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may 2006 43

HBR’s cases, which are fictional, present common managerial dilemmas

and offer concrete solutions from experts.D A

N IE

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A larger-than-life

CEO left Innostat with

larger-than-life

problems. The new

boss knows the

company needs

fundamental change,

but the image of her

predecessor hovers.

H B R C A S E S T U D Y

he memorial service was a sellout. Jack Donally had been a colossal fig-

ure who commanded a lot of respect,

if not affection. He’ll be a hard act to

follow, Stephanie Fortas thought as she

strained to make sense of the eulogy,

delivered in a thick Irish accent by the

same priest who had married Jack and

Moira Donally 40 years ago. Moira must

be feeling especially lost, Stephanie

thought. A deferring, uncomplaining

woman, Moira had apparently taken

second place to Innostat all her married

life, and just when it seemed that she

would soon have Jack all to herself, he

up and died.

But it wasn’t just Moira and her five

children who looked lost, Stephanie

thought. Everyone seemed bewildered.

As the CEO appointed by the board to

succeed Jack just before his untimely

death, Stephanie knew that a lot of

people would be looking to her for an-

swers. She edged forward to pay her re-

spects to Moira, aware that a lot of curi-

ous eyes were fixed on her.

“I’ve heard so much about Jack,”

Stephanie said, offering her condo-

lences to Moira. “I’m going to do my

best to protect his legacy.”

A One-Man Show That legacy was formidable. Boston-

based Innostat was very much Jack

Donally’s creation. He had transformed

the company from a small local manu-

facturer of scalpels and other surgical

equipment into the world’s best-known

maker of prosthetic limbs and surgical

implants. Sales had reached more than

$2 billion, with the company employing

more than 5,000 people at locations

in Boston, Los Angeles, and Dublin,

Ireland. Innostat also had sales and mar-

keting country organizations around

the world. A pharmacist’s son from the

rough-and-tumble Irish American strong-

hold of South Boston – Southie to the

T

Big Shoes to Fill by Michael Beer

locals – Jack had joined Innostat as a

salesman right after completing a tour

of duty in Vietnam as a medical orderly.

His unit had been in the thick of some

of the worst action, and he always said

afterward that his passion for the com-

pany and its products came from that

experience.

Under Jack’s leadership, Innostat built

a reputation for technological innova-

tion and manufacturing quality. That

was, on the face of it, surprising, since

Jack had majored in history at the Uni-

versity of Massachusetts and liked to

say that he had no head for “science

talk.” But the truth was, he loved to

spend time talking to surgeons and re-

searchers. He had that special skill that

merged an interest in technology with

an understanding of what customers

needed and wanted. He typically came

back from his travels full of ideas for

new products. He would go straight to

the head of R&D and get him started on

a project, rarely engaging Innostat’s se-

nior team in discussions of these ideas

and how they fit in to the company’s

broader strategy. Consequently, market-

ing never developed as a strong func-

tion, and R&D, though technologically

sophisticated, never developed market-

ing savvy.

Despite his primary focus on new

product ideas, Jack was also acutely con-

scious that health care products had to

be error free, and he had always kept a

close eye on manufacturing. Frank Tim-

oshotsky, the self-effacing head of pro-

duction recruited from Toyota, had in-

troduced many of the car company’s

quality practices, which had helped the

firm win a Baldrige prize.

But in the three years before Jack’s

retirement, Innostat’s performance had

declined dramatically, and the com-

pany was facing strong competitive

challenges in its key markets. The firm’s

once generous margins had narrowed

as other companies found ways to engi-

neer around Innostat’s patents and de-

velop competitive products of their own.

Worse, the company seemed to have lost

its innovating edge. After a string of new

offerings in the 1990s, which delivered

annual growth in revenues and profits

of more than 15% a year, Innostat had

not launched any major new products

for the past four years, yet they were

essential for profitable growth.

Stephanie had not been Jack’s choice

for a successor. He had strongly pleaded

the case for Frank to the board. But

three years of falling results and grow-

ing pressure from Wall Street had

prompted the board to look for an out-

sider. The directors settled on Stephanie

because of her technical background.

A 1989 PhD from Stanford, she had also

received an MBA from MIT’s Sloan

School in the early 1990s, and then

headed back West to join the marketing

department of Phasar, a medical tech-

nology company. Stephanie’s combina-

tion of technological skills and busi-

ness savvy had marked her as a highflier,

and within ten years she had become

the company’s chief operating officer.

In that role, she worked closely with

Phasar’s chief science officer to ensure

that the company’s R&D efforts were fo-

cused on commercially viable products.

The headhunter had caught Steph-

anie at the perfect moment – right after

a messy divorce. She was eager to put

California behind her, and a profes-

sional challenge offered just the kind

of distraction she needed. There was no

doubt that Innostat would present that

challenge. It seemed to have completely

lost the ability to innovate, and investors

were starting to question whether the

company actually had a strategy. Long

term, Stephanie knew that she would

have to radically alter the way the firm

innovated. But she wasn’t sure that In-

nostat was in any shape to survive a

major change initiative.

The Walk by the River Stephanie believed in tackling big chal-

lenges head-on. Her first priority was

to figure out how Frank felt about her

and whether she could work with him.

They had met at her hotel in Harvard

Square the day after her appointment

was announced, and Frank had pro-

posed a stroll along the Charles. It was

a warm, early October day, and the uni-

versity crew teams were out on the river

practicing for the Head of the Charles

regatta later in the month. As they

walked, Stephanie and Frank struggled

to find common ground.

“Where do you plan on living?” Frank

asked.

“Back Bay, probably,” Stephanie said.

“I don’t have kids, so I don’t need a big

house. Anyway, I like the buzz of city life.”

“I know what you mean,” Frank

agreed. “I miss Back Bay. Cathy and I

had a place there until the kids came

along. Now we’re in the suburbs. The

schools are good, and the commute is

fairly short. But I miss the edge of city

life sometimes.”

Frank shuffled his feet. “Look, Steph-

anie,” he said. “You have a lot of prob-

lems in this company, and I’m not one of

them. I know everyone thinks of me as

Jack’s boy, and I was. But I’m not such

a fool that I can’t see that the company

needs to change.” He caught Stephanie’s

eye. “We got way too dependent on

Jack for ideas,” he said, “and, to be hon-

est, he didn’t have much faith that any-

one in the company could come up

with them, so he didn’t really develop

the capability. He was always talking to

people outside the company for ideas.

And now we’ve got a real problem on

our hands.”

Stephanie listened intently. “And

what would you do if you had my job?”

she asked pointedly.

Frank paused for a moment. “Well,

to begin with,” he said,“we’ve got to take

a look at why people are not thinking

beyond their immediate functional

departments. People around here are

44 harvard business review

H B R C A S E S T U D Y • B i g S h o e s t o F i l l

Michael Beer ([email protected]) is the

Cahners-Rabb Professor of Business Ad-

ministration Emeritus at Harvard Busi-

ness School in Boston.

“Jack said that really

good ideas don’t need

incentives, they need

passion, and that he

was the chief passion

officer.”

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may 2006 45

B i g S h o e s t o F i l l • H B R C A S E S T U D Y

focused only on making their numbers

within their own units, so they don’t

have much reason to respond to prod-

uct development initiatives from R&D.

Besides, they don’t believe R&D’s esti-

mates of market potential. So why in-

vest time and money on a promise they

don’t believe? When Jack pushed an

idea, we all responded because Jack was

the boss, and he was just that kind of

guy. But with him gone, who’s going to

stick their necks out now?”

“Did you ever talk to Jack about this?”

Stephanie asked more abruptly than

she had intended.

“I didn’t,” Frank acknowledged. “But

we did get a report from PK Henderson

a year ago. The board got Jack to call

them in for a consult. They came up

with this reorg idea. Most of us thought

it was a little crazy and that a massive re-

organization was not the answer. Per-

sonally, I still believe that the problem is

motivation, that the company needs

more powerful incentives to get people

thinking out of the box. Jack didn’t see

it, though, and he buried the report. He

said that really good ideas don’t need

incentives, they need passion, and that

he was the chief passion officer.”

Filed but Not Forgotten Stephanie had come away from the

conversation intrigued. She’d been

told about the Henderson report in her

negotiations with the board, but only

in passing. The board members had

seemed quite dismissive, so she hadn’t

pressed them on it. She decided to get

herself a copy.

Stephanie read the report that night

in her office over a tuna sandwich from

the company cafeteria. She picked up

the binder and turned to the summary

page. As Frank had told her, the report’s

recommendations involved a fairly

major change to the company’s man-

agement practices. Decision rights for

new product development were to be

taken out of R&D and given to cross-

functional new product development

teams headed by senior marketing

people. The teams would be responsi-

ble for seeing the development from

its early stages through to introduction

of the product. The teams would be

made up of those most closely related to

the new development: bench scientists

from R&D, a relatively senior manufac-

turing engineer, along with the man-

ager of the plant making the product

and someone from sales.

Because Jack had played such a dom-

inant role in defining new product op-

portunities and pushing them through

the organization, the consultants ac-

knowledged that the marketing divi-

sion lacked the experience and credibil-

ity to do this kind of work. On the other

hand, the division had the best view of

the market through its relationships

with surgeons. Yet sales and marketing

at Innostat was heavily sales dominated

and had few people with both high lev-

els of marketing and general manage-

ment skills. To get around this problem,

the consultants had suggested creating

a strategic marketing department that

would report to the CEO. This new de-

partment would be responsible for

identifying opportunities and for lead-

ing the product development process.

No recommendation was made as to

who in the company might head this

new department. It was this issue that

slowed acceptance of the reorganization

plan. Jim Pappas, director of sales and

marketing, clearly didn’t have the head

for this kind of work. But, like most sales-

men, he was fiercely territorial and re-

sented losing part of his responsibilities.

Stephanie felt for Jim. He was an old-

school salesman down to his fingertips.

He entertained lavishly, and he proba-

bly knew the golfing handicap of every

hospital purchasing manager in Boston.

It wasn’t going to be easy for him or for

anyone in the company to give up his

sovereignty; once it happened, all hell

could break loose. Stephanie looked

around her office, which had Jack’s per-

sonality imprinted on it. A huge corner

suite with an oversized mahogany an-

tique desk, the room communicated the

force of life that had been Jack Donally.

“He certainly was a charismatic leader,”

Stephanie thought, scanning her sur-

roundings, “but I wonder what his kids

thought of him. He must have been

a difficult man to live with.”

Stephanie forced her mind back to the

report. The consultants believed that

people needed to be motivated further

to commit the time and energy to the new

process, and recommended that employ-

ees be held accountable to both their

functional and team heads. The consul-

tants also suggested that the team leaders

and members be measured on the time-

liness and profitability of new products

and that all incentives be monetary and

based on performance. They recom-

mended hiring an organizational devel-

opment consultant to work with HR on

designing the new system and on creat-

ing appropriate training programs.

It was the final recommendation,

though, that obviously got the report

killed. Henderson had strongly urged

Jack and other top executives to be less

involved in the details of developing

new products, limiting themselves to

formulating strategy, choosing the port-

folio of new products, reviewing team

progress, and continually reprioritizing

projects and reallocating money and

people based on emerging information.

Stephanie wondered whether the con-

sultants who recommended these mea-

sures would ever have received another

assignment from Innostat. Probably not.

Jack would never have said yes to these

recommendations. But should she?

Company or Career Stephanie put the question to Teddy

Adler, her executive coach. Stephanie

had first consulted Teddy for career ad-

vice shortly after joining Phasar. A fel-

low Sloan alum had recommended him:

“He’s a bit domineering but very smart,”

the alum had said. “He can give you a

real political edge.” Teddy had more

than lived up to the billing.

After Stephanie read the report, she

and Teddy met at a small restaurant in

Cambridge, one of Stephanie’s favorite

haunts when she had been a student at

MIT. The restaurant was part of a popu-

lar, upmarket local chain, and Stephanie

remembered having a farewell meal

there with some friends after her busi-

ness school graduation. She ordered a

small Caesar salad and a glass of Diet

Coke as she settled down to talk with

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Teddy, who was fairly dismissive of the

Henderson report. “There’s no way you

can win doing a wholesale reorg,” he

said, leaning in and lowering his voice.

“You just don’t have the people to make

it work fast enough. It’ll take five years

minimum. If he’d wanted to, Jack might

have made it work, but not you, not yet.

You’ve got to build some capital with

the board to make that kind of change,

and to do that you’re going to have to

rack up some successes.”

Stephanie pushed back. “Suppose I

don’t turn out to have any great ideas

for products, or the ones I do develop

and push through just don’t pan out?

Then we’re back to square one – and at

that point, the honeymoon, such as it

is, will be over.”

“Look, Stephanie, that’s just the risk

you take with this kind of job. What

this board wants is new products, and

they’re not worried about how they get

them. They’ve made you CEO because

they think you can give them what they

want. Remember, they saw the report,

too, and they buried it. If they’d wanted

to do what the report recommended,

they would have hired some reorg ex-

pert instead of you. Your strong suits are

technology and marketing. That makes

you the best person to spot new prod-

ucts that will work – products that you

can then drive through the organiza-

tion. In this respect, your biggest prob-

lem will be Timoshotsky because, what-

ever he says, he’ll resent the fact that

you got the job and he didn’t. The other

people will fall in line. Pappas is near the

end of his career and won’t want to

move, so he’ll ultimately knuckle under.

And Chuck Bukowski over there at

R&D is used to playing a supporting

role anyway. With limited time at your

disposal, you’ve got no choice but to re-

peat the Jack Donally leadership for-

mula. Create your own senior team, pick

a product, and be forceful in moving

it through to conclusion, even if that

means more top-down management

than is typically your style.”

At that point, friends joined them,

and the conversation shifted to the Red

Sox. Stephanie listened with only half

an ear; baseball bored her, and her head

may 2006

IT solutions, processes and automation can improve your company’s success. But there’s one resource that trumps all others. Your people.

They stand at the core of your company’s ideas, partner relationships and customer knowledge. When you empower your people with the right tools, you recognize them as your greatest asset.

Steve Ballmer, CEO,

Microsoft Corporation

“Empowering your people will empower the entire company.”

Watch Steve Ballmer’s webcast about how people drive business success. Visit microsoft.com/business/ peopleready

© 2006 Microsoft Corporation. All rights reserved. Microsoft and “Your potential. Our passion.” are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries.

was full of the conversation she and

Teddy had just had. On one level, every-

thing he said made sense. A massive reorg

carried a lot of risks. The noncollabora-

tive culture of the company made it hard

to see how a complex matrix like cross-

functional organization could possibly

work. Moreover, there was the question

of who in the company could lead the

new strategic marketing group. As Teddy

had pointed out, she could find herself

out on her ear before the results came

in. If the company survived after she

left, it would be the next CEO who got

the glory. And that was supposing Inno-

stat could even stay independent. It was

obvious that the board knew that, too.

Why else would it be in such a hurry?

But Stephanie wasn’t so sure that

Teddy was giving her good advice. Her

experience and values instinctively told

her that developing the organization

and its people so that the company

would possess the capability for sus-

tained innovation was the way to go. In-

nostat has shown that it can’t dream up

new products on its own. Shouldn’t she

be looking for ways to fix that? Wasn’t

a CEO supposed to look to the long

term? Or was she just cooking her goose?

Then again, she had never been in

this type of turnaround situation be-

fore. Frank had said that the problem

in the company was motivation. People

needed an incentive. Why not make a

larger percentage of managers’ compen-

sation contingent on sales and profits?

This, together with strong leadership

from her, might be just the solution.

Maybe Teddy was right after all.

“Guys,” Stephanie said to Teddy and

those who had joined them, “I have to

go. I have an early morning meeting

tomorrow.” She suggested they stay

and enjoy the rest of the evening. She

walked out of the restaurant into the

cool fall air. “Let’s see, which way?” she

said out loud, speaking to no one in

particular.

What should Stephanie do: institute

a basic reorganization, or re-create

the Jack Donally model of strong

leadership? • Four commentators offer

expert advice.