midterm strat and change.docx

Tushman, M. L., & Anderson, P. (1986). Technological discontinuities and organizational environments Administrative science quarterly, 439 - 465. Technology evolves through periods of incremental change punctuated by technological breakthroughs that either enhance or destroy the competence of fi...

Tushman, M. L., & Anderson, P. (1986). Technological discontinuities and organizational environments Administrative science quarterly, 439 - 465. Technology evolves through periods of incremental change punctuated by technological breakthroughs that either enhance or destroy the competence of firms in an industry. Competence-destroying discontinuities are initiated by new firms and are associated with increased environmental turbulence, while competenceenhancing discontinuities are initiated by existing firms and are associated with decreased environmental turbulence. These effects decrease over successive discontinuities. Technology= those tools, devices, and knowledge that mediate between inputs and outputs (process technology) and/or that create new products or services (product technology). Technology seems to evolve in response to the interplay of history, individuals, and market demand. Major product / process technological breakthroughs are relatively rare and tend to be driven by individual genius. As a new product class opens (or following substitution of one product or process for a previous one), the rate of product variation is substantial as alternative product forms compete for dominance. A dominant design reflects the emergence of product-class standards and ends the period of technological ferment. Once a dominant design emerges, technological progress is driven by numerous incremental, improvement innovations. Incremental technological progress occurs through the interaction of many organizations stimulated by the prospect of economic returns. Discontinuities offer sharp price-performance improvements over existing technologies. Major technological innovations represent technical advance so significant that no increase in scale, efficiency, or design can make older technologies competitive with the new technology. Product discontinuities are reflected in the emergence of new product classes, in product substitution, or in fundamental product improvements. Process discontinuities are reflected either in process substitution or in process innovations that result in radical improvements in industry-specific dimensions of merit. Competence-destroying: requires new skills, abilities, and knowledge in both the development and production of the product. Product discontinuity either creates a new product class or substitutes for an existing product. Process discontinuities represent a new way of making a given product (substitution); may involve combining previously discrete steps into a more continuous flow or a completely different process. Such major changes in skills, distinctive competence, and production processes are associated with major changes in the distribution of power and control within firms and industries. Existing firms are bound by traditions, sunk costs, and internal political constraints -> remain committed to outmoded technology. Competence-enhancing: order-of-magnitude improvements in price/performance that build on existing know-how within a product class. Product discontinuities represent an order-of-magnitude improvement over prior products. Process discontinuities result in an order-of-magnitude increase in the efficiency of producing a given product. 2 critical characteristics of organizational environments: Uncertainty= the extent to which future states of the environment can be anticipated or accurately predicted. Munificence= the extent to which an environment can support growth. Technological discontinuities drive sharp decreases in price-performance or input-output ratios. This fuels demand in a product class. Environmental munificence (and demand) will be higher after a technological discontinuity. Important dimensions of competitive conditions include entry-exit patterns and degree of order within a product class (can be assessed by interfirm sales variability). Competence-enhancing discontinuities consolidate leadership in a product class -> increased barriers to entry and minimum scale requirement -> fewer entries relative to exits and a decrease in interfirm sales variability. Competence-destroying discontinuities break the existing order. Barriers to entry are lowered; new firms enter previously impenetrable markets by exploiting the new technology -> increased entry-to-exit ratios and an increase in interfirm sales variability. Anderson, P., & Tushman, M. L. (1990).Technological discontinuities and dominant designs: A cyclical model of technological change. Administrative science quarterly, 604-633. A technological discontinuity initiates an era of intense technical variation and selection, culminating in a single dominant design. This era of ferment is followed by a period of incremental technical progress. Sales always peak after a dominant design emerges. Discontinuities never become dominant designs, and dominant designs lack behind the industry’s technical frontier (= will not be the best in technical terms, because these are perceived as too unreliable or expensive). Technological change can be characterized as a sociocultural evolutionary process of variation, selection and retention. Social, political and organizational dynamics select dominant designs. Incremental change leads to increased interdependence and enhanced competence. The era of ferment is characterized by 2 distinct selection processes: competition between technical regimes and competition within the new technical regime. Existing practitioners often increase the innovativeness and efficiency of the existing technological order in response to new technologies. During the era of ferment, variation and selection pressures are substantial due to both substitution and design competition. The era of ferment will be longer after a competence-destroying discontinuity than after a competence-enhancing discontinuity. It grows shorter in each of a series of consecutive competenceenhancing discontinuities. In regimes of low appropriability (= little intellectual property protection, e.g. patents), a single dominant design will emerge. The focus of competition will shift from performance to cost and differentiation via minor design variations and strategic positioning tactics. The majority of potential adopters will await the emergence of an industry standard before purchasing a new product / process technology. Sales of all versions of the new technology will peak after the emergence of a dominant design. Variation is generated by technological discontinuities and eras of ferment. If an accelerated rate of variation speeds the pace of innovation, less technical advance will occur during periods of incremental change than during eras of ferment. Week 2 Birkinshaw, J., & Gibson, C. (2004). Building ambidexterity into an organization. MIT Sloan management review, 45(4), 47-55. Ambidexterity=a company’s ability to simultaneously execute today’s strategy while developing tomorrow’s. Adaptability=the ability to move quickly toward new opportunities, to adjust to volatile markets and to avoid complacency. Alignment=a clear sense of how value is being created in the short term and how activities should be coordinated and streamlined to deliver that value. Too much focus on alignment will lead to good short-term results, but changes in the industry will blindside you sooner or later. Too much attention to the adaptability side means building tomorrow’s business at the expense of today’s. Ambidexterity is highly correlated to performance. A supportive organizational context – characterized by a combination of performance management and social support – is associated with a higher level of ambidexterity. Ambidexterity mediates the relationship between organizational context and performance: the influence of organizational context on performance only occur through the creation of ambidexterity. Structural and contextual ambidexterity are complementary, should use a combination of both approaches. Structural ambidexterity=creating separate structures for different types of activities. Standard approach: structural separation is necessary because the two sets of activities are so dramatically different that they cannot effectively coexist. However, separation can lead to isolation -> R&D groups fail to get their ideas accepted because of their lack of linkages with the core businesses. Alternatives are to create crossfunctional teams or to separate different activities within a single business unit. Remains top-down: relies on managers to judge how to best divide employees’ time between activities. Contextual ambidexterity=individual employees make choices between alignment-oriented and adaption- oriented activities in the context of their day-to-day work. The systems and structures in ambidextrous business units are more flexible, great level of attention must be paid to the human side of the organization. There are 4 ambidextrous behaviors in individuals: Take initiative and be alert to opportunities beyond the confines of your own job. Be motivated and informed enough to act without seeking permission. Be cooperative and seek out opportunities to combine your efforts with others. Be a broker, always looking to build internal linkages. Be a multitasker who is comfortable wearing more than 1 hat. An individual’s ability to exhibit ambidexterity is facilitated/constrained by the organizational context in which (s)he operates. At the organizational level, contextual ambidexterity can be defined as the collective orientation of the employees toward the simultaneous pursuit of alignment and adoptability. 4 attributes define organization context: stretch , discipline, Context=the often invisible set of stimuli and pressures that motivate people to act in a certain way. Top managers shape organizational context through the systems, incentives and controls they put in place, and through the actions they take on a day-to-day basis. It is then reinforced through the behaviors and attitudes of people throughout the organization. support and trust. Create 2 dimensions of organizational context: 1) performance management, a combination of stretch and discipline, stimulating people to create high-quality results and making them accountable for their actions; 2) social support, a combination of support and trust, providing people with the security and latitude they need to perform. Are mutually reinforcing, the strong presence of each will create a high-performing organizational context. High performance management + low social support -> burnout context. High social support + low performance management -> country-club context. Lowperformance contexts should prioritize performance management over social support. 5 key lessons for building an ambidextrous organization: Diagnose your organizational context. Focus on a few levers, and employ them consistently. (best if they affect many employees) Build understanding at all levels of the company. The erosion effect: the lower someone is in the corporate hierarchy, the lower (s)he rates the organization’s ambidextrous characteristics. The magnitude of this effect diminishes as performance increases. Depends on consistency and quality of communication. View contextual and structural ambidexterity as complements. Structural separation might be essential, but should always be temporary, a means to give a new initiative the space and resources to get started. The goal should be reintegration with the mainstream organization asap. View contextual ambidexterity initiatives as “driving leadership”, not as being “leadership-driven”. Christensen, C. M., & Overdorf, M. (2000). Meeting the challenge of disruptive change. Harvard business review, 78(2), 66-77. Only few established companies innovate successfully because their people are working in organizational structures (such as functional teams) designed to surmount old challenges. Avoid this mistake by asking: Does my organization have the right resources to support this innovation? Does my organization have the right processes to innovate? Dilemma: processes are set up so employees perform tasks in a consistent way, are not meant to change. Most disabilities with coping with change reside in informal/less visible processes. Does my organization have the right values to innovate? = the standards by which employees set priorities. 2 values are most important: overhead costs determine the minimum gross margins, and a high stock price requires bigger projects to enhance growth (which is especially a problem with megamergers). What team and structure would best support our innovation effort? $\begin{matrix} \mathrm{\text{~If\ your\ innovation...~}} & \mathrm{\text{~Select\ this\ type\ of\ team...~}} & \mathrm{\text{~To\ operate...~}} & \mathrm{\text{~Because...~}} \\ \begin{matrix} \mathrm{\text{~Fits\ well\ with\ your~}} \\ \mathrm{\text{~existing\ values\ and~}} \\ \mathrm{\text{~processes~}} \\ \end{matrix} & \begin{matrix} \mathrm{\text{~Functional\ teams\ who~}} \\ \mathrm{\ work\ sequentially\ on\ issues,\ } \\ \mathrm{\ or\ lightweight\ teams - \ } \\ \mathrm{\ ad\ hoc\ cross - functional\ } \\ \mathrm{\ teams\ who\ work\ simulta - \ } \\ \mathrm{\text{~neously\ on\ multiple\ issues~}} \\ \end{matrix} & \begin{matrix} \mathrm{\ Within\ your\ exist - \ } \\ \mathrm{\text{~ing\ organization~}} \\ \end{matrix} & \begin{matrix} \mathrm{\text{~Owing\ to\ the\ good\ fit\ with~}} \\ \mathrm{\ existing\ processes\ and\ val - \ } \\ \mathrm{\ ues,\ no\ new\ capabilities\ or\ } \\ \mathrm{\text{~organizational\ structures~}} \\ \mathrm{\text{~are\ called\ for.~}} \\ \end{matrix} \\ \begin{matrix} \mathrm{\text{~Fits\ well\ with\ existing~}} \\ \mathrm{\text{~values\ but\ poorly\ with~}} \\ \mathrm{\text{~existing\ processes~}} \\ \end{matrix} & \begin{matrix} \mathrm{\text{~Heavyweight\ team~}} \\ \mathrm{\text{~dedicated\ exclusively\ to~}} \\ \mathrm{\ the\ innovation\ project,\ } \\ \mathrm{\ with\ complete\ responsibil - \ } \\ \mathrm{\text{~ity\ for\ its\ success~}} \\ \end{matrix} & \begin{matrix} \mathrm{\ Within\ your\ exist - \ } \\ \mathrm{\text{~ing\ organization~}} \\ \end{matrix} & \begin{matrix} \mathrm{\text{~The\ poor\ fit\ with\ existing~}} \\ \mathrm{\text{~processes\ requires\ new~}} \\ \mathrm{\text{~types\ of\ coordination~}} \\ \mathrm{\text{~among\ groups\ and~}} \\ \mathrm{\text{~individuals.~}} \\ \end{matrix} \\ \begin{matrix} \mathrm{\ Fits\ poorly\ with\ exist - \ } \\ \mathrm{\text{~ing\ values\ but\ well~}} \\ \mathrm{\text{~with\ existing\ processes~}} \\ \end{matrix} & \begin{matrix} \mathrm{\text{~Heavyweight\ team~}} \\ \mathrm{\text{~dedicated\ exclusively\ to~}} \\ \mathrm{\ the\ innovation\ project,\ } \\ \mathrm{\ with\ complete\ responsibil - \ } \\ \mathrm{\text{~ity\ for\ its\ success~}} \\ \end{matrix} & \begin{matrix} \mathrm{\ Within\ your\ exist - \ } \\ \mathrm{\text{~ing\ organization~}} \\ \mathrm{\ for\ development,\ } \\ \mathrm{\text{~followed\ by\ a~}} \\ \mathrm{\ spin - off\ for\ } \\ \mathrm{\text{~commercialization~}} \\ \end{matrix} & \begin{matrix} \mathrm{\ In - house\ development\ } \\ \mathrm{\ capitalizes\ on\ existing\ pro - \ } \\ \mathrm{\ cesses.\ A\ spin - off\ for\ the\ } \\ \mathrm{\text{~commercialization\ phase~}} \\ \mathrm{\ facilitates\ new\ values - \ } \\ \mathrm{\text{~such\ as\ a\ different\ cost~}} \\ \mathrm{\text{~structure\ with\ lower\ profit~}} \\ \mathrm{\text{~margins.~}} \\ \end{matrix} \\ \begin{matrix} \mathrm{\text{~Fits\ poorly\ with\ your~}} \\ \mathrm{\text{~existing\ processes\ and~}} \\ \mathrm{\text{~values~}} \\ \end{matrix} & \begin{matrix} \mathrm{\text{~Heavyweight\ team~}} \\ \mathrm{\text{~dedicated\ exclusively\ to~}} \\ \mathrm{\ the\ innovation\ project,\ } \\ \mathrm{\ with\ complete\ responsibil - \ } \\ \mathrm{\text{~ity\ for\ its\ success~}} \\ \end{matrix} & \begin{matrix} \mathrm{\ In\ a\ separate\ spin - \ } \\ \mathrm{\text{~off\ or\ acquired~}} \\ \mathrm{\text{~organization~}} \\ \end{matrix} & \begin{matrix} \mathrm{\ A\ spin - off\ enables\ the\ } \\ \mathrm{\text{~project\ to\ be\ governed\ by~}} \\ \mathrm{\ different\ values\ and\ en - \ } \\ \mathrm{\text{~sures\ that\ new\ processes~}} \\ \mathrm{\text{~emerge.~}} \\ \end{matrix} \\ \end{matrix}$ Managers can usually see disruptive changes coming and have the resources to confront them, but they lack a habit of thinking about their organization’s capabilities as carefully as they think about people’s individual capabalities. A great manager can identify the right person for the right job and train employees to succeed at the jobs they’re given. If an organization faces a disruptive innovation, the worst possible approach might be to make drastic adjustment to the existing organization, because it can destroy the capabilities that sustain it. Young companies rely more on resources, but over time this will shift toward processes and values. Once employees begin to follow processes and decide priorities by assumption rather than conscious choice, the processes and values will constitue the organization’s culture. -> The factors that define an organizations capabilities and disabilities start in resources, move to visible processes and values, and migrate to culture. Sustaining innovation= responding to evolutionary changes in markets. Innovations that make a product/service perform better in ways that customers in the mainstream market already value. Are usually developed and introduced by established industry leaders. Disruptive innovation= handling or initiating revoltionary changes in the market. Create an etirely new market through the introduction of a new kind of product/service that’s intially worse as judged by the performance metrics mainstream customers value and nearly always promise lower profit margins. They have other attributes that enable new market applications to emerge. When an organization needs new processes and values, because it needs new resources, managers must create a new organizational space where those capabilties can be developed. 3 options: Creating new capabilties internally. Heavyweight teams= teams that are entirely dedicated to a new challenge, Create new organizational structures within corporate boundries in which new processes can be developed. Managers need to pull the relevant people out of the existing organization and draw a new boundary around a new group. Can create new patterns of working together and eventually new processes. team members are physically located together, and each member is charged with assuming personal repsonsibility for the success of the entire project. Creating capabilities through a spinout organization. Mainstream organization’s values render it incapable of allocating resources to an innovation project -> spin it out as a new venture. Only used when a disruptive innovation requires a different cost structure or when the size of the opportunity is insignificant relative to the growth needs of the mainstream organization. New physicial location is not always necessary, as long as the project does not compete for resources with the mainstream organization. Creating capabilities through acquisitions. Know where the capabilities reside in the acquisition and assimilate them accordingly. If the capabilties being purchased are embedded in an acquired company’s processes and values, then the acquisition should not be integrated into the parent organization, but the parent’s resources should be infused into the acquired (stand alone) company’s processes and values. If the capabilities are embedded in resources, the acquired company can be integrated into the parent company. Week 3 Eisenhardt, K. M., & Sull, D. N. (2001). Strategy as simple rules. Harvard business review, 79(1), 106-119. The greatest opportunities for competitive advantage lie in market confusion -> jump into chaotic markets, probe for opportunities, build on succesful forays, and shift flexible among opportunties as circumstances change. Need a few key strategic processes/rules to guide you through the chaos. In the new (fast-moving) economy, companies must capture unanticipated, fleeting opportunities in order to succeed (instead of exploiting resources/market position). Pick a small number of strategicaly significant processes and craft a few simple rules to guide them. The combination of opportunities and constraints often dictates the processes a company chooses. 5 types of simple rules: How-to rules. Boundary rules. Priority rules. Resource allocation. Timing rules. Exit rules. Simple rules should not be broad, vague (someone should be able to reasonably argue the opposite of the rule in order to be effective), mindless, stale. You should have 2-7 rules in order to remain flexible but also provide guidance. In a period of predictability and focused opportunites, companies should have more rules to increase efficiency. In changing markets you want less rules to increase flexibility. Simple rules do not arise from clever thinking, but from experience and mistakes. Often, a rough outline of simple rules already exists in some implicit form. 2 companies can focus on the same key process yet develop radically different simple rules. Risk: managers become too tentative (cautious) in pursuing uncertain opportunities/ prone to quick retreat. Sethi, R., & Iqbal, Z. (2008). Stage-gate controls, learning failure, and adverse effect on novel new products. Journal of Marketing, 72(1), 118-123. Gate conditionality (relaxation in gate Stage-gate controls have the potential of restricting learning in a new product development project, hurting the performance of novel new products. Repeated application of strictly enforced and objective evaluation criteria for improved control makes projects more inflexible. evaluation by allowing a project to proceed to the next stage even if it meets just part of the criteria, subject to its meeting the remaining criteria at a subsequent stage) does not mitigate the adverse effect of gate review criteria. Project inflexibility leads to learning failure, this is worsened when the technological environment of the firm is turbulent. Learning failure adversely affects the market performance of novel new products. Continuing trend in firms toward improving efficiency and lowering costs through control initiatives. Control imposed through state-gate evaluation helps firms’ product development efforts in terms of introducing discipline, improving performance, enhancing efficiency, and reducing new product cycle time. Might not be suitable for all types of products, e.g. radical innovations. This article argues that even for products that are developed using the traditional product development process, rigorous gate controls can harm new products that have high novelty (=degree to which a product is distinct from competing alternatives or preceding generations). When gate evaluation becomes rigorous, it has to potential of reducing flexibility needed for new product development, which in turn can adversely affect learning. Learning (=ability to acquire new information and incorporate it succesfully into the project) is considered critical for effective new product development. Project inflexibility=the extent to which project parameters become rigid and unchangeable when the project is approved after review at initial gates. Stage-gate controls break the traditional new product development process into stages, each consisting of a set of prescribed activities. Stages are separated by gates that serve as control and go/no-go check points. These are meetings between senior management and representatives of the product development team. Objective: allow projects that satisfy screening criteria to proceed further and killing/recycling bad projects. 2 types of management controls: process and output. Process controls direct by specifying methods and procedures to be adopted for performing tasks. Output controls direct by specifying output goals and standards. Stage-gate evaluation is a combination of both. 3 characteristics of rigorous gate criteria: Strictness. Objectivity/consistancy. Frequence of application. Processes=collection of activities that, together, create output for customers (internal/external). Process management techniques focus on improving efficiency and reducing variation. It stabilizes organizational routines and tightens linkages among them -> reduces flexibility/adaptability. This happens because managers become enthousiastic about using stage-gate control since it diminishes costs and wastage due to elimination of weaker projects, improves speed to market, and it’s a more efficient way of allocating resources. Therefore, they will use it more often and the process becomes routine and rigourosly implemented. Product development teams are concerned about their project’s continued survival and will do anything to meet the gate criteria. Project specifications might be defined too early in order to meet the criteria, and once these are presented at the gate, it becomes difficult to change because these will now be used as a standard to rate the project against (=strict enforcement). Objective criteria which are used for all types of projects in the same way can form constraints. E.g. not possible to use new technology because they will not be able to meet the standard criteria or follow the standard sequence of activities. With frequent evaluation, the team ends up committing to deliverables repeatedly and more deeply. Gate conditionality could save teams from making premature choices, because they are allowed to meet some of the criteria in a later stage, leaving more freedom to make changes. Effective learning takes place if there is a perceived knowledge gap, motivation to acquire new knowledge, and cognitive freedom to process new input and change the existing cognitive structure. If project parameters are fixed, the team is expected to overlook any knowledge gaps and may have reduced motivation to acquire new knowledge. Market turbulence=the degree of instability, uncertainty and lack of control within a firm’s marketplace. Technological turbulence=the degree to which technologies change over time within an industry and the degree to which such changes affect the industry. Both will create many unexpected developments that will require motivation and cognitive flexibility. Mismatch will lead to frustration which worsens team members’ attention to new information and its integration into project plans. Products with high novelty involve a great deal of exploratory learning activities. It is often difficult to obtain all the input and knowledge required in the initial stages of product development -> learning in subsequent stages becomes more critical. The team needs to refine and update it’s knowledge at almost every step of the development process, otherwise the product might become unappropriate for the market. Christensen, Kaufman, and Shih “Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things” Harvard Business Review, 2008, 98-105. 1. The use of discounted cash flow (DCF) and net present value (NPV) to evaluate investment opportunities causes managers to underestimate the real returns and benefits of proceeding with investments in innovation. Discounting a future stream of cash flows into a “present value” assumes that a rational investor would be indifferent to having a dollar today or to receiving some years from now a dollar plus the interest or return that could be earned by investing that dollar for those years. Error 1: by comparing the base case of not investing against the cash flows from the innovation you assume Parmenides’ Fallacy: measuring whether a proposed that the present health of the company will persist indefinitely into the future if the investment is not made. The most likely stream of cash for the company in the do-nothing scenario is not a continuation of the status quo but a nonlinear decline in performance. investment will make us better off than we are today. We might be worse off than we are now after we make the proposed investment but better off than we would have been without it. The projected value of an innovation must be assessed against a range of scenarios, the most realistic of which is often a deteriorating competitive and financial future. Error 2: errors of estimation. Future cash flows, especially those generated by disruptive investments, are difficult to predict. To cope with what cannot be known, analysts often project a year-by-year stream of numbers for three to five years and then “punt” by calculating a terminal value to account for everything thereafter. Assumed terminal values often account for more than half of a project’s total NPV. Terminal value numbers, based as they are on estimates for preceding years, tend to amplify errors contained in early-year assumptions. It also does not allow for contrasting the result of this investment with the deterioration in performance that is the most likely result of doing nothing, whereas this effect begins to accelerate from the 5th year, where terminal value factors in. 2. The way that fixed and sunk costs are considered when evaluating future investments confers an unfair advantage on challengers and shackles incumbent firms that attempt to respond to an attack. When new capabilities are required for future success, margining on fixed and sunk costs biases managers toward leveraging assets and capabilities that are likely to become obsolete. By focusing on maximizing marginal profit, companies will not minimize long-term average costs. They compare the marginal cost of leveraging the old with the full cost of creating the new. A related misused financial practice that biases managers against investment in needed future capabilities is that of using a capital asset’s estimated usable lifetime as opposed to the (shorter) competitive lifetime as the period over which it should be depreciated. Knowing that the equity markets will punish them for a write-off of obsolete assets, managers may stall in adopting new technology. The only way managers can see the world as the attackers see it and they can predict the consequences of not investing is by valuing strategies instead of projects. Because a firm’s actual strategy is defined by the stream of projects in which it does or doesn’t invest, finance and strategy need to be studied and practiced in an integrated way. 3. The emphasis on earnings per share as the primary driver of share price and hence of shareholder value creation, to the exclusion of almost everything else, diverts resources away from investments whose payoff lies beyond the immediate horizon. High pressure to focus on short-term stock performance instead of the company’s long-term health due to principal-agent theory. Because EPS growth is an important driver of near-term share price improvement, managers are biased against investments that will compromise near-term EPS. Many decide instead to use the excess cash on the balance sheet to buy back the company’s stock, which does not enhance the underlying value of the enterprise and may even damage it by restricting the flow of cash available for investment in potentially disruptive products and business models. Managers who are more concerned with their reputations than with amassing more wealth also focus on stock price and short-term performance measures such as quarterly earnings. They know that, to a large extent, others’ perception of their success is tied up in those numbers. However, equity prices over the short term respond positively to upside earnings surprises, so investors have no incentive to look at rational measures of long-term performance. Cause of focus on EPS: CEO compensation tied to stock price + risk of overtures from outsiders when stock prices are low (e.g. hedge funds). We have an agent-agent problem. Shareholders usually have shares in portfolios which they sell within 1 year. Most CEOs don’t work because they are paid for it but because they are passionate about it. Drawback 2: assuming that the proposed Stage-gate innovation also has disadvantages; decision criteria are based on projected revenues/profits and risks. When disruptive plans are pitted agains incremental plans, they will lose. Drawback 1: project teams generally know how good the projections (such as NPV) need to look in order to win funding, and it takes only nanoseconds to tweak an assumption and run another full scenario to get a faltering project over the hurdle rate. Difficult for gatekeepers to judge whether it’s realistic. strategy is the right strategy. Cannot be known in advance and has to emerge and be refined. Discovery-driven planning reverses the sequence of some of the steps in the stage-gate process. Instead of fabricating acceptable numbers, the required numbers are stated on the first page, followed by an assumptions checklist—a list of things that need to prove true for the project to succeed. The items on the checklist are rank-ordered, with the deal killers and the assumptions that can be tested with little expense toward the top. When a project enters a new stage, the assumptions checklist is used as the basis of the project plan for that stage. It is a plan to test as quickly and at as low a cost as possible whether the assumptions upon which success is predicated are actually valid. If a critical assumption proves not to be valid, the project team must revise its strategy until the assumptions upon which it is built are all plausible. If no set of plausible assumptions will support the case for success, the project is killed.