STRATEGIC MANAGEMENT REVISION

TT 2007

Examiners Comments: 2007• Students who made more use of literature got better marks, but

those that used critical comment and literature to support reasoned argument, did better than those who just described the litereature.

• Students need to make sure they answer the question and do not just review the literature.

• Candidates who use concise, contemporary and illustrative examples from the relevant media will be able to distinguish themselves

• Candidates need to think more broadly across the range of material contained in the course when answering questions (as opposed to just using material from one topic)

Examiners Comments: 2006• 1. Need to show both their critical ability and knowledge and not just

ability to memorise relevant material.

• 2. Some cases it was clear that short answers were because of lack of time rather than lack of material.

• 3. Need to make sure question is actually answered.

• 4. Better answers made careful use of empirical materials, and concise illustrative examples from the real world.

• 5. Many of this year’s questions were clearly centred on core issues and thus at first sight less stretching than was the case. This may have lulled candidates into a false sense of being able to answer questions adequately simply by displaying sufficient relevant knowledge of the issues.

Examiners Comments: 2005• In general, the students seemed to prefer questions that placed a premium on reciting theories

or empirical results given in materials on the reading list, and they tended to be quite proficient at repeating what they had read. However, none of the questions were such that memorization alone would have been sufficient for a first-class answer.

• The students did not perform as well when the questions required one or more of the following:• • 1. Reasoning with the concepts, integrating them, and drawing conclusions from them, rather

than merely reciting them.

• 2. Taking a position on an issue, and making arguments in support of it. Here again, most students preferred to repeat what they had read, and few were willing to take a stand.

• 3. Combining material from the readings with discussions and notes from the lectures. Students seemed to prefer questions for which there were many supporting readings, and avoided questions that had relatively few readings, but stronger supporting class lecture notes.

• In sum, the students performed well in the areas they prepared, but evidently used “vertical” preparation strategies, memorizing deeply in a few topical “silos” – the resource-based view, diversification strategy, strategic change, international strategy – but placing less emphasis on connecting the topics, or on integrating the readings with the lecture notes. For many students, this approach may have been sufficient for an upper second. However, it would not have merited a first – for this, it would have been necessary to think integratively across topics, to take positions and form effective arguments, and to show facility with a more complete range of course materials

Examiners Comments: 2003-4

• 2004:– To produce the best answers candidates needed to think clearly

about the particular wording of questions and how to use material from the course to best answer them rather than merely identifying the general field of questions and adjusting material from past essays to fit. However, most candidates showed a considerable degree of familiarity with the course material which was reflected in the generally high level of marks awarded.

• 2003:– A notable feature of some answers was an extensive

introduction which was later repeated in the body of the answer. All writing in an exam has an opportunity cost and introductions which, even if outlining the rest of the answer, included material not repeated elsewhere were usually associated with better answers.

Examiners Comments: 2001-2• 2002:

– The best answers combined 3 key elements : 1) An argument, 2) Citations, 3) Examples

– A further consequence of the questions set was perhaps a relatively rigid division between the sub-sections of the subject as taught and relatively few answers used material from across the course to help answer specific questions.

– As in previous years candidates should first improve their knowledge of and ability to use references to the relevant literature. They should then structure their answers around logical arguments which make use of that literature and finally illustrate them with relevant examples. Every attempt should be made to make answers distinctive in each of these respects, to avoid the formulaic answer and show originality in selection of relevant material. The best answers did just this and conveyed not only a familiarity with the topic but an ability to argue cogently about it.

• 2001: – Should make maximum use of references, and use distinctive points with reasoned

criticism.– Little correlation between length of answer and marks awarded– Higher correlation with respect to references, though diminishing returns past 10

references.– Need to use literature in a way that demonstrates that the examiner does know the

subject– For those that use literature, need to have strong argument and critical comment

Key Learnings from Comments:

• Make an argument

• Try and integrate material from different topics

• Don’t just repeat material, be critical

• Try and use innovative and different material to distinguish yourself

• Be weary of long introductions

TOPICS

• Defining Strategy• Planning VS Emergent• Strategic Groups• Economics• RBV and Porter ISA• Knowledge Management

• Technology Strategy• Strategic Change• Institutional Theory• Strategy as Process• Diversification• Acquisitions and

Alliances• Globalisation• Organisational Structure

DEFINING STRATEGY / Planning vs Emergent

• Chandler (1962) – Strategy and Structure

• Porter (1996) – Operational Effectiveness

• Whittington (1993) – Systemic, Processual,

evolutionary, classical

• Hamel and Prahalad (2000)– Stretch and Leverage

• Mintzberg et al (1996) – Honda Effect

• Mintzberg & Walters (1994) – Continuum– “Strategy walks on two

feet, one deliberate and the other emergent” (pp.20)

• Brews & Hunt (1999)

– Econometric analysis

DEFINING STRATEGY – PLANNING VS EMERGENT QUESTIONS

• 2006 Q2• What matters most, strategic planning or strategy implementation? • Very unpopular• 2006 Q11• Why is the concept “structure follows strategy” important in the context of a

firm’s international strategy?• 2005 Q1• In the proposition “structure follows strategy,” what do the terms “structure”

and “strategy” mean? Is the proposition true?• Very unpopular• 2003 Q 3. Explain how and why 'structure' is a recurring theme in strategy.• Q3: As with Question 2, in cutting across conventional subject divisions this question

required a broad knowledge of the subject to provide a good answer. However, there were some very good answers to the question, highlighting the issue of structure in strategy in a wide range of contexts and not just Chandler’s discussion of strategy and structure.

• 2002 Q2 Strategy is a process which must involve some form of planning. Discuss

• Very unpopular

Chandler (1962) ‘Strategy and Structure’

• Chandler – Business Historian• Examined the growth of large organisations since WWII in political, educational and medical

fields• Saw role of executives to co-ordinate, appraise and plan

• STRATEGY• “The determination of the long run goals and objectives of an

enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (pp. 13)

• STRATEGY vs TACTICS• “Strategy decisions concerned with long term health of the

organisation” (entrepreneurial)• “Tactical decisions deal more with day to day decisions

required for the smooth running or organisation” (operational)

Chandler (1962) ‘Strategy and Structure’

• STRUCTURE• “The design of the organisation through which the

enterprise is administered” (pp. 15)

• STRUCTURE vs STRATEGY• “Structure follows strategy”• “changes in strategy which called for changes in

structure appear to have been in response to the opportunities and needs created by changing population, changing national income and technological innovation” (pp. 15)

Porter (1996) ‘What is Strategy’

• Strategy is about combining operational effectiveness and positioning

• Operational effectiveness is not strategy• Operational effectiveness is about performing tasks better than

competitors• Companies can only outperform rivals if they deliver greater value or

create comparable value at a lower cost. Or both.• Japanese companies rarely develop distinct strategic positions

– those that do (Sega, Sony, Canon are exception rather than rule). – Rest just imitate each other– As productivity gap shortens, they will need to learn strategy

• Competitive strategy is about being different. Choosing a different set of activiites to deliver a unique set of values– E.g Southwest Airlines positioned itself for low cost convenient services– Ikea – targets young furniture buyers who want style at low cost

Porter (1996) ‘What is Strategy’• Strategic Positions emerge from three main sources:

– Variety based positioning (having a distinct set of activities)– Needs based positioning (serving consumer needs)– Access based positioning (methods of getting to customers)

• “Strategy is the creation of a unique and valuable position”

• “If there were only one ideal position, there would be no need for strategy” (pp. 64)

• Sustainable Strategic Positioning requires Trade-offs

• Need to get fit between different activities:– Simple consistency < Reinforcing Activities < Optimisation of effort

Pluralistic vs Unitary• Grant (2002):

– Ultimate objective of any firm is long term profitability making profit maximisation a rationally desired outcome

• Johnson & Gill (1993):– Above is fine in unitary organisation– However organisations are likely to be pluralistic in nature –

desired outcomes not so clear

• Given the wide range of organisations in existence:– Firms likely to be on continuum between pluralistic and profit

maximisation (Whittington, 1993)– Firms are likely to be on continuum between pure deliberate and

pure emergent strategy (Mintzberg & Walter, 1994)

Whittington (1993)

• Lots of books written on strategic management• If you could buy secrets for £25, managers wouldn’t need to be paid

so much• “If there was so much agreement on the fundamentals of corporate

strategy, then strategic decisions wouldn’t be so hard to make”• 4 Generic Approaches to Strategy:

– Process: Deliberate vs Emergent

– Outcomes: Plurastic vs Prft Mx

Whittington (1993)

• Classical– Porter (1985)– Rational Planning– Separation of analysis and

execution– Effort to gather information– Outside world predictable– Good planning allows mastery

DELIBERATE EMERGENTP

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• Evolutionary– Outside environment unpredictable– Hostile and competitive markets– Survival cannot be planned– Successful strategies revealed through

natural selection– All managers can do is try and fit as

much as possible to the outside environment

• Processual– Long range planning for future– Firms and organisations pluralistic– Neither organisations nor individuals

perfect– Failure to complete strategic plan not going

to result in failure– “strategy emerge from a pragmatic process

of bodging learning and compromise rather than a rational series of leaps forward.”

Systemic• Strategy does matter, but not as much as

classicists think• Less pessimistic than processsalists about

ability to follow plans• Strategic objectives depend on social system

in place– Often deviate from Profit Max– Based on social status pride, managerial power

etc– May be perfectly rational, but what is rational is

disputed• Class country make a difference to strategy

Mintzberg (1991)

• Strategy formation– Many Schools of thought

• Prescriptive School– Design School, Formal Planning, Analytical Positioning

• Emergent School – Learning School

• Incrementalism– Logical Incrementalism

Mintzberg (1991)

• Design School

– Controlled conscious process of thought

– CEO = one brain = strategist

– Simple, Informal & Unique

– Explicit and Articulate

– Only emerge when fully formulated

Mintzberg (1991)

• Design School - Criticisms

– Conception, not learning– Ok for stable environment, not for turbulent– Explicit, change in environment bad consequences– Bounded rationality (Williamson)

• One brain cannot handle so much information

• Solution:– Learning school– “Strategy follows structure”

Ansoff (1991)

• Learning School:– Trial and error– Progress over time, discarding error

• Criticisms:– High speed of change trial and error too slow– Need some sort of direction to cope with change– Otherwise, more dynamic companies will prevail– Strategic reponse in anticipation of need required

Quinn (1978)

• Logical Incrementalism:– Broad Goals and Policies– Accommodate a variety of proposals– Provide some guidance not everything– Plans are only framework

• Conscious purposeful movement• Awareness and understanding of processes

• Diversification and Divestification

Mintzberg & Walters (1994)

• Two polarised views of strategy:– Pure Deliberate:

• Precise Intentions, Intentions common to all actors– Pure Emergent:

• Consistency of action over time: in absence of intention of it

• Reality, no strategy is on either pole, but lies on a continuum between the two.

• Emergent strategy does not imply chaos but unintended order

• “STRATEGY WALKS ON TWO FEET, ONE DELIBERATE, THE OTHER EMERGENT” (pp.20)

Brews & Hunt (1999)

• Bitter debate between Mintzberg & Ansoff • Ansoff (1991):

• Formal Planning beneficial in both stable and unstable environments

• Mintzberg (1991):• Favours logical incrementalism (Quinn, 1990) especially in

unstable environments

• 18 Empirical studies on effect of formal planning on economic performance concluded link was tenuous

• Decision making made today but performance may come later

Brews & Hunt (1999)

• Research performed:• 656 firms • In a range of environments (mature industry (slow change), mature

industry (turbulent change), Young Industry, Technological Change Industry

• Econometric methods

• Findings:• Economic returns to be made from strategic planning especially in

unstable and turbulent environments• Environment does not appear to moderate the type of planning firms use• Turbulent environments associated with better developed planning

capabilities and enhanced abilities to amend plans• 4 Years of formal planning required before external performance returns

are noted• Firms emerging from stable environments should be cautious, as being

in stable environment can lead to underdeveloped planning capabilities

Mintzberg et al (1996) ‘Honda’• Strategy - $500m a year industry in 1986 and has grown

significantly since• 2 Contrasting Stories:

– BCG story:• Exemplifies Honda as a ‘strategy model’• Suggests they used dominant and cost competitive position in

Japan to force entry into the US• Intention was to sell to US public

– Organisational Process Perspective:• Honda executives thought they were silly for entering such a rich

market• Execs slept on floor in $80 a year apartment• Ideas for advertising came from college students and was very

difficult decision (not planned choice)• Were scared to release 50cc engines as it might ruin their reputation

in such a macho environment• 50cc only released because larger cycles were breaking and

something needed to be sold• Rapidly resolved problems through learning and from various

setbacks

Mintzberg et al (1996) ‘Honda’

• Hamel and Prahalad– “What is needed is a strategic architecture that

provides a blueprint for building the competences needed to dominate future markets”

– Honda used ‘loose bricks’ approach:• Honda developed competencies in engines and power trains• It entered different markets in different countries• Competitors fixated on their own markets and did no see

Hondas strategic intent.

• Planning vs Learning Debate:– Planning too much may result in non-starters:

• Watson predicted world demand for 5 computers• P&G through Pampers would only be used for travel

purposes

Hamel and Prahalad (1993)• Consider the following battles

• GM vs Toyota, RCA vs Sony, CNN vs CBS, BA vs Pan Am• With hindsight, choice is easy• In 1973/83, GM, RCA, CBS and Pan Am had stronger reputations,

deeper pockets, greater technological riches and bigger market share

• Strategy is about stretch and Leverage:• Stretch:

• The gap between aspirations and resources• Smaller company may want to overpower bigger company, but may

do this by guerilla warfare, focussing on undefended niches rather than confronted the compaetitior in well-defended market segments

• HONDA Example: Using 50cc bikes in US, larger bikes in Europe, developing a core competence in enginers, automobiles, lawn mowers, and generators

– Built a base of operations and used it to attack

Hamel & Prahalad (1993)

• Leverage: Increasing effectiveness of existing resources

• Concentrating resources on strategic goals• Accumulating them more efficiently• Complementing with one another • Conserving resources • Recovering them effectively

• “What is needed is a strategic architecture that provides a blueprint for building the competences needed to dominate future markets”

Example: Sony Minidisc• Mini-disc example

– 1989 – sales of portable cassette players began to deteriorate– Sony aimed to replace with mini-disc which had the advantage over CD

of being smaller, tougher and having the ability to record• “reinvigorate the market for audio goods”

– 1992: Target customers – “MTV watching teenagers”, price $750, gave away 1 million disks in marketing campaign

• Result failure – portable cassette player available for $20– 1996: Target customers – 18-34 year olds with above average income,

$20million advertising campaign (over half Sony’s marketing budget), cut price of minidisk due to improved technology (already a core competence as uses similar technology to hard drives)

• Result moderate success– Key point is that strategy exhibits degree of learning as well as having

planned approach necessary to devote enough resources to give project potential chance to develop network externalities before a better product replaced it

Example: Tom Hunter

• Built Sports Division sports chain (one of the largest in the UK in 1990s) from scratch and was sold for £290m in 1998

• Retrospectively, the development of his business could be seen as the result of long term strategic planning, implemented by a single mind.

• Started off selling trainers from the back of a van.– Made a number of promises that he was not sure that he could

deliver.– Did not have a clear plan of what he was going to do, but always

remained flexible and was willing to adapt

Example: Google

• Facts– Most popular search engine– Valued at > $20bn after IPO in 2004

• Originally started off as a p.h.D research project as a way of examining the mathematical properties of the web

• Originally was much smaller than other webservice providers:– Leveraged limited resources– Provided simple to use website– Accessed the long-tail of advertising rather than using

big banner adds

Strategy & Economics• Besanko et al (1996)

– Defining Economics

• Brandenburger & Nalebuff (1995)– Applying Game theory to strategy

• Camerer (1991)– Problems with applying Game

Theory

• Coase (1937)– Transaction Costs– Boundaries of the firm

• Porter (1981)– Suspicion– Fundamental differences in goal,

reference, unit of analysis etc

• Rumelt et al (1991)– Historical differences

• Williamson (1981)• Williamson (1991)• Kay (1991)

– Business men don’t think much of economists

– Need to express economics in way that is useful for business poeple

Strategy & Economics Overview

• Two disciplines – share common ground• Examine behaviour of firms• Decision making within a business environment• Seek to describe and explain ways in which firms achieve

their objectives

• Fundamental Differences:• Purpose – (Goals of organisation vs ‘Scarcity and Choice’)• Frame of reference: (Manager / Shareholder vs Government)• Unit of analysis – (Firm vs Industry)• Research Values: (Applied vs Formal Modelling)

• Gap between two has narrowed, but likely to remain distinct for forseeable future

Strategy & Economics Questions (1)

• 2007 Q3: Is strategic management just a subfield of economics?• Very Popular

• 2007 Q4: Game theory has been described as the “the Argentina of economics, in terms of the gap between potential and achievement”. Are there Argentina(s) of strategic management and if so where any why do they exist? Very unpopular

• 2006 Q3 Is economic analysis alone sufficient for strategic decision making?

• 2006 Q10 What practical use is game theory?

• 2006 Q12: “All strategic decisions involve judgments about economic value”. Discuss.

• Very unpopular

• 2005 Q2 What problem is being solved by transaction cost economics (TCE)? Does TCE have any consequences for either economic policy or practicing managers?

Strategy & Economics Questions (2)2004 Q 4. How might strategists apply game theory to markets where technologies are rapidly

changing? • Candidates tended to assert that this was possible rather than leading the examiners through the means

that strategists could use to apply the theory. In particular, scenario planning, real options, and simple game theory could have been applied to questions of technological standards and the management of R&D. The key, however, was not simply to assert the linkage but to demonstrate it.

2004 Q 11. Is portfolio analysis in agreement or at odds with the view of the firm held by economists?• Very unpopular. Many candidates who answered this question felt that the question must just be referring

to the economic model of transaction costs that had been discussed in the course. Candidates could also have included discussion of the “rational” view of economists that one cannot create value simply by buying or selling – that markets are efficient. Portfolio analysis is generally at odds with this view unless managers are actually adding value in this process.

2003 Q1. 'Strategic management as a field of study is no more than a branch of applied economics.' Discuss.

• Q1: This was a popular question. Though general differences between strategy and economics were dealt with well, many assumed that strategy just applied to the pursuit of private profit and omitted the possible pursuit of multiple objectives. Whilst some referred to other bridges between strategy and economics than game theory, not all provided appropriate references.

2002 Q4 Economics makes some significant contributions to the field of Strategic Management but major differences between the fields exist. Discuss

• Very popular

2001 Q3 Will the emergence of game theory and the resource based view of the firm bring economics and strategy closer together in the future?

2001 Q2 Is strategic management fundamentally opposed to the economist's view of Pareto optimality?

Besanko et al (1996)Economics = “study of scarcity & choice”• Analysis of “individual and institutional decision making” (pp.3)• Strategy may thus be a specialised type of economics

“Economic modelling, by its very nature, abstracts from the situational complexity that individuals and firms face” (pp.3)

Distinction between broad definition of economics and main bulk of economic theory:– Neoclassical theory: perfect information, markets, atomicity

Firms do not succeed randomly:• Strategies associated with many successful firms will have been attempted by a large number of

unsuccessful firms• Successful firms may pursue several strategies, only some of which may be successful

Besanko et al (1999)

• In order to successfully formulate strategy, a firm must confront four issues:– Boundaries of the firm

– horizontal, vertical, corporate (distinct businesses)

– Market and competitive analysis– Position and dynamics - – Internal Organisation (structures and systems)

• Economics clearly can be useful tool in all of these issues

Kay (1991)“If you ask most businessmen what they think economics is about, they say

forecasting” (pp.57)• Do not think very much of forecasting but think they need it• Do not think very much of economists

Hall & Hitch: most businessmen unfamiliar with many standard economic concepts

Economic input into costing, pricing and business environment analysis, “yet costs, prices, industries and markets are the very lifeblood of microeconomics” (pp.57)

• Micro theory sheds relatively little light on the real world business decisions

Bain (1959): Structure Conduct Performance Paradigm: • Industry the unit of analysis,not firm. Completely external to firm.

TCE only just joined mainstream economics:– Coase paper written in 1937 and is still seminal

Kay (1991)

• Porters 5 Forces did well at integrating 2

• Contract theory, principal agent theory, game theory and competition policy are all micro research areas:

• Will only be useful for strategy if expressed in a way useful for business

• Has had the potential to play big role in management but has not because of the way it has evolved

• Partially because firm is not the unit of anaylsis

“Mainstream econ theory firm is now a collection of contracts, arrangements between principals and agents, supplier / buyers = cooperative games, competitors = non-cooperative games”

Porter (1981)

“A majority of economists studying IO and strategic management researchers have, over the years, viewed each other with suspicion” (pp. 609)

Despite “increasingly clear evidence that much promise for cross-fertilisation existed” (pp. 609)

• IO has had little effect on business policy concept of strategy• Business Policy has had little effect on IO

Lots of recent developments in IO, and may appear more in strategy books and may contribute more to strategy analysis in the future.

Porter (1981)

• LCAG Paradigm:– Goals of firm include economic and non-

eocnomic considerations– Effective strategy formaulation requires:

– Company SWOT analysis– Industry economic and technical SWOT– Broader societal expectations– Personal values of key implementers

Porter (1981)

• Bains / Mason IO Paradigm:– Industry structure determines behaviour / conduct of

the firm determine collective performance of firms in the marketplace

– Primary elements of structure researched:• Barriers to entry, number, size and distribution of firms,

product differentiation, elasticity of demand

• Little cross fertilisation across disciplines, one is either an economist or a business teacher or practitioner

Porter (1981)• Differences between two:

– Purposes– Economics – policy making and analysis – comp policy– Strategy for profit maximisation

– Frame of reference– Managers want to maximise profit or ROI– Economists want to maximise social welfare or inform policy

– Unit of Analysis– Traditional IO uses industry as unit of analysis (firm conduct a function

of industry)– Assumptions:

– IO often deterministic, takes industry structure as exogenous– Firms not seen as part of portfolio of businesses but as free standing

entities– Dynamics

• IO often using static oligopoly models

Rumelt et al (1991)

• History of economics in strategy:– 1960’s: strategy introduced– 1970’s:

• IO theories empirically tested• Some firms persistently more profitable conclusion non inimitable

differences exist• BCG experience curve

1980s: Neoclassical assumptions relaxed• Game theory, information asymmetry, bounded rationality, sunk

costs, first mover costs, dynamic models, limit pricing, principal agent theory introduced.

• Theories of corporate control, leverage, hostile take overs• Economic thinking moved towards strategic management• Porters 5 forces linked strategic management with IO• Nature of formal business education changed from being around

case studies integrative discipline

Rumelt et al (1991)

• Infusion of economic ideas into strategic management has several reasons:– The need to interpret perofrmance data– The experience curve– The problem of persistent profit– The introduction of imperfections in

economics• TCE, Game theory, Agency,Game theory, New IO

– Changing nature of business schools

Rumelt et al (1991)

• Economics has clearly infused and informed strategic management

• Future:– Strategy unlikely to become branch of applied

microeconomics• Strategy requires all disciplines, not just micro• Economists will not learn business – more academic and

infatuation about modelling• Economics chiefly about performance of markets and

allocation and coordination of resourecs• Strategic management about coordination within the firm, i.e.

when non-market means of coordination and commitment are superior

Pitkethly (2008)

• Economics finds it difficult to deal with:• Process and Change• Politics, Power and Leadership• Firm Idiosyncrasies• Tacit knowledge• Corporate Culture• Organizational Slack

• All of these are crucial to effective strategy

Williamson (1991) Transaction Costs

• Firms are profit maximising and thus cost minimising:– Production costs– Transaction Costs

• Caused by departures from market perfection• In some circumstances minimised through open

markets, others through transactions

• Coase (1937): Search, negotiation, monitoring and enforcement

• Williamson (1985): Bounded Rationality, Opportunism

Coase (1937)• Neoclassical economics presumes transactions costs are 0• Why do large firms exist?• Transactions incurr costs:

• Search costs• Negotiation costs• Monitoring costs• Enforcement costs

• Firm will integrate and internalise up and down the supply chain, so long as the cost of internal transactions are cheaper than of market ones.

• Ford integrated backwards• GM did not integrate into Fisher Bodies until Fisher refused co-operation

• “Efficient boundary” of the firm• Organisations exist because of the transaction costs (the cost of

administration of contracts within the firm) from internalising production offset the returns of buying things from outsiders

Williamson (1981)• Agents have bounded rationality (not irrationality)

• Agents are overwhelmed by market information, cannot analyse everything, thus cannot be perfectly rational

• At least some agents are also opportunistic • Opportunism can be resolved by high competition• Uncertainty associated with transactions and contracting• Complex contracts cost more than simple ones• Whether to integrate depends on asset transaction

specificity and frequency of transaction and uncertainty

Asset Specificity (more important in this particular transaction than what they are worth elsewhere)

Uncertainty Low both parties High for both parties High for one, Low for other

High Contract / Vertical Vertical Integration Vertical Integration

Low Spot Contract Long term contract Vertical Integration

Problems with TCE

• Somewhat tautological – Coasian TCE give the limits of the firm, but are not of much use to a strategist.

• Hard to measure transaction costs• Hard to distinguish between production and

transaction costs• Makes little allowance for other conflicts other

than bounded rationality:– Agency, Pluralism, Power

• Reputation and trust are not considered– Reputation & Trust may reduce opportunism

Brandenburger & Nalebuff (1995)

• Game theory attempts to mathematically capture behavior in strategic situations, where an individual's success in making choices depends on the choices of others.

• Managers can profit from these insights to design a game that is good for their company

Brandenburger & Nalebuff (1995)

• Example: GM & Credit Cards:– Early 1990’s lots of competition in Auto Industry Destructive

competitions– 1992: GM launched credit card that allowed cardholders to apply 5% of

charges towards buying or leasing GM cars• Successful launch 1.2mm a/c in 1 month, 8.7mm a/c 2 years

– Cards replaced other initiatives – increasing the price of GM card to non-card holders (prospective Ford buyers)

– Thus allowed Ford to raise prices, and then GM to raises its prices, without loosing any customers to Ford

• Win-Win situtation between Ford & GM

• Cards consequently copied by Ford and VW, but generated more loyal customer base and thus allowed price increases across all firms

Brandenburger & Nalebuff (1995)

• Example: GM & Credit Cards:– Early 1990’s lots of competition in Auto Industry Destructive

competitions– 1992: GM launched credit card that allowed cardholders to apply 5% of

charges towards buying or leasing GM cars• Successful launch 1.2mm a/c in 1 month, 8.7mm a/c 2 years

– Cards replaced other initiatives – increasing the price of GM card to non-card holders (prospective Ford buyers)

– Thus allowed Ford to raise prices, and then GM to raises its prices, without loosing any customers to Ford

• Win-Win situtation between Ford & GM

• Cards consequently copied by Ford and VW, but generated more loyal customer base and thus allowed price increases across all firms

Brandenburger & Nalebuff (1995)

• Value-net:• Like Porters 5 Forces:

– Competitor / Substitutor• customers value your product less if they own a substitutors product

– Complementor• customers value your product less if they own a substitutors product

– Customers– Suppliers

• However, companies can both be substitutors and complementors at the same time:– Often takes place when companies are complementors in making a

market but substitors in dividing a market.– E.g. American Airline and United Airlines

• Competitiors for customers• Complementors when buying planes (Boeing can only afford to develop a

plane if both companies buy them)

Brandenburger & Nalebuff (1996)

• Example: Coke, Pepsi & Nutrasweet– Nutrasweet patent on sweetener used by (Diet)Coke

and Pepsi – very profitable (70% Gross)– HSC entered market when patents expired– Both Coke and Pepsi kept nutrasweet brand as they

did not want to show messing about with survey– However, Coke and Pepsi had to pay a lower price

because of competition that HSC introduced– HSC ‘Changed the game’– Perhaps Coke and Pepsi would have paid HSC

before it had entered the market, but once it entered

Brandenburger & Nalebuff (1996)

• Put yourself in the shoes of others to:– Assess your added value– Anticipate reactions to your actions– See the game

• Change the game:– Opportunities for cooperation (cooptition) and

competition– Who stands to lose and who stands to gain

Brandenburger & Nalebuff (1996)

• Added value example: Nintendo:• Market for nintendo cartridges could have absorbed 45

million cartridges, through concentrated retailers such as Toys R Us and Walmart

• Rather than filling the market, it only sold 33 million cartridges

• The total pie shrank, but its share of the pie increased, as no individual retailer was guaranteed to get cartridges and thus Nintendos power increased

• Similar story for software development and licensing.

Brandenburger & Nalebuff (1996)

• Cooptition example: New York Newspapers– New York Post vs Daily News

• New York Post increased price to 50c• Daily news kept price at 40c • New York Post announces price cut to 25c

– Daily News do not believe it will harm their market share

• NYP cuts price on Staten Island – market share increases massively

• Daily News raises price to 50c to prevent a price war

Personal Criticism of Game Theory

• Brandenburger & Nalebuff (1996) provide a number of ways in which game theory can be used by a strategist:– Examine added value, change the players, change perceptions

etc• Problem: Economists use game theory to try and protect

consumers, increase competition (often resulting in decreased company profit)

• Example: US Justice department investigated Nintendo for reducing competition (by limiting supply unnecessarily)

• Example: MCC Clause (Meet the competition clauses) now often outlawed as they reduce competition

• Eaxmple:

Camerer (1991)

• Game theory = analysis of rational behaviour in siutations involving interdependence of outcomes

• Poor reasons why game theory has not been used much in business strategy.

• Ignorance – – strategists lack training– However, maths no harder than metrics

• Theory = set of methods– Generally applicable methods put do not necessarly lead to general

regularities that researchers like to test

• Analysis assumes more rationality than players are capable of– Leess rationality required than often assumed

Camerer (1991)

• Usefulness may be limited by assumptions required

• Real life may contain more factors than simple game theory can capture

• However, real life may be dominated by several factors that game theory may be able to capture

Camerer (1991)

• Game theory does not always work:• Ultimatum game: Game theory £99/£1, tests £55/45

• Difficult to assume rationality of others• Players tend not to look too far forwards or backwards

Conclusions:• A little game theory would not hurt• Common criticisms are not deep.• Still problems:

– Hard to use

– Models form an incoherent collage with no general principal

– Hard to test

Porters 5 Forces vs RBV• Porter (1979)

– 5 Forces Model, Enter an attractive industry, build up barriers, exploit monopoly rents

• Fortune 500 1969-99– Intracompany profit levels different in pharma– Merck 16% - Johnson & Johnson 9%, Pharma Average 11.3%

• Wernerfelt (1984)– Need to look at firms resources input into competitive advantage– Builds on Ricardian rent, work by Ricardo, Schumpeter, Penrose

• Grant (2001):– Increased external market instability market may not be good foundations

for strategy strategy focused on resources / capabilities may be better. (E.g. Levitt (1960): don’t define industry to broadly)

• Barney (1991)– Resources – Human, Tangible, Intangible– For Comp Ad, Need valuable, rare, inimitable, non-substitable resources

Porters 5 Forces vs RBV• Grant (2001)

– Determine resources / capabilities, design strategy, build / augment resources, implement strategy, review, adjust / augment

• How to Protect resources – Causal Ambiguity (don’t know what), Historic Significance (path

dependency, first mover advantage), Time Compression diseconomies (reputation, brand) , legal (patents etc)

• Prahalad & Hamel (1990)– Strategy about cultivating Core competencies– e.g. Canon (microelectronics, optics, precision engineering)

• Grant (2001)– Organisational Capabilities – combining lower level resources and

capabilities– E.g. Hospital – cardio surgery, operative care, diagnosis– Hard to dismantle – may be easier to start of from scatch (computer

companies – Olivetti, GE were unsuccesful – most others startups)

Porters 5 Forces vs RBVPeteraf (1992)

– Need to link to competitive advantage– Resource heterogeneity, exante and exposts limits to competition, factor

immobiility– Factor Immobility – firm specific and co-specialised assets

Teece et al (1997)– Resources not enough, need dynamic capabilities required in changing

internal and external environment

Porter (1996)– Operational effectiveness and Good position required– Need fit between the two

Example:– 1980’s Typewriters lost ground to microprocessors

• Olivetti tried to keep external market without considering internal competencies and unsuccesfully entered computer market

• Remington – harnessed core competencies in mechanics and design and went into electric shavers

– Eastman Kodak managed to change from chemicals to electronic photography – exploited dynamic capabilities

Porters 5 Forces vs RBVButler & Priem (2001)

– RBV limited in use – not testiable, view not theory– Tautological in that valuable and rare resources give c.a.

Rumelt at al (1991)– C46% of business unit performance explained by business unit effects– C8% of business unit performance explained by industry effects

Maghan & Porter (1997)– 19% of business segment profitability variance due to industry

Conclusions: • Both industry and business matter – how

much is a matter of debate• Both provides two sides of the same coin• RBV provides internal analysis that ISA lacks

and vice versa• RBV may be more limited in prescriptive

value

RBV / Porters ISA Questions (1)• 2007 Q2: “The common problem for all views of strategic management is to know how a firm

can interact successfully with what lies outside the firm.” Discuss Very unpopular

• 2007 Q5: Are the resource-based view of the firm and industry structure analysis equally useful in practice and equally founded in theory?

• Very Popular. . A similar tendency for answers to make less of questions than there was opportunity for. This question required a critical discussion of the theoretical basis of the Resource Based View of the firm as well as discussion of the origins of Industry Structure Analysis in IO Economics. It was however quite common for answers to concentrate more on the RBV aspects than ISA or vice versa rather than adopting a more balanced approach to the comparison.

• 2006 Q4 “The resource based view of the firm is, despite any shortcomings, the central idea in strategic management theory”. Discuss.

• Very Popular

• 2005 Q4 What does the resource-based view (RBV) provide that was missing in Porter’s account of industry structure and competitive advantage? Do the RBV and Porter disagree?

• Very popular

• 2004 Q 10. How might the Resource-Based-View of the firm be applied to improve the chance• of successful strategic change? • Very popular. This question, like the second question, was not simply asking if the RBV could be

applied to strategic change but how it could be applied. The question thus asked for a more definite analysis than most candidates were willing to provide.

RBV / Porters ISA Questions (2)• 2004 Q 12. Does every core competence also represent a core liability?• In question 7, candidates were often too concerned with the word “only” and in this question “every” preoccupied some to the

exclusion of considering the question as a whole. It is best if candidates consider questions not simply as black or white but as a starting point. In this case, the question of how a core competence could also be a core liability led nicely into a discussion of core rigidities for those candidates who took the lead.

• 2003 Q 7. Are industry structure analysis and the resource-based-view complementary or contradictory approaches to strategy?

• Q7: Though marks were not deducted for the misspelling, too many candidates managed to refer to complimentary rather than complementary assets. Answers could have been broadened to include comparisons between more general internal / external views of strategy. Some candidates were to be commended for supplementing answers with references beyond the reading list. There was a tendency in answering the question to refer more to industry structure analysis than to the resource based view of the firm and a greater balance between the two might be preferred.

• 2003 Q 10. If a firm's resources can be divided into people, money, tangible resources, and intangible resources, which of these resources is most critical for long-term success?

• Q10: Some having chosen intangibles as their most favoured resource, managed to miss out any mention of David Teece’s concept of Complementary assets

• 2002 Q3 Consideration of the external environment is neglected in some views of strategy but is nonetheless essential to good strategy formulation. Discuss.

• 2002 Q12. The resource based view of strategy is important but insufficient for success. Discuss

• 2001 Q11 "The resource based view of the firm complements rather than replaces earlier views of strategic management". Discuss.Popular

• 2001 Q12 "Whatever the resource based view of the firm may have taught us, the analysis of a firm's environment is still critical in deciding a firm's strategy". Discuss.

Different industries – different profit• Mobility of investment:

– Money should move from less profitable industries to more profitable industries:

– Profit levels should equalise

• However:– Average profitability of industries 1960-99:

• Pharma – 11.3%• Mining – 9%• Chemicals 5.5%• Rubber – 3.3%• Textile – 2.9%• Average – 4.9%

• Explanation: Porter (1979)

Porter (1979)

Goal: • Find a defensible industry position that secures

MONOPOLY rents

• Collective strength of competitive forces determine an industries profit potential

Vertical Forces• Powerful Buyers• Powerful Sellers

» Size and concentration of buyers relative to sellers» Buyers’ information» Bargaining power and price sensitivity» Credible threat of vertical integrationa

Porter (1979)

• Horizontal Forces• Substitutes

» Elasticity of demand

• Threat of entry» Capital requirements» Economies of Scale» Absolute cost advantages» Channels of distribution» Legal barriers, retaliation» Brand» Product differentiation

Porter (1979)

• Horizontal Forces• Jockeying for position

» Concentration (Market structure)

» Product differentation

» Cost advantages

» Exit Barriers

• Solution:– Enter Industry, acquire resources– Create barriers and increase forces for entrants– Compete by product differentiation or cost competition

Problems with Porter IS

• Somewhat static model– Views industry structure as being stable and

externally determined– Possible to drive the market (Jaworscki et al, 2000)

• All firms could do exactly the same thing

• Assumes that firms can acquire resources to compete in such industries

• Looks externally, does not look internally

Intracompany Profits Don’t Equalise

• Pharmaceutical Companies 1960-99– Merck – 16.9%– Johnson & Johnson – 9.8%– Baxter-Travenol – 8.0%– Average – 11.3%

Wernerfelt (1984)

• First defined RBV of the firm– However, Importance of resources first

highlighted by Ricardo (1818), Schumpeter (1942), Penrose (1959)

• Examines the relationship between resources and profitability

• By looking at firms in terms of resources, new insights can be gained

Why don’t intra-industry firm profits equalise:

• Porter:– Product market competitive advantage– Monopoly Rents, Strategic Grous, low cost,

differentiation, first mover advantages– Mobility Barriers

• RBV:– Factor markets – competitive advantage– Scarce, firm specific resources and

capabilities

Competitive Advantage

• Competitive Positioning:– Market share, Brand positioning– Geographic scope, Product Features– Cost position, vertical integration

• RBV:– Technological Skills– Teamwork, processes, – Leadership, Organisation culture

Which one is more important

• Rumelt (1991):– c8% of business unit performance explained by industry effects

– c46% of business unit performance explained by business unit effects

• Maghan & Porter (1997): – Industry effects matter:

• 19% of business segment profitability variance due to industry

• Conclusion: Both industry and business matter – how much is a matter of debate

Grant (2001):Resource Based View

• External environment dominated 1970s and 1980s• 1990s “surge of interest” in role of resources and capabilities as the

base for strategy and the primary determinant of a firms profitability– Ideas coalesced into what is known as RBV

• Rationale: – External environment is volatile: technology and consumers changing– Market focussed strategy may not provide stability and constancy of

direction required for foundation of long term strategy– Levitt (1960): Firms should try and market themselves more broadly

• Railroad companies Transport, not railroad– Many companies trying to serve broad markets done badly– Others which have had strategies ased on exploiting clearly defined

internal capabilities have successfully adjusted to and exploited change

Grant (2001):

Example: Typewriter business:• Typewriters started to become obsolete in

1980’s because of microcomputers

– Olivetti tried to keep market and move into computing and failed

– Remington used capabilities in mechanics to develop things such as electric shavers

– Kodak however, managed to keep industry and move from chemial expertise to electronic photography

Grant (2001): RBV

• Elements to an RBV approach to strategy:

– Identify resources / opportunities

– Select a strategy for achieving competitive advantage that exploits principle resources and capabilities

– Ensure that firms resources and their profit potential is exploited to the limit, adjusting where necessary

• E.g. turnaround at Disney 1984-88 mainly in way in which assets changed

– Implement strategy, and augment resources with results• E.g Honda – long term success owing to building on resources and

capabilities

Grant (2001)

• Resources of the firm:– Tangible

• Generally not useful for strategy but easy to value• Plant, equipment, raw materials, finance

– Intangible resources:• Technology (patents, copyrights, trade secrets)• Reputation and Brand, Relations with stakeholders

– Human Resources• Training and Expertise• Adaptability of employees• Organisational Culture• Commitment and Loyalty of employees

Grant (2001): Resource Characteristics

• Appropriability– How easy is it to capture the benefits

• Longevity– How long will it last for

• Transferability– How easy is it to acquire or transfer

• Replicability– How easy it for others to create the resource

Barney (1991)• In order for resources to bring competitive advantage. They must

be:

– Valuable• Must generate revenues or reduce costs

(appropriable)

– Rare• Not widely diffiused among competitiors

– Non-inimitable

– Non-substitutable

Barriers to resource imitation

• Causal ambiguity– Not knowing what the resource is– Not being able to reverse engineer it– Examples: Culture, systems, motivation

• Unique historical conditions:– Path dependency, – Examples: First mover advantages – location, raw materials

• Time Compression Diseconmies– Reputation, Knowledge, skills, relationships

• Legal protection:– Patents, copyrights, etc

Prahalad & Hamel (1990)

• Strategy is about identifying and cultivating core competencies

» Competency Core Product Businesses End product

• Competencies allow corporate wide skills and knowledge to be integrated

• Collective learning• Help spawn unanticipated products

– Canon Competencies Success in printing + digital photography

• Microelectronics• Optical Imagery• Precision Enginerring

Grant (2001)• Organisational Capabilities analagos to core Prahalad & Hamels

(1990) core competencies :

– Formed when teams of resources work together• Resources are not productive on their own • Brain surgeon useless without radiologist, surgical instruments, anaesthetist

etc

– Some higher level capabilities require integration of lower level capabilities:

• Hospital requires capabilities of diagnosis, cardio surgery and operative care• Toyota: welding and assembly, distirbution, quality and control

– Capabilities can only be developed through integrating the knowledge of individual persons:

• Very hard to form

Grant (2001): RBV

• Example: Canon– Organisational Capabilities / Core

Competencies in:• Microelectronics• Fine Optics• Precision Engineering

Grant (2001)

• Organisational Capability requires the integration of knowledge and skills of employees with tangible and intangible resources:

• Can occur in two ways:

• Rules and Directives– Not possible for McDonald manager to know everything about

marketing, food production, design etc

• Organisational routines– Productive activity taking closely coordinated action wihtout

significant direction or verbal communication

Hamel & Prahalad (1993)

• Leverage: Increasing effectiveness of existing resources

• Concentrating resources on strategic goals• Accumulating them more efficiently• Complementing with one another • Conserving resources • Recovering them effectively

• “What is needed is a strategic architecture that provides a blueprint for building the competences needed to dominate future markets”

Grant (2001)

• Builiding capabilities:

– Capabilities often developed through routines and experiences

– Management intervention can be more effective in destroying capabilities than generating them

– Existing capabilities may be barrier to building new ones:• Need to dismantle obsolete capabilities and build new ones• Start ups just need to create new capabilities• Most successful computer companies were start-ups

– Many well endowed companies failed – Xerox, GE, AT&T, Olivetti– Exceptions, IBM, HP, Dell and Toshiba

Peteraf (1992)• Links Porters and RBV to competitive advantage:

– Resource Heterogeneity

– Ex ante limits to competition• Get resources before others

– Ex post limits to competition• Keep monopoly rents• Stifle competition for resources

– Imperfect mobility of resources• Inimitable• Non Transactable• Firm specific resources (co-specialised – needs one firm specific resource to

get highest marignal productivity)• Sunk costs switching costs

Teece et al (1997): Dynamic Capabilities

• Firms may lose competitive advantage if:– Market demand loses stability– Resources become imitable

• Dynamic capabilities:– “The firm’s ability to integrate, build and reconfigure internal and external

competences to address rapidly changing environments”

• Factors helping dynamic capabilities:– Paths– Positions– Processes

Resource based strategy is not enough – dynamic capabilities needed• Example: Ollivetti vs Remington – remington transferred capabilities to

shifting environment: olivetti did not

Porter (1996) ‘What is Strategy’

• Strategy is about combining operational effectiveness and positioning

• Operational effectiveness is not strategy• Operational effectiveness is about performing tasks better than

competitors• Companies can only outperform rivals if they deliver greater value or

create comparable value at a lower cost. Or both.• Japanese companies rarely develop distinct strategic positions

– those that do (Sega, Sony, Canon are exception rather than rule). – Rest just imitate each other– As productivity gap shortens, they will need to learn strategy

• Competitive strategy is about being different. Choosing a different set of activiites to deliver a unique set of values– E.g Southwest Airlines positioned itself for low cost convenient services– Ikea – targets young furniture buyers who want style at low cost

Porter (1996) ‘What is Strategy’• Strategic Positions emerge from three main sources:

– Variety based positioning (having a distinct set of activities)– Needs based positioning (serving consumer needs)– Access based positioning (methods of getting to customers)

• “Strategy is the creation of a unique and valuable position”

• “If there were only one ideal position, there would be no need for strategy” (pp. 64)

• Sustainable Strategic Positioning requires Trade-offs

• Need to get fit between different activities:– Simple consistency < Reinforcing Activities < Optimisation of effort

Problems with RBV

• Butler & Priem (2001):– It is a view not a theory – not testifiable– Key variable exogenous to the firm (product markets

determine the value of resources)– In focussing on the valuable resources as a source of

CA, the RBV is tautological

• Foss (1997):– Not one integrated perspective– Somewhat limited in use: firms resources are path

dependent, hard to develop new resources– Not well developed model of how to create resources

Strategic Change Q(1)2007 Q7:“All strategic management involves the inevitably problematic process of

effecting strategic change.” Discuss• Very popular

2006 Q5 What is “strategic change”, why is it necessary, why is it difficult and how can managers achieve it?

• Very Popular

2005 Q9 Suppose Oxford University wants to make major strategic changes. Should it make them all at once or proceed incrementally? Why?

• Very Popular. Many students treated it entirely as a problem of strategic change – few students recognized the connections with institutional theory (myths, rituals, inertia) or structural contingency theory. Few students argued strongly for incremental or transformational change at Oxford (they just presented the theories of strategic change).

2005 Q11What is the organizational life-cycle? How does it help us understand strategic management?

Strategic Change• Rajagopalan & Spreitzer (1996)

– “any change in the form, quality or state of an organisations alignment with it external environment that will result in a difference in a firms strategy, with the intention of achieving realignment and coherence”

• Why is strategic change needed? (Scott, 2001)– Change in internal or external environment at micro or macro level, organisational inertia prevents adaptation, strategic

change required to help achieve organisational change– E.g. Nokia decision to focus on mobile phones, following phenomenal success and increasing world demand

• Gunn (2008)– Companies that scored highly in terms of how well they embrace change saw increases in market capitalisation of 15%

higher than those who did not embrace change well.– Companies that embrace change, are more likely to hold onto managers and retain change managers exacerbating

differences between change embrancing and change fearing firms

• Hows does change take place?– Proactive / Reactive (Johnson & Scholes, 1999)– Incremental (Quinn, 1978) – tuning / adaptive– Punctuated equilibriums (Gersick, 1981, Tushman & Romanelli, 1985) –

• Transformational change (planned / forced)

• Johnson & Scholes (1990) – How to institute change:– Education and motivation, Cooperation, intervention, direction, coercion – Problems with each one. Coercion good in

crisis– Communication style is important – needs to be appropriate– Managers may need to get out of the comfort zone, and discuss things like culture, attitude,– Resistance to change – look at cultural web (routines, stories, rituals, power – Hatch, 1997)– Importance of middle management – often implement change at bottom level, can be impossible without them.– May need to remove power groups in advance– Consultants or outside opinions can be useful

Strategic Change• Pascale et al (1997)

– Ability to change depends on structures (established power bases etc), systems (accounting, it, training systems) and CULTURE

– Cultural factors – Power, Identity, Conflict

• Nohria (1996)– Nearly all Fortune 500 attempted strategic change 1980-95. Only 50% lead to

increased market share, and less 1/3 got profit > cost of capital

• Beer et al (1990)– Many executives know that change is required, but don’t know how to institute it– Mission statement not enough– Those companies that successfully implemented strategic change started from

the peripheries in a collaborative way. Organisational change strategic change– Starting at top is not impossible, but risky,

• Griskevicius et al (2008)– Employees can be convinced to participate if enough other employees also participate

• Example – HMRC – gossip before changes taking place in London area – location based groupd function based groups

Defining Strategic Change

• “any change in the form, quality or state of an organisations alignment with it external environment that will result in a difference in a firms strategy, with the attention of achieving realignment and coherence”

Rajagopalan & Spreitzer (1996)

Nohria (1996)

• Between 1980 and 1995, nearly all of the companies listed on the Fortune 500 attempted at least one strategic change programme. – ½ of these lead to an increase in market share

– Less than a 1/3 resulted in profits more than the cost of capital

Beer et al (1990) – change programs often don’t produce change

Why is strategic change needed?

• Erosion of competitive advantage from:– Changes in organisations external environment– Changes in organisations internal environment

• Inertia prevents organisation from adapting

• Strategic change required to help organisational change

• Examples of causes:– New entrants– Industry costs– Regulation– Social changes– New technology– Changing stafff

Strategic Change Example

• 1992: KPMG attempted to achieve strategic change (Johnson &Scholes, 1999):

– Move from skill units to industry units– Change in strategy, reward system, feedback

systems, assessment centres

• 3 years later strategic change did not impact the way in which people worked in a day to day basis

Strategic Change Example:

• Beer et al (1990): US Financial– Published a new mission statement– Implemented a new organisational structure– Response to deregulation & competititive

pressures– Two years after introducing new strategy and

structure, virtually no changes to organisational behaviour.

Tushman & Romanelli (1985)

• Rare that rate of organisational change is incremental (Quinn, 1978)

• Punctuated Equilibria is more likely.

Time

Rate of organisational change

Cumulative Organisational change

Change

Johsnon & Scholes (1999)

• Types of change:– Incremental (Quinn, 1978) vs Transformational (Tushman & Romanelli,

1985)

– Proactive vs Reactive

• Organisations– Typically seen as hierarchical and bureacratic

– Should be seen as adaptive, continually chaning, learning organisations too

Nature of change Incremental Transformational

Proactive Tuning Planned Transformational

Reactive Adaption Forced transformational

Johnson & Scholes (1999)

• Managers often faced with resistance to change.• Organisations “trapped in its own paradigms and

routines” (pp. 499)• Cultural web may be useful to analyse:

– Rituals and Routines– Little bottom up communication– Stories – rivalry and competition within organisation– Power– Organisation– Controls -team and individual targets– Paradigm – individualism, core bueinss, HR

Johnson & Scholes (1999)• Those implementing change need to internalise the change.

• Success likely to be low if it is regarded as being imposed rather than being related to ownership

• Requires managers to go into zone of uncomfortable debate:– Normally discuss techniques, formulation, planning procedures– Now must discuss managerial attitudes and beliefs, vested interests,

bases of power, reputation etc

• Unless managers enter this zone of uncomfortable debate and discuss blockages to change, unlikely that these issues will be tackled

Johnson & Scholes (1999)• Styles of managing change:

– Education and communication• Explain motives

– Good if lack of information is a problem– Difficult for large numers of people. Requires trust.

– Collaboration and Participation• Resolving issues by groups

– Increased ownership may help align goals– Tim consuming

– Intervention• Controlled coordination – but risks being seen as manipulation

– Direction• Use of authority to set direction and means of change• May be fast but risk of lack of acceptance and ill conceived strategy

– Coercion• Explicit use of power• Could be good in timrs of confusion or crisis, but otherwise unlikely to be successful

Johnson & Scholes (1999)

• Organisational Routines– “The way in which we do things here”– Useful in achieving competitive advantage, but can

also act as a block to change

• Symbolic Processes:– Objects, events or acts which express more than their

intrinsic content– Stories, language, technology, rituals, office size– Lots of rituals in organisations:

• Induction, award ceremonies, appointment procedures, parties, grumbling, rumours, surveys, systems

Johnson & Scholes (1999)

• Power and Political Processes– Managers need to understand power structures

– Power can be achieved by:• Acquiring scarce resources• Grouping together stakeholder groups with similar interests• Authority in the managerial hierarchy

– May be worth considering protecting against blockers (senior management) by sacking them in advance

Hatch (1997)

• Power has many sources– Authority in managerial hierarchy– Personal characteristics and traits

• Charisma

– Expertise• Non substitutable skills and abilities that are of

value to others

– Opportunity• Access to powerful individuals can itself can

generate power

Johnson & Scholes (1999)• Importance of communicating change:

– Need to have appropriate communication method• Face to face meetings• Bulletins / Newsletters / Boards• Telephone• E-mail

– Confusion caused by using face to face for routine change

– General bulletin insufficient for complex changes

• Timing is important too:– Near a crisis – can increase chance of succcess as

probability of status quo chaning is higher

Johnson & Scholes (1999)

• Importance of middle management: HIGH– Often the implementers and executioners of change,

explain new strategy to staff and monitor– If middle management object to changes, it is quite

hard to achieve change

• Consultants can be useful:– Provide objective angle and emphasise importance– Often viewed with a negative point of view

Strategic Change Example

• HMRC– Tax administration in London– Change from geographic structure to

functional structure to increase efficiency and knowledge spill overs

– Lots of speculative stories and gossip

Griskevicius et al (2008) – Sloan Mabagement Review –

• Examines Peer influence• People can be persuaded to indulge in both good and

undesirable behaviours if they perceive sufficiently large numbers of peers behaving similarly

• Corporate policy can be communicated more effectively by peer groups rather than executives

• Evidence from:– Donations to street musicians– Shopping carts– Re-use of towels in a hotel– Theft of petrified wood from a National Park

Gunn (2008) - HBR • Study of 84 major multi year change initiatives between 1995 and 2005 and 36

Fortune 500 Companies.

• 1/3 Companies got high scores at embracing change:– 62% of executives leading change initiatives were promoted. – Only 11% left voluntarily.– Market capitalization increased on average 62.3% over 5 year period

• Other 2/3 of companies got low scores at embracing change:– 74% of initiatives succeeded– only 12% of leaders got promoted and 25% of them left voluntarilty– Market capitalisation increased by an average of 54.8% at these firms.

• Conclusions:– CEOs at poor rated firms lost proven change leaders, where as CEOs at high rated firms

retained more change leaders– Creates a virtuous cycle where some companies become increasingly seeking bigger goals

and taking bigger risks– Valuations indicate that investors notice companies adept at managing change and value

this – 15% change in growth in market cap over 5 years

Beer et al (1990)

• Organisational change required to sustain competitive advantage in a turbulent competitive environment

• Senior managers understand change is needed, but often misunderstand how to bring it

• Assume mission statements, training courses and pay for performance will be enough. – Employee behaviour changes through changing

formal structure and systems

Beer et al (1990)

• Few proportion of firms were successful:– Change normally started at periphery level– Ad-hoc organisational arrangements– Contribution from bottom up– Alignment of employee goals

• Starting change at the top is possible but is a risky strategy

Beer et al (1990)

• 3 Factors required to corporate revitilisation:– Coordination– Commitment– Competencies

• Most change programs only address one or two of the above

Beer et al (1990)

• 6 steps to effective change:– Mobilise Commitment to change through joint

diagnosis– Develop a shared vision– Foster consensus for the new vision,– Spread revitalisation without pushing it from the top– Institutionalise revitalisation formally– Monitor and adjust

• Create a climate for grass-roots change.

Scott (2001)

• Institutional form changes over time• Causes:

– External factors • new technology, management innovations, political policies

etc

– Endogenous factors:• Mismatch or gap between micro and macro levels

– Micro- experiences and thoughts of individuals– Macro – content and regulations in socially constructed

institutions• Overallapping social structures compete for attention,

constraining some actors but enabling others.

Quinn (1978)

• Logical Incrementalism

• When organisations make major change to strategy, unlike rational planning in literature

• Effective strategies emerge from a series of strategic subsystems – blended incrementally –Logical incrementalism

Strategic Change (2)• 2004 Q 10. How might the Resource-Based-View of the firm be applied to improve the

chance of successful strategic change? • Very popular. This question, like the second question, was not simply asking if the RBV could be

applied to strategic change but how it could be applied. The question thus asked for a more definite analysis than most candidates were willing to provide.

• 2003 Q 9. If strategic change is difficult to control, can strategic management really be effective?

• Q9: This was the most popular question, though few answers discussed institutional issues that a comprehensive answer might have involved. There were also few answers which discussed evolutionary views of the firm. The nature of the question allowed the use of a range of material from across the course and not just that part dealing with strategic change.

• 2001 Q1What are strategic groups, what are their limitations and how might they be involved in the analysis of an industry? Do they serve any useful role?

• 2002 Q5 Strategic Change is frequently necessary but not easy. Discuss• Very popular

• 2001 Q 6 "Strategic change is rarely felt to be necessary when it might be most easily achieved". Discuss.

• Popular

Geographic Expansion Q (1)2007 Q12: “If a company is to make the most of its resources, globalization is inevitable. The

real problem is not whether to globalize but how”. Discuss.• Very popular - Candidates again showed a tendency to concentrate on just the core literature and

in this case omit discussion of how to exploit a business model to the greatest extent possible by expanding it to other markets. Greater discussion of the “how” question, for example, could also have naturally led on to discussion of structure in international companies.

2005 Q10 Why do companies go international, and what patterns do they usually follow when they do?

• Very Popular

2004 Q 2, What are the various ways in which firms may enter new international markets? What factors might help executives to decide on the best means to expand internationally?

• There are many ways to enter international markets and the best candidates did not simply focus on simple dichotomies between standardized products and differentiation but actually dealt with the mechanics of export, alliances, setting up new factories, licensing, etc in these settings. Obviously these different options in turn lead to choices that depend upon the time frame that executives adopt and the external environment in which they operate and the best candidates made some mention of these.

2005 Q12 Geographic expansion is one strategy for corporate growth. Identify other growth strategies, and discuss how and when firms adopt them.

Geographic Expansion Q (2)2004 Q 7. “Diversification is only successful when it is geographic, not product,

diversification.” Discuss.• Very popular. Although many candidates attempted this question, very few were willing to

agree. This was often a mistake since although it seemed extreme, there was a case to be made that geographic diversification is far more likely to be successful than product diversification. By arguing the opposite – that both were equally likely to be successful – candidates often boxed themselves into a corner.

2003 Q 4. How should successful companies respond to the global market?• Q4: This was a moderately popular question, but with few exceptional answers. Most referred

to Douglas & Wind, Levitt and Bartlett & Ghoshal’s work but few to a broader range of authors.

2003 Q 12. 'Alliances and acquisitions are difficult to get right. International alliances and acquisitions are almost impossible to get right.' Discuss.

• Q12: Few candidates attempted this question. Whilst there was a reasonable attempt to cite a broad range of references, a key issue that was often not treated as centrally as the question suggested was the comparison between International and Local alliances or acquisitions.

2001 Q4 How might a company structure its entry into a foreign market, and how might corporate executives evaluate the potential risks?

• Popular

Diversification / Portfolio Q (1)2007 Q8:“Diversification is not bad for companies, just difficult – the greater the diversification, the

greater the difficulty” Discuss

2007 Q“Portfolio management methods were designed for a particular set of circumstance and as such any present use of them is likely to be flawed.” Discuss Very unpopular

2006 Q7 Does wide diversification still have a useful role to play in strategy, and if so, how might it be managed?

• Very Popular

2005 Q8 The Virgin Group’s corporate portfolio includes airlines, retail stores, music publishing, cosmetics and mobile communications. What does strategy theory have to say about such portfolios, and why?

• Very Popular. Despite being prompted, few students would commit to whether they thought Virgin’s corporate portfolio was sensible or not (they just presented the diversification theories)

2005 Q12 Geographic expansion is one strategy for corporate growth. Identify other growth strategies, and discuss how and when firms adopt them.

2004 Q 7. “Diversification is only successful when it is geographic, not product, diversification.” Discuss.

• Very popular. Although many candidates attempted this question, very few were willing to agree. This was often a mistake since although it seemed extreme, there was a case to be made that geographic diversification is far more likely to be successful than product diversification. By arguing the opposite – that both were equally likely to be successful – candidates often boxed themselves into a corner.

Diversification

• Grant (2001)• Rumelt (1982)• Prahalad & Bettis (1986)• Prahalad & Bettis (1995)• Goold & Luchs (1993)• Whittington & Mayer (2000)• Whittington & Mayer (2003)• Porter (1987)

Portfolio Management

• Bowman & Faulkner (1997)

• Hapeslagh (1982)

• Hedley (1977)

Rumelt (1982)

• 1949-79 proportion of largest 500 US companies that were substantially diversified more than doubled

• Profits varied among firms with different diversification strategies:– High profits for diversification into industries drawing on some common

skill or resource

– Lowest profits for vertically integrated firms and diversification into unrelated businesses

• Empirical tests performed. Results:– Within largest 500 firms:

• Those that are less diverse have larger m share• Those exhibiting large clusters of related businesses will have unusually

productive core factors

Porter (1987)

• Studied 33 large organisations between 1950 and 1986

• Most divested more acquisitions than they kept

Goold & Luchs (1993)

• Diversification Strategy 1950s/60s– Established Business Schools

Diversification / Portfolio Q (2)2004 Q 11. Is portfolio analysis in agreement or at odds with the view of the firm held by economists?• Very unpopular. Many candidates who answered this question felt that the question must just be referring to the

economic model of transaction costs that had been discussed in the course. Candidates could also have included discussion of the “rational” view of economists that one cannot create value simply by buying or selling – that markets are efficient. Portfolio analysis is generally at odds with this view unless managers are actually adding value in this process.

2003 Q 6. If many diversified companies have been successful, why do many management theorists see diversification as an unsuccessful strategy?

• Q6: Some candidates mentioned Rumelt’s work and other standard research on Diversification, but there was little mention of risk. Virgin was commonly mentioned, but few commented on its private ownership and the implications this had for its diversification strategy. Some answers ventured into discussion of portfolio theory; but the justification of this link was usually not handled particularly well.

2002 Q6. What factors might affect decisions concerning the internalization of a business? In making such decisions what choices need to be made?

• Very Popular

2002 Q8. Diversification can prove a successful strategy but is full of traps for the unwary manager

2002 Q10. Portfolio Analysis as a means of developing corporate strategy is more easily criticized than praised. Discuss

2001 Q7 Are the roles that Corporate Centres have played in the past in managing multidivisional corporations outmoded or are they all just as relevant today?

• Popular

Technology Questions2006 Q6 Can technology strategy be dealt with using general principles of strategic management or is

technology strategy a special case?

2004 Q 4. How might strategists apply game theory to markets where technologies are rapidly changing? • Candidates tended to assert that this was possible rather than leading the examiners through the means that

strategists could use to apply the theory. In particular, scenario planning, real options, and simple game theory could have been applied to questions of technological standards and the management of R&D. The key, however, was not simply to assert the linkage but to demonstrate it.

2004 Q 9. “Unless they control key patents, executives should not aim to be first movers in new technologies.” Discuss.

• Very popular. This was one of the most popular topics because it echoed questions on the reading list. That similarity, however, often meant that candidates weren’t so much thinking as simply repeating material from past essays.

2003 Q 11. Is good technology or good judgement more important in the success of a technology based business?

• Q11: This was a popular question, but not one that produced exceptional answers. Few candidates managed to produce very wide-ranging discussions of the literature, though some took the opportunity to discuss Teece’s work.

2002 Q7 Technology is an inescapable feature of modern strategic management, although who will benefit from it is uncertain. Discuss

• Very popular

2001 Q9 What strategies might a company use to benefit from innovation? To what extent do these depend on the type of innovation and the stage of technological development that it has reached?

• Popular

Technology & Strategy

• Innovation and invention important sources of economic growth• Technology is important in nearly all aspects of the value chain:

– Important for both of Porters (1980)generic strategies - cost competitiveness and product differentiation

• Facilitates economies of scale, economies of learning, production techniques

• Technology goes through cycles:– Emerging, Growing, Maturing, Declining

– Characterised by discontinuity, ferment, selection, retention as switch from one technology standard to the next

• Progress – S-shaped – depends on cumulative effort:– Marginal returns to effort lower at beginning and at end

Pavitt (1990)

• Key characteristics of of technological innovation:– Continous and intensive collaboration and

interaction among functionally and professionally specialised groups

– High levels of uncertainty– Cumulative (knowledge is specific)– Hihgly differentiated

Teece (1986)

• Innovating firms often fail to get significant returns from innovation

• Business strategy is an important factor– If imitation is easy, then owners of

complementary assets will get returns– Many products will be positioned badly in the

market

Teece (1986): Examples• EMI CatScan:

– Developed High resolution TV in 1930’s

– Developed CatScan in 1960’s (brain scanner)• One of greatest advances in radiology• Lost market leadership within 6 years

– Reason: CAT scanner was of high technical specification compared to other things in hospitals:

• Required training, support and services• EMI could not provide these services (though could have gone into a partnership with

Siemens to provide them)

– GE and Technicare had complementary capabilities• Were able to develop a competitive scanner and improve on EMIs designs

– EMI eventually taken over by Thron Electrical, even though inventor got a nobel prize

Teece (1986): Examples

• RC Cola– First developed cola in a can and diet cola– Pepsi and Coke followed and deprived RC of any

advantage in its innovation• IBM:

– Ordinary computer architecture and standard components

– Successful because of set of complementary assets that IBM built around PC

– Also because of marketing ploy – charge per computer built at company rather than computer with MS Dos installed.

Schapiro & Varian (1999)

• Standard Wars – battles for market dominance between incompatible technologies

• Often bitter and crucial to business success – especially when network effects (telephone and fax machines – not with mobile phones)

• Historical examples:– Varying rail widths in North / South USA– AC vs DC electricity– RCA vs CBS colour television

Schapiro & Varian (1999)

• Key assets in network markets:– Control over an installed base of customers– Intellectual property rights– Ability to innovate– First mover advantages– Manufacturing Capabilities– Strength in complements– Reputation and Brand Name

HD DVD vs Blue-Ray Disc

• Recent format war:– Blue Ray Disc – Sony, Pioneer + Others– HD DVD – Toshiba

• February 2008 – Toshiba Announced it was no longer going to manufacture HD DVD players, after several retailers such as Walmart and Warner Brothers announced they were only going to use Blue-Ray Discs following support

• Sony used Blu-Ray discs in PS3s

Hamilton (2000)

• Real options:– Primary value of investments in emerging

technologies is in the option created through opportunities for future development

– Considerable power in using real option theory over DCF models

– Similar to call option – valuation difficult, but as uncertainty increases – value increases.

Schapiro & Varian (1999)

• Classifications in Standards Wars:– Evolutionary

• New technology compatible with olds with superior performance and lower adoption costs:

– Colour tv receive B&W, B&W receive colour broadcats

– Revolutionary• Incompatible with old technology - CDs

– Rival Evolutions• Two evolutionary strategies, backwards compatible

but not with each other - DVDs

Alliances & Acquisitions Q(1)• 2007 Q10: Why do mergers and acquisitions often fail?

• 2007 Q11: Why buy a company if you can ally with it?• Answers tended to be lop-sided, concentrating more on alliances or acquisitions but rarely adopting a

balanced approach that the question suggested. These examples suggest an over concentration on revising particular topics by candidates rather than preparing a more broadly based view of the field.

• 2006 Q8 How can acquisitions be justified when their record of success is so poor?

• 2006 Q9 Are “strategic alliances” a better way to obtain the benefits acquisitions seek but often fail to deliver?

• Very Popular

• 2005 Q12 Geographic expansion is one strategy for corporate growth. Identify other growth strategies, and discuss how and when firms adopt them.

• 2004 Q1. “Alliances are only beneficial to the extent that their knowledge management is successful.” Discuss.

• Very popular, but posed a problem for some candidates because they did not deal with knowledge management but simply dealt with knowledge. One of the keys was to differentiate between the different types of alliances and the purpose of the alliance.

• 2003 Q 5. Which factors affect the choice between buying or forming an alliance with another company?

• Q5: Trust, learning, control, time, integration, game theory implications regarding duration, links to technology, access to complementary assets, and regulatory issues might have been mentioned inter alia. However, in several cases some of these were omitted, perhaps due to spending too much time discussing one or two examples or references in more detail than might have been necessary.

Alliances & Acquisitions Q (2)• 2003 Q 12. 'Alliances and acquisitions are difficult to get right. International alliances and

acquisitions are almost impossible to get right.' Discuss.• Q12: Few candidates attempted this question. Whilst there was a reasonable attempt to cite a broad

range of references, a key issue that was often not treated as centrally as the question suggested was the comparison between International and Local alliances or acquisitions.

• 2002 Q6. What factors might affect decisions concerning the internalization of a business? In making such decisions what choices need to be made?

• Very Popular

• 2002 Q9 Acquisitions depend for their success more on what happens after the acquisition than what happens during the acquisition process. Discuss

• Very unpopular

• 2002 Q11. Why might a firm enter an alliance and how do alliances compare with alternative forms of strategic interaction between firms?

• Very unpopular

• 2001 Q8 What accounts for the continuing popularity of mergers and acquisitions as components of strategy?

• Popular

• 2001 Q10 How might firms decide whether to co-operate or compete? If they decide to co-operate what forms might that co-operation take and why? Popular – Reference – Cooptition

Institutional Theory Q• 2005 Q3 What forces cause firms in the same industry to resemble

each other? Why do firms nonetheless remain heterogeneous?• Many students failed to see the important connection to institutional

isomorphism, which gives arguments for strategic similarities among firms.

• 2005 Q5 “Strategic management is a cross between economic theory and institutional sociology.” True or false? Does strategic management add anything new?

• 2004 Q 6, Institutional theorists suggest that markets are converging while strategists suggest that companies aim to be different. How can we reconcile these two opposing views?

• Very unpopular. One reason that many candidates may have avoided this question was that it seemed complicated. In fact, whilst the reading list supplied the material to answer the question, the lectures had also directly addressed the point and it could be the basis for a good essay providing candidates set out the theories in a clear fashion.

Random Questions• 2007 Q4: Game theory has been described as the “the Argentina of economics, in terms of the gap

between potential and achievement”. Are there Argentina(s) of strategic management and if so where any why do they exist? Very unpopular

• 2007 Q6:Are first mover advantages as valuable as they are often said to be?

• 2005 Q6 What is structural contingency theory and how does it relate to strategy? • Very unpopular

• 2004 Q 8. Should older or younger companies be more interested in cooperative strategies?• Very unpopular. Perhaps because this was an unusual combination of concepts, very few candidates attempted

this question making it the least popular question. It makes sense, however, that younger companies might want access to markets that older companies control and, equally, that older companies might want access to the intellectual property of startup high technology firms.

• 2003 Q 2. 'Time is a crucial factor in strategic management.' Discuss.• Q2: Few attempted this question; but those who did generally mentioned a range of time related areas of strategy

including technology strategy, debate about the deliberate or emergent nature of strategy, and the nature of strategic change more generally. This was an example of a question which cut across the usual ways of dividing up the subject and as such required a broad knowledge of the subject to answer well.

• 2003 Q 8. 'Theorists of strategic management have focused on the management of large, multidivisional firms. Thus existing theories in strategic management are not useful for managers of smaller, single-business-unit firms.' Discuss.

• Q8: This question was not answered by any candidates