BPS 6210.595 – Fall 2001

Lecture Notes – Session 02

BPS 6210.595 – STRATEGIC MANAGEMENT

SESSION 02 – THE CONTEXT OF STRATEGY

INTRODUCTION
  • Name Cards
  • Turn in Papers
  • WebCT
/ 6:00 – 6:10
AMERICAN AIRLINES CASE
  • AA: What do we know about the company?
  • What industry is AA in?
  • What are the key features of AA’s competitive environment?
  • Do strategic groups exist in the airline industry? How can we identify them?
  • Five forces analysis (before & after deregulation)
  • What changes have occurred in the industry since 1990?
  • Value Chain Analysis
  • What was AA’s strategy before deregulation?
  • What were AA’s strengths in 1978- 1980 (period of deregulation)
  • What were AA’s principal weaknesses in 1978-1980?
  • What was AA’s strategy after deregulation?
  • How does AA’s strategy compare to that of its competitors?
  • Why did AA choose to “build” rather than “buy”?
  • The concept of “fit”: AA’s strategy vs. the environment
  • The concept of “fit”: AA’s strategy vs. resources and capabilities
  • What are the key issues for AA in the 1990’s?
  • Does AA’s strategy make sense?
/ 6:10 – 7:00
HOW MANAGEMENT PERSPECTIVES SHAPE STRATEGY
  • Reading: Drucker, P.F. The Theory of the Business, HBR, Sept-Oct 1994: 95-104
  • Reading: Picken, J.C. and Dess, G.G. Right Strategy – Wrong Problem, Organizational Dynamics,Summer 1998
What are the key themes of these readings?
  • Organization strategies are based on management’s assumptions, premises, and beliefs, rather than on objective reality
  • This set of assumptions, premises and beliefs (theory of the business) provides both a road map and a set of constraints on management’s thought processes
  • Strategies based on a faulty set of premises frequently go awry
  • The Theory of the Business must be made explicit, tested and updated regularly
DRUCKER: THEORY OF THE BUSINESS
What kinds of assumptions make up the Theory of the Business?
  • Environment of the organization, society and its structure, the market, the customer, competition and technology (what an organization gets paid for)
  • The specific mission of the organization (meaningful results)
  • Core competencies needed to accomplish the organization’s mission (where an organization must excel to maintain leadership)
What are the specifications of a valid theory of the business?
  • The assumptions about environment, mission and core competencies must fit reality
  • The assumptions in all three areas must fit one another (consistency)
  • The theory of the business must be known and understood throughout the organization
  • The theory of the business has to be tested constantly
Preventive Care
  • The principle of abandonment: challenge every product, every service, every policy, every distribution channel with the question: if we were not in it already, would we be going into it now?
  • Study what goes on outside the business – especially study non-customers
Early Diagnosis
  • Achieving one’s objectives is not a cause for celebration, it is a cause for new thinking
  • Rapid growth: any organization that doubles or triples in size in a short period of time has outgrown its theory
  • Unexpected success – either own firm or a competitor
  • Unexpected failure – either own firm or a competitor
Cure
  • Update the theory of the business
PICKEN & DESS: RIGHT STRATEGY – WRONG PROBLEM
  • Dangers of applying the wrong paradigm (erroneous assumptions, biases)
  • Overly optimistic assumptions (wishing for success – Jerry Del Signore)
  • Failing to recognize change (assumptions no longer valid)
Sources of Assumptions & Values
  • Formal education and training
  • Individual background, family values, etc.
  • Natural process of socialization in working groups
  • Deliberate attempts at acculturization
Dangers of the Dominant Logic
  • Tendency to magnify significance of supportive information, discount inconsistent information – leads to groupthink
  • Narrows vision
  • Linked more to the past than to the future
  • Organizational blind spots – misreading competitors (historical blind spots, belief in a shared world view)
How Individual Biases And Values Shape Perceptions Of The Environment (Slide)
How Assumptions And Values Influence Strategies And Actions (Slide) / 7:00 – 7:45
EMI AND THE CT SCANNER (A)
How is EMI doing in the early 1970’s?
  • Profitable and growing – has a major franchise in popular music
  • Secondary expertise in electronics – business is fragmented and less profitable
  • Issue of what to do in the marketplace with their technical capabilities
What are their core competencies?
  • Music distribution
  • R&D – military electronics product development
How does the CT Scanner play to EMI’s strengths and weaknesses?
  • Slide: Market potential in 1970
  • Slide: Is innovation profitable?
  • Slide: complementary resources
  • Slide: Core competencies, Core Products & End Products
  • Existing electronics capability
  • Technology lead in CT scanning
  • Limited expertise in medical electronics
  • Lack complementary resources
  • No experience/distribution infrastructure in North America
/ 7:45– 8:00
BREAK / 8:00 – 8:15
EMI AND THE CT SCANNER (A)
What are the key issues in Case (A)?
  • Should EMI take advantage of this (apparently) excellent opportunity?
  • If so, how (licensing vs. internal development of complementary resources)?
What are the pros and cons surrounding this opportunity?
  • Slide: pros and cons
What is EMI’s theory of the business?
  • Assumptions about environment, markets, customers, competitors?
  • Assumptions about technology?
  • The mission of the organization (meaningful results)?
  • Core competencies needed to accomplish the organization’s mission?
Is the theory of the business valid?
  • Are the assumptions realistic?
  • Are they internally consistent?
  • Was the theory widely communicated? Did the key players buy in to it?
  • Was the theory tested frequently and updated based on new information?
What happened over the next five years?
  • Slide: time line
  • Slide: Industry life cycle
Case (B): It’s 1977 – How is EMI doing in Medical Electronics?
  • Sales performance: Sales of 42 million pounds by 1976
  • Shipped 450 of 650 units worldwide (70% market share)
  • Backlog of 300 units
  • Profitable, but margins declining with competition
  • Not meeting demand – backlog of 300 units opens the door for competition
  • Multiple new entrants (16 total; many small + GE, Picker, Siemens)
  • Rapid technology development (GE has leapfrogged existing technology)
  • GE had 300 person sales force, 1200 service technicians
  • Competitors had successfully circumvented EMI’s patents
  • Pfizer enters market through acquisition
  • Losing technology lead: competitors have greater access to complementary resources
Problems on the Horizon
  • Slide: Scanner market potential vs. industry capacity
Let’s reevaluate EMI’s Assumption Base
  • Significantly underestimated market potential – 10 to 15 times greater than assumed
  • Market underestimated invalidated market strategy
  • Significantly underestimated competitive response/impact on market pricing
  • Overestimated effect of technological lead/patent protection – what they thought were core competencies were easily imitated
  • Underestimated need for complementary resources (manufacturing, sales, service)
  • Underestimated difficulty of launching a product in a foreign market with no local base of operations, no organizational infrastructure to manage it effectively
Case (B): What should EMI’s strategy be at this point? What changes are required? Why?
  • Need to bolster R&D to keep pace with the development of technology
  • Broaden the product line – they have a beachhead, but nothing to follow with
  • Protect the existing customer base – upgrades and better service
  • Build stronger customer service capability
  • Improve delivery performance (capacity of 20 units/month vs. backlog of 300 units)
  • Address organizational issues: leadership, coordination and control
  • Develop strategies to counter regulatory pressure to suppress demand
Do you think they can pull it off? What are their strengths, vulnerabilities?
Epilogue / 8:15 – 9:15
INNOVATION AND TECHNOLOGICAL CHANGE
Innovation/Life Cycle/Network Effects
  • Characteristics of technology-intensive industries
  • The evolution of technology from knowledge creation to diffusion
  • Industry life cycle: the diffusion of knowledge
  • Network effects
  • Critical success factors over the industry life cycle
  • Managing the evolution of industries and markets
  • Is innovation profitable?
  • Issues of appropriability: complementary resources
The New Economics of Information (Evans & Wurster)
  • Explosion in connectivity is fundamentally altering the economics of information
  • Information is a key element in the operational and cost structures of many businesses
  • 1/3 of the cost of health care in US is the cost of managing information: patient records, insurance claims, etc.
  • Value chains involve both physical and information flows across activities
  • Supplier relationships, brand identity, process coordination, customer loyalty, switching costs all involve information flows
  • Profits of intermediaries rely largely on information asymmetries (auto dealers, real estate brokers, insurance agents, financial institutions)
  • Information is the basis for competitive advantage in many industries that involve physical flows as well
  • AA/Sabre – information managed to improve capacity utilization
  • Wal-Mart: item sales by store reviewed daily; automatic replenishment, EDI links to suppliers result in few stockouts, lower inventories across supply chain
  • Changes in the cost/availability of information will significantly change many relationships – undermine the value chains of many industries
  • Newspapers, retail banking, insurance, financial services
  • Existing value chains will fragment into multiple businesses; each will have unique sources of advantage
  • Some new businesses will benefit from network economies of scale; critical mass will drive consolidation
  • Bargaining power will shift; switching costs will drop as information becomes more freely available
  • Incumbents will be vulnerable because of investment (real and psychological) in obsolete infrastructures
/ 9:15 – 9:45
DIGITAL IMAGING IN 1995: OPPORTUNITIES IN THE DESCENT TO THE DESKTOP / 9:45 – 10:00

© 2001 Joseph C. Picken1

October 26, 2001