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.
Contributed by Peter Klein
Human capital is often considered to be a critical component of valuable capabilities. However, it is intimately tied to value capture in that one might anticipate that those who have valuable and rare skills might also be in a position to appropriate rent. Is it a competitive advantage if the resulting value does not flow to shareholders? The following survey gets at this question and may spur interesting discussion among academics and students alike.
Human Capital Competitive Advantage Survey
Contributed by Russ Coff
The Alphabet Soup exercise was posted here earlier as a general exercise to flesh out the impact of cognitive traps when applying frameworks. This focuses students to think about how frameworks, while valuable, could lead them astray as they try to analyze complex problems. A special application of this lesson is in the discussion of the problem of Architectural Innovation (see Henderson and Clark, ASQ 1990). That is, when firms are very familiar with a set of components, a small change in how they interact may create a very difficult adaptation challenge. Here, the letters in the alphabet are the components and a simple priming tool gets people focused on how these components relate. This exercise is very easy to run and makes the point powerfully how such cognitive frames may prevent people from reaching obvious solutions.
It’s been a red letter week in terms of the business combination scavenger hunt. In addition to Dyson entering electric cars, now we see Aston Martin going into the submarine business. These are both serious ventures. Dyson has had 400 staff members working on this project for over two years and expects to bring a product to market in 2020. One can’t resist wondering if it will really suck (I know, vacuum humor isn’t in vogue — if it ever was)…
More seriously, Dyson is a private company and so won’t face as much market pressure to explain why/how the business portfolio creates value. Also, while most of us are more familiar with their vacuum business, they are a diversified manufacturing company. This includes supplying inputs for the automobile industry among others. One might argue that they have more complementary assets to produce electric cars than Tesla had when they first started. But still…
Aston Martin’s effort is also serious. It’s worth noting that, unlike Dyson, they plan to do this with a partner, Triton Submarines, that is already a player in the luxury submarine market.
Drawing on the Strategy Diamond framework, a vehicle is the mode used to acquire resources needed to enter a new market. In this context, why would Dyson use organic growth to enter electric cars while Aston Martin forms a strategic alliance to enter submarines? In each case, the firm lacks important resources needed to enter. One might apply Capron & Mitchell’s Resource Pathway’s Framework. This could lead one to conclude that Dyson is overestimating the relevance of its internal resources (to go without a partner). In the case of Aston Martin, since their partner has all the capabilities needed to produce the product, the main asset that Aston Martin brings is their brand. This may be useful to court customers who are James Bond fans — Perhaps not the largest market segment among those seeking submarines.
Meanwhile, Ikea just acquired TaskRabbit — presumably a bid to vertically integrate into assembling the furniture they sell in kits.
These efforts do not necessarily restore one’s confidence in managers’ abilities to make reasoned decisions about the scope of the firm.
Contributed by Russ Coff
Shareholder activism is often identified as a mechanism to discipline managers and keep them focused on value creation for investors. An NPR story reports that shareholders in a zoo near Shanghai, frustrated that they weren’t making a profit on their investment, fed a live donkey to zoo tigers as a form of protest. At a shareholders meeting they voted in favor of feeding the donkey to the tigers to express their anger. Their objections center on the zoo’s debts and legal troubles. For two years, the investors said the venture has not been profitable. The video of the event has stoked public outrage and condemnation. While this is a rather unusual example of shareholder activism, it may spur some fruitful discussion in class. One of the interesting elements of this action is that the Corporate Social Responsibility literature would lead us to expect that investors have idiosyncratic preferences and will make trade-offs on returns (see this article by Mackey, Mackey & Barney). For example, one might expect that investors in a zoo would be willing to trade off financial returns to care for animals. A protest of poor profitability that hurts an animal seems especially unlikely. Yet there is is. As the cartoon implies, there are other ways for investors to protest…
Contributed by Russ Coff
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.
Contributed by Aya Chacar and Russ Coff
Students might be confused about time compression diseconomies as a foundational component of a resource-based advantage. However, Dierickx and Cool’s (1989) idea here is quite simple: It may take time to build a resource or capability and even if rivals know the source of an advantage, they may not be able to recreate the resource in a timely fashion. Of course, Barney (1991) captures this as history or path dependence being the barrier to imitation. This simple video illustrates the principle (in a darkly humorous way). Of course, in this case, our protagonist merely needs to incur some search costs to find a fully grown tree. There is no practical way to rush the process to get the tree to grow substantially faster.
Contributed by Russ Coff
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.
Contributed by Isabel Coff
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.
string of educational videos that leverage this “confusion” technique to teach principles of science here.
You can find a
Contributed by Rich Makadok and David Kryscynski
Ronnie Chatterji and Charlie Williams have put together an excellent research podcast series. They describe it as “Big ideas from business school professors.” It offers an excellent bridge between cutting edge business research and the world of practice. The podcast is sponsored by the Strategic Management Society (publisher of the Strategic Management Journal, Strategic Entrepreneurship Journal, and Global Strategy Journal). You can find the podcasts at iTunes, Soundcloud, and YouTube among other places. Want a quick taste? Here are some of the topics that this reviewer found especially interesting in the realm of entrepreneurship and innovation:
Contributed by Russ Coff
Early movers stand to lose if late movers learn from their mistakes and enter with better product offerings or better strategies. Classic early movers who lost include Osborne Computer Company (subsequently overtaken by Compaq) or EMI’s exit from the CT Scanner business. Myspace and AoL might also be counted among early entrants that ultimately fizzled.
That said, early movers can can gain key assets that make it hard for rivals to enter and compete. You may have noticed that “JebBush.com” takes one to Donald Trump’s home page and there are numerous other political misdirections along these lines for other candidates. Similarly, Tesla Motors has only just gained ownership of the Tesla.com domain (probably at a handsome price). In this way, there can be a race to secure resources and capabilities to take advantage of an opportunity and others are in competition for those resources even if the resources are firm specific (as candidate domains tend to be). From a scholarly standpoint, such resources can be approached from a variety of perspectives including strategic factor market theory, Coasean bargaining, or first mover advantages. Of course, there is a humorous side to all of this. SNL has captured this nicely in their spoof commercial for Dillon Edwards Investments (note that this may be a bit “saucy” for many classrooms but we’re all adults here).
Contributed by Peter Klein
Knowledge and intellectual property inherently complicate exchange (e.g., property rights are poorly defined, the value is unclear, there are high transaction costs). One manifestation of this is the disclosure problem (Arrow’s 1962 information paradox). Figuring out the “price” for an idea requires revealing data which intrinsically reduces its value. Entrepreneurs often have ideas stolen by larger corporations that have significant complementary assets. Accordingly, they often try to go it alone despite the fact that their lack of such resources may ultimately create less value (for example, Tony Fadell tried to go it alone before bringing the iPod idea to Apple). His alliance with Apple turned out very well. However, this is often not the case. This clip illustrates what happened to Kramer (on Seinfeld) when he approached Calvin Klein with his idea for a new cologne called “beach” hoping to access their resources while gaining a signal of the idea’s value. He reveals the idea in an effort to obtain both. While it is funny, it will also kick off a serious discussion on this issue.
Contributed by Michael Leiblein, Marcel Bogers and Marcus Holgersson
American Eagle Outfitters has shown strength among teens at a time when hipster Abercrombie & Fitch is struggling (see this WSJ article for details). The company credited their “Don’t Ask Why” collection in part for its 3% increase in revenue. They referred to the collection a cost-effective “testing lab” to spot trends. By experimenting with new fabrics, washes and styles, they believe they can gauge which styles are gaining favor and add them to the regular collection. American Eagle said the process was key to turning around the company’s tops business, which is now one of the best-performing segments. For example, one of the trends is to abandon the logo covered clothing that was popular in the 1990s. For class, this might make a discussion of dynamic capabilities much more tangible than the academic literature has so far achieved. How do they do it? Does this confer an advantage? If so, to what extent is it sustainable? Of course, this is also an opportunity to bring research into the classroom. For example, one might have students discuss whether this example looks more like Eisenhardt & Martin’s view or dynamic capabilities or those of Teece, Helfat, Peteraf, Winter or others (even Coff had something to say about this ;-).
Contributed by Aya Chacar
Maybe you could use this in your PhD seminars? This video depicts the … um … normal process for defending one’s dissertation. Its hilarious and is bound to bring back fond memories for anyone who has been through the process…
Contributed by David Kryscynski
What is the most significant thing that differentiates entrepreneurs from others? Somehow, in the face of overwhelming odds that they will fail, they still manage to push forward. Rejection, almost inevitable, doesn’t deter them. The rest of us kill inventive ideas before we even test them because we fear rejection. This NPR story explores a new form of therapy where rejection is turned into a game: how many times can you get rejected in a day? Could desensitizing people to failure create more entrepreneurs? This also has important implications for academics who typically face many rejections from journals for each manuscript that gets accepted. Without “rejection therapy,” they may avoid sending papers to journals because they are concerned that the work will be rejected. Like would be entrepreneurs, they kill ideas before they have had a chance to test the waters.
Contributed by Don Hatfield