How_strategist_really_think

8/7/2019 How_strategist_really_think

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How strategist really think?How strategist really think?A short summary presented by Vivek Bhola ( 10EX-059)


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IntroductionIntroduction

y The heart of companys strategy is what ischooses to do and not to do.

y The quality of the thinking that goes into suchchoices is a key driver of the quality and success

of a company's strategy.y Reasoning by analogy plays a role in strategic

decision making

y Faced with unfamiliar situation senior managerapply knowledge from similar situation in

past.y Managers who pay attention to their own

analogical thinking will make better strategicdecisions and fewer mistakes.


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Circuit CityCircuit City

y It started in 1990, thrived by selling consumerelectronics in superstores Wide Selection,

Professional Sales Help

& a policy of not haggling with customers.

y In 93, announced opening ofCarMax, a chain ofused-caroutlets.

y They argued that used car industry bore resemblance toelectronic retailing industry

y Mom-and-pop dealers with questionable reputations

dominated the industry, leaving consumers nervous whenthey purchased and financed complex durable goods.

y They believed Its success formula from electronics retailingwould work well in an apparently analogous setting.


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The core elements of analogicalThe core elements of analogical

reasoningreasoning1. A novel problem that has to be solvedor a new opportunity that begs to be

tapped

2. A specific prior setting that managers

deem to be similar in its essentials;

3. A solution that managers can transfer

from its original setting to theunfamiliarcontext


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Other Approaches of StrategicOther Approaches of Strategic

DecisionDecisionDeduction Trail & Error

y Here, managers apply generaladministrative and economicprinciples to a specific businesssituation, weigh alternatives, and make arational choice

y It require lot of data and it is mostpowerful only in information-richsettings ex: mature and stable industries

y Processing a great deal of raw data isvery challenging, particularly if thereare many intertwined choices that span

functional and product boundaries.

y The mental demands of deduction caneasily outstrip the bounds on humanreasoning.

y Deduction works best for modularproblems

y It involves learning afterthe fact rather than

thinking in advance.y Effective in settings so

ambiguous, novel, orcomplex that anycognitively intensive effort

is doomed to fail.y Useful in new situations,

such as launching a radicallynew product


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y strategic problems are neither so novel

and complex that they require trial and

error nor so familiar and modular that

they permit deduction

y It is in this large middle ground that

analogical reasoning has its greatest

power.


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Analogical reasoningAnalogical reasoning

y It makes efficient use of the information and themental processing powerthat strategy makers have

y In AR, Managers pay attention to select features of it anduse them to apply the patterns of the past to the problemsof the present

y For Ex: Charles Lazarus, the founder of Toys R Us, analyzed all of the

interdependent configurations ofchoices in toy retailing-from marketing to operations, from human resourcemanagement to logistics.

The analogy he drew to supermarkets was extraordinarily

efficient from an informational and cognitive point of view it gave him an integrated bundle ofchoices: exhaustive

selection, relatively low prices, rapid replenishment of stock,deep investment in information technology, self-service, shoppingcarts, and so forth.


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ContinuedContinued

y Analogies lie at the root of some ofthe mostcompelling and creative thinking in businessas a whole, not just in discussions of strategy.

y For Ex:

Taiichi Obno, the foremost pioneer of Toyota's famedproduction system, invented the kanban system forreplenishinginventory after he watched shelf-stocking procedures at U.S. supermarkets,

He also devised the and-on cord to halt a faultyproduction line after seeing how bus passengerssignaled a driver to stop by pulling a cord that rang abell.


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Why is analogy prevalent amongWhy is analogy prevalent among

strategy makers?strategy makers?y It because of a series of close matches:

1. between the amount of information

available in many strategic situations and

the amount required to draw analogies;2. between the wealth of managerial

experience and the need for that

experience in analogical reasoning;

3. and between the need forcreative

strategies and analogy's ability to spark

creativity.


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How Analogies Fail?How Analogies Fail?

y Example:

y Circuit City's managers, for instance, had an effective solution in consumerelectronics retailing.They then found a new setting, used-car retailing, to which they

believed their solution could be applied with success.

an individual starts witha situation to be handle

Intel - competitionfrom makers of low endmicroprocessors

Target

problem

identifies a setting thatdisplays similarcharacteristics throughsimilarity mapping

the steel industry

Source problemsolution emerges fromsource problem

a vigorous defense ofthe low end

Candidate

solution

Source Problem

an individual starts with a source

problem

Candidate solution

Identifies a solution

Target Problem

uses similarity mapping to find a

target problem where thesolution would work well


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ContinuedContinued

y Dangers arise when strategists draw ananalogy on the basis ofsuperficialsimilarity, not deep causal traits

y For Ex: Ford in overhauling its supply chain looked atDells Virtual Integration with its supplier assource for analogy.

Difference:In PC business prices of inputsdecline must faster and by as much as 1% perweek


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ExampleExample-- Enrons CollapseEnrons Collapsey For Enron, diversification based on loose analogies played an

important role in collapse

y They achieved success in trading natural gas and electricpower.Theymoved rapidly to enter coal, steel, and pulp and paper to weatherderivatives and broadband telecom capacity.

y Looked for characteristics reminiscent of the features of the gas and

electricity markets.The characteristics included fragmented demand, rapid change due to deregulation or technological progress,

complex and capital-intensive distribution systems, lengthy sales cycles, opaque pricing,and mismatches between long-term supply contracts and short-term fluctuations incustomer demand.

y Managers were confident that Enron's market-creation and tradingskills would allow the company to make hefty profits.

y

They looked at broadband opportunity like gas and electricity model.

y Failed to identify difference between the two. The broadband market was based on unproven technology

was dominated by telecom companies that resented Enron's encroachment.

The underlying good-bandwidth-did not lend itself to standard contracts.

Enron had to deliver capacity the "last mile to a customer's site


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What are the reasons for focus onWhat are the reasons for focus on

superficial similarity?superficial similarity?1. Distinguishing between a target problem's deep,structural features and its superficial characteristicsis difficult

In the earliest days of the Internet portal industry, for instance, itwas far from clear what structure would emerge in the business.

Players in the market adopted analogies that reflectedidiosyncrasies of the management teams rather than deeptraits of the evolving industry.

Lycos assumed that the company with the best searchtechnology would win.

The pioneers ofYahoo, seeing the portal industry as a mediabusiness, invested in the company's brand & site

2. People typically make little effort to draw distinctions. In laboratory experiments conducted by psychologists, subjects-

even well-educated subjects-are readily seduced by similaritiesthey should know to be superficial.


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AnchoringAnchoring

y Once an analogy or other idea anchors itself in amanagement team, it is notoriously hard todislodge.

y Psychologists have shown that this is true even whendecision makers obviously have no reason to believethe initial idea.

y The anchoring effect suggests that early analogies in acompany can have a lasting influence.

y This is especially true if decision makers becomeemotionally attached to their analogies. Ex: CEO of Sun Microsystems has focused on delivering

entire systems of hardware and software even as thecomputer industry has grown less and less integrated.


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Confirmation BiasConfirmation Bias

y Decision makers' tendency to seek outinformation that confirms their beliefsand to ignore contradictory data.

y

To some degree, this tendency arises simplybecause managers like to be right - andlike to be seen as right.

y But there is evidence from psychology that

people are better equipped to confirmbeliefs than to challenge them, evenwhen they have no vested interest in thebeliefs.


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How to Avoid SuperficialHow to Avoid Superficial

Analogies?Analogies?y Recognize the analogy and identify its purpose

Strategists must analyze chains of cause and effect

y Understand the source analyze the source environment, the solution or strategy

that worked well (or that failed) in the original contex

t, and the link between the source environment and the

winning (or losing) strategy.

y Assess similarity search actively for differences

ask whether thesimilaritiesarelargelysuperficial?y Translate, decide, and adapt

what the strategy would look like in the new setting?

how much a company should translate the candidatesolution?


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