Organizational Change Test #1

Motivation

"I see the threat but don't want to respond" *"Rational" concerns:* -loss of valued assets -cost/benefit tradeoff -some cannibalization *"Irrational" concerns:* -other cannibalization *Agency issues:* -cushion from success -subsidies from other businesses, government -reluctance to confess earlier mistakes -organizational level, a management team may legitimately fear that a response to an external threat will devalue precious assets or relationships. -Managers may also legitimately see that the costs of an adequate response outweigh the short- term benefits. -A particularly common motivational problem at the organizational level is the fear of cannibalization. Managers worry that a response to an external threat will only undermine the company's existing business. -It may be better to cannibalize your own business rather than cede it to someone else; eat your own lunch before someone else eats it for you. -Too many managers assume that the "no change" strategy will result in preservation of the status quo, i.e., continuation of the current profit stream, or else they value current profits much higher than future profits because they will be long gone from the business when profits erode. -Managers therefore need to be brutally honest about the consequences of not responding to a threat if they are to have a chance of accurately evaluating strategic options and developing the motivation to respond. -level of the individual, particular managers may feel little motivation to respond to a perceived threat if they are well cushioned from any ill effect. Such a cushion may come from subsidies—either from governments or from other businesses. -Motivation may also be weak if a response threatens an individual's personal standing. (for example, that animators at Disney who drew by hand had little incentive to support large investments to move into computer-generated animation.) -Finally, managers may be unmotivated to respond to a threat if doing so requires them to confess to earlier mistakes. -Simple hubris—the belief that the manager can do no wrong—can also reduce one's motivation to change.

Warren Buffet on the importance of *where to compete*:

"when an industry's underlying economics are crumbling, talented management *may slow* the rate of decline. Eventually, though, *eroding fundamentals will overwhelm managerial brilliance.* (as a wise friend told me a long time ago: if you want to get a reputation as a good businessman, be sure to get into a good business.)"

A firm's strategy must answer...

#1. *Where should we compete?* What is the business landscape on which we are competing: -what are the forces which shape competition? -what are the dynamics among the players? -what are the drivers of our industry's evolution? -where are the profit pools in our industry? #2. *How should we compete?* Understanding the business landscape and the positions we and our competitors occupy (and to which we/they can move) informs our choice of a business model--and the underlying set of activities that sustain it. -to achieve superior financial returns, our choices must simultaneously and continuously fit the external environment and be internally consistent

Name two (2) sources of inertia to the "network strategy" Tom was seeking to implement - and the type of barrier this inertia represented [if applicable, categorize using the types presented in our reading, "Strategic Decline"]?

#1: Senior management team and staff...both perception and motivation barriers. #2: Lorraine Cichowski, Gannett profitability mandates, etc.

An Industry...

(the arena in which competition takes place!) -a group of firms producing products or services that are *perceived by CUSTOMERS* as satisfying the same need.

As companies pursue their breakthrough projects, they have a variety approaches to organizing and structuring their initiatives. Among these, 4 basic ways are most common:

*Functional Structure*: -Inserted into a firm's existing functionally structured organization, the breakthrough initiative is completely integrated into the firm's regular organizational and management structure. *Cross-Functional Structure:* -The breakthrough initiative is assigned to a cross-functional team - a group operating within the established organization but outside the existing management hierarchy. *Autonomous Structure:* -The breakthrough effort is set up outside the established organization and management hierarchy as an autonomous and independent unit. *Ambidextrous Structure:* -The breakthrough initiative is organized as a structurally independent unit with its own processes, structures, and cultures but it is integrated into the existing senior management hierarchy. *As it turns out, when it comes to launching breakthrough products or services, those projects which are set up as ambidextrous structures are significantly more likely to successful than when launched and managed under one of the other three structures.*

Progressive CEO Glenn Renwick was concerned that several of its major competitors were adopting sophisticated data mining techniques to price their policies. Referring back to our reading "Strategic Decline," what type of generic external threat would this represent to Progressive's sustained competitive advantage? Why?

*Generic Threat:* -Imitation *Why:* -Adversely affects Progressive's ability to achieve/sustain a wider [WTP-cost] wedge relative to its competitors.

The Ladder of Strategic Intelligence ("SIQ")

*HIGH* -smart strategy, organization, talent *MODERATE* *LOW* -strategic incompetence -strategic denial -strategically blind: (strategic amnesia, let's pretend, blissfully ignorant)

Open innovation can be pursued in a variety of ways, including these typical models:

*Idea contests [a/k/a "hacking"]* -An organization holds a contest to generate ideas to solve a unique problem. A company or organization [formal and informal] would set out a specific issue, often generalized and abstracted to protect proprietary information, offer a prize that appealed to skilled participants, and publicize the contest to the public, often through online platforms. Contests are best used for problems that were complex or new, where the appropriate skills or technical approach needed were unclear, and that would otherwise require extensive experimentation. While there was usually one contest winner, a company could learn from trends in the multiple approaches and submissions. *Collaborative communities* -A collaborative community enabled a company to collect a large number of diverse solutions from a product's users. The participants were usually familiar with the product's flaws and had the skill set to solve particular issues. Collaborative communities required minimal coordination from the company and were best for open-collaboration projects or customer support groups. The communities were not cohesive groups and the company had little control over the participants, but the strength came from aggregating many varied solutions. The participants needed to share information freely, so it was difficult to protect intellectual property. *Crowd complementors* -Companies used complementors to provide various solutions to users' numerous problems with a core product. They worked best when a company wanted a large number or big assortment of complements. Unlike contests where a problem could be generalized away from a company, complementors needed to access the core product, which could pose a technologic challenge to coordination and protecting assets. Complementors worked best for open operation or marketing data initiatives as well as app development. *Crowd labor markets* -Often run by third-party intermediaries, crowd labor markets matched buyers and sellers of services. Websites matched the skills of participants to the task a company needed accomplished. Labor markets worked well when a company knew the skills that were needed to accomplish a project, or for a projects with a well-defined scope and process. The tasks usually could not be done by a computer, but were repetitive (e.g. simple data entry) and would be too expensive to hire a full-time employee to do.

Source of Failures

*Inertia* -a tendency to do nothing or to remain unchanged -to remain at rest or to remain in motion in the same straight line, unless acted upon by some external force Ex: Kmart, Circuit City, Sears, Polaroid, Kodak, Gap, Toys R Us, Bally Fitness, US Air, IBM, HP, GM, Best Buy, GE, Walmart

Strategic Mind-set:

*JTBD--Jobs To Be Done* -*customers just need to get things done.* When people find themselves needing to get a job done, they essentially *"hire" products* to do that job for them

Threat of Substitutes

*NOTE*: two products are considered *substitutes* when a rise in the price of one increases the demand for the other. -substitutes compete for industry profits, but from outside the industry -videoconferencing competes for profits with business-class air travel. Digital downloads compete with DVDs. Online retailers compete for the same profits as brick-and-mortar stores *NOTE*: the concept of "substitutes" is an artifact of how economics defines industries: although one could argue that airplanes and automobiles are both in the "transportation industry" since both provide transportation, economists place them in different industry classifications bc the technologies they use are different. -this scheme has the advantage of "comparing apples with apples" and data collection, but it obscures the *customer-based* reality that automobiles and airplanes are in some sense competitors. To deal with this issue, economists developed the concept of *"substitutes"* regardless of the technology employed and, as such, *strategists focus on substitutes bc customers do*

Finally, this week's Strategic Decline reading identified a progressive chain of internal failures tat can lead to a firm's inadequate response to an external threat. List the 4 links in this chain--in the order in which they most typically arise/occur:

*Perception* -"I don't see the threat" *Motivation* -"I see the threat but I don't want to respond" *Inspiration* -"I want to respond but don't see (or know) how" *Coordination* -"I see how to respond but I can't get the organization to move"

Internal Barriers to Response

*Perception, Motivation, Inspiration, Coordination* When a firm declines, not only does there have to be an external change in the industry that erodes the original advantage; there also has to be an internal failure to respond to that change. -"Every failure is a failure of management." What internal factors prevent a company from mounting an adequate response to an external strategic threat? -The obvious answer is inertia, a powerful force in most organizations. -To understand the roots of inertia in an organized way, we consider the things that a management team must do in order to respond well to a threat. -The team must see the threat, be motivated to respond to it, have a good idea of what to do, and be able to coordinate a response in the threatened organization -A failure anywhere along this chain can lead to an inadequate response to an external threat. *internal failures of perception, motivation, inspiration, and coordination all make it difficult for companies to respond adequately to external threats such as imitation, substitution, and holdup.*

KEYS

*Purpose of Strategy* -create a *competitive advantage* over a firm's rivals that generates superior, sustainable financial returns *Competitive Advantage* -Our (WTP-Cost)> Rival's (WTP-Cost)

External Consistency

*Sizing up external change* -Successful renewal efforts are often distinguished by the degree to which a management team grasps the external changes that have made the renewal necessary in the first place. -The strategic failures we have discussed in the course so far involved management teams that did not grasp the fundamental transformation that had occurred or that were underway in their markets/industries. (Ben & Jerry's management, for instance, did not appear to understand how premium ice cream had become a national [global] consumer packaged good rather than simply ice cream.) (Likewise, most senior managers at LEGO did not understand the true nature of the threat arising from the rapid concentration in the retail industry long after the trend was underway.) -Undertaking comparative analyses of relative cost and willingness to pay also represent powerful strategy tools by clearly illuminating if and how a company has lost its competitive advantage to rivals and/or new entrants. -As we work to assess external change, it is crucial to distinguish transient changes from permanent ones - and not to overreact to transient changes. -Dramatic drops in revenues caused by a global recession are fundamentally different from revenue declines driven by the rise of substitutes entering the industry at much lower prices: It's likely that a recession's impact will pass in due course and a radical response to that shift would be ill advised; however, the substitution effect, on the other hand, might very well be part of a pattern that is unlikely to go away - and, accordingly, would demand a concerted response. *Formulating A Response* -Having understood the changing environment, the management team must shift to the hard job: Discovering a way to adjust the firm's strategy to become consistent with the new external reality. -Two common pitfalls in this step reflect the tendency to pursue size or emulate success, rather than to craft a distinctive position with a competitive advantage. 1. The leadership team is drawn into large and growing markets or a segments but where it has little hope of establishing a competitive advantage. (Recall LEGO's entry into a wide range of new product and customer segments in an attempt to leverage its favorable "family brand."; Had LEGO's leadership team asked themselves, however, whether they could serve customers at theme parks or customers seeking kids clothing with an adequate gap between WTP and cost relative to competitors in those product-markets, they likely would have quickly concluded not to enter these markets and, in so doing, divert their attention and resources from addressing their eroding core business.) 2. The leadership team pursues a knee-jerk tendency to do exactly what the competition is doing. However successful a competitor is, copying the rival is unlikely to be profitable unless the firm itself has an advantage relative to that competitor. All that naive imitation brings is deterioration in overall industry attractiveness since rivals will most often resort to competing on price. (in crafting a firm's strategy, it's all about being unique relative to your rivals, potential entrants, and substitutes:) -Finally, in formulating a response, it is important for the leadership team to ask, "Can an apparently threatening change be turned into an opportunity?" "Can we turn lemons into lemonade?" (Recall, for instance, how Jorgen pivoted LEGO's attitude toward retailers: In stead of continuing to view retailers as a "necessary evil," he decided LEGO needed to make a fundamental shift in its attitude to become the retailers' most profitable toymaker [supplier]...LEGO needed to create more value for these retailers than any other toymaker by helping each retailer improve its respective competitive advantage and customer value proposition. In short, LEGO needed to become dedicated to the success of its customers.)

Consider three of the many initiatives launched by Progressive: (i) Immediate Response; (ii) Express Quote; and (iii) Concierge Service. Select one of these initiatives and explain its logic and how it drove Progressive's competitive advantage [in terms of WTP and/or actual costs] relative to its major competitors in the personal auto insurance industry.

*Strategic Initiative* -Immediate Response -Express Quote -Concierge Service *CA Logic/Driver* -Increase WTP, lower loss ratio -Increase WTP, lower expense ratio -Increase WTP, lower loss ratio

What is NOT strategy:

*plans supported by underlying actions are not strategy* -"marketing strategy" -"pricing strategy" -"innovation strategy" -"technology strategy" *goals or aspirations are not strategy:* -"to be #1 or #2 in our industry" -to grow by making key acquisitions -"to have the largest audience in the world" -"to become a customer centric company" *Strategy is NOT about being the best...* -it's all about being unique: COMPETE TO BE UNIQUE (Ex: Southwest, Apple, IKEA, Whole Foods, Walmart (early days), etc.

Differentiation Strategy

-Raise WTP by a large amount with only slight increases in costs -*don't confuse* "differentiation" with the general notion of "being different than the competition" (firms pursuing a low cost strategy can be highly distinctive, e.g., SWA or Dell (in early days) -strategy uses the term "differentiation" in a precise way: >> creating a larger wedge between WTP and costs than our rivals >> raise WTP much higher than our rivals while incurring only somewhat higher costs

In the personal auto insurance industry, Progressive's top 3 competitors were [in rank order]: (Progressive Case)

-STATE FARM -ALLSTATE -GEICO

The case presents 3 options Harry was debating as he sought to accelerate adoption of the Quartz shower. Which option do you recommend? Why? If you do not recommend one of these 3 options, what alternative action would you recommend? Why?

-Targeting consumers directly -Targeting do-it-yourselfers -Targeting developers -???

Imitation

-The most direct threat to a successful strategy is imitation by another competitor. -Imitation arises for a company when some other firm begins to offer what the company itself provides, to the same target customers -Note that merely copying the market leader's strategy is unlikely to displace that firm. Instead, what results is typically described as "commoditization" of the business: A number of imitators offer essentially the same product or service, and the industry degenerates into undifferentiated competition. (Holland Sweetener's attempt to emulate Nutrasweet's strategy only ruined industry profitability, not the incumbent's superior relative performance, because the imitator lacked any competitive advantage) -More often, therefore, the challenge to a successful strategy comes not from naïve imitation, but from a firm that in some way widens the wedge between willingness to pay and supplier opportunity cost, and so grasps competitive advantage in the business

Power of Buyers (Customers)

-buyers' power is the mirror image of suppliers' power -the factors affecting the buyer bargaining power include: >>large purchase volumes relative to the size of single vendor >>industry's products are standard or undifferentiated >>low costs for buyer to switch to new vendor >>buyers have credible threat to integrate backward >>buyers are under financial pressure >>cost and/or quality of buyer's products are little affected by quality/price of industry's products

Competing for *profits* is a struggle involving *multiple players*, not just rivals, over who will *capture the value an entire INDUSTRY* creates......

-competitors (industry rivals) -customers -suppliers -substitutes -potential new entrants (into the industry) -(complements) *Unit Profit Margin = Price - Full Cost (including cost of capital)*

Understanding the power of complements and how it arises:

-complement concentrate -relative switching costs -ease of unbundling -influence on demand -asymmetric threats -the profit of opportunity's rate of growth

Step 1 of 2: Creating Competitive Advantage

-configuring the firm to deliver *unique AND valuable* products and services to *targeted customers* --> *VALUE PROPOSITION* -a product or service that helps customers do *more effectively, conveniently, and affordably* a *JOB* that they've been *trying* to do -by *"job"* we mean a fundamental problem in the customer's situation that needs a solution --> *What unmet needs will the firm's product address?*

Power of Suppliers

-every transaction is a tussle (*over profits*) between a seller and a buyer. The more powerful one secures the larger portion of the available profit. -powerful suppliers can raise prices and shift costs downstream to industry participants -*NOTE*: price sensitivity is another source of power for suppliers. Bargaining power influences price, while price sensitivity influences quantity. Suppliers with no direct ability to influence price may nevertheless be so sensitive to the market price that they substantially reduce the amount they are willing to supply.

Industry Competitors (rivalry among existing firms)

-potential entrants (*threat of new entrants*) -buyers (*bargaining power of buyers*) -*complements* (opportunity of complementary products or services) -substitutes (*threat of substitute products or services*) -suppliers (*bargaining power of suppliers*)

Understanding the threat of substitutes and how it arises:

-price-performance trade off for customer -place a ceiling on industry's profit potential -place a constraint on industry's growth potential -watch-out for substitutes produced in industries reaping high profits that may erode with competition

Low Cost Strategy

-reap large cost savings with only slight decreases in customer WTP -firms pursuing a low cost strategy can be highly distinctive, e.g., SWA or Dell (in early days) -*Remember*: Cost does not equal Price >> low prices require low costs (to be sustainable) >> but low costs do not require low prices

Rivalry Among Existing Firms

-rivalry among competitors threatens the profits of all of them, although industries can differ in the intensity and focus of their rivalry -competition on dimensions other than price--product features, support services, delivery time, or brand image, for instance--is less likely to erode profitability bc it improves customer value and can support higher prices Example: real estate brokers in the United States, for example, compete on service rather than on price. Participants in this industry that offer excellent service can sustain good margins even in the face of competitors with practically undifferentiated (the same) products. *Industry competition gravitates o price if:* -products lack differentiation..or if switching costs are low -fixed costs are high..and marginal costs are low -capacity must be expended in large increments -the product is perishable *Industry competition intensifies when:* -large number of competitors roughly equal in size/power -industry growth is slow -exit barriers are high -intense commitment to industry

Understanding the power of suppliers and how it arises:

-supplier concentration -costs of switching to other suppliers -supplying differentiated products -no substitutes for supplier's products/services -threat of forward integration -supplier needs us less than we need them

Understanding barriers to entry and how they arise...

-supply-side economies of scale -demand-size benefits of scale (aka, "network effects") -customer switching costs -capital requirements -incumbent advantages (independent of size) and *reaction* -unequal access to distribution channels -barriers to exit -restrictive government policies

When profit pressures arise......

-try harder -overhead cost reduction (profit improvement) programs -reorganize -financial engineering -or a strategy problem?

Threat of New Entrants

-when an industry's potential for profit is high, companies have a powerful incentive to enter (if they see that their product/service could do really well there; they want to enter badly (incentivized bc of the potential profit they could gain)) -new entrants increase competition, driving down prices and profit (with more entrants, others are lowering their prices to try and compete for customers; but lowering prices a lot in turn can decrease overall company profit bc you aren't making money by offering lower prices) -the impact of potential entrants on profit depends on how easy it is to enter the industry, which in turn depends on barriers to entry (you want to make it hard to enter so that competition isn't as high and you are able to win customers) --> strategists need to evaluate the size of the *barriers to entry*, and how they may change an industry's profitability.

This week's reading "Strategic Decline" introduced the following 3 generic external threats to a firm's sustained competitive advantage:

1. *Imitation* -other firms (rivals) offering what the company itself provides to the target customer segment 2. *Substitution* -another firm develops a new and potentially better way to serve the underlying purpose of the company's products or services 3. *Holdup* -another firm or party--typically a supplier or customer--achieves a position of power and is able to extract profits from the company despite its competitive advantage.

4 Dimensions of Organizational Design Choices

1. *critical tasks and workflows* -driven by the firm's strategy, these choices determine the nature of interdependence between work units--and, as a result, impact the information flows and coordinating requirements for getting the work done. 2. *people* -the choices regarding competencies, motives, country/cultural, demographics--and the resulting mix required. 3. *formal organizations* -the structures, roles, processes, and systems used to structure tasks and responsibilities within the organization and accomplish the firm's work 4. *informal organization and culture* -the informal structures, systems, and roles--as well as the organization's culture and value system *not only must each of these 4 sets of choices be effective on its own (in terms of accomplishing the work of the organizations), but the choices need to fit with--and be *congruent* with-- each other.

As organizations adopt the Open Innovation process, typical challenges can include:

1. How best to manage the open distribution of ideas. 2. Deciding when and where open innovation may work best, and at what stage of the problem solving process. 3. Once selected, problems can be too complex and may benefit from being broken down into smaller pieces. 4. Concerns about sharing confidential or sensitive internal information with outsiders. 5. Concerns about who owns the idea or solution (the intellectual property or IP), once submitted. 6. Concerns that open innovation may inhibit collaboration within the research organization. 7. Resistance to collaborating with outsiders who may be considered "non-experts."

In making strategic changes, a management team must address 3 pivotal questions:

1. In what new direction should the company head? 2. How can a firm overcome the internal barriers to change [refer to our previous reading "Strategic Decline"]? 3. How should the company sequence its efforts to unravel one set of intertwined choices and establish another set of choices? *These questions address the 3 tests of a good strategy:* 1. External consistency: -Surveying the external environment to find an appropriate destination for the firm; 2. Internal consistency: -Examining the internal situation facing the firm's leadership; and 3. Dynamic consistency: -The dynamic sequencing of steps to the new strategy.

3 Types of Inertia

1. Strategic 2. Structural 3. Human

Some common myths about marketing:

1. it's easy to sell a great product (Corollary: it's tough to sell a bad product) 2. brand equity equals brand power 3. innovative products tend to be adopted in a linear manner, with early adopters leading the way 4. the easiest way to go market is the best way to go to market

Substitution

A different risk is when a newcomer views the business in a different way than existing players do and seeks to exploit a novel approach that substitutes for current ways of competing. -threatens a company when another firm comes up with a new and potentially better way to serve the underlying purpose of the company's products or services. -Substitutes typically employ some new technology or business approach to address a need that already exists. -the ability of substitutes to destroy the advantages of entrenched market leaders. -More than just exploiting a new technology, the most potent threat to a successful strategy is often from an entrant that leverages new ways of doing things to offer an improved value proposition to customers.

Perception

A number of human and organizational tendencies may cause a management team to fail to see a threat. "I don't see the threat" -*Denial:* selective rejection of bad news -*Hubris:* pride in past accomplishments -*Set beliefs and rigid mental model; inappropriate metaphors* -*Misplaced sensors:* paying attention to bed customers or rivals like oneself -*Superstitious Learning:* incorrect analysis -Simple denial—an inclination to reject bad news selectively—may play a role. -Pride in past accomplishments may also cause a team to be overly confident and to take a threat lightly. -Long-term familiarity with an industry may leave a company with rigid mental models and an inability to imagine that things might change radically. -Moreover, mistaken beliefs can be self-fulfilling. -Related is the interpretation of the threat through an incorrect lens, or by reference to another, incorrect analogy -"a metaphor, once accepted, provides a powerful restriction on future thought."19 -To cope with this barrage of information, they must choose what to focus on and what to ignore. -If a threat comes from an ignored direction, the stage is set for a truly rude awakening. -A particularly common problem, documented forcefully by Christensen, is to pay attention to one's best, most profitable customers and to ignore attacks in small or less profitable segments where needs may presage future trends -In each case, companies shut themselves off from valuable customer information that might have allowed them to perceive a vital threat. -A related perceptual error is to pay disproportionate attention to companies that look like your own company. -Finally, if managers do not know the source of their own competitive advantage, they might well ignore a real threat. -Rumelt refers to this problem as "superstitious learning"—we attribute past success to factors that were coincidental with it but that actually bear no causal relationship to that success -Obviously, misunderstanding one's current advantage can lead a manager to misinterpret an external threat

Assume Ryanair filled all 44 seats on its aircraft's 4 Dublin-London round-trips per day during its first full year of operation at a price of IL98 per R/T. Recall that AL and BA currently charge IL166.5 per passenger for a R/T on the Dublin-London route. Further, recall that AL/BA's marginal cost per passenger on this route is IL29. What is the impact on AL/BA's annual operating profit if all of Ryanair's passengers are stolen from AL/BA [i.e., none were from the sea ferries]?

A reduction in AL/BA's operating profit = 4 X 44 X 365 X [166.5 - 29] = IL8.8 million per year.

In response to the revolution Tom believed was underway, he proposed implementation of a "network strategy." What was this "strategy" and how did it operate/function?

A technology platform intended to leverage USAT's brand, news gathering and reporting operations, and the content generated across multiple distribution channels by collecting, sharing, and distributing content to each channel for repackaging as appropriate to meet the needs of the channel's customers.

During the 1980s, B&J's growth consistently averaged over 60% annually. What was their primary mechanism for achieving this impressive rate of growth?

Aggressive geographic expansion... expanded rapidly to quickly launch sales and distribution in all major markets in the US.

Looking back to Question #1, above, what was the long-term value Harry anticipated accruing to Aqualisa from the new skills, capabilities, and competencies developed during creation of the Quartz shower?

As Harry worked to transform Aqualisa into an innovation-focused company, he expected for these new skills to serve as his "innovation factory" capable of supporting a constant flow and pipeline of new value-innovating products.

As you reflected on Ryanair's launch, which rival--AL or BA--do you believe will be most threatened? How do you believe they will respond--and why?

BA is likely to see Ryanair as little more than a thorn in its side. Dublin-London is just one of its many, many routes, some of which already have competition from carriers far more frightening than puny Ryanair (e.g., the American carriers on the New York-London route). Ryanair is hardly likely to serve BA's target segment—business-class customers on long-haul international flights—ever. In contrast, AL probably sees Ryanair as a mortal threat, especially if it believes that the upstart will expand. Ryanair's chosen route, Dublin-London, is one of AL's few lucrative routes. Any future expansion by Ryanair is likely to be on routes that the flag carrier already serves. Further, AL is making only the slenderest of operating margins in its air transportation business and must fear the prospect of an efficient entrant on its routes.

Identify 2 sources/types of inertia that served as obstacles to adoption of the Quartz shower?

Complacent marketing team and sales force; indifferent channels; conservative plumbers; ignorant consumers.

Inspiration

Even if motivated to respond to a perceived threat, a management team might not have any good ideas about what to do. "I want to respond but don't see how" Sometimes, there really is no good response -no viable strategic options -lack capabilities Deer-in-the-headlights syndrome Commitment to industry or firm convention Function-by-function planning; lack of integrative skills >> It is also possible that executives can envisage what needs to be done, but simply view the challenge as too difficult to achieve. If the firm lacks the capabilities needed to adopt and successfully implement the new strategy (e.g., to move a newspaper entirely online), managers might prefer not to risk pursuing that option. *two factors that appear to contribute to a lack of inspiration. The first is a commitment, especially among longtime insiders, to conventional wisdom or the way that things have always been done in a firm or an industry.*

Ryanair enjoyed a competitive advantage over its rivals, Are Lingus and British Airways, on the Dublin-London route bc it was able to drive a wedge between its costs and its customers' willingness to pay that was wider than the wedges achieved by AL or BA.

False

At the core of these required dynamic capabilities is the firm's ability to be ambidextrous - where senior managers must accomplish two critical tasks:

First, they must be able to accurately sense changes in their competitive environment, including potential shifts in technology, competition, customers, and regulation. Second, they must be able to act on these opportunities and threats; to be able to seize them by reconfiguring both tangible and intangible assets to meet new challenges.

A Business Model

Four interlocking, interdependent elements that, *taken together*, create and capture value: -*value proposition* for a *targeted customer* -*resources* that must be put in place in order to deliver the value proposition -*processes* (activities) by which resources are used to create/deliver the value proposition -*profit model*--the "formula" that defines the gross and net margins for the firm's structure and for the magnitude of the fixed and variable costs inherent in its resources (look on page 28 of slides)

Which of the following companies provided the most competition for Ben & Jerry's Homemade Ice Cream ["B&J"] in the US superpremium ice cream segment during the 1980s and early 1990s:

Haagen-Dazs

What unmet needs will the firm's product address?

In *creating customer value* will the firm emphasize: -*Differentiation*, by increasing customer willingness to pay--*relative to rivals' offerings*--for a comparable bundle of benefits? or -*Low Cost*, by reducing expenses/costs that customers incur--*relative to rivals' offerings?* If it emphasizes differentiation, will the firm's edge principally be *vertical* (ex: outperforming rivals' products or dimensions for which most customers would agree that "more is better," e.g., a car's gas mileage) or *horizontal* (i.e., distinguishing itself on dimensions of taste that cannot be intrinsically rank-ordered, e.g., an Audi's styling compared to a Saab's)? Which customer segments will the firm serve upon launch? How will targeted segments change over time? Will the firm serve: -a *fundamentally new market*, offering a radically innovative product, -an *existing market*, offering a product that offers superior relative performance against well-established benefit and/or cost metrics; or -a *re-segmented market*, offering a product that offers superior performance on familiar attributes strongly valued by a *subset* of the existing market's customers? What will be the firm's *minimum viable product ("MVP")* for a new product innovation/launch, i.e., what is the smallest set of product features needed to validate key business model assumptions? What is the plan for adding features over time, i.e., what is the *product road map?* To access a whole product solution, will customers need to acquire *any complements or ancillary services from third parties?* If so, who will provide them and under what terms? How will the product be *priced?* Will revenue be collected per transaction, per period (as with a subscription), or through some hybrid approach?

How can leaders attempting a strategic renewal effort get their arms around a changed external environment?

In our study of the LEGO case, we leveraged the power of the 5 Forces model, for example, to identify thoroughly the important changes underway in the structure of the traditional toy industry (e.g., shifts in customer needs or segments, changes in the nature of rivalry) - it was especially helpful in pinpointing those changes that were most economically relevant to LEGO. -We then used the 5 Forces model to assess whether LEGO was more or less exposed than its rivals to the changes occurring in the industry. And having assessed that LEGO was, in fact, very vulnerable, we found we could also deploy the 5 Forces framework to guide LEGO's repositioning in the industry.

What force did this week's reading highlight as being particularly powerful in creating a firm's internal failure to respond to external changes in its industry? (Strategic Decline Reading)

Inertia

What did the data Progressive received from J.D. Power show? Why is this surprising? Why is it important?

J.D. Power data showed Progressive well behind the competition [#14 in Overall Satisfaction and #14 in Collision Repair] - very surprising to Progressive since it prided itself [and for over 15 years focused] on delivering customer satisfaction...a source of competitive advantage [higher WTP] for which Progressive strives.

Step 2 of 2: Creating Competitive Advantage

Making an *integrated set of choices* that distinguishes the firm from its rivals in the industry...choices that align the full range of activities (marketing, production, finance, etc.) to achieve an *internal consistency* --> *VALUE CHAIN ACTIVITIES* (look at slides on page 27)

So how exactly do ambidextrous organizations work?

One of the most important lessons from our USA TODAY and AQUALISA cases is that... ambidextrous organizations need ambidextrous senior teams and managers - executives who have the ability to understand and be sensitive to the needs of very different kinds of businesses: Combining the attributes of rigorous cost cutters and free-thinking entrepreneurs while maintaining the objectivity required to make difficult trade-offs calls for a rare but essential breed of manager like Tom Curley and Harry Rawlinson. -Another important lesson from the USA Today case is that a company's senior team must be committed to operating ambidextrously even if its members aren't ambidextrous themselves. Resistance at the top levels of an organization can't be tolerated, which means that a shift to an ambidextrous organization can be a wrenching experience: At USA Today, Tom Curley had to dismiss a full 40% of his executive team. And once Tom had the right leadership team in place - for print, for online, and for broadcast - he backed up his actions with new incentive programs that institutionalized the integration of the senior management team. -In both USA TODAY and AQUALISA, we also observed the power of a clear and compelling vision, relentlessly communicated by Tom and Harry - an essential ingredient to building ambidextrous capabilities since these aspirations provide an overarching goal that permits exploitation and exploration to coexist. Curley's "network strategy" was a compelling vision that underscored the strategic necessity of ambidexterity and the benefits for all employees, both those in the traditional units and those in the breakthrough initiatives. -not only can an established company renew itself through the creation of breakthrough products and processes, but it can do so without destroying or even hampering its traditional business. Building an ambidextrous organization is by no means easy, but the structure itself - in which you combine organizational separation with senior team integration -- is not difficult to understand and apply.

The only shower industry player with both the incentive and ability to put pressure on plumbers to adopt the Quartz shower is:

Showrooms

Aqualisa spent 5.8 million euros developing the Quartz shower - a considerable sum to develop a single product, particularly for a company with little history in innovation. However, in the process of developing the Quartz technology and product, the company acquired and developed new sets of skills and capabilities to support Harry's long-term vision, including all of the following except:

Skills for marketing and selling innovative products.

A firm is said to have a competitive advantage over its rivals in an industry if the wedge it has driven between (i) the amount its customers are willing-to-pay ["WTP"] for a product or service, and (ii) the costs the firm incurs to deliver the product or service, is wider than the wedge the firm's competitors have achieved. Based on this framework, does B&J enjoy a competitive advantage over, say, Haagen-Dazs? Why or why not? Explain your assessment - be specific.

The case reveals price parity across flavors in both the smooth and mix-in categories comprising the superpremium segment. The case also reveals that B&J incurs higher costs than its competitors in several key cost elements in the production of high quality ice creams: (i) dairy milk, (ii) ingredients, and (iii) transportation/distribution. You could also infer the likelihood that B&J has higher production labor costs due to its 5:1 pay scale range. [In addition, because B&J outsources 40% of its production and 52% of its distribution, it may incur higher costs for these key elements of its cost structure.] As a result of these considerations, we can deduce B&J's wedge is materially [at least 10%] less than Haagen- Dazs's wedge, i.e., B&J is at a competitive disadvantage.

Strategic Decline Reading

The harsh truth is that changes in the external environment and competitive pressures cause the profitability of the typical superior performer to revert to the mean very rapidly. -This fact challenges the strategist not only to craft robust strategies whose advantages last as long as possible, but also to design a strategy-making process that is capable of appropriate strategic change and effective strategic renewal. -But external change alone should not mean the end of superior performance, since the skilled strategist ought to be able to adapt to such changes. why we study the structure of strategic decline. -First, we examine decline in order to avoid it, to know what we must overcome if we are to steer our own ventures away from its shoals. -Second, in the study of decline, we can unearth the roots of success, even if looking at failures is less uplifting than looking at successes. -With a systematic understanding of the causes of decline, we are better able to build an organization capable of continual strategic renewal. -Only when we have recognized and addressed the causes of impending decline can we prevent its occurrence.

The Sustainability of Competitive Advantage (Strategic Decline Reading)

The holy grail of the strategist is a competitive advantage that lasts for many years. -This is why we pay so much attention to dynamic consistency when we design and evaluate a strategy. -Unfortunately, durable, effective strategies are rare. -the odds are against us when we try to build strategies that will generate superior performance over the long term -Anita McGahan and Michael Porter found that competitive advantage and the superior intra-industry returns that accompany it usually fade quickly, with a half-life of roughly three years. -Richard D'Aveni and L. G. Thomas found that industries have become "hypercompetitive," to the extent that by the late 1990s, one-third of firms that were in the top quartile of performance in any year would drop out of the top quartile the next year. -Researchers have also noted that the speed of profitability convergence varies by industry, reinforcing the importance of understanding the effect of industry structure on firm performance and strategy

Coordination

The most inspired response in the world is not valuable if the management team cannot get the organization to implement the response in a coordinated manner "I see how to respond but can't get the organization to move" *Political deadlocks* -divergent interests/winners & losers -divergent beliefs *Interactions among existing activities* -single changes backfire -systemic change is hard to coordinate *Strategic commitment* -tradeoffs favor efficiency over flexibility

Internal Consistency

The notion of internal consistency has two major implications in the context of strategic renewal. -First, the idea that decisions within a strategy are intimately connected to one another suggests that real strategic change will often require a sweeping set of changes to many of the firm's activities and prior decisions. Ben & Jerry's and LEGO were cases that highlighted the danger of implementing only a subset of the required changes. *Leaping halfway across a chasm is often worse than not moving at all*.) -By beginning from a set of integrated strategic alternatives, each fully fleshed out and internally consistent, a management team can weed out those options that involve only half the required changes - that are neither status quo nor a coherent alternative. -The second implication of internal consistency concerns the internal barriers to response that we examined in our earlier reading "Strategic Decline": Any effort to renew a firm's strategy must deal explicitly and effectively with the relevant internal barriers: >> *Failures of perception* (Managers at Ryanair had to endure a financial crisis before recognizing the need for change.) >> *Coping with weak motivation* (Recall how Ben & Jerry's violated its historic salary ratio in order to bring in outside management and to change attitudes.) >> *Improving the caliber of inspiration* (Within troubled organizations, we saw, especially, the appointment of outsiders to key positions, such as Bob Holland at Ben & Jerry's.) >> *To enhance coordination* (he use of a top-down management style [telling everyone what to do!], especially in the short term, may be required to achieve coordination! Alternatively, having champions drive the transformation agenda, 0r establishing a separate unit for a new initiative that can better thrive if it is outside the constraints of the existing organization provide other ways to ensure that there is a coordinated response to the external threat.) *NOTE* -Decentralized organizations tend to be very good at adapting quickly to changes in conditions within functions. However, they often respond slowly and poorly to changes that cut across functions.

Why does organizing the breakthrough project using an ambidextrous structure lead to a substantially higher probability of success?

This structure allows cross-fertilization among units while preventing cross-contamination. And further, the tight coordination at the managerial level enables the fledgling units to share important resources from the traditional units - cash, talent, expertise, customers, and so on - but the organizational separation ensures that the new units' distinctive processes, structures, and cultures are not overwhelmed by the forces of "business as usual." -At the same time, the established units are shielded from the distractions of launching new businesses; they can continue to focus all their attention and energy on refining their operations, improving their products, and serving their customers.

In our case studies this semester, we will always be assessing the strategic intelligence of companies: Their continuous ability to successfully recognize changes in their environments and then to successfully adapt their strategies and organizations to meet these changes. As we apply this framework, what is the purpose of strategy?

To create a competitive advantage over a firm's rivals that generates superior, sustainable financial returns.

Strategic Decline vs. Failure

While a few firms are able to sustain a competitive advantage over long periods of time, many thousands of other firms fail to develop or implement an effective strategy in the first place. -During each five-year period in a typical U.S. manufacturing industry, for instance, 30% to 40% of all companies disappear *Strategic Failures* -entrants that never addressed the difficulties of competing against much larger incumbents in a high fixed-cost industry (external consistency) or never identified a distinctive value proposition or a unique configuration of activities to deliver that value proposition (internal consistency), nor those that failed to anticipate likely competitive response (dynamic consistency). -the truth is that many businesses fail simply because they never develop an effective strategy. *Strategic Decline* -how those firms that do have a competitive advantage, and which do know how to develop strategy, see their advantages erode over time. -The decline of a strategy that once succeeded typically combines two elements: an external threat to the advantage created by the strategy, and an internal barrier that prevents an adequate response to the threat

When Progressive began writing standard and preferred auto insurance policies in 1990, they experienced "strategic inertia" from whom? Why?

Whom: -Independent agents [Progressive's primary distribution system] Why: -In view of Progressive's long history of selling only nonstandard policies, the agents didn't typically think of Progressive as a viable product/solution for their standard- or preferred-rated customers due to the agent's loyalty and familiarity with insurers already selling standard and preferred policies.

Structural Inertia

a firm knows it needs to change but its structure gets in the way --> Strategic Agility

What do we mean by an organization's "culture"?

a patten of basic assumptions--invented, discovered, or developed by a given group as it leans to cope with its problems of external adaptation and internal integration. ...that has worked well enough to be considered valid and, therefore, should be taught to new members as the correct way to perceive, think, and feel in relation to those problems.

The decline of an organization's strategy that once succeeded typically combines the following two elements:

a. External threats to the firm's competitive advantage created by its strategy b. Internal barriers that prevent an adequate response to the threats

In our case studies this semester, we will always be assessing the strategic intelligence of companies: Their continuous ability to successfully recognize changes in their environments and then to successfully adapt their strategies and organizations to meet these changes. In our review of key strategy concepts, we confirmed that an organization's strategy must answer the following two (2) essential questions:

a. Where should we compete in an industry's landscape? [What competitive advantages to seek/establish and how to deliver these advantages?] b. How should we compete? [What business model should we build/deploy and what are the underlying activities that will support it?]

Dynamic Consistency

and three major themes will emerge from our look at successful and unsuccessful renewal efforts. -First, we'll be looking for some common ways to sequence strategic renewal efforts. In many instances, we will observe an initial period in which the management team focuses on operational effectiveness. The team "stops the bleeding," gathers a number of critical resources—cash as well as credibility with employees, customers, and investors—and then changes the firm's true competitive position. (Recall that Holland fixed Ben & Jerry's manufacturing operations before attempting to alter the company's overall market position. At LEGO, Jorgen defined his initial turnaround step as a "managing for cash" phase in which he focused the leadership team on securing the financial resources required to survive through asset sales, cash conservation, withdrawal from non-core businesses, etc.) -Initial steps can limit managers' options during the repositioning stage and therefore must be taken with some view of the future in mind. Though repositioning may take longer to unfold and may therefore appear to happen after management stops the bleeding, it is dangerous for leaders to enter that initial phase with the attitude, "Let's just get this company under control, and we'll come back later to worry about that little matter of repositioning." -A second theme in the sequencing of change efforts concerns the role of "hub choices" - decisions that are tightly coupled to many other strategic choices. In renewal efforts that have proceeded past the "stop the bleeding" phase, hub choices are often the first to change. -Early changes in hubs have two desirable effects. First, because they have far-reaching impact, they can make a dramatic difference quickly. Second, they have enormous symbolic value; they send an unambiguous signal to an organization that things have changed and will continue to change. (At LEGO, for example, after stabilizing the financial condition, Jorgen transitioned quickly to a "managing for value" phase focused on building up new capabilities in product development, manufacturing, sales forecasting, management of key retail accounts, consumer analysis, and cross-functional coordination.) (And the visibility he gave these moves signaled to everyone in the company that dramatic strategic change was underway and would require a host of other changes to support the new structure as he began transitioning LEGO to the third "managing for growth" phase of Jorgen's plan in which he focused on deploying new attitudes and capabilities to grow the core brick-based business..) -The third and final dynamic theme concerns an early external focus on change efforts. Successful efforts to change strategy often start with an understanding of which customer needs a company can uniquely satisfy. Internal priorities then flow from that external understanding. -Remember, the most successful change efforts are, first and foremost, driven logically and initially from the outside (think of PROGRESSIVE), not by an internal focus (think of Ben & Jerry's). NOTE: always "drive change from the outside"

Why this should be is a puzzle because when firms are doing well they have all the resources (financial, physical, and intellectual) to continue to be successful. Yet the evidence is that most organizations do not survive for long periods of time....

central to the ability of a firm to survive over time is its ability to exploit existing assets and positions in a profit-producing way and simultaneously to explore new technologies and markets - to configure and reconfigure organizational resources to capture existing as well as new opportunities -This fundamental tension is at the heart of an enterprise's long-run survival. The basic problem confronting an organization is to engage in sufficient exploitation to ensure its current viability and, at the same time, devote enough energy to exploration to ensure its future viability -Our challenge, then, is both to develop an understanding and a process for building organizations that can both explore and exploit - to build dynamic capabilities that give an organization the ability to sense, seize, and reconfigure organizational assets to adapt to changed environmental conditions. -If we can successfully develop these dynamic capabilities in a firm, the firm should [in the absence of macroeconomic "earthquakes'] be able to sustain its competitive advantage by leveraging and reconfiguring its existing competencies and assets in ways that are valuable to the customer but difficult for competitors to imitate. -For this to occur continuously - and without the need for a crisis to drive often painful change - these dynamic capabilities must be embedded in an organization's processes or routines for coordination, learning, and transformation...and they must enable a firm to sense opportunities and then to seize them by successfully allocating resources, often by adjusting existing competencies or developing new ones. -These are the capabilities that underpin the organization's ability to maintain ecological fitness and, when necessary, to reconfigure existing assets and develop the new skills needed to address emerging threats and opportunities.

Purpose of Strategy

create a competitive advantage over a firm's rivals that generates superior, sustainable financial returns

As a dynamic capability, ambidexterity embodies a complex set of routines including

decentralization, differentiation, targeted integration, and the ability of senior leadership to orchestrate the complex trade-offs that the simultaneous pursuit of exploration and exploitation requires. As you would expect, developing these dynamic capabilities is a central task of executive leadership - and a remarkably accurate marker of a firm's strategic intelligence and strategic agility.

The Strategist's Goal

find "positions" within an industry where you can fend off threats from other players in the industry and/or exploit opportunities *Strategic Thinking* -building defenses against the industry's competitive forces, and/or -finding a position in an industry where the forces are weakest *Strategic Challenge* -competing for *industry profits* -tug-of-war with customers, suppliers, potential entrants, substitute products, and, of course, rivals producing products or services which *meet the same needs as your products* do and which are *aimed at your targeted customers* *Strategic Mind-set* -understanding the roots of *an industry's profitability* -anticipating and influencing changes in industry competition (and profitability) over time -defending against competitive forces or shaping them in our favor

A firm has a competitive advantage over its rivals if it......

has driven a wide *wedge* between the amount its *customers are willing to pay ("WTP")* and the *costs it incurs*--indeed, *a WIDER wedge than its competitors have achieved* -a firm with a competitive advantage is positioned to earn superior profits within its industry -the concept of competitive advantage helps strategies *(YOU)* understand and analyze within-industry differences in performance

"Open innovation"

is a term used to describe new models of innovation, where the firm is not the main source of innovation but rather develops innovative products or approaches through collaboration with users or individuals outside the firm. -It is heavily inspired by the model of open source software and usually involves online open innovation communities and platforms. -Many organizations refer to open innovation in a more general sense, including collaborations with partners and networks of organizations outside their own. -Open innovation is often as viewed a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology.

For a firm to sustain its competitive advantages over time...

it always needs to worry about *5 potential threats:* -imitation -substitution -holdup -saturation -slack

Strategic Agility

it can be much harder to explain how to fix a failing strategy or build an agile organization that can continuously renew its strategy. -Every successful strategy is always undergoing some adjustment. For the most part, however, these adjustments center on marginally altering some activity to adapt to changing circumstances. -making major changes that substantially pivot or actually replace a firm's previous historical strategic choices with a new, integrated set of choices, i.e., a new strategy and/or new strategic initiatives [e.g., Progressive]. -our focus on strategic agility and renewal in the companies typically involve making adjustments along many dimensions of choice, including (i) the competitive advantage the firm pursues; (ii) the scope of the market it chooses to serve; and (iii) the activities throughout the value chain the firm undertakes in order to deliver the desired advantage over the target scope.

Why do we use the 5 Forces Framework?

it was developed for use as a framework for understanding the drivers of industry average profitability--to understand an industry's structural profitability

Low Price --> Volume

look on page 30 of slides

An organization must be *ambidextrous* to survive...to succeed:

must do 2 very different tasks well....*at the same time* 1. *EXPLOIT* -execute the existing business efficiently 2. *EXPLORE* -innovate and unearth new market opportunities--and respond to new competitive threats--effectively

There are several models of open innovation.

product platforming; idea competitions; customer immersions; collaborative product design and development; and, innovation networks. -With the rise of the Internet, the university and the corporation have been increasingly dis- intermediated as the predominant centers of innovation, as crowds can be called up on demand to solve problems. -At the same time, analog tasks are increasingly digitized, making them easier to break up into individual or autonomous problems to solve and work on. Open innovation leverages this modular aspect of many challenges. -Open innovation thereby opens problem solvers to a broader number and range of potential solutions from the community. While the average solution may not be of high quality, the volume of solutions means that statistically you are more likely to find much better values. -Open innovation can work in a range of settings: e.g., NASA, PepsiCo, car manufacturing. -Open innovation is often cheaper, faster, and better. -Open innovation platform and community participants are motivated by a number of factors, including financial reward (prizes in challenges), reputation enhancement, or recognition as experts.

Complements

products that are typically consumed together, like computers (Dell) and operating system (Microsoft); or cell phones (Apple) and cell phone services (AT&T) *NOTE*: The Five Forces Framework focuses on *competition* between existing rivals, potential entrants, suppliers, customers, and substitutes competing for the largest slice of an industry's *profit* pie. -however, sometimes a business will *cooperate* with customers or other businesses in order to grow a market. And even though they may work together to make the pie bigger, they may still compete for the largest slice of an industry's profit pie (*co-opetition*) *as such, complements are also often considered a force on industry competition and profits*

Human Inertia

reluctance of individuals and groups to change --> Strategic Leadership

One factor that often sets imitation, substitution, or holdup into motion is..

saturation of the original market for which a strategy was designed -Once growth in the original market is over, a firm faces a stark choice between pursuing growth by diversifying into new markets or accepting zero growth in the future. Either of these choices has severe penalties. -Wal-Mart, rather than diversifying into serving new customers or markets, like organic foods, might choose to remain a discount retailer and risk becoming a zero-growth company. This will make the company a less attractive place to work; at the extreme, promotions will occur only when the CEO retires. Wan-Mart would then be subject to holdup by employees who demand higher salaries than they did when Wal- Mart was growing rapidly and creating rich opportunities for career advancement.

Our definition of strategy

strategy is the integrated set of choices that positions the business in its industry so as to generate superior financial returns over the long run

Strategic Inertia

the failure of firms to change their strategies in a timely fashion --> Strategic Intelligence

Industry Positioning

the process by which a firm establishes a *unique position* in a market segment relative to industry players *Companies seek to create an attractive environment by:* -exploiting industry change -exploring strategies to compete over time -reshaping one or more of the 5 forces to their advantage

The Strategist's Never-Ending Challenge

the relentless quest for competitive advantage.....*a search for ways to widen the wedge between actual costs and willingness to pay*

As it turns out, a few companies have actually been quite successful at both exploiting the present and exploring the future - and, not surprisingly, they share some important characteristics

they separate their new, exploratory units from their traditional, exploitative ones, allowing for different processes, structures, and cultures; BUT at the same time, they maintain tight links across units at the senior executive level. In other words, they manage organizational separation through a tightly integrated senior team.

Observing Culture:

to repeat, culture comprises the processes and priorities that people instinctively employ when solving problems and making decisions -as it turns out, an *informal* appearing group (as characterized by norms of dress, language and decor) may actually be very rigid and formal about the way people are expected to work together, to make decisions, and so on. This is because these *artifacts* (norms of dress, language, decor, etc.) are manifestations of the culture; they are not *"the culture"* as we will use this term in this course.

To flourish over the long run, most companies need to maintain a

variety of innovation efforts. -At a minimum, they must constantly pursue incremental innovations - those small improvements in their existing products and operations that let them operate more efficiently and deliver ever more value to customers. -In addition, companies also have to make architectural innovations in which they apply technological or process advances to fundamentally change some component or element of their business. (Capitalizing on the data communication capabilities of the Internet, for instance, PROGRESSIVE could directly offer instant quotes on insurance policies to prospective new customers without engaging independent [and more expensive] agents.) -Finally, businesses need to come up with discontinuous innovations - those radical advances like the QUARTZ shower [and its associated derivatives] that offer the opportunity to profoundly alter the basis for competition in an industry, often rendering old products or old ways of working obsolete. (All these types of innovation can have different targets.)

Holdup

when some party—typically a supplier or customer—gets itself in a position of power and is able to extract profits from a company that has a competitive advantage. -Players in professional sports leagues, for instance, have often been able to hold up team owners. -For example, antitrust authorities have sometimes limited Microsoft's profitability, and consumer activists can hold up dominant firms that are seen to be abusing their market power (witness, for instance, the backlash against Wal-Mart).

Identify two (2) external forces that led Tom Curley to believe a "revolution" was underway.

• Successful rise of serious competitive substitutes [TV, internet...both specialized and portals] • Digitization of information - enabling digital distribution • Despite total circulation increasing, 34 consecutive months of decreasing single copy sales --> Industry transformation! Need for new strategy: Where and how does USAT play?