We often see rivals locate very close to each other (e.g., CVS and Walgreens, Home Depot and Lowes, etc.). The question of how and when rivals choose to co-locate is interesting both in theory and in practice. Peter Klein explores the topic in class using a simple Hotelling model of spatial competition. Here, two firms with identical products choose where to locate on a street, assuming buyers: 1) are evenly distributed along the street, 2) prefer to shop at the closest store, and 3) will shop with the same frequency no matter what choice is made. The Nash equilibrium has the firms located next to each other in the middle of the street — if either locates to the left or right, it can attract more customers by moving toward the center, without losing those at the extremes.
That last assumption, that buyers will shop with the same frequency is central to the median voter theorem in a two party system. That is, people will vote with the same frequency regardless, so it is best for candidates to “co-locate in the middle” of the political spectrum. Note however, that as this Politico piece suggests, voter turnout can be very much in question: “modern American elections are rarely shaped by voters changing their minds, but rather by shifts in who decides to vote in the first place.” Under these assumptions, having candidates at political extremes may be a winning strategy. In a similar fashion, firms must be aware of whether some customers will choose to stay out of the market if there is no seller located nearby.
Amazon is encouraging employee spinouts. They are offering employees $10,000 plus 3 months salary to quit and form entrepreneurial ventures in their Delivery Service Partner Program. This makes for an excellent “ripped from the headlines” case. I ask students to read a brief packet of news articles on the program and complete a poll before class (here is the poll I used). Since the program started, Amazon has shifted 30-50% of its delivery needs away from big vendors (USPS, UPS, FedEx, etc.) in favor of internal and small external service providers. It brings out multiple strategic issues and can be used to frame a semesters worth of strategy issues:
Market structure: How does this alter the market structure for Amazon? On the other side, what is the market structure that employee entrepreneurs face?
Competitive dynamics: How will players respond? (FedEx has now declined to serve Amazon)
Internal analysis: How might this move enhance Amazon’s competitive advantage? Do the entrepreneurial ventures enjoy any competitive advantages?
Entrepreneurship: Is the opportunity for employee entrepreneurs attractive?
Corporate: Should Amazon vertically integrate into the delivery business? How does their tapered integration affect the market?
Alliances: How do the collaborative relationships between Amazon and its partners differ between big and small partners?
As Netflix’s strategy unfolds it becomes clearer the extent to which it threatens traditional media companies. Initially, Netflix was a welcome partner who paid for access to older entertainment assets – new income streams for studios. More recently they have developed new content and lure top talent away from traditional media companies. Now, by offering a compelling portfolio of options, they compete more directly against traditional media companies. AT&T, Comcast, Fox, and Disney have taken notice of Netflix’s increasingly vertically integrated business model that bypasses traditional distributors (cable, DSL, satellite) and doesn’t rely on advertising revenue. The new model is driving mega mergers & bidding wars as rivals try to build compelling portfolios to offer streaming services. This is a great live case to frame many strategic management course topics including:
What is strategy? I use the Strategy Diamond and Netflix is a great case to look at things like staging and pacing, vehicles, and arenas.
Market structure – How attractive is the media industry and how has this streaming model affected industry profitability
Resources/Capabilities – Rivals lack some resources and some of their substantial existing resources have become “core rigidities” that hinder adaptation
Competitive dynamics – What strategic moves can we observe? How will Netflix respond?
Disruptive innovation – Netflix started as a limited low-cost alternative but added features that eventually made it a significant threat to incumbents.
Corporate strategy – The billions rivals spent on M&A are another critical angle. This also provides a vehicle to discuss when vertical integration creates value.
I have assembled some useful materials to frame a discussion of this case. First, the case can be taught using a series of recent news articles (sample article pack). In addition, I have prepared a spreadsheet to explore scenarios for how various events might affect the value of Netflix. For instance, what would happen to its business model if the market started to value the company as a traditional media company as opposed to a tech firm? Similarly, what will happen if rivals’ M&A strategies succeed and pose a critical challenge? Finally, here is a link to a sample pre-class survey to help students think about the strategic issues before class.
As the container shipping industry continues to boom, companies are adopting new technologies to move cargo faster and shifting to crewless ships. But it’s not all been smooth sailing and the future will see fewer players stay above water. This WSJ video takes students through the history and shows how the industry structure has changed with new innovations. Excellent for teaching industry analysis and innovation (architectural/systemic innovation).
Generic strategies are easy enough to explain and students typically feel that they understand. But do they really? Could they develop and implement a sound strategy? Sometimes it’s worth a bit of additional hands-on experience to make sure the lessons stick. Probably the most important message is alignment — the need to design the organization and product to fit the strategy. In other words, to make the appropriate tradeoffs. Lee Bolman offers a very simple house building exercise (out of index cards) that makes these points very nicely. Teams plan what kind of houses they will build and organize their production. Strategies naturally fall into more low cost (simple one story house) or differentiation (complex two story). The 20% quality bonus and 20% first mover bonus help to highlight these competing objectives. This one-page handout describes the rules and process for running the exercise. The debrief focuses on the teams’ strategies and how they organized:
Planning process — How did they frame the problem and explore solutions?
Competitive Dynamics — A strategy is more likely to be successful if few firms (teams) adopt it. How do they anticipate what rivals will do?
Implementation — Plans often don’t unfold as expected. A common problem is that when the time is up, they are stuck with inventories of unfinished products.
Overall, this is a simple and easy to implement exercise that drives home basic strategy and organization issues nicely. The exercise can be run in a little as 75 minutes, though 90 to 120 minutes provides more time for both the exercise and debriefing. The steps to run the exercise are:
Provide materials to teams (2 packs of 3-5 cards, 2-3 rolls of tape, 2-3 markers).
Distribute the Quality Housing Instructions. Briefly introduce the exercise and announce how much time is available for planning (10 min). At the end of the production period, do a count-down from 5 and firmly announce “Stop!”. Teams may be startled when the time is up.
Once teams have produced, have them calculate their expenses, revenue, and net income. You can check houses against the specifications either immediately after a team produces, or after all teams have produced. If a team produces multiple houses, test a few to see if they can be dropped 12 inches without damage.
Collect the financial results from all teams (revenue, costs, net), and award the bonuses for quality and first-to-market.
With its $13.7B bid, Amazon agreed to pay a 27% premium over Whole Foods’ previous market valuation. This makes for a nice live case case in your strategy classroom. Was this a sound business decision? The market rewarded Amazon with an increase in its stock price. While some opportunities are apparent, it remains unclear exactly how Whole Foods will be worth 27% more to Amazon (and that’s just to break even). A five forces analysis will reveal that the grocery market is highly competitive with exceptionally thin margins — not an especially attractive industry to enter. So how can they win in this game? There are many possibilities that may come up in a discussion. For example, Amazon may:
Build online grocery sales, a tiny but growing portion of the industry.
Lower costs by applying automation technology and their supply chain expertise.
Use customer data to build sales through Amazon or to sell some higher margin “impulse” items at Whole Foods.
Leverage the market’s expectations that Amazon won’t pay dividends or post significant profit to lower prices and invest in the business.
Of course, these are highly speculative and carry significant risks. What is the likelihood that any of these will be achieved? Can Amazon manage change in such a large acquisition? Will other grocers make similar changes (or be bought out by tech companies with similar capabilities)? There is lots of fodder to discuss. Here is a packet of news articles that may be helpful. Also, I have prepared a spreadsheet to explore different scenarios for how this might play out where the starting point is Whole Foods’ recent financial performance (note that the decision tree requires the PrecisionTree Excel Add-in). Finally, here is a very brief poll to help assure that students come to class prepared and with an opinion on the deal.
How do firms modify their products so they will be well-received in the most promising global markets? Case in point: Hollywood’s biggest movies are being subtly reworked to appeal to Chinese audiences. Since, that market may soon outstrip the U.S. to become the most lucrative movie audience in the world (see chart). Movies like Warcraft and Now You See Me 2 have been huge successes in China even though their domestic performance has lagged. Why? The Warcraft cast features Daniel Wu, a very bright star in China, who may have been unrecognizable as the orc Gul’dan, but his promotional efforts were important to the film’s success. Similarly, Now You See Me director, Jon M. Chu, cast star Jay Chou and filmed a portion of the movie in the Chinese region of Macau. The movie industry is a great example of product design for market entry. The following video frames it nicely for students interested in addressing barriers to market entry.
The Financial Times reports that in 2010, a Heuer Autavia Reference 2446, a popular driver’s chronograph of the 1960s, was sold for £5,400. But late in 2016, Christie’s achieved $125,000 for an identical watch. Valuable and rare resources are heavily sought after. This also creates a strong incentive to imitate. Enter “Frankenwatches.” Enterprising individuals have been able to cobble together watches from vintage spare parts that can be convincing. This has bread mistrust in the market and increased the value of market mechanisms (e.g., prim auction houses) that can certify authenticity. Then, there is also a market for known fakes (if they are done well). Ultimately, this demonstrates valuable and rare resources as well as imperfect imitation. Perfect for watch affectionados and students of the resource based view. The Financial Times article is a good (and timely) reading to prime a classroom discussion of strategic resources and attempts to imitate.
Are there cultural norms for telling the truth? Recent research by David Hugh-Jones suggests that this may be the case. In his coin flip experiment, respondents were asked to get a coin ready. On the next screen, they were asked to flip the coin and report the result. They were also informed that they would receive an incentive (either $3 or $5) if they reported “heads.” As such, respondents who flipped “tails” had to choose between telling the truth and receiving the money. This experiment allows honesty to be estimated at an aggregate level, by comparing the proportion reporting heads in any group to the 50% proportion expected. The figure above shows how the results for honest reporting differed by country. You may be able to repeat a version of this in your class. You may note that another coin flip exercise is recommended in the toolbox to explore luck and entrepreneurial success. You might run this in an earlier class with no incentive and record the proportion of people that report heads on each round. Then, in a class on ethics (or global strategy), repeat the exercise with an incentive ($20 should be enough). See if the proportions of heads reported differ. It may be that the class setting affords enough monitoring that cheating is not observed. Also, a large sample (100 or so per group) would generally be required to find significant differences in honesty. Even so, you can still present the results of the study (and, perhaps, argue that your class is more honest than average subjects in their country). You could also try to duplicate the lack of monitoring in the experiment by having students flip a coin at home or online and report the result. As such, there might be reasons to have students do this exercise outside of class and discuss the results in class.
Most of the media has chalked up President Elect Trump’s phone call with Taiwan’s President, Tsai Ing-wen, as driven by inexperience and/or a willingness to ignore prior policy. Indeed, the call has certainly sparked ire from the China and raised concerns of increasing tension. A recent WSJ article notes that it may have been an intentional and calculated move. However, this move is likely to have a completely different meaning coming from Trump. He has expressed a willingness to consider drastic/risky solutions and it may be more likely that China will ultimately blink. In a game of chicken, his reputation may be a distinct advantage over the more calculating reputations of prior presidents. Consider Thomas Schelling’s concept of the “rationality of irrationality.” In a game of chicken, a driver who appears crazy enough to prefer dying over chickening out will enjoy an advantage. In this context, it may be rational to convince rivals that one is actually irrational. Game theory can seem inaccessible when it is only presented using abstract examples (though Dilbert can help there), this offers a concrete example that may bring it to life for the students. Perhaps ironically, this post mirrors one that was posted here two years ago regarding Vladimir Putin’s strategy. Of course, it is worth noting that the game of chicken can also end very badly…
This isn’t the first time polls have been wrong. The election of Donald Trump was a shock to many college students (as well as the press) and this may warrant some class time. Some instructors responded by providing space for students to express their feelings and this may be within the scope of the educational objectives for some classes. For a strategy class, a more relevant focus might be to examine the implications of the outcome for business strategies or to examine the campaigns from a strategic perspective. This might be considered as a template for how to discuss other sudden world events in the strategy classroom. Here are some takes on how to bring the election in while still emphasizing the pedagogical objectives of a strategy course:
Project case scenario analyses (Aya Chacar). Scenario analysis is designed to unearth factors that affect the efficacy of a given strategy. In a global context, country risk is a central factor in assessing strategic alternatives. In class, students discussed the likely impact of the election on the companies their teams are studying. Can you help the company? What do you think “could” be the impact on the companies under the new American administration -based on stated positions or past behavior? The companies they chose to study in this class are Amazon, Auchan, Didi Chuxing, General Motors, Naver, Uber, Volkswagen, and Walmart. All already have major international presence with some but not all having significant operations in China, Europe, India, Japan, Mexico, South Korea, SouthEast Asia and the US.
Entrepreneurship/Opportunity Recognition. The pollsters were all wrong. Often businesses and whole industries miss critical trends in consumer preferences and this probably means that there is unserved market space. Given trends that are now unearthed by the election, what market opportunities might there be for firms in various industries? One could use the project firms, cases you have done or specific firms that you think might be affected.
SWOT on campaigns (Peter Klein). While this framework is not preferred by most strategy scholars, it may raise some good points. A few examples from the Clinton campaign: O: demographics (e.g., increased Hispanic population, more socially tolerant electorate), unpopular opponent,chance to make history. T: middle-class concerns about economic inequality, backlash against political correctness, Clinton fatigue, incumbent fatigue, WikiLeaks. S: experience; support from major media, Wall Street, large corporations; ties to Obama and WJ Clinton; large staff of handlers; polish. W: experience; support from major media, Wall Street, large corporations; ties to Obama and WJ Clinton; large staff of handlers; polish.
Resources/Capabilities. Many of the campaign strengths turn out to be weaknesses depending on the context (experience, polish, support from corporations, etc.). What resources give a party a sustained advantage? What does “sustained” mean in this context? This might bring in a discussion of core rigidities and how once valuable resources can become critical weaknesses over time.
Disruptive Innovation (David Burkus). Clay Christensen described disruptive innovations as an innovation (typically from an outsider) that creates a new market and value network that eventually disrupts an existing market and value network, displacing established market leading firms, products and alliances. The Trump campaign might be viewed in this light as a disruptive strategy that overtook the conventional establishment.
PESTEL. Of course, this demonstrates the value/importance of looking outside of the industry for trends that may influence whether a given strategy will be effective or not. The PESTEL framework is a simple tool for bringing this in to the analysis (Political, Economic, Social Technological, Environmental, and Legal).
The augmented reality (AR) game, Pokémon Go, has taken the world by storm as players roam the real world catching Pokémon and battling in Pokémon gyms. The game has set 5 records since its launch in July 2016 — including the most revenue by a mobile game in its first month ($206.5 million). Nintendo’s stock doubled 15 days into the release, adding $7.5B in value, but then settled back into a mere 50% increase when it became clear that Nintendo was a partner with limited ownership in the company that developed the game (Niantic, a Google spinoff). Although the game is free, users can make purchases in the app store to support their Pokémon ‘hunting’. The bewildering success must clearly be keeping Niantic’s CEO, John Hanke, and his crew awake at night. Besides the operational issues related to scaling up, intellectual property (IP) had become a big issue. A slew of imitators were emerging as well as a number of companies trying to steal the game’s data content and algorithm. In addition, the formidable international expansion faces roadblocks in the most populous Asian countries while potential users were impatient. There were many additional potential revenue sources to be tapped and explored such as the recent win-win partnership with McDonalds Japan. Moreover, while getting gamers out and about was good, there were a number of unintended consequences. On the plus side, many entrepreneurs were finding ways to make money from the game — for example restaurants could lure in customers if there was a Pokestop nearby. At the same time, users and non-users worried about possible injuries, trespassing, and invasion of privacy among other things. Naturally, this makes an outstanding ripped-from-the-headlines case for strategy courses. It is a great vehicle to cover key topics such as entrepreneurship, strategic alliances, internal analysis/capabilities, and external analysis. The following are some materials that are useful for the case:
This cooking competition show begins with an auction of resources needed to cook including space to work and cooking utensils. The contestants bid to preempt rivals by obtaining access to key resources while saddling them with inferior resources. This is ultimately quite similar to the egg drop auction exercise but it can be assigned as a “video case.” This is a nice way to introduce to students to the fact that fierce competition occurs in resource markets – an arena that they may be less familiar with. One can then explore different resources and how they are acquired (human capital, locations, technologies, etc.). It might even be an opportunity to assign them Barney’s original article on strategic factor markets.
Comparative advantage is about nations leveraging their unique resource advantages. There was a time when, for China, that referred to cheap labor. There was once a notion that good manufacturing jobs were “shipped” to China because wages were so low. This narrative still bubbles up in today’s political rhetoric. However, today’s news also highlights that Foxconn, the World’s largest contract manufacturing company, is replacing 60,000 workers with robots. Wages in China do remain below those in other countries. However, the comparative advantage is no longer about cheap unskilled labor. In fact, China has produced about 60 million college graduates in the last ten years. At this rate, the World Bank predicts there to be up to 200 million by 2030. This is greater than the entire U.S. workforce. In short, they seek a comparative advantage based on human capital as opposed to generic labor. Cheap labor, in turn, may be replaced by capial investments (Foxconn seems to be on the leading edge in this trend). A question for a global strategy class might be how should other countries respond? Would an education arms race help or hurt comparative advantage?
Most students quickly grasp the concept of game theory–figuring out what your opponent is likely to do helps you decide what you ought to do. As this clip shows, however, failing to understand the real decision choices to be made can lead to deadly, but funny results. In class, after introducing simultaneous vs. sequential games, I show the clip, pausing it just before the 2:11 mark. At this point the poison is in the goblet, and I ask the students who haven’t seen the movie which goblet they think is poisoned. I record answers, and then show the clip (up to anywhere between 4:45 and 5:02). I then ask if they were surprised. I then show the remainder of the clip, and we discuss what mistake Vazinni made. Students see the real payoff matrix as: a) if I (Vazinni) guess wrong, I’m dead; b) If I guess right, then the Dread Pirate Roberts knows it too has incentive to kill me before he dies. I only live if Iocane powder kills instantly. My correct answer can only be not to drink either goblet if I want to live. After watching this video clip and class discussion, students can:
identify what is a simultaneous decision
identify the true payoffs in a payoff matrix
understand the value of changing the game
never get into a ground war in Asia (okay, just kidding about that one).
Economics-games.com is a free educational games site for teaching microeconomics, industrial organization and game theory. This site includes some simple (short) simulations designed to demonstrate specific principles. This should not be confused with longer simulations that extend across many class sessions. Instructors set up user IDs & passwords for their class and students are paired with others in the class (or even across universities if desired). These are really nice interactive online exercises that can be done between classes. In this sense, they are an excellent online complement beyond the usual readings and talking head videos. Here are some of the games:
Cournot and Stackelberg games
Public good financing game
Common-pool resources game
Asymmetric matching penny game
An air transport economics simulation covering price discrimination, vertical differentiation and peak-load pricing.
Differentiation can be a challenge if existing products have identified the most central value propositions for customers. Increasingly, firms must differentiate using paths that may not follow others and there may be good reasons that rivals have left the path uncharted. Here is an example of differentiation whose time may not have come…
Presenting material clearly and concisely may not be the best way to help students learn. In fact, presenting ambiguous information that leverages common sources of confusion may be a much better route to learning. This post is intended to serve as a BLEG to solicit examples of confusions that students experience. Accordingly, this is a starting point for developing new material that draws on confusion to teach strategy. We begin by understanding what confuses students. Here are some examples that come to mind (please add your own examples in the comments):
What does 5 Forces tell us about the firm’s advantage? Students often put a focal firm in the center and consider rivals to be substitutes. They don’t understand that the framework addresses the industry and not the firm.
What industry to choose for 5 forces? Students often choose an umbrella industry instead of the specific segment they are considering entering (e.g., beer instead of micro brews in South Africa). The result, then, is almost useless for making decisions and the analysis is not used to make recommendations.
Some resources are valuable while others are Inimitable (VRIO): Students think they are looking for some resources that fit in each bucket (V,R,I, & O) instead of a few resources that meet all of the criteria. They don’t understand that VRIO is a filter to evaluate all strengths in the value chain.
What is that “O” for anyway (in VRIO)? It seems to make sense but students often don’t really understand how a firm can have all of the pieces and still not execute. I use Xerox PARC as an example.
How do we make decisions using VRIO? Students often think they understand but don’t really know how to use it to make a decision. For example, how are capabilities relevant to decisions like entering new markets or fending off rivals?
Motivation for diversification: guilty until proven innocent. Students often suggest that a firm should acquire a successful target. They fail to see that future success is built into the acquisition price and don’t ask why the buyer could create unique value over other bidders.
Technology advantages erode rapidly. People see technology as key but miss that it can be easy to reverse engineer (leading to a temporary advantage). While the iPhone confers an advantage to Apple, Samsung has more market share.
Core competence is not what a firm does well if rivals can do it better. Core competence must refer to VRIO resources in order to create value.
Again, please add your own examples in the comments below. The following TED talk by Derek Muller describes the technique in teaching science.
Mattel just lost to Hasbro on producing Disney princess dolls — a $500M a year business. This brings to an end a 60+ year strategic alliance. A recent Bloomberg article tells the story of what happened and makes a nice start to a mini case. There are many facets to this that might be of interest in the classroom. Bargaining power is probably front and center. Mattel wanted to have their own princess line that they didn’t have to pay the substantial licensing fees to Disney. Once they were a competitor, Disney started to consider other options (an alliance or coopetition story). By seeking out Hasbro, Disney increased their options (BATNA to you negotiation buffs) and thus gained even more bargaining power. In the end, Hasbro had to work hard to present a fresh vision (including substantial firm-specific investments) but Disney still retains the power in the relationship. This also sends a signal to other Disney partners about reducing their commitment to Disney. Of course, Disney’s power is rooted in strategic assets (characters) and capabilities (to create more characters) so this brings in the resource based view (RBV) nicely. If you are in need of related comic relief, there are ample videos. Here are hipster princesses to get you started.