TMI Vorlesung 3

Corporate Strategy can be defined as “...the pattern of major objectives, purposes or goals and essential policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be...”.

Strategic Management is a way of approaching business opportunities and challenges aimed at formulating and implementing strategies that promote a superior alignment between the organization and its environment and the achievement of its goals.

What type of strategy ensures the most effective environmental adaptation and efficient allocation of resources necessary for carrying out these goals?

Reflects the plan rationally conceived and conceptualised by management to achieve a predetermined clear goal.

Is the strategy that is eventually implemented. It passes through a multitude of negotiations, agreements and compromises.

• Is the predominant part of the implemented strategy, which is formed from individual decisions.

• Comes from a complex social process in which individual managers interpret and adapt the communicated strategy.

Plan, Ploy, Pattern, Position, Perspective

The five P’s of strategy show different conceptions of the term strategy. Depending on the perspective, strategy can mean different things.

An intentionally selected course of action or guideline to manage a situation

A specific dynamic maneuver to overcome the competition (in battle)

A pattern in a stream of actions that reflects consistent behavior of the organization

The match between the organization and its environment (competitive advantage)

An abstraction existing in the individuals’ minds. Shared visions and mental images form a common understanding and culture within the organization.

• Articulates the position that an organization would like to attain in the distant future

• Future aspirations that lead to an inspiration to be the best in one‘s field of activity

• Creates identity and shared purpose

• Inspires and motivates

• Long-term focus, low complexity, high abstraction

• Describes what an organization is and why it exists

• Essential purpose of the organization, concerning questions like “What is our business”, “Who are our customers”

• Feasible and reachable

• Precise and clear

• Mid- to long-term focus, medium complexity

• Bundle of decisions, actions and behaviors that aim at achieving long-term success

• Aligns (1) strengths & weaknesses, (2) opportunities & threats, (3) objectives & values, and (4) stakeholder expectations

• Mid- to long-term focus

• High complexity

• Low abstraction

Capability of companies to identify market opportunities

Focus on market-relevant characteristics

A company's strategic resources, skills and competences are the foundation for competitive advantage

Focus on the internal perspective

Privileged market positions (barriers to competition) arising from the structure of the market

Competition within industry leads to asymmetries (industry position)

Market Structure-Conduct-Performance

Main author: Porter (1980)

See also: Monopoly rents

• Static view

• Focusing on (short-term) industry competition

• Neglecting resources / firm idiosyncrasies, complementarities and path dependencies

Distinctive, valuable firm-level resources that competitors are unable to reproduce

Valuable, Rare, Inimitable, Non-substitutable (VRIN)

Resource-Conduct-Performance

Main authors: Wernerfelt (1984), Barney (1991)

See also: Core-competence view, Ricardo-rents

• Ignoring factors surrounding resources (e.g., markets)

• Potentially tautological framework (e.g. if value is defined as giving competitive advantage)

The concept of dynamic capabilities expands the resource-based view.

Resting on distinctive processes (ways of coordinating and combining), shaped by the firm's asset positions (such as the firm's portfolio of difficult-to-trade knowledge assets and complementary assets), and the evolution path(s) it has adopted or inherited

Integrate, build, and reconfigure internal and external competences to address rapidly changing environments

Resource development and renewal

Teece (1991), Winter (2003)

Potentially tautological framework (same argument as with Resource-Based View)

Innovation Strategy is a part of overall business strategy that determines when and where innovation is required to meet the aims of the organization and lays out in broad terms what is to be done about it.

• Where is innovation needed and which dimension of innovation is needed? When to enter a market?

• How much change is required? How high is the aspired level of newness?

• Which distinctive competencies and capabilities are necessary to establish and maintain competitive advantage? Should we build the competencies ourselves or partner with others?

• How should innovation be organized and managed to meet changing environmental conditions?

• The market segments and target customers to be addressed

• The product policy guidelines

• The timing of the product launch

• The required technologies

• The allocation of resources regarding these technologies, including make-or-buy decisions

• The timing of technology development (technology roadmaps)

Both strategies result in a self-reinforcing cycle. Product-market strategy and technology strategy are linked via platforms or the company's core products.

The S-Curve model is a conceptual foundation for technological development.

• Technology S-curve models are based on the idea of technology life cycles (birth, growth, decline of technologies)

• S-curve is a graphical design that demonstrates the performance of a technology relative to its cumulative R&D investments

• Slope describes R&D productivity, i.e. the increase of performance of a technology by an additional use of R&D resources

• Shape is due to slow introduction phase and natural performance limits

• At any time, technologies can reach their natural performance limits at least in a certain application area

• Totally new technologies arise and will substitute the current technologies

• Technology S-curve is a centerpiece in thinking about technology and innovation strategy

• Inductively derived theory of the potential for technological improvement

• Useful insights at an aggregate, industry level about the potential of the technology

• Selection of Technologies to be integrated in the analysis

• Determination of the performance scale

• Estimation of the cumulated R&D investments of the analyzed technologies

• Big uncertainty regarding the further development course and performance limits of the analyzed technologies

• Not all technologies follow s-curved patterns (Sood/Tellis 2005)

Newness of the technological principle (change in s-curve), changes in the architecture, and/or leaps in technical performance

Required changes in the organization (processes, competences, structure, culture, strategy), lacking internal resource fit

New customer value, creation of new markets, increase in adoption risk, and/or changed value chain

Required changes in the environment (infrastructure, norms, values, legislation), lacking external resource fit

A radical innovation has high novelty in all four dimensions: Technology, Organization, Market, Environment

• Higher customer benefit through new functionality

• Differentiation from the competition

• Temporary monopoly

• High risk of technical and market failure

• High complexity and high costs

• Understanding and adaptation problems with customers

• Lack of synergies with existing capabilities

• Overall, cumulative evidence suggest a positive effect

• The market dimension has a strong positive effect

• The organizational dimension has a negative effect: organizational consequences of innovation are often not accounted for

• Surprisingly, the innovativeness on the technology dimension has no direct effect

• The environment dimension also has anegative effect

• The degree of technological innovation has an indirect effect on success because it positively influences the other three dimensions; the overall influence is therefore zero, because positive and negative indirect effects are equally strong

• The cumulated influence is inverted U-shaped (there is an optimal degree of innovativeness)

The relationship between innovativeness and success is complex, but not unclear

• Systematic evaluation of the degree of innovativeness before and during the project is essential.

• Organizational and environmental dimensions must be taken into account in project evaluations.

• A sense of proportion in selecting innovation projects is necessary -> no innovation for the sake of innovation.

• Classic project success criteria are rather unsuitable for innovative projects and can lead to early project termination.

• Conscious selection of a small number of highly innovative projects in combination with incremental projects -> portfolio approach to innovation is necessary

• Innovations were technologically straightforward and often discovered by incumbents.

• When innovations improved the performance on dimensions that customers historically valued (capacity/recording density), incumbents tended to lead commercialization.

• When innovations did not improve along this trajectory but introduced a unique constellation of new attributes (e.g. small, lightweight, rugged), new entrants led development while incumbents failed.

• This pattern was observed consistently across multiple technological generations and product lifecycles.

Managers’ logical, competent decisions that are critical to their

company’s success are also the reason why they lose their positions of

leadership:

1. Pace of technological progress outstrips customers’ demand for

higher-performing technologies: incumbents overserve demand,

leaving gap at the bottom for new entrants

2. So-called “disruptive technologies” do not give benefits to important mainstream customers – they are only valuable for very different newstream customers

3. Existing customers and profit models constrain incumbents’ investments in new innovations: incumbents lack motivation to invest in disruptive innovation

• Sustaining technologies improve the performance of established products along the dimensions of performance that mainstream customers in major markets have historically valued.

• Although incremental innovations are typically sustaining, a radically new technology with completely new customer benefits can also be sustaining.

• Disruptive technologies are innovations that first result in lower product performance in established value networks but offer a new mix of performance attributes.

• For example, disruptive technologies may be cheaper, simpler, smaller, more accessible or more convenient to use.

• Leading firm’s most profitable customers generally do not want, and initially cannot use, products based on disruptive technologies.

• Disruptive technologies typically are first commercialized in emerging or insignificant markets.

Low-end Market

New Market

• High margins, well-known and profitable customers

• Ever improving products

• Adjusted processes

• Poorly defined customers

• “Good enough” products

• Steel industry (minimills)

• Discount retailers

• Turn non-consumers into consumers

• New value network

• New challengers in the photocopying industry provided affordable solutions to individuals (former non-consumers)

• Sony’s transistor pocket radio

• Disruptive is relative

• No innovation is inherently disruptive

• A given innovation can be disruptive to one firm but sustaining to another firm

• For instance, the internet was a sustaining innovation for mail-order retailers, while it is disruptive for in-store retailers

Technologies and business models go together – disruptive innovation must be evaluated relative to a firm’s business model

Absorb the disruptive technology by building a separated organizational function.

• Strengthen the core business and relationships with customers by building sustaining innovations

• A separate organizational to focus on growth opportunities of disruptive technologies.( separated from the core business)

• New unit is unencumbered by existing customers demand, margins and market-size thresholds

• Re-integration to the main organization after success and growth

Empirical support for success (Christensen andRaynor, 2003, Gilbert 2006)

Separation also has disadvantages (Gemünden/Salomo/Krieger 2015; O’Reilly and Tushman 2016) :

• Creation of interfaces that need coordination

• Higher visibility of new unit (easy to terminate)

• Redundancy (lacking synergies with mainorganization)

• Internal competition and conflicts with main organization

• Resource intensive

Organizational separation does not have a significant impact on innovation success in case of radical innovation (Gemünden/Salomo/Krieger, 2015)

• Aggressively invest in existing capabilities to extend current performance-improvement trajectories to slow onset of disruption

• Reposition in profitable new niches

• Co-opt disruptive entrants once they start challenging incumbents’ market leadership (e.g., partner, license startup technology, acquire entrants)

• Pursue technology reemergence: redefine the meanings and values associated with legacy technology (and create new performance dimensions)

• Hybrid offerings (combine features of emerging and existing offerings): Hybrid cars, online newspapers, hybrid brick-and-mortar/online video rental

• Insulate disruptive innovation efforts from evaluation metrics that favor sustaining innovation (e.g., discounted cash flow)

“We want to be on the leading edge - not on the bleeding edge.”

(Pat Gallagher, Managing Director, BritishTelecom Europe 1997)

“You don ́t have to get the first bite of an apple to make out. The second or third juicy bite is good enough. Just be careful not to get the tenth skimpy one.” (Unknown source in Theodore Levitt)

• Establish barriers to imitation

• Reap early profits

• Leadership reputation with customers & users

• Create switching costs

• Lock-in key suppliers

• Define industry standards

• Pre-empt scarce and valuable resources

• Capitalize non-linear effects of s-curves, learning curves, and diffusion curve (see following slides)

• Incur pioneering costs, from which followers can also benefit

• Experience greatest demand uncertainty

• Experience difficulties of unproven technologies (“bugs”)

• Cope with changing customer/ user needs

• Make irreversible specific capital investments

• Cope with unexpected low-cost imitation

Prime physical locations with access to local resources: natural resources, traffic flows, financial flows, consumption flows, local knowledge-flows, political decision-making flows, etc.

Prime access to communication flows through control over mass media like radio, TV, print media, heavily visited sites on the web.

Prime access to knowledge generating and diffusing institutions, which act as competence center & diffusion agents. (e.g., TÜV, food and drug administration in the U.S.)

Attracting and activating high potentials and their cooperation through an entrepreneurial achievement-oriented culture.

Exclusive rights for business licenses, exclusive occupation of legal rights like patents, trademarks, or trade-secrets.

Access to physical distribution (particularly relevant for consumer goods in a highly concentrated retailing industry).

• Higher performance, higher reliability, and/or higher quality of products and/or processes (i.e., Advantages typically shown on s-shaped technology curves)

• Higher flexibility and individuality (e.g., mass customization of products and/or services)

• More convenient, easier, and safer use of products and services (e.g., usability of software)

• More emotionally appealing products and services

Pioneers have greater marginal returns of R&D investments due to non-linear s-curve.

• Network externalities may establish the pioneer’s product as the industry standard or dominant design

• Customers develop switching cost as they accumulate experience with the pioneer’s product (e.g., keyboard)

• Cognitive and emotional anchors for new product categories (e.g., Tesa, Tempo)

In all three cases the superior resources do not reside within the pioneering firm, rather they exist at the level of customers/users, whose habits and preferences have been shaped to favor the pioneer’s product

• Free ride on first mover investments (cheap access to knowledge and markets)

• Resolution of market, technological or regulatory uncertainty

• Development in technology and/or changes in customer needs

• Targeting of other market segments

• Better complementary assets

Imitation is a strategic option!

• Entry barriers

• Innovator is market and technology leader

• No image advantages

• Adjustment to standards required