SM Strategic Development Lecture 1 PDF

SM Strategic Development | WS 24/25 Lecture 1 Prof. Dr. Philip Steinberg 1 Today‘s agenda 1. Course administration 2. Introduction & Background 3. Value creation in incumbent firms (RBV) 4. Value creation in incumbent firms (Org. Learning)...

SM Strategic Development | WS 24/25 Lecture 1 Prof. Dr. Philip Steinberg 1 Today‘s agenda 1. Course administration 2. Introduction & Background 3. Value creation in incumbent firms (RBV) 4. Value creation in incumbent firms (Org. Learning) 2 Today‘s agenda Rough planning: 09.00 – 10.30 Lecture 10.30 – 10.45 Coffee break 10.45 – 12.15 Lecture 12.15 – 13.00 Lunch break 13.00 – 14.30 Lecture 3 Today‘s readings › Priem, R. L., & Butler, J. E. (2001). Is the resource-based “view” a useful perspective for strategic management research?. Academy of Management Review, 26(1), 22-40. › Lavie, D., Stettner, U., & Tushman, M. L. (2010). Exploration and exploitation within and across organizations. Academy of Management Annals, 4(1), 109-155. 4 1. Course administration 5 Lecturers Dr. Philip Steinberg Dr. Vera Schweitzer Associate Professor of Lehrstuhl für Organizational Strategy & Innovation, Behavior, University of University of Groningen Cologne [email protected] [email protected] koeln.de Lectures Exercises/ Presentations 6 Who am I? 7 Who are you? › PollEv.com/pjsteinberg933 › B.Sc. Degree – What and where? › Cologne or Elsewhere? › Native tongue / internationals? › Visions/goals? - Industry, Academia, Consultancy? 8 Learning goals Upon completion of this course, the student is able to: › master the language and processes of value creation and appropriation in innovative organizations. › analyze and discuss how incumbent firms can create value via innovation › clarify how firms can capture and protect value from their innovations through formal and informal protection mechanisms. › apply the protection mechanisms to show how an innovator captures and protects value in a business setting. › determine the effectiveness of various formal and informal protection mechanisms in a business setting. › reflect on specific contexts of value creation and appropriation, i.e., two-sided markets, open innovation, etc. › critically discuss different theoretical lenses in relation to value appropriation in innovative organizations. 9  Course Schedule - Lectures WHEN WHERE CONTENT (approx.) PREPARATION Friday, 11.10.24 105 Hörsaal A2 (105/EG/0.04) Introduction, Strategic Development toward innovation Mandatory literature 09.00-14.30 value creation in incumbent firms (Resource-based view, (see §11 Reader) knowledge-based view, organizational learning) Friday, 08.11.24 105 Hörsaal A1 (105/01/1.02) Strategic Development toward innovation value creation Mandatory literature 09.00-14.30 in incumbent firms (Business model innovation; Open (see §11 Reader) Innovation) Saturday, 09.11.24 100 Hörsaal XVIII (100/EG/HS XVIII) Strategic Development toward innovation value Mandatory literature 09.00-14.30 appropriation (Introduction & refresher; Value (see §11 Reader) appropriation – Teece framework, value appropriation in open business models) Saturday, 07.12.24 100 Hörsaal XVIII (100/EG/HS XVIII) Strategic Development toward innovation value Mandatory literature 09.00-14.30 appropriation in incumbent firms (Two-sided platforms, (see §11 Reader) Hybrid (social) enterprises, critical reflection of the “value” definition); Conclusion & wrap-up, exam preparation 10  Course Schedule - Exercises WHEN WHERE CONTENT (approx.) PREPARATION Friday, 18.10.24 100 Hörsaal VI (100/U1/HS VI) Presentation Assignment – Information & Training Mandatory literature 10.00- 13.15 Strategic Development toward innovation value creation (see §11 Reader) in incumbent firms (Resource-based view, knowledge- based view, organizational learning) Friday, 25.10.24, 10.00- 13.15 100 Hörsaal VI (100/U1/HS VI) Remainder: Strategic Development toward innovation Mandatory literature value creation in incumbent firms (Resource-based view, (see §11 Reader) knowledge-based view, organizational learning) Friday, 15.11.24 100 Hörsaal VI (100/U1/HS VI) Strategic Development toward innovation value creation Mandatory literature 10.00-13.15 in incumbent firms (Business model innovation; Open (see §11 Reader) Innovation) Friday, 22.11.24 100 Hörsaal VI (100/U1/HS VI) Strategic Development toward innovation value Mandatory literature 10.00-13.15 appropriation (Introduction & refresher; Value (see §11 Reader) appropriation – Teece framework, value appropriation in open business models) Friday, 29.11.24 105 Hörsaal A2 (105/EG/0.04) Remainder: Strategic Development toward innovation Mandatory literature 10.00-13.15 value appropriation (see §11 Reader) Student presentations Friday, 13.12.24 105 Hörsaal A2 (105/EG/0.04) Remainder Two-sided platforms Mandatory literature 10.00-13.15 Student presentations (see §11 Reader) 11 Important Deadlines – Exam WHEN REGISTRATION WHERE/HOW CONTENT DEADLINE 12.02.25 29.01.25, 23.59 To be communicated; Exam 08.30-09.30 103 Seminarraum S91 & S93 - Short answer questions - Essay-type questions 21.03.25 07.03.23, 23.59 To be communicated; 103 Resit exam 11.00-12.00 Seminarraum S91 & S93 - Short answer questions - Essay-type questions 12  Open office hours (Steinberg) – per appointment WHEN WHERE CONTENT PREPARATION REGISTRATION DEADLINE Monday, 04.11.24 Zoom / Google meet Q&A Bring your questions Wednesday, 30.10.24, 10.00-12.00 12.30 Wednesday, 20.11.24 Zoom / Google meet Q&A Bring your questions Friday, 15.11.24, 12.30 10.00-12.00 Monday, 16.12.24 Zoom / Google meet Q&A Bring your questions Wednesday, 11.12.24, 10.00-12.00 12.30 Wednesday, 15.01.25 Zoom / Google meet Last-minute Q&A Bring your questions (if possible Friday, 10.01.25, 12.30 10.00-12.00 send questions also in advance via email) 13 Rules of the Game › Virtual reader (See course manual), Prepare each lecture, Check ILIAS › Presence for all students is expected in all sessions  no recordings are provided. › Slides will be made available after the lectures/ sessions › Deadlines are not negotiable › No audio/ video recordings allowed. Other important rules: - There are no dumb questions/ statements - Every opinion counts - Feel free to ask / raise questions throughout 14 Grading Individual (on-site), written exam (100%):  Short answer questions (remember, understand, apply)  Open essay-type questions (evaluate, analyze, apply, discuss) What is relevant?  Lectures, exercises, readings (articles) Bonus points (group presentations)  Max. +0.3 to +0.7 (but only if you pass the exam) llustration by Tomi Um 15 Bonus point assignment - How to form groups › 1. Self-organized: Groups of 2-4 (See discussion board on ILIAS if you are still looking for a group member) › 2. Wednesday, 23.10.24 before 11.30 a.m.:  Self-enroll into groups via GOOGLE FORM.  Link: https://forms.gle/7H4jKTpAVfUmPPYf6  Indicate first and second preference  In case of overlapping topic with other group – randomly selected; if no overlap can be avoided: absolutely no plagiarism!  Serious work required for bonus points – but will help understand specific content for exam as well 16 General Assignment Requirements › Please attend the exercise next week 17 Questions? 18 2. Introduction to course topic and background 19 Fortune 500 1. Walmart 2. Amazon What are the chances that if you are in the F500 this year, 3. Apple you would not be in 15 years? 4. CVS Health 5. UnitedHealth Group 6. Exxon Mobil 7. Berkshire Hathaway 8. Alphabet 9. McKesson 10. AmercourceBergen 20 Class questions – PollEv.com/pjsteinberg933 1. What are the chances that if you are in the F500 this year, you would be in 15 years?  1/3 of the Fortune 500 list firms in 1970 had disappeared by 1983 (acquired, merged or broken to pieces) 2. How large is the percentage of firms listed on the 1957 S&P 500 that remained 50 years later? (in 2007)  16% 3. How many top 500 firms in the US from 1980 survived by the year of 2000?  202 4. What is the average lifespan of a multinational Fortune 500 firm?  45 years 21  “Electric engines are just a hype. We focus on building lighter cars to make engines with fuel-injection more efficient” Manager X of a large German car manufacturer, 2009 https://www.eea.europa.eu/ims/new-registrations-of-electric-vehicles 22 “Today's companies face a paradox. The creation of a radical innovation brings with it success, market dominance, and profits. But that very success generates complacency and arrogance, which blind the firm to the next big innovation. Indeed, firms are in greatest danger of failing when they are at the peak of their success.” Gerard J. Tellis, Author of "Unrelenting Innovation" https://www.valuer.ai/blog/50-examples-of-corporations-that-failed-to-innovate-and-missed-their-chance 23 From anecdotal to empirical evidence › Firms size  Larger firms have a higher likelihood to perform R&D  Among R&D performing firms: R&D increases proportionally with firm size among R&D performers within the same industry  Number of innovations tends to increase less than proportionately with firm size  R&D productivity (=Innovative output/ R&D expenditures( declines with firms size 24 From anecdotal to empirical evidence 25  Firms face constant change … › What are potential sources of change? (class) Dimension Source Example Technology changes (in E-mobility your or another country) External Societal/ environmental Tsunami in Japan changes Market changes Trends towards healthy food New CEO and Top Breaking with the Management Team „larger is better rule“ of car companies Internal Organizational Digital cameras, innovation (of one firm) integrated cell phone may also create changes cameras in the market/industry 26 … but have difficulties to adjust But why can‘t firms adjust to this change? Why do they struggle to innovate and remain relevant?  Think (3) – Pair (5) – Share (10) - Use knowlege from prior courses - Draw on own experience - Make educated guesses 27  Internal: Organization-related barriers Can you think of examples? Leadership & Individuals become Strategy invested in old approaches (inertia, competencies) Whole scale changes to structure and process are very disruptive: Two years Structure / of lost time? To Whom? Process Existing incentives not aligned with change / Who Incentives benefits from change? Strong cultures & deeply rooted mental models resistant to change Culture & Mental Models 28  Internal: Organization-related barriers Leadership & Individuals become Strategy invested in old Whole scale changes to approaches (inertia) structure and process are very disruptive: Two Structure / years of lost time? To Process Whom? Existing incentives not aligned with change / Strong cultures & Who benefits from Incentives change? deeply rooted mental models resistant to change Culture & Mental Models 29 Inertia › Organizational learning theory (Fiol & Lyles, 1985) Theory › Evolutionary economics (Nelson / Winter, 1982) › Behavioral theory of the firm (Cyert & March, 1963) › Organizational experience (knowledge) embodies in routines › Routines are stable patterns of org. action, executed automatically in response to external stimuli Assumptions › Importance of experience for current organizational action: Firms (as people) tend to continue doing the same things that they have been doing in the past (part- dependency and inertia: resistance to change) › Path-dependency Relevant concepts › Competency (learning) traps › Core rigidities 30 Technology-& innovation-related barriers 31  Summary Threat of Organizational inertia cannibalization Driven by inertia, managers can Tendency to invest resources in easily adjust the wrong set of business with proven track organizational capabilities and records routines to the emergence of Bound/inflexible resources market opportunities/ changes Reluctance to cannibalize Difficulty to unlearn existing businesses because Innovation: Managers face a new technology is unproven and paradox (Core capabilities risky enhance innovation but have also a dark side: core rigidities , cf. Leonard-Barton, 1992) Can even lead to a failure to spot new opportunities or assess them wrongly 32 However, it is possible to overcome these barriers and remain relevant The world’s most innovative companies (Forbes, 2022) 33 And, of course, we shall not forget the societal relevance Source: Greenstone & Looney, 2011 34  Course objective Understand how firms can remain relevant  To do so we consider the creation and appropriation of value via innovation. 35 Background & Refresher › Setting the groundwork – definitions and concepts allowing a common understanding for our course 36 STRATEGY 37  STRATEGY How would you define strategy? (PollEv – Enter, upvote and downvote) 38 “Good strategy has a simple logical structure I call the Kernel. These three elements are (1) a clear-eyed diagnosis of the challenge being faced, (2) an overall guiding policy explaining how the challenge will be met, and (3) a set of coherent actions designed to focus energy and resources.” – Richard Rumelt Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique Strategy is the result of mix of value – Michael Porter, 1996 choices executive make, on where to play STRATEGY and how to win, to maximize long-term Strategy can be defined as the determination value – Ken Favaro, of the basic long-term goals and objectives of Kasturi Rangan, Evan the enterprise, and the adoption of courses of Hirsh, 2012 action and the allocation of resources necessary for carrying out these goals – Alfred Chandler, 1962 39 Strategy in the light of Value Creation and Appropriation › Effective strategies answer two key questions: How do we create How do we appropriate value? (capture) value? › Value Creation: the ability of innovators to create value with their innovations to stakeholders (HOW TO MEASURE?) › Value Appropriation: the ability of innovators to capture the value of their innovations (HOW TO MEASURE?)  how firms can capture and protect value from their innovations: appropriability 40 Strategy in the light of Value Creation and Appropriation Creation side Capturing value from innovation (1st half) (2nd half) Value System How to continue being How to reap benefits innovative? from innovation? How to remain How to defend against relevant? competitors? time development launch commercialization stage stage 41 Think / Discuss Largest Acquisitions of Biotech firms in Europe by potential value in 2019 Targets (Acquiring firm) Souce: Statista 42 43 Innovation – Basics Definition of innovation 44 45 Innovation – Basics What is an innovation? Joseph A. Schumpeter › Invention: An idea, sketch or model for a new or improved device, product, process, or system › Innovation: the process and outcome of creation and commercialization of something new. › Innovation includes opportunity identification, ideation or invention to development, prototyping, production, marketing and sales › Innovation = Invention + Appropriation (or Exploitation) 46 Innovation: something new In this course: › A firm that introduces something that is new to the industry/ market:  Innovation: when no identical or similar products have been introduced at an earlier date by other firms operating in the same industry  Imitation: when competitors copy the innovator (without consent), even though it is something new for them Why relevant for this course to focus on innovators? 47 Types of innovation › Which types of innovation can we differentiate? 48 Types of innovation (A) Product, Process, Organizational (can be BMI) › Often appear in combination › can enable each other › Categorization can differ depending on firm perspective (B) Level of newness › Radical vs. Incremental (departure from existing practices) (C) Competence-enhancing vs. Competence-destroying innovation › Depends on perspective › Building on firm‘s existing knowledge vs. Destroying ist value 49 Questions? 50 Conclusion – First part › Conclusion – Class 51 3. Value creation in incumbent firms (RBV) 52 Failed innovation around the world 53 › Objective: Identify a useful framework to understand how we can create sustained value! › How to situate RBV … ? › Why does it matter … ? 54 Main arguments RBV › RBV argues that the idiosyncratic, immobile strategic resources owned or controlled by a firm are its source of competitive advantage. › Sustained competitive advantage derives from developing superior resources and capabilities  Translate into assumptions: Resource heterogeneity & imperfect resource mobility 55  Resources & Capabilities Overview – Resources and Capabilities Collinson, Narula and Rugman, International Business, 7th edition, © 2017, 2013, 2009 Pearson education, Inc.; Table 3.1 Firm-specific resources and capabilities 56  Interplay of resources, capabilities, and strategic capabilities Strategic Resources Capabilities capabilities Tangible The skills of using Valuable (equipment, a bundle of Rare location, …) resources and (unavailable to Structures competitors) Intangible Processes Difficult/ costly to (technology, Systems imitate knowledge, Non- brand, … ) substitutability Organized to exploit Building Bundling Core resources resources competencies 57 The VRIO Framework https://www.youtube.com/watch?v=I-5gaT7AVUM , from minute 1.25 58 The VRIO Framework Resources/Capabilities: 1.A loyal customer base. 2.Integrated software and hardware products (e.g., macOS, iOS, and the seamless interconnection of iPhones, MacBooks, iPads, etc.). 3.Brand strength and innovation culture. Apple's ability to organize: Ecosystem Integration: Apple has set up an ecosystem where its devices and software integrate seamlessly (iCloud, Apple Pay, etc.), which drives customer loyalty and enhances the user experience. Supply Chain Management: Apple's well-structured and tightly controlled supply chain allows it to maintain product quality and innovation while controlling costs. Organizational Culture: Apple fosters a culture of innovation, allowing it to consistently deliver groundbreaking products and services. https://www.youtube.com/watch?v=I-5gaT7AVUM , from minute 1.25 59  The Summary VRIO framework VRIO The VRIO framework is a theoretical model based on the resource-based view (RBV) that helps to understand the sources of sustainable competitive advantages. Do a firm’s resources and capabilities add value by enabling it to exploit opportunities and/or neutralize threats? (Valuable) How many competing firms already possess these valuable resources and capabilities? (Rare) Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it? (Imperfectly Imitable) Is a firm organized to exploit the full competitive potential of its resources and capabilities? (properly organized) 60 Strategic valuable resources - examples 61 Two „good-practice“ cases 62 Coming back to the cases… 63 Final Conclusion RBV › Framework to explain heterogeneity in firms within industries › Enables better understanding on how to identify which capabilities provide a firm a sustainable competitive advantage › Can help firms spot potential threats to these capabilities › Only if all VRIO criteria are met, a capability creates a sustainable competitive advantage 64 4. Value creation in incumbent firms (Org. learning) 65  Broad theory Absorptive Capacity Exploration-exploitation Learning economies (Cohen & Levinthal, 1990) framework (March, 1991) 66  Challenges of building new capabilities „Der US-Autobauer Ford steigt direkt aus dem Geschäft aus und verbuchte dafür eine Abschreibung von 2,7 Milliarden Dollar, wie der Konzern nach US- Börsenschluss mitteilte. Diese Belastung führte im dritten Quartal zu einem Nettoverlust von 827 Millionen Dollar. Die beiden Partner hielten bisher jeweils 40 Prozent an Argo und hatten sich 2019 auf eine breit angelegte gemeinsame Entwicklung der Technik geeinigt.“ Source: Der Spiegel 67  Challenges of building new capabilites Nokia: open source software Nokia took steps towards greater openness with its 770 Internet Tablet based on the Linux operating system. Nokia has developed the company’s main products (smartphones) in house using Symbian, because the market in smartphones is mature with strict operator and server requirements. To speed the development of this open source product, Nokia published an open development platform, which is a Linux software toolset available to developers. The new development platform was targeted to open source developers and innovation houses to ensure the most effective development of a product and its applications. The company’s goal was to work closely with technology experts and the OS community. 68 A basis for continuous learning and innovation? A firm‘s absorptive capacity 69 A firm‘s knowledge stock as absorptive capacity Absorptive capacity = “ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends” (Cohen & Levinthal, 1990) = “set of organizational routines and processes by which firms acquire, assimilate, transform, and exploit knowledge to produce a dynamic organizational capability (Zahra & George, 2002) 70  A firm‘s knowledge stock as absorptive capacity 1) Acquisition – identify and acquire externally generated know- ledge that is critical to operations (intensity, speed, direction). 2) Assimilation – analyze, process, interpret, and understand in for- mation obtained from external sources (interpretation, compre- hension, learning) 3) Transformation – combine existing knowledge and the newly acquired and assimilated knowledge  alter knowledge stock (synergy, recodification, conceptual blending) 4) Exploitation – harvest and incorporate knowledge into operations 71  A model of Absorptive Capacity (Zahra & George, 2002) Where did Nokia potentially fail? Potential absorptive capacity: Realized absorptive capacity: Value creation by providing strategic Value creation by creating a competitive flexibility to change and reconfigure firm advantage. operations 72 Absorptive capacity – empirical support 73 Final conclusion absorptive capacity › AC helps us address the „problems“ with resource decay and building new capabilities › Enables us to consider how firms can build new resources and capabilities – partly from external sources – that will deliver sustained competitive advantage › Consists of PACAP (potential) and RACAP (realized) and its subcomponents 74 Organizational learning – Exploration- exploitation paradigm 75  Broad theory Absorptive Capacity Exploration-exploitation Learning economies (Cohen & Levinthal, 1990) framework (March, 1991) 76  Exploration-Exploitation framework Why failed? What happened here?  Exploration-exploitation at the organizational level: A Paradox lens  Core insights from ambidexterity research 77  Exploration-Exploitation Paradigm Exploration:...“includes things captured by terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, innovation“  radical, disruptive innovation Exploitation: „... Includes such things as refinement, choice, production, efficiency, selection, implementation, execution.“  incremental, performance-improving innovation Firms need both sets of innovative activities for long-term survival, but as their execution demands very different activities, capabilities, processes and evaluation criteria, firms often focus solely on exploitation – and fail...  Ambidextrous organizations manage a good balance between exploration and exploitation (Ambidexterity) 78  Example - Automotive industry Optimization of processes vs. New business models 79 BCG Innovation Survey 2010 80 What’s the challenge? › Require fundamentally different underlying knowledge search processes:  Exploitation—search depth: "how deeply a firm reuses its existing knowledge”  Exploration—search scope "how widely a firm explores new knowledge” (Katila & Ahuja, 2002: 1183) 81 Exploration & Exploitation (organizational level) › Organizing such search processes requires opposite focus and contradictory demands, at multiple levels (individual, team, project, organizational structure, etc.) › Yet, simultaneous pursuit of exploration and exploitation is required to avoid success and failure traps (e.g. Gupta et al., 2006) 82  Challenges in Organizing Explorative Innovation at the individual level Exploitative innovation: Explorative innovation: Analytic cognitive style Intuitive cognitive style 83  Challenges in Organizing Explorative Innovation at the process level Exploitative innovation: Explorative innovation: Structured process model Flexible process model 84  Challenges in Organizing Explorative Innovation at the organizational level Exploitative innovation: Explorative innovation: Mechanistic structure Organic structure Centralized structure with multiple Decentralized structure with limited number hierarchical levels of hierarchical levels Formal coordination by means of Informal coordination by means of lateral vertical communication communication Focus on control Focus on autonomy 85 A paradox lens Ambidexterity literature: › Exploration-exploitation as a paradox › Organizational ambidexterity: ability to deal with such paradox and resultant tensions 86 A paradox lens How can organizations attain ambidexterity? › Shift organizational focus from exploitation to exploration (vice versa) over time. › Set up organizational design with dedicated units responsible for either exploitation or exploration. › Create organizational context that enables organizational actors to situationally oscillate between exploitation and exploration. Exploration-exploitation tensions are resolved: › Temporally (over time) Sequential ambidexterity › Structurally (across units) Structural ambidexterity › Contextually (embedded in day-to-day Contextual ambidexterity operations) 87 A paradox lens › Four paradox management strategies Contextual Opposition ambidexterity Synthesis (acceptance) Spatial Temporal Structural & sequential separation separation ambidexterity (Poole & Van den Ven, 1989; Schad et al., 2016) (e.g. O'Reilly III & Tushman, 2013; Martin et al., 2019) 88  Ambidexterity: potential organizational answers Structural ambidexterity 1- through structural separation within firm boundaries Exploration/ exploitation on the Structural ambidexterity 2- firm level through external venturing & strategic alliances Contextual ambidexterity 89  Ambidexterity through structural separation -1 External v enturing, Strategic alliances Structural separation / structural ambidexterity Exploration/ exploitation on the firm level Exploitation Exploration Advantages Disadvantages Each separate unit can be optimally Expensive and limited ability to realize staffed, managed and structured synergies across different units Example 90  Ambidexterity through strategic alliances - 2 External v enturing, Strategic alliances Structural separation / structural ambidexterity Exploration/ exploitation on the firm level Contextual ambidexterity Exploitation Exploration Advantages Disadvantages Core of the company can focus on Limited control and difficulties to integrate exploitation, whereas explorative activities explorative activities when successful are nurtured outside the firm Example 91  Ambidexterity through combination (contextual ambidexterity) - 3 External v enturing, Strategic alliances Structural separation / structural ambidexterity Exploration/ exploitation on the firm level Contextual ambidexterity Exploitation Exploration Advantages Disadvantages Bottom-up approach Demanding for individuals who continuously need to switch between exploration and exploitation; need for Example organizational systems and cultures that support contextual ambidexterity; cost- effectiveness questioned 92 › Question: But which factors trigger increased exploration? Think-Pair-Share. 93 Framework by Lavie et al., 2010 94 Exploitation-Exploration framework › Conclusion 95