W2 & 3: Adaptation & Search

Question 1

Strategic innovation and change

Answer 1

Strategic innovation entails deep changes in those organizations that embark in it, which become
manifest at many different levels: * Processes
* Culture
* Knowledge *…

Question 2

Strategic innovation is characterized by:

Answer 2

change in the whole organization, not just a subset of it

deploying a new technological trajectory,

developing a new business model or new capabilities

a change process that leads to a “new” way of organizing and making strategy

Question 3

typical questions strategic innovators ask themselves …

Answer 3

Markides (1998) identified four strategic innovation issues that strategy-makers in mature, established companies face:
1. I am having a good time in my little part of the world and making good money. Why should I change?

2. Even if I recognize the need to change (and, in particular, to change my strategy or who-what- how position), what shall I change into?
3. Even when I see a possible new position emerging, how do I know that it’s going to be a winner? What if I jump into it and it turns out to be a mistake?
4. Even if I decide to jump, how do I make sure that my employees (who have vested interests in maintaining the status quo) jump with me? Can I manage two industry positions simultaneously or do I have to relinquish the old for the new?And if I can have both positions, how do I organize to manage the old and the new simultaneously?

Question 4

A framework of fit - strategic fit

Answer 4

Strategicfit: how can fit be achieved among the focal firm’s (new) business model, its competitive strategy (e.g., product-market positioning), and its corporate strategy (degree of diversification, scope and boundary decisions, market timing decisions)?

LEGACY STRATEGY
Business strategy
Corporate strategy
Market entry strategy (timing)
Resources & capabilities

Strategic fit

BUSINESS MODEL
* What activities?
* How connected?
* Who conducts them?
* Why is value created?

Question 5

A framework of fit - external fit

Answer 5

External fit: how should the focal firm, and its new business model, be embedded into its ecosystem? For example which specific external stakeholders e( .g., customers, partners, suppliers) should be enlisted, and how can positive
relationships with them be created, managed, and maintained?

BUSINESS MODEL
* What activities?
* How connected?
* Who conducts them?
* Why is value created?

External fit

ECOSYSTEM
Creating and managing relationships with stakeholders (customers, suppliers, partners, etc…)
External environment (PESTEL)

Question 6

A framework of fit - internal fit

Answer 6

Internal fit:how should the firm be r( eo) -rganized internally? Which are the enablers and the obstacles to the strategic innovation?

BUSINESS MODEL
* What activities?
* How connected?
* Who conducts them?
* Why is value created?

Internal fit

ORGANIZATION
Purpose
Culture & values Governance
Organizational design
Organizational processes

Question 7

Strategic innovation and the S-curve

Answer 7

The S-curve provides an intuitive instrument to think about how companies start, grow, and either fail or
engage in strategic innovation over time.

Growth and competitive advantage is not linear.
During their lifecycle, companies face four phases, punctuated by inflection points: early stage, growth, maturity and decline. Strategic innovation enables mature incumbent companies to renew themselves.

Question 8

Causes of organizational inertia

Answer 8

Strategic Innovation is all about change. However, change is challenged and made complex by inertia. Hannan and Freeman (1984) write that “structures of organizations have high inertia when the speed of reorganization is much lower than the rate at which environmental conditions change. Thus the concept of inertia, like fitness, refers to a correspondence between the behavioral capabilities of a class of organizations and their environments.”

There are four main causes of inertia in established companies:
* Organizational routines
* Political systems
* Conformity
* Local search

Question 9

Organizational routines

Answer 9

Organizational routines are “patterns of coordinated interaction among organizational members that develop through continual repetition”.
Routines are highly relevant in strategy, because they are the social processes through which companies coordinate actions to reach their goals. They are the foundation for any company’s strategic capabilities.

Nelson and Winter (1982) claim that routines in companies follow an evolutionary trajectory:
1. Adoption (managers seek to develop specific routines in the company)
2. Selection (evaluation of the effectiveness of the different routines in reaching the objectives)
3. Retention (effective routines are maintained over time, ineffective routines are abandoned)

Question 10

Routines: “core competencies - core rigidities” paradox, or competency trap.

Answer 10

In context of strategic innovation, where the need for adaptation is key, the very routines that led the company to success are also the ones that, through resistance to change, can lead it to failure. This situation is called “core competencies - core rigidities” paradox, or competency trap.

Question 11

Routines: path dependence and path breaking

Answer 11

Another element that contributes to the resistance to change of organizational routines is path dependence. Path dependence refers to the history-dependent, unaware self-reinforcement of specific social processes (like routines).

Path dependent processes lock-in the possible courses of future action, because they might become too costly to reverse (escalation of commitment on a specific trajectory) or they might become integral part of the cognitive schemas of the manager.

Strategic innovation is often a process of path-breaking.

Question 12

Routines: managerial overconfidence

Answer 12

Organizational routines are strengthened (and become more difficult to adapt and change) also due to managerial overconfidence

Managerial overconfidence refers to the leader’s perception that she can predict the future easily, alter the status quo easily and quickly, and overcome any resistance to required changes

This leads to underestimating the problems of changing existing routines to support strategic innovation

Question 13

Routines: Political systems

Answer 13

One cause of inertia comes from the political nature of organizations. Directors and managers are resistant to alter the status quo, because this might change the checks and balances of power within the company. The threat of altering the equilibrium triggers pushback by the top management team.

Contestable political issues during strategic innovation:

• managerial compensation
• distribution of resources within the company (especially in large, multinational companies)
• relationships with specific stakeholders

Question 14

Routines: Conformity & institutional isomorphism

Answer 14

Companies do not operate rationally at any given point in time, but they are affected by the social and cultural norms in a society, as well as by their peers.
While the mantra of strategic management (since Michael Porter) is “differentiation”, most of the time companies try to be similar to other companies that they consider their peers. The reason behind this is that conformity (and not differentiation!) brings legitimacy to the company.

Behind this idea of conformity there is the concept of institutional isomorphism, which prescribes that, due to external or internal pressures, companies in a social system tend to imitate each other and become similar to one another over time.

Question 15

Routines: Local search

Answer 15

A fourth source of inertia is local search. Even when companies are not extremely rigid, they tend to search around the position they are in, meaning that incremental, non-competence- threatening innovation is more common than radical, competence-threatening change.

A consequence of local search is that companies are likely to search around their core business. Local search is also bounded by the history of company, by the market position the company occupies, and the technological trajectory that a company has committed to follow.

Local search rests on the assumption that managers are characterized by bounded rationality, which means (1) they do not have perfect knowledge, (2) they do not maximize their utility, but they will continue to search until they reach a satisfying (not Pareto-optimal) outcome.

Question 16

Local search can trigger different strategic behaviors which might hurt the company in strategic innovation:

Answer 16

• fear of cannibalization of the core business
• focus on the core business as only driver of success * specialization by function (not seeing the bigger picture)
• radical ideas are discarded from the company

Local search is not considered as a process that grants success in strategic innovation because it often entails solutions that are familiar to the company. The renewal of capabilities and resources in strategic innovation requires a more distant search.

Question 17

Types of inertia: cognitive

Answer 17

There are two types of inertia based on its locus: cognitive inertia and action inertia.

Cognitive inertia shows about when the strategy-makers think about strategic aspects of the company, such as its competitive position, its industry membership, its core capabilities, the most important factors that will affect the future of the company, and so on.
In particular, this happens when strategists are in the option generation phase of the strategy process

Cognitive inertia might take three forms, linked to cognitive biases:
* framing lock-ins
* incorrect analogies
* emotional traps

Strategic innovators need to be aware of such biases and try to curb them. Inability to recognize cognitive inertia inhibits the perception of the need of strategic innovation.

Question 18

Types of inertia: Action inerita

Answer 18

Action inertia involves resistance to the implementation of a new strategy, thus it occurs during the strategy implementation phase of the strategy process.

Action inertia might take three forms:
* sticky routines
* ingrained culture
* leadership failures

Question 19

Innovation streams

Answer 19

Innovation streams are portfolios of innovation that include incremental innovations in a firm’s existing products as well as more substantial innovations that extend a firms’ existing technical trajectory and/or move it into different markets.

We can think of strategic innovation as an endeavor in grafting a new innovation stream within the existing portfolio of companies that entails:
* new capabilities and/or new markets
* non-incremental change in how the company works.

The problem with strategic innovation is not just “jumping” from one S-curve to the other, but being able to manage both of them at the same time, even though they pose radically different, and seemingly irreconcilable, strategic demands and problems.

Question 20

Strategic innovation and innovation streams

Answer 20

fig

Question 21

The concept of absorptive capacity

Answer 21

Absorptive capacity is “a set of organizational routines and strategic processes by which firms acquire, assimilate, transform, and exploit knowledge for the purpose of value creation” (Zahra & George, 2002).
Absorptive capacity can be potential (referring to the accumulation of knowledge within the company) or realized (referring to the “use” of the stock of knowledge for value creation).

fig
knowledge source and complementarity, Experience
AC: Potential to Realized
Competitive advantage

Activation triggers, Social integration mechanisms, Regimes of appropriability

Question 22

Potential AC, Realized AC:

Answer 22

Potential AC:
* Acquisition: capability to identify and acquire externally generated knowledge that is critical to its operations.
* Assimilation : routines and processes that allow it to analyze, process, interpret, and understand the information obtained from external sources.

Realized AC:
* Transformation : capability to develop and refine the routines that facilitate combining
existing knowledge and the newly acquired and assimilated knowledge.
* Exploitation : capability that allow firms to refine, extend, and leverage existing competencies to create new ones by incorporating acquired and transformed knowledge into its operations.

Question 23

Activation triggers: internal, external

Answer 23

Absorptive capacity can have many activation triggers that can influence its development in a company over time.

There can be internal triggers, which occur within the company:
* Performance failures (falling short of company-wide targets, such as turnover or ROI, or
business unit targets)
* Discontinuous events in a company lifetime, like M&As

There can be external triggers, which occur in the industry or in society:
* Technological shifts
* Emergence of new dominant design
* Introduction of government policies that heavily alter the planned strategy

Question 24

Social integration mechanisms

Answer 24

In order to transform efficiently potentialabsorptive capacity into realizedabsorptive capacity, companies should put in place effective social integration mechanisms, which facilitate the processes of continuous knowledge sharing and integration within the company at different levels.

Social integration mechanisms can be informal, such as:
* Work-talk between employees of different functions or BUs
* Adaptive organizational culture

Social integration mechanisms can be formal, such as: * Employee mobility programs
* Internal platforms for knowledge sharing

Question 25

Knowledge and knowledge renewal

Answer 25

Just as for most renewal, companies are not often prone to knowledge renewal, for strategic reasons, financial reasons, or cognitive reasons.

However, knowledge renewal is fundamental, because:
* Knowledge can become obsolete, and it can create a threat to the competitive advantage of the company
* Technological innovations and shifts in the market structure can create “capability gaps”, which put pressure on the firm to renew the stock of knowledge (es.: entering distant technological trajectories)

Thus, an imperative for companies is the development of the capability of “learning to learn”: to constantly enhance the available pool of knowledge, and to exploit it.

Question 26

Search and strategic innovation

Answer 26

At its very core, strategic innovation is a process of search. In pursuing strategic innovation, companies search for:
novel and unexploited market opportunities
new customer segments
novel knowledge and new applications of their knowledge basis new geographical markets
new business models

Searching is critical because it directs what the company chooses to do and what the company
chooses not to do.

Search is also a problem-solving activity: companies engage in search when they identify issues that need to be addressed, such as the imperative of growth or long-term survival, or the pursuit of a certain purpose

Question 27

Search is the controlled and proactive process of:

Answer 27

Finding, examining, and evaluating new knowledge and information elements across multiple domains

Identifying novel combinations of these new knew knowledge and information elements

Question 28

Three aspects qualify the search process which underlies strategic innovation:

Answer 28

1. The directions of the search process
2. The search strategy
3. How to search

Question 29

1. The directions of the search process: local, distant

Answer 29

The “distance” is interpreted in three ways:

market relatedness: distant search might look for opportunities that are loosely related with the customer targets that are currently served by the company

technological relatedness: distant search might look for opportunities that are loosely related with the technological base and the technological trajectory of the company

temporal relatedness: distant search might look for opportunities that are placed in a future characterized by uncertainty and ambiguity

In each case, distant search emphasizes elements of novelty and discovery, while local search emphasizes the exploitation of existing resources and technologies.

Question 30

Why is local search not enough?

Answer 30

Most companies do fine with local search, performing incremental forms of innovations, exploiting a core niche market, etc…
However, in contexts of strategic innovation, local search is not enough.
In fact, while companies are comfortable with local search, the outcomes of it
are unlikely to be:
* novel
* uncontested by competitors
* a big departure from the status quo

Question 31

The Closed Innovation Model

Answer 31

In closed innovation, a company generates, develops and commercializes its own knowledge, ideas and technologies.

Closed innovation emphasizes control over knowledge and technology and their future development trajectory

This philosophy of self-reliance dominated knowledge generation and innovation processes of many leading industrial corporations for most of the 20th century.

Question 32

The Open Innovation Model

Answer 32

In the open innovation model, a company:
* Leverages both its own knowledge, ideas and technologies as well as those from other organizations

• Seeks ways to bring its in-house knowledge, ideas and technologies to market by deploying pathways outside its current businesses.

Question 33

A company that adopts an Open Innovation model:

Answer 33

Seeks knowledge (not just ready-to-use technologies) from outside the company:
- Buy technology licenses, buy entire companies
- Joint development
- Tap into the knowledge of community of solvers

Transfers some good knowledge and ideas out of the company:
- License out to start-up companies or other firms, thereby make return-on-R&D-investment
while maintaining business focus (and hedging risk)

• Seller company aims to achieve greatest return (which requires win-win license that aids success of the buyer firm, as well)

Question 34

Search strategy: breadth and depth

Answer 34

Search strategy distinguishes between search breadth and search depth.

Search breadth refers to the number of diverse external stakeholders a firm seeks knowledge from. A firm with a broad search strategy seeks to access a wide range of external knowledge, for example, about customers, universities, start-ups, etc…

Search depth refers to how intensively a firm draws from each external stakeholder. Firms with a deep search strategy intensely explore fewer external sources that they consider to offer important knowledge inputs.

Question 35

How to search: Experiential search, cognitive search, temporal search

Answer 35

Experiential search is guided by a desire for direct feedback from trials. An important element of experiential search is the “on-line” evaluation of alternatives, and the subsequent action on immediate feedback from current actions without reflecting on their causes through the implementation of a “learning by doing process”.

Cognitive search involves the use of representations and abstractions in the search for solutions. Cognitive search employs “off- line” evaluation, and learning-before-doing. Such representations contribute to the development of heuristics of variable. Rather than allowing environmental stimuli to feedback directly into action, cognitive search allows for the feed-forward of information into existing or nascent representations. These off- line representations can be studied and then later enacted.

Temporal search is defined as the process through which firms search for knowledge that has
been developed in the past

Conventional assumptions in management:
- Old knowledge is obsolete for current environmental needs and expectations
- The past is a source of resistance
- The past generates inertia, liability of senescence, core rigidity, path-dependency

This view is being challenged by organizations that radically innovate making use of knowledge, technologies and ideas from the past, very old, and/or dismissed. Someone calls this process innovation through tradition

Question 36

Delinking, relinking: Searching for applications of knowledge and technologies outside the core business

Answer 36

This search process requires «de-linking» the technology from its current product/business model application and then «re-linking» it to new applications:
1 Characterize the technology
2 Identify potential applications
3 Select from among the identified applications
4 Choose the best entry mode

(1,2) De-linking starts with understanding the capabilities and the limits of the technology, which sets the stage for identifying new applications.

(3-4) Re-linking consists of selecting the most attractive markets and the determining whether to serve them with products developed internally or to work with external partners and licensees.

Question 37

Searching for opportunities and analogy: strategic mental models, analogical reasoning

Answer 37

When leaders are faced with the necessity to interpret and make sense of the market, they use strategic mental models, i.e., cognitive representations of the core features of the market and the technology, its potential evolution, and how the company can create and capture value from it.

Strategic mental models are fundamental in strategic innovation because they inform every phase of the strategic decision-making process. As for resources, having uncommon and valuable strategic mental models can give an edge to the company vis-à-vis other competitors.

One way to use strategic mental models to search for (distant) opportunities is analogical reasoning. Two situations are analogous if “they share a common pattern of relationships among their constituent elements even though the elements themselves differ across the two situations.” (Holyoak)

Question 38

Making analogies work in strategic innovation

Answer 38

1. Understanding the source problem (the apparently similar problem as yours but from another context) and why a certain candidate solution is a good solution:
   - historical internal strategy analysis
   - historical external strategy analysis
   - complete analysis of causal relationships and contextual factors
2. Assess the similarity between the source problem and your problem:
   * analyze superficial and deep differences and similarities
   * beware of cognitive biases (confirmation bias and anchoring)
3. Apply the analogy to the strategic problem you are facing:
   * adjust it to the market features
   * monitor it over time: a strategic move has long term consequences