In the face of volatile change and mounting uncertainty, firms may have to adapt rapidly. We highlight the mandates of strategic leaders who know how to develop organizational capabilities that allow for fast as well as slow action as circumstances dictate. In a world where unexpected twists and turns can overturn the most iron-clad handbook of standard operating procedures, strategic leaders remain a final, crucial line of defense. Once organizations have sensed incipient change in their environment, and understand its potential impact better, the question becomes what to do practically. This is where action and commitment enter the picture, while recognizing the very real risk of pursuing dead-end strategies based on incomplete or biased information. In every industry, there is a graveyard of early adopters and this death rate peaks when dealing with high velocity, complex markets and uncertain technologies. This harsh reality means that it seldom pays to completely commit to a new initiative. Instead, a disciplined experimentation regiment is a proven way to balance risk and reward under foggy conditions. This exploratory approach goes hand-in-glove with a flexible investment strategy expressed as portfolio of real options. The ultimate aim of this “shadow options” approach is to exploit opportunities and parry threats when the timing is optimal, without delay in pulling the trigger when needed.

Explore and Commit Partially

Small, well-designed experiments that explore new strategic initiatives allow for the type of sequential investments that are most likely to generate positive results.[i] For example, rapid prototyping, via quasi-experimental designs, can greatly aid complex design decisions.[ii] The best firms elevate this practice to a dynamic capability that can be deployed on many fronts, provided three conditions are met. First, the organization must nurture an experimental mindset, including a willingness to challenge existing (and even sacred) beliefs.[iii] Second, teams employing this method must be able to codify and share their insights. New software tools, including advances in data analytics, can help teams keep track of test and control groups as well as help identify the attributes that most affect performance. Third, firms must look beyond their own organizational and market boundaries, probing for insights from a wide array of peer companies, precursors and network partners. The main purpose is not just learning for its own sake but to gain a competitive strategic edge in a turbulent world that often paralyzes others.

Trial-and-error learning, through exploration and experimentation, requires an organizational culture in which mistakes are tolerated and even encouraged at times. Although careless or negligent failures should be avoided, no organization can learn if it pursues a policy of zero tolerance for failure. And it isn’t enough to simply pay lip service to the idea that “mistakes will be tolerated”: it takes deliberate effort to foster a climate in which learning from failures is possible, and experimentation is a norm. As Einstein noted: if you have never failed, you never tried anything new. But the mistake making process has to be hypothesis driven, with anticipation of possible outcomes and a preliminary assessment of possible actions to be taken once uncertainty has been surgically reduced. Options thinking is about assessing the economic value of possible future data as well as maintaining flexibility within the context of a specific decision or strategy.

A firm with proper failure-tolerance, as part of its options planning strategy, is one in which leaders recognize that every setback has a silver lining in terms of the potential for insight. For example, leaders might conduct post-mortems for every major project and investment, especially those that were not considered a success. At an even higher level, leaders should recognize and laud not just projects that have succeeded, but also those that failed – boldly perhaps, as long as it was for the right reasons. A related approach is to deliberately sensitize the organizations not just to actual mistakes but also potential ones. This latter approach was institutionalized by the Danish company Grundfoss which is the world’s leading manufacturer of pumps, from smallest to super large. At Grundfoss, assembly line workers are also asked to document things that almost went wrong. They learn as much from these near misses as from actual mistakes, just as the US Civil Aeronautics Board does from close calls with airplanes.

Deploying Real Options

Trying different things, probing puzzling questions deeply, and being alert to the unexpected are all valuable ways to learn faster. But to getcloser to the truth may require a significant financial investment beyond what is typically allowed in an exploration budget. This is where real options approach shines since real money and commitment are needed now to get a strategic edge on the competition. The essence of a real or shadow option is the make a significant investment to create a strategic position without making a full commitment yet. The firm makes this bet to secure the right to make a further investment once more information has been gleaned, but without any obligation to do so. Akin to a call option in finance, you invest less upfront than needed to own a security fully, but for a limited time period you can buy more at the initial price in case the stock rises. And if the stock does not rise during the option’s time window, then you can let is expire and limit your loss to the upfront investment. This same concept underlying financial call options applies to real options. They are called “real” options since they entail bets on real business investments, which cannot easily be sold or traded, in contrast to financial securities. In a sense, they shadow or mimic call options.

The purpose of real options is to improve the firm’s strategic position in the face of uncertain external change. For example, a company might bet modestly to understand a new technology or market, either by supporting research in its own lab or through an investment in a startup or a pilot launch. This buys the firm an option to pull the plug if its initial investment sours while preserving the opportunity to invest more once the pilot project looks sufficiently promising. There are several kinds of real options firms can create depending on the degree of uncertainty in the technology and the market. As shown in Figure 1, different kinds of options can serve different purposes and successful firms develop a portfolio of varied types.[iv]

· Preserve and protect options. These are used when the market and technology spaces are familiar and uncertainty is significant but manageable using standard tools. Such options are used to respond to possible competitive moves, shift in market requirements, or surprises in the economic climate. They are created through carefully developed experiments that test different strategic responses, and anticipatory development programs that ensure the firm is not behind when rivals move.

· Scouting options. There are cautious investments made to discover new technologies or new markets when uncertainty is still quite high, beyond the reach of standard tools like NPV analysis. The scouting metaphor from the military is apt; to find an enemy, the army sends out scouts; even if these scouts fail to return due to capture or death, the generals will at least develop rough knowledge of the whereabouts of the enemy. Scouting forays are especially useful when the market or technology is hard to discern or quantify.

· Exploratory options. These are mostly stepping stone options, entailing high market and technical uncertainty. Their goal is to minimize fixed investments and sunk costs until sufficient commercial feasibility has been established. These small exploratory investments help the firm acquire additional business experiences that can later be parlayed into larger strategic commitments. Small R&D investments, joint ventures, or in start-ups in new technologies or markets can serve this purpose.

Transforming: Internal And External

In this section, we move beyond individual investments or even entire portfolios, and emphasize the importance of organizational transformation.[v] In many instances, new business opportunities can only be fully seized if the organization is properly aligned or perhaps fundamentally restructured. Depending on the broader business strategy involved, this may require various organizational shaping capabilities.[vi]

A classic example is General Motor’s transition during the 1930s from a functional design to a multi-divisional form, under the dynamic leadership of Alfred Sloan. This fundamental organizational redesign was crucial to implementing GM’s strategy of competing against Ford’s black model T by greatly diversifying GMs product offerings. This bold move gave rise to the Cadillac, Oldsmobile, Chevrolet and other divisions within GM which could operate with greater autonomy. To fully pursue innovative options will at times require increased organizational separation from the parent, but how much is optimal entails many leadership judgments. It took Alfred Sloan and his team over a decade to get it fully right as detailed in his biography My Years with General Motors. A contrasting case is the slow and inadequate organizational transformation attempted by Kodak.

The Kodak case is not one where leaders failed to anticipate change or create options. Eastman Kodak had actually developed some of the earliest digital technologies for photography. Both its scientific staff and senior leaders recognized how disruptive the digital imaging revolution could be. But they badly underestimated the speed and breadth of its impact. Kodak had launched numerous digital projects early on, with technological advantages in many. However, these electronic imaging activities were widely dispersed, without a cohesive overall strategy and limited accountability for market performance.

When it became clear that more focus was needed around digital strategies, Kodak brought in a highly regarded outside CEO in 1993. The company hired George Fisher who had led Motorola to great success as CEO there. Fisher assembled all of Kodak’s digital imaging projects into a single autonomous digital division, and charged that division with launching new products. In a marked departure from the dominant culture, which encouraged teams to “go it alone,” Fisher also initiated a number of joint alliances for digital imaging projects. To the “old guard” at Kodak, Fisher’s moves seemed bold, even aggressive. In retrospect, however, these maneuvers proved to be too little- too late, especially since the company’s silent middle was not on board. Midlevel managers did not really understand the need for urgency, felt threatened, and in many small ways retarded progress.

Organizational separation may make or break new strategic initiatives. How much independence is needed in a particular case depends on the magnitude of the technological discontinuity, the speed of change, and whether the new strategy threatens to undercut the competencies of the core business. The greater the differences, the less the new business should be tied to the mother ship and the more it needs to develop its own capabilities and degrees of freedom. Many large companies establish separate organizational units dedicated to pursuing new endeavors that don’t fit well the old. At their best, these “cocoons” generate internal flexibility and entrepreneurial dynamism. GM’s Saturn division, IBM’s PC unit, and Roche’s Genentech investment are well-known examples. By “cocooning” a new business, a firm establishes clear walls so that the new group can “experiment within bounds” – trying out new approaches while still benefiting from the resources and experience of the parent organization. Royal Dutch Shell had such a unit in London in the 1980s called Non-Traditional Businesses. Its acronym NTB became known, however, as Not to Be Businesses underscoring the challenge of making NewCo thrive in the shadow, or under the thumb, of OldCo.[vii] Few top executives wanted to risk their careers on NewCo ventures, often for good reasons.

When tackling completely new or disruptive technologies, both physical and structural separation may be necessary, such as a separate division that reports to senior management or even launching an equity spin-out to attract new capital and fresh talent. Even if such a full degree of separation is not warranted, it may still be desirable to have separate funding and accounting, so that losses from the new projects are not carried by an established business unit. The new venture may also need the freedom to set its own policies in order to match the realities of building a new business in a different market space. Ideally, a new venture should be able to attract the best talent, have the latitude to do fast prototyping and develop options for ill-defined markets, while keeping restrictive controls and burdensome overhead to a minimum. But this is more the exception than the rule since organizations are political systems in which power, control and accountability play key roles. To illustrate the need for customized solutions, and the importance of integrating strategy, context and leadership, we compare two cases below about how to respond properly to technological changes in the market place.

Novartis’ Digital Strategies

The sales side of the pharmaceutical industry represent an instructive example of how fast adaptation of digital technologies can bestow a competitive advantage. Historically, pharma companies relied on a “Share of Voice” model. Sales representatives paid visit after visit to prescribing physicians, following a carefully constructed script and leaving a standard set of printed materials, along with branded pens, pads and other swag, at the front desk. Through the “fat years” of block-buster drug breakthroughs, handsome margins meant there was no need for pharma companies to re-invent their standard approach. Eventually, both external forces and internal shortcomings led to the gradual decline of the blockbuster era. Many drugs lost their patent protection, and weak R&D pipelines meant that they were no ready replacements. Generic versions captured market share and led to sharp price cuts. Simultaneously, purchasing power and influence shifted to consolidating payers and providers. Payers instituted formulary lists, which restricted the number of approved medications that a physician could prescribe.

By 2011 the sales force at Novartis Pharmaceuticals was quite demoralized about all this. Sales representatives found themselves operating in a radically changed world; their access to physicians was now far more limited, and the number of new products that they could discuss when they did get in the door was dwindling as well. Nevertheless, Novartis’ leaders stayed with the traditional “Share of Voice” detailing model, asking the sales representatives to buckle down and apply greater effort to connect with “key prescribers,” physicians with a demonstrated history of prescribing Novartis’ target products. These interactions were brief, one-way communications that felt, to the sales representatives, like monologues. As a result Novartis Pharmaceuticals had little data on how their drugs were being perceived and used by their customers, and no way of knowing what sales strategies were most effective.

In response to the declining sales and the mounting frustration of the sales force, Novartis leadership launched an initiative in 2012 to help 25,000 sales representatives in 80 countries engage with doctors in consultative two-way dialogues.[viii] Value-added services and broad channels of communication replaced the simple recitation of standard messages, and the hand-over of static, general sales documents. This initiative envisioned new, technologically enabled communications between sales representatives and physicians, such that answers could be provided in real time, by bringing in the appropriate scientific staff. Reps could immediately access whatever data the doctor would find most relevant to their patients, whether it was efficacy in women, safety in the elderly, or the risks of interactions with other drugs being prescribed. This allowed the conversation to flow naturally, rather than being set by a rigid agenda and formulaic sales pitch.

Novartis leadership decided to equip their sales representatives with mobile devices that enabled videoconferencing (often, across multiple locations) while accessing the latest digital information and interactive patient tools. This digital platform also encouraged direct sharing of innovative practices across countries, rather than relying on mostly one-way messages from headquarters to the regions. While some competitor firms were also using digital sales tools, they were designed with limited functionality to support, rather than supplant, the conventional sales model.

The Novartis customer engagement initiative was implemented by teams of dedicated leaders representing the information technology, scientific and commercial functions. The CEO’s clear commitment to this effort lent it credence; the personal credentials of the chosen team leaders gave it additional slanting. Especially important was the designation of the respected head of IT in Europe to lead the initiative. In each major country, teams rolled out the program to great effect. Their success can be attributed to highly skillful orchestrations of the following dynamic capabilities, each being crucial to leveraging the digital revolution.

Seeing Sooner. Changing the sales representative’s interactions with doctors from “monologues” to “dialogues” allowed Novartis to better sense weak signals from conversations with its customers. Compare this to the analogy of having multiple thermometers in a room to ensure an isotropic climate – using 25,000 direct touch points with customers. Novartis is more apt to understand what factors are becoming most relevant and important to its customers. Over half a million calls with the digital platform have taken place since May 2014 and 80 percent of employees say the digital platform has had a positive effect on how they communicate with doctors. The new norm of “e-detailing” allows Novartis to increase its touch points, even with the “no-see doctors” who had chosen to opt-out of the old in-person visitation model.

The digital customer engagement platform captures detailed information about the interactions of sales representatives, improves understanding of customer’s preferences, and then personalizes the marketing message. As DuPont deepened its market knowledge, it could notice budding problems and spot market opportunities sooner, as well as sensitize the entire organization to making decisions from the outside-in. The key here was the cross-functional collaboration of the users of the information and those who managing information files.

Seizing Opportunities. The spirit of trial-and-error learning further suffused the customer engagement initiative. As many as 42 pilot tests were conducted in multiple countries to learn how best to design the platform, decide what features to include, and importantly to monitor acceptance by the sales representatives. The feedback from these experiments was crucial to the final investment commitment decision.

Before the digital sales platform was in use. Novartis sales representatives detailed only one or two drugs at a time in their meetings with potential buyers. The new digital platform allows reps to carry an entire portfolio of drug presentations that can instantly connect to research papers regarding side effects and off-label use requests, as well as expert opinions, visuals of clinical pathways, and more. The platform provides reps with multiple pathways to “win” going into their sales meetings, rather than the traditional idea of forcing a single drug upon a buyer in a sales meeting.

Organizational Transformation. The ultimate success of the platform depended heavily on the innovative work by various development partners. This required a non-linear navigation approach that would let the user jump through different content domains without losing eye contact with the physician. The company also collaborated with a cloud-based provider of the software platform, and both were guided by numerous experiments with sales representatives. In addition, local graphics agencies got involved to work on the information architecture, file formats and graphic design to buttress Novartis’ commercial teams in areas where they lacked skill or experience.

Novartis stepped beyond industry norms with its deep commitment to a vision of a “digital future” within their sales force. According to former CEO Joe Jimenz, iPad adoption created an annual savings of 250 hours for each sales representative and enabled an additional 35,000 customer visits per year. Given this initial successes, the iPad experiment should be viewed as part of Novartis’ broader organizational strategy toward embracing of innovative technology. Recent investments in technologies to improve remote health monitoring, drug adherence, and optical solutions in organizational functions other than sales are indicative of this new thrust as well.

The Novartis experience highlights the contingent nature of dynamic capabilities listed in Figure 2. It shows how their relative importance varied across six sub-capabilities with Vigilant Learning ranking the highest, while organizational redesign scored medium in importance for this specific case. To further underscore this context dependence, the second column profiles the next case we shall examine, namely DuPont’s long-term strategy to obtain a leadership position in the changing landscape of biofuels. In the Novartis case, fast exploratory action was crucial since they wanted to be ahead of their rivals and the prevailing bias in large organizations is to be stymied by uncertainty. But there is now an extensive literature that challenges an overly aggressive pursuit of first mover strategies, suggesting that being a fast follower is often better. However, this is not always true either and the real challenge for leaders is to find the optimal timing for each move given the pros and cons, as illustrated next with DuPont’s long term strategy over decades.

DuPont’s Biofuel Initiative

n some industries, the time frames over which strategies materialize can amount to decades rather than years. The optimal timing of strategic decisions entails carefully weighing the costs and benefits benefit of such competing objectives as competitive advantage, waiting to learn more, preserving flexibility and learning by doing.[ix] This last item especially will require making real commitments to see how well a technology works when scaled up, what the reactions of rivals might be, or the organization’s ability to execute a complex strategy. The step-building approach to developing a strong long term strategic position, using disciplined patience when needed, is well illustrated by the DuPont example below. It shows how this company systematically developed a broad portfolio of real-options for its extensive biofuel initiative, with the help external partners where needed, while also keeping its parent (DuPont Corporate) sufficiently involved.

In some industries, the time frames over which strategies materialize can amount to decades rather than years. The optimal timing of strategic decisions entails carefully weighing the costs and benefits benefit of such competing objectives as competitive advantage, waiting to learn more, preserving flexibility and learning by doing.[ix] This last item especially will require making real commitments to see how well a technology works when scaled up, what the reactions of rivals might be, or the organization’s ability to execute a complex strategy. The step-building approach to developing a strong long term strategic position, using disciplined patience when needed, is well illustrated by the DuPont example below. It shows how this company systematically developed a broad portfolio of real-options for its extensive biofuel initiative, with the help external partners where needed, while also keeping its parent (DuPont Corporate) sufficiently involved.

The urgent need for green technologies represented fertile grounds for DuPont and other companies to grow. But exploring alternative energy entails a daunting level of challenge. There are significant capital risks to be absorbed and diverse stakeholders to be brought on board. Few firms can go it alone since public and private collaborations are crucial in clean energy.[x] DuPont launched its biofuels initiative around 2001 to leverage the company’s overall biotech expertise and long-standing competencies in commercializing material, chemical and biological sciences. The biofuel team used a real options approach to narrow almost 50 opportunities down to 12 strategic initiatives, including biofuels, bio-materials and bio-medical businesses. For example, to develop biomass technologies, DuPont created a $40 million joint project with the U.S. government. To explore biomaterials, it made more than a dozen investments in areas such as sustainable materials and energy, applied bio-surfaces, and therapeutics. As one manager said, “We kept asking, how do we reduce the uncertainty? How do we get a platform we can build on?”

Sensing. The crucial sensing period for DuPont’s biofuel initiative actually began a decade prior to its launch. Since the early 1990s, DuPont possessed top notch capabilities for make renewable polymers. But the company could not do so profitably due to the high costs of producing a key ingredient, Propanediol (PDO), which was needed in its hydrocarbon-based chemical process. To solve this problem, DuPont began experimenting with ways of producing PDO through biotechnology by using living organisms to synthesize the compound. The project used organisms called methanotropes which require large amounts of methane and a fermenter to implement. DuPont found a company in Norway that had already built a fermenter to handle methane generated as a by-product of oil production and approached them to create an alliance. Combined with DuPont’s own software, the Norwegian hardware allowed the concept to be piloted without massive investments and risk. The testing resulted in the successful development of a new process that could produce PDO from corn starch (Bio-PDOÒ) at lower cost. Shortly thereafter, DuPont successfully launched SoronaÒ, the synthetic polymer used in soft floor covering, textiles, and packaging.

DuPont quickly began to apply this newly acquired base of technical competence in biotech to other endeavors. Given its traditional use of energy as a major input as well as previous ownership of Conoco, the company had a thorough understanding of trends in energy markets. Using its superior peripheral vision, DuPont spotted an opportunity to apply its new innovation to the fuels sector. The company not only saw that many governments were getting serious about energy security and climate change, but also understood that ethanol, the widely produced alternative fuel source, was a “disadvantaged” one. It cost at least twice as much as gasoline to produce, had a significantly lower energy content per unit compared to gasoline, and could be distributed using the same infrastructure as gasoline and diesel.[xi] So DuPont started strategizing about how to enter this new market.

When asked, during an interview in 2007, how DuPont made the leap from SoronaÒ to biofuels, John Ranieri, DuPont’s Biofuels Vice President and General Manager at the time, noted that decision-makers at the company could now ask the right questions, a key component to vigilant learning.[xii] It was always obvious that ethanol had significant limitations and that there was a great need in the fuel opportunity space, but only after developing their new core competency in biotechnology could researchers at DuPont ask, “Well, what biofuel would I like to make?” That question was not a valid one before. As John Ranieri put it, “That’s really the key to innovation: it’s not about always having the answers―it’s about first being able to ask the right questions.”

While sensing is opportunity in biofuels, DuPont displayed superior vigilant learning skills as well: embedded in the company culture is the process of triangulating perspectives on a complex issue. The company’s corporate strategy can be summarized by the phrase “sustainable growth.” The aim is to enhance shareholder value, contribute positively to society, while also decreasing its environmental “footprint” along the value chains in which it operates. These are three very different lenses through which DuPont looked to analyze its biofuel initiative.

Seizing. To seize the newly identified opportunity, DuPont first probed and then invested its capital in a flexible manner. This focus on adaptive experimentation and learning led DuPont to explore investment opportunities in many parts of the globe. The first generation of biofuels that DuPont explored included corn ethanol and soybean diesel fuel. Eventually, it became clear that both corn ethanol and soybean diesel fuel required very high land-use and water resources. Thus, reductions in greenhouse gas emissions achievable through its production were too low to make these products worth exploring further. Instead, DuPont’s R&D focus shifted toward second generation biofuels, using microbes and enzymes to convert non-food cellulose materials into sugars that could be used to create biofuels.[xiii]

To do so, DuPont employed open innovation. The first facility to produce ethanol from non-food biomass was built through a 50/50 joint venture with Danisco in Denmark, the world’s largest industrial enzyme company (together with Novozymes). To bring this production to commercial scale, a second joint venture facility was completed in 2014, at an estimated capital cost of $200 million. At this point, the focus narrowed to cellulosic ethanol produced from corn stover, which is the readily-available biomass consisting of the stalks, leaves and cobs that remains after the harvesting of industrial corn. This product was not without risk: through extensive work with auto and oil companies, DuPont had come to understand its limitations. Due to a vapor pressure that exceeds that of traditional gasoline, this form of ethanol is incompatible with parts of the traditional fuel infrastructure.

Even with these risks in mind, DuPont saw the innate potential of a higher value fuel that leveraged corn stover as feedstock and used a genetically modified micro-organism to produce iso-butanol. This led to a joint venture with BP called Butamax Advanced Biofuels, combining BP’s refining and distribution prowess with DuPont’s proprietary biotechnology. This joint venture was able to address and resolve further technological challenges, such as the inherent high toxicity of bio-butanol. After 1.5 million miles of vehicle testing, DuPont eventually resolved the issue of compatibility with existing vehicles and infrastructure. In early 2014, the joint venture submitted a 16% butanol fuel to EPA for regulatory approval. The economics appeared attractive; one estimate assumed that bio-butanol would be competitive with oil at $70 - $80 per barrel. It remains to be seen whether oil at $50 a barrel will jeopardize the project.[xiv]

The DuPont biofuels experience demonstrates how crucial dynamic capabilities are to the exploration of new businesses, especially those in highly technical and uncertain markets. In this case, large investment commitments are highly contingent on the concurrent development of an emerging technology. After a full decade of R&D, DuPont’s time-to-market was more than seven years. These patient investments were protected by a series of patents issued in 2005, allowing for long-term, sustained investment. Ultimately, the goal was achieved. In hindsight, DuPont’s most important dynamic capability was its commitment to learning from real options, which allowed critical opportunities to be explored through relatively small, staged investments. By limiting investment exposure, DuPont “reserved its right” to withdraw if certain technologies didn’t bear fruit. More significantly, DuPont could move ahead with the most promising technologies without significant loss of time and limited up front risk.

Transforming. Nearly as important was DuPont’s decision to redefine the company’s research culture, create organizational separation between the new ventures and the mother ship, and to actively engage with external partners with a common stake in successful outcomes. John Ranieri remarked that DuPont asks teams to tackle the toughest problems first, the ones that really prevent a product from getting to market. According to Ranieri, many other firms that conduct scientific research will do the opposite, teaching their teams to solve the quick and easy problems first before tackling the big issues. This fundamental organizational shift in process helped DuPont avoid “rat holes,” ensuring flexible and probing investments.

Secondly, the foundation that made DuPont’s biofuel initiative possible was laid with the original creation of the Applied Biosciences business unit. It was to function as its own separate platform with the agility and flexibility to use resources to look for skills within the corporation that could aid in pursuing emerging market opportunities. And lastly, the company developed partnerships with Fagen Inc plus, a consortium of early adopters to support the rapid build out of bio-butanol production. The company also remained vigilant about seeking and applying insights from the market. Throughout its 17 years of exploration, DuPont remained highly alert to the changing needs of automakers, regulators (including the EPA), oil companies, legislators and agencies whose regulatory decisions could influence demand.

Figure 2 compares the dynamic sub-capabilities at play across the DuPont and Novartis cases to highlight key differences. The scale of investment commitment is clearly one crucial contingency factor.[xv] Although it isn’t free to put an interactive digital device into the hands of 25,000 sales representatives, this investment pales in comparison to the multiple billions DuPont poured into biofuels. Digital technologies typically require smaller investments, within a far narrower time frame – and thus need a supporting ecosystem that is agile and responsive. Another contingency factor concerns the firm’s strategic intent when deploying new technologies: is the aim to develop a few emerging technologies that develop slowly over time, and thereby provide a virtual guarantee of sustained market leadership – or is it, instead, to develop a wide range of rapidly evolving technologies that can potentially disrupt existing markets? Biofuels represent the former and digital transformation the latter.

The two cases we profiled differ in other key respects as well, suggesting additional customization factors. For example, the digital technologies underlying the Novartis strategy were widely available, so there would be very little intellectual property in the form of patent protection. The main advantage Novartis gained, as an early mover, was to stay ahead of the competition for some time. The role of time is quite different in the biofuels case, however, with DuPont deliberately investing in long term patents over time in order to establish firm beachheads against competitors encroaching on their space. Relatedly, the far lower investment requirements in the Novartis case represent a low capital barriers to entry but a strong first mover advantage. Furthermore, compared to biofuels and clean energy, the adoption of digital technologies has not so far been constrained heavily by regulations, and has thus far entailed fewer stakeholders and influencers. These features make customer data analytics a more promising case for virtual capability building with partners than biofuels. But this is changing due to rising privacy concerns about personal data (as Facebook experienced) and large security breaches in many firms. European regulations afoot as we write this may greatly change the landscape.

Adaptation, Speed And Leadership

“If the rate of change inside an organization is less than the rate outside, the end is in sight…Leaders must develop a sixth sense, an ability to see around the corner” Jack Welch

Organizations best able to handle fast changing markets and technologies develop customized capabilities to sense change and seize opportunities faster than rivals. Nonetheless, adaptive organizations share some common characteristics as well, such as being resilient and information being more free-flowing. They favor just-in-time decision-making, sharing key activities with network partners, and learning to profit from increased market and technology uncertainty. The traditional strategy process of long internal debates leading to detailed budgets and multi-year plans is replaced by greater clarity and consistency about how to sustain an advantage built around dynamic capabilities, structures, and processes.[xvi]

Even the best designed strategies and capabilities, however, cannot succeed without seasoned managerial judgment. No strategic architect can envision all possible scenarios the firm may encounter. When Jeff Immelt took over as CEO of General Electric (GE) in 1991, following several decades of spectacular wealth creation by legendary CEO Jack Welch, he could hardly have anticipated what awaited him. In his words, “When I started I could never have forecast so many tail-risk events hitting GE: 9/11, Enron, Hurricane Katrina, Fukushima, the global financial crisis.”[xvii] Immelt could also have added various Arab Springs that turned into foreboding autumns, China asserting its power in Asia and beyond, protracted civil wars in Syria and Iraq, global warming challenges, prolonged unemployment, and myriad other black swans. Immelt’s eventual undoing as CEO came when poorly timely bets on energy and infrastructure led to stock declines during 2017. Adaptation strategies clearly cannot be reduced to algorithms, nor can CEOs be replaced by robots or AI for a long time to come. Instead, organizations need to develop sufficient leadership capacity and bench strength to deal with the unexpected.

Developing dynamic action capabilities throughout the organization is a powerful way to manage stormy waters with fast moving currents. But by necessity, these systems are premised on subjective world views about what matters in the current environment and also what may lie ahead. The contingent nature of dynamic capabilities will often favor the known present over the unknown future. Ideally, sense and response systems should be less tailored to the firm’s current environment or strategy and more to future trends and uncertainties. But even in the best case, much will be missed in fast changing environments. This means that strategic leaders, rather than organizational systems, remain last line of defense when back swans appear. And each time they do get blindsided, the organization should get stronger rather than weaker, in the spirit of Taleb’s anti-fragility theory. [xviii] Paraphrasing Nietzsche’s famous aphorism: what doesn’t kill the firm should make it stronger.

References

[i] A.K. Dixit R.S. Pindyck, “The Options Approach to Capital Investment,” Harvard Business Review, May-June 1995, 105-15; I.C. MacMillan and R. Gunther McGrath, “Crafting R&D Project Portfolios,” Research Technology Management, September-October 2002, 48-59.

[ii] T. Kelley, The Art of Innovation, New York: Doubleday, 2001 and G.S. Lynn, J.G. Morone, and A. Paulson, “Marketing Discontinuous Innovation: The Probe-and-Learn Process” California Management Review, 38 (Spring 1996).

[iii] A. Schoemaker, P.J.H. and Philip Tetlock, “Taboo Scenarios: How to Think about the Unthinkable” California Management Review, Winter 2012, Vol. 54, No 2, pp. 5-24.

[iv] For a similar conceptualization, see IC MacMillan and R Gunther McGrath “Crafting R&D Project Portfolios” Research Technology Management (September – October 2002) 48-59. Real options principles are integral to the concept of super flexibility – including developing a valuable portfolio of initiatives, and executing through experimenting, prototyping and iterating. See H. Bahrami and S. Evans, “Super-Flexibility for Real-Time Adaptation: Perspective from Silicon Valley,” California Management Review, 53/3 (Spring 2011) 21-39.

[vi] D.J. Teece, G. Pisano, & A. Shuen, “Dynamic capabilities and strategic management.” Strategic Management Journal, 18/(7) 1997, pp. 509-533; see also D.J. Teece, Explicating dynamic capabilities: the nature and micro-foundations of (sustainable) enterprise performance. Strategic Management Journal 28/13 (2007), pp. 1319-1350.

[vii] Govindarajan, Vijay, M. B. A. Vijay Govindarajan, and Chris Trimble. Ten rules for strategic innovators: From idea to execution. Harvard Business Press, 2005.

[viii] This description of the Novartis digital initiative drew from case IMD-32437 by D. A. Marchand and P. Bochukova, “Digital Transformation at Novartis to Improve Customer Engagement” (Lausanne, Switzerland, January 1, 2014) as well as “From Monologue to Dialogue: Fostering Meaningful Engagement with the Medical Community” Novartis AG, 2015m and S. Bennett “From Snitch Pill to Xbox sensors, Novartis goes Digital” Bloomberg.com (March 24, 2015).

[ix] Our 2000 book Wharton on Managing Emerging Technologies provides various organizational and strategic insights about why managing new technologies is often a different game for incumbents. This edited volume examines the major functions of business in light of new technologies, across a range of industries, and explains in part why this new game is so hard for firms and leaders to master.

[x] “Green technologies” are science-based applications that aim to conserve the natural environment and resources by minimizing waste and toxicity, conserving energy and reducing pollution and carbon emissions: GS Day and PJH Schoemaker, “Managing Uncertainty: Ten Lessons for Green Technologies,” MIT Sloan Management Review, (September 2011), 53-60.

[xi] Among the sources we consulted were: R. Rapier “A Look at DuPont’s” Work on Cellulistic Ethanol and Butonaol, www.energytrendinsider.com (April 14, 2014).

[xii] Truman, Semans & de Fontaine. “Innovating through Alliance: A Case Study of the DuPont-BP Partnership on Biofuels.” Pew Center on Global Climate Change. September 2009. http://www.c2es.org/publications/dupont-bp-partnership-on-biofuels-sept-2009

[xiii] Dupont Applied Biosciences FactSheet. May 11, 2010. http://www2.dupont.com/Media_Center/en_US/assets/downloads/pdf/FactSheet_IR_ABS.pdf

[xiv] Bringing biofuels to market has proved to be slower and more costly than expected and a recent report sounded a pessimistic note, “What Happened to Biofuels?” Economist (September 7, 2013).

[xv] Contingency theories were developed in the strategic management literature to show how the effectiveness of various management practices, techniques and capabilities will vary according to the circumstances. See for example, E. Daneels, “The Dynamics of Product Innovations and Firm Competences,” Strategic Management Journal, 23 (2002), 1095-1121; E. Daneels, “Trying to Become a Different Type of Company: Dynamic Capability at Smith Corona,” Strategic Management Journal, 32/1 (2011), 1-31, and M. Tripsas and G. Goretti, “Capabilities, Cognition and Inertia: Evidence from Digital Imaging,” Strategic Management Journal, 21/10, 1147-1161.

[xvi] H. Bahrami, “The Emerging Flexible Organization: Perspectives from Silicon Valley,” California Management Review, 34 (4), Summer 1992, 33-52 or K. Eisenhardt and S. Brown, Competing on the Edge: Strategy as Structured Chaos, Harvard Business School Press, 1998.

[xvii] http://www.economist.com/news/business/21605916-it-has-taken-ges-boss-jeffrey-immelt-13-years-escape-legacy-his-predecessor-jack.

[xviii] Taleb, Nassim Nicholas. Antifragile: Things that gain from disorder. Vol. 3. Random House Incorporated, 2012.

[xix] A.K. Dixit R.S. Pindyck, “The Options Approach to Capital Investment,” Harvard Business Review, May-June 1995, 105-15; I.C. MacMillan and R. Gunther McGrath, “Crafting R&D Project Portfolios,” Research Technology Management, September-October 2002, 48-59.

[xx] T. Kelley, The Art of Innovation, New York: Doubleday, 2001 and G.S. Lynn, J.G. Morone, and A. Paulson, “Marketing Discontinuous Innovation: The Probe-and-Learn Process” California Management Review, 38 (Spring 1996).

[xxi] A. Schoemaker, P.J.H. and Philip Tetlock, “Taboo Scenarios: How to Think about the Unthinkable” California Management Review, Winter 2012, Vol. 54, No 2, pp. 5-24.

[xxii] Para conceitos similares, veja IC MacMillan and R Gunther McGrath “Crafting R&D Project Portfolios” Research Technology Management (September – October 2002) 48-59. Os princípios de opções reais são parte integrante do conceito de super flexibilidade - incluindo o desenvolvimento de um valioso portfólio de iniciativas e a execução, por meio de experimentos, protótipos e iterações. Veja H. Bahrami and S. Evans, “Super-Flexibility for Real-Time Adaptation: Perspective from Silicon Valley,” California Management Review, 53/3 (Spring 2011) 21-39.

[xxiv] D.J. Teece, G. Pisano, & A. Shuen, “Dynamic capabilities and strategic management.” Strategic Management Journal, 18/(7) 1997, pp. 509-533; see also D.J. Teece, Explicating dynamic capabilities: the nature and micro-foundations of (sustainable) enterprise performance. Strategic Management Journal 28/13 (2007), pp. 1319-1350.

[xxv] Govindarajan, Vijay, M. B. A. Vijay Govindarajan, and Chris Trimble. Ten rules for strategic innovators: From idea to execution. Harvard Business Press, 2005.

[xxvi] A descrição da iniciativa digital do caso Novatis foi retirado de IMD-32437 por D. A. Marchand and P. Bochukova, “Digital Transformation at Novartis to Improve Customer Engagement” (Lausanne, Switzerland, January 1, 2014) e também de “From Monologue to Dialogue: Fostering Meaningful Engagement with the Medical Community” Novartis AG, 2015m and S. Bennett “From Snitch Pill to Xbox sensors, Novartis goes Digital” Bloomberg.com (March 24, 2015).

[xxvii] Nosso livro de 2000, Wharton on Managing Emerging Technologies, fornece vários insights organizacionais e estratégicos sobre o motivo pelo qual o gerenciamento de novas tecnologias é, muitas vezes, um jogo diferente. Este volume editado examina as principais funções dos negócios à luz das novas tecnologias, em vários setores, e explica, em parte, porque esse novo jogo é tão difícil para as empresas e os líderes dominarem.

[xxviii] “Tecnologias verdes”são aplicações baseadas na ciência, que visam conservar o meio ambiente natural e os recursos, minimizando o desperdício e a toxicidade, conservando energia e reduzindo a poluição e as emissões de carbono: GS Day and PJH Schoemaker, “Managing Uncertainty: Ten Lessons for Green Technologies,” MIT Sloan Management Review, (September 2011), 53-60.

[xxix] Entre as fontes, consultamos: R. Rapier “A Look at DuPont’s” Work on Cellulistic Ethanol and Butonaol, www.energytrendinsider.com (April 14, 2014).

[xxx] Truman, Semans & de Fontaine. “Innovating through Alliance: A Case Study of the DuPont-BP Partnership on Biofuels.” Pew Center on Global Climate Change. September 2009. http://www.c2es.org/publications/dupont-bp-partnership-on-biofuels-sept-2009

[xxxi] Dupont Applied Biosciences FactSheet. May 11, 2010. http://www2.dupont.com/Media_Center/en_US/assets/downloads/pdf/FactSheet_IR_ABS.pdf

[xxxiii] Teorias de contingência foram desenvolvidas na literatura de gestão estratégica para mostrar como a eficácia de várias práticas de gestão, técnicas e capacidades variará de acordo com as circunstâncias. Veja, por exemplo, E. Daneels, “The Dynamics of Product Innovations and Firm Competences,” Strategic Management Journal, 23 (2002), 1095-1121; E. Daneels, “Trying to Become a Different Type of Company: Dynamic Capability at Smith Corona,” Strategic Management Journal, 32/1 (2011), 1-31, and M. Tripsas and G. Goretti, “Capabilities, Cognition and Inertia: Evidence from Digital Imaging,” Strategic Management Journal, 21/10, 1147-1161.

[xxxiv] H. Bahrami, “The Emerging Flexible Organization: Perspectives from Silicon Valley,” California Management Review, 34 (4), Summer 1992, 33-52 or K. Eisenhardt and S. Brown, Competing on the Edge: Strategy as Structured Chaos, Harvard Business School Press, 1998.

[xxxv] http://www.economist.com/news/business/21605916-it-has-taken-ges-boss-jeffrey-immelt-13-years-escape-legacy-his-predecessor-jack.

[xxxvi] Taleb, Nassim Nicholas. Antifragile: Things that gain from disorder. Vol. 3. Random House Incorporated, 2012.