Unit 7: Discussion 2 MBA695

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Built to Become:
Corporate Longevity and Strategic Leadership*

© Robert A. Burgelman
Stanford University

Working Paper Series #3115
(Revised March 2015)

*This paper forms the conceptual foundation for the introductory chapter of a book
manuscript titled: Built to Become, co-authored with Philip E. Meza and H. Webb
McKinney. I thank Philip and Webb for checking facts and helpful edits on early
versions.

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A Thought Experiment

Suppose Bill Hewlett and Dave Packard came back from the Elysian fields today and

visited the corporation that bears their names. Would they recognize it? Would they be

happy about how HP has evolved and what it has become since their departures? Why

does it matter how they would react? Such is the level of respect for Packard’s and

Hewlett’s leadership and accomplishments in Silicon Valley and the wider world that the

two men’s legacies are still reflexively invoked to measure any change at HP.

Chances are that the founderswould hardly recognize the company today. For one thing,

gone are the original core Test and Measurement (T&M) businesses – the direct

descendants of the products the two engineer-entrepreneurs developed and manufactured

in that famed garage. Those assets were taken by a public company called Agilent that

spun off from HP in 1999, and some were to be spun off again in 2014 (in particular, the

core Test and Measurement business that the founders started in the garage so that

Agilent can focus on Life Sciences). Remembering GE’s old “Jack Welch rule” of

keeping in the corporate portfolio businesses that are #1 or #2 in their industry segments,

Hewlett and Packard might ask why HP’s corporate management did not continue to

capitalize on these leading-edge technology-based T&M businesses that dominated their

segments and ended up generating far greater return on investment than most of HP’s

other businesses.1 The founders likely would not be impressed by HP’s gigantic size

today and they would almost certainly be disappointed to find that the company HP is

now positioned in mostly commodity-type businesses.

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Poignantly, it is easy to imagine the founders one more time attempting to get a feel for

the culture of the current HP “by walking around,” as they did regularly at HP plants and

offices all over the world. They would probably be sorely disappointed at finding that

transaction-oriented values, imported from acquisitions and leaders from outside of HP,

have largely replaced the relationship and innovation-oriented values of the old HP Way,

and that the old culture of solidarity-and-meritocracy they built over decades has too

often given way to opportunism-and-careerism. Hewlett and Packard would surely

wonder what they could have done differently to preserve more of their values at the

company they created. Flipping through HP’s annual reports and news clippings, they

might think about the kind of boards of directors they assembled and the impact these had

on the company and its culture after they had gone; and the two men would wonder about

the impact that going outside the company for CEO leadership four times in a row had on

the legacy they probably believed they had cemented into the foundation at HP.

And yet, hard-headed businessmen and solid engineers that they were, they also would be

impressed that HP is still around as an independent company. Moreover, they would be

gratified that while HP—like many very large companies—is struggling to get back to

growth, it is profitable; that it still attracts excellent people; that it still has a bedrock of

very strong technological competence and human capital and that it still evokes in many

in Silicon Valley the feeling that HP has the potential to continue to be a great company.

The founders would probably admit to themselves and to each other that it does not really

matter what they think and feel about the company that was once theirs. What really

matters is that HP’s longevity be preserved so that it can continue to offer employees

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highly-valued jobs and be a source of innovation and contribution that makes the country

and the world a better place. Rooted in science and engineering as their thinking always

had been, they would probably return to the Elysian fields with fresh questions about the

forces that drive the evolution of long-lived companies, shape them in ways not

anticipatable by their founders, and about new ways to think about what makes such

companies great.

Inspired by the idea of Hewlett and Packard returning to visit their beloved HP, this book

addresses several questions that they probably would take back with them: Why do some

companies survive over long periods of time while others do not? What makes some

long-living companies great, and what does “great” actually mean? What is the role of

strategy and culture in helping a company live for many decades over the tenures of

multiple CEOs? How do long-lived companies balance their strategic resource allocation

between exploiting existing business opportunities and creating new ones? What is the

role of the board of directors in helping top management secure the future of the

company? These are questions for which executives (and business school professors) are

always looking for better answers.

Corporate Longevity and Greatness

Few companies survive as independent entities for very long periods of time. Of the top

100 US-based industrial companies listed in Fortune magazine in 1983, the year HP first

cracked into that elite group, only 21of those companies remained in the top 100 in 2013,

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the rest having been acquired, dropping in relative size or going out of business. But not

HP, it continued to rise. This is shown in Figure 1.1.

_______________
Figure 1.1 About Here

_______________

The rapid turnover in the Fortune 100 list shows the highly dynamic external

environments that most large corporations face. It is a tough world out there, especially

for tech companies. This dynamism results from industry players, sometimes incumbents

but more often upstart new entrants, changing the rules of the game. Whether implicit or

explicit, these rules of the game usually remain unchallenged for extended periods of

time, giving leading companies enough room to get comfortable and set in their strategies

until their worlds are turned upside down2

The rapid turnover in the Fortune 100 shows how short life can be for even very large

companies. Contrast this with religious, political and educational institutions, which often

are imbued with time-transcending values, and sustained by the faithful efforts of

successive generations of members who want them to continue to exist, for rational and

emotional reasons, beyond their stewards’ own lifespans. This is also true in many

family-owned companies.3 Corporate longevity for its own sake, however, can feel out of

step in publicly-owned companies that exclusively focus on maximizing share price,

particularly in our time of global competitive dynamics, transient corporate relationships

and purely transaction-motivated interactions between employers and employees that

leave no place for loyalty.4

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If longevity is hard to achieve; what about enduring corporate greatness? The best-selling

book, “Good to Great”5 defined “great” companies as those 11 that for a period of 15

years after a major transition were able to achieve average cumulative stock returns at

least 3 times those of the overall stock market. The book concluded that such enduring

greatness depends on a certain type of leadership style. Alas, corporate greatness appears

to be even more fleeting than corporate longevity. By 2007, only 3 of the 11 great

companies profiled in “Good to Great” remained “great”, with the 8 others either no

longer existing as independent institutions or now performing at levels below greatness.6

This seems consistent with the fact that some companies get lucky for an extended period

of time.7 But even companies that are identifiable as great through the statistical analysis

of sustained superior performance 8 still face the question whether their success is based

on superior capabilities or on benefiting from a process of cumulative advantage (e.g.,

increasing returns to adoption, or network effects, that create non-linear winner-take-all

strategic dynamics).9

Of course, all of this raises the question of what “greatness” really means. In the end,

greatness is unavoidably subjective since the objective measures used to demonstrate it

are a matter of choice. Corporate greatness should perhaps always be considered in terms

of performance measured against the best relevant competitors along multiple

dimensions, such as stock performance, market share, profitability, customer and

employee satisfaction and the like. A company only lives long enough to become great if

it continues to be able to satisfy its customers to generate the resources necessary for

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staying afloat, and can only remain independent if the majority of its shareholders want it

that way.

Also, company greatness is somewhat similar to company size; that is, it is basically a

static measure that is determined at a particular moment in time and is ephemeral because

in the next moment, as the data suggests, any given company can (and usually will) fall

from greatness. It may therefore be more useful to view company greatness, like

company size, as the by-product of a dynamic process. Company size, for instance, can

be viewed as the by-product at any moment in time of the company’s growth process.10

Similarly, corporate greatness can be viewed as the by-product of a company’s continued

strategic efforts to remain – in the words of Microsoft’s CEO Satya Nadella – relevant11

— to customers, investors and others. Remaining relevant is a necessary condition for

corporate longevity. With this in mind, greatness, admittedly subjectively, is re-defined

in this book as a company’s capacity to transform itself significantly throughout its

lifetime so as to remain relevant to its shareholders and thereby maintain its

independence.

A Typology of Company Founding

Company-building efforts can be characterized in terms of two dimensions. The first

dimension concerns the founders’ purpose: whether the venture’s purpose is short-term

instrumental (primarily serving the financial objectives of the founders and early

employees) or long-term institutional (primarily geared toward building a long-living

company). The second dimension concerns adaptive capability: whether the venture

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relatively quickly succumbs to the pressures of the external environment or is able to stay

ahead of these pressures (stays relevant!) and survives for the long term. This is shown

in Figure 1.2.

________________
Figure 1.2 About here
________________

Figure 1.2 shows four generic types of company building efforts. Failing companies are

ventures that serve an instrumental purpose but have low adaptive capability. The vast

majority of start-up companies, unfortunately, fall into this category. Short-lived

companies are built-for-exit ventures that serve an instrumental purpose but have

sufficiently high adaptive capability that they can survive long enough to secure a

successful exit for the founders and investors. A fairly recent example is Instagram, a

start-up company with 13 employees, that was sold to Facebook in 2011 for $1 billion.12

Live-to-be-acquired companies originate with an institution-building purpose but over

time lose the adaptive capability necessary to sustain their independence in the long run

and eventually get acquired (or fail and disband). HP’s acquisition of Compaq in 2002

remains a major example. Long-lived companies originate from an institution-building

purpose and are able to continue to develop the adaptive capability necessary to sustain

themselves as independent economic institutions for the long term, sometimes hundreds

of years.13 These long-lived companies are able to transform themselves multiple times

to weather the turbulence of environmental change and often absorb some of the built-

for-exit ventures and live-to-be-acquired companies, which add diversity and growth

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opportunities and increase their ability to survive. They are the companies that are

characterized further down in this chapter as “built-to-become.”14

This book focuses on HP as a built-to-become company; one that was able to acquire

other major companies such as Compaq and EDS. Compaq itself had been able

previously to absorb live-to-be-acquired companies such as Tandem Computers and

DEC. It also views HP as a “great” company because it has so far been able to transform

at least five times (some say six times15) in the course of its 75-year history and is

currently working through a sixth major transformation. The chapters that follow will

examine how HP and its successive CEOs have been able to sustain the company’s

longevity and greatness.

Context Dynamics and Corporate Becoming

Looking at a company’s history involves understanding the continuities, contingencies,

and changes in context – the context dynamics – that the company faces over time.

Continuities are patterns that extend for a long time; by contrast, contingencies are

events that do not form a pattern.16 External continuities (e.g., technological forces;

regulatory laws) as well as internal ones (e.g., the imprint of founders’ values and

approaches beyond their own tenures; the unresolved issues and challenges left to a

successor CEO by his or her predecessor) extend beyond the tenure of any CEO in the

evolution of the firm. Contingencies – unexpected good luck or bad luck events –

unavoidably confront CEOs during their tenures.

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Context is formed by the set of changing external and internal forces within which

strategic leadership must operate. Context does not cause events but determines its

consequences; for instance, slipping on a path in a flat field may result in a strained ankle

or broken leg, but slipping on a path along a hundred-foot cliff may result in death.17 As

the statesman and historian Henry Kissinger has insightfully observed:

Leaders cannot create the context in which they operate. Their distinctive
contribution consists in operating at the limit of what the given situation permits.
If they exceed these limits, they crash; if they fall short of what is necessary, their
policies stagnate. If they build soundly, they may create a new set of relationships
that sustains itself over a historical period because all parties consider it in their
own interest.18

Kissinger’s view about context could be interpreted to imply that leaders must always

take the context as unalterably given, but this would of course be too limited an

interpretation.19 Also, leaders must be able to simultaneously take into account and deal

with both the internal and external dimensions of context. Once a leader takes strategic

actions that change the context, however, the consequences, as is widely understood,

usually cannot be fully anticipated.20

One important implication of the importance of context is that strategic leadership must

be able to operate in unstructured, or at best ill-structured, situations.21 The corporate

environment is messy: key executives often undertake strategic actions that may not be

well aligned; a company’s most threatening competitor may not be apparent in advance;

the players in any industry can make a multitude of strategic moves; and the results of

competitive interaction between industry competitors are not always predictable. The

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functioning of the strategic leadership in large, complex organizations is therefore likely

to be relatively untidy, and difficult to capture in relatively simple analytical models.

Changes in internal and external context make useful milestones for studying the

role of strategic leadership in the evolution of a company over time. The changes

can be subtle and hard to perceive as they occur or they can be clankingly

obvious. They are usually caused by changes to the “rules of the game” that

govern the context in which firms operate. There are several different types of

rules that shape the context dynamics over time.

Normative rules are based on law, cultural norms, ethics, and administrative

principles. For instance, consider the rule of “fair use” that governed the way in

which consumers could copy and share their copyrighted material such as music.

Technological rules are based on the available technical solutions at a particular

moment in time. Consider here how, because of the Internet and the availability of

broadband, the Internet startup company Napster made it possible to share music

files electronically and thereby induced many consumers to violate the “fair use”

normative rule. Economic rules form the foundation for the business models

adopted by industry players. For instance consider how software as a service

(SaaS) is changing the business model of enterprise software companies such as

SAP AG and Oracle. Economic rules usually also reflect the relative bargaining

power of different industry players (often apparent in contracts). Cognitive rules

are judgments about critical success factors that are widely shared among senior

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executives of incumbent companies in an industry. For instance, think about how

senior executives in major American automotive companies during the 1950s

through the early 1960s thought about key success factors until the entry of

Toyota with its completely different, innovative manufacturing and supplier

relation strategies. 22 Innovation, a major force in the evolving contextual

dynamics, involves changes in some or all of the rules, and has a big impact

(positively or negatively) on the strategic position and distinctive competencies of

different industry players.

Changes in context create strategic challenges for CEOs during their tenures: positive

ones in the form of opportunities that beckon to be pursued, and negative ones in the

form of threats to be neutralized. To see the impact of past shifts in the context, it is

helpful for researchers to trace events back in time to where the context significantly

changed, and to look for changes in rules that caused the shift. To try to forecast how

prospective shifts will impact a company’s external and internal contexts, researchers can

use “critical event horizons”- the informed estimate of the time that it will normally take

for a particular event to be completed and its impact felt (for instance, the time it takes to

develop and bring to market a new product or service) – to estimate how long to look,

real-time, for the expected change.23

This book combines the historical perspective gained from years of research, experience

and interviews with more than 60 former and current key HP executives (including all of

HP’s living CEOs) with “grounded theorizing:” an inductive method that uses the rich

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field research data in combination with relevant existing and novel theoretical concepts

and frameworks to generate deeper insights into why and how HP has survived and most

of the time thrived in the face of major context changes, well beyond most of its

competitors. [See APPENDIX 1]

The book’s novel and distinct focus is on the strategic leadership efforts of successive

CEOs to stay on top of context dynamics and to guide HP to continued survival and

economic performance through turbulent times. The capacity to stay on top of external

and internal context dynamics, and to stay relevant to its shareholders, determines a

company’s capacity for “becoming:” An open-ended evolutionary process for which

there is no ex ante teleological vision and which unfolds through a series of epochs and

transformations in the course of the company’s history. Studying this process of

corporate becoming involves examining how strategic leadership of corporate

transformations makes it possible to morph earlier epochs into later ones, including how

it handles conflict between early and later epochs as the company evolves.24

Corporate Becoming and Strategic Leadership

This book intends to show that sustaining HP’s process of becoming has depended on the

effectiveness of the company’s strategic leadership throughout its history. Effective

strategic leadership results in the company remaining in control of its destiny;25 that is,

able to maintain a level of performance that consistently meets the expectations of the

majority of its shareholders to keep the company independent in the long run.

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Strategic Leadership Involves Executives throughout the Organization

While this book focuses on the contribution of HP’s founders and successive CEOs to its

process of becoming, strategic leadership in large, established organizations, such as HP,

involves key executives throughout the company.26 House and Price in their

comprehensive narrative of HP’s history until early 2009, for instance, list several

hundred names of HP senior executives that made a strategic contribution during the

company’s evolution.27

Carlos Brito, the CEO of AB-Inbev, the largest brewing company in the world, points out

that companies need to be able to maintain a core membership, around 65 percent of the

employees at any given time, that views itself as the “torch bearers” sustaining the

company’s continued existence, and that these are held together by around 15 percent of

the employees that form a company’s “critical leadership” that helps the company stay

relevant in its changing environment.28 Also, the desire and drive to maintain a

company’s relevance, longevity and greatness are enhanced if, as luxury goods company

LVMH’s Managing Director Antonio Belloni put it, the critical leadership thinks of itself

as the guardian of some timeless brands: “We are guardians of the temple for a relatively

small or short period in the life of these brands.”29 Substitute “HP”for brand, and a

similar desire and drive to sustain the company’s relevance, longevity and greatness may

be observed in the study of HP’s critical leadership.30

Strategic Leadership Exploits Existing Opportunities and Creates New Ones

As the study of HP’s history of becoming will show, to be effective in the long term a

company’s strategic leadership must be able to exploit existing business opportunities in

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its familiar environment. To do so, top management creates a top-down strategy process

that aligns strategic actions by the critical leadership deeper in the organization (who

significantly commit key resources of the company) with the company’s strategy in the

pursuit of clearly defined growth opportunities. This is called here the induced strategy

process, which aligns strategic action with corporate strategy in the pursuit of a major

growth opportunity. Another way to put it is that strategic leadership in the induced

process seeks to achieve tight “fit” with the company’s familiar product-market

environment. Intel’s Andy Grove has called this strategic leadership task “vectoring” the

organization. Strategy vectors, however, tend to create lock-in with the familiar

environment.31 In a way, the company chains itself to the specific environment it selects,

especially if the company is extraordinarily successful in that environment, as has been

the case with Intel in the PC industry. And, major growth opportunities in familiar

environments usually eventually diminish or may even vanish.

As the study of HP’s history of becoming will also show, companies fortunately usually

have a reservoir of entrepreneurial employees who try to create new business

opportunities in newly emerging environments, in a mostly bottom-up process. This is

called here the autonomous strategy process.32 Through the autonomous strategy process

the company pursues new opportunities that are outside of the scope of the existing

corporate strategy, relate to new environmental segments, and often emerge through

unanticipated novel applications or extensions of the company’s distinctive competencies

by entrepreneurial employees. Another way to put it is that strategic leadership through

the autonomous process seeks to maintain the company’s capacity to “evolve.”

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Autonomous strategic initiatives can be complements to the company’s existing

businesses or provide early signals of the emergence of potential substitutes; e.g.,

“disruptive technologies,”33 showing the importance of keeping the autonomous strategy

process alive and well and developing the capability to capitalize on it.

Autonomous strategic initiatives, however, pose different strategic leadership challenges

than induced strategic initiatives. Often such initiatives take on the form of projects that

are dispersed in several parts of the organization and need to be brought together to create

a new, sufficiently large business thrust that is relevant from the corporate point of view

(we describe three important HP examples below). This agglomeration and scaling effort

needs to be performed by a company’s senior executives who are able to formulate a

strategy for a new business area that is convincing enough to get peers to surrender

control of autonomous projects that may be “orphans” in their part of the operations. In

addition, these senior executives also need to be influential enough to secure top

management support to make complementary or supplementary acquisitions, if needed, to

further scale the new business.34

Senior executives championing autonomous strategic initiatives need to work hard to

convince top management to amend the corporate strategy, thereby integrating the

autonomous initiatives into the induced process going forward. A powerful example is

provided by former IBM CEO Lou Gerstner’s recall of how Dennie Welsh, the senior

executive in charge of IBM’s Integrated Systems Services Corporation (ISSC) which was

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at the time only a sub-unit of the sales force, convinced him that global services was a

tremendous new growth opportunity for IBM. In Gerstner’s words:

My mind was afire. Not only was he describing something I’d wanted
when I was a customer (for example, I had tried unsuccessfully to
outsource the running of RJR Nabisco’s data centers), here was a man
who understood what customers were willing to spend money on, and he
knew what that meant – not just the business potential for IBM, but the
coming restructuring of the industry around solutions rather than piece
parts.35

Another powerful example concerns the development of “multi-touch” for the iPad in the

extremely tightly top-down run Apple. Whereas Steve Jobs reportedly told his biographer

that he asked his team to come up with a multi-touch screen, Jonathan Ive, the team

leader, had a different memory of the development:

He said his design team had already been working on a multi-touch input that was
developed for the trackpads of Apple’s MacBook Pro, and they were
experimenting with ways to transfer that capability to a computer screen. They
used a projector to show on a wall what it would look like. “This is going to
change everything,” Ive told his team. But he was careful not to show it to Jobs
right away, especially since his people were working on it in their spare time and
he didn’t want to squash their enthusiasm. “Because Steve is so quick to give an
opinion, I don’t show his stuff in front of other people,” Ive recalled. “He might
say, ‘This is shit,’ and snuff the idea. (…)”36

Capitalizing on autonomous strategic initiative depends critically on the “strategic

recognition” capacity of the company’s senior leadership. Strategic recognition means

that some senior executives (at first usually only one or a few) are able to see the strategic

implications for the company of pregnant actions and events that have started to happen

inside or outside the company and signal emerging opportunities or threats. These

executives are willing and able to bring those insights into conversations with other

senior executives and top management before everybody agrees about them, which

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broadens support for action to deal with the changes.37 A simple and powerful example

of strategic recognition at HP was provided by one scientist from HP Labs when he said

“Dick Hackborn played a critical role in Inkjet: ‘He said this was the kind of thing that

suits HP.’” Three examples of new business development briefly reported below (see

balancing strategic resource allocation to fit and evolvability) highlight how senior

executives such as Richard (“Dick”) Hackborn, Joel Birnbaum, Willem (“Wim”)

Roelandts, and John Brennan, among many others, performed these critical leadership

activities over multiple decades at HP.

Companies with strong strategic leadership, like HP, are aware of the important role of

both induced and autonomous processes in strategy-making, tolerate a sufficient level of

uncommitted resources and looseness in control to continue to maintain a portfolio of

autonomous initiatives, and are able to select at the right time (when the viability of an

autonomous initiative has been demonstrated) to integrate those initiatives into the

induced process in order to exploit the changing environmental dynamics. Because many

autonomous initiatives are likely to fail, it is important to develop the appropriate

strategic leadership discipline that helps leaders decide which ones to stop, and when.

Without the discipline of stopping autonomous strategic initiatives that do not work, the

company dissipates its resources and ruins the careers of its entrepreneurial employees.

“Strategic context determination” is the part of the autonomous strategy-making process

through which these disciplining strategic leadership activities are performed. Strategic

context determination helps resolve the tension that exists between newly emerging

autonomous strategic initiatives and the corporate strategy in force at that time. 38

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[APPPENDIX 2 shows a schematic of the induced/autonomous strategy processes

framework. It also discusses how the induced/autonomous strategy processes can be

related to the idea of becoming in complexity theory.]

Strategic Leadership: The Key Role of the CEO

As noted above, a company’s critical leadership involves executives throughout the

organization. In contrast to more pluralistic organizations, however, where power is often

widely diffused and objectives can widely diverge,39 business organizations usually have

a “peers-plus-one” mechanism in place to force change on the organization.40 The “one”

is the CEO. With the help of the “Strategy Diamond” framework, this book focuses on

the key strategic leadership role of HP’s successive CEO in sustaining the company’s

process of becoming. The strategy diamond framework views strategic leadership in

terms of mastering the alignment of five dynamic forces that drive a company’s

evolution: (1) the company’s strategy; (2) its chosen product-market position; (3) its

distinctive competencies; (4) its strategic actions; and (5) its internal selection

environment.41 This integrative theoretical framework simultaneously considers the links

between product-market position and distinctive competence, and between strategy

(formulation) and strategic action (execution). The effectiveness of a company’s strategic

leadership is determined by the CEO’s ability to use these five forces to keep the

company viable in the face of highly dynamic external and internal contexts. [See

APPENDIX 3 for a schematic representation of the strategy diamond framework.]

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Key Tasks of the CEO’s Strategic Leadership

This book’s chapters focused on the contribution of successive CEOs to HP’s process of

becoming will document how they discharged the key tasks of strategic leadership. This

will involve examining how clear each CEO was about the company’s strategy; that is,

clear about the business(es) the company wanted to be a winner in, what winning means,

and what competitive advantage the company would rely on to be a winner during their

tenure. Clarity about strategy is important because it helps guide positioning the company

in its product-market environment and gives it a roadmap to navigate the non-market and

capital market environments as well. To get this strategic clarity, successive HP CEOs

had to truly understand what it takes to win (the basis of competitive advantage) in their

desired product-market position. Clarity about the strategy also provides the basis for

identifying what the company’s distinctive competencies are; that is, what the company

has got that allows it to occupy the desired product-market position, defend it and

leverage it. Through formulating the corporate strategy and the implied product-market

position and distinctive competence, successive HP CEOs stated their intent about how to

shape the company’s future.

Successive CEOs’ strategies, however, become reality as opposed to mere rhetoric when

taking strategic action (or not taking action). Strategic actions are consequential; that is,

they commit the company to a particular position in its environment and deploy and

develop competence in support of that position. These actions (or their absence when the

changing environment requires them) are difficult to reverse. Through getting the

company’s executives to execute the strategy, successive CEOs actually determined HP’s

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future which then became the past with associated path dependencies for their successors.

The chapters that follow will examine to what extent the strategic actions that anew CEO

had to take were constrained by the strategic actions of his or her predecessor(s).

The CEO’s Role in Developing the Company’s Strategic Leadership Capability

The strategy diamond framework defines the role of the internal selection environment in

terms of helping top management discharge the key tasks of strategic leadership in the

face of external and internal context dynamics: (1) defining and redefining the businesses

the company wants to be a winner in and the required corporate strategy, (2) aligning and

re-aligning strategic positioning with distinctive competence, and (3) aligning and re-

aligning strategic action with corporate strategy (see APPENDIX 3). In the remainder of

this book the internal selection environment is cast in terms of the company’s “strategic

leadership capability,” and its development viewed as an important CEO responsibility.

The chapters that follow will examine how HP’s founders and successive CEOs

developed the four key elements of the company’s strategic leadership capability: (1)

developing the strategic leadership regime (integrating top-down and bottom-up strategic

leadership), (2) managing dynamic interplays between corporate strategy and corporate

culture, (3) balancing strategic resource allocation for fit (exploiting existing product-

market opportunities) and evolvability (developing new product-market opportunities),

and (4) managing dynamic interactions with the board of directors. These four elements

are further discussed below.

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Developing a Strategic Leadership Regime

Integrating Top-Down and Bottom-up Strategy Processes

A company’s strategic leadership regime can be characterized in terms of the strength of

top-down and bottom-up strategic leadership processes, which suggests four distinct

types. Bottom-up strategic leadership can only be strong, of course, if the CEO

consistently encourages and supports it. Also, companies will seldom, if ever, show an

exact fit with any one of these four pure types. However, given the external and internal

context dynamics, the typology can serve as a diagnostic tool to help the CEO better

assess the direction in which the strategic leadership regime is evolving (if left

unattended) and so be better able to make sure it continues to integrate bottom-up with

top-down strategic leadership to maintain the effectiveness of the strategy-making

process. The four types are shown in Figure 1.3.

_________________
Figure 1.3 About Here
_________________

If top-down and bottom-up leadership are both weak, the company has a strategic

leadership regime characterized by “Brownian motion:” it is one where employees, like

particles suspended in a liquid, go through motions following a random path. Here, the

induced strategy process lacks direction, and the autonomous strategy process pursues

new ideas haphazardly and without the ability to scale potential winners and stop losers.

It is difficult to see how this regime could effectively sustain the process of corporate

becoming.

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If top-down leadership (and the induced strategy process) is weak and bottom-up

leadership (and the autonomous strategy process) is strong, the company has a strategic

leadership regime characterized by “drifting.” Here, the company will possibly face

increasing complexity because of unchecked proliferation of businesses and business

models that cannot all be sustained; or radical innovation may in fact become stifled

because strong-headed business-level leaders focus almost exclusively on the short-term

and compete vigorously among each other for the company’s resources. In either case,

the company is likely to progress more or less in a zigzag fashion without clear corporate

strategic direction. Here too it is difficult to see how this regime could effectively sustain

the process of corporate becoming.

Where top-down leadership is strong and bottom-up leadership weak, the company has a

strategic leadership regime characterized by “lock-step.” Here, the top-down induced

strategy process imposes a clear direction but the bottom-up autonomous strategy process

receives no consistent corporate support and is likely to atrophy over time. Conflict

remains latent or is suppressed, and everybody is expected to march full speed in the

same strategic direction, so the direction better be the right one. This regime is closely

related to the “Great Leader” theory of strategic leadership. (In recent times Steve Jobs

immediately comes to mind as the exemplar of this model.) Charismatic leaders are very

closely associated with the periods of extraordinary success in a company’s history that

they oversee. Sometimes, the company’s board of directors will try to “routinize the

charisma” of such a CEO by attempting to codify the leader’s strategic leadership

intuition and idiosyncratic approaches such that it becomes institutionalized and

24

presumably helps successors to continue to benefit from the great leader’s extraordinary

talent.42

Strong top-down leadership combined with strong bottom-up leadership creates a

strategic leadership regime characterized by “constructive confrontation.” Here, the CEO

encourages lower level leaders to use the expert knowledge and information that they

obtain from being exposed to signals coming from internal and external environmental

change to challenge upward to be able to get clarity about the strategic situation facing

the company at critical times in its evolution. This regime presumably enables the

company to deal quicker and better with external and internal context dynamics. In

particular, with this regime the top-down induced strategy process provides clear

direction for the core business(es), but it also provides room for the bottom-up

autonomous strategy process to make the case for initiatives that are able to scale to

become integrated in the corporate strategy going forward.

“Constructive confrontation” is a term adopted from the Intel Corporation where it took

root as a result of the founding triumvirate (Robert Noyce, Gordon Moore, and Andy

Grove) insisting that “position power” (read more senior, usually older executives)

should not shut up “knowledge power” (read less senior, usually younger executives).43

The terminology used is, of course, less important than the strategic leadership regime

that it intends to describe, and different organizations might wish to use their own

terminology for characterizing a regime that tries to capitalize on the best information

about the strategic situation facing the company that is available in the organization.44

25

Furthermore, given the diversity of national and regional social cultures in the global

corporate context, strategic leaders adopting constructive confrontation must be able to

translate the ways in which it is applied to those cultures. In Japan, for instance, the very

sound of constructive confrontation will come across as incompatible with the Japanese

culture, and strategic leaders will have to find other terminology to communicate the

model while making sure that its purpose – which is to get to the unvarnished truth of the

strategic situation facing the company at a particular moment in time – will not get diluted

or adulterated.

Maintaining constructive confrontation as the organization evolves and successive CEOs,

all with their distinctly different personalities and approaches, take charge of the

company’s strategic leadership, is extremely difficult. Over time, there is the danger that

a new CEO will send powerful signals that debating strategic decisions is no longer

particularly valued, and strategic leadership moves in the direction of lock-step.

Alternatively, a new CEO’s indecisiveness allows debates to go on too long and without

resolution (e.g., the same issues come up time and again; or criteria of functional

excellence that are no longer externally relevant keep fueling endless debates), which

drives strategic leadership regime in the direction of drifting or even Brownian motion.

Context Dynamics and Strategic Leadership Regimes

Context dynamics create strategic inflection points that are usually signaled by strategic

dissonance: senior executives no longer have a shared understanding of the strategic

situation facing the firm and disagree about the fundamental actions to take. Strategic

26

dissonance must be resolved before the company can transform itself as it tries to find a

viable path while traversing the “valley of death” associated with a strategic inflection

point, but it is usually not clear in advance what the ultimate shape of that transformation

will be.45

A strategic leadership regime based on constructive confrontation (or equivalent

culturally acceptable terminology) is best able to deal with strategic dissonance because it

values dissent and genuinely encourages open debate. It makes it possible to capitalize on

top and senior executives’ strategic recognition capacity; that is, their ability to quickly

recognize important changes in the external context, to determine how much time there is

take strategic action, and to persuade others to help them adjust to exploit the changes.

This, in turn, helps bring the debate to a conclusion by reaching general agreement on a

new strategic direction necessary to re-align action with strategy.

Managing Dynamic Interplays between Strategy and Culture

A company’s process of becoming also depends critically on how well the company’s

strategy and culture continue to support each other throughout the company’s evolution.

While some management experts caricature strategy and culture as alternative sources of

corporate success, often belittling the importance of strategy (“culture eats strategy for

breakfast”),46 a more enlightened view is that strategy and culture complement each

other. As Burgelman points out in his lectures on strategic leadership at Stanford

Business School, “strategy without culture is powerless; but culture without strategy is

aimless.” In the happy days of a company’s history, culture and strategy are mutually

27

supportive. Happy days, however, are not forever, so it is useful to consider various

dynamic interplays between strategy and culture in light of changing context dynamics.

Corporate Strategy

A recent treatise on “good” versus “bad” strategy47 posits that the kernel of a good

strategy contains three elements: (1) a diagnosis that simplifies the complexity of a

situation and identifies critical aspects that define the challenge facing the CEO; (2) a

guiding policy for dealing with the challenge that helps overcome the obstacles to

meeting the challenge; and (3) a set of coherent actions to execute the guiding policy.

These three elements are highly valuable for helping to ex ante ascertain the potential

effectiveness of a corporate strategy, one of the five forces in our strategy diamond

framework (discussed earlier).

However, to get enacted by a sufficiently large proportion of the company’s senior

executives; i.e., the critical leadership, the strategy must also engage these leaders both

rationally and emotionally. They must feel compelled to execute it. This fourth element is

crucially important. This is powerfully illustrated by a recollection former Intel CEO

Andy Grove shared with Burgelman after Intel top management had decided to transform

the company from a semiconductor memory maker to a microprocessor-for-PCs

company. Grove said:

The “Grove leadership approach” consisted of trying to persuade and sell the new
strategic approach to the management team. (…) After some period of time, the
new strategy had traction with some managers and did not have traction with
some others. The people who did not get traction – they may have provided lip
service to the new strategy, but their actions were not supportive – the approach
was to remove these people from positions were they could choke progress. (…)

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As a top manager you have to have a high level of understanding and then let
people do the implementation. They do or they don’t. (…) It was not that some
didn’t understand the strategy, or even that they disagreed with it; it was more like
they didn’t get excited about it. 48

A critically important condition for Grove’s successful intervention was of course that the

new strategy was clear in his own mind. In other words, if the strategy is not clear and/or

is not clearly communicated to the critical leadership, it is not possible for the CEO to

judge whether it is being implemented or not.

In light of this, the corporate strategy at a particular moment in the company’s evolution

can be considered compelling if it is clearly articulated and communicated by top

management (meets the three core elements of strategy) and acted upon by the critical

leadership because they accept it both rationally and emotionally as necessary to deal

with strategic change, or as non-compelling if many senior executives are unclear about

what it really means and why they should care about acting upon it.

Corporate Culture

The research of HP’s process of becoming suggests that to better understand the dynamic

interplays between corporate culture and corporate strategy it is useful to distinguish the

hard part of corporate culture, which is called here the “operating model” (employees’

beliefs about “how we execute strategy in this company”) from the soft part, which is

called here the “core values” (employees’ beliefs about how people ought to be treated

and treat each other while we execute strategy in this company). This research also

discovered that there are latent potential conflicts between the operating model and the

29

core values, which sometimes becomes apparent when external context dynamics

necessitate a change of the corporate strategy.49

In light of these insights, corporate culture during a particular CEO’s tenure can be

compatible with his or her corporate strategy; that is, is viewed by the critical leadership

as generally consistent with the existing operating model and with the existing core

values; or incompatible; that is, many senior executives are no longer sure about how the

strategy should be executed with the existing operating model; further, they might

experience significant conflict with the company’s existing core values.50

Managing Dynamic Interplays

These two dimensions define four different types of dynamic interplays between culture

and strategy potentially that a CEO may face when dealing with changing context

dynamics. Managing these interplays is the second key element of strategic leadership

capability associated with corporate becoming. This is shown in Figure 1.4.

_________________
Figure 1.4 About Here

_____________

The combination of a compelling corporate strategy with a compatible corporate culture

is likely to produce commitment. Here, the CEO faces little difficulty in getting

employees to forcefully try to execute the strategy. This type of interplay is most

congruent with “constructive confrontation” based on strong top-down and strong

bottom-up leadership (Figure 1.3). A compelling corporate strategy combined with an

incompatible corporate culture, on the other hand, is likely to produce conflict. Here the

30

CEO is likely to face starkly different views among key employees, probably some old-

timers who are steeped in the culture that worked well in the past and some new-comers

who advocate new ways of doing things, about what the best way is to execute on the

strategy. This situation can be viewed as most congruent with “lock-step” based on

strong top-down leadership to impose the new strategic direction and keeping conflict

suppressed, but with weak bottom-up leadership (Figure 1.3).

The combination of a non-compelling corporate strategy with a compatible corporate

culture is likely to produce contention. Here the CEO is likely to be faced with competing

factions each supporting a different strategic direction, while claiming that their preferred

strategic direction is (more) consistent with the corporate culture. This type of interplay is

most congruent with “drifting” based on weak top-down and strong bottom-up leadership

(Figure 1.3). A non-compelling corporate strategy combined with a non-compatible

corporate culture, on the other hand, is likely to create confusion. Here the CEO is likely

to be at a loss about what to do and how to do it, and change events may simply take

over. This interplay can be viewed as most congruent with “Brownian motion” based on

weak top-down and weak bottom-up leadership (Figure 1.3).

Balancing Strategic Resource Allocation for Fit and Evolvability

Fit and Evolvability in the Internal Ecology of Strategy-Making

Large companies like HP can be viewed as ecological systems within which strategic

initiatives emerge and compete for the company’s resources through the induced and

autonomous strategy processes.51 As noted above, the company’s strategic leadership

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orchestrates the overall strategy-making process by (1) providing guidance for the

induced process (usually through the regular strategic planning process) to improve fit

with the existing product-market environment; and (2) activating strategic context

determination processes to decide which autonomous (unplanned) initiatives to continue

to support in new environmental segments to maintain evolvability (see APPENDIX 2).

The internal ecology of strategy-making plays a crucial role in the process of corporate

becoming because it serves to define and protect but also to redefine the company’s

identity in relation to its external ecosystem. This is so for two related reasons. First, the

induced and autonomous strategy processes involve competing claims by senior

executives about the allocation of the company’s resources, which directly affects their

interests and therefore concentrates their efforts to influence top management’s strategic

decisions about how the company should define itself (e.g., HP as an instruments

company or a computer company). Second, initiatives emerging in the autonomous

strategy process challenge the concept of strategy that drives the induced strategy

process. Either the CEO ultimately refers to the existing concept of strategy to maintain

the focus on fit and rejects the autonomous initiative and thereby also re-affirms the

current identity of the company in its external ecosystem; or the CEO integrates the

autonomous initiative to pursue evolvability into the corporate strategy going forward

and thereby redefines the company’s identity. In this way, induced and autonomous

strategy processes “mutually specify each other “so that they constitute the company as

“a self-perpetuating entity” in relation to its evolving ecosystem.52

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While it is difficult to predict how a company will evolve over long periods of time with

this type of strategy-making process, it also offers it the best chance to remain adaptive in

the face of external context dynamics, which is the very meaning of built-to-become.

Three HP Examples of Evolvability

Sidebars 1-3, briefly report three previously mentioned new business development

initiatives within HP that emerged through the autonomous strategy process and shaped

the company’s process of becoming. They highlight the importance of “strategic

recognition” on the part of senior executives; as well as of “strategic integration:” their

ability to bring together various autonomous strategic initiatives that are dispersed

throughout the company but need to be brought together to focus and scale a new

business development effort for the company.

Sidebar 1: Emergence and Development of Computers at HP

During the 1960s, HP‘s initial focus in computers was on instrumentation control and

scientific calculation. (Dave Packard preferred to call them Instrument Controllers to

avoid antagonizing IBM, a large HP customer at that time). HP’s work in computers had

been dispersed across regions and divisions in the highly decentralized company

designed for the instrumentation business. In fact, there were three major lines of 16 bit

mini-computers, all with different architectures, operating systems and purposes

(technical oriented or business oriented). These computer systems all had homegrown,

proprietary architectures for hardware, software and networking, and the company had

not brought in many experienced computer scientists. As it became clear that computers

33

were moving toward 32-bit architectures, CEO John Young realized that HP could not

afford to convert all of its lines of computers to their own 32-bit architecture, so he

decided to poach Joel Birnbaum, head of experimental systems at IBM, to lead a drive

toward a unified 32-bit computer architecture in HP labs. Birnbaum and his team pursued

a reduced instruction set computing (RISC)-based architecture that was referred to by the

internal code name “Spectrum.”

Interestingly, one of HP’s three computer systems was already developing its own 32-bit

architecture it called “Vision.” As this group comprised HP veterans that Young was

familiar with and trusted, he initially put his money on the Vision project.. At the same

time, however, he encouraged Birnbaum to continue full-speed with the development of

Spectrum. In the words of Birnbaum, who had foreseen that Vision would have fatal

problems (strategic recognition in action) long before others at HP, “Vision died of its

own weight. A decision was made to kill Vision, but it was at least a year later than

needed. It wasn’t really a decision. They had no choice.”53

The actual functioning of the Spectrum technology, now named HP-PA (for Precision

Architecture), however, was still troubled. As another senior executive said:

“There was a lot of work left to do to get these systems to market across the multiple

computer product lines.” HP still faced the problem of strategic integration with

Spectrum. It ultimately took almost 10 years and several senior executives, including top

scientist Joel Birnbaum and hard-charging senior executive Wim Roelandts, to

34

successfully oversee the completion and integration of Spectrum across HP’s computer

product lines.

Sidebar 2: Emergence and Development of HP’s Inkjet Printers

Both dispersed autonomous strategic initiatives and strategic integration were also

important in the great success story of HP’s Inkjet business. According to one senior

scientist in the HP Labs:

There is this stress between opportunism and strategy. I think a lot of what
happened when HP got into Inkjet printing was opportunistic more than strategy.
Nobody was asking us to produce an Inkjet printer.” (…) It just so happened that
John Vought came up with a great idea and wanted to work on it; but the
opportunistic thing is that Frank Cluture had been working on liquid crystal
displays in Corvallis – he had a lab there and got a lot of equipment and a lot of
people – and was trying to compete with the Japanese on building liquid crystal
displays. But he could get the finished displays from Japan cheaper than it cost
him to buy the components in the U.S. That killed his project, but he found
himself with people and a lab that could do thin films on glass and other things.
When Vought heard about HP’s early work in thermal Inkjet, he knew he found a
viable home for his people and their work, He could put thin films on glass, which
is the way we first started out. He got very excited that he had something he
could do with his organization and resources. That was the point in time, long
ago, when a general manager could be an entrepreneur.

This scientist also observed the dispersion of entrepreneurial initiatives (through the

autonomous strategy process) within HP:

We were ultimately involved in 4-5 different HP divisions; each was coming at
inkjet printing from a different direction, including Boise, Vancouver, San Diego,
Corvallis and Fort Collins. It was like the history of computing at HP, with
different divisions coming at it from different directions. HP Labs struggled trying
to support these different businesses with different objectives in their printers:
some of them wanted low-cost throw-away print heads; Boise wanted a page-
wide print head to replace the Laser Printer; everybody wanted something
different and everybody had a slightly different technology they were basing their
Inkjet on. Basically, (it was) our technology (but) with different materials and
different architectures.

35

Finally, highlighting again the importance of the strategic recognition as well as strategic

integration capacity of senior executives, this scientist also said:

It wasn’t until Hackborn formed the Peripherals Group and converged all of that
that we could deal with one technology that everyone could end up using.

Sidebar 3: Emergence and Development of HP’s Networking Business

One HP group working early in networking was in Grenoble, France. That group made

industrial terminals. It was a business that started to bore a young Belgian engineering

manager named Wim Roelandts (the same one we met earlier, associated with HP-PA

development) who started “digging around looking for something else to do.” One of the

ideas he came up with was for expanding in networking. Roelandts said:

: You came up with an idea and you tried to convince your boss to let you pursue it.
You sold it to your division manager. He would then talk to the group manager. If
there was an interest, you could then talk to the group manager and get your idea
funded. They would give you a little bit of money to kind of work on your idea.
So, that was kind of how it started, at least in Grenoble.54

Until the early 1980s, HP’s three major computer divisions each developed its own

networking technologies and protocols. In 1985, the Information Networking Group was

formed, and led by Roelandts, to consolidate the independent networking businesses. HP

had to be able to connect their computer systems to those of IBM and DEC, and this

created a problem. According to Roelandts, “I had fewer resources than IBM and DEC

but I had to create protocols to interact with their systems and HP’s systems. That’s why

we started playing with TCP/IP, because it was an open single standard.”55

HP’s success with open standards, created its own momentum. Roelandts’s successor was

quite bullish on HP’s opportunity in networking. As early as 1988, he thought it could be

36

a $1 billion for HP. This, however, led to further internal tensions and the successor lost

the argument and left the company. In 1988, HP disbanded the networking group,

sending most of its component parts to various systems groups. Networking had been

briefly put under Hackborn, who ran the highly successful printer business, and then was

assigned to the PC business. There it developed a larger complement of networking

equipment, including routers and bridges and began to compete more directly, albeit on a

smaller scale, with Cisco and 3Com. This caused internal friction with the computing

centers whose enterprise sales force was selling Cisco products together with their own

big UNIX servers.

By the mid-1990s, HP executive John McHugh was asked to run. Through a combination

of lower prices with an imaginative lifetime warranty policy and rebranding itself as HP

ProCurve, McHugh began to grow the business more profitably. This increased the

internal friction with those at HP who benefitted from a smooth relationship with Cisco.

When Carly Fiorina became HP’s new CEO in 1999, she wanted to sell the networking

business to protect the partnership with Cisco, on whose board of directors she served,

and tasked senior executive John Brennan to do so. Brennan, showing a high degree of

strategic recognition, had higher hopes for ProCurve than selling it off. He convinced

Fiorina to let networking have its own sales force and almost all of its own infrastructure

– a very unusual exception at HP – and relocated the business under the aegis of HP’s

Chief Strategy Officer, still under the pretext that this was necessary to increase its

chances to get sold. There the business thrived for several years. After Fiorina was fired,

new CEO Mark Hurd became impressed with the growth and profitability of ProCurve

37

and decided to keep the business and to in fact augment it with the acquisition of 3Com.

It is now a multi-billion dollar business for HP.

The stories of the development of the computer, inkjet printers and networking

businesses summarized in the sidebars provide compelling examples of how the

autonomous strategy process of HP’s internal ecology of strategy-making helped the

company evolve from an electronic instrument company to a computer and (later) also a

networking company.

Strategic Leadership Skills for Evolvability

As these stories also show, pursuing evolvability in the internal ecology of strategy-

making highlights the messiness of the process of corporate becoming and depends

critically on sophisticated strategic leadership. In particular, they underscore the

importance of strategic recognition and strategic integration on the part of senior

executives in the strategic context determination process to set the stage for resolving the

indeterminacy between autonomously started new business developments and the

existing corporate strategy going forward; that is, for resolving whether top management

should go ahead and embrace this new strategic direction.

Indeed, while the autonomous new business opportunities originated from interrelated

distinctive competencies developed by entrepreneurial employees in bottom-up fashion

rather than through top-down strategic direction setting, ultimately HP’s top management

had to legitimize the new strategic direction by fully embracing it and further strengthen

38

it through major resource allocation commitments (computers, printing), sometimes also

involving major acquisitions (networking), and driving necessary changes in the

corporate culture (computers, networking).56

All of this also indicates that the CEO’s ability to balance fit and evolvability in the

internal ecology of strategy-making depends on creating a strategic leadership regime

that effectively integrates top-down and bottom-up strategic leadership and on securing

continued commitment by managing the dynamic culture-strategy interplays unavoidably

triggered by initiatives related to evolvability.

Patterns of Balancing Strategic Resource Allocation for Fit and Evolvability

Previous research has identified the strategic leadership challenges associated with

balancing strategic resource allocation to fit and evolvability: (1) exploitation of existing

opportunities to the fullest (through pursuing fit), (2) the generation of entirely new

opportunities (through pursuing evolvability), and (3) the balancing of exploitation and

generation over time (because resources are limited).57

Strategic leadership resource allocation

The reality that the company’s reservoir of strategic leadership resources (skills and

efforts) is limited at any given time58 determines the possibilities frontier for the CEO to

optimally pursue different possible combinations of fit and evolvability. The possibilities

frontier is shown in Figure 1.5.

_________________

Figure 1.5 About Here
__________________

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The horizontal axis in Figure 1.5 represents the percentage of total available strategic

leadership resources allocated to fit (with current product-markets – maximum 100

percent); the vertical axis the percentage allocated to evolvability (seeking out new

product-markets – again, maximum 100 percent). On the possibilities frontier, the

tradeoffs between allocating strategic leadership resources to fit and evolvability are

binding. In other words, if the CEO decides to allocate a certain percentage of the

company’s strategic leadership resources to fit, for instance point A on the possibilities

frontier, this also determines the remaining percentage of the resources available for

evolvability, and conversely.59

Interestingly, the “perceived” availability of strategic leadership resources at a particular

time may be below the actual one, for instance points B and C in Figure 1.5. At point B,

the strategic leadership resource allocation to evolvability is less than would be possible

if the company were operating at point A on its possibilities frontier (as a result, total

allocation of actually available strategic leadership resources is less than 100 percent). At

point C, the strategic leadership resource allocation to fit is less than would be possible if

the company were operating at point A (total allocation again less than 100 percent).

Such gaps indicate under-utilization of the company’s actual potential of strategic

leadership resources, which may be due to ineffective integration of bottom-up and top-

down strategic leadership and/or poorly managed interplays between strategy and culture.

It is the responsibility of the CEO, if necessary sometimes nudged by the board of

directors, to show the senior leadership team the existence of these sorts of gaps (skill or

40

efforts, or both) between the perceived and actual availability of strategic leadership

resources and how they can be bridged.

Financial resource allocation

In practice, balancing fit and evolvability also depends on the availability of financial

resources for innovation. The key financial resources are associated with corporate R&D

and concern two aspects: (1) the ratio of R&D expenditures to yearly total revenues,

which determines the absolute amount of available resources (often 10 percent or more of

total revenues in leading high-technology companies), and (2) how that amount is

allocated for fit (innovation in the core businesses) and evolvability (new business

development). As financial resources are limited in relation to claims for their use the

allocation process can be characterized in terms of the relative amounts absorbed by fit-

related (induced strategy process) and evolvability-related (autonomous strategy process)

initiatives.

The way the company’s available financial resources for R&D are allocated between fit

and evolvability at any given time can be reasonably assumed to be correlated with the

allocation of the strategic leadership resources on the possibilities frontier (Figure 1.5).

Any point on this frontier may then also be viewed to roughly correspond to the

percentage of R&D resources allocated to fit (associated with the induced strategy

process) and evolvability (associated with the autonomous strategy process) that the CEO

considers optimal.60

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At some times, the CEO’s rhetoric about the importance of evolvability may not be

reflected in the pattern of financial resource allocation (point B again in Figure 1.5) or

about fit (point C again in Figure 1.5). Also, during any CEO’s tenure, the relative

allocations to fit and evolvability may be adjusted, usually in incremental ways as a

function of external and internal context dynamics. Furthermore, successive CEOs may

adopt quite different allocation patterns.

Positive discontinuous changes in absolute amounts of R&D resources may become

available as a result of highly successful radical innovation (think Apple since 2007).

Negative discontinuous changes resulting from falling behind (think Nokia and

Blackberry since 2007) may have the opposite effect. These types of radical changes in

the CEO’s ability to balance strategic resource allocation to fit and evolvability materially

affect the prospects of the company’s process of becoming.

Managing Dynamic Interactions with the Board of Directors

The Key Tasks of the Board

The board is responsible for the hiring and firing of the CEO and the creation of a long-

term CEO succession plan. Effective boards are able to select the type of CEO who fits

the challenges and opportunities associated with the context dynamics that a company

faces or is likely to face at particular times in its evolution, and it is crucial that the

selected CEO can assume that he or she has the board’s confidence.

42

In light of this, the board must provide support for how the CEO intends to discharge

him/herself of the key tasks of strategic leadership, and for the strategic leadership

capability that he or she develops during their tenure. In particular, the board must

encourage the balancing of top-down and bottom-up strategic leadership, and can do so

by familiarizing itself with levels of strategic leadership below the CEO and the rest of

top management. The board also must review and then support changes in the corporate

strategy proposed by the CEO and the difficult cultural adjustments that it may imply.

Furthermore, the board can play a very important role in making sure that strategic

resource allocation balances fit and evolvability. Research has shown that pursuing a

narrow business strategy makes it possible for the CEO to credibly commit to aligning

incentives for employees to pursue that strategy.61 But this favors fit and the induced

(top-down) strategy process. Evolvability, however, requires the development and

support of new business initiatives through the autonomous (bottom-up) strategy process

that broaden the scope of the corporate strategy. Further research has shown that the

board can play a critical role in helping the CEO support such new business initiatives.62

Ultimately, the board must evaluate the CEO’s performance and decide on his or her

commensurate compensation. But the board is also responsible for making sure that its

members have the right skills for evaluating the company’s evolving strategic leadership

capability, and for its own effective functioning and management of the interactions with

the CEO.

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Dynamic Interactions

These interactions will depend on the extent to which the CEO is able to develop a good

and compelling corporate strategy and, on the other hand, on the extent to which the

working of the board of directors is more or less functional. These two dimensions

generate another simple diagnostic tool for assessing the CEO-BoD interactions. This is

shown in Figure 1.6.

_________________
Figure 1.6 About Here
_________________

As shown in Figure 1.6, the best situation is where the CEO has a compelling corporate

strategy and works with a highly functional board. This creates constructive dynamic

relations that further the prospects of the company’s becoming. A CEO’s non-compelling

corporate strategy combined with a well-functioning board may lead to corrective

dynamic relations in which either the CEO is encouraged to strengthen the corporate

strategy or he or she is replaced.

In case the CEO’s corporate strategy is compelling but he or she is faced with a

dysfunctional board, the relations are likely to become disruptive. This is a difficult and

probably time-consuming situation for the CEO that may impede his or her efforts to

sustain the company’s becoming. Finally, the combination of a non-compelling corporate

strategy and a dysfunctional board is likely to produce destructive relations that

materially put in jeopardy the company’s continued becoming.

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Successive CEOs’ Strategic Leadership Performance
Shapes the Process of Corporate Becoming

How Evaluate CEO Performance?

Both HP founders were always unequivocally clear that the performance of public

companies is ultimately measured in terms of financial results; that is, profitable growth,

not just growth for growth’s sake! They also were deeply convinced that the company’s

financial results depend critically on the effectiveness of its strategic leadership. This

book proposes that the effectiveness of HP’s strategic leadership can be examined in light

of how its successive CEOs have taken advantage of the company’s internal ecology of

strategy-making by discharging the key tasks of strategic leadership and developing the

company’s strategic leadership capability to sustain the company’s process of becoming.

However, this still leaves open the question by what criteria the strategic leadership

contributions of each of HP’s successive CEOs to that process need to be evaluated.

Late in his professional life, Dave Packard provided important insights to answer this

question. He did so, in one of his final company speeches, by distilling HP’s ability to

achieve continued success into “three principles” that he admonished the current and

future HP critical leadership to continue to adhere to. In addition, and far more

surprisingly, in his last speech he also admonished HP’s critical leadership to help the

company avoid the fate of “the wonderfully constructed one-hoss shay,” which was

constructed to perfection but unable to evolve. Carly Fiorina, reflecting on her experience

as HP’s first externally recruited HP CEO, provides an additional insight that helps

complete a reasonable answer to the question.

45

Dave Packard’s Three Principles

In August 1990, in one of his last speeches to company personnel, Dave Packard

highlighted what he called the “three principles” that had guided HP over the years:

First, that the company had always worked on fundamental contributions rather
than “me-too” products; second, that the company had always worked as a team
focused on its competitors rather than fighting about internal issues; and finally,
that the company had been lucky to choose electronics as a field of endeavor
because years ago there was a lot of room for contribution and it wasn’t so hard to
make a mark.”63

Packard’s guiding principles are remarkable in their simplicity and power. What they

basically imply is that the foundation of built-to-become companies – ones that can

continue to transform themselves over time in the face of contextual change – resides in

their being able to continue to make fundamental contributions that are valued by their

evolving customer base and that, in turn, help generate sufficient value for their

shareholders so that they want to indefinitely support the continued independence of

the company.

In order to continue to make such fundamental contributions, however, a company must

be ready to sell or drop businesses in which it can no longer make fundamental

contributions, as well as to buy or build different ones where it can make new types of

fundamental contributions.64 Carefully picking target markets was actually one of the

“Objectives” in the official “HP Objectives” document that was a key part of the HP

Way. It defined the area of new markets as “Fields of Interest” and described how HP

leaders should approach the entering such new fields of interest. These sorts of internal

selection processes, associated with the internal ecology of strategy-making, are required

46

to meet Packard’s third principle, and they make it possible for a company to reduce its

dependency on the vagaries of the external context dynamics.65

Multi-business Corporate Strategy Considerations

Strategic leadership in the internal ecology of strategy-making, however, is different

depending on where a company is situated on the continuum between highly focused

ones (e.g., Intel) and conglomerate ones (e.g., GE). HP, especially during the tenure of

Lew Platt, was a highly diversified company but with strong operational and strategic

linkages between the different businesses in its portfolio:

Focused companies HP (under L. Platt) Conglomerate companies
(e.g., Intel Corporation) (e.g., GE)
ß—————————————————————————————————à

In a focused company, the CEO determines the content of the (single) business-level

strategy, what the contribution is that the company intends to make, and the main task of

the critical leadership is to effectively execute this strategy (Andy Grove’s statement

about removing managers from position where they could choke the strategic change he

was trying to instill mentioned above is an example). In a conglomerate company, the

CEO cannot determine the content of the strategy for the different business in the

portfolio. Instead, the CEO must select and develop strategic leaders for each of the

businesses who will determine that business’s strategy. (Jack Welch at GE is an

outstanding example of a successful conglomerate CEO.)

In a multi-business company with more tightly linked businesses like HP, the CEO must

formulate a corporate-level strategy that determines the contribution that the company

47

will be able to make by having these different businesses in its portfolio over and above

the contribution that each business can make on its own. This depends on the extent to

which the adaptive requirements of the different businesses remain commensurate with

each other (and therefore not too difficult to manage within the same organization) and

on the ability of the company to take advantage of relatively unique cross-boundary

business opportunities (a strong form of strategic integration). Chapter 2 will revisit these

conditions in light of the “antifragility” of the corporate strategy; that is, whether the

potential performance upsides associated with positive external context dynamics are

higher than the potential performance downsides associated with negative environmental

dynamics.66 Correctly ascertaining all of this requires a high-level of strategic acumen

that few CEOs have demonstrated.

Capital Market Considerations

The stock market values company growth together with profitability. As companies get

very large, however, high growth rates are hard to sustain. For instance, a company like

HP with almost $120 billion in revenues that wants to grow at a yearly rate of 10 percent

needs to grow revenue by almost 12 billion dollars, and the number keeps growing as

company size increases. This makes it difficult for the stock market to value very large

companies.67 Nevertheless, it is a key role of each successive CEO in the company’s

process of becoming to satisfy the stock market; that is, to be able to maintain the belief

among the majority of shareholders that the value-creating potential of the company as an

independent institution for the foreseeable future is higher than if it would be acquired by

another one. This may sometimes require reducing the size of the company. CEO Lew

48

Platt’s decision to spin off HP’s Test & Measurement businesses (chapter 5) and current

CEO Meg Whitman’s decision to break the company in two in 2015 (chapter 9) are

dramatic instances of this necessity to sustain HP’s process of becoming.68

Avoiding the One-Hoss-Shay Trap

Besides articulating the three principles, Packard also gave one last speech to all of the

HP general managers, roughly one year before he died, in which he recited (to the

consternation among some of the attendees) a long poem by Oliver Wendell Holmes, Sr.

called “The Deacon’s Masterpiece: Or The Wonderful One-Hoss-Shay.”69 Holmes’s

poem recounts the efforts of a fictional deacon to craft a horse-drawn carriage (“one-hoss

shay”) “in such a logical way” that it could endure for exactly one hundred years. On its

one-hundredth anniversary the shay collapses all at once as planned. 70

This story is not what Packard had in mind for HP! The metaphor of the one-hoss shay

that is built to last for one hundred years is the opposite of what in this book is called

built-to-become. In a poignant way, Packard was warning his general managers that a

company must continue to change in order to be able to remain relevant and viable. From

the perspective of this book, without of course using its terminology, he is admonishing

his general managers one final time that they must think of HP as built-to-become.

Keeping that drive alive in the organization, Packard was basically saying, is the ultimate

challenge and responsibility of each of the company’s successive CEOs’ strategic

leadership.

49

Carly Fiorina’s Maxim

Dave Packard’ three principles and his warning about the “One-Hoss-Shay” trap are

powerful criteria for evaluating whether the strategic actions of the critical leadership of a

built-to-become company will enable it, in the face of significant internal and external

context dynamics, to continue the process of corporate becoming. Carly Fiorina, HP’s

fifth CEO and the first externally recruited one, articulated a maxim that succinctly

captures what this requires on the part of successive CEOs:

A leader who respects the people and the institution he or she is privileged to lead
strives for sustainable performance that will continue long after the leader is
gone.71

But how? This book proposes that deep understanding of how to discharge the key tasks

of strategic leadership and develop the company’s key elements of strategic capability

helps successive CEOs stay ahead of internal and external context dynamics. This, in

turn, may help successive CEOs deal more confidently with the reality that strategic

leadership that was effective for dealing with a particular set of contextual conditions

almost certainly will not ensure the company’s success in the long run, when the context

will be different in unpredictable ways. This implies that the process of becoming will

involve metamorphosis: transformative changes that alter extensively the company’s

general form and life (think GE at the time of Edison and GE in 2014). 72 Corporate

transformation, however, is not governed by deterministic physical laws or biological

constraints. The process of becoming remains open ended, with no ex ante teleological

vision determining what its future will be.

50

Conclusion, Implications and the Road Ahead

Packard’s three principles and his warning to avoid the “one-hoss-shay” trap, together

with Fiorina’s maxim, provide helpful performance criteria for guiding the strategic

leadership of successive CEOs of a built-to-become company like HP. Given these

performance criteria, this chapter has developed a conceptual framework encompassing

the key tasks of strategic leadership and key elements of the company’s strategic

leadership capability in support of discharging the key tasks of strategic leadership to

examine and evaluate in the chapters that follow the contributions of HP’s successive

CEOs to HP’s process of becoming.

The key tasks of strategic leadership encompass: (1) formulating the corporate strategy in

terms of what the game is the company wants to be a winner in (and what wining means),

(2) aligning product-market position with distinctive competence to achieve competitive

advantage, and (3) aligning strategic action with corporate strategy, all in the face of

external and internal context dynamics. Each successive HP CEO faced the challenge of

meeting Packard’s three principles by discharging the key tasks of strategic leadership; in

first instance by formulating and executing a “good” and “compelling” corporate

strategy..

The four key elements of the company’s strategic leadership capability are:

(1) Adopting a strategic leadership regime that integrates top-down and bottom-up

strategy processes;

51

(2) Managing the interplays between a changing corporate strategy and the existing

corporate culture;

(3) Balancing strategic resource allocation between fit and evolvability in the internal

ecology of strategy-making;

(4) Maintaining constructive relationships between the CEO and the board of

directors.

These four elements of the company’s strategic leadership capability help the CEO to

effectively discharge the strategic leadership tasks to meet Packard’s three principles,

avoid the one-hoss-shay trap and apply Fiorina’s maxim. This is so, first, because

integrating top-down and bottom-up strategic leadership helps maximize the relevant

information about context dynamics that informs the CEO’s strategic decision-making

and the company’s ability to continue to make significant contributions to its customers

(Packard’s first principle).

Second, managing the potentially intense tensions between the existing corporate culture

(especially the operating model) and corporate strategic change will speed up the difficult

adjustments necessary to effectively execute it, importantly by keeping the company’s

leadership focused on the external competition rather than on internal competition

(Packard’s second principle).

Third, balancing fit and evolvability involves the willingness of the CEO to allocate

resources to new business initiatives in the autonomous strategy process that are beyond

the scope of the current corporate strategy and whose financial results may be achieved

52

beyond his or her own tenure, which will invariably require tradeoffs with allocating

resources to improve fit for mainstream businesses in the induced strategy process. Doing

so, however, helps the company find new fields of technologies and markets where it can

make new significant contributions (Packard’s third principle, avoiding the one-hoss-shay

trap, and Fiorina’s maxim).

Fourth, maintaining constructive interactions with the board of directors is likely to

reinforce the CEO’s ability to continue developing the other three key elements of the

company’s strategic leadership capability; for instance, in gaining support of the board

for materially increasing R&D spending to support evolvability.

Finally, it seems reasonable to propose that to the extent that these four key elements

mutually support each other, the company’s strategic leadership capability will be better

able to support the CEO’s efforts to sustain its process of becoming.

The Key Role of the CEO: A Caveat

While the importance of the strategic leadership role of the CEO for the company’s

process of becoming is examined and extolled in Built to Become, it is good to keep in

mind Nobel Laureate Daniel Kahneman’s observation that the correlation between the

success of the firm and the quality of its CEO might be only as high as .30, which implies

“… that you would find the stronger CEO leading the stronger firm in about 60% of the

[generally similar firms], an improvement of a mere 10 percentage points over random

guessing…”73 Nevertheless, to the extent that a company could select successive

53

generations of superior CEOs, the compounded effect of these relatively small

differences (for any CEO’s tenure) throughout the firm’s history would be potentially

highly significant. In other words, the potentially small differences in corporate

performance generated by superior CEOs compared to good enough CEOs, and their

contributions to strategic leadership capability, add up over time.

An Empathic Account

The research for and writing of Built to Become is based on the reasonable assumption

that boards of directors always intend to appoint CEOs that are smart and well

intentioned. It therefore also seems reasonable to start with the belief that each of HP’s

CEOs were indeed smart and wanted the best for the company according to their points

of view. Consistent with this belief, the chapters that follow intend to provide an

empathic account of each of HP’ CEO’s efforts to maintain the relevance and greatness

of the company.

Keeping Henry Kissinger’s insight in mind, Built to Become intends to objectively

describe the changing external and internal contexts within which each of HP’s CEOs

had to act in order to shape the company’s process of becoming during their tenures.

Each CEO at the beginning of their tenure was dealt a hand, sometimes a favorable one

but at other times one less so that they had to play. Each CEO subjectively defined and

discharged the key strategic leadership tasks in light of the forces that shaped the external

and internal context dynamics during their time running the company. Each CEO’s

54

perception of these forces influenced the type of strategic leadership capability that he or

she chose to develop to sustain the company’s process of becoming.

Built to Become’s reconstruction of the stories of strategic leadership of HP’s successive

CEOs provides a deeper appreciation of the challenges that all of them faced in coming to

grips with the limits of their power, as well deeper insight into the occasions when they

were able to take advantage of the opportunities offered by various contextual changes

while at the same time sidestepping potential pitfalls. This, hopefully, will also instill a

sense of empathy on the part of the readers for the different protagonists that they are

about to encounter.

Chance or Necessity? A Second Caveat

Built to Become intends to highlight the important role of strategic leadership in HP’s

process of becoming. The analysis, however, must also keep in mind two important

questions raised earlier in this paper. First, is HP’s 76-year existence as an independent

company the result of a strategic leadership process of becoming or simply the

manifestation of a random process? Second, even if HP has survived so far as the result

of the process of becoming, to what extent can this be attributed to superior strategic

leadership capabilities or has the company simply been benefiting from a process of

cumulative advantage? The data and analysis provided in Built to Become will provide

the foundation for offering a reasoned answer to these questions.

55

HP’s History of Becoming – 1939-2015: An Integral Process Overview

The research paper by this title (available from this author) forms the basis for Chapter 2

of Built to Become. It provides an overarching picture of the external and internal

contextual dynamics that the company has faced in its 75-year history and that have

shaped the workings of its internal ecology of strategy-making. It conceptualizes the

outcomes of HP’s internal ecology of strategy-making in terms of seven epochs in the

company’s history of becoming, and it highlights the role of HP’s successive CEOs in

strategically leading the corporate transformations that connect the different epochs. The

paper also examines the extent to which the performance of HP’s successive CEOs can

be usefully evaluated in terms of the company’s stock price movements during their

tenure. It further identifies the paradox of corporate becoming, elucidates the

antifragility74 of the adaptive capacity of HP’s strategy-making process in its history of

becoming, and highlights the existential situation faced by HP’s successive CEOs in

contributing to the company’s process of becoming.

Built to Become: Why Strategic Leadership Matters

The research paper by this title (also available from this author) forms the basis for the

final chapter (Chapter 10) of Built to Become. It first revisits the paradox of built-to-

become to identify three conditions that govern it, and the existential situation facing the

CEO, to alleviate concerns about over-determination and tautology that could be raised in

relation to the proposition that strategic leadership really matters for corporate becoming.

With the methodological issues addressed, the paper continues with reiterating the crucial

role of the CEO and his or her ability to harness the company’s past while also driving its

56

future, and with briefly recapitulating how each successive CEO sustained HP’s process

of becoming by discharging the key tasks of strategic leadership and by developing the

four key elements of the company’s strategic leadership capability. One key insight is

that to sustain the process of corporate becoming top management must make sure that

the company continues to have a not too specialized distinctive competence base and

product-market positions in which it is not too dominant, so as to reduce the likelihood of

falling into the competence trap and/or position trap (and suffering from co-evolutionary

lock-in) while maintaining strong motivation to both sharpen its competitive abilities (in

existing product-markets) and seek out new product-markets through innovation. Another

key insight is that successive CEOs need to understand the company’s past to be able to

manage path dependencies as well as drive its future.

Building on the insights gained from the study of HP’s history of becoming, the paper

also suggests how the frameworks used to conceptualize the tasks of strategic leadership

and the development of strategic leadership capability can serve as steps toward a

dynamic theory of strategic leadership that animates an evolutionary framework of

corporate becoming. This framework builds on and significantly extends the academic

writings of the lead author. It will be helpful for further theory development about the

role of strategic leadership in built-to-become companies. It also offers practical tools for

founders of new companies and CEOs and boards of directors of existing companies who

intend to create, run or oversee companies built for continued relevance, longevity and

greatness. The paper’s conclusion summarizes Built to Become’s distinct empirical and

conceptual contributions and their implications for practice.

57

APPENDIX 1: RESEARCH METHOD

In studying the role of strategic leadership and strategic leadership capability in HP’s

process of becoming, the research for Built to Become involved historical tracing of HP’s

evolution between 1938 and 1999 and real-time longitudinal tracking of the company’s

evolution since 1999 in combination with “grounded theorizing.”75

The longitudinal qualitative research combined grounded theorizing and insights from

modern historical methods to generate novel conceptual frameworks that establish

theoretical bridges between historical narratives and reductionist quantitative models.

This methodology can be successfully situated on a spectrum of theory development

between the historian’s “particular generalization” and the reductionist’s “general

particularization”. Particular generalization is what historians do; they “…generalize for

particular purposes.” On the other hand, general particularization is what most social

scientists typically do: “… embedding narratives within generalizations. 76 The theory

development spectrum is shown in Figure 1.

Figure 1: The Bridging Role of Longitudinal Qualitative Research in Theory
Development

HISTORY: PARTICULAR ßà LONGITUDINAL ßà REDUCTIONISM: GENERAL
GENERALIZATION QUALITATIVE RESEARCH PARTICULARIZATION

– Particular – Specific – General
– Concrete – Substantive – Abstract
– Experiential – Suggestive – Non-experiential
– Narratives – Conceptual frameworks – Statistical and
(boxes-and arrow charts) mathematical models

58

At the history end of the spectrum of theory development, particular generalization

involves carrying out case studies of particular, concrete and experiential social

phenomena characterized by complex, nonlinear causation. Mostly natural language is

used to construct a coherent and complete representative and explanatory narrative. At

the reductionist end of the spectrum of theory development, general particularization

involves statistically-based models or axiom-based mathematical models. These types of

theories are general, abstract and non-experiential.

In between the historian and the reductionist types of theory development, longitudinal

qualitative research of complex social systems, with the help of substantive and formal

grounded theorizing, seeks to go beyond particular generalizations by creating conceptual

frameworks: boxes-and-arrow charts that show how the complex system hangs together

and its operative logic. Such conceptual frameworks are specific (representative of a class

of phenomena), substantive (capturing the essential/material part underlying the

phenomenon), and suggestive (evoking the phenomenon indirectly). They provide deeper

and more general insight into phenomena than is possible with the natural language of

narratives.

Applied to Built to Become’s research about HP, this longitudinal qualitative research

method involved (i) documenting the role of “strategic leadership” in the process of

corporate becoming, and the role of successive CEOs in developing and employing the

four key elements of HP’s strategic leadership capability, (ii) constructing comparative

narratives (case studies) of both the evolving corporate-level context and the strategic

59

leadership approaches of the successive CEOs, and (iii) using the comparative case

studies to generate a grounded theory about the role of strategic leadership in corporate

becoming.

In light of this, the research method involved comparative case analysis performed at

multiple levels of analysis. At the industry level, the analysis describes the evolving

external context dynamics in terms of continuities, contingencies and constraints that the

company and its successive CEOs faced. At the organizational level, the analysis used the

dimension of time to compare five corporate transformations in HP’s history to date and a

sixth one in process. This involved close examination of the seldom studied inter-tenure

dependencies and associated path dependencies that successive CEOs had to cope with,

as well as how successive CEOs discharged the key tasks of strategic leadership and how

they developed the company’s strategic leadership capability during their tenure. At the

intra-organizational level of analysis, the research traced the composition of HP’s

business portfolio in terms of the evolving relative importance of different core

businesses, the generation of new ones and the exit of old ones.

Several case studies capture the findings of the longitudinal research. Dozens of former

and current HP executives were interviewed as well as several consultants who had been

directly involved with the firm at certain times in its evolution.

60

APPENDIX 2: INDUCED AND AUTONOMOUS STRATEGY PROCESSES

The Internal Ecology of Strategy-Making

The figure shown below represents the two key strategy processes that constitute the

internal ecology of strategy-making and help shape a company’s evolution.

Source: Burgelman, R.A., Strategy Is Destiny: How Strategy-Making Shapes a
Company’s Future, New York, The Free Press, 2002, p. 9.

Through the induced strategy process a company exploits opportunities in its

familiar environment. To do so, top management sets the corporate strategy and

induces strategic actions by executives deeper in the organization that are aligned

with it. The induced strategy process limits actions that deviate from the corporate

strategy for at least two reasons. First, the company survived environmental

selection by satisfying its customers and other constituencies in reliable ways and

wants to continue to abide by the rules. This reactive propensity constitutes a

rational source of strategic inertia. Second, the company tries to successfully

align all the forces at its disposition to reshape the environment (E) to its

Strategic
Context

5

Concept of

Corporate

Strategy

1

Structural
Context

3
Induced Strategic

Action

2

EE

ee
Autonomous

Strategic Action
4 Autonomous
Strategic Action

4

61

advantage, but this proactive propensity results in co-evolutionary lock-in and

becomes another rational source of strategic inertia.

Through the autonomous strategy process the company explores new opportunities that

are outside the scope of the existing corporate strategy, relate to new environmental

segments (e), and are often based, at least in part, on distinctive competencies that are

new to the company. Autonomous strategic initiatives usually, but not necessarily,

originate at operational or middle management levels. They often come about fortuitously

and somewhat unexpectedly as a result of the company’s dynamic capabilities that co-

evolve with (E, e). To overcome the selective effects of the company’s structural context,

which is set up to support initiatives that are aligned with the current corporate strategy,

the initiators of these autonomous initiatives try to activate a process – which we call

strategic context determination to convince top management to amend the company’s

corporate strategy, thereby integrating them into the induced process going forward. The

key role of the autonomous process is to extend the boundaries of the company’s

competencies and opportunities and/or to help it prepare for potentially disruptive

competitive moves. On the other hand, resources can be spread thin if the company

supports too many autonomous initiatives (and halts too few), perhaps at the expense of

its core businesses. Most dangerously, autonomous initiatives may undermine the

company’s existing competitive position without providing a secure new one.

In general, the effectiveness of a company’s internal ecology of strategy making depends

on maintaining its ability to exploit existing opportunities through the induced process,

62

while simultaneously maintaining itss ability to pursue new opportunities through the

autonomous process.

From Being to Becoming

While working on a paper (in fall 1981) that intended to integrate strategic management

and corporate entrepreneurship, the author stumbled onto From Being to Becoming, a

then recent (1980) book written by Ilya Prigogine, a famous fellow Belgian who had

recently won the Nobel Prize in chemistry. Intrigued by the title and browsing through

the highly mathematical chapter on self-organization, a topic of interest, its final

paragraph struck him with the force of a bolt of lightning:

“This ‘over creativity’ of nature emerges naturally from the type of description
being suggested here, in which ‘mutations’ and ‘innovations’ occur stochastically
and are integrated into the system by the deterministic relations prevailing at the
moment. Thus, we have in this perspective the constant generation of ‘new types’
and ‘new ideas’ that may be incorporated into the structure of the system, causing
its continual evolution.” 77

The parallel between Prigogine’s conclusion and the model of induced (top-down) and

autonomous (bottom-up) strategic initiatives (see schematic below) seemed immediately

clear: Prigogine’s observation of “mutations” and “innovations” occurring stochastically

mapped directly onto the autonomous process; and his observation that they can become

integrated into the system by the “deterministic relations prevailing at the moment”

mapped directly onto the induced process. It also seemed clear that the strategic context

determination process (box 5 in the schematic below) provided the critical means through

which the “integration into the system” is fostered. The framework thus could possibly

63

provide a stepping stone in developing a theory of organizational adaptation as

“becoming;” a view of an open-ended, unpredictable but potentially manageable, future.

The finding that the strategic context determination helps maintain a balance between

induced and autonomous strategy processes also provided a link to Kauffman’s (1993)

theory about “adaptation at the edge of chaos.”78 Kauffman distinguishes between three

regimes systems can exhibit: ordered, complex, and chaotic (1993: 234), and he views

complex systems – poised between order and chaos – as the “… natural culmination of

selective evolution” (1993: 235). The importance of balancing induced and autonomous

strategy processes seemed particularly clear in light of Gould’s (2002) succinct

translation of the idea of adaptation at the edge of chaos.79 Gould observes:

“… that a system must be adaptive, but that too much (and too precise) a local
fitting may freeze a system in transient optimality with insufficient capacity for
future change. Too much chaos may prove fatal by excessive and unpredictable
fluctuation, both in external environments and internal states. (…) Adaptation at
the edge of chaos balances both desiderata of current functionality and potential
for future change, or evolvability.” (2002: 1273-74).

Built to Become is about how strategic leadership capability shapes corporate becoming

through balancing the simultaneous strategic challenges of “fit:”exploiting existing

opportunities through the induced (top-down) process; and “evolvability:” generating

new opportunities through the autonomous (bottom-up) process.

64

APPENDIX 3: THE STRATEGY DIAMOND FRAMEWORK

The Strategy Diamond framework shown in Figure A3 below helps define the CEO’s key

strategic leadership tasks and his or her responsibilities in developing the company’s

strategic leadership capability.

Figure A3: The Strategy Diamond Framework

Source: Burgelman, R.A., “Fading Memories: A Process Theory of Strategic Business
Exit in Dynamic Environments,” Administrative Sciences Quarterly, March 1994, p. 31.

Official corporate strategy. Official corporate strategy concerns top management’s

statements about the company’s intended strategy: the business(es) it wants to be a

winner in and its intended competitive advantage.

Basis of competitive advantage in the industry. The basis of competitive advantage

that the company faces depends on its chosen product-market position. Most industries,

though not all, contain several viable positions that companies can occupy. Market and

non-market forces determine the basis of competition that governs success in each of

65

these positions. As any of these forces change in major ways the basis of competition—

the external selection environment—changes as well.

Distinctive competence. Distinctive competence concerns the differentiated skills,

complementary assets and routines that the company possesses to meet the basis of

competitive advantage in the industry. Distinctive competencies are viewed as intrinsic to

the company’s identity and character. For instance, they very much determine the type of

corporate strategy, e.g., differentiation or cost leadership that a company will pursue.

They are not easy to change.

Strategic action. Strategic actions commit the company’s resources (human, financial,

technological, reputational, and so on) in significant ways. They involve binding trade-

offs and are difficult – sometimes impossible – to reverse. Strategic action in large

companies is usually distributed over different levels of management and different,

specialized groups. Leaders’ strategic actions respond to external and internal selection

pressures as well as to the stated official strategy.

Internal selection environment. To appreciate the role of the internal selection

environment, it is useful to think about an important difference between startup and

established companies. Most startup companies fail because they cannot overcome the

selective pressures of the external selection environment (e.g., not enough customers

have an interest in its products; or customers are not willing to pay the company what it

costs to develop and bring to market its products). An established company differs from

startups by the fact that it has overcome the selective pressures of the external

environment and can to some extent substitute internal selection for external selection.

This implies the centrality of the internal selection environment in the company’s

66

strategy-making process. The internal selection environment mediates the link between

official corporate strategy and strategic action and between industry-level sources of

competitive advantage and firm-level sources of distinctive competence.

This book conceptualizes the internal selection environment in terms of the company’s

strategic leadership capability, and developing this capability is viewed as an important

responsibility of the CEO. Four key elements constitute the strategic leadership

capability: (1) developing the strategic leadership regime, (2) managing dynamic

interplays between strategy and culture, (3) balancing resource allocation for fit and

evolvability, and (4) managing dynamic interactions with the board of directors.

67

Figure 1: HP’s Progression in Fortune 100 between 1983-2013

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69

70

71

72

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1 “Since the separation from H.P., Agilent investors have seen a 27 percent return on their
investment, while investors in its former owner have seen about 30 percent of their value
vaporize.” Robert Cyran, “Lessons for H.P. From Its Offspring,” The New York Times,
Dealbook, September 19, 2013.

2 Burgelman, R.A., & Grove, A.S. 2007. Let chaos reign, then rein in chaos – repeatedly:
Managing strategic dynamics for corporate longevity. Strategic Management Journal, 28:
965-979.

3 Stacy Perman, “Centuries-Old Family Businesses Share Their Secrets,” BusinessWeek,
May 14, 2008.

4 Social scientists from different disciplines have different views on the importance of
corporate longevity. Economists, who view companies as instruments for organizing
economic transactions that cannot be performed with market mechanisms and/or for
maximizing financial benefits for their owners, do not consider company longevity a goal
per se. Sociologists, who view companies as institutions that inherently seek to survive
study why and how they do so, primarily in terms of legitimacy as a determinant of
longevity. Strategy scholars combine aspects of the economic and sociological
perspectives by focusing on the determinants of a company’s economic performance and
viewing this as a condition for its continued survival. See, for instance, Williamson, O.E.
2000. “The New Institutional Economics: Taking Stock, Looking Ahead.” Journal of
Economic Literature, 38: 595-613; and Scott, R.W. 2001. Institutions and Organizations,
2nd ed., Thousand Oaks, CA, Sage Publications.

5 Collins J. 2001. Good to Great. HarperBusiness: New York.

6 Burgelman, R.A., & Grove, A.S. 2007, o.c.

7 Denrell, J. 2004. “Random walks and sustained competitive advantage. “Management
Science 50: 922-934.

8 Henderson, A.D., Raynor, M.E., Ahmed, M. 2012. “How long must a firm be great to
rule out chance? Benchmarking sustained superior performance without being fooled
by randomness.” Strategic Management Journal, 33: 387-406. Interestingly, using
sophisticated mathematical modeling techniques applied to the extensive Compustat
database to determine which companies achieved consistent superior performance that
cannot be attributed to simple good luck, this study did not identify any of the “Good to
Great” companies.

9 Denrell, J., Fang, C. , Zhao, Z. 2013. “Inferring superior capabilities from sustained
superior performance: a Bayesian analysis.” Strategic Management Journal, 34: 182-
196. Also see Gould, S.J. 1991. “The streak of streaks.” In Gould, S.J. (ed.) Bully for
Brontosaurus: Reflections in Natural History. New York, W.W. Norton: 463-472.

74

10 Burgelman, in an early study of “optimal firm size” through the lens of business
economics found that firm size is really the by-product of the firm’s growth trajectory at
a particular moment in time, and that the problem of “optimal firm size” could be
usefully redefined in terms of a process of developing an optimal strategy and the
ongoing optimal adjustment of the organization’s structure along that growth trajectory.
Burgelman, R.A. 1969. Optimale Grootte in Bedrijfseconomisch Perpspectief.
Unpublished Licenciate thesis. Antwerp University, Faculty of Applied Economics
(UFSIA).

11 Léo Apotheker, one of HP’s CEOs, raised the question of “relevance” as the critical
one facing HP at the time of his appointment. Interestingly, Satya Nadella, when he was a
candidate for the CEO position at Microsoft, points out: “What drives me every morning
and what keeps me up every night is one thing: this business is not about longevity, it’s
about relevance.” Clark, D., Langley, M. and Ovide, S. “Microsoft’s CEO Pick: From
India To Insider.” The Wall Street Journal, February 1, 2014: A 1.

12 Derek Thompson, “Instagram Is Now Worth $77 Million Per Employee ,” The
Atlantic, April 9, 2012.

13 For a list of the oldest companies in the world see, Stacy Condrat, The Quick 10: 10 o
the World’s Oldest Companies,” Mental Floss, July 20, 2009.

14 Built-to-become differs from built to last (see Collins, James and Porras, Jerry. 1994.
Built to Last, New York, Harper Books). As we will see later in this book, even a
company’s core values may have to change to make adaptation to context dynamics
possible. Thousands of tribes that stuck to their core values, for instance, have
nevertheless disappeared in the course of history.

15 House, C.H. and Price, R.L. 2009. The HP Phenomenon: Innovation and Business
Transformation, Stanford, CA, Stanford Business Books.

16 Gaddis, J.L. 2002. The Landscape of History: How Historians Map the Past, Oxford,
Oxford University Press.

17 Gaddis, 2002, o.c.

18 Kissinger, H. A. 2011. On China, New York, The Penguin Press: 215.

19 For instance, President Nixon’s 1972 trip to China significantly changed the context
within which future geopolitical relations between the U.S and China would take shape.

20 Again, in the case of President Nixon, his involvement with the Watergate affair, an
example of the internal context of the U.S. Government and the domestic social-political
system, was not anticipated and had enormous implications for his continued ability to
deal with the external geopolitical context that he helped shape.

75

21 Burgelman, R.A. 2014. “Concept of Strategy and Organizational Evolution.” The
Palgrave Encyclopedia of Strategic Management.
In well-structured situations, in contrast to ill-structured ones, all the competing players
are known and each player is a rational actor whose strategic moves are drawn from a
predetermined set. Particular combinations of players’ strategic moves have clearly
defined, if sometimes probabilistic, payoffs. Such strategic situations lend themselves
well to the quantitative methods of decision theory and game theory. See, for instance,
Saloner, G.1994. “Game theory and strategic management: contributions, applications,
and limitations.” In Fundamental Issues in Strategy, ed. R. P. Rumelt, D. E. Schendel and
D. J. Teece. Boston, MA: Harvard Business School Press: 155-194.

22 Burgelman and Grove, o.c., 2007.

23 Burgelman, R.A. 2011. “Bridging history and reductionism: A key role for longitudinal
qualitative research.” Journal of International Business Studies, 42: 591-601.

24 Here we draw strategic implications based on the definition of “becoming” offered by
Allport, G.W. 1955. Becoming: Basic Considerations for a Psychology of Personality.
New Haven & London, Yale University Press: 28.

25 Burgelman, R.A. 2002. Strategy is Destiny: How Strategy-Making Shapes a
Company’s Future, New York, Free Press.

26 There exists an important literature on dynamic capabilities in the field of
strategic management. See, for instance, See: Teece, D.J. “Explicating Dynamic
Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise
Performance,” Strategic Management Journal, 28, 2007: 1319. This article
provides the most comprehensive review and explication of the “dynamic
capabilities” perspective. It is important, however, to emphasize here that
capabilitities are only potentially consequential to the extent that strategic actors
actually deploy them. See Burgelman RA. 1996. A process model of strategic
business exit: Implications for an evolutionary perspective on strategy. Strategic
Management Journal, Summer Special Issue 17: 193-214.

27 House and Price, 2009, o.c,:607-615.

28 Carlos Brito’s remark on “critical leadership,” registered during a videoconference
presentation to the Stanford Executive Program in summer 2012, could be fruitfully
related to “upper echelon” and “top management team” concepts on which there exists an
extensive research literature in the field of strategic management. See, for instance,
Carpenter, M.A., Geletkanyca, M.A., and Sanders, W.H. 2004. “Upper echelons research
revisited: Antecedents, elements, and consequences of top management team
composition.” Journal of Management, 30: 749-778; and also Finkelstein, S., Hambrick,
D.C., and Cannella, A.A. 2009. Strategic Leadership: Theory and Research on

76

Executives, Top Management Teams, and Boards. New York, Oxford University Press.
Pursuing this further here, however, is beyond the scope of this book.

29 See Schifrin, D. and Burgelman, R.A. 2013. “LVMH in 2013: Sustaining Leadership in
the Global Luxury Industry.” Stanford Business School case SM-197: 2.

30 Our concern with “built-to-become” could be fruitfully related to the concept of
“corporate identity” on which there also exists an extensive research literature in the field
of organization theory. See, for instance, Gioia, D.A. 1998. “From individual to
organizational identity.” In: D.A. Whetten and P.C. Godfrey (eds.), Identity in
Organizations. Building Theory through Conversations, Thousand Oaks, CA, Sage: 17-
31; and also Gioia, D.A., Price, K.N., Hamilton, A.L., and Thomas, J.B. 2010. “Forging
an identity: An inside-outside study of processes involved in the formation of
organizational identity.” Administrative Science Quarterly, 55: 1-46. It could also be
further related to the earlier-mentioned book on the relationship between becoming and
personality by Allport entitled Becoming (note 25). Also see note 53. Pursuing this
further here, however, is beyond the scope of this book.

31 Burgelman, R.A. 2002. “Strategy as vector and the inertia of coevolutionary lock-in.”
Administrative Science Quarterly, 47: 325-357.

32 The autonomous strategy process is a manifestation of the irrepressible human
entrepreneurial spirit. John W. Kiser III in his book entitled Communist Entrepreneurs
(Watts, 1989 – unfortunate timing!) shows how even in the most repressive socio-
economic systems it was not possible to entirely eliminate the entrepreneurial drive.
Eugene Lewis in his book entitled Public Entrepreneurship (Indiana University Press,
1984) documents how autonomous entrepreneurial activity helped shape major
government agencies. Edith Penrose in her book The Theory of the Growth of the Firm
(Oxford, Basil Blackwell, 1959) was among the first scholars to systematically examine
the implications of internal entrepreneurship for the growth of the firm. It is important to
point out, however, that autonomous strategic action can also be potentially dangerous.
For instance, the autonomous development of a reduced instruction set computing (RISC)
processor at Intel during the late 1980s – the i860, that CEO Andy Grove later called a
“renegade” product – had the potential to undermine Intel’s powerful ecosystem built
around its complex instruction set computing (CISC) microprocessor product line. See
Burgelman, R.A, Strategy is Destiny, o.c.: 146-153.

33 Christensen, C.M. and Bower, J.L. “Customer power, strategic investment, and the
failure of leading firms.” Strategic Management Journal, 17: 197-218.

34 Burgelman, R.A. 1983. “A Process model of internal corporate venturing in the
diversified major firm.” Administrative Science Quarterly, 28: 223-244. Also see
Burgelman, R.A. and Valikangas, L. 2005. Managing internal corporate venturing cycles.
MIT Sloan Management Review 46, 26–34.

77

35 Gerstner, L.V.2002. Who Says Elephants Can’t Dance? New York, HarperBusiness,
pp: 129- 130. The strategic change was dramatic. In 1992, IBM’s total revenues of $59.9
billion were composed of $33.8 billion in hardware (56 percent of total), $11.1 billion of
software (18.5 percent) and $15.0 in services (25 percent), In 2001, IBM’s $81.6 billion
in revenues were now composed of $33.7 billion in hardware (41 percent of total), $12.9
billion in software (16 percent) and $35 billion in services (43 percent).

36 Isaacson, W. 2011. Steve Jobs, New York, Simon & Schuster: 468.

37 Burgelman, R.A. 1983. “Corporate entrepreneurship and strategic management:
Insights from a process study.” Management Science, 29: 1349–1364.

38 Burgelman, R.A. 1983. “A Process model of internal corporate venturing in the
diversified major firm.” Administrative Science Quarterly, 28: 223-244.

39 See for instance, Denis, J.L., Lamothe, L. and Langley, A. 2001. “The dynamics of
collective leadership and strategic change in pluralistic organizations.” Academy of
Management Journal, 44: 809-837.

40 Grove, A.S. and Burgelman, R.A., “Modeling Nation-Level Strategic Change,”
Unpublished manuscript, April 2009.

41 This framework is called the “strategy diamond.” See Burgelman, R.A. 1994. “Fading
memories: A process theory of strategic business exit in dynamic environments.”
Administrative Science Quarterly, 39: 24-56. Also see Burgelman, R.A. and Siegel, R.E.
2008. “Cutting the strategy diamond in high-technology ventures.” California
Management Review, 50: 140-167.

42 Max Weber discusses the nature of charismatic authority and its routinization in
Weber, M. 1947. Theory of Social and Economic Organization.
It has been reported, for instance, that Apple has hired business historians to create case
studies of Steve Jobs’s strategic leadership approaches, but for internal use only. In view
of the process of corporate becoming examined in this book, however, Apple’s approach
can be problematic if it assumes that what was adaptive in the past will also be adaptive
in the future.

43 See Grove, A.S. 1983. “Breaking the chain of command.” Newsweek, October 3.

44 At Intel today, for instance, the preferred terminology is “candor” rather than
constructive confrontation.

45 Burgelman, R.A. and Grove, A.S. 1996. “Strategic dissonance.” California
Management Review, Winter 1996.

78

46 This phrase is popularly but perhaps inaccuratly attributed to management theorist
Peter Drucker. In any event, it has taken on a life of its own.

47 See Rumelt, R.P. 2011. Good Strategy Bad Strategy: The Difference and Why It
Matters. New York, Crown Business: 77 (italics in original).

48 Burgelman, R.A. 2002. Strategy is Destiny, o.c.: 160.

49 A classic example of how latent conflict between the operating model and the core
values can become manifest in the face of contextual change is offered by the Johnson &
Johnson (J&J) company. J&J’s top core value always was to do what is best for the
customers; its operating model, on the other hand, was based on very high
decentralization, with the many division presidents being the company’s key executives.
During the 1980s, in the face of great consolidation among hospital companies, J&J’s key
customers increasingly wanted to deal with a limited number of J&J sales representatives,
rather than with the sales representatives of the dozens of different J&J divisions.
Corporate management created a Hospital Services Group, with the purpose of
establishing a single sales interface for the customers, but this was strenuously resisted
for many years by the division presidents.

50 Intel Corporation’s problem witht the so-called “Pentium flaw” in 1994 powerfully
illustrates how the latent conflict between a changed corporate strategy and the
company’s core values can become manifest. One of Intel’s core values is “discipline” as
defined by engineers. Intel engineers in their disciplined approach to examining the
functioning of the new chip discovered that the Pentium (like all new chips) had a flaw: it
sometimes produced an error in so-called “floating point” calculations. But they also
discovered that the probability of the error was extremely small (approximately1 in 7
billion). As was their custom, they produced a white paper explaining this and shared it
with their OEM customers. A non-Intel mathematician somehow got news of the flaw
and used the Internet to widely broadcast it. This created a furor, especially after IBM
recalculated the potential error and claimed that its probability of occurring was
significantly higher (though still extremely low) than the estimate provided by Intel.
Eventually, Intel had to offer to recall the flawed Pentiums and replace them with non-
flawed ones at the cost of some $475 million, even though only the smallest number of
users would ever have had to deal with the problem. Intel’s fundamental error? They did
not fully appreciate that after having entered into consumer space with their extremely
successful “Intel Inside” marketing campaign, they now faced a context in which
“Reality = Perception;” and their core value of discipline as defined by engineers in the
relationsship with OEM customers did no longer apply. See Burgelman, R.A. Strategy is
Destiny, o.c.,

51 Burgelman, R.A. 1991. “Intraorganizational ecology of strategy making and
organizational adaptation: Theory and field research.” Organization Science, 2: 239-262.

79

52 This statement applies at the organizational level an insight of recent research at the
individual level that integrates neuroscience, meditation and philosophy related to the
brain, mind and self-consciousness. See: Thompson, E. 2015. Waking, Dreaming, Being:
Self and Consciousness in Neuroscience, Meditation, and Philosophy. New York,
Columbia University Press, chapter 10 (p. 325).

53 Interview with Joel Birnbaum.

54 Interview with Wim Roelandts.

55 Interview with WimRoelandts.

56 This form of diversification has been called “related constrained” and was found to be
associated with the highest economic performance among types of diversified firms. See
Rumelt. P.R, 1974. Strategy, Structure, and Economic Performance, Harvard Business
School Press.

57 These challenges were identified by Burgelman and Sayles 30 years ago:
The challenge for established firms, we believe, is not either to be well organized and act
in unison or to be creative and entrepreneurial. The real challenge, it would seem, is to be
able to live with the tensions generated by both modes of action. This will require top
management’s exploitation of existing opportunities to the fullest (because only
relatively few will be available), the generation of entirely new opportunities (because
today’s success is no guarantee for tomorrow), and the balancing of exploitation and
generation over time (because resources are limited). Strategic management approaches
will have to accomplish all three concerns simultaneously and virtually continuously.

See Burgelman, R.A. and Sayles, L.R. 1986. Inside Corporate Innovation, New York,
Free Press: 191, emphasis added. This quote from the Epilogue anticipated large streams
of important academic research that has built on James March’s distinction between
“exploitation” and “exploration” in organizational learning (1991) and on the revival and
elaboration of the idea of “ambidextrous” organizations by Michael Tushman and
Charles O’Reilly (1997). See March, J.G. 1991. “Exploration and Exploitation in
Organizational Learning.” Organization Science: 71-87; and Tushman, M.L. and
O’Reilly, C.A. 1996. Winning Through Innovation. Boston, Harvard Business School
Press.

58 Edith Penrose was the first to systematically identify and examine the managerial
constraints that limit the rate of growth of a firm. See Penrose, E. T. 1959. The Theory of
the Growth of the Firm. Oxford, Blackwell.

59 It is interesting to note that the possibilities frontier can be related to a typology of
firms identified and defined by Raymond E. Miles and Charles C. Snow in their 1978
book Organizational Strategy, Structure and Process (McGraw-Hill). High fit/low
evolvability seems to correspond to their “Defender” type; low fit/high evolvability

80

seems to correspond to their “Prospector” type; high fit/high evolvability seems to
correspond to their “Analyzer” type; and low fit/low evolvability seems to correspond to
their “Reactor” type, who operates inside the frontier. On balance, HP would seem to be
somewhat similar to the “Analyzer” type.

60 Strong concern for fit and weak concern for evolvability is the strategic posture of
highly specialized firms that are usually also dominant in their market. Intel Corporation
with it dominant position in microprocessors for PCs is an example. Such dominant
specialists face great difficulties in finding significant radically new growth
opportunities. Weak concern with fit and strong concern about evolvability is the
strategic posture of firms that are highly innovative and able to move into new niches
when competitive pressures in an existing one become intense. Maxim Integrated, an
analog/digital microprocessor company, is an example. Such firms may face strategic
difficulties if scale and scope (through consolidation) increase in importance. We expect
that unsuccessful companies are characterized by weak concern for fit and weak concern
for evolvability.

61 Rotemberg, J.J. and Saloner, G. 1994. “The benefits of narrow business strategies.”
American Economic Review, 84: 1330-1349.

62 Rotemberg J.J. and Saloner, G. 2000. “Visionaries, managers, and strategic direction.”
RAND Journal of Economics, 31: 693-716.

63 House and Price. 2009. o.c. p. 530.

64 Burgelman, R.A. 1994. “Fading memories: A process theory of strategic business exit
in dynamic environments.” Administrative Science Quarterly, 39: 24-56.

65 Burgelman, R.A. 1991. “Intraorganizational ccology of strategy making and
organizational adaptation: Theory and field research.” Organization Science, 2: 239-262.

66 Taleb, N.N. 2012. Antifragile: Things that Gain from Disorder, New York,Random
House.

67 See for instance, Sommer, J. 2014. “Trying to See Apple From a Different Angle.” The
New York Times, February 1.

68 HP CEO Lew Platt commissioned a study about the growth “stall points” that
companies, such as HP, seemed to systematically encounter once they reached a certain
size (see Olson, M.S. and Van Bever, D. 2008. Stall Points. New Haven, CT, Yale
University Press). It is important to point out, however, that great companies do not
necessarily have to proceed on a sustained quantitative growth trajectory. For instance,
HP under Lew Platt decided to spin off its Test & Measurement business in 1999
(renamed Agilent) and thereby reduced its size. In September 2013 Agilent announced it
would split off its electronic measurement business from its life sciences and diagnostics

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businesses creating two publicly traded companies. The life sciences and diagnostics
buinesses would retain the Agilent name. See “Agilent Technologies to Separate into
Two Industry-Leading Public Companies,” Agilent press release, September 19, 2013.
Earlier examples include the International Harvester company, which sold off its heavy
construction equipment business and its agricultural equipment business in the 1980s to
focus on its heavy truck engines business only and renamed itself Navistar. Several years
ago, IBM sold off its PC business to Lenovo and in 2014 is planning to also sell off its
low-end server business to Lenovo.

69 The reference to Packard’s speech is based on a recollection of Webb McKinney, who
was an employee of the company at the time. The poem was originally published in The
Atlantic Monthly, September 1858, in Holmes’ regular “The Autocrat of the Breakfast
Table” column for that magazine.

70 Wikipedia, o.c. In modern times, the term one-hoss shay is used to describe “a capital
asset that exhibits neither input decay nor output decay during its lifetime.” See:
https://stats.oecd.org/glossary/detail.asp?ID=1904.

71 Fiorina, C. Tough Choices: A Memoir, New York Portfolio (Pinguin), 2007: 320.

72 The New Webster Encyclopedic Dictionary of the English Language.

73 Kahneman, D. 2011. Thinking , Fast and Slow. New York, Farrar, Straus and Giroux:
205.

74 Taleb, N.N. 2012. Antifragile, o.c.

75 Glaser, B. G., & Strauss, A.L. 1967. The Discovery of Grounded Theory. Chicago:
Aldine.

76 Gaddis JL. 2002. The Landscape of History: How Historians Map the Past. New York,
Oxford University Press: 62-63.

77 Prigogine I. 1980. From Being to Becoming: Time and Complexity in the Physical
Sciences. New York, W.H. Freeman: 128. Also see Burgelman, R.A. 2015. “Prigogine’s
Theory of the Dynamics of Far-from-Equilibrium Systems Informs the Role of Strategic
Entrepreneurship and Innovation in Organizational Evolution.” In Shalley, C.E., Hitt,
M.A., and Zhou, J. (eds.), Oxford Handbook of Creativity, Innovation, and
Entrepreneurship : Multilevel Linkages, Oxford University Press.

78 Kauffman SA 1993. The Origins of Order: Self-Organization and Selection in
Evolution. Oxford, Oxford University Press: 234.

79 Gould SJ. 2002. The Structure of Evolutionary Theory. Cambridge, MA, Harvard
University Press: 1273-1274.