Volume 4, Issue 2
Reprinted from Product Development Best Practices Report


You are a traditional functional organization. You have had some success with cross-functional development teams, but the functional forces keep pulling things back to the status quo. The problem is that you know your cycle time is too long and that you're doing a sub-optimal job capturing customer input into product design. The best solution is to blow up your functional silos, put your strongest people into cross-functional teams, demand cross-functional cooperation at the senior level, and have all these cross-functional operators get as close as possible to your customer, right? Maybe not, says MIT associate professor of strategic management Rebecca Henderson. Do it and you may wake up to discover that you won the battle and lost the war, sacrificing long-term institutional strength to short-term victories in the marketplace.

Based on a twenty-year study of ten large European and American pharmaceutical firms, representing 25% of the worldwide R&D in an industry undergoing rapid and wrenching change, Henderson presents a strong case for stepping back and making organizational decisions based as much on a strategic assessment of your knowledge portfolio as on your product portfolio. (She's not talking about intellectual capital, but the institutional skills you need today and will need three years from now).

Says Henderson, "Nobody has the answer to the problem to which cross-functional teams are supposed to be the solution, the problem of innovation and productivity in product development. People are dispersed throughout the organization who have valuable bits of information. The problem of product development is that to do it effectively, you need to pull that information together in a seamless, creative, novel way."

Cautions Henderson, "If you blow up the functional system, you get lots of short-term benefits. But in the long term, there has to be some way to build the technical and organizational skills you've put at risk."

Success Equals Luck, Great People, Strategy, and Organization

Henderson says she assumed at first that the answer to the problem was cross-functional teams. The research eventually showed that in addition to their considerable strengths, team-based operations bring serious weaknesses: they generate role and responsibility confusion; most firms have a shortage of effective project leaders; they tend to generate "death by a thousand teams" (She cites one example of an Italian sales manager who was on 15 teams, five located outside his country!); they degrade functional skills, particularly insofar as organizations tend to put their best people on teams.

The research ended up showing that the most important success factor was luck, followed by great people, a good strategy, and effective organization. And when it comes to organization, most successful firms maintain over time a dynamic tension between well-tended functional groups and equally strong cross-functionality. Says Henderson, "They were never satisfied that they had found a final answer."

She highlights three key learnings about successful firms:

They maintain rich links across organizational boundaries and with outsiders. They use resource allocation mechanisms that encourage "High conflict, high respect" exchange of information across boundaries.

They continually experiment with the tension between organizing research by discipline and research by therapeutic area.

Be Strategic About Human Resource Management

One of Henderson's most provocative notions is that your long-term success will benefit greatly by making your human resource management function strategic. She's not talking about bringing your benefits people to the strategic table. She's talking about the fact that long-term success entails paying as much attention to your organizational and skill needs as you do to strategic market research and your product portfolio.

Says Henderson, "This doesn't mean maintaining a big database. Ford has one; nobody looks at it. I'm talking about taking this seriously at the strategic level, having a general manager, or some other individual, very much aware of who the key people are, their strengths, your plans for them, and what mix of strengths you'll need in the future."

Being strategic about HRM means maintaining a balance of your institutional knowledge through individual tracking, rotating people through cross-functional assignments, ensuring continued disciplinary excellence, and developing people who are simultaneously deep in their disciplines and very aware of how their work relates to others, and to the organization as a whole.

Henderson acknowledges that she's not sure that she's right about how best to change the incentive structure, but she says that the research suggests that you might be smart to direct rewards toward the weak dimension, introducing product-based incentives in a strong functional organization and skill-building incentives in a strong product-focused organization. Says Henderson, "As far as possible, motivate individuals towards the success of the enterprise rather than the local group."

Concludes Henderson, arguing for being strategic about HRM, "You might want to ask whether you should manage projects in different ways so that people get different kinds of experience; you might want to manage the experiences individuals have so that they're moving between different kinds of projects; you might want to make decisions as to which projects to pursue on the basis of what kind of knowledge will be generated." Her final advice? "There is no single best way to organize for innovation; beware of consultants who say there is and promise to provide them."PD

Copyright 1998 The Management Roundtable, Inc.