Cutthroat Kitchen & Strategic Factor Markets

kt0201_alton-brown_s4x3_lgThis 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

China’s Comparative Advantage of Low Labor Costs: Think Again

globalbizComparative 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?

Contributed by Russ Coff

Princess Bride Iocane Powder: Anticipating rivals

20120522-143633Most 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).

Princess Bride fans might also appreciate this clip illustrating non-substitutability…

Contributed by Russ Coff and Jay Janney

What Strategic Change Feels Like

Managing change is given little time in most strategy courses. We often understate how difficult strategic change actually is and then wonder why organizations struggle so much with implementation (and our students think its all common sense). You can think of it as walking blindfolded on a tightrope between two solid foundations. During the transition, there is great uncertainty about whether the desired path is attainable. This, of course, is another way of looking at Lewin’s unfreeze/change/refreeze model. This video can help to illustrate the issue:

Contributed by Russ Coff

Fun and Game Theory

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
  • Prisoner’s dilemma
  • Asymmetric matching penny game
  • An air transport economics simulation covering price discrimination, vertical differentiation and peak-load pricing.

In addition, you may wish to check out some of their longer, commercial games (http://aireconsim.com).
Contributed by Nicolas Gruyer

Differentiation Can be a Pain in the Butt

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…

Contributed by Russ Coff

Bring Me Your Confusions!

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.

 You can find a string of educational videos that leverage this “confusion” technique to teach principles of science here.

Contributed by Rich Makadok and David Kryscynski

Research Chatter: Coffee talk for geeks

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

JebBush.com & Late Mover Disadvantages

DillonEdwardsEarly 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).

https://video.yahoo.com/dillon-edwards-investments-000000517.html

Contributed by Peter Klein

Entry Barriers (for Terriers)

content-marketing-barriers-349x171Entry barriers are a critical element of Porter’s five forces framework. A key question is how firms get around the barriers. While the framework is at the industry level, a central part of the discussion is how the entry barriers might differ for different potential entrants. Some will have complementary resources or capabilities that make entry much easier. If a firm is considering entering a new industry, they want high entry barriers for all firms — except them. This sometimes sounds too good to be true until you discuss critical differences in resources and capabilities. This (admittedly silly) Doritos commercial from Superbowl 50 illustrates entry barriers and how some creative dogs get around them…

Contributed by Russ Coff

Princess Bride, Nonsubstitutability & the RBV

screen-shot-2012-08-28-at-2-04-20-pmNonsubstitutability is a critical resource attribute for sustaining a competitive advantage. Otherwise, a rival may find a different resource that can nullify an advantage without actually imitating the focal firm’s resource or capability. An example might be Apple’s iPhone patent for the “screen bounce” when the user scrolls to the bottom of a page or list. Early Android phones had the same feature but, more recent phones, work around this patent by displaying a blue tinge at the edge of the screen (see picture) when one has scrolled to the end. In this way, many patents do not confer an advantage as rivals find ways to work around them and customers don’t perceive a significant difference in the product. In class, one might give this example coupled with the video below which depicts a battle between Fezzik and Westley in the Princess Bride — agility and size can be discussed as substitutes in determining competitive advantage (of course, Westley wins though he at first seems to be at a disadvantage).

PrincessBride-Nonsubstitutability (click to download)

Contributed by Russ Coff

Dr. Shad Takes you Global

Here are a couple of great videos from Shad Morris on international strategy. The first focuses on how to evaluate the overall health of a country’s economy. This is important in assessing the business environment for strategic investment. Is a given market attractive? This might also lead into a nice discussion of comparative advantage of nations. If so, this might be another application of the Global Game exercise. The second video offers the distinction between multi-domestic, mega-national, and trans-national.

Contributed by Shad Morris

A PEST to Infest Your Analysis

pest-analysisPEST 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.

Contributed by Shad Morris

Disney Wields its Princess Power

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.

Contributed by Russ Coff (HT Virgina Postrel)

Not Your 父亲 (Father’s) Buick

Buick will begin selling the Chinese-made Envision crossover in the U.S. next summer despite resistance from the UAW, which would prefer that it be produced in the U.S. The car is produced through a joint venture with China’s largest auto maker SAIC Motor Corp. Rather than produce the car in the U.S., GM plans to import the Envision from Yantai, China, where the joint venture has produced the vehicle for about a year. Through the first 11 months of 2015 it sold 127,000 of them in China. This example brings out several key points with respect to strategic alliances. Certainly the UAW viewpoint brings in a stakeholder perspective. However, SAIC is also potentially a competitor. It’s home market has sheltered it while it gained capabilities to produce on a very large scale. Recently, growth in the Chinese auto market has slowed which may push SAIC to seek other growth opportunities. This venture with GM may help it gain capabilities that allow it to enter U.S. and other world markets. In sort, this is a nice case to apply the “Four C” alliance framework (or other alliance tools) to identify whether the alliance is likely to create value for both sides (and for how long).

Contributed by Russ Coff

Is ESPN the Right Toon for Disney?

Between the Football games, you may have seen that ESPN is losing subscribers in droves (7M lost in the last 2 years — about 7%). Not only is it dragging down Disney’s stock price, its a weight on the whole industry. This is an interesting problem to discuss in class. Of course, Disney’s corporate strategy always provides fodder for discussion (see our discussion of the multi-business strategy around Frozen). I have asked my class the following questions:

  • Discipline. As a stand-alone business, you might start with what needs “fixing”? Why hasn’t Disney fixed it already and is there another company better positioned to fix it?
  • Potential Synergies? Digging further, as a part of Disney’s portfolio, you might ask why ESPN would be worth more as a part of Disney than it would be as a stand-alone company or as part of another company. For the most part, Disney can’t leverage it’s content, characters, or brand to enhance the value of ESPN. What can they bring to the game?
  • Should they sell it off? If Disney doesn’t add much here, who do you think could create more value with ESPN? What would be the next steps?

Contributed by Russ Coff

Lego Industry Ecosystem

Lego profits have more than doubled in the last five years. The company has sold non-core businesses and doubled down on the core building block products. They are the undisputed king of building toys. A recent New York Times article describes the lay of the land brick by brick. Lego has focused on more wholesome building themes (Star Wars, etc.) while rivals have sought space where they don’t have to directly compete. For example, Mattel’s MEGA unit has a series of much more realistic building sets (Sponge Bob, Terminator, and Star Trek). Similarly, McFarlane toys has a very successful series of “Walk Dead” building sets that deviate from the image Lego prefers to maintain. In addition to competitors seeking to differentiate, many complementors have emerged such as Pley which offers Lego set rentals (the “Netlix” of the Lego world) or numerous used Lego trading businesses (here is one in Madison). Interestingly, research suggests that these Lego sets may actually reduce creativity — especially compared to the older version that involved a simple bucket of bricks rather than a kit to build a specific thing. Of course, their move into Lego films brings in an interesting discussion of diversification.

Contributed by Russ Coff

Smartphone Scavenger Hunt

Of course there are a spate of Chinese entrants into the Smartphone space. This probably comes as no surprise since many of them have been manufacturing phones for other firms and have large local markets that help to incubate their capabilities to become global players. In addition, there are some players that seek to leverage very different capabilities into the smartphone space. For example, I have reported here on Boeing’s efforts to leverage their defense contracting capabilities — now, it would appear that the U.S. government is interested in Boeing’s self-destructing Black phone. More recently, Pepsico is entering the fray with a branded Android phone. These examples fit nicely with the business combination scavenger hunt exercise. Of course, it is worth noting that Pepsi and Boeing are entering via strategic alliances with key players who have significant capabilities. Given these very different approaches, capabilities, and entry modes, one might have a fruitful class discussion of the emergent competitive dynamics in the industry.

Contributed by Russ Coff

Discussing Terrorism in a Strategy Class

I started my class last Saturday with words of hope that my students’ friends and family were safe. Since I teach in Madison Wisconsin, it was a fair bet that they were not heavily touched. This first response is probably a good starting point. However, where does the discussion in a strategy class go then? Here are a few brief thoughts:

  • Responding to the humanitarian crisis. From there, one might explore how firms can respond to the humanitarian crisis. Do the Syrian refugees and terror victims all over the world pose an imperative to which businesses must respond? How can they help? What types of businesses can make a real difference?
  • Responsibility to shareholders. Should firms help even if this hurts shareholder returns? Of course, helping people can build a firm’s reputation. When would this come into play and how can firms position such actions to help firm performance (eliminating any conflict with shareholders)? If it does hurt profitability, when is that justifiable? When is it an imperative?
  • Global strategy. How should firms develop and execute international strategies in a more uncertain business environment? How should they balance this type of risk in their portfolio?
  • Employee Welfare. What steps should be taken to assure employee welfare and/or help employees in need?
  • Opportunity. Some firms may see economic opportunities amid the uncertainty. Of course, defense contractors and security-related firms may win. What other types of firms might see opportunity? See, for example, the video below about Ikea’s refugee shelters or bulletproof blankets for kids in response to school shootings.
  • Exploitation & Fraud. One of my students pointed out that some firms may take advantage the situation and play off of people’s fears. This might be considered the unethical side of opportunity and is certainly important to discuss as well.
  • Broader economic impactAndrew Ross Sorkin offers a brief discussion of this. Conventional wisdom (from studies of the economic impact) is that attacks cause only small blips in GDP and stock markets. However, the political impact and the diversion of resources to agencies like homeland security and defense contractors show up positively in GDP and so understate the impact. Isolationism also may impact global trade well beyond the initial shock.

You may notice that I offer questions rather than answers. I think this topic is fruitful for class discussion and I would hope to learn from the students. I only wish I had answers…

Contributed by Russ Coff