HOW STRATEGISTS REALLY THINK

TAPPING THE POWER OF ANALOGY

by

Giovanni Gavetti Jan W. Rivkin

GROUP MEMBERS

Mohammad Asif

Sagheer Mohammad

Syed Faizan Hyder

Seemab Chaman

Rabeea Sadaf

What is analogy:

Reaching back to an earlier experience for a solution is know as analogy.

Generally, executives use analogies (similar models or pathways or strategies) to make strategic choices.

Efficient strategists know the powers and weakness of previous models adopted by other companies while adopting/applying such strategies.

The choice of a company’s strategy is a key driver of the quality and success of the company.

Reasoning by analogy play an important role in strategic decision making that is most of the times ignored.

Senior managers learn from the previous experiences of other companies.

But reasoning by analogy has some powers as well as pitfalls which are generally ignored by managers.

THE POWER OF ANALOGY

Intel resisted to provide cheap microprocessors for inexpensive PCs.

But during a seminar he came to know that once, when US steel mills resisted to make inexpensive steel bars and assigned the task of making inexpensive steel bars to other small companies, with the passage of time the established themselves and became a threat for US steel mills. When the CEO of Intel Andy Groove came to know this fact, he decided to start making inexpensive micro processors known as Celeron. This decision benefited the Intel company.

Circuit city, succeeded in the sale of consumer electronics in 1970s with the policy of:

1. Wide selection

2. Professional sales help

3. No bargaining.

In 1993, they applied the same policy to their newly announced chain of used car outlets-CarMax.

The application of this policy analogy was very successful for their new business.

COPYING BUSINESS ANALOGIES

1930s• Super market-retail

market

1950s• Copied by Charlie Merrill

(Merrill Lynch) & Charles Lazarus (Toys R Us)

1960s

• Thomas Stemberg (Staples), too much inspired by Charles Lazarus he put an analogical question to his business as “Could we be the Toys R Us of office Supplies”.

TWO APPROACHES FOR STRATEGIC DECISION MAKING

1. Deduction

2. Trial and error

Deduction

Work in information rich settings

Use general administrative and economic principles for specific business situations

Analyze the alternatives and select the best one

Trial and error

Works in ambiguous/complex settings

Involves learning after the fact rather than thinking in advance

Strategic problems, mostly, are neither so novel and complex that they require trial and error nor so familiar that they permit deduction (Giovani Gavetti & Jan W. Rivkin).

Should pay attention to select features of a problem.

Need not understand every aspect of the problem.

Analogical reasoning requires:

HOW ANALOGIES

FAIL

Strategists must know about how to use analogies wisely.

Deeply understand the Target problem e.g Intel, the competition from makers of low-end microprocessors

The concept of similarity mapping displays similar characteristics

Dangers arise when strategists draw an analogy on the basis of superficial similarity,not deep causal traits.

Ford vs Dell

virtual integration• Dell’s key strategic

principle

How analogy Fails• Ford Executives Think

Here? Is there is possible for us

Ford vs Dell

• Ford existing supply chain if changed then bear high cost due to increase or decrease prices of inputs .

ENRON

Many factors contributed to Enron’s startling collapse(falling Down) also this due to use loose analogies

Enron executives moved rapidly to enter or create markets for other goods ranging from coal, steel, paper to weather derivatives and broadband telecom capacity.

Enron Chairman Kenneth Lay failed to appreciate important, deeper differences between the

markets for natural gas and bandwidth (based on

unproven technology).

HOW PEOPLE REACH JUDGMENTS

Anchoring: describes the common human tendency to rely too heavily on the first piece of information offered (Framing Bias).

Confirmation Bias: Confirmation bias is a tendency of people to favor information that confirms their beliefs.

PTCL share purchase. why this?

HOW TO AVOID SUPERFICIAL

ANALOGY

ANALOGY

Analogy is the similarities between the two different sets of problems

Problems: Target Problems Source Problems

Approaches to develop analogical reasoning Deductive approach Trial and Error approach

PITFALLS OF ANALOGICAL REASONING

Element of superficiality in analogical reasoning

Superficiality is Lack of deep understanding or solid reasoning

STEPS TO AVOID SUPERFICIAL ANALOGIES

Recognize the analogy and identify its purpose: Matching the apparent situations to find out best “fit”. Identification of purpose(Motivation, brain Storming or

strategic decision making etc.)

Understand the source: Strategic Analysis of source.(Environment Analysis) Nature relevancy between source and target problems

RECOGNIZE THE ANALOGY AND IDENTIFY ITS

PURPOSE

Recognize:

Obvious

Background

Purpose:

Brainstorming

To Motivate Employees

UNDERSTAND THE SOURCE

In-Depth Analyses

Winning Strategy Unsatisfied Customer Need Barriers To Entry Fragmented Industry

ASSESS SIMILARITY

Not Only Similarity

Differences Reputable Suppliers to Individual Sellers Diverse Inventory Can We Build Entry Barriers Substitute Goods : New Cars

TRANSLATE, DECIDE, AND ADAPT

Adjustments Large Stores Untrained Sales Persons Well Trained Buyers Managers Overestimate Uncertain Envoirnment

TOWARD BETTER STRATEGIC CHOICES

Analogies lie on a spectrum. At one end lie perfect analogies,

where the source and target are truly alike on the dimensions that drive economic performance.

At the opposite end of the spectrum are profoundly problematic analogies.

Perfect Problematic

analogies analogies(Toy retailing (Enron’s

industry of the comparison of

1950s deeply broadband and

resembled the natural gas trading)

grocery

business)

SPECTRUM OF ANALOGIES

The vast majority of analogies fall somewhere in between—they’re imperfect but useful. The challenge is to get the most out of them.

The best users of analogy harness deduction and trial and error to test and improve the analogies that lie in the middle of the spectrum.

Managers who wish to tap the great power of analogy and sidestep its pitfalls must master multiple modes of thought.

STRATEGIC DECISION

MAKING AND THE CASE METHOD

The case method in business education has often been criticized, most recently by Henry Mintzberg, because it depicts management as an abstract theoretical exercise removed from the reality of managerial work.

Teaching managers with cases, and to reason from cases, is an appropriate and powerful approach. It enable managers to draw better analogies, for two reasons.

First, the case method creates a large range of secondhand experiences from which students can reason.

Second, the case method gives students extensive experience in deciding what is and what isn’t important in a given business situation.

A VERSATILE TOOL

Most important, analogies can be catalysts for generating creative options.

Analogies are also powerful tools for communicating complex messages quickly,

THANK YOU