Category Archives: Managing under uncertainty

Honda “B” Emerges

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In this video, Henry Mintzberg presents the story behind the classic Honda B case. That is, when Honda tried to enter the traditional US motorcycle market with large machines but ran into implementation problems that pushed it toward introducing small bikes through non-traditional distribution channels. As a result of their pivots, they were able to create a new market for smaller bikes in the US. This was a startling contrast to the “A” case which implied that the strategy was intentional from the start.

Heard Through Marko Rillo

Love Triangle Goes Hostile

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Few things are more dramatic than a good hostile takeover attempt. Dollar General has been trying all summer to break up the planned nuptials between Family Dollar and Dollar Tree. They have offered $600 million more for Family Dollar than the preferred suitor. Two things may be preventing Family Dollar from switching partners: 1) concerns that a Dollar General deal would be thwarted by anti-trust regulators, and 2) the Family Dollar CEO would lose his job if Dollar General takes over. Of course, they say the second issue is not on their minds. This makes a great “ripped from the headlines” case (here is a small packet of news articles). There are many directions that the discussion can go which, I think, makes for a nice introductory case to frame the rest of the semester. Here are a few:

  • What is an industry? The anti-trust argument assumes that the industry is defined as small discount stores (in other words, Wal-Mart is not really a player).
  • Corporate governance: How much should it matter what the Family Dollar CEO’s preferences are?
  • Cost advantages: Do any of the players have a cost advantage? At what point do the advantages of scale diminish?
  • Industry structure: What, if anything, makes this an attractive industry?
  • Competitive dynamics: What will be the next competitive move? What has driven the past moves?
  • M&A Synergies: The news packet includes an estimate of the synergies and suggests that Dollar General could create more value. Do you buy this analysis?
  • Scenario planning: How might this unfold? To explore this, I have created a simple decision tree and added financials draws from a SeekingAlpha analysis in the news packet. Here is the spreadsheet (which uses the Precision Tree Excel add-in).

Contributed by Russ Coff

Scenario Planning Success?

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In 1993, AT&T released a series of commercials offering their vision for the future. Their predictions were surprisingly on target (ebooks, turn-by-turn GPS directions, iPads, sending documents via mobile devices, video conferencing, electronic tollbooths, on-demand videos). Someone had a good handle on technology possibilities that would transform our world. And yet, AT&T was decidedly NOT the company to bring us this future: it was effectively gone within a decade. Colbert offers some explanation for how the AT&T brand collapsed and rose again after the disappearance of the old ma bell. Mike Leiblein points out that the company may have failed to make appropriate investments or been concerned about cannibalization of their existing products. This old case about internal disruptors from Bell Labs trying to shake things up at AT&T suggests that is true – the company ejected the “disruptors” and tried to suppress the heresy that the internet would change everything. Ironically, at the time these commercials were filmed, Rebecca Henderson was writing about organizational limitations that hinder incumbents from successfully pursuing radical innovation. These ads make a nice point about the limits of scenario planning. Even if a company has people who can see the future clearly, it may be unable to execute. Here are a few slides that Charlie Williams uses to make that point.

Contributed by Charlie Williams

Vertical Integration with Style!

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Andrew Shipilov offers a nice case (with video) of Louis Vuitton’s strategy for vertical integration and alliances. He documents how Vuitton vertically integrated into distribution when the rest of the fashion industry relied only on partnerships. This allowed them to gain access to important market information (customer preferences) on a more timely basis — a source of advantage in the industry. Shipilov notes: “The more unique your assets are and the greater the control you need to exercise over the value chain to extract competitive advantage from these assets, the more vertical integration makes sense. However, the higher the uncertainty and complexity in your markets, the more you should think about partnerships.”

Contributed by Andrew Shipilov

Fail to Pivot: Battleship v. Lighthouse

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Sometimes no matter how strong your resources are, you still can’t win. In those cases, it’s critical to avoid conflict so you can fight another day. This classic video depicts a battleship demanding that a rival change course to avoid collision. This might be useful for competitive dynamics (game theory), entrepreneurship (failure to pivot) or strategy process (cognition & stubbornness) where it may be critical to know when to change course. Guoli Chen, Crossland, & Luo’s recent SMJ article on CEO overconfidence is a nice academic complement to this. Of course there is a large literature on escalation of commitment that is also relevant.

Contributed by Russ Coff

Stuck in the Middle Blues

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Samsung’s profits are down by a whopping 25% and they put the blame firmly on Chinese competitors entering with cheaper smartphones (see this NYT article). Companies like Xiaomi and Huawei have increased market share in China over the last year as they sell good products at break-even prices. Now, they have turned their sights on western markets that eat into Samsung’s bread and butter. Pressure on Samsung to respond with lower prices? Perhaps but Apple continues to compete effectively at the high end. It’s proprietary operating system keeps rivals from fully imitating many of the most important product attributes. For now, Samsung is signalling that it will accelerate efforts to differentiate their products — an innovation war more than a price war. The real winner may be Google which gains as Android dominates growth in this market. As you can see, this “live” case allows one to explore the complexities of how different strategies play out in the market. It also pushes us to explore how a sequence of strategies might unfold leading to a longer term competitive advantage. This case might go nicely with the HBS case on Samsung’s dual (cost/differentiation) advantage in memory chips and the threat of Chinese rivals. Of course, in the race for new features, one wonders what they will think of next…

Heard Through Michael Leiblein

Taking Strategic Risk for a Spin

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Individuals and firms have different tolerances for risk. This video certainly captures fearlessness (and maybe stupidity). This might lead to a nice discussion on how such different attitudes might affect competition (for example between small and large firms). It also might seed a discussion of how decisions are made or human capital.

Contributed by Russ Coff

Coopetition: Shaping up your strategy

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This exercise is a simplified version of the Global Alliance Game. That is, there are resource complementarities created among teams. However, this one emphasizes (to a greater extent) that the teams are in direct competition to complete the same tasks. As such, it is a nice exercise to explore coopetition and alliances with competitors. Introduce the exercise as an experience with the use of resources needed to accomplish a task that have been distributed unequally. Form the groups. Groups should be placed far enough away from each other so that their negotiation positions are not compromised by casual observation. Distribute an envelope of materials and a copy of the accompanying task sheet to each group. Explain that each group has different materials, but must complete the same tasks. Explain that groups may negotiate for the use of materials and tools with other teams. The first group to finish all the tasks is the winner. Give the signal to begin. When the groups have finished, declare the winner. Then conduct a discussion on using resources, sharing, negotiating, competing and using power.

Group Materials (Groups may negotiate with each other for the use of needed materials and tools on any mutually agreeable basis):

The Key Lime Market Sours

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This NYT article about the scarcity of key limes, and the concurrent price increase, is perfect for a PESTEL analysis. The current violence in Mexico (Political factor), rains when the trees were blooming and pests (environment) have resulted in poor harvests. The problem is compounded because of the increase in demand from Hispanics in the US, and the growing popularity of Mexican food around the world (social factors). The Florida plantations that used to be the main source of key limes were all but wiped out by hurricane Andrew and citrus canker (environment). Production moved to Mexico because of the weather, but also because legal factors (NAFTA) make it cheaper to import the limes from Mexico than from anywhere else. This explains why lately waiters have been asking if I want lemons or limes with my half and half tea…

Contributed by Susana Velez-Castrillon

Rival Analysis: A whale of a problem

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Sometimes firms think they are the “hunter” only to find that their rivals are stronger than they thought. Firms may find that they are the prey rather than the hunter. After an especially cold winter, this video may help to drive home that point. In the context of judo strategy, it demonstrates the value of going undetected until you are stronger than rivals expect. Finally, the video is valuable to illustrate the general issue of managing under uncertainty.

Contributed by Russ Coff

Winner’s Curse: Online Edition

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auction-0Gourmet adventures is a very nice exercise to demonstrate the Winner’s curse in class. The key takeaway there is that decision-makers need to try to understand how certain they are in order to figure out how much to shade their bids — something that few managers actually do. If you have an online course or don’t have time to do this in class, you might consider this simple winner’s curse online simulation (by Mike Shor). The Java applet works nicely to simulate bidding competition over a target including an estimate of the private synergies. Note that you may have to turn off popup blockers and lower security settings for the web page to run properly.

Contributed by Russ Coff

Adaptation on Rugged Seascapes?

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We teach strategy formulation in a dynamic world and yet many of our analytic tools may seem more static if we aren’t careful. For example, 5 forces offers an industry snapshot unless students know to explore how the forces evolve. I tend to introduce scenario planning, decision trees, and monte carlo simulations to incorporate the qualitative and quantitative dimensions of strategy formulation under uncertainty. This brief video provides a fairly graphic view of how it feels to managers. Of course, the seascape metaphor is a play on Levinthal’s classic article (adaptation on rugged landscapes)…

Contributed by Russ Coff

Tesla Strategy Sparks Cusiosity

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Melissa Schilling notes that, despite extensive automation (video below), labor usage is quite high. “There are 3000 workers in the plant, and Tesla produced a little over 20,000 cars in 2013. That’s about 7 cars per worker in a year (assuming the workers are full time). However, the GM Lordstown plant made 70 cars per worker last year (thanks Linos Jacovides for this stat), and in the well-known Renault-Nissan HBS case it reports that Nissan’s productivity was 101 cars/worker/year, and Renault’s was 77 cars/worker/year.” Given the automation, the workers are probably highly skilled (and, thus, well paid). Is Tesla at a huge economies of scale disadvantage? What might be the strategy? They are still 3 years away from selling a cheaper model so it will be a while before they can generate volume from a mid-market product. In the meantime, one possible solution may be found in Chinese sales of electric cars.

Contributed by Melissa Schilling

Paper Fight Exercise

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Having a paper fight in class can really shake things up. It also allows you to demonstrate some simple competitive dynamics principles in a very short exercise. I use this with evening, executive and BBA students — generally on the first day of class to shake things up and introduce the topic.

Learning Objectives:

  • Industry evolution and performance targets.
  • Strategic resources & competitive advantage
  • Dynamic capabilities and hyper-competition
  • Competitive dynamics and game theory
  • Improvisation and strategy
  • Shake things up!

Process/Setup (<5 min): Continue reading →

Budget Failure…

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Budgeting is often a political process where firms fail to make strategic choices and underfund all projects instead of picking the ones that deserve funding and giving them what is needed. This short Dilbert video gets at that squarely.

Contributed by Russ Coff

MicroDesign Negotiation: Cross-business coordination

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This exercise focuses on the problems with designing incentives and structures to promote the cooperation across divisions needed to achieve synergies. MicroDesign is a negotiation to transfer a technology between 2 divisions of a corporation in order to take advantage of a market opportunity. Sub-optimal agreements (money left on the table) represent transaction costs and inefficiencies that must be overcome in order to create corporate value.

There are two roles (Gant and Coleman). One division, Household Appliances (HA), has developed a new technology that has value if sold outside of the company. However, the division does not have a charter to sell chips. In order to take advantage, the technology must be transferred to the Chips & components (CC) division. Continue reading →

Heroic Assumptions…

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Often strategy is geared toward upside scenarios that may not be particularly realistic. This can be ok when using tools like real options (e.g., the strategy is part of a portfolio of options). However, one would have to make a case that at least some of the options might be in the money…

Contributed by Russ Coff

Outliers and Competitive Advantage

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Competitive advantage is often driven by outliers. However, betting on outliers can be risky business. This video illustrates that average performers might be better over the long haul unless you are able to really identify who the outliers are (and it is not based on luck). Denrell and Fang have a nice paper on how trying to pick extreme outliers will mean that you are wrong most of the time.

Contributed by Russ Coff

Impossible Goals…

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This gets at diagnosing problems when failing to achieve goals. Which is the problem, “the impossible goal, the il-advised goal or the one you never told me about?” Nice discussion starter…

Contributed by Russ Coff

Strategy in Volatile Times: 1885-1925?

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You thought things were volatile now? Professor Rumelt shows us how more change occurred a hundred years ago. He then goes on to explore the elements of a good strategy in the context of change and uncertainty. This goes nicely with Professor Rumelt’s McKinsey Quarterly article.

Contributed by Russ Coff