11&12.Corning Incorporated Reinventing New Business.pdf

CASE: SM-167A DATE: 06/10/08 (REV. 11/16/10)

CORNING INCORPORATED (A): REINVENTING NEW BUSINESS DEVELOPMENT Technology is at the heart of whatever we do. We are going to keep putting money into new technologies and we will go wherever new technologies tend to take us. —Jamie Houghton, Chairman Emeritus of Corning Incorporated, in 2008

INTRODUCTION Throughout its history, Corning Incorporated had maintained a strong dedication to technology and innovation, committing approximately four to six percent of its annual sales to research, development, and engineering (RD&E) until the late 1990s when this figure climbed to 10 percent. Even when the company was faced with severe financial challenges in the early 2000s by a crash in the telecommunications industry, its largest business segment, Corning saw investment in innovation⎯and particularly in new business development⎯as its road to recovery. While other companies might have slashed their RD&E budgets in a desperate effort to regain profitability, Corning increased and formalized the amount of time, money, and resources it dedicated to the identification of potentially large new businesses. As the company emerged from its financial crisis, management set a goal to double Corning’s rate of innovation with the objective of launching two to four significant new businesses each decade. To accomplish its ambitious goals, Corning created an organization called Strategic Growth. The purpose of this new team was to collaborate with corporate research to identify and develop new, large (approximately $0.5 billion), and profitable business opportunities. Under the leadership of Dr. Mark Newhouse, a Corning senior vice president, Strategic Growth was more than three years into its charter by late 2007. Although the group had realized many accomplishments since its inception, the question facing Newhouse, his team, and Corning’s executives was how well the company’s innovative approach to organic growth was working.

Lyn Denend prepared this case under the supervision of Professor Robert A. Burgelman as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2008 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business. This document is authorized for use only in economics of strategy1 by Dr. Suresh Srinivasan at Great Lakes Institute of Management (GLIM) from September 2014 to March 2015.

SM-167A Corning Incorporated: Reinventing New Business Development

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COMPANY BACKGROUND Corning’s Early History The story of Corning Incorporated began in 1851 when Amory Houghton Sr., a carpenter, builder, and entrepreneur, purchased an interest in a small Cambridge, Massachusetts glass company.1 Although glass had been in use for thousands of years, Houghton perceived it to be a poorly understood and vastly underutilized material.2 After buying two other glass companies in the northeastern U.S. (and selling one), Houghton and his sons moved their operation to Corning, New York in 1868, thus establishing the Corning Flint Glass Company. Overcoming a difficult start, the business was incorporated as Corning Glass Works in 1875. Corning’s commitment to innovation can be traced back to the company’s roots. Houghton’s sons, Amory, Jr. and Charles, had a great interest in experimentation. Some of their earliest work led to formulations that produced high-quality glass with consistent color, making glass a more viable material for new applications. Under the leadership of the Houghton family (and drawing on the family’s passion for invention), Corning began to develop a reputation for innovation and deep technological prowess. This reputation led Thomas Edison to approach Corning in 1879 to develop bulbs for his electric lights. The resulting invention made electric lighting commercially feasible. To continue fueling innovation within the company, Corning established a corporate research center in 1908, one of the first in the United States. An important early innovation coming out of the new lab was a heat-resistant glass (called borosilicate after its composition) that was capable of withstanding extreme changes in temperature. In 1912, this product was used to make shatterproof lanterns for the railroads. In 1915, Corning released another borosilicate product, Pyrex®, which was first used for laboratory equipment and eventually for consumer cookware products. During World War I, Corning prospered as a supplier to defense contractors based on the company’s ability to produce high-quality glass that others could not replicate. As demand for Corning’s products continued to grow, the company invested in developing its process expertise. In 1926, it invented the “ribbon machine,” which produced blanks for incandescent lamps at the rate of 2,000 bulbs per minute. During the Great Depression, Corning continued to expand, developing breakthrough products such as silicones in the early 1930s, electrical sealing in 1938, and 96-percent-silica glass in 1939. In this era, Corning initiated several joint ventures, including Owens-Corning in 1938 (to produce fiberglass), Pittsburgh Corning Corporation in 1937 (to make glass blocks), and Dow Corning in 1943 (to produce silicones). In the 1940s, the company realized many improvements in optical glassmaking. Beginning in 1942, Corning mass-produced cathode-ray tubes for use in World War II radar detection systems. By the end of the decade, Corning had revolutionized the materials and process used to 1

Much of this company history based on “Corning Incorporated: Company Profile,” ReferenceforBusiness.com, http://www.referenceforbusiness.com/history2/3/Corning-Incorporated.html (January 16, 2008). 2 Brian Howard, “Corning Incorporated,” American Biotechnology Laboratory, October 2005, http://www.corning.com/docs/corporate/media_center/ABL-Howard-Reprint.pdf (January 16, 2008).

This document is authorized for use only in economics of strategy1 by Dr. Suresh Srinivasan at Great Lakes Institute of Management (GLIM) from September 2014 to March 2015.


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produce television picture tubes, making TVs affordable to the mass market. Beyond these scientific innovations, Corning experienced a number of other changes in the 1940s. The company went public in 1945. That same year, it created the position of chairman of the board, which Amory Houghton Sr. assumed. The decade also began an extended period during which Corning was led by chief executives outside the Houghton family (see Exhibit 1 for a chronology of Houghton family leadership at Corning). To help sustain the Houghton family’s commitment to innovation, Corning began committing approximately four to six percent of the company’s sales to research, development, and engineering (RD&E). In the 1950s, Corning introduced electricity-conducting coated glass, fused silica, and color television tubes. A new process for producing glass ceramic materials (Pyroceram® products) led to the marketing of CorningWare® cookware in 1958. In the 1960s, Corning’s record of innovation continued. Among other accomplishments, the company made the ceramic heatresistant reentry shields and the glass windshields for the 1960s Apollo moon program (and produced glass for every manned spaceflight thereafter). Corning’s advancement in cellularceramic structures became key components of automobile catalytic converters in the 1970s after automakers approached the company for help addressing new emission control requirements. Corning also developed the first optical fiber capable of maintaining the strength of laser light signals over significant distances. This advancement would launch the use of fiber optics for telecommunications. In the 1980s, the company pioneered glass substrates for liquid crystal display technology that would make large, high-quality flat display panels possible for a variety of applications. Cyclical Slowdowns in the 70s and 80s Despite this track record of successful innovations, Corning suffered a downturn in the 1970s. Although more than one-third of the products in the company’s portfolio were new, their contributions were significantly unbalanced, making the company vulnerable. For example, Corning generated half of its sales and three-quarters of its profits from the glass envelopes that housed TV picture tubes. When competition from Japanese imports dramatically reduced domestic demand for Corning’s television glass, the company’s sales plunged. According to Amory Houghton Jr., the company’s chairman at the time, Corning’s earnings dropped so far, so fast during the 1974-1975 recession that “the integrity of the company was in danger.”3 From $4 a share in 1973, earnings fell to $1.76 in 1975.4 In response, Houghton initiated a major turnaround, reducing the company’s workforce to 29,000 employees (from a high of 46,000), selling off a troubled semiconductor manufacturing unit (acquired by the company in 1962, but never made profitable), selling or closing five other plants, and eliminating thousands of products (from black-and-white TV tubes to Christmas ornaments).5 These efforts enabled the company to rebound, to some extent, in parallel with the 1976 economic recovery.

3

“The Trials of Amory Houghton Jr.,” Forbes.com, http://www.forbes.com/forbes/1977/0901/032.html (January 14, 2008). 4 Ibid. 5 Ibid.

September

1,

1977,



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The recovery of Corning’s stock, however, was slow (with some analysts and investors remaining disillusioned by the fall and critical of Corning’s overall, long-term performance to shareholders). Moreover, the company’s growth was uneven through the 1980s and into the 1990s. For example, a recession in 1982 caused the company’s profits to plummet 30 percent. Consumer products sales (CorningWare®, Pyrex®, and Corelle® dinnerware) also began to slip in 1982. In 1983, Corning halted production of light bulbs. Yet these types of challenges paled in comparison to what would come next: the rise and fall of Corning’s telecommunication business. The Telecom Bubble While there was little demand for Corning’s optical fiber when it was originally developed, deregulation of the U.S. telephone industry led to a boom that peaked in the 2000/2001 timeframe. In the build-up, customers submitted huge orders to Corning. In turn, the company invested heavily in ramping-up its production capacity, spending millions internally and $10 billion on external acquisitions in the space. Corning’s revenue jumped from $4.7 billion in 1999 to more than $7 billion in 2000. Telecommunications-related products, including optical fiber, accounted for 75 percent of total sales.6 As sales grew, so did the company’s employee base. In 2001, Corning had more than 40,000 employees, up from a low of 17,000.7 Its research center tripled in size in three years and, in 2000, 65 percent of all RD&E spending was focused on fiber optics.8 Less profitable or “less exciting”9 businesses, such as housewares, medical testing, drug research, television, and laboratory glass, were sold off, closed down, or sidelined to allow the company to concentrate on telecom.10 Through this growth, Corning’s stock price soared, reaching a high of $113 in September 2000.11 “We caught one hell of a wave in telecommunications,” said John Loose, Corning’s CEO at the time. “I think we can keep growing the top and bottom lines by 20 to 30 percent a year,” he predicted in a January 2001 interview with the New York Times.12 But by July 2001, just six months later, Corning was in shambles, described by the New York Times as “the victim of the greatest bubble of our time, the fiber optics craze.”13 As it turned out, telecommunications companies discovered that their fiber networks were being grossly overbuilt, and that there was more than enough existing fiber, not being used, to meet demand. Corning’s orders for new fiber stopped abruptly, catching the company completely unprepared. “We lost half our revenues in a year,” said Wendell Weeks, who was the head of optical communications during the crash and later became the company’s CEO. “Even in the Great Depression, that didn't happen.”14 Telecommunication sales dropped more than 75 percent, from $5 billion to 6

Claudia Deutsch, “The Horse and the Cart, in Order,” The New York Times, January 7, 2001. Ibid. 8 Jonathan Fahey, “The Glass Menagerie,” Forbes.com, April 24, 2006, http://www.forbes.com/forbes/2006/0424/063.html (January 15, 2008). 9 Floyd Norris, “Corning’s Desperate Deal Destroys Value,” The New York Times, August 2, 2002. 10 Deutsch, “The Horse and the Cart, in Order,” op. cit. 11 Ibid. 12 Ibid. 13 Floyd Norris, “Disaster at Corning: At Least the Balance Sheet Is Strong,” The New York Times, July 13, 2001. 14 Kevin Maney, “Corning CEO Keeps His Eye on Long-Term Ball,” USA Today, May 10, 2005, http://www.usatoday.com/money/industries/technology/maney/2005-05-10-corning_x.htm (January 14, 2008). 7



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$1.6 billion in 2002.15 The stock plunged to a low of $1.10 per share in October 200216⎯roughly one one-hundredth of its value two years earlier (see Exhibits 2 and 3 for select Corning financials). The company’s debt ballooned to nearly $5 billion.17 And, although the company had about $1.8 billion in cash on its balance sheet, it was burning through it at a rate of approximately $1 billion a year, with no end to its losses in sight.18 CEO Loose abruptly left the company and James Houghton, the great-great grandson of founder Amory Houghton, came back to lead the company’s turnaround. “Jamie” Houghton, as he is known, served as Corning’s chairman and CEO from 1983-1996 and then as chairman emeritus until 2001 when he returned as non-executive chairman. In 2002, he reassumed executive responsibilities as the company’s chairman and CEO. Houghton alone owned more than 600,000 shares of Corning stock at the time of his return19 (with the Houghton family retaining approximately 5 percent of the company’s voting shares20). As CEO, he and his leadership team immediately initiated a series of painful cuts intended to quickly and dramatically reduce Corning’s costs to a level commensurate with its revenues. This included once again slashing the workforce (from 44,000 to 20,000 employees), selling off businesses, and closing plants.21 Despite these cuts, Corning employees seemed relieved to have him in charge. As Houghton described in an interview with the New York Times, “I have a record of leadership, and there’s a feeling that a Houghton is back, and everything will be okay.”22 Getting Back on Track Against this backdrop, the Corning organization went through a period of extreme introspection⎯what many within the company called “soul searching.” “When you have survived a near-death experience, whether you’re a corporation or you’re a human being, you’re going to wake up and say, ‘Wow. Where am I? Let me take stock of the current situation,’” recalled Dr. Lina Echeverria, who joined the company in 1983 as a scientist and worked her way up to a corporate vice president role.23 Dr. Mark Newhouse, another scientist turned executive hired by the organization in 1986, agreed. Reflecting on his experience managing Corning’s optical switching business through the boom and then selling it off after the bust, he said, “I shut down more locations than any other human being at Corning. After doing something like that, you’d have to be a robot not to ask yourself, ‘What went wrong?’” Throughout the organization, significant time and effort was devoted to helping Corning define a clear company identity. According to Dr. David Morse, a senior vice president who joined 15

Claudia Deutsch, “Hot Product Has Corning Thriving and Wary,” The New York Times, September 20, 2005. Fahey, op. cit. 17 Claudia Deutsch, “A Familiar Face Is Trying to Put Corning Back on the Right Track,” The New York Times, June 13, 2002. 18 Ibid. 19 Deutsch, “A Familiar Face Is Trying to Put Corning Back on the Right Track,” op. cit. 20 “America’s Oldest Family Companies,” Family Business Magazine, 2002, http://www.familybusinessmagazine.com/oldestcos.html (January 17, 2008). 21 Deutsch, “Hot Product Has Corning Thriving and Wary,” op. cit. 22 Deutsch, “A Familiar Face Is Trying to Put Corning Back on the Right Track,” op. cit. 23 All quotations are from interviews with Corning representatives conducted by the authors in late 2007 and early 2008, unless otherwise cited. 16



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Corning as a scientist in 1976, “For decades, analysts on Wall Street have had a hard time saying what Corning is. When we were doing great with optical displays in the early 1990s, they wanted us to be in consumer products. And when we started doing a lot of fiber, they said ‘Why don’t you sell off displays and become a pure play telecom?’ And if you look us up in BusinessWeek or Fortune, you’ll find us under building materials or some odd category like that.” According to Houghton, “During this period, I spent a lot of time talking about the context⎯the context is who we are. I wanted to make sure everyone understood who we were, what our values were, and what we stood for. After that’s done, then you can go and talk about content, which is the strategy. The context, to me, is more important then the content.” At its most basic, Corning defined itself as a technology company. Houghton explained: I was brainwashed from the minute I was born about the value of technology from my father and my brother. It’s a fundamental, core belief with us and has been ever since the company was founded. We believe very strongly in patient money and investing in technology. To some extent, we’re swimming against the stream. There are a lot of companies that are getting out of basic research and relying on universities or other places for it, but we’re going in completely the opposite direction. We are adding all the time. According to Charles Craig, a 33-year Corning veteran, “Throughout our history, we’ve continued to spend 10 percent of sales on research and development⎯it varies between 9 and 11 percent” (see Exhibit 4 for Corning’s spending on research, development, and engineering as a percentage of sales over the last several years). “For the segments that we participate in, that’s incredibly high,” noted Echeverria, particularly during down periods. “That’s one of the advantages Corning has always had with the Houghton family: we’ve always taken the long view. We know that we’re not just going be around as a CEO for four or five years and then retire,” noted Houghton. “We’re not going to pay as much attention to the short-term results of the firm. We’re just not. Anybody who’s followed us for any length of time understands that. When we hit a blockbuster, it's usually a 10-to-15-year time frame before we make any money, and so we have to be long-term oriented.” Weeks concurred by adding, “Innovation takes a very long time. It’s easier for families to think about the next generation.” Through its soul searching, Corning “came to believe that the fundamental basis of the company was sound, and what we needed to do was address some of the excesses that we went through and mitigate the downside of being who we are,” said Weeks. From a corporate perspective, this included stabilizing the company’s balance sheet and taking a more careful approach to its financial management. “What we do has volatility in it. We have to accept that and build the financials to reduce the volatility. That’s why our balance sheet is now so conservative,” he explained. After the telecom collapse, Corning improved its balance sheet specifically by reducing the company’s debt and cost structure so it could more effectively weather the volatility inherent in being a technology-driven company. Additionally, it modified its P&L by centralizing research (and leaving development and engineering within the businesses, e.g., for product line extensions and other near-term projects related to its existing divisions). These centralized funds, along with the savings from the cost reductions, were reinvested back into research and innovation-based activities to help the company rebuild for the future.



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Another key activity initiated by the leadership team was to dramatically change the company’s approach to managing innovation. To accomplish this, Houghton and Weeks turned to Corning’s Science & Technology (S&T) organization. Changes Within S&T Changes within the company’s Science and Technology (S&T) function began in earnest after Dr. Joseph Miller was hired as Corning’s new chief technology officer (CTO) in mid-2001. Miller came from Dupont. “It was the first time that we had a CTO who was not home-grown in a long time,” commented Echeverria. “He was able to look at the way we managed innovation with fresh eyes.” As the leader of S&T, Miller would oversee all science and research that was not led directly by Corning’s four primary divisions: display technologies, environmental technologies, telecommunications, and life sciences (see Exhibit 5 for a directional representation of Miller’s organization). Of all the money Corning devoted to research and development, “60 percent is spent on what’s called development and engineering [D&E],” explained Craig, who was vice president S&T and Miller’s chief of staff. “D&E focuses on the implementation of new innovations, so these funds are charged directly to the businesses. The remaining 40 percent is corporate funding for longerrange and exploratory research, which is managed by S&T” (see Exhibit 6). S&T’s specific charter was to: (1) provide support for research projects aligned with Corning’s existing businesses, (2) fund non-directed exploratory research led by scientists in areas they found interesting, and (3) play a role in supporting new business development. Centralizing Corporate Research to Address Business-Aligned and Exploratory Research As CTO, Miller’s first priority was to stabilize and rebuild corporate research at Corning. To do so, “We made a very clear decision to have a strong central lab,” said Morse. According to Weeks, Corning was a strong believer in the value of having a centralized research function. “If you leave it to the businesses, the division that’s doing the best will get the most resources. But if you centralize it, you can actually help protect the company against volatility by starving the businesses that are doing best and giving more resources to the others that have up-and-coming technologies.” Corning shut down all but two of its 10 research labs, maintaining the Sullivan Park laboratory in Corning, New York as the primary hub (the second facility was located in France). “The reasons for that were around preserving the lab that had the longest history and, therefore, the greatest culture of innovation. At Sullivan Park, the scientists have the deepest understanding of Corning’s core technology and what we have done well for the past 100 years,” Morse explained. In the process, Miller changed the entire leadership team and cut more than 100 active projects. “The need was to eliminate them so that we could begin to think about a more purposeful and complete way of recreating the portfolio,” he said. “Before this happened, we had nearly 70 percent of our technical resources going to telecommunications, with 30 percent focused on other areas. When we got finished, we had 70 percent going to other areas and 30 percent focused on telecommunications.”



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The changes were also intended to help create more synergy among projects, rather than preserving research silos within the organization. “We set up a series of directorships of research, each one with a different competency area. And then we set up a project management approach that would help us cross-pollinate across areas on major projects,” said Morse, who was asked by Miller to become the director of the centralized corporate research organization. Once these structural changes were complete, motivating scientists to once again begin nondirected exploratory projects in areas outside of telecom was relatively easy. Scientists were asked to “spend five to 10 percent of their time on work they feel is important and that can add a significant value to Corning in the future,” said Dr. M.K. Badrinarayan, division vice president for inorganic and integration technology. In contrast, reestablishing linkages between corporate research and Corning’s non-telecom businesses was a slightly more difficult challenge. As one article put it, “When Corning was all fiber optics, research in other areas was crowded out.”24 As a result, “We had to reestablish credibility with some of the businesses,” explained Morse. “Business and research had grown apart from each other. And so the first thing we did was to focus a lot of talent on relatively short-range problems so that all the major businesses would have the best chance to get back on their feet, at least from the standpoint of what the technology could do. We did lots of analytical work, and we added lots of top people to business-aligned projects that were going out the door in the next year or two to help make those successful.” He continued: “The next step was working with businesses on major new products⎯product extensions and product renewals.” Corporate research also undertook a major budget readjustment with the goal of “regaining the credibility of top management and the financial management of the company that we could, in fact, manage to a budget because it just hadn’t been done for about five years or so,” said Morse. In combination, these steps helped corporate research get back on track with regard to S&T’s exploratory and business-aligned research projects. “We came out the other side with a much different feel about RD&E,” Miller commented. “There was much better communication, greater interaction with senior management, and more credibility for RD&E. Then we said, ‘Okay, what do we need to do now to begin to build the portfolio of the future?’” New Business Development To help address the issue of new business development, Miller advocated for what he initially called an inbound marketing function. “The idea was to build a group that could do two-sided assessments⎯from the technology side and the market side,” he said. Miller had experimented with this approach during his years with Dupont and had seen the benefits of having a group within corporate research that proactively sought new ideas and market-led opportunities. Because these opportunities were explicitly meant to be in areas that were not aligned with Corning’s existing products or divisions, this effort would help maintain diversification in the company’s portfolio and ensure that corporate research was directly contributing to Corning’s future growth. “Because Corning does not think of itself as aligned with any particular markets, we needed a group that could think beyond what we’re currently doing,” recalled Weeks. Corning had experimented with different incarnations of inbound or early-stage marketing over the years. “In the 1970s, we had a new business development function with the same goal of 24

Fahey, op. cit.



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finding opportunities that weren’t aligned with our current divisions. But it eventually waned and disappeared,” recalled Craig. When asked what went wrong, he continued: “For one thing, it’s hard to find new opportunities, ones that are real and big enough to create a new business. So it takes organizational patience to sustain the effort. The second thing is that established businesses don’t actually favor new business being created because it takes away from their total capacity to access resources and so forth. But if there is a good opportunity coming up, they’re first in line to receive it. So you have this sort of love-hate relationship at work within the company.” In the mid-1980s, another new business development function was formed. “It was called corporate marketing,” said Craig. “This group had several functions. One, of course, was to provide early-stage marketing capability to develop and understand markets. The second was to have some nominal new business development skills to move new opportunities into further stages of development. The third thing was to provide experience for new MBAs when they joined the company. Through corporate marketing, they would get experience to learn the company’s culture, and then we’d move them into a marketing role in one of the divisions.” Deborah Mills, a marketing director and long-time Corning veteran, was part of this organization. “I did this job in the 1980s and it was the worst job I had ever had,” she recalled. “I was a lone ranger, working independently to identify opportunities. We had access to technology people within research who would act as resources to the group, but they didn’t really pound the pavement with us. The other thing was that we were working inside-out⎯so taking a really cool material that Corning had invented and trying to find an application for it. It was a hard job made even harder by the approach.” Over time, the prominence and results of this group ebbed and flowed. While corporate marketing still existed when Miller joined Corning, “it wasn’t working,” said Craig. “But Joe strongly believed it was important for Corning to grow and for the R&D function to contribute. And so we basically began to take down corporate marketing and rebuild it in the context of Joe’s experience with inbound marketing. That’s what started in 2002.” Miller and team also conducted some benchmarking to see how other major companies managed their new business development efforts. By looking at companies such as IBM and Johnson & Johnson, they had several realizations: “One observation was that this was not something we should do halfway. Just putting a little bit into it was basically as effective as putting nothing into it. We had to be willing to make a sizable investment,” said Mark McClusky, founder and president of Newry Corp., a consultancy that began working with Corning in the mid-1990s. “Another observation was that we needed to put somebody in charge of it who had a lot of commercial and technical credibility, because this is a very hard job. In order to sustain people’s willingness to invest in this over time, we had to get someone with a lot of personal clout.” In terms of finding the right leader, “There were only a couple of people at Corning who were the right fit, and Newhouse was one of them,” recalled McClusky. “So we did some reconfiguration and we attracted Mark Newhouse to the job after he wound down his restructuring in optical switching,” added Craig. When he accepted, Newhouse became the leader of a new group within S&T called Strategic Growth. “The big change was that this function became part of the research organization as opposed to being in marketing or the



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businesses,” noted Dr. M.K. Badrinarayan, division vice president for inorganic and integration technology. The vision for Strategic Growth was to create the ability for Corning to identify and build new businesses that directly expanded its portfolio (i.e., products that did not fit within an established line of business). In the past, Corning had successfully launched one to two major new businesses per decade (with annual revenue greater than $500 million). Miller’s goal was to boost that success rate to two to four new business every 10 years. The creation of Strategic Growth was met with mixed reviews, largely due to its timing. “For Joe Miller to say, ‘I want an early-stage marketing group within research, and I'm going to fund it,’ was a hugely courageous act. We had just let go half of our employees worldwide, so some people thought ‘Gosh, shouldn’t we be working on things that are more applied, more nearterm?’” recalled Mills, who became the director of early-stage marketing within the new team. “People didn't believe in it,” added McClusky. “Around that time, people really thought that what they should be doing is keeping their eye on the ball.” However, with the support of Miller, as well as Weeks, who was promoted to president after the crash and became the company’s next CEO, the Strategic Growth organization was given the green light to proceed. The new group would receive roughly 25 percent of S&T’s research budget (with 50 percent going to business-aligned opportunities and the remainder allocated to exploratory research). Corning’s Innovation Recipe With some of these preliminary issues within S&T addressed, Weeks asked Miller, Morse, and Newhouse to capture and describe the essence of what Corning did best. Together, they developed what would come to be known as Corning’s innovation recipe. As input to this exercise, they drew from the various soul searching exercises that had been taking place across Corning after the telecom collapse. For example, one key observation came shortly after the crash from a working session that included Morse, Echeverria, and six or seven of the corporate research directors. “We were talking about our competencies and it was immediately clear that what we’re really, really good at is glass and optical physics,” said Echeverria. “But David kept saying, ‘Keep going at it. So what?’ And I remember getting to the point where we recognized that what we like to do are things that other people cannot do⎯really difficult projects that result in technology that becomes part of a larger product. So we do not make systems, but we do make what we now say is the keystone component of systems.” “It’s like the ‘Intel Inside’ model,” added Morse. “Corning is inside the catalytic converter, we’re inside the display. It doesn’t say ‘Corning Inside,’ but we’re a totally enabling part of the overall system. Without us, the system doesn’t work.” As Miller summarized, “We find the strategic spot in the value chain where the value chain doesn’t work without us.” Another important realization was that Corning’s success relied on the combination of materials expertise and deep process know-how. For instance, said Mills, “Thomas Edison needed a costeffective way to make his electric light work. So we developed a material and a process. The material was a specific type of glass. The process was the ribbon machine. Together, they made light bulbs cost-effective. Similarly, RCA came to us and said, ‘We think we can take radar technology and make it commercially viable for television if we can find a better way to make the back end of the tube, the funnel.’ And so we again developed a glass and a process that made that economical and gave birth to the television industry.”



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Finally, there was the recognition that Corning’s deep scientific knowledge necessitated strategic positioning. “We are not the kind of company that can compete on price alone. We just don’t do that well. So, we compete by creating a strategic position based on our intellectual property [IP] and our ability to defend it,” said Echeverria. All of these elements came together in the innovation recipe. Mills described the end result (see Exhibits 7 and 8): We have the input of the research and our deep technical capabilities. We have the problem that we identify in the market or industry. We invent the materials and the process to meet the very demanding attributes necessitated by the problem. What results is a keystone component. And because we invent that key enabler, we’re generally able to get a lot of IP protection. Also because we are in high-capital, high-investment businesses, that⎯in combination with the IP⎯tends to give us strategic control. Newhouse and Morse presented the recipe to Corning’s executive management team as part of a corporate strategy review in the summer of 2004. “This was really the first place where the recipe was written down and articulated,” remembered Newhouse. The idea was to use it to help evaluate new opportunities and determine whether or not they were aligned with the factors that typically brought Corning success. The recipe and the approach resonated with the executive management team because “it embodies the tradition of innovation and the culture that members of the Houghton family have indoctrinated into Corning employees over many years,” explained Weeks. As one way to begin institutionalizing the recipe within Corning, Newhouse was encouraged to incorporate it into the processes he was developing for Strategic Growth. BUILDING STRATEGIC GROWTH The formal mission of the Strategic Growth organization was defined as follows: In partnership with research, fuel the strategic renewal of Corning Incorporated by identifying and developing new, profitable, large ($0.5B) business opportunities. The specific objectives of the Strategic Growth team were to: • •

Identify large, complex system problems that could be solved through the development of keystone components. Evolve the opportunity into a business proposition, and where appropriate, ramp the business so that it can stand on its own.

(See Exhibit 9 for an illustrative organization chart for the group.) In contrast to Corning’s established business divisions, Strategic Growth would be focused primarily on “white space” markets and technologies, or fields in which Corning did not already have a presence. While the businesses sought adjacencies to their established markets or



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technologies, worth $50 million or more, which could be realized within one to five years, Strategic Growth would go after new material and process innovations requiring significantly more time and investment to accomplish, but with much larger potential returns. In addition to embedding the innovation recipe into Strategic Growth, Newhouse committed to using Corning’s innovation process as an organizing principle for his group. “Corning had an existing, five-stage innovation process,” he said (see Exhibit 10). “While the innovation recipe is an articulation of what made Corning successful in the past, the innovation process is more general. It’s a process for how you make sure you’re doing the appropriate activities required to create a new product.” Echeverria elaborated: “The innovation process takes three currents simultaneously and looks at the requirements of each one in order to deliver the project at each stage. Those currents are marketing, technology, and manufacturing.” Of the stages in the innovation process, Strategic Growth, in close collaboration with corporate research, would oversee new opportunities through stage 1 (build knowledge), stage 2 (determine feasibility), and stage 3 (test practicality). Opportunities progressing beyond stage 3 would require the creation of a new business unit or division within Corning, which would then be responsible for managing the resulting product through stage 4 (prove profitability) and stage 5 (manage lifecycle). A group dedicated to stage 1 activities already existed. Echeverria was asked to lead this team, which became known as exploratory markets and technologies. To address stage 2, Newhouse explained, “I brought an individual, David Charlton, with me. He was very experienced in the next stage in the process, which was essentially new business development or incubation. We added this function to go beyond just identifying an opportunity to actually begin commercial interactions and the formulation of a business proposition.” Given the increasing importance of each project as it progressed from stage to stage, Newhouse decided that, at least initially, when a project got to stage 3 it would report directly to him. Pre-Stage 1 Activities: Early-Stage Opportunity Identification Activities leading up to stage 1 were driven by technology and market-oriented resources, funded and managed by Strategic Growth’s exploratory markets and technologies group under Echeverria. Reporting to Echeverria were Mills, who led the marketing workstream, and Daniel Ricoult, director of early-stage technology, who led the technical workstream. Together, they co-managed the early-stage commercial effort via a team of Strategic Growth marketing and technology professionals. Opportunities were identified through workshops and other connections and activities that involved Corning scientists and commercial representatives, as well as external experts in high potential fields. Strategic Growth professionals wrote white papers on the most promising ideas resulting from these sessions to help facilitate more informed decision making regarding which ones warranted more detailed opportunities analysis. Opportunity analysis was performed by pairs of Strategic Growth resources⎯one person with a technical background and one with a marketing focus. Over a six-to-eight-month time period, these resources attended conferences, networked with academics, scientists, government agencies, and potential customers to gather more information about the opportunity. The data they gathered were then assessed in great detail and a recommendation was developed as to whether or not a more elaborate research project should be launched.



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Importantly, corporate research resources participated in these early-stage activities, providing input, expertise, and sponsorship for different opportunities, on a largely voluntary basis (they were not formally assigned to work with the Strategic Growth teams). Ricoult elaborated: “Once the team has identified the problem to be solved, it’s important to identify scientists in the research organization that may either have the right skill or may be interested in the topic. And from that time on, whatever recommendation we make will be much stronger and more effective if it can come as a joint recommendation between our team and a few scientists. If the scientists have already been involved and engaged in the pre-stage 1 analysis, the transition to stage 1 is almost flawless.” Corning was pursuing early-stage opportunities in fields such as energy, the environment, consumer electronics, transportation, chemical processing, and architectural materials. Between 2005 and early 2007, the exploratory markets and technologies team had involved more than 45 external speakers at ideation workshops, completed 61 white papers, performed 21 in-depth analyses, and launched 10 stage 1 research projects. Stage 1 Activities: Building Knowledge If Corning decided to launch a research project based on the outcome of early-stage opportunity analysis, the opportunity transitioned to a stage 1 project. At this point, scientists would begin performing experiments to build the company’s technical knowledge. The commercial resources that worked on the early-stage assessment would also remain involved, conducting the continuous market analysis that Corning required for all projects. According to Ricoult, “Stage 1 teams start out small, with maybe four or five people. By the end of stage 1, if there is enough progress, there could be 10 to 12 people on the team. In stage 1, corporate research resources were formally assigned to the project. These resources were sponsored by Newhouse and funded from an allocation within Morse’s research budget based on the percentage of their time that was dedicated to Strategic Growth projects. In addition, Newhouse funded the commercial resources (the marketing and technical representatives that worked on the project through opportunity identification). “Resources are assigned to stage 1 projects,” Morse explained, “through a consensus-driven process between the research directors and the stage 1 team.” Ricoult noted, “One thing that you have to keep in mind is that Strategic Growth does not own the scientists. So, we act as champions of a project through stage 1, making sure that it is progressing at an appropriate pace and moving in the right direction. But it’s more of an influential role at that stage. We have to be very close to our colleagues in the research organization and work with them to make sure that we have the right resources, maintain the right staffing levels, and address all the bumps on the road that may exist.” Negotiations for resources took place between the leaders of exploratory markets and technologies and the 10 or 12 research directors within corporate research. “Assigning resources to a project is based on our interactions and our gut feelings. It’s never a decision made by one person,” explained Badrinarayan, who was involved in many such discussions. “In my group, I talk with my managers, get their feedback, and then talk with my peers to get to the right decision. But there is no real process. And I don’t think it’s a good idea to have a process for staffing early-stage projects because that process would only be as good as the information you



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have.” Scientists typically worked on one to three projects at a time. Whenever possible, they were given input into what projects were of greatest interest to them. According to Badrinarayan, “It’s usually a mutual discussion between the supervisors and the scientists when we locate people on a project. There are some people who really want to do exploratory research and others who would prefer to work on things that are more applied. We try to take that into account, but we don’t have that freedom all the time. Sometimes, based on the skill requirements and needs for a particular project, we may assign a certain person to work on a project that isn’t their first choice.” While opinions differed to some extent among scientists, many saw early-stage work as an outlet for their interests and the results that stemmed from their non-directed exploratory research. Newhouse explained: “The near-death experience of Corning Incorporated left everyone without any illusions regarding the need to create financial value for the corporation. During that time period, the company made a continued investment in technology even though the whole corporation was at risk. It’s a pretty small number of companies that almost go bankrupt but still maintain R&D. The research organization up here noticed that. They saw that they were valued and that gave them a sense, I think, of responsibility and accountability that you often don’t see in research labs. When the Strategic Growth function was put into place and it was clear that it could become a path to commercialization for the scientists’ great ideas, it was received pretty well.” As projects entered stage 1, more formal mechanisms were put into place to manage the effort, which usually spanned one to three years. For one thing, a steering committee was formed. In general, anyone with resources assigned to the project was invited to play a role on this governance committee (including Mills, Ricoult, and the research directors who contributed scientists to the project). Additionally, a stage 1 contract was developed that outlined success criteria for the project. “There’s usually a one-day meeting where the team defines what it has to accomplish for this specific project in order to complete stage 1,” said Ricoult. “For example, they may have to demonstrate the viability of the technology concept, define how many samples to make, demonstrate that there is a significant market pull, and determine that the technology will be conducive of a feasible manufacturing process.” These metrics were defined with the help of a proprietary online tool designed to take some of the guesswork out of project evaluation. “It's probably the closest thing we have to a crystal ball,” said Rob Craig, a former Strategic Growth analyst. The project contract was reviewed and approved by the steering committee. To date, 10 projects had transitioned to stage 1. Stage 2 Activities: Determining Feasibility Once a stage 1 project had achieved the metrics within its project contract, another recommendation was made as to whether or not it should advance to stage 2. If so, the project was transitioned to the new business development team within Strategic Growth, which was managed by Charlton, a division vice president. At this point, a program manager with deep domain expertise was added to the project and the focus shifted; no longer driven only by science and technology, it was now dominated by customers and markets. The primary objectives at this stage were to test prototypes with customers, refine product concepts based on their feedback, validate all assumptions in the marketplace, develop a business model, and establish customer pull.



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Generally, most of the research resources assigned to the project in stage 1 transitioned to the stage 2 project (and more were added). However, more often than not, the early-stage Strategic Growth resources transitioned off the project to refocus their efforts on the identification of new early-stage opportunities. In parallel, Mills and Ricoult handed off their management responsibilities to Charlton. To date, stage 2 projects had spanned anywhere from two to five years. In terms of funding, Charlton described the process, which was managed by Strategic Growth, as “a little muddy.” “By the time we’re in late stage 2, it’s department funding. So, to fund a project, we create a whole new department with separate people and accounting systems. In early stage 2, it’s what I call project funding. We set up a project budget and have people charge time to their project, whether they’re assigned to the project or just helping out on a secondary basis. This allows us some flexibility, so we can move people in and out without having to worry about reporting changes and the messiness that occurs when you start changing peoples’ boss⎯we try to avoid that.” Charlton further commented on how the dynamics of the project shifted with the transition from stage 1 to stage 2: “Stage 1 is highly consensus driven. My focus is not consensus… By the time we get into stage 2, what we need to accomplish has been set by the mission of the group. So it’s more about how do we do it⎯and who has a right to an opinion. My experience is that way too many research directors want to get way too involved in way too many things.” He elaborated with an example: On my first stage 2 project, there were three oversight groups⎯21 people involved to oversee a project of 14 people. So, there was no way the project could maintain a consistent direction from month to month. My role was to come in and say, ‘There will be no more meetings.’ I said, ‘Let's negotiate a set of objectives.’ After we got the set of objectives approved, I took them back to all the groups and said, ‘These are our objectives. If anyone has a new objective, they're welcome to introduce it, but that means we’ll have to drop an old objective off the list.’ Then, I basically shut down the interaction for a year. And we were able to get our feet underneath us and start to move forward. Now, that’s not to say that the research directors can’t be invaluable as advisors and supporters. But the context has to be something more along the lines of risk management and audit, and not on actually operating the project. This conflict was driven, in part, by the fact that the scientists still formally reported to the research directors, even though they were working on a stage 2 project. As a result, the research directors wanted to maintain a voice in managing these resources despite the fact that they were under someone else’s immediate supervision. Furthermore, there were cultural difference between research and business that came into play. Dr. Chung-en Zah, research director for semiconductor technology research, explained: When the project gets bigger and bigger, we always have issues with the balance between efficiency and transparency. Running a research project [stage 1] is very



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simple. Everybody knows what's going on. But when it progresses to development and customer interaction [stage 2], sometimes it’s not based on science anymore. In research, the people who have the scientific knowledge are making the call. But later, the people who have the information about what the customer wants become those with more authority.… Business and research are two different cultures, so the tension is unavoidable. But people have to compromise. Morse agreed that stage 2 could be somewhat tumultuous before it became clear whether or not a project would make it through. “You oscillate a project wildly, sometimes going backwards, sometimes going forwards. But if you are successful at collecting knowledge, the oscillations narrow. And at some point, you’re not in stage 3 yet, but you can look ahead and say, ‘Okay. I can tell what stage 3 is going to be like.’” As of late 2007, four projects had transitioned into stage 2. Stage 3 Activities: Testing Practicality As Craig described, “The challenge, of course, is to get to the famous stage 2 to stage 3 transition. At stage 3, we actually begin the commercialization of a new product.” This was the point at which Strategic Growth, in collaboration with research and the engineering group, sought to test the practicality of the opportunity. The focus of the work shifted from research to development. “We’re looking at things like will the customers actually buy? Will they buy in quantity? Can we actually support that with our scale-up? And so forth,” said Craig. As of late 2007, no projects had yet transitioned into stage 3, but several were getting close to being ready. “We have four potentially significant business opportunities in stage 2 that fit the original innovation recipe concept and are roughly the $0.5 billion range for size,” explained Craig. “Will any of these four make it? That’s where we are today, trying to figure out what we call the ‘customer driven transition’ from stage 2 to 3.” According to Newhouse, having to become increasingly dependent on customer input to make these decisions was risky, “because it doesn’t really cost them very much to be nice. Customers will not reject you fast enough to be a filter on your spending because they have no direct incentive to tell you no…. It’s very difficult.… We have not yet demonstrated our capability to make judgments past early stage 2.” Newhouse elaborated on additional challenges faced by Corning in preparing to transfer a project from stage 2 to stage 3: If new skills are required that are nonexistent in the company, it’s our preference to create those skills while the project is still within Strategic Growth, or at least seed those skills before a project is pushed out to a division. In addition, we have to have a receiver who can devote adequate attention to the project. The complexity of new business opportunities is out of proportion with their scale. We have pushed out programs in stage 1, in stage 2, and we'll hopefully do it in stage 3. It all depends on whether those two elements are present… It also depends how big the opportunity is. Since big opportunities will require more attention from the division to be successful, they’re more likely to stay in our organization longer.



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Because of these complexities, Newhouse intended to oversee the first few stage 3 projects himself before putting in leadership and/or a more formalized process for managing new businesses at this stage in their development. In terms of staffing at the stage 2 to stage 3 transition, Mills said, “The projects are like a flaming inferno in terms of the resource requirements.” More resources from engineering became involved, while some corporate research resources transitioned out. “I think if scientists are willing to go into development, they can move with the project into stage 3,” said Zah. “But if they are more inclined to do fundamental research, then they should be able to shift back to that kind of work in the same topic area or on different topics.” Evaluating and Filtering Projects: Corning’s Seven Questions Deciding which opportunities or projects would progress from stage 1 to stage 2 to stage 3 (and which would not), was an ongoing source of concern. “We knew we had to develop and implement filters,” said Newhouse. “I was worried that stage 1 would generate lots of ideas, and we should have lots of projects incubating in stage 2. But there were only so many that we could support. A funnel would bottleneck with the first few projects that got into it. And we knew that coming up with net present value models too early in the development of a business did not work as a filter. So we needed a different approach.” Craig had come up with a series of questions that the company might ask itself when considering new opportunities based on the innovation recipe. “We took those questions and said, ‘Okay, how can we reformulate those questions a little more precisely so that they could be used as filters as projects move through the innovation process,” recalled Newhouse. “It wasn’t a big change to what Charlie had already written, but it led to the creation of what we now call the seven questions.” According to McClusky, the seven questions were built around issues such as: Is this thing an attractive commercial opportunity? Is it big? Is it connected to a megatrend? If it’s not connected to a megatrend, then one could be suspicious that it would be a flash in the pan kind of thing. Is there a technical fit? Is this something Corning is really good at? Is it something that we can protect through intellectual property or specialized manufacturing processes? And is the timing right? Are we too early or are we too late? The seven questions were customized slightly for each stage gate in the innovation process (see Exhibit 11). Mills explained: “The questions are all tailored to allow us to reduce uncertainty as more information becomes known over time. They required us to be rigorous without being unrealistic about what we can understand at each stage. Otherwise, projects would never get past stage 1. For example, a question that changes from stage 1 to stage 2 is about market pull. In stage 1, we ask, ‘Is there a problem that requires a step change in cost or capability?’ It’s a relatively generic question. But in stage 2 the question becomes ‘Is there customer pull for the innovation?’” “The process becomes a lot more rigorous as you go forward, because it’s not just conceptual work anymore,” noted Dr. Kishor Gadkaree, a Corning research fellow.



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In terms of their implementation, “We had to spend a fair amount of time trying to get people to use the questions correctly,” said Newhouse. “The challenges were helping people understand them, getting them to adopt them, and then teaching folks not to always answer them ‘yes.’” According to McClusky, “The seven questions are sort of religion at this point. They take a lot of the guesswork and ambiguity out the decisions at each stage gate.” However, he noted, “There’s still a lot of judgment in the process. It’s not nearly as clear as ‘If you’ve checked all seven boxes, go to the next stage.’ It’s much more about, ‘Now that you’ve checked those seven boxes, what do we think? Is this really a good idea?’” The Corning Technology Council Ultimately, the decision to advance a project from one stage to another was made by an entity called the Corning Technology Council (CTC). The CTC, led by Miller in his role as CTO, was the governance body with oversight for stages 1 and 2 in the Corning innovation process (a second group, led by CEO Weeks, called the Growth Strategy Council (GSC), oversaw stages 3, 4, and 5). Miller’s staff made up the voting members of the CTC. However, all of the research directors and research fellows in Morse’s corporate research organization were invited to attend the monthly CTC meetings. A benefit to opening the meetings to a wider audience was that it provided a forum to keep members of the research organization informed about new projects. “I try to attend every CTC meeting if I'm available. To me, it’s a useful way to get an overview of what’s going on since Corning’s research organization is quite large,” said Zah. On the other hand, said Charlton, “If you really want to have a dialogue and build a consensus, you need to have an exchange of views. And you can’t have an exchange of views with 30 people in the room. There isn’t time.” Regarding the decisions themselves, explained Newhouse, “Most are made in advance of the CTC meeting. It’s rare for a real decision to be made in that forum⎯it’s more of an endorsement or an opportunity for you to share with the organization what’s been going on and to gather understanding and support for the recommendation.” Echeverria added, “This is a culture that doesn’t have big discussions, big heated arguments in meetings. Even though you may disagree, you express it in a very polite way. Or you may not even express it there⎯you express it later on. So commonly there would be meetings before the meetings so that there is agreement before you go in.” Benefits of a Structured Process While there was still much to work out regarding the way new business development was managed at Corning, particularly in the later stages, the company had taken great strides forward in terms of managing this process. “When I came here, I think the theme that I emphasized was the importance of rigor,” said Newhouse. “I called it ‘rigor without precision.’ The philosophy is to ‘know what you can know well.’ Don’t just throw up your hands and say ‘I can't know things precisely; therefore, I don’t have to proceed in a rigorous manner.’” Following this approach, Newhouse and his team sought to understand as much as they could while acknowledging variables that were unknown or difficult to predict. “The other thing we emphasized was how value could be created. We brought a standard of value analysis to most of our problems, which was a standard that was not well implemented and a skill that was not well



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developed outside a few businesses,” he added. This led to a process that “rejects more than we accept,” said Newhouse. “That is the principal reward of having such a rigorous process.” Others agreed with this assessment. “Newhouse established a very rigorous process,” said Echeverria. “In the past, we looked at opportunities and made our decisions based on a gut feel or what somebody desired. Mark established, with the help of his team, a process and the systems for evaluating the outcomes of this process. Therefore, he gained credibility, so he started having access to good people. And, as you know, success brings success.” “I have been exposed to many new business development groups around the world,” said Dr. Waguih Ishak, vice president and director of Corning’s West Coast research center, who joined the company in mid-2007. “I was stunned when I saw the structure of Corning. At first when I saw the structure and the relationships between corporate research, Strategic Growth, and development, it was very strange to me. It was strange because I have always believed that you could not put so much structure and strong guidelines on the way technology is transferred from research to the business end… But every place I go I see it working.” Craig elaborated on some additional reasons why the process seemed to be off to a strong start: “First of all, I'd say this process is strategically aligned with our corporate direction. So it’s not the guys in R&D doing their thing. It has the support of the CEO and the board. Second, Joe Miller is a big believer in early-stage work. So the championship is strong, which is so critical.” To build a strong base of support at the highest levels of the organization, Miller had proactively worked to inform and engage the board of directors regarding the company’s new business development activities. Miller started by setting up education sessions with the two most technically astute members of the board before each board meeting to brief them on key projects in the company’s new business portfolio. Before long, these individuals recommended to the other board members that they all attend, based on the value that the sessions provided. This helped ensure that there was adequate visibility within the organization to these growth-oriented activities, that they had a better chance of being sustained, and that they would also play a role in helping shape corporate strategy. “We’ve got this whole top-to-bottom approach to governance that connected. It really makes a big difference in being able to pace and allocate resources to these programs,” noted Miller. Ricoult highlighted other organizational benefits associated with Strategic Growth: The overall intent of this process is to make sure that the organization is allocating resources to the right problems, and that we are not wasting our precious resources to pursue opportunities that are not good opportunities. Strategic Growth is buffered from the rest of the organization. Our only objective is to identify these new opportunities. We are not distracted by having to support the existing business which can and does happen in the research organization. Whenever there’s a crisis in the plant, regardless of whether you’re working on another project, research is going to be involved in solving the problem. But we are not. That’s good because that guarantees our absolute focus on the search for new opportunities. It’s not a mission that we pursue whenever we have the time. It is our mission⎯period.



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Zah added, “I think it’s a good model. Otherwise, the existing businesses would get all the money and you’d end up with no new products.” Finally, Ishak commented on the advantages of the company’s market-based approach to new business development. “In order to succeed in corporate research,” he said, “you have to solve problems that matter. You have to be marketing-driven, not technology-driven. We can’t design a laser or a transistor and then find an application for it in the future. That time is over… Corning has been relatively insular for a long time. Let us open up.” By taking a more marketoriented approach to new business development, Corning would not only improve its focus on problems that mattered but find potential new synergies. “The Strategic Growth group is a driving force in this new approach,” said Ishak. “They go outside, talk to customers, and bring problems that matter back to the researchers.” This approach also helped ensure that Corning remained market-focused without requiring scientists to take on new commercial roles for which they might not be well suited. LOOKING FORWARD As Corning looked forward, the company was optimistic about its approach to new business development and the results its efforts would yield. However, there were still many issues to resolve, including challenges related to human resource and financial management, as well as measuring and sustaining the success of Strategic Growth. Human Resource Management Corning’s corporate research group had a portfolio process that evaluated the best allocation of the company’s scientists. In contrast to the CTC meetings, which were focused on which projects moved forward without getting into the specifics of how they would be staffed, the portfolio process sought to balance Corning’s supply of scientists with demand created by the businesses, Strategic Growth, and non-directed exploratory research projects. Morse’s chief of staff managed the process with input from Corning’s divisions, Mills, Ricoult, and Charlton, as representatives of Strategic Growth, and the research directors. “We meet every three or four months and review the entire portfolio of research projects,” said Ricoult. “And we have a giveand-take discussion. At the end, there’s always a compromise, but we try to find the best compromise in terms of allocating resources to the right projects.” “There is no formula for how much time research should spend on each of those three activities [supporting the businesses, working with Strategic Growth, and conducting exploratory research],” said Ishak. “You need really good managers who can balance the need for short-term versus long-term solutions.” It’s all about balance,” concurred Craig, “and very high levels of communications.” As in most organizations, demand for scientists generally outstripped the available supply. This problem had gotten increasingly worse as the early-stage opportunity identification process ramped up. Mills explained: “We have eight active stage 1 projects right now, and we’re coming up with more. At the same time, the company is doing exceedingly well, and there’s a lot of stuff that research needs to do to support its ongoing businesses. So people are getting tapped out.” Badrinarayan elaborated on how the Strategic Growth approach was exacerbating this problem: “The rate at which we can identify new market opportunities is not in balance with the time it takes to develop new businesses. The number of ideas being generated is a lot more than



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our funding and resources can support.” For example, it took just 8 to 10 months to identify and evaluate a new opportunity, but several years to develop the project through stage 1. With a dedicated force of nearly 20 people focused on early-stage opportunity identification in Strategic Growth, Corning faced the risk of developing a sizable bottleneck in its new business development pipeline. To help address this imbalance, Corning recognized the need to improve its project selection process. “A good idea and a bad idea look exactly the same in the beginning,” commented Weeks. “Project selection is our number one issue,” said Morse. “The scientists will always invent and the engineers will always be able to solve the tough engineering problems. But if we haven’t chosen the right project, it won’t matter.” Further, the company could not afford to commit scarce scientific resources to projects without a relatively high probability of success. This applied to work that occurred in the early stages, but also to Corning’s later-stage activities, which were much more resource intensive. “At least half of our large projects have to die,” said Newhouse. While stringent selection and project evaluation criteria would help manage the supply of scarce resources, it would create new people-related issues to resolve. “It’s difficult to manage organizations through the huge changes that are associated with killing projects. We don’t have a perfect model for doing that,” said Newhouse. For example, when Corning recently decided to shut down a stage 2 project focused on fuel cell technology, the strain on the organization, particularly all of the scientists assigned to the project, was apparent. “For the people sitting outside the project, it might look like a perfectly logical decision. But to those of us who were deeply involved, it’s tough. It’s disappointing,” noted one individual. The challenges associated with redirecting resources after a project was closed down could be difficult, especially when they had highly specialized skills sets that were not easily transferrable. “We need a model for making sure we know how each person could be used on another project,” said Charlton. “Everybody has to have at least two plausible uses so we can minimize the impact on any one team if a project goes south.” Project shutdowns also had the potential to make it harder for Corning to attract employees to later-stage projects. Newhouse explained: “I think we are having difficulty attracting qualified people for the later stages because the risks are high and the management tension is high. People are more willing to come in the early stages.” However, more resources were needed as the work progressed. In terms of resolving these human resource-related challenges, there were at least two factors working in Corning’s favor. First, and most importantly, while many other companies sidelined or fired individuals who failed, Corning had a well-established history of giving them new opportunities to be successful. “A unique part of this culture is that it allows people to fail and still contribute because often they are the ones who have learned the most,” said Weeks. “We don’t punish people if they fail, especially in these brand new business,” Houghton added. “We believe deeply in risk-taking. But if you take risks, you’ve got to assume that sometimes they’re not going to work, and that’s okay.” Second, even when Corning discontinued a project, it “put it on the shelf” rather than completely abandoning the effort. As a result, the work of a team or individual could be reinvigorated when technological advancements, market conditions, and/or customer demand appeared more promising. For example, Houghton reminisced about one such



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opportunity that came from a visit to the British Post Office in the 1970s. This group requested a glass with sufficient purity to transmit communications over long distances without losing the signal. Corning was able to satisfy the need with the chemical vapor deposition process that had been invented in-house in the 1930s, but had not yet found a commercial application. As of 2007, the company still used this process for the manufacture of optical wave guides, an important product for the company. Financial Management Of course, financial resources related to new business development also required careful management. “We are used to investing in long exercises. We are comfortable with patient money,” noted Echeverria. On the other hand, countered Newhouse, “It sometimes takes years and years to become profitable.” According to Charlton, there was a study performed in the 1970s that indicated roughly 17 years were required for a business to achieve nominal profitability in a new field.25 The effect of this time frame was that the more new businesses Corning moved into the development pipeline, the more money the company would lose until they reached their eventual payback. “The more we succeed, the more we lose, and the more it hurts the rest of the company until we actually get a profitable business launched,” Charlton said. While new business development was widely perceived as a necessary investment, the extent and duration of that investment (with little or no payback) was the issue that could become controversial. “I would say that we're pushing the envelope on 10 percent [of sales directed toward RD&E], which is causing strains everywhere,” said Newhouse. “The company has done well. The model hasn’t broken yet. So far, 10 percent of sales goes up nicely every year. But we are pushing it. We’re under more budget constraint now than we’ve ever been before.” Charlton added, “All we can do is minimize the damage, which is a hell of a way to motivate a senior executive, you know: ‘Instead of generating wealth, let’s try to lose fewer resources.’” “The question is how long the corporation will be willing to put up 10 to 15 percent of sales to create these new businesses,” said Badrinarayan. “My concern is that these big, new opportunities may require us to spend more than 10 percent in the next 10 years.” Measuring and Sustaining Success Effective financial management was intricately linked to Corning’s ability to measure and, therefore, sustain the success of Strategic Growth. As Newhouse put it: Well, I think how this organization is managed and how decisions are made remains a learning process which we’re not done with. A core problem with new venture arms is they don’t produce the kind of quantitative results that management traditionally uses to manage organizations. Being able to say, ‘You have a target for profitability. You have a target for sales. Did you hit them? If not, why not?’ yields a very straightforward management model. But when you’re essentially doing discovery-based work, which is what new ventures are 25

E. Ralph Biggadike, Corporate Diversification: Entry, Strategy, and Performance (Harvard Business School Press, 1979).



p. 23

like, what are you accountable for? I’ve tried to set up a system where we develop a hypothesis. We’re accountable for testing that hypothesis and returning results versus that hypothesis and then defining how we’re going to change our action on the basis of that result. However, the first thing that creates trouble is that organizations tend to not want to hear what’s inconsistent with their hypothesis, so they don’t change. Even if they hear it, they don’t actually change their response. The second thing is that people have great difficulty reporting that kind of information to management, and management has trouble hearing it. Management values predictability more than anything⎯even more than profitability. But by the very nature of new business development work, we’re going to surprise them. How do I keep management comfortable and hold onto the credibility of those who are doing this work when, by its very nature, it is uncertain? People have to be willing to go in front of management and effectively say ‘I was wrong again’ multiple times. How can we sustain the reputation of the people who work in that environment? That is an unresolved problem. One long-term metric for assessing the success of Strategic Growth could be the number of divisions formed within Corning based on its work. What was less clear was how long Corning should give the group to accomplish this desired end result in light of the sizable investment required, competitive pressures, and other complicating factors. Corning would, indeed, need to be patient given the complexity of the businesses it was investigating. The question was how to gauge the extent to which the effort was working to help ensure that it would be sustained in good times and in bad. Reflecting on Strategic Growth’s first few years in existence, Newhouse said, “We have created the right kind of structure and approach, I believe, to tackle this problem. But we won’t know the answer for years—the next 5 years will tell.”



p. 24

Exhibit 1 Chronology of Houghton Family Chief Executives at Corning

Corning has been led by five generations of Houghtons over its 150+ year history. Name Amory Houghton, Sr. Amory Houghton, Jr. Alanson Houghton Arthur Houghton Amory Houghton, Sr. Amory Houghton, Jr. James Houghton

Dates 1851-1870 1875-1910 1910-1918 1919-1920 1930-1941 1961-1964 1983-1996 2002-2005

Source: Compiled from public sources.



p. 25

Exhibit 2 Corning Incorporated Income Statement (2000-2007) 12/31/00 7,127.10

12/31/01 6,272.00

12/31/02 3,164.00

12/31/03 3,090.00

12/31/04 3,854.00

12/31/05 4,579.00

12/31/06 5,174.00

12/31/07 5,860.00

Cost of Goods Sold Depreciation, Depletion & Amortization

3,611.20 764.90

3,406.00 1,080.00

1,944.00 661.00

1,761.00 517.00

1,954.00 523.00

2,191.00 512.00

2,311.00 591.00

2,514.00 607.00

Gross Income Selling, General & Admin Expenses Other Operating Expenses Operating Expenses Total Operating Income Extraordinary Credit Pretax Extraordinary Charge Pretax Non-Operating Interest Income Reserves - Inc(Dec) Pretax Equity In Earnings Other Income/Expense Net Earnings Before Interest And Taxes (EBIT) Interest Expense On Debt Interest Capitalized Pretax Income IncomeTaxes Current Domestic IncomeTaxes Current Foreign IncomeTaxes Deferred Domestic IncomeTaxes Deferred Foreign IncomeTaxes Income Tax Credits Minority Interest Equity In Earnings After Tax Other Income/Expense Discontinued Operations Net Income Before Extra Items/Preferred Div Extr Items & Gain(Loss) Sale of Assets

2,751.00 1,587.30

1,786.00 1,728.00

559.00 1,199.00

812.00 943.00

1,377.00 1,008.00

1,876.00 1,104.00

2,272.00 1,374.00

2,739.00 1,477.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

5,963.40

6,214.00

3,804.00

3,221.00

3,485.00

3,807.00

4,276.00

4,598.00

1,163.70 6.80

58.00 -

(640.00) 176.00

(131.00) 19.00

369.00 6.00

772.00 84.00

898.00 0.00

1,262.00 4.00

462.60

6,058.00

2,080.00

672.00

1,858.00

259.00

65.00

200.00

104.60

68.00

41.00

32.00

25.00

61.00

118.00

145.00

0.00 #N/A

0.00 #N/A

0.00 #N/A

0.00 #N/A

0.00 #N/A

0.00 #N/A

0.00 #N/A

0.00 #N/A

(14.50)

(26.00)

(38.00)

147.00

19.00

30.00

86.00

162.00

(605.00) (1,439.00)

688.00

1,037.00

1,373.00

163.00

143.00

113.00

101.00

9.00 22.00 (759.00) (1,580.00) (254.00) 1,031.00 (14.00) (27.00)

27.00 572.00 578.00 (14.00)

37.00 961.00 55.00 (8.00)

19.00 1,291.00 80.00 2.00

Net Sales or Revenues

Net Income Before Preferred Dividends Preferred Dividend Requirements Net Income Available to Common

798.00 (5,958.00) (2,541.00)

163.10

202.00

192.00

56.50 49.00 13.00 691.40 (6,111.00) (2,720.00) 407.10 (452.00) (726.00) 372.60 (14.00) (337.00)

163.00

82.90

73.00

43.00

23.00

111.00

167.00

164.00

176.00

(54.40)

(475.00)

(333.00)

(282.00)

767.00

443.00

0.00

(3.00)

6.00

(36.00)

(99.00)

19.00

180.00

(18.00)

(101.00)

(95.00)

0.00 23.70 185.20 0.00

0.00 (13.00) 148.00 0.00

0.00 (98.00) 116.00 0.00

0.00 (73.00) 209.00 0.00

0.00 17.00 443.00 0.00

0.00 7.00 598.00 0.00

0.00 11.00 960.00 #N/A

0.00 3.00 942.00 #N/A

12.50

0.00

#N/A

0.00

0.00

0.00

0.00

0.00

(223.00) (2,185.00)

585.00

1,855.00

2,150.00

20.00

0.00

0.00

0.00

(223.00) (2,165.00)

585.00

1,855.00

2,150.00

0.00

0.00

0.00

0.00

(223.00) (2,185.00)

585.00

1,855.00

2,150.00

458.30 (5,498.00) (1,780.00)

(36.30)

0.00

415.00

422.00 (5,498.00) (1,365.00) 0.80

1.00

128.00

457.50 (5,499.00) (1,908.00)

0.00

0.00

Note: In millions of U.S. dollars. Source: Complied using data from Worldscope.



p. 26

Exhibit 3 Other Select Corning Incorporated Financials

Corning’s Quarterly Revenue in Thousands (1998-2007) Corning Inc. (NYSE:GLW) - Total Revenues ($mm) 2500 2000 1500 1000 500 0

Corning’s Weekly Stock Price in Dollars per Share (1998-2007) 120 100 80 60 40 20 1/20/2007

1/20/2006

1/20/2005

1/20/2004

1/20/2003

1/20/2002

1/20/2001

1/20/2000

1/20/1999

1/20/1998

0

Source: Compiled using data from Capital IQ and FT.com.



p. 27

Exhibit 4 Corning Spending on RD&E (1999-2006)

700

18

14

$ Millions

500

12

400

10

300

8 6

200

4 100

Percentage of Sales

16

600

2

0

0 1999

2000

2001

2002

2003

2004

2005

2006

Source: Information provided by Corning Incorporated.



p. 28

Exhibit 5 Illustrative Organization Chart Science & Technology

Joseph Miller Executive Vice President Chief Technology Officer Strategy & Technology (S&T)

Charles Craig Vice President Director, Administration & Operations for S&T

David Morse

Mark Newhouse

Senior Vice President Director, Corporate Research

Senior Vice President Director, Strategic Growth

Jean-Pierre Mazeau

Marc Giroux

Senior Vice President Director, Corporate Product & Process Development

Vice President Director, Corporate Engineering

Source: Developed by authors based on information provided by Corning Incorporated.



p. 29

Exhibit 6 Approximate Breakdown of Corning’s RD&E Expenditures The company’s total annual RD&E allocation equals approximately 10 percent of sales. It is divided between corporate research and development & engineering. Corporate Research – 34 percent • 3-20 year timeframe • Focused on research and new business development • Budget managed centrally by corporate research

34%

66%

Development & Engineering – 66 percent • 1-5 year timeframe • Focused on existing product lines • Budget managed as part of business P&Ls

The percentage allocated to corporate research is shared across three primary types of research activities. Exploratory Research – 25 percent • Non-directed invention • Driven by scientists • Unspecified timeframe

25%

50%

Exploratory Markets & Technologies – 25 percent • Market opportunity focused • Driven by Strategic Growth • 7-20 year timeframe

25%

Business Aligned Research – 50 percent • Focused on extensions to existing businesses • Driven by businesses • 3-7 year timeframe

Source: Developed based on information provided by Corning Incorporated.



p. 30

Exhibit 7 Corning’s Innovation Recipe




p. 31

Exhibit 8 Corning’s Recipe Results

Materials

Keystone Component

Process




p. 32

Exhibit 9 Illustrative Organization Chart Strategic Growth

Mark Newhouse Senior Vice President Director, Strategic Growth

Business Development

EMT

Marketing

Technology

Government Programs

Licensing

Human Resources Finance Manufacturing




p. 33

Exhibit 10 Corning’s Innovation Process

I.

II.

III.

IV.

V.

Marketing Technology Manufacturing I Build Knowledge

Ideas

II Determine Feasibility

Experiments

III Test Practicality

IV Prove Profitability

Projects

Production

V Manage Life Cycle

Profits

Source: Reprinted with permission from Corning. © Corning Incorporated 2005. All Rights Reserved.



p. 34

Exhibit 11 Corning’s Seven Questions Stage One What, if any, are the key megatrends driving the opportunity? Is the opportunity large? Is the problem significant – requiring a step change in cost or capability? What is the hypothetical (quantified) value proposition? Is Corning’s approach unique? Is there a possibility for significant differentiation? Does it fit Corning’s materials and process expertise? Are the required resources available?

Stage Two What, if any, are the key megatrends driving the opportunity? Is the opportunity large? Is there clear customer pull? Does it have clearly articulated value proposition? Do we have opportunity for substantial differentiation/strategic control? Does it fit Corning’s materials and process expertise? Do the size of the opportunity and the potential investment appear to be in balance?



11&12.Corning Incorporated Reinventing New Business.pdf

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