Flexibility Is Key to Product Development in Internet Time
The Right Connections
Capturing Human Capital
Business Suits You: Experimenting with Professional Identity
Networked Computers behind IT Payoff
Social Capital Markets: Creating Value in the Nonprofit World
Books

• e-Leadership
  
• Performance Measurement & Control Systems for Implementing Strategy
  
• The Arc of Ambition
  

hen the number of Internet-based businesses took off in the mid-1990s, many long-standing rules for product innovation were blown away. Previous models of development based on a sequential process of planning and execution are not workable in the Internet age, where technologies and customer requirements are in a constant state of flux, according to HBS professor Marco Iansiti and assistant professor Alan MacCormack.

With Italian colleague Roberto Verganti, the pair coauthored a 1999 working paper, "Developing Products on 'Internet Time': The Anatomy of a Flexible Development Process." The authors propose that a process emphasizing learning and adaptation is the key to successful innovation in this emerging age.

To understand the procedures required for product evolution in these new circumstances, the researchers studied 29 completed projects from 17 Internet firms. The projects encompassed a wide range of applications, including products, services, and development tools for both commercial and individual users. Because the undertakings were so diverse, the researchers couldn't measure each project against the same performance criteria -- such as the speed of a browser or the functionality contained in a search engine. Instead, each project was assessed by a panel of industry experts, who rated the performance of the resulting product relative to others that targeted similar customer needs at the same time.

Overall, the authors found that developing products in a compressed time frame, or "Internet time," requires that firms generate and respond to new information for a greater proportion of a development cycle, with much of the feedback coming from customers. In fact, early and continuous contact with users is a key building block of the flexible development process. "For one of the products in our sample, the designers had only coded about 30 percent of the new functionality before putting it into customers' hands," notes MacCormack. "From that point on, this early version of the product became a vehicle for communicating with these customers. This partnership helped them find errors in the initial version, as well as add new features to it." Such collaboration allows a search engine like Yahoo!, for example, to respond to customer requirements by adding new types of personalized search capabilities to its Web site.

In addition, say the researchers, investments in architectural design can facilitate a more flexible innovation process. They observed successful firms creating a modular system that could accommodate the addition of new components without affecting the core infrastructure. "You don't want to redesign the architecture of the system and work out all of the interactions between modules every time you add a new function," asserts MacCormack.

The authors also found that a design team with experience developing multiple product generations is helpful in a flexible process. Indeed, the evolution of products through experimentation is what flexible development is all about. "In a traditional environment, product development is usually thought of as a recipe of tasks. You go from task A to task N, and eventually the product will get done," says Iansiti. "In an environment fraught with uncertainty, however, the process is best approached as a series of experiments. You don't know what tasks are needed to complete the product, but you can still plan which sequence of trials to run. Developing products in a turbulent setting requires a process that does not avoid uncertainty but instead allows one to both accommodate and manage it," he concludes.

-- Judith A. Ross

rom genome research to e-commerce, new ventures are popping up everywhere, competing for the cash needed to turn them into successful enterprises. When trying to secure backing for a high-risk start-up, whom you know can be just as important as what you know.

"Our work suggests that the functional backgrounds or experience levels of the top management team -- the CEO, CFO, and chief scientific officer, in particular -- aren't really the deciding factors for investment bankers," explains HBS associate professor Monica C. Higgins, coauthor of a new working paper titled "The Effects of IPO Team Ties on Investment Bank Affiliation and IPO Success." In research conducted with Ranjay Gulati of Northwestern's Kellogg School, Higgins found that "what matters most when executives are trying to raise money is their professional ties and company connections, their access to information and resources -- what we call social capital."

Organizational behaviorists have known for years that third-party endorsements are critical to a young firm's success. Higgins and Gulati wanted to understand the origins and nature of these important relationships. They pinpointed the biotechnology industry as an especially promising area for studying the effects of top executives' social capital on their ability to secure resources. "In biotech, it can take eight to ten years to developa product and cost hundreds of millions of dollars to bring it to market," says Higgins. "Therefore, funding is particularly crucial; yet it is also difficult for external parties to assess the quality of a young firm."

Higgins had noticed that in many pre-IPO discussions, venture capitalists would invariably ask company executives what firms they had worked for previously. "Prior service at a reputable company seemed to indicate competence at the young firm, thereby validating it and its potential for firm-level success," she says. Higgins and Gulati began their research by documenting the career histories of top managers from Boston-area biotech companies. They gathered additional data by examining the prospectuses of all public biotech firms going back twenty years. Information from 295 companies and more than 3,000 executives formed the core of their study.

The results showed that top managers' ties to notable pharmaceutical companies -- what the authors call "downstream" social capital -- had a direct impact on the size of the start-up's IPO. "Downstream social capital was essential in attracting the interest of a top investment bank and getting a high valuation for the IPO," Higgins says. Such downstream connections can be valuable sources of information about the FDA approval process and can offer insights about marketing and selling a young firm's products. They can also provide resources and contacts to facilitate these tasks. Another significant factor identified in the study was "intra-industry" social capital -- that is, top management's connections to major biotech firms. In contrast, "upstream" social capital -- team members' ties to important research institutions -- had no impact at all on the new organization's success. "In this industry," Higgins theorizes, "upstream connections may indicate that the enterprise is only in the early stages of product development." Each kind of social capital, she contends, helps mitigate three categories of investor uncertainty: technological, firm-based, and market-based.

Higgins maintains that an IPO team's connections are a crucial component of any start-up's portfolio. "There's no question that the new company must show promise that it has a good product and that it can bring favorable returns to investors," she says. "But that's just part of the package. It must also assemble a management team that brings a combination of influential and complementary affiliations to the table." Social capital, it turns out, is truly worth its weight in gold.

- Judith A. Ross

Adapted from the Fall 1999 edition of Working Knowledge, a publication of the HBS Division of Research.

Confronted with the fundamental changes that are transforming today's global business environment, a number of firms are finding it necessary to reevaluate their organizational priorities. "These are turbulent times for business as many companies struggle to adjust to a diverse set of changes simultaneously," commented HBS professor Christopher A. Bartlett in a recent interview with writer Peter K. Jacobs.

Bartlett, faculty chair of the School's Executive Education Program for Global Leadership, identified the globalization of markets and competition, the arrival of the information age, the expansion of the service-based economy, rapid technological innovation, deregulation and privatization, and today's knowledge revolution as forces that are "driving companies to fundamentally rethink their business models and radically transform their organizational capabilities."

Most modern corporations rely on information planning and control systems and processes that are designed to help management make sound strategic choices and ensure efficient implementation of those decisions. "They do this by allocating scarce capital resources to the best opportunities, then measuring and controlling performance against plans and budgets," Bartlett explained.

"But, what if the assumptions behind that management philosophy are flawed?" he asked. "What if intellectual capital rather than financial capital were the scarce resource, as it is in most companies today? Unlike financial resources, an organization's vital information, knowledge, and expertise cannot be hauled to top-management levels for reallocation across competing needs. These reside deep within the organization and therefore must be developed and leveraged through processes completely foreign to the vertical, control-based management approaches that proved to be all-powerful in earlier times.

"Increasingly, the drive for global expansion must be to capture scarce sources of intellectual and human capital -- resources that can provide sustainable competitive advantage in the 21st century. It's a very different game, strategically and organizationally."

A longtime observer of multinational corporations, Bartlett is the School's Daewoo Professor of Business Administration. In 1998 he and Sumantra Ghoshal published a second edition of Managing Across Borders: The Transnational Solution, their 1989 groundbreaking work. The Individualized Corporation, their 1997 book that explores the revolutionary changes occurring in organizations, received the Igor Ansoff Award for best new work on strategic management.

Role-playing is not just for the psychiatrist's couch or the acting student, according to new research by HBS professor Herminia M. Ibarra. In studying how junior professionals learn the skills required to move into senior roles, Ibarra found that "people adapt to new professional roles by experimenting with images that serve as trials for possible but not yet fully elaborated professional identities."

In an article titled "Provisional Selves: Experimenting with Image and Identity in Professional Adaptation," published in the December 1999 Administrative Science Quarterly, Ibarra writes that "provisional selves" provide temporary solutions that less-experienced professionals can use to "bridge the gap between their current capacities and self-conceptions and the representations they hold about what attitudes and behaviors are expected in the new role."

Ibarra's research centered on junior professionals in consulting and investment banking firms. She found that these individuals had various methods of discovering how to create an effective image for themselves as senior managers. The most prevalent form of experimentation was imitation, which Ibarra divides into wholesale and selective. "Wholesale imitation refers to experimenting strategies in which the junior person mimics the self-presentation style of a single role model, holistically, without much adaptation," she writes. With selective imitation, the junior person "emulates distinct traits or behaviors selected from a broader array of role models, choosing bits and pieces from different people to create a customized model," she explains.

The second form of experimenting that Ibarra documented was characterized by a concern for authenticity, defined as the degree of congruence between what one feels and what one communicates. "Rather than trying out unfamiliar behaviors and unpracticed routines, these participants clung to their old role identities, attempting to transfer to the new role some of the styles, skills, and behaviors they had perfected in earlier, more junior roles. Typically, they relied on their technical and analytic skills to craft a 'well-prepared' provisional self," she writes.

"By rehearsing these clumsy, often ineffective, sometimes inauthentic selves," Ibarra concludes, "junior managers learn more about the limitations and potential of their repertoires and begin to make decisions about what elements to keep, refine, reject, or continue to search for."

Investments in information technology (IT) are finally beginning to pay off, thanks to the era of the networked computer. So says HBS assistant professor Andrew P. McAfee in an article published in last October's issue of Exec: The Executive's Guide to Electronic Business Solutions.

"PCs were initially islands, and we started to get good at interconnecting them (outside universities and research labs) only about ten to twelve years ago," writes McAfee. "We've become a lot better at it over the past five years, with the explosion of the Internet, intranets, extranets, and other offspring of the Internet Protocol (IP)." McAfee explains that because they connect people to vast pools of information, networks are extremely valuable tools for businesses. "It may well be that businesses benefit primarily not from the computer's ability to execute algorithms but from its ability to interconnect information and the people who use it," he observes.

McAfee's research shows that employees generally embrace networked systems, perhaps, he says, because their databases and business processes "interconnect people within the company who were previously isolated from each other and, especially, from each other's information." He asserts that when making IT investment decisions, organizations should ask themselves, "How can I put my employees in touch with the people and the information they need?" Unfortunately, he writes, "this is not the question a lot of organizations ask when they buy IT, nor is it the question around which many IT vendors design and sell their products. Instead, functionality continues to be king."

IT decisions, however, should not be based on functionality, says McAfee, who takes an example from the automobile industry to illustrate his point. The features of a new car may be seductive, he notes, "but let's not forget that a car's real function is to cross distances and bring people to each other. And let's start to consider that the real function of IT might be strikingly similar."

For years, money given to nonprofits has been thought of as charity, says Jed Emerson, the School's Bloomberg Senior Research Fellow in Philanthropy. But a new perspective is emerging: These dollars, while charitable, are still capital investments of precious resources. The HBS Initiative on Social Enterprise recently embarked on an endeavor to understand the fast-changing and fertile arena of social capital markets. "The question has become, can we extract bedrock lessons from the for-profit world and apply them to philanthropy?" says Allen Grossman, the Bloomberg Senior Lecturer in Philanthropy, who will spearhead the effort along with Emerson.

Changes are sweeping the social capital markets, in part because a new breed of donor is altering the terrain: Internet moguls, entrepreneurs, and other business leaders who have created wealth early in their lifetime. "They look at how they created value in the for-profit marketplace and want to take a similar approach with philanthropy," Emerson asserts.

Joining this group of philanthropists are baby boomers, who are "entering their retirement years very engaged," Emerson notes. "They are not going to be happy just writing a check and going to the annual dinner." In addition, says Grossman, there's growing pressure from the government and other funders for "outcome-based" funding -- an approach based on nonprofits achieving certain goals. "It comes down to people questioning the system in which we've invested hundreds of billions of dollars and asking, 'Is it working in an optimum fashion?' "

Grossman, the former CEO of Outward Bound USA, wrote (with Christine W. Letts (MBA '76) and William P. Ryan) the pathbreaking 1997 Harvard Business Review article "Virtuous Capital: What Foundations Can Learn from Venture Capitalists." The article helped catalyze the thinking of many in the nonprofit field and illuminated and encouraged the evolving concept of "venture philanthropy."

Drawing on the expertise of HBS faculty in finance, negotiation, and entrepreneurship, Grossman plans to examine the impact of the terms and conditions of the distribution of capital on nonprofit management and organizational performance. He will also investigate how the availability of capital at various stages of an organization's evolution affects its growth.

Jed Emerson has been engaged in the development of social capital markets for the last ten years as executive director of the Roberts Enterprise Development Fund (REDF) in San Francisco. A pioneer in developing VC-like ways of measuring "social return on investment" (SROI), REDF invests substantially in a small portfolio of local, market-based nonprofits (such as Juma Ventures, which recruits at-risk youth to work in Ben & Jerry's shops). It monitors employee progress and tries to quantify the costs each represents to society. It then tracks how that cost structure changes due to the nonprofit's intervention. "If employees go off welfare and start earning wages and paying taxes, there's an inverse relationship; they end up contributing to society," Emerson says. "We are trying to find out what investments are needed to achieve social value."

At HBS, Emerson will explore how investors in the social capital markets understand valuation without clear-cut metrics by which they can assess their ROI. He will also research how others across the country are trying to develop and advance such metrics. "For decades, people have said there is just no way to measure nonprofit value creation. How can you value a forest, or a clean ocean, or living in a nonracist society? But," concludes Emerson, "there are ways we can begin to talk about value in terms that tell us whether or not we are moving in the right direction."

- Anne Kavanagh

This article originally appeared in the Winter 2000 issue of Social Enterprise, a newsletter published by the HBS Initiative on Social Enterprise.

by D. Quinn Mills
(Cyber Classics, Inc. /BNI/ Publications)

In today's fast-changing, global, Internet-influenced economy, the successful corporate leader must bring a new set of skills to the job. In e-Leadership: Guiding Businesses to Success in the New Economy, Professor Quinn Mills proposes a mindset that will help executives to expand and grow their businesses in the new international economy and describes strategies that come to terms with the realities of globalization and technological change.

Mills, the Alfred J. Weatherhead, Jr., Professor of Business Administration at HBS, is a noted authority on leadership, strategy, organizations, and human resources. His new book is particularly relevant to leaders of nontraditional firms who may or may not be technology experts but who need to have the ability to identify and support those who are. Mills emphasizes that today's top executives must build organizations in which the new can constructively displace the old and where talented employees are encouraged to help formulate company strategy.

"Successful e-leaders focus on two things: a new approach to market development and a new approach to implementing strategy," notes Mills. To help managers fine-tune these techniques, the book offers guidance on developing global opportunities; changing the local corporate mindset to a global one (and filtering that way of thinking down to employees); developing skills to recognize and anticipate new business trends; and devising a new cooperation model, with less emphasis on competition and more on building working relationships within and between companies.

Mills writes that the book is about "how people, limited by misconceptions based on past experience, make errors in the new business environment. It is also about helping executives to get beyond these misconceptions by opening their eyes to new vistas."

e-Leadership is also available as an electronic version that can be downloaded and customized at the reader's discretion. More information on the electronic version can be found at www.e-managing.net or www.mindedge.com.

Performance Measurement & Control Systems for Implementing Strategy

by Robert L. Simons
(Prentice Hall)

"This book is built around a number of tensions inherent in all business," declares HBS professor Robert Simons of his new work, Performance Measurement & Control Systems for Implementing Strategy. "There's the question of profit and growth versus control, for instance, or short-term results versus long-term capabilities. Managers today are involved in a very delicate balancing act."

A proponent of the "balanced scorecard" approach to performance measurement, Simons makes clear that innovative accounting and control tools are needed to implement strategy appropriate to the business dynamics of the 21st century. He offers important new techniques such as profit wheel analysis (integrating profit planning, cash flow, and ROE analysis with business strategy), strategic profitability analysis (strategic variances), and the risk-exposure calculator (a tool for analyzing strategic risk).

Simons begins his book by establishing foundations for implementing strategy, including identifying organizational tensions that need to be managed, examining the basics of successful strategy, organizing for performance, and using information for performance measurement and control. He then explains how to create performance-measurement systems by building a profit plan, evaluating strategic profit performance, designing asset-allocation systems, linking performance to markets, and creating a balanced scorecard. Finally, he demonstrates how to achieve profit-oriented goals and strategies by using diagnostic and interactive control systems, aligning performance goals and incentives, identifying and managing strategic risk, and using levers of control for implementing strategy.

The text of Performance Measurement & Control Systems for Implementing Strategy is supported by more than thirty new case studies, all of which have been taught in the HBS Executive Education and MBA Programs. (A text-only version of the book is also available.) Concludes Simons, "Anyone interested in running a business -- either experienced managers or students -- will benefit from understanding these new concepts and approaches to implementing strategy."

The Arc of Ambition

by James Champy and Nitin Nohria
(Perseus Books)

"People have always felt ambivalent about ambition. We see it as dangerous yet essential. We disapprove of those who abuse it, but we dismiss those who lack it." So begins HBS professor Nitin Nohria and best-selling author James Champy's The Arc of Ambition: Defining the Leadership Journey, a thorough and thoughtful exploration of ambition and the role it plays in our lives. Rich with examples of current and historical failures and successes, The Arc of Ambition is a straightforward, practical guidebook that offers advice on how to develop a vision, recognize opportunity, and proceed with conviction.

Nohria and Champy define three stages of the arc of ambition. Using examples such as the Wright brothers' determination and Rosa Parks's courage, the authors label the first stage "ascending the arc." In this phase, a leader sees what others do not, follows a steadfast path, and seizes the moment. The second stage of the arc, dubbed "finding balance," includes tempering ambition, inspiring others with a greater purpose, and not violating values. The authors cite Mohandas Gandhi and Cesar Chavez as leaders who were able to motivate others and Andrew Grove and Diego Rivera as men who stood by their values. The third stage, called "passing the torch," is marked by the ability to surrender control, accept change, and make a graceful departure. Examples of success in this stage include the exit strategies of Peter Lynch and Andrew Carnegie.

While the authors acknowledge the importance of humility and encourage moderation, they conclude: "We believe the world needs more ambition, not less. It's our desire to inoculate as many people as possible with [the] confidence to use their talents."