Lessons of Hospital Equipment Corporation
The Hospital Equipment Corporation case is one I have used for about four years. Here is it's description its the Havard Business School case catalog:
Hospital Equipment Corp. is a very successful maker of hospital beds. Due to outstanding performance in new product development, it grew to dominate its primary market and is searching for other opportunities to grow through new product development. It discovers that its internal system for identifying new, high-growth markets actually screens out some exciting growth possibilities.
The case was written by Clay Christensen, the man who is now Dean of the Harvard Business School. As such, the case is especially amenable to being analyzed by his now well-known theory of "disruptive technologies." As with several other cases used in past years, I plan to discontinue use of this fine case in my strategy courses. As such, I am now making public my "lessons of" notes that I formerly distributed to my students at the end of the session in which this case was discussed.
Lessons of Hospital Equipment Corporation
Firms frequently have more than one strategy process operating at the same time- one emergent (bottom-up) and one deliberate (top-down). This is not an inherent problem. But when patterns of resource allocation don’t mirror the stated strategy, people can get very confused about what the strategy actually is. The emergent strategy process operates continuously, comprehensively, powerfully. The only way a deliberate strategy can be effectively implemented is when the way and time money are spent on projects to develop new products, services, and capabilities is managed to exactly mirror the strategy which management intends to execute.
In some regards, HEC may have succeeded too well in the 1980’s. The prior success of HEC may have delayed their recognition of some seemingly inevitable industry dynamics. You may ask yourself whether it the conversation that Steele and Gorman are having should have taken place five years earlier, i.e. 1986, when the market saturation was lower, instead of 1991, after it was saturated. Success, particularly overwhelming success like HEC experienced, can lead firms to overlook imminent threats, gloss over shortcomings in their organizational processes, misidentify their core competencies, and fail to challenge their most basic assumptions about themselves and their environment.
Meeting the needs of customers as well as HEC did can not be seen as anything other than helpful and contributory to their success up to 1991. But you might also ask yourself what are the consequences of being so attuned to your customer’s needs that you can anticipate them before they do? Is it possible that some customers need to be ignored and that by consistently meeting their needs, attention may be distracted from emerging market demands that may represent the next source of above-average growth. Are there negative returns to scale from meeting and exceeding customer requirements? Should some customers be told no?
Organizational theorists have observed that the physical architecture of a product is a good indicator of the division of labor in an organization, the production or design processes, and what the patterns of interaction are: parts of the product that interface suggest the need for interaction among organizational members with responsibility for those parts of the product. However, when the product architecture changes, different groups of people need to interact over issues at different points in the design process. This presents a challenge for any organization because, as historically configured, it may not have the capability for designing the product with the new architecture as efficiently. Thus, the same habitual ways of working in the existing organization, the capabilities to develop products in the existing way, can also be disability to the development of new products. We might also consider whether the physical architecture provides clues about the architecture of the firms capabilities.
Several researchers and observers have noted that organizations face a fundamental and constant trade-off between engaging in sufficient exploration to ensure the long-term viability of the firm while also engaging in sufficient exploitation of prior capabilities to ensure survival through all the near terms that, in summation, comprise the long term. Exploitation frequently takes the form of efforts designed to meet clearly-defined and short-term objectives and immediate targets; to improve short-run efficiency; to reduce slack; and to increase reliability, accuracy, precision, or control of core processes and activities. Exploration, on the other hand, typically includes complex search, basic research, invention, risk-taking, relaxed control, loose discipline. The performance and organizational implications for each of these activities are quite different and have to be taken into consideration when strategy is being formed and resource allocation decisions which follow from it are being made.
Company names don’t garner much attention among management theorists. That said, it may serve our purposes to give this one some consideration. Consider again the task that Steele, our protagonist, has been given: to generate a draft proposal with recommendations for new product development activities at HEC. The scope of those recommendations extend well beyond the matter of if and how the NPVD process should reorganized; they implicitly touch upon the matter of HEC’s core strategy, strategic resources (including core competences) and by extension, the architecture or configuration of its capabilities. Now consider the “framing” effect that having the name “Hospital Equipment Corporation” can have as Steele begins to consider a wide range of options. How different, if at all, will the recommendations be if Steele challenges, rather than accepts, that framing? Just as importantly for him, what will be the effects on his career? As I see it, this is the kind of assignment you give to someone that you one day expect to see leading the company. If Steele gets this right, he’ll be the most likely (internal) choice for the CEO spot when Gorman steps down.