Strategic Alliances don’t make the news the way M&A do so some may struggle for examples. It is especially helpful to make students aware that, while Alliances may be less risky than M&A, there are still risks that need to be analyzed. Tom Petty provided a useful example to apply the “Four C” alliance framework. Like many musicians, he signed a contract with a record label before he made it. He and ABC had Complementary capabilities needed to develop and promote hits. Initially, they had Congruent Goals in that their interests were aligned to make the band a hit. Organizationally, they were Compatible in that they were able to coordinate effectively. What Petty failed to anticipate was how things would Change over the course of their agreement. By their 3rd album, he felt that the arrangement was so unfair that he tried to back out of the agreement claiming that ABC had no right to sell the contract to MCA. Ultimately, he only got out of it by declaring bankruptcy. The song, Refugee captures the anger he felt over how he was treated by the record companies and offers a nice lead in to the discussion. This also brings out a discussion of bargaining power and how it may change over time.
When there is a new lucrative opportunity, a small number of firms may exploit it initially. However, if the opportunity is visible to others and the entry barriers are low, the market will soon be swamped. This short video illustrates this vividly (best w/sound off):
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.
Strategies rarely work out as planned but somehow, students remain eternally hopeful that everything will go exactly as they expect. This experiential exercise allows students to “feel” Mintzberg’s (1994) critique of strategic planning. It also helps to illustrate and compare causation and effectuation decision-making logics (e.g., finding entrepreneurial opportunities). You can bring “Deflategate” (from the 2015 NFL season) to a classroom near you. The exercise proceeds as follows:
Inflate ball & sit on it. Ask 2 volunteers to inflate a heavy duty inflatable ball using a small air pump (one can buy these a sport store) and try to sit on it afterwards for a minute. While introducing the exercise, the instructor should keep the plug hidden in her/his pocket. Inflating the ball is amusing (both the volunteers and the audience). It is not easy or quick to inflate the ball.
Where’s the plug? After inflating, students look for a plug. The instructor waits a few seconds and takes the plug out admitting that she/he had it all the time. The class will laugh. It may be frustrating for the volunteers but then we begin the debrief and explain the reason for the deception in the exercise.
Debrief: According to Mintzberg, decision-makers (those who inflate the ball) expect everything will go smoothly according to what they planned but usually some unexpected circumstances occur that alter the plan’s effectiveness. Decision-makers cannot anticipate everything and the exercise drives this home and shifts focus to decision-makers’ bounded rationality. It is quite rare that students will look for a plug before doing the exercise (though it happens on occasion). One might move from here to discuss innovation, business models and disruptive innovation.
This is another in our series of explorations in learning from failure (and learning from success). The Swedish Museum of Failures reminds us of some of the most spectacular product failures. Interestingly, most of them can be closely linked to some spectacular product successes. A complete failure may be a near miss. Perhaps a slight pivot away from extreme success. This video offers a window into some of the more interesting exhibits in the museum. One might ask students to review the video and imagine how a well-placed pivot might have helped each failure turn the corner. This might also fit with some of the toolbox posts on pivoting.
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).
Will presents his 5 forces plus 3 more framework. In the video, he discussed the standard 5 forces framework but adds the following 3 critical elements that are left out of the five forces: Complementors, Social forces, and new strategies. Complementors are organizations that provide complementary products or services to an industry (e.g., cases for iPhones). New strategies refer mostly to rivals who are pursuing distinct strategies that may alter the fundamental way that firms compete in the industry. Social forces refer to the customer values and norms that may affect their preferences and thus, their willingness to pay. In short, these additions may serve to unpack factors that drive change in the five forces over time in an industry. Here is the video:
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:
Successful strategy is often a combination of luck firm specific skills and favorable conditions. AmorePacfic makes a great ripped-from-the-headlines case since it rose to be the #1 South Korean firm buoyed by a growing and large domestic demand from a growing population. Hallyu – the Korean equivalent of Hollywood was also a driving factor as South Koreans want to look like their favorite stars and use the same cosmetic products and that includes men. In fact, it is estimated that a whopping 20% of South Korean men use cosmetic products on a regular basis. AmorPacific capitalized on this growing trend by building up its brand and investing in R&D and ultimately riding the popularity of K-pop and K-movies to expand internationally. At a time that demand is softening, K-cosmetics are still growing with exports increasingly exceeding imports and Korean cosmetics brands now more popular than European brands in China and increasing their penetration in many countries including China, Hong Kong, Japan, the US, Vietnam, and in a surprising list of other countries such as Poland where their addition to Sephora’s product line and other large retailers will ensure broad distribution. How has a $150 1.7 oz managed to gain global popularity? Some materials for the case might include:
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?
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.
PEST analysis can be helpful to identify trends or factors outside of a firm’s focal industry that will ultimately affect the industry. It stands for Political, Economic, Socio-cultural, and Technological factors. PESTEL is a similar framework that adds Environmental and Legal trends to the mix. The PEST framework is simple but it has the advantage of focusing trend analysis efforts so you can cover ground in a more systematic fashion (than, for example, SWOT analysis which is quite unsystematic). Shad Morris’ video below offers a great introduction to the analytic framework.
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.
Sometimes students struggle with how a firm can have valuable, rare, inimitable resources and still not have an advantage. This is central to the resource-based view and the VRIO framework. This clip from “Triumph of the Nerds” shows how PARC Xerox developed the GUI interface, object-oriented programming, and local area networks. Then it shows how they failed to exploit any of these innovations. In particular, it shows how Steve Jobs toured PARC and lifted the GUI to create the Macintosh computer. Here is a nice discussion of what the Xerox engineers thought of Steve Jobs’ visit. This can lead to a nice discussion of intellectual property, complementary assets, internal and external analysis. It is useful to show the first half (first 4.5 minutes) and ask students to speculate on why we don’t all have Xerox computers. Then the second half explains how Apple exploited the innovations.
Pivoting from one strategy to another is essential for entrepreneurial firms but also for more established firms operating in a dynamic environment (see other materials on dynamic capabilities on this site). The video below can stimulate a conversation on what it takes to pivot (both in entrepreneurial and established contexts). Of course, its also moderately entertaining…
Chrome has been sucking power from your laptop batteries. Google has been playing catch up to Apple’s Safari in terms of power consumption on Mac computers for some time. Apple’s product is optimized to be more efficient to their own proprietary operating system while Google is optimizing development efforts across platforms. Indeed, Microsoft’s Internet Explorer also enjoys a power consumption advantage on Windows machines. Of course, this could just be a flaw in Chrome but it does seem like it might be linked to specialization on a single platform as opposed to cross-platform compatibility. Strategy classes might explore more deeply how valuable the advantage of vertical integration might be in this case. Also, what type of organization must be in place to realize this potential value. Of course, the ad revenue gleaned from these products may justify vertical integration but it is less clear how this would create value for users. Power consumption, on the other hand, would be important to users.
Rather than fully embed superior design capabilities in organizational routines, Apple has instead identified and promoted Jony Ive into the design guru role once occupied by Steve Jobs. Ive “worked closely with the late co-founder Steve Jobs, who called Mr Ive his spiritual partner on products stretching back to the iMac.” As before, the reliance on a single person in this role raises key questions: An article published in the New Yorker earlier this year described how “Mr Ive had been describing himself as both ‘deeply, deeply tired‘ and ‘always anxious’ and said he was uncomfortable knowing that ‘a hundred thousand Apple employees rely on his decision-making – his taste – and that a sudden announcement of his retirement would ambush Apple shareholders.‘” Can this be described as an organizational capability? An organizational routine? A dynamic capability? Does it matter that the capability is largely embedded in a single person who is not an owner? All good questions to kick off a nice class discussion…
Contributed by Russ Coff
Here is a simple exercise to demonstrate competitive advantage on the first day of class. Hold up a crisp $20 bill and ask “Who wants this?” When people look puzzled, ask, “I mean, who really wants this?” and then “Does anyone want this?” Continue this way (repeating this in different ways) until someone actually gets up, walks over, and takes the $20 from your hand. Then the discussion focuses on why this particular person got the money. How did their motivation differ? Did they have different information or perception of the opportunity? Did they have a positional advantage based on where they were sitting? Other personal attributes (e.g., entrepreneurial)? The main question, then, is why do some people/firms perform better than others? This simple exercise gets at the nexus of perceived opportunity, position, resources, and other factors that operate both at the individual and firm level. Note that instructors should tell the class not to share this with other students. However, if you do have a student who has heard about the exercise (and grabs the money), asymmetric information about an opportunity is certainly one aspect of the discussion. The following “vine” might also help drive home the point about money and resources…
Economic bubbles reflect irrational escalation but there is always an element of underlying rationality. This classic exercise, the Dollar Auction, is an ideal vehicle to emphasize how this can come about — even with actors who intend to be rational. With much fanfare, the instructor auctions off a dollar bill (a very crisp one to reflect a “rare” asset). The bill goes to the winner; however, the second-highest bidder also loses the amount that they bid. The game begins with one player bidding five cents (the min), hoping to make a ninety-five-cent profit. However, a ten cent bid would still yield a ninety-cent profit (if bidding stopped there). If the first bidder bids ninety five cents, and the second bidder bids one dollar (for no net gain or loss), the first bidder stands to lose ninety five cents unless she bids $1.05. In this way, bidding continues well beyond a dollar, usually until one player issues a preemptively high bid to signal intent to outbid at any cost. Only the auctioneer gets to profit in the end. While the incentive structure is idiosyncratic, one might debrief with a discussion of why they didn’t anticipate this problem when they started bidding? This fits broadly in discussions where escalation is a risk (decisions under uncertainty, M&A, technology investments, etc.). You may find that some students have seen this exercise previously. However, it only takes two uninformed bidders to create a bubble. Of course, the following classic bubble video is a good fit in the debrief (came out right before the real estate bubble)…