Lecture 2 - How to deal with uncertainty Flashcards
Resilients
o Resilients created flexibility—a safety buffer. They did this by cleaning up their balance sheets before the trough, which helped them be more acquisitive afterward. They are consistent in this, they can’t sense when the crisis is coming. But when it happens, they can execute quickly because of the flexibility and buffers.
o Resilients cut costs ahead of the curve. There is little evidence to suggest that the resilients were better at timing the market. However, it is quite clear that they prepared earlier, moved faster, and cut deeper when recessionary signs were emerging.
o Resilients in countercyclical sectors focused on growth, even if it meant incurring costs (Oil & Gas, healthcare, pharmaceuticals). Their resilients actually overdelivered significantly on revenue, while taking on higher costs.
They achieved a Total Return to Shareholders (TRS) that was structurally higher than the median in their sector
Meta-capabilities
The ability to change your capabilities to another setting that is equally successful in the case of an disruptive event.
You don’t want to do things to survive (cut costs, reduce risk), you need to realize that reality could become entirely different
Environmental Dynamism
Turbulence level: 1. Repetitive, 2. Expanding, 3. Changing, 4. Discontinuous, 5. Surprising
Complexity: 1. National Economic, 2.-, 3. Regional Technological, 4.-, 5. Global Sociopolitical
Familiarity of events: 1. Familiar, 2. Extrapolable, 3.-, 4.Discontinuous Familiar, 5. Discontinuous Novel
Rapidity of change: 1. Slower than response, 2.-, 3. Comparable to response, 4.-, 5. Faster than response
Visibility of future: 1. Recurring, 2. Forecastable, 3. Predictable, 4. Partially predictable, 5. Unpredictable surprises
- History driven: You can look back and sort of predict what is going to happen by looking at the same event in the past (inflation, oil prices etc.)
- Rapidly changing (4) and Turbulent (5): These levels (4 and 5) is what we are interested in, Covid-19 has been totally new (lockdowns etc.). We can’t predict what will happen. We don’t have a situation to compare it against.
- Porter: 5 forces, value chain etc. They give a static/stable view of a company, industry etc., no real dynamism
- RBV: If you want to be sure you survive and thrive
- -> have VRAINN resources. Maybe that is not enough either, by the time you develop or buy these resources, the environment changed again. You haven’t been able to capitalize on it.
See picture on page 11 of the summary
Dynamic Capabilities
- Enable companies to create, deploy and protect the intangible assets that support the superior long-term business performance
- Companies can have the same tangibles (IT systems and resources), but by having different ITG (processes, decision rules) some companies can extract more value from the tangible assets and react more rapidly
- Detection (sensing) and capturing (seizing/taking advantage) of opportunities in order to reconfigure (transforming) their capabilities
- Create resource combinations that create value and are difficult to imitate and have effective (long-term) interorganizational relationships on a global basis
Digital Dynamic Capabilities
- External triggers (competitors, consumer behaviors, disruptive technologies)
- Digital sensing (scouting, scenario planning, mindset crafting)
- Digital seizing (rapid prototyping, balancing digital portfolios, strategic agility)
- Digital transforming (navigating innovation ecosystems, redesigning internal structures, improving digital maturity)
- Strategic renewal of (business model, collaborative approach, culture)
With the influence of:
- Internal enablers (cross-functional teams, fast decision making, executive support)
- Internal barriers (rigid strategic planning, change resistances, high level of hierarchy)
Organizational Resilience
The ability to maintain the functionality of a system when it is perturbed or the ability to maintain the elements required to renew or reorganize if a disturbance alters the structure of function of a system
You need to be fluid like water and change form/be adaptive.
You want to be in the top right quadrant (adaptability quadrant) –> High resilience, high desirability of system state
You need ambidexterity: maintain the current organization but also innovate
Desirable organizational resilience = adaptability = dynamic capabilities
Systems in the rigidity quadrant (high resilience, low desirability of system state) are not satisfying the needs of their stakeholders. There are obvious signs of decline in the systems performance, however, despite these signs, the system remains in denial, unable to enter a phase of change and reorganization. This is either because it has managed to develop defense mechanisms, processes that maintain current structure and functions, or because it does not have the sufficient capital to instigate and support the restructure. (think of IBM and Ford)
High Reliability Organizations (HROs) (5 aspects)
Organizations that have the potential for catastrophic failure yet engage in nearly error-free performance (e.g. nuclear plants)
5 aspects:
- Preoccupation with failure – small failures must be noticed; focusing on points of failure by increasing alertness, fighting inertia, looking for new alternatives, identifying errors, and developing processes to prevent mistakes.
- Reluctance to simplify – “distinctiveness retained rather than lost in a category”; promotes a thoughtful, data-driven process that considers the uniqueness of a problem before applying a solution. It discourages the form-fitting application or popular ‘best practice’ solutions to problems without thorough consideration of the problem’s unique context (don’t put them in a category).
- Sensitivity to operations – “notice nuances that portend failure”; recognizes that a solution to one problem may create another and therefore process-wide measurement is essential. This is accomplished through sharing real time data, shifting problems to experts, and engaging in face to face communication.
- An under-specification of structures (expertise > rank) refers to using the highest level of recognized expertise in improving reliability, not necessarily the higher-ranking “boss” for decision making.
- Commitment to resilience – ability to bounce back by “locating pathways to recovery”; encourages the use of individual initiative to maintain process improvements long-term (relying on the expertise of front-line workers). *
The consistent performance of these HROs is grounded less often in routines and structures and more often in processes related to organizational mindfulness—the human capacity to detect and correct errors and to adapt to unexpected events before small factors develop into catastrophic failures.
Fit enterprises (Gartner)
They don’t take unique skills or scarce resources, just excellence in 10 capabilities across three critical areas:
- Alignment (leadership, disciplined IT investment, compelling vision, continuous strategy, robust relationships)
- Anticipation (IT as differentiator, anticipating change, balanced risk-taking)
- Adaptability (fluid culture, enterprise agility)
CIOs should tackle these three areas in order
Processes (dynamic capabilities)
The way things are done in the firm, or what might be referred to as its routines or patterns of current practice and learning. They have three roles:
- Coordination/integration (a static concept): Efficiency and effectivity inside the firm and external collaboration (strategic alliances, virtual corporation, buyer-supplier relations and technology collaboration)
- Learning (a dynamic concept)
- Reconfiguration (a transformational concept): In rapidly changing environments, there is obviously value in the ability to sense the need to reconfigure the firm’s asset structure, and to accomplish the necessary internal and external transformation. In dynamic environments, narcissistic organizations are likely to be impaired, the capacity to reconfigure and transform is itself a learned organizational skill. Change is costly and so firms must develop processes to minimize low pay-off change.
Position (dynamic capabilities)
Its current specific endowments of technology, intellectual property, complementary assets, customer base and its external relations with suppliers and complementors. Such assets determine its competitive advantage at any point in time
- Technological assets: Ownership protection are clearly key differentiators among firms
- Complementary assets: Related assets that technological innovations require to produce and deliver new products and services, these assets typically lie downstream
- Financial assets: In the short run, a firm’s cash position and degree of leverage may have strategic implications (balance sheet), in the long run cash flow ought to be more determinative
- Reputational assets: Of summarize a good deal of information about firms and shape the responses of customers, suppliers and competitors. It is sometimes difficult to disentangle reputation from the firm’s current asset and market position
- Structural assets: Formal and informal structure of organizations and their external linkages have an important bearing on the rate and direction of innovation, and how competences and capabilities co-evolve (degree of hierarchy, vertical/lateral integration, governance models etc.)
- Institutional assets: Regulatory systems, as well as intellectual property regimes, tort laws and antitrust laws also are a critical element of the business environment
- Market (structure) assets: Product market position matters, but is often not at all determinative of the fundamental position of the enterprise in its external environment
- Organizational boundaries: Degree of integration (vertical, lateral and horizontal) is of quite some significance. Boundaries are not only significant with respect to the technological and complementary assets contained within, but also with respect to the nature of the coordination that can be achieve internally as compared to through markets
Paths (dynamic capabilities)
By paths we refer to the strategic alternatives available to the firm and the presence or absence of increasing returns and attendant path dependencies.
- Path dependencies: Where a firm can go is function of its current position (the path it has traveled) and the paths ahead
- Technological opportunities: The concept of path dependencies is given forward meaning through the consideration of an industry’s technological opportunities, this determines how far and how fast a particular area of industrial activity can proceed. Those opportunities can be quite firm specific, by the degree on how much they engage in basic research
Ordinary (operational) capabilities
Helps organizations in maintaining the status quo
Doing the things right, dynamic capabilities are about doing the right things
Sensing (dynamic capabilities)
The identification, development, co-development, and assessment of (technological) opportunities in relationship to customer needs
Scanning, learning, calibrating
Seizing (dynamic capabilities)
Moving beyond understanding new business opportunities to actually decide on what specific changes to make
Designing, selecting, committing
Transforming (dynamic capabilities)
Continuous renewal involving “asset alignment, co-alignment, realignment and redeployment
Leveraging, creating, accessing, releasing
5 themes that shape post-COVID-19 efforts in operations (McKinsey)
- Building operations resilience (reassess assets, make or buy, agility, robustness etc. to protect against potential shocks)
- Accelerating end-to-end digitization (digital customer experience, industry 4.0)
- Rapidly increasing capital- and operating-expense transparency (operations with different cost-structure, tools for opportunity identification, liquidity, reassess projects frequently)
- Driving the future of work (reskilling to human-only capabilities, automation, remote working, safety norms)
- Reimagining a sustainable operations competitive advantage (agile product development, digital connection with customers for designing, form ecosystems, engage in M&A’s, embed sustainability)
Competitive forces approach (Porter)
Dominant paradigm in the 1980s. The actions a firm can take to create definsible positions against competitive forces
- Entry barriers
- Threat of substitution
- Bargaining power of buyers
- Bargaining power of suppliers
- Rivalry among industry incumbents
Strategic conflict approach
How a firm can influence the behavior and actions of rival firms and thus the market environment. Firms that have tremendous competitive advantage over their rivals ought not be transfixed by the moves and countermoves of their rivals. Their competitive fortunes will swing more on total demand conditions, not on how competitors deploy and redeploy their competive assets.
Resource based approach
Firms with superior systems and structures being profitable because they engage in strategic investments that have markedly lower costs or offer markedly higher quality or product performance. It focuses on the rents accruing to the owners of scarce firm-specific resources rather than the economic profits from product market positioning.
Dynamic capabilities approach
Firms that can demonstrate timely responsiveness and rapid and flexible product innovation, coupled with the management capability to effectively coordinate and redeploy internal and external competences.
Showrooming
Hybrid model where customer tries product in physical store and then buys it online
Webrooming
Hybrid model where customer browses products online and buys in physical store
