VUCA Notes PDF

VUCA NOTES Week 1 – Understanding the Future Megatrends Understanding the Future Predictions are difficult The world we live in is complicated and it keeps changing o Hence, we have to find ways to make sense of it and one way to understand it is through the len...

VUCA NOTES Week 1 – Understanding the Future Megatrends Understanding the Future Predictions are difficult The world we live in is complicated and it keeps changing o Hence, we have to find ways to make sense of it and one way to understand it is through the lens of VUCA Megatrends Definition: Megatrend is a long-term change that affects governments, societies and economies permanently over a long period of time o Slow, steady and powerful for decades o Forces that define our present and future worlds o The interaction between them is as impt as each individual megatrend ▪ Futures Wheel: used as a first step in understanding the interconnection of upcoming changes and challenges 3 dimensions of megatrends: o 1. Time: Observable over decades. Megatrends can be projected with a high degree of probability at least 15 years into the future o 2. Reach: Megatrends affect all regions and stakeholders, including gvt, individuals and businesses  o 3. Impact: Megatrends fundamentally transform policies, society and the economy 2 of these megatrends are simultaneously cited as forces of change: globalisation & evolution of technology o Shape economies, societies and our lifestyles 1. Global challenges not directly dependent on human factor will bring about extensive pressure on countries – climate change, potential financial crises, pandemics and implications of exponential tech developments 2. Fragmentation of societies, states and the international system make it diff to face common challenges – interconnectivity of our world contributes to fragmentation and radicalization of ppl and communities o Hyperconnected information environment, intensification of urbanisation and interdependence of economies signify that most aspects of daily lives of citizens are closely interrelated 3. Imbalances – growing mismatch at all levels between challenges and needs on one hand and systems and org that aim to address them o International system not ready to meet increasing global challenges populations are facing o COVID-19 – coordination failure in handling health crisis & mismatch among existing pandemic response mechanisms and future health challenge o Gap between what citizens demand and what gvt and private sector can offer is likely to be created and established within states and societies 4. Imbalance creates conflict within the communities, states and international community – relations between societies and gvts will be under constant pressure while states will strive to meet citizens’ growing demands o No country, ideology or system of government meets demands of citizens o Increasingly competitive geopolitical environment because of China challenge to US and allies o Major power competition 5. Adaptability is an imperative – technology is key to gaining advantages  o AI productivity growth helps to provide more services, reduce national debt, finance part of the cost of ageing population and help emerging countries avoid middle income trap o Benefits of tech will be unequally distributed and adaption process is likely to reveal new inequalities Examples of Megatrends Changing Population increase demographics o 7 billion ppl in 2011 → expected to grow to 8.6 billion in 2030 o Increase in no of ppl surviving to reproductivity age, changes in fertility rates, increased urbanization and accelerating migration o 50% population growth based in Africa while population in EU’s eastern neighbouring countries is either shrinking or growing at a slower pace Aging (the world will be 9 years older) o OECD says that over the last 40 years, no of people over the age of 65 as a share of ppl of working age (15-64) has increased from 20% to 31% o Rapid ageing put pressure on pension systems, decrease in total productivity, leads to labour supply reduction and economic challenges o Creates new markets and increased demand for services in fields that require innovation such as health systems, infrastructure, transport, communications and technology o Increases pressure on health services, long-term care systems and public finances 70% more urbanized Rise of the individual o Rising income, expectations, tastes and preferences o Empowerment through education o Demand for transparency and accountability o Participation in governance o Interconnectedness blurs the lines of private and public boundaries. o Social Media Women are over half of the workforce More food and housing needs, migration, depletion of natural resources, urban impoverishment, increasing pressure on environment and climate stability, and increasing energy needs Global Entire world buyers and sellers, considered independently of national borders marketplace Increasing dependence of nations on each other o Interdependence through trade investments, financial system linkages, supply chains etc o Balance the tensions between local vs global priorities Gulf between ‘mature’ and ‘rapid-growth’ countries continues to shrink New tier of nations driven by their own middle classes has come to the front o Hot spots for innovation o War for talent Urbanisation Global pace of urbanisation continues to increase but urbanisation rate varies by region o Most of urban population growth expected to occur in Asia, Africa and Latin America o Population decrease in Asian and European countries with low fertility rate Social, economic and environmental challenges caused by overpopulation, degradation, social inequalities, rising temp, pollution and traffic congestion Proximity of ppl, businesses and services provides opp to rebuild cities with more efficient use of resources Enabling Technology diffusion rate technology o Telephone – 35 years; TV – 26 years; Radio – 22 years; PCs – 16 years; Internet – 7 years o IOT connected devices reached 23.14b in 2014 and expected to reach 75.44b by 2025, possibly many trillions by 2040 o Reach 100 million users ▪ Twitter – 5 years ▪ FB – 4.5 years ▪ ChatGPT Impactful technologies o AI, advanced robotics, drones, Smart devices, 3D printing, cloud computing, blockchain technologies, VR and AR, commercial space technologies, nanotechnologies and biotechnologies New technologies will emerge and disrupt the economy, labour market, society and citizen’s position in it (+) IOT connectivity will enable the creation of new skills and facilitations and will help raise SOL o (- ) BUT also create tensions at all levels from societies that are being divided as they differ in core values and goals, to regimes that use digital repression to control their citizens o (-) Ppl come tght and share info with others with similar views, reinforcing specific beliefs and a sense of owning the truth World’s advanced economies likely to dominate tech-based industries, with China and India also leveraging deep pools of technical talent and massive domestic markets to become “players” in digital industries Economic The rise of Asia power shift o By 2050, India is expected to overtake US, becoming the 2nd largest economy in the world, while Indonesia is likely to climb to the 4th place, surpassing advanced economies such as Japan and Germany o Vietnam emerge as fastest growing economy by 2050 China: the rise, the slowing down, the aging population o China overtaken US in PPP and is expected to become largest economy in market exchange rate terms before 2030 Rising geopolitical tension o If current trends continue, political influence of G7 (USA, UK, France, Germany, Japan, Canada, Italy) to shift to E7 (China, India, Indonesia, Brazil, Russia, Mexico, Turkey) o Progress and achievement of Asians in science, tech, rapid growth of population and middle class and their rich natural resources  o New international economic, financial and political systems emerging as impact of New Development Bank (NDB) and China-based investments (Silk Road) increase The role of Africa: o The next Asia o Can Africa feed the world? The potential of middle east Climate Global warming change and o Climate change exacerbate inequalities and intensify the phenomenon of climate resource migration globally, creating new problems in both countries of origin and of scarcity destination o Rising sea levels and stronger storms affecting coastal areas o Increased costs of extreme weather Pollution, overexploitation of natural resources and environmental degradation o Greenhouse gas emissions and pollution increasing due to mainly economic development but also population growth Resource scarcity o 1. Raw materials ▪ Doubling of world population & tenfold increase in GDP in the last 50 years ▪ Global Footprint Network (NGO): “Humanity is currently using the planet’s resources 1.75 times faster” than our planet’s ecosystems’ capacity to regenerate them o 2. Energy ▪ Increased energy consumption led by increased urbanization ▪ According to WWF, consumption of fossil fuels doubles every 20 years ▪ Dramatic increase in use of non-renewable natural resources will exacerbate climate change, increase air pollution and reduce biodiversity → lead to depletion of natural resources, shortage of critical materials ▪ Increase environmental pressure ▪ Contribute to local conflicts such as those observed in areas where mining competes with agriculture and urban development o 3. Water resources ▪ Rising demographic imbalances, increasing consumerism and continuing urbanisation will increase water demand, whereas supply will become more volatile 40% gap between water supply and demand ▪ Large amount of water lost through irrigation network leaks, while equally large amt is wasted due to poor irrigation practices and lack of planning ▪ Food security: 50% increase of food production to feed the increasing population o 4. Food ▪ Growing population and consumerism ▪ Exacerbated by climate change and environmental degradation Growth of Over 50% of the world’s population classified as “middle class” in 2018 middle class Most growth in Asia & Investment opp, change in CB (basic consumer goods and clothing → luxury, tourism, consumption cosmetics, restaurant, entertainment, health, sports, education and transports), rise in on a global total PP which boosts global dd level Larger share of middle class, larger economy grows in LR Mechanisms through which middle class influences economic growth: o Stable dd: Stable dd has positive effect in investment and investment boost EG o Trust: Stronger middle class = more trust and stability in society and economy o Virtuous governance = strong middle class encourages virtuous governance, functioning of institutions, the fight against inequality o Values = social responsibility, work ethics, intolerance towards crime Black Swan Events Highly disruptive and surprising event that has a major impact 3 characteristics: o Hard to predict o Unexpected consequences of large magnitude o After occurrence, they are rationalized by hindsight Examples: 9/11, Epidemics, Natural Disasters, Wars COVID-19 is not a BSE → it is a white swan as the impact of the pandemic is foreseeable is foreseeable due to the interconnectedness of our world today o The aim is not to have a list of black swan events but rather build structures that can cope with random events Week 2 – Overview of VUCA Strategy Under Uncertainty; Putting Organisational Complexity in its Place Origin of VUCA Notion introduced by US Army War College Acronym itself not created until late 1990s, notion and acronym took hold after 9/11 VUCA subsequently adopted by strategic business leaders to describe the chaotic, turbulent and rapidly changing business environment that has become the “new normal” Explanation of VUCA VUCA Explanation Causes Example Solutions s Volatility Unstable and unexpected change for Digitalisation Prices Build in slack unknown duration Connectivity fluctuate in the o Means nature, speed, volume, and Trade after a system magnitude of change that is not in a liberalization natural Be prepared predictable pattern Global disaster Caution: Volatility is turbulence competition takes a expensive o a phenomenon that is occurring now Business supplier intervention more frequently than in the past model off-line s; match the o Worst financial turbulence in 2002, innovation risk now 2023... o Financial turbulence has increased in intensity and persisted longer than in the past Uncertainty Unable to know everything fully Lack of A Building an The lack of predictability in issues and information competit intelligence events or’s operation Difficult for leaders to use past issues and pending Collect, events as predictors of future outcomes launch interpret Makes forecasting extremely difficult and muddies and share decision-making challenging the Gather from Residual uncertainty = uncertainty that future of new remains after the best possible analysis has the sources, been done business create new and the information Level of Description Solution market networks Uncertainty & Example Look at new Level 1: Clear Managers can Standard Tool perspectives Enough Future develop a Kit: single forecast Market of the futures Research Competitor’s This prediction cost & is precise capacity, enough for Value chain determining analysis, strategy Porter’s 5 Forces One strategic direction Adapter Poster → No regret EX: Southwest moves, Airline’s positioning strategy towards low- cost, no-frills airline entrant Level 2: There are a few Decision Alternate alternate Analysis: Futures outcomes / Develop a discrete set of scenarios that discrete  define the scenarios, future probability of each Possible using a outcomes are classic DA clear but which framework one occurring is Identify the diff to predict likely paths the industry Analysis cannot will take to determine reach those which situation alternative will occur outcomes Which strategy Sharper → to use is Lower determined by uncertainty, the outcome increase that occurs probability of best case EX: Capacity strategies for factories. Dependent on competitor moves. Strategies for companies entering deregulated markets. (Due to some form of Major regulator / legislative change.) Level 3: Range There is a range Scenario of Futures of potential Planning: futures defined Develop a by key variables set of scenarios Actual outcome that may occur describe alt anywhere on future the continuum outcomes Focus on Which strategy trigger to use is events that determined by signal the outcome moving that occurs toward certain EX: Entering scenarios emerging Each markets (e.g. scenario India) → EU should offer company a distinct pic  entering Indian of the market industry → Probable, Has 10-30% not all market possible penetration outcomes rate See how robust the Developing / strategy is acquiring emerging tech Sharper will → Broad range move in a of costs but general direction overall profitability is Adapter will based on this keep options open Level 4: True Environment is Stock take what Ambiguity virtually we know impossible to predict Identify a subset of variables that A range of will determine potential how the market No basis to outcomes will evolve over forecast the cannot be time future identified Identify Transitional → favourable and Moving into a unfavourable new and never indicators that before-seen will let them environment track the market evolution However, after time and Identify patterns stability, can through other move back similar market down to Level 3 experiences or 2 RRTP is risky EX: Entering the Russian marketing after 1991 → no idea what laws & regulations governing everything will be Entering a market that uncertainties btwn how consumers will  react to new product → unpredictable and no plausible scenario (e.g Telecom entering consumer power market) Entering the market for consumer multi-media applications Strategic Intent Strategic posture defines the intent of a strategy relative to the current & future state of an industry Shapers = aim to drive their industries toward a new structure of their own devising (create new opp by shaking up relatively stable level 1 industries or by trying to control direction of market in industries with higher uncertainty) o Kodak: pursued this through investment in digital photography as its new technology supersedes the one that generated most of earnings o Hewlett-Packard: Pursued a radically different model in which high-quality, low-cost photo printers shift photo processes from stores to home Adapters = take the current industry structure and future evolution as givens, and react to opp the market offers o Little uncertainty = choose a strategic position - where and  how to compete – in current industry o High uncertainty = strategies are predicated on the ability to recognize and respond quickly to market developments (e.g. telecom service resellers are adapters who buy and resell latest P&S, rely on price and effective execution instead of product innovation as CA) Reserving the right to play = making incremental investments today that put a company in a privileged position, through superior info, cost structures or relationships between customers and suppliers Strategic Moves No Regrets Move = pay off no matter what happens Options = designed to secure big payoffs of best-case scenarios while minimizing losses in worst-case scenarios Big Bets = large commitments (e.g. major capital investment or acquisitions) that leads to large payoffs or losses Note Avoid binary view of uncertainty Match your internal capability with external environment when formulating and implementing your strategy FIT! Complexity Many interconnected parts or variables Digitalization A Complexity in forming an elaborate network of Connectivity company the information or procedures Trade is doing environment: 3 properties of complexity liberalization business adapt and be  o Multiplicity: No of potentially Global in many flexible, aligning interacting elements competition countries to new o Interdependence: How connected Institutional , all with environmental these elements are change unique complexity o Diversity: The degree of regulator heterogeneity y Institutional vs environ Individual Complicated vs complex ments, Complexity: Complicated Complex Systems tariffs Removing Systems and complexity Have many parts but May have cultural that doesn’t they operate in interactions that are values add value predictable ways – constantly changing Channelling e.g. an aircraft – e.g. air traffic what’s left control situation to employees Institutional vs Individual Complexity who can Institutional Individual either No of countries the Poor processes, handle it company operates in, confusing role naturally or the no of brands or definitions or unclear be trained ppl they manage, the accountabilities to cope with no of partners they it have Many leaders cite Less consider this – this as problem but reveals executives’ focus on institutional blind spot when Steps: complexity at the managing complexity 1. Survey the expense of individual effectively + scene kind can lead to financially costly 2. Draw a map wasted effort or org of what’s damage really going on Types of complexity: How manageable is 3. Reduce and your complexity? redirect Imposed Includes laws, industry complexity Complexity regulations and interventions once you by NGOs. have a clear picture of Not typically manageable by where companies complexity Inherent Is intrinsic to the business and hampers Complexity can only be jettisoned by effectivenes exiting a portion of the s business 4. Bolster skills Designed Results from choices about where Complexity where the business operates, needed  what it sells, to whom and how. Companies can remove, alter some of these but this may impact control systems and business models Unnecessary Arises from growing Complexity misalignment btwn needs of org and processes supporting it. Once identified, it is easily managed Note When tackle the problem of complexity be careful not to introduce unnecessary value- reducing complexity at the individual level To deal with complexity need new skills of handling and coping with complexity Ambiguity Lack of clarity about the meaning of an All of the above A Systems event three (V, U and C) company thinking Lack of knowledge about the basic rules of will lead to high decides Experimenta the game level of ambiguity to move tion More than one interpretation into Org agility Causal relationships are completely unclear immatur o The causes and the “who, what, e or where, how and why” behind the emergin things that are happening are unclear g and hard to ascertain markets or to launch products outside its core compete ncies Summary The world is turbulent and not fully predictable Isn’t just complicated but complex Often involves more than one interpretation Become increasingly VUCA  One way of how to embrace VUCA: Unilever’s example o In 2010, Unilever, one of the world’s largest consumer goods companies, pledged to double the size of their business in the next 10 years while reducing its environmental footprint and increasing its social impact. o Sustainability became a central component of their new business model, one based on VUCA principles o When asked by Forbes contributor Avi Dan why they changed their business model, Keith Weed, chief marketing and communicating officer said ““We look at the world through a lens, which we call VUCA, which stands for ‘volatile, uncertain, complex, and ambiguous.’ So you can say ‘It’s a tough world,’ or you can say, ‘It’s a world that’s changing fast, and we can help consumers navigate through it.’ Two-and-a-half billion more people will be added to the planet between now and 2050, of which 2 billion will be added to developing countries. The digital revolution, the shift in consumer spending, all this suggests that companies have to reinvent the way they do business.” Week 3 - Understanding Context: From the Lens of Speed Adaptability: The New Competitive Advantage First Order Size, tangible resources, scale, position Capabilities Increasing instability has upended the business environment and led to precarious market leadership o Volatility of operating margins has doubled since 1980 ▪ Size of gap between winners and losers widened o Increasing uncertainty poses challenges for strategy making as traditional approaches assume a stable and predictable world ▪ Market leader position changes quickly, making it hard to apply frameworks based on scale or position Percentage of companies falling out of top 3 rankings in their industry increased from 2% in 1960 to 14% in 2008 ▪ Once strong correlation between profitability and industry share is almost non-existent ▪ Impossible to identify what industry they are in and which companies they are competing with → hard to measure position ▪ Traditional forecasting and analysis impossible in unpredictable environment  ▪ Overwhelming changing information makes it hard for managers to pick up right signals to understand and harness change ▪ Rapid change → irrelevant 1 or 5 year planning cycle Big company with large EOS may not always be competitive: Insufficient because with megatrends in the world such as globalization, many small companies can outsource to emerging economies of production to lower cost of production Sustainable CA no longer arises exclusively from position, scale & first-order capabilities in producing or delivering an offering as they are static Companies start to rely on second-order capabilities that foster rapid adaptation – instead of being really good at one particular things, companies must be good at learning how to do new things Second-Order Foster rapid adaptation – learning to be good at doing new things Capabilities Types of Market* Slow cycle Competitive advantage shielded from imitation for long periods market of time, imitation is costly These markets are close to monopolisitic markets conditions – trade barriers are high. Focus: build one-of-a-kind competitive advantage (proprietary and difficult for rivals to understand), then protect, maintain and extend that competitive advantage. o Find CA and exploit it → well protected in this market Eg. Market for Utilities/Power – shielded by Govt E.g. Pharmaceutical industry → sole producer of the drug once gvt gives patent Fast cycle Competitive advantage not shielded from imitation, imitation market happens often, rapid and inexpensive Unstable, unpredictable and complex Focus: learn how to rapidly and continuously develop new competitive advtange through innovation Eg. IT markets (many tech firms can do reverse engineering to find out how tech works and come up with similar tech) Standard cycle Competitive advantage moderately shielded from imitation – market between slow and fast cycle markets. Focus: form alliances with partners who have complementary resources & capabilities Eg. STY Team chaired by Delta and Air France, and recently joined by China Souther Airlines – develop an internal website to speed joint buying – reduce cost in competitive air-travel market. E.g. FMCG → P&G, Unilever → Look at market share or brand image, pump lots of money into marketing so that consumers make a purchase when they recognise the brand *Overall trend is that becoming faster: Slow → Standard → Fast How to deal with the future – how to obtain ‘Second-Order Capabilities?’ The 4As*: 1. The Ability to Read and Act on Signals of Change 2. The Ability to Experiment Rapidly and Frequently – not only with P&S but also with Business Models, Processes and Strategies 3. The ability to Manage Complex and Interconnected System of Multiple Stakeholders 4. The ability to Mobilize Resources and Motivate Employees and Partners * If an industry is stable and predictable, companies are better off sticking to the traditional sources of advantage. If the industry that firms operate in are uncertain and rapidly changing, firms need a dynamic and sustainable way to stay head by using the four organisational capabilities to gain adaptive advantage. #1 The Ability to Read and Act on Signals of Change Why is it important? o Companies need to be alert to these signals of change, decode/read them, quickly respond to them and act on them. o Ensure that no opportunities are missed o Earns a stream of revenue if successful Why is it a challenge? o Small companies may not necessarily have the information required – imperfect information and fluid environment ▪ How can you make sure you are reading the right information? ▪ How can you read the situation when it is always changing? o Even though big companies have the necessary information, they have to go through levels of management to enforce and act on the signals – inefficiency o Complex – varying signals available to all companies What can be done? o Select and analyse the relevant information through: ▪ Point-of-scale systems ▪ Data-mining technologies ▪ Signal-reading capabilities (learning)  ▪ Data-analytics The process of examining large amounts of data to uncover hidden patterns, unknown correlations and make other useful information that can be used to make better decisions High-performance analytics used to figure out what’s important and what’s not. #2 The Ability to Experiment Why is it important? o Helps to uncover information that cannot be deduced or forecasted Why is it a challenge – using traditional approaches? o Costly – can rely on tech to reduce cost o Time-consuming o Inaccurate: Research based on consumers’ perceptions is often a poor predictor of success o Failed experiments may ruin company’s brand & recognition What can be done?  o Adaptive companies need to change the way experiments are done at using new technologies – done faster and at lower cost o Adaptive companies need to broaden the scope of experimentation – not just products and services, but business models and strategies o Adaptive companies must know that experimentation necessarily produces failures, need to be receptive and learn from past mistakes – embrace failure ▪ Top management needs to instil a real culture of failing and moving on fast, be able to trust employees to not exploit the system ▪ Prevent employees from covering up failure Case Study: Intuit 2005 marketing campaign to reach young tax filers through a website called rockyourrefund.com flopped as no one used the site o Offered discounts at Expedia and Best Buy and opportunity to get tax refunds in the form of prepaid cards Marketing team documented what it had learned from the failure and won an award from company chairman #3 The Ability to Manage Complex Multicompany Systems  Companies today are no longer one single entity - they have a web of stakeholders that can affect their business; managing them equates to managing their survival in the market Increasingly beyond corporate boundaries Why is it important? o Increasing amount of economic activity occurring beyond corporate boundaries through outsourcing, offshoring → no longer a single business unit, so need to think about strategies not just for individual companies but for dynamic business systems o Industry is now an ecosystem of co-dependent companies instead of independent competitors producing similar goods, and working on a stable, distant and transactional basis with suppliers and customers Why is it a challenge? o Lack of expertise or resources to curate expertise (especially SMEs) o More roles being created presents challenge o Government rules and intervention may affect ecosystem (e.g. tariffs) o Management of stakeholders relationship → Joint value creation (who should start) → building trust to maintain relationship What can be done? o Competitive advantage will flow to companies that can create effective strategies at the network or system level ▪ Push activities outside company without benefiting competitors and how to design and evolve strategies for networks without being able to rely on strong control mechanisms o Adaptive companies manage their ecosystems by using common standards to foster interaction with minimal barriers ▪ Generate trust among participants by enabling people to interact frequently and by providing transparency and rating systems that serve as “reputational currency”  ▪ E.g. Toyota’s automotive supply pyramids had Kanban and kaizen feedback mechanisms, EBay’s seller ratings and online payment systems Able to bring together the assets and capabilities of many entities #3 The Ability to Mobilize and Motivate Why is it important? o Encourage the knowledge flow, diversity, autonomy, risk-taking, sharing and flexibility to be adaptive o Creating a decentralised, fluid, flexible structure and dispersal of decision- making down to the front-lines (not too top-driven) o Traditionally, adaptive companies have replaced permanent silos with modular units that freely communicate and recombine according to the situation at hand ▪ To reinforce this framework, have weak or competing power structures and a culture of constructive conflict and dissent Case Study: Cisco Early on relied on hierarchical, customer-centric organisation to become a leader in market for network switches and routers CEO John Chambers then created novel management structure of cross- functional councils and boards to facilitate moves into developing countries and 30 adjacent, diverse markets (ranging from healthcare to sports) with greater agility than would previously have been possible o Driving decision making down to the front lines allows people who are most likely to detect changes in the environment to respond quickly and proactively Case Study: WholeFoods Basic organisational unit is the team and each store has about 8 teams  Team leaders decide what to stock Teams have veto power over new hires Encouraged to buy from local growers that meet quality & sustainability standards Rewarded for performance with bonuses based on store profitability over the previous month o Creates a culture of constructive conflict – talk openly and respectfully about conflict, with mutual attempts to understand each other’s perspective and create the best solutions Why is it a challenge – having a decentralised structure o Some employees may not have fixed jobs – inefficiency resulting in uncertainty of their JDs. o High cost o Loss of accountability from top managers – everyone is a decision maker o Leading to slower and inconsistent decision making – inefficiency o Dependent on structure and industry → if you need to make efficient decisions (e.g. medical industry, hard to implement decentralized structure) o Middle managers lose power as power is shifted to people on the ground – may be hard to get buy-in from them ▪ Mitigate through ensuring transparency in objectives and communicating that role is still valid (formulating overall strategy and direction in correcting mistakes on the ground) ▪ Training them to be able to manage new staff What can be Done? o Simple, generative rules to facilitate interaction and set the boundaries within employees can make decisions ▪ Important since creating a decentralized organisational structure destroys a big advantage of a rigid hierarchy, which is that everyone knows precisely what they should be doing ▪ Need substitute for certainty  o Train middle and lower tier managers to be meeting facilitators who are able to recognise differences between constructive and deconstructive conflict, and help groups keep conversations constructive The Challenge for Big Businesses Challenge: Big companies may not be as adaptive as they are oriented towards manging scale and efficiency, and their hierarchical structures and fixed routines lack diversity and flexibility needed for rapid learning and change Tactics to foster Adaptive Advantage 1. Learn from mavericks o Shift focus from traditional competitors’ o See what new players are doing and think of ways to insure their firms against new competition o See what is happening in adjacent or analogous industries and visualise what if it happens in their markets 2. Identify and address the uncertainties o Examine risks and uncertainties that could significantly affect company to realise what they don’t know and how to address it ▪ Distinguish “false knowns” (questionable but firmly held assumptions) from “underexploited knowns” (megatrends you may recognise and may have acted on, but without sufficient speed or emphasis) and “unknown unknowns” (intrinsic uncertainties that you can prepare for only by hedging your bets) o Megatrends  o Black Swan Events 3. Address every significant risk o Portfolio of strategic initiatives should become engine that drives organisation into adaptability o Depending on uncertainty, goal of the initiative for risk may be responding to a neglected business trend, creating options for responding to it down the line or simply learning more about it 4. Examine multiple alternatives o Plans and backup plans – scenario planning, creating portfolio of options o Legitimizes and fosters cognitive diversity and organisational flexibility 5. Plan at shorter intervals o Time pacing o In fast-moving environments, companies need to accelerate change by making annual planning processes lighter and more frequent Time Pacing: Competing in Markets that Won’t Stand Still Time-Pacing* Event-Pacing* Definition Scheduling changes at predictable Scheduling change only when intervals and time – regularly some event happens in the releasing new products environment – new tech. Characteristics Proactive, rhythmic, regular Reactive, irregular, erratic Schedules change as a rule (need not be speedy) *Note: Companies can adopt both strategies at the same time (e.g. Time pacing – McD changes menu based on season; Event pacing – McD change menu due to surge in demand for certain flavours) Adaptive capabilities  Time pacing Both mutually reinforce each other - If you have adaptive capabilities can help with Benefits of Time Pacing implementing time pacing = read and react with signals -> can pace properly to change e.g. menu Better at managing transitions - If pace is well done and transitioned is well done, can Better at creating rhythm become more adaptive Creates a sense of urgency with confidence – tempo might be fast, but it becomes predictable and gives managers a sense of control Resist the extremes of changing too often Focus, efficiency and confidence enhances performance  Disciplines the manager to excel at 2 critical (often neglected) processes essential to success in changing markets: o Managing Rhythm → builds momentum o Managing Transitions → sustains momentum Examples of Time Pacing: 3M wants to have 30% of revenue from new products every year Starbucks want to open 300 stores every year British Airways want to refresh its service every 5 years Examples of transitions: Shifts in product development product Entering or leaving markets Launching new alliances Mergers and Acquisitions Shifting between marketing campaigns Importance of managing transitions effectively Transition is the hardest part where it could potentially fail Involving a large number of people, communication easily falls apart. Because of the fast pace, it becomes easier to fall, and falling behind in the VUCA world allows competitors to catch up, making it difficult to regain competitive lead Some managers spend months analysing an acquisition, but spends far less time planning the integration, ignoring transition – leads to rough takeovers. Case Study: Blockbuster Poor transition management In an attempt to cut costs, decided to bring distribution of videos in- house Switched from third-party distributor to own newly designed, automated facility in Texas before new system was up and running → led to repeated delays in getting latest videos from warehouse to local stores Cash flow dropped by 70% in 1997 Where does transitions matter the most? In Fast Cycle Markets o The faster the pace, the more the transitions, commanding a larger portion of manager’s time. o Transitions are more critical because the faster the market moves, the harder it is for companies to catch up after a fall. The best transitions happen when: Where organisations use these transitions to learn, reflect, change direction and accomplish other goals Where companies use transitions as opportunities for change The way companies manage transitions may differ – some may time longer time, but successful transitions must be clear, choreographed processes that all employees understand Managing Rhythm Creates momentum for changing in time pacing Help managers plan ahead and synchronise activities Not about speeding up – without rhythm, managers tend to be reactive and not proactive, and see changes as unwelcomed surprises Examples of using rhythm – by getting in step with the market Align with rhythm in the market place o Korean Pop Girl Group aligns their launch of a new upbeat song during summer – summer holidays are perceived as light-hearted and fun – rather when they think of the idea. o Launch new drink for the summer (rather than when a new drink idea comes up) o Appliance manufacturer aligns its new product with retailer’s schedule shelf planning cycle. o Computer manufacturer aligns its new product launch with computer magazine reviews – Razor launches a new gaming mouse during IT fair 2019/ Creative launching new in-ear headphones at IT fair. Although customers may be the most important source of rhythm, external rhythms from supplier and complementers (market/external factors) are also important Case Study: Intel Time-pacing strategy depends on company’s ability not only to execute rhythm but also to synchronize with others If company pumps out chips too fast for complementary products or designs chip for which there aren’t enough uses → Intel falters To stay in rhythm, must create “new uses and new users” Ensure software developers and important customers like personal computer manufacturers are able to keep up with pace o Give developers early access to enw products  o When tech threatens established rhythm, engineers found solutions (e.g. speed of microprocessors outstripped tech for accessing data from networks) Managing Rhythm – choosing a manageable pace Why? o Companies can only time-pace as fast as their internal capabilities allow them to move o Hence, companies must match internal capabilities with rhythm How? o Companies that want to time-pace effectively must match their rhythm to the realities of their internal capabilities o But when their pace falls short – companies must ramp up internal capabilities Managing Rhythm – Changing Often Enough Time pacing can help organizations resist the extremes of changing too often or too little – especially since signals of when to change are unclear o Changing too frequently: reacts too quickly to any signals and never learns to be good at anything – employees failing to accomplish tasks creates poor products/services and sends confusing messages to customers. o Changing too little: Companies become locked into old patterns and habits – they run the risk of waiting too long and falling too far behind to catch up. Week 4 – Understanding Context: From the Lens of Disruption Meeting the Challenge of Disruptive Change  Introduction to Disruptive Innovation Disruption is a problem for incumbents – they never introduce or cope well with disruptive change: o RPV framework: Industry leaders are organised to develop and introduce sustaining technologies. Processes and values support only sustaining innovation and become disabilities when faced with disruptive change ▪ Processes: Developed processes for evaluating technological potential of sustaining innovations and for assessing CX needs for alternatives ▪ Values: Investments in sustaining technology fit in values as they promise higher margins from better products sold to leading-edge CX Incumbent firms might not react as they are chasing high profit sectors, allowing disruptor to improve its services while preserving the advantages that give it early success o Consumers migrate to new firms → disruption occurs Disruptive products nearly always promise lower profit margins per unit sold and are not attractive to the company’s best CX → inconsistent with company’s values o Disruptive innovations occur so intermittently that no company has a routine process for handling them o This is why they surrender emerging growth markets to smaller, disruptive companies who are more capable of pursuing them (values embrace them and cost structure can accommodate low margins) Sustaining Innovation vs Disruptive Innovation Sustaining Innovation Disruptive Innovation Definition Focus on making existing products Creates entirely new market through the better to meet the demand of introduction of a new and more affordable mainstream customers product – not meant to satisfy mainstream market Product / Improve a product or service such that it Introduces a new product/service that Technology performs better than what the market performs worse initially currently values Improvements along dimensions Improved performance on new valued by current customers attributes (e.g. simplicity, convenience)  Can be incremental or Allow people to do things they couldn’t breakthroughs do due to lack of money or skill Things they are already trying to do but can’t with the available P&S Customers Innovations that mainstream customers Innovations that do not satisfy current demand consumers Serves the most profitable customers in Serves new customers that the existing market existing markets (higher paying does not serve – create an entirely new customers) market (must be undervalued by current customers) Over time, the innovation may improve so rapidly that they also address the needs of the customers in the existing market Business Model & Similar to existing model, improves or New business model, often lower price points, Firm Size maintains margins new sales model & distribution channels Nearly always developed and introduced by established industry leaders (who never introduce or cope well with disruptive innovations) Example Apple and their yearly releases of Netflix replacing Blockbuster → from iPhones and iPads renting DVDs to streaming on-demand video Mainframe computer → expensive, hard to use. → Mini-computer → Desktop → Laptop Typing machines 3D printing → feels cheap now → when it improves Sources of Capabilities Resources Tangible o People o Equipment o Technologies o Cash Intangibles o Product designs o Information o Relationships with supplier, distributors and customers The higher quality resources an organisation has, the higher chances of it coping with change. Processes Patterns of interaction, coordination, communication and decision making that employees use to transform resources into products and services. Formal [more visible] Informal [less visible] Explicitly defined and Routine that evolves over time documented Processes are only effective only when dealing with what they are designed for – creating boundaries of abilities and disabilities Problem: These are set up so that employees can perform tasks in a consistent way repeatedly: o They are not meant for change – change only through controlled procedures if required  ▪ When you use process to do the task it was designed for = perform efficiently ▪ When you use process to tackle different task = perform sluggishly ▪ A process that creates the capability to execute one task concurrently defines disabilities in executing other tasks o Most important capabilities/concurrent disabilities are likely to be in the background, not visible processes like logistics. o Eg. Making decisions about where to invest resources, Process of market research, Negotiation process of plans and budget Reason for failure – these processes are too rigid and cannot adapt to change Values Decision priorisation framework Cost structure of business model Standards by which employees set priorities that enable them to judge o Whether an order is attractive or unattractive o Whether a CX is more or less impt o Whether an idea for a new product is attractive or marginal Prioritization decisions made like: o Which products to push and which to de-emphasize o Decisions to invest in new products, services and processes The larger the company, the more important for employees to be able to make independent decisions about priorities that are consistent with cost and business model (value-based decisions) Problems Values define what organisations cannot do Reflects its cost structure and business model o If margins are to be kept above 40%, managers will tend to kill ideas that promise margins below due to value or decision rule → organization would be incapable of commercializing projects targeting low-margin markets (e.g. ecommerce) 2 predictable values in most companies that inhibit them from addressing disruptive change successfully: o 1. Gross Margins ▪ As companies add features and functions to P&S to capture premium CX → add overhead cost → gross margins once attractive become unattractive ▪ Attitude towards gross margins usually entrenched  ▪Difficult to get people to agree that accepting lower margins but increasing volumes is better way to go o 2. Growth Rates / Growth Volume ▪ Stock price represents the discounted present value of its projected earnings ▪ Companies are burdened to keep rates of growth ▪ Opportunities to smaller firms do not excite big firms as they’re not large enough; stops them from entering small, emerging markets ▪ Disruptive technology can’t fulfil the growth needed for a big company ▪ Problem is magnified when companies suddenly become bigger through M&A Migration of Capabilities The capabilities required evolve as the company matures, but the mind-set towards them tend to remain constant o Factors that define an org’s capabilities and disabilities evolve over time (resources → processes and values → culture) o Capability migration happens from resources to processes and values as the latter 2 are hard to imitate o Core competency vs core rigidity: Strengths become weaknesses → Processes are harder to change compared to resources → Incumbents find it hard to react to disruptions In start-up stage: Much of what a firm can do is because of resources (Especially people)  o When company’s processes and values are formed in early and middle years, founder has profound impact o Founder's judgment is critical → has strong opinions on how employees do their work and what the organizational priorities are o If flawed → fail; if sound → employees experience the validity of founder’s methods and problem-solving = define processes. Once company is financially successful by allocating resources according to priorities, company’s values coalesce around those criteria ▪ As people address recurrent tasks, processes become defined ▪ As business model takes shape and it becomes clear which types of businesses need to be accorded highest priority, values coalesce In the mature stage: Locus should shift towards processes and values o As an organisation matures, its processes and values become ingrained and are assured to be the right way to get work done – organisational culture o Employees begin to follow processes and decide priorities by assumption then conscious choice, and these coalesce to form culture ▪ Assume: processes and priorities are right way to do work ▪ As number of employees increase → harder to manage. Culture then enables employees to act autonomously but causes them to act consistently o Managerial decisions become routine, guided by assumptions rather than choices. When the organisation’s capabilities reside primarily in people, changing capabilities to address new problems is relatively simple. But when capabilities have come to reside in processes and values, and especially if they have been embedded in culture, change can be very difficult o Capabilities need to evolve to deal with new situations; evolution in resources is easy, but difficult in processes and values. Ingrained processes and values are only useful when organisations continue to face the same type of problems  More sustainable for CA = Processes as people come and go, processes drives resources (e.g. established recruitment framework affects people, product development after product) and are harder to imitate (competitors must copy the whole system while resources are more mobile, easier to copy) Creating Capabilities to Cope with Change Managers whose organisations are confronting change must ask a few questions: o 1. Do they have the resources required to succeed? o 2. Does organisations have the processes and values it needs to succeed in this new situation? o Understand that the very capabilities that make their organisations effective also define their disabilities Since processes are less flexible or adaptable as resources are, and values less so, managers need to create a new organisational space where new processes and values can be developed when needed: 1. Create new organisational structures within corporate boundaries in which new processes can be developed 2. Spin out an independent organisation from the existing organisation and develop within the new processes & values required to solve the new problems 3. Acquire a diff organisation whose processes and values closely match the requirement of the new task Region A:  Good fit with company’s values and processes → no need for new capabilities Use of lightweight team within organization. Lightweight team is cross-functional, but team members stay under the control of their respective functional managers Region B: Good fit with company’s values, but poor fit with processes Use of heavyweight team within organization. Heavyweight team whose members are pulled out from different departments to work on NEW products and NEW processes Region C: Poor fit with company’s values and processes Use of heavyweight team in a spinout. Spinout will be governed different values (e.g. different cost structure) and processes Region D: Good fit with company’s processes but poor fit with values Development may take place in-house, but commercialization will be spin-out #1 Creating New Capabilities Internally When company’s capabilities reside in its processes and when the new challenge REQUIRES NEW PROCESSES Form heavyweight teams within the organization o Pulling relevant people out from the organization and draw a new boundary around a new group o Team is entirely dedicated to pursuing this challenge and physically located tght o Each team member is charged with personal responsibility for the success of the project Case Study: Chrysler Created Heavyweight teams separate from component-based organisation Dedicated to automobile platforms Created new processes that were faster and more efficient in integrating subsystems into new car designs #2 Creating Capabilities through a Spinout Organisation When the company's mainstream values are conflicting with that of the new innovation it seeks to develop, then the company should spin it out as a new venture o Values rendering it incapable of allocating resources to an innovation project o Spinout is appropriate when: (1) Innovation requires a different cost structure in order to be profitable or competitive o (2) Current size of the opportunity is insignificant relative to the growth needs of the organization Form heavyweight team in a separate spinout organization o New physical location isn't necessary o Primary consideration is that the new unit must not be forced to compete for resources with the mainstream organization o Whether the independent organisation is physically separate is less impt than its independence from the normal decision-making criteria in the resource allocation process o Developing a new operation does not mean abandoning the old one, but running two businesses in tandem o Requires personal, attentive oversight of CEO – precisely because of the power of values in shaping normal resource allocation process, only CEO can ensure that new organisation gets required resources and is free to create processes and values that are appropriate to the new challenge Case Study: HP New inkjet printers represented a disruptive innovation, languished beside the Laser printing business Although process of developing both were the same, there were clashes in values HP had to accept lower margins And a smaller market size Embrace lower performance standards Transferred the unit to a separate division, therefore allowed the inkjet business to become successful #3 Creating Capabilities through Acquisitions Companies that successfully gain new capabilities through acquisitions know where those capabilities reside in the acquisitions and assimilate them accordingly o If companies acquire for the acquired company’s processes and values ▪ SHOULD NOT integrate the acquisition into the parent organization as it would vaporize the processes & values of acquired firm i.e. let it be a stand-alone business ▪ SHOULD infuse parent’s company resources into acquired companies o If companies acquire for the acquired company’s resources ▪ SHOULD integrate the acquired company into parent company (adopt their processes and values into the acquired company) Case Study: Cisco Systems When Cisco acquired many small companies, it did so their resources (people, products) Discarded any processes and values that came with their businesses Integrated the rest When Cisco acquired a larger organisation, Stratacom, it did not integrate Cisco let it function as a standalone company as it recognised the value in Stratacom was its processes and values Infused Cisco's resources into Stratacom to help it grow more rapidly Innovation Doesn’t Have to be Disruptive Introduction to Nondisruptive Creation “Disruption” has been a leading battle cry in business o Either from the low end – disruptive innovation or from the high-end – Apple’s iPhone dominated mobile phones o Many come to see “disruption” as near synonym for “innovation” o Corporate leaders have continually been told that the only way to innovate and grow is to disrupt their industries or even own companies But market-creating innovation isn’t always disruptive o It’s only one end of the spectrum of market-creating innovation o On the other end is nondisruptive creation, through which new industries, new jobs and profitable growth come into being without destroying existing companies or jobs  o It reveals an immense potential to establish markets where none existed before and in doing so, foster economic growth in a way that enables business & society to thrive tght o Offers an alternative path to market-creating innovation Examples o Microfinance – transformed people in poverty by making financial services available to them o Sanitary napkins o Preschool entertainment 3 Fundamental Characteristics of Non-Disruptive Creation 1. It can occur with either new or existing tech 2. Applicable across Geographies, Markets, Economies and Societies 3. Can be new-to-the-world innovation or new-to-the-specific-market innovation How the Economic and Social Impacts Differ Disruption Consumers win big-time o Disruptive product or service delivers a leap in value o CS delivered by disrupter is high and society’s resources are allocated where they are deemed to be better used Disruption tends to grow industries and upend them o Compelling value it unlocks draws ppl who didn’t previously purchase incumbents’ P&S o Inspires incumbents’ existing CX to use new offerings more frequently Disrupter’s success comes at direct expense of existing players and markets → imposes a clear trade-off between winners and loses Win-lose approach triggers painful adjustment costs for society o For example, in New York City, Uber’s largest U.S. market, the company has had a huge impact on taxi drivers and medallion owners who bought the right to operate a taxi in the city.  ▪ Taxi medallions have plunged in value from more than $1 million to as little as $175,000 since the appearance of Uber. ▪ Taxi drivers’ earnings have nosedived by as much as 40% ▪ Bankruptcies, foreclosures, evictions, and even suicides have resulted. o Amazon’s disruption of booksellers and retail has led to as many as 900,000 jobs lost and stores obsolescence While disruption yields aggregate long-run growth at the macro level, ensuring adjustment costs often trigger backlash from social interest grps, gvt agencies, and nonprofit associations seeking to minimize carnage Non Disruptive Creation Positive-sum outcome to innovation Also delivers compelling value for buyers (consumers or businesses) Differs in adjustment costs – effectively disentangle market creation from market destruction which allows org to grow with little asset obsolescence and social pain o Produces no evident losers and only minimal painful adjustment costs o Positive impact on growth and jobs Examples o Kickstarter Disruption vs. Non Disruptive Creation Micro Meso Macro Disruption Generates growth through Produces a win-lose outcome Incurs social adjustment the displacement and costs from shuttered expansion of existing Winners: the disrupter and organizations, lost jobs, and market space consumers hurt communities Losers: disrupted organizations Short-term growth comes and their employees with social pain, although the net gain in growth over time is positive Non-Disruptive Generates growth through Produces a positive-sum Incurs no evident social Creation the creation of new outcome adjustment costs because market space beyond there is no displacement existing industries Winners: the nondisruptive creator and consumers The gains in economic growth and employment  Losers: none evident are positive from the start, with no social pain Rising Importance of Nondisruptive Creation Friedman’s theory of shareholder primacy (at the heart of capitalism): “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits” o Social issues beyond that fall outside the proper scope of the enterprise o A presumed trade-off between maximizing economic gain and social good Increasingly challenged as the world wakes up to the costly social effects that result from the pursuit of profit maximization & increasingly vocal public & AI displacing jobs à rise in need for socially responsible form of capitalism o Think beyond profit and consider the impact of their actions on local communities and society at large o Nondisruptive creation speaks to this, does not compromise economic good but by innovating new markets without destruction Identifying Nondisruptive Opportunities 1. Address an existing but unexplored issue or problem Problem could have long existed but remained unexplored as it wasn’t seen as a problem to solve or opportunity for creation o Accepted as “the way things are” o A reputable organisation could have tried solving the problem but failed → people regard it as impossible 2. Address a newly emerging issue or problem Socioeconomic, environmental, demographic, and technological changes that have an impact on society or people’s lives give rise to new problems, opportunities and issues Week 5 – Understanding Context: Organisational Boundaries How a Firm’s Capabilities Affect Boundary Decisions? Organisational boundaries: imaginary dividers meant to distinguish a unit/company from external but nearby influences. How should companies decide what should be brought under the purview of the firm and what to source? o Check if it’s the right business to bring in – will it lead to a loss of strategic focus, become bureaucratic and bloated o Check if it’s the right business to bring in – will it give competitive advantage Transaction-Cost Economies: An approach that specifies the conditions under which firms should manage a particular economic exchange within their organisation boundary as well as the conditions which it should be outsourced o Does not focus on capabilities of a firm when deciding which economic exchanges to include within firm’s boundary and which to outsource o Consider only a single characteristic of an economic exchange – the level of transaction-specific investment – in order to decide whether to include an exchange within a firm’s boundary Boundary Decision from Transaction Costs: 3 Main Transaction Costs The more elaborate the governance, the more effective (lower threat of opportunism) but also more costly. Hierarchical > Intermediate > Market Firms must thus be able to balance between cost of governance Outside the boundary of the firm mechanism and threat of opportunism Within the boundary of the firm Governance: mechanism through which a firm manages an economic exchange; control over resources of capabilities. 1. Market Governance (Buying from others)  a. Exchange in which organisations interact with other firms at arm’s length across nameless, faceless market b. Uses market-determined prices c. E.g. oil refineries use market governance to gain access to crude oil purchased on the spot market; electronics firms use market governance to obtain standardized electrical components from component distributors; and food processors use market governance when purchasing food from farmers and food brokers. 2. Intermediate Governance (Collaborating with others) a. Manage exchange which uses complex contracts, strategic alliances, joint ventures b. E.g. Retail firms use intermediate governance to obtain products by negotiating long-term supply contracts with suppliers, by establishing electronic data interchange linkages with those suppliers, and when those suppliers locate critical operations near a retail firm’s headquarters. c. Firms use intermediate governance when partnering to form a joint venture and when they use complex franchise agreements to manage an exchange. 3. Hierarchical Governance (Make the capability myself) a. Manages exchange within firm’s boundaries b. Performs activities in-house or through acquisitions c. Parties to exchange no longer independent, as the third party (“the boss”) has the right to direct actions and decision making d. E.g. Manufacturing firm uses hierarchical governance when it owns and operates a factory supplying the products that it sells. A retail firm uses hierarchical governance when it owns and operates its own stores. A diversified firm uses hierarchical governance when it operates a sales and distribution network that two or more of the businesses it owns use to sell and distribute their products. Threat of Opportunism When choosing which form of governance, companies need to check: o Transaction-specific investment: ▪ When one party to an exchange has made a large transaction-specific investment in that exchange, other parties to that exchange have a strong incentive to behave opportunistically o Threat of opportunism:  ▪ Opportunism exist when a party to an exchange takes unfair advantage of other parties to that exchange ▪ Exists when one party to an exchange has made a transaction-specific investment, while others have not made such an investment Firms can use governance to mitigate threat of opportunism o More elaborate the governance mechanism, more effective to reduce the threat of opportunism created by transaction-specific investment o High level of transaction-specific investment of the exchange, threat of opportunism is high: firms should employ hierarchical govt o Moderate level of transaction-specific investment, no threat of opportunism: firms should employ intermediate govt o Low level of transaction-specific investment, no/low threats of opportunism: firms should employ market govt Capability Considerations 3 ways to gain access to capabilities firm needs: o 1. Market/Intermediate: Cooperate with firm that already possess the capabilities o 2. Hierarchical: Develop these capabilities on its own o 3. Hierarchical: Acquire another firm that possess the capabilities Firms have to weigh between (1) Transaction-specific investment & (2) Cost o Transaction cost logic suggest that choice should depend on level of transaction-specific investment required to gain access to capabilities needed ▪ If required transaction-specific investment is high, choose hierarchical governance instead of market and intermediate governance o Capability considerations play a significant role in boundary decisions – when it is too costly to create new capabilities or acquire a firm with the described capability (both are forms of hierarchical governance), may choose non-hierarchical governance ▪ High cost of hierarchical governance stems from: Costliness of creating a new capability  Costliness of acquiring another firm with the desired capability o Sometimes, opportunism stemming from transaction-specific investment is simply the cost of gaining access to capabilities that are too costly to obtain in alternative ways ▪ Most firms in rapidly evolving high-tech industries will often prefer to gain access to capabilities through non-hierarchical forms of governance, despite threat of opportunism that such a decision may entail Cos