring analysis. And you get to sprinkle holy water.
Meanwhile, up in the corporate stratosphere, we’ve allowed ourselves to become insulated from the technological realities—when to shift from electromechanical to solid-state, say, or from discrete components to integrated circuits. And we’ve even become insulated from some of the market realities—when to try to segment a market by creating unique performance specs, as you did with the Model A-300. We even fumble over developing control systems that will meet new EPA and OSHA regulations. We let the lawyers and the R&D staff worry about the problem.
In general, we’re allowing big technological decisions to be made by some very bright people who are at such a low level in the organization that they can’t see the trees for the undergrowth, let alone the forest for the trees. Subtle but critical trade-offs involving manufacturing cost, product features, reliability, and date of introduction are made almost daily at the design level. We could be missing a major market opportunity or crippling our economics just because a single designer or his boss would rather walk over his grandmother than exceed his budget.
That may have been MCR’s problem—maybe it could be traced to the company’s brittle financial control, everyone frightened of spending a dollar, no one rocking the boat. How many millions has MCR written off now?
Well, Miles, this memo has gone on longer than I intended, and I’m going to cut it off. Before doing so, however, I want to say two more things.
First, I don’t believe our situation is all that bleak yet. I’ve talked to people in a lot of other companies about these problems, and most of them, outside of the really top performers, seem to be muddling along pretty much the way we are. And we have made quite a few good decisions. But we owe half of them to luck or dumb decisions by our competitors, which I guess is much the same thing. We can thank our stars that the quality of our people has partly compensated for our failure to manage technological change. On the other hand, we’ve always been the industry leader, and we don’t want to let that slip away from us.
Second, I want to ask you to take the attached list of questions to the annual R&D budget review meeting the Tuesday after you get back from Montego Bay. If you see fit, ask a few of the questions then. I’m going to be uncharacteristically quiet.
Well, Miles, I hope I haven’t given you indigestion. See you on Tuesday.
Thoroughly aroused by Brad’s comments, Miles pored over the list. He added a couple of questions to it, rearranged the order of the questions, and wrote out a final list, as follows:
Finance (Cutler Sims)
1. How many R&D projects have been proposed to top management in the past five years? How many has it turned down or substantially modified?
2. Of the projects we have approved, what was the distribution of projected rates of return?
R&D and Sales (Jim Pasinaro, Sid Rogers)
3. How do our present electromechanical control systems stack up against Focused Industries’ line in terms of technology, reliability, maintenance, and cost structure?
4. How will Focused’s new integrated-circuit line affect us? What do we plan to do in response?
5. What do our customers regard as the three most important performance parameters of our control systems in earthmoving equipment? In medical equipment? In oil-drilling equipment?
6. How do we stack up against Focused in each of these markets in terms of these parameters?
7. Are there any anticipated changes in external developments—e.g., legislative or regulatory action or shifts in raw material availability—that could change the strategic performance parameters of our products in these markets?
8. How do our R&D programs reflect these considerations? How much technological risk are we taking in introducing the new drilling-equipment line? How much marketing risk?
Back at his desk at 9 a.m. Monday, Miles dictated three brief memoranda, one to each of the three VPs, listing the relevant questions and requesting each man to bring the answers with him to the review the next day. Then he shut himself up for the rest of the day and dealt with two weeks’ accumulation of paper.
Confrontation on Tuesday
Reviews of the budget, of the ratios of R&D expense to sales, and of the other customary financial gauges of the R&D effort took up the first part of the meeting. Pasinaro had just finished with the chart summarizing new-project ROIs and was about to start the project-by-project ROI reviews when Miles asked the finance VP his first question: “Cutler, your finance guys track our project selection system pretty closely. What percent of the projects that are proposed to us have been turned down since we started this process?”
“Well, Miles,” said Cutler, “I’d never really looked at that before, but I followed it up for you. It looks as if we’d never actually turned a project down. Once they get to us, it’s pretty automatic because the losers have already been screened out. I’d say that’s as it should be.”
Score one for Brad, thought Miles. He said that’s what they’d say. “I see,” he said. “And what about the distribution of projected rates of return?”
“I have that one too,” said Cutler. “Of course, given that we’ve never turned a project down, no projection has fallen below the 20% hurdle rate. But I was a little surprised to find that 95% of the projections over the past three years, since we got the system on line, have come in between 20% and 25%. It’s possible that some of the boys down the line have been plugging numbers. You know how hard it is to project sales from new products.”
“Yes, I know.” “Possible,” my foot; it’s a dead certainty, and he knows it. “Jim,” said Miles, turning to Pasinaro, “I know we have high hopes for those new drilling-equipment controls. If that line succeeds, it will have a major impact on next year’s earnings. How much technical risk are we taking in that project?”
“Miles, I’m happy to report that there’s nothing to worry about there. The system is a classic design, and there isn’t a component in it that hasn’t been proved out over time in our electromechanical devices. The whole project is solid as a rock, technically. Being conservative,” Pasinaro concluded, “I’ll say it’s 99% risk free.”
That’s great, Miles thought wryly. You’ll guarantee the product will work if anyone happens to buy it. “Jim,” he continued, “what features of our control systems are most important to potential customers in this market, and how will the program help our market position relative to, say, Focused Industries?”
“I’m not sure I follow you, Miles. We’ve never looked at it in quite that way. Our customers want four main things—low cost, high performance, low maintenance, and high reliability. We’re tops in every single one of these counts, and we aim to stay that way.”
“Staying tops in market share is what I had in mind,” Miles said dryly. “Thanks anyway, Jim. Sid, how would you estimate the marketing risk in this introduction?”
“Well, you know how hard it is to estimate sales of new products,” Rogers said. “I hate to commit myself, but we’ve got a solid cadre of loyal customers in that market segment, and we’re going to hold them and add to them with this new line. Cutler, you’ve got the charts. What are we projecting that market as?”
Miles interrupted him. “No, Sid, I know we’ve got the projections. I want to know about the risk. What’s the chance that the projections won’t materialize?”
“I hope I don’t seem to be ducking the question, Miles, but we haven’t really looked at it that way. How the hell could we calculate that risk? To be honest, a number of my salesmen are getting kind of nervous about Focused Industries’ all solid-state approach. You know salesmen—always crying wolf. Anyway, our headquarters guys have ironed this all out with Jim’s people.”
“They sure have, Sid.” Pasinaro chimed in. “Your guys have extrapolated the market based on some very sophisticated smoothing techniques, and my guys have nailed down the cost and reliability to a gnat’s eyeball. I don’t see how we can miss.”
This is unreal, thought Miles. But before he could speak, Seymour Crawford, the general counsel, interrupted. Miles was rather surprised; Seymour had never been known to say a word at an R&D budget meeting. Usually he had to be coaxed into attending.
“Jim, Sidney,” Crawford said, “pardon me for butting in. I just wanted to make sure you’re aware of the possibility of some new OSHA legislation prohibiting the use of electromechanical relay contacts on drilling equipment. It’s not a certainty this year by any means, but I think the handwriting’s on the wall. My assistant, Hal Masterson, took it up with one of your engineers a few weeks ago and got roughly nowhere. Your guy’s position, as I heard it, was that our electromechanical devices had the best safety record in the business and that anyway we had no alternative, since we don’t make semiconductors. Hal thought that was rather beside the point, but your guy’s back was up so he didn’t pursue it at the time. I thought you ought to know the story. Mind you, I’m not pushing the panic button.”
Horace Bender, the manufacturing VP, spoke up for the first time: “Let’s not forget all that electromechanical capacity we just put in, Jim.”
“That’s right,” said Pasinaro. “We’re already committed, and, anyway, I think Osha’s a paper tiger.”
“I don’t know, Jim,” Crawford said. “They’ve been taking some tough stands lately, and the courts have been backing them up. Still, we’re probably OK for a while.”
They could swat us like a gnat, eyeballs and all, Miles thought.
“Come to think of it,” said Rogers, “one of my guys was going on about Osha last week too. Maybe we should check our contacts in Washington.”
They’ll have to treat me for depression when this is over. Glancing around the table, Miles saw Cutler, so cool and confident a moment ago, now looking decidedly ill at ease; Sid was pensive; and Seymour was rather above it all. Only Jim and Horace seemed relaxed. Brad was quietly watchful.
As Miles was about to put his next question, Jim Pasinaro took the floor again. “Miles, we’re falling way behind schedule with this speculation. I know our guys have studied all these things, and they’re satisfied. Now, if you want to finish reviewing the numbers, we’d better get back on track.”
“OK, Jim. But before we go on, I’d like to ask you to elaborate a bit on my point about performance parameters. What do you think are the most important features to our customers in the drilling segment, and how will the project under consideration help our competitive position in those areas?”
“Miles, as I said before: cost, reliability, maintainability, performance. That’s what all our customers want. Now, if you want details on what our competitors’ equipment is like, we’ve got the complete literature and specs on every one of them in our files. One of our guys can dig them out and answer any questions you might have by the end of the week. But it seems to me that here and now we ought to be concerned with approving our own projects instead of sitting around speculating about a competitor’s product line.
“As far as the solid-state issue is concerned, you’ll recall that we had a task force look at it two years ago. They concluded that solid-state controls wouldn’t take over the market for six to ten years, so we could afford to relax. Or, if we wanted to push it, we could retread half of our engineering staff, hire a bunch of high-priced, solid-state hotshots, and scoop the industry. Nobody was very keen on that one, you remember. What did make sense was to go ahead with our proven electromechanical technology, watch the trends in semiconductors, and review the bidding in two years’ time. That’s next spring, I reckon.”
Now Sims spoke up. “It seems to me, Jim, that we may have let our decision making in these areas get a little too routine. Your down-the-line engineers seem to be making an awful lot of key decisions.”
“I don’t see anything wrong with that,” Pasinaro retorted. “That’s exactly what—” whereupon Sid interrupted angrily, and others joined in the hubbub. But in a few minutes Miles had restored order, and the group completed the agenda as planned.
Then Miles took the floor. “Gentlemen,” he said, “it’s now past one o’clock. Although personally I seem to have lost my appetite, I suggest we move over to the dining room for lunch. There’s no sense in coming back here afterwards, however. It seems clear to me, based on this morning’s rather depressing performance, that we’re superbly prepared to discuss things of little importance and totally at sea when it comes to assessing the strategic significance of our R&D programs. Obviously, we’ve all got some hard thinking to do about our approach to managing technological change.
“Since we’ve never turned down an R&D project before, let’s consider this year’s R&D budget approved as proposed for the moment and spend the afternoon reflecting on why we seem to be so distant from the realities of our businesses. You’ll all be getting a memo on the subject from me early next week.”
Shape of a Solution
To: R&D Planning Committee
From: Miles Atkinson, President
I’ve had a few days to reflect on our meeting last Tuesday and discuss its implications with each of you, so now I want to share my thoughts with you. We agree that we have a serious problem with our approach to managing technological change. We can deal with that problem if we avoid defensiveness, figure out precisely what needs to be done, and do it.
Fortunately, our company is still the leader in its industry, our financial position is sound, and our basic functional skills and technical capabilities are adequate—apart from a few weak spots. So we have the time to analyze and deliberate; but we must also be decisive.
Let me give you some insight into the nature and extent of the problem. Brad, Jim, and Sid have collaborated on a quick-and-dirty analysis that puts it into perspective. In 1970, our competitive position looked roughly like this:
These are the percentages for particular product items in our line, weighted by sales. Today we estimate our competitive position to be as follows:
When Focused introduces its new line, it could go to this extreme:
Brad, Sid, and Jim feel that this analysis needs further refining, but that the trend is disturbingly clear. We are steadily losing our competitive position. We haven’t felt it too badly yet because we are so well established in our markets, with an extremely loyal customer base. Nevertheless, the trend helps to explain why our sales have gone up half again as fast as our profits over the past five years. And it strongly suggests to me that we’ve lost our ability to manage technological change effectively.
By now all of you have read and discussed with me Brad’s original memo on the subject. We agree that it’s an incisive analysis of this insidious loss of strategic control. We’ve been working so hard to capitalize on our traditional strengths that we’ve forgotten to look at the strategic performance parameters of our product lines and markets. We’ve become the captives of tradition and the slaves of procedures. In particular, I have noted the following.
Item: Instead of monitoring the constant changes in technology and in our markets, and modifying our strategy to maintain our leadership, we have followed the incremental approach that has worked so well in the past—giving our customers more and better of our established products.
Item: We have never tried to balance technological risks and marketing risks. As a result, it appears that our overconservative approach to technological risk is exposing us to a dangerous level of marketing risk.
In short, we simply haven’t learned to adapt to change. Let me assure you, I take the largest share of responsibility for the state of affairs that I’ve just described. But let me also assure you that all of us will have to change our ways radically, starting now. Here are the two main changes we will make:
1. A New Kind of Review
As top managers, we will participate much earlier in the R&D project selection process; when we do, we will be prepared to make substantive contributions. To this end we will institute monthly, full-day competitive product position reviews, starting one month from today. At these sessions, Sid’s marketing people will take the lead in providing an in-depth analysis of one of our major product lines and/or market segments. These analyses will be circulated to each of us in hard copy a week before the meeting so that we can prepare to deal with the questions they raise. Their contents will consider, at a minimum:
• The strategic performance parameters of our products in each product/market segment, how they have shifted over the past five years, and how we can expect them to shift in the next five.
• Our position in each parameter compared with that of our principal competitors.
• The improvements that our customers would value most in each such parameter.
• The changes in each parameter that could lead to either further market segmentation or reaggregation of the market at a level giving us a competitive advantage.
• Potential moves of competitors that might undermine our company’s advantages in each parameter.
• Potential changes in the environment (government action, activity of consumer groups, availability of raw materials) that could weaken our position in, or require changes in, each parameter.
• Any other internal or external factor that might make such an impact.
At these sessions we will also evaluate every effort under way to improve each strategic performance parameter, and we will assess these efforts against those of competitors and potential competitors. Jim will report to us on the status of each project and, if possible, of competitive efforts. Supporting the description of each parameter will be a qualitative and, where possible, quantitative estimate of its susceptibility to further modifications through technology. In addition, we will try to pinpoint opportunities for further segmentation or for aggregation of the markets where this strategic factor is relevant.
Note that these reviews will necessarily include some financial analyses. But their focus will be to provide the judgmental raw material required by our top management group to deal effectively with strategic technological issues.
When we start these reviews, we will naturally have some growing pains. Our first sessions may be uneven. But they should rapidly improve, particularly if we discipline ourselves to record the strategic issues that emerge in these sessions and follow them up to see that they are resolved. I’ve asked Brad to take responsibility for that follow-up.
These monthly sessions will continue until we have reviewed our entire product line and have identified and understood all the major strategic issues in each of our businesses. At that time we will reassess this new approach and modify it as necessary. Our goal is to develop an exact understanding of what we are doing in R&D, and why.
2. A New Boldness in Intervention
We will adopt a much more disciplined approach to monitoring the progress of R&D projects. Brad and Jim are still researching the details, but we have already come to a decision on some major requirements.
Henceforth, our new-product introduction process will be divided into discrete phases, as shown in the attached chart [see Exhibit III]. Of course, we do this now to a certain extent, but God knows we lack discipline. From now on, before any major project can move from one phase to the next, our top-management group will sign it off. At each sign-off point, we will agree on whether to continue the project and, if we decide to continue it, whether and how the project plan should be modified in the light of new conditions.
Exhibit III Top Management’s Monitoring of Project
I fully expect that this procedure will result in some cancelled projects and substantial redirections of projects as they develop, as we gain better information on technological possibilities and difficulties and, increasingly, as we attune ourselves to developments and changes in the marketplace. This, of course, will differ sharply from our past practice of leaving product development in the hands of R&D once a project had been initially approved and subjecting it to only the most cursory review at our annual budget meetings.
Further, before each sign-off, we will review the competitive position of the product to make sure that the technological and marketing risks remain in balance. We will be less concerned with minimizing schedule delays and cost overruns than with capturing every significant opportunity to strengthen our competitive position through improvements in product performance.
In contrast to our future role, let me note a fact that Cutler has unearthed: with one minor exception, every development project we have undertaken over at least the past five years has been completed with essentially no revision to the original performance specifications, even though substantial shifts in market, competitive, and governmental conditions have taken place. This must never be allowed to happen again. It won’t happen if we apply the informed judgment in these matters for which our stockholders are paying us.
Beyond these immediate steps, I am contemplating further moves to streamline our decision making and pinpoint responsibilities for individual businesses and product lines. Since these moves are not yet formed in my mind, I would appreciate suggestions about them from each of you. In the meantime, I know you will cooperate in the fullest with me and also with Brad, as we move to seize strategic control of our technology.
Decisions at the Top
Miles breathed a sigh of relief as he shut off his dictating machine. I deserve one of those Macanudos I brought back from Jamaica, he thought. Sara’s gone for the day, and she’ll never notice that I’ve been smoking if I remember to clean out the ashtray. I think we’re on the way to solving this problem.
He was feeling pleased with himself. But as the first puffs of his cigar created a gray halo of smoke over his head, he reflected that he was still troubled about the tone of the corporation and the attitudes that underlay the problems he was now moving to solve. If the tone and attitudes were wrong, it was up to him as CEO to change them. He was not yet sure how, but he was beginning to get a handle on the problem.
He had begun with a simple question: What types of technological decisions should his top management team make? The more he thought about it, the more convinced he became that three decisions were key to managing technological change. And as long as DMC was organized as a single profit center, ensuring the soundness of those decisions was his responsibility.
The first was the decision on what to do—that is, what problems or opportunities to deploy technological resources against. Most of the raw material for this decision would have to come from his top functional people during the review sessions. But he would have to immerse himself sufficiently in the issues to be able to ask the right questions and test the assumptions underlying the answers he got. And ultimately he would have to provide direction with respect to the product parameters that would have to be changed to gain a competitive edge.
The second decision concerned how to do it and, particularly, how much risk to take in each instance. This was a tricky decision, balancing (at the least) technological and marketing risks. It was also a critical decision because it determined timing. As he and Brad had agreed the other day, the widespread availability of technology and the proliferation of multiple approaches to meet market needs had put a premium on the appropriate timing. And it was becoming increasingly difficult to sit on a technological lead.
The final decision concerned when to stop and when to redirect projects. The work and preparation necessary to make the first two decisions properly would, of course, really help them all to review each project’s progress from the standpoint of its continued strategic significance. Nevertheless, decisions to cut off projects were notoriously tough to make—and making them stick sometimes even tougher. He knew how difficult it was to factor in the opportunity costs of continuing to commit scarce technological resources to projects that had lost their relevance or chance for success. Too often, he knew, investments in ego turned out to be the controlling factor in letting projects continue.
The steps he had already taken were, of course, aimed at forcing these decisions on top management, but he knew he was asking a great deal of some of his executives and he was unsure whether all of them were able to change. There would be a powerful tendency, reinforced by the sheer magnitude of the task, to slip back into the habit of pushing numbers instead of coming to grips with technological and competitive realities.
Has Diversified become too diversified to manage as a single profit center? he wondered. If so, I’ll have to bring more top management focus on particular products or markets. Or maybe the company should slow down its diversification until the executives learn how to manage it better. That was one reason Miles had alluded in his memo to some possible further moves.
But Miles was most concerned about the company’s attitude toward change, as reflected by its top management. If the signals coming from the top pointed so clearly to an ultraconservative technological strategy, what else could I expect from the down-the-line people? There are bound to be a few innovative souls out there, not all of them in Jim Pasinaro’s department. But the evidence of the past two weeks had shaken him.
I suppose that to an independent observer DMC has been as much a hotbed of innovation as the Catholic Church or the railroads. Well, that’s my problem. Even if it means knocking some heads together, I’ve got to create a positive attitude toward change. And I will.
He had finished his cigar. He made a note to himself to send a box of Macanudos to Brad first thing in the morning.
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