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Analogical Strategic Reasoning

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Executives often use analogies to make strategic choices, a technique known as Analogical Strategic Reasoning. This document discusses the Analogical Strategic Reasoning methodology. Topics include approach, strengths, pitfalls, examples, deduction, and trial and error. Also includes case examples and PowerPoint templates to be used in your own analyses and presentations.

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  • 1. Crowdsourced Business Presentation Design Service Analogical Strategic Reasoning How Strategists Really Think July 29, 2013 Executives often use analogies to make strategic choices, a technique known as Analogical Strategic Reasoning. This document discusses the Analogical Strategic Reasoning methodology. Topics include approach, strengths, pitfalls, examples, deduction, and trial and error. Also includes case examples and PowerPoint templates to be used in your own analyses and presentations. ORIGINAL PROJECT DETAILS http://pptlab.com/ppt/Business-Framework-Analogical-Strategic-Reasoning-39
  • 2. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 2 PPT Lab (www.pptlab.com) is the only crowdsourced presentation design service. Get consulting-quality presentations at a fraction of the cost! Each month, we will create well over 50 slides of for our members. As a member, you will drive what business slides we create by submitting your own presentation projects to our team. All presentations will be created by a team of management consultants and follow the Consulting Presentation Framework. www.PPTLab.com support@pptlab.com
  • 3. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 3 Contents  Overview 4  Strengths and Pitfalls 9  Deduction vs. Trial and Error 14  Approach to Forming an Analogy 18  Case Example 25  PowerPoint Templates 30
  • 4. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 4 Executives often use analogies to make strategic choices using a technique called Analogical Strategic Reasoning Executive Summary Strategy is about choice. Oftentimes, executives use analogies to make strategic choices, known as Analogical Strategic Reasoning. Using this technique plays a role in strategic decision making that is large, but largely overlooked. Strategists who pay attention to their own analogical thinking will make better strategic decisions and fewer mistakes. Analogical Strategic Reasoning is described in the HBR article “How Strategists Really Think,” authored by Giovanni Gavetti and Jan Rivkin. Much of this document is based on the thinking proposed by these authors. Analogical Strategic Reasoning is often used by strategists for the following purposes: • The amount of information available in many strategic situations is similar to the information required to draw analogies. • The wealth of managerial experience matches the need for that experience in analogical reasoning. • The need for creative strategies can be fulfilled through analogy's ability to spark creativity. Successful strategy consultants and firms are known for their ability to draw lessons from one industry and apply them to another—i.e. apply Analogical Strategic Reasoning. This document discusses the merits and methodology to Analogical Strategic Reasoning, including its strengths, common pitfalls, and other problem solving methods: Deduction and Trial and Error. This document also contains case examples and PowerPoint templates to be used in your own analyses and presentations. Source Problem Source Problem Target Problem Target Problem Candidate Solution Candidate Solution Our Solution Our Solution Application
  • 5. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 5 A great example of Strategic Analogical Reasoning is when Intel referred to cheap PCs as the “digital rebar” Example – Intel Intel has renowned strategist Clayton Christensen to thank for learning about the steel industry case study. BACKGROUND Throughout the mid-1990s, Intel had resisted providing cheap microprocessors for inexpensive PCs During a training seminar in 1997, Intel’s executive management team learned a lesson about the steel industry: • In the 1970s, upstart minimills established themselves in the steel business by making cheap concrete- reinforcing bars known as rebar • Established businesses, such as U.S. Steel, ceded the low end business to them • However, they regretted this decision when the minimills moved up into high-end products ANALOGY / COMPARISON Intel’s CEO Andy Grove seized on the steel analogy and referred to cheap PCs as the “digital rebar” Grove argued: “If we lose the low end today, we could lose the high end tomorrow.” BUSINESS DECISION Intel soon began to promote its low-end processor, Intel Celeron, more aggressively to makers and buyers of inexpensive PCs Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005) THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 6. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 6 The Supermarket is a popular analogy—that sparked the business models behind Merrill Lynch, Toys R Us, and Staples Examples – The Supermarket Analogy The supermarket is a retail format that was pioneered in the 1930s. It has served as an analogical source countless times successfully since then. Here are a few examples: • Charlie Merrill relied heavily on his experience as a supermarket executive, as he developed the “financial supermarket” Merrill Lynch • Charles Lazarus was also inspired by the supermarket when he founded Toys R Us in the 1950s • Thomas Stemberg is the founder of Staples and former supermarket executive • In his autobiography, he stated Staples began with an analogical question: “Could we be the Toys R Us of office supplies?” Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005) THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 7. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 7 To avoid a faulty analogy, it is critical to avoid superficial similarities when constructing the analogy… Pitfalls of Analogical Strategic Reasoning (1 of 3) WARNINGWARNING There are numerous pitfalls that we may lead us to draw problematic analogies on the basis of superficial similarity—and not deep casual traits. Difficulty in determining structural features • It can be very difficult to distinguish between a problem’s deep, structural features and its superficial characteristics • This is particularly true in new and largely unknown markets • In the early days of the Internet portal industry, players adopted analogies that reflected differences in how management perceived the deep traits to be: • Lycos saw the market as a high-tech battle field and felt the company wit the best search technology would win • Magellan sough to build “the Michelin guide to the Web” and thus developed editorial capabilities • Yahoo saw it as a media business and invested heavily in the company’s brand and the look and feel of its sites 1 COMMON PITFALL OVERVIEW EXAMPLE THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 8. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 8 … and, as humans, are prone to Anchoring and Confirmation Bias Pitfalls of Analogical Strategic Reasoning (3 of 3) Psychological principle of Anchoring • Once an analogy (or any other idea) “anchors” itself in a person’s mind, it is very difficult to dislodge • Studies have shown this is true even when decision makers obviously have no reason to even believe that initial idea • This suggests early analogies (even incorrect) can have lasting influences • Nobel Prize winner Daniel Kahneman demonstrated this principle when he asked study participants to estimate the percentage of African countries in the membership of the United States • He then spun a roulette wheel with numbers from 0 to 100 • Surprisingly, the outcome of the roulette wheel had a drastic affect on final estimates: • When subjects saw 10% on the wheel, the average estimate was 25% • When they saw 65%, the average response was 45% 3 COMMON PITFALL OVERVIEW EXAMPLE Psychological principle of Confirmation Bias • Confirmation Bias asserts we tend to seek out information that confirms our beliefs and ignore contradictory data • Thus, strategists will seek evidence that their analogy is legitimate, not evidence that it is invalid • In the 1970s, a study asked participants one of two questions: • Which pair of countries is more similar, West Germany and East Germany; or Sri Lanka and Nepal? • Which pair of countries is more different, West Germany and East Germany; or Sri Lanka and Nepal? • In both cases, most people answered “West Germany and East Germany” • When asked to test their hypothesis, subjects all sought out evidence to confirm the similarity or dissimilarity (depending on their response) 4 THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 9. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 9 Commonly, credit for a strategic decision goes to one of two approaches: Deduction and the process of Trial and Error Deduction vs. Trial and Error DEDUCTION  When manager apply deduction, they apply general administrative and economic principles to a specific business situation  They weigh alternatives and then make a rational, informed choice  They choose the alternative that, per their analysis and data, would lead to the best outcome TRIAL AND ERROR  On the other hand, trial and error involves the process of learning after the fact, rather than thinking in advance vs Both deduction and trial and error play important roles in strategy—but each is effective only in specific circumstances. Deduction typically requires a lot of data and is likewise most powerful in information-rich settings— e.g., mature and stable industries Trial and error is a relatively effective way to make strategic decisions in settings that are ambiguous, novel, and/or complex THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 10. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 10 For most problems, we can’t apply purely Deduction nor Trial and Error— for these issues, Analogical Strategic Reasoning serves us best Between Deduction and Trial and Error – Analogical Strategic Reasoning Very familiar and modular Very novel and complex Universe of Strategic Problems The vast majority of problems fall in this middle ground, where neither pure Deduction and pure Error and Trial are viable approaches—it is in this middle ground that Analogical Strategic Reasoning has its greatest power Use Deduction Use Trial and Error In analogical strategic reasoning, managers do not need to understand every aspect of the problem—they only need to apply the analogy to select features of it. THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 11. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 11 Analogical Strategic Reasoning takes 4-step approach Approach to Forming an Analogy Recognize the analogy and identify its purpose Understand the source Assess similarity Translate, decide, and adapt 1 2 3 4 It is impossible to make analogies 100% safe—however, these four steps below can improve our odds of using analogies correctly and skillfully Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005) THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 12. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 12 Step 2. Understand the source Approach to Forming an Analogy Recognize the analogy and identify its purpose Understand the source Assess similarity Translate, decide, and adapt 1 2 3 4 Source Problem Source Problem Target Problem Target Problem ILLUSTRATIVE PROCESS DESCRIPTION Understand the source 2 • Begin by examining why the strategy worked in the industry from which the analogy was drawn • Classic tools of strategy analysis (e.g. Porter’s Five Forces, SWOT, BCG Matrix) are extremely useful here • The keys are to lay out: • In-depth analyses of the source competitive environment • The solution of strategy that worked well in the original context • The link between the source environment and the winning strategy Candidate Solution Candidate Solution THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 13. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 13 Step 4. Translate, decide, and adapt Approach to Forming an Analogy Recognize the analogy and identify its purpose Understand the source Assess similarity Translate, decide, and adapt 1 2 3 4 Source Problem Source Problem Target Problem Target Problem ILLUSTRATIVE PROCESS DESCRIPTION Translate, decide, and adapt 4 • The final step is to decide whether the original strategy—properly translated— will work in the target industry • This step requires that we state clearly what the strategy would look like in the new setting • This requires some adjustments • Even the best analogies involve some differences between the source and target settings • After the translation, there is a Go or No- go strategic decision on whether to pursue the analogy in the market • If the decision is “Go,” there is another round of adjustments: • The strategy must be adapted to feedback from customers, rivals, suppliers, and other key players Candidate Solution Candidate Solution Our Solution Our Solution Application Adjust the solution for glaring differences—finetune the solution using market feedback THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 14. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 14 Let’s walk through the 4-step approach to Analogical Strategic Reasoning by looking at the case of Circuit City launching CarMax Case Example – Circuit City Launching CarMax (1 of 4) Source Problem Source Problem Target Problem Target Problem Candidate Solution Candidate Solution Our Solution Our Solution Application In 1993, Circuit City announced to investors it would launch CarMax. Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005) THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 15. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 15 When Circuit City launched, the retail environment was very fragmented, there were untapped efficiencies and unmet customer needs Case Example – Circuit City Launching CarMax (2 of 4) Recognize the analogy and identify its purpose Understand the source Assess similarity Translate, decide, and adapt 1 2 3 4 When Circuit City launched CarMax in the earl 1990s, management recognized significant parallels between the competitive environment of the used car market and that of consumer electronics in the 1970s (when Circuit City launched). The goal was to leverage this similarities to duplicate its retailing business model in an entirely new vertical market. Let’s start by analyzing the source environment. When Circuit City began its rise to success in the 1970s, the consumer electronics industry was dominated by mom-and-pop retailers of varying quality and effectiveness. Demand kept these small retailers in business, despite three key issues with their businesses: • Consumer were more committed to national brands than to retailers; • The switching cost from one retailer to another was very low; and • Customers often feared that retailers were preying on their ignorance of high-tech products. The environment was also marked by untapped efficiencies (e.g. economies of scale) and unmet customer needs (e.g. stores carried limited selections of brands and products, products were oftentimes out of stock). Circuit City developed a highly successful strategy to take advantage of these market opportunities and neutralized the threats in this situation. Key to its success were a series of fixed investments: 1) large stores that could provide a wide selection of products, 2) technology that could track sales patterns closely, 3) automated distribution centers that were tied to the sales-tracking technology, and 4) significant branding efforts. Additionally, through economies of scale and scope, Circuit City offered lower, competitive prices. These scale-driven cost advantages also put up barriers to entry. (Analysis continued on next slide.) Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005) THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 16. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 16 The used-car market shared many similarities to the environment characterizing consumer electronics in the 1970s Case Example – Circuit City Launching CarMax (3 of 4) Recognize the analogy and identify its purpose Understand the source Assess similarity Translate, decide, and adapt 1 2 3 4 (Analysis continued.) Our goal is to figure out whether the casual logic holds up in the target environment. In preparing this analysis, it is helpful to create 2 lists of industry features: • Those that play a crucial role in the causal logic; and • Those that don’t. For Circuit City, these are the crucial elements: • Unsatisfied customer needs, especially for product selection, product availability, and trustworthy retailers; • Untapped economics of scale and latent, but largely unrealized, barriers to entry; • Unexploited opportunities to apply information and distribution technologies for better inventory management; • Fragmentation of competitors (many of them weak); • Brand, powerful, reliable suppliers; • Low customer switching costs; and • Absence of goods that are close substitutes at the high end of the market. There were numerous similarities between the source and target environments: • Many customers were unsatisfied with and distrustful of current retailers (till this day, there is still stereotype of the sleazy used car salesman); • Economics of scale and barriers to entry were limited; • The industry was fragmented; • Information and distribution technologies remained primitive, even though the inventory was very diverse; and • There was low customer switching costs. All these similarities match crucial elements of the casual logic in the electronics retailing model, which suggests a strong analogy. Note that important differences also exist. Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005) THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 17. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 17 Contents  Overview  Strengths and Pitfalls  Deduction vs. Trial and Error  Approach to Forming and Analogy  Case Example  PowerPoint Templates
  • 18. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 18 Insert headline TEMPLATE – Analogical Strategic Reasoning Approach/Process Application Insert bumper. [INSERT LOGO] [INSERT LOGO] • Filler text, filler text, filler text • Filler text, filler text • Filler text, filler text, filler text • Filler text, filler text • Filler text, filler text, filler text • Filler text, filler text • Filler text, filler text, filler text • Filler text, filler text Source Problem Source Problem Target Problem Target Problem Candidate Solution Candidate Solution Our Solution Our Solution THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 19. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 19 Insert headline TEMPLATE – Analogical Strategic Reasoning Approach/Process Recognize the analogy and identify its purpose Understand the source Assess similarity Translate, decide, and adapt 1 2 3 4 Insert bumper.  Filler text, filler text, filler text  Filler text, filler text, filler text Filler text, filler text, filler text Filler text, filler text, filler text Filler text, filler text, filler text Filler text, filler text, filler text Filler text, filler text, filler text Filler text, filler text, filler textTHIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 20. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 20 Insert headline TEMPLATE – Analogical Strategic Reasoning Approach/Process Insert bumper. Recognize the analogy and identify its purpose Understand the source Assess similarity Translate, decide, and adapt 1 2 3 4 • Filler text, filler text, filler text, filler text, filler text, filler text • Filler text, filler text, filler text • Filler text, filler text • Filler text, filler text, filler text, filler text, filler text, filler text • Filler text, filler text, filler text • Filler text, filler text • Filler text, filler text, filler text, filler text, filler text, filler text • Filler text, filler text, filler text • Filler text, filler text • Filler text, filler text, filler text, filler text, filler text, filler text • Filler text, filler text, filler text • Filler text, filler text THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 21. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 21 Insert headline TEMPLATE – Analogical Strategic Reasoning Approach/Process 1. Recognize the analogy and identify its purpose 2. Understand the source 3. Assess similarity 4. Translate, decide, and adapt Source Problem Source Problem Target Problem Target Problem Source Problem Source Problem Target Problem Target Problem Candidate Solution Candidate Solution Source Problem Source Problem Target Problem Target Problem Candidate Solution Candidate Solution Similarity Mapping Source Problem Source Problem Target Problem Target Problem Candidate Solution Candidate Solution Our Solution Our Solution Application THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 22. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 22 Insert headline TEMPLATE – Analogical Strategic Reasoning Approach/Process (Variant) 1. Recognize the analogy and identify its purpose 2. Understand the source 3. Assess similarity 4. Translate, decide, and adapt Source Problem Source Problem Source Problem Source Problem Target Problem Target Problem Candidate Solution Candidate Solution Source Problem Source Problem Target Problem Target Problem Candidate Solution Candidate Solution Similarity Mapping Source Problem Source Problem Target Problem Target Problem Candidate Solution Candidate Solution Our Solution Our Solution Application Candidate Solution Candidate Solution THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 23. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 23 Insert headline TEMPLATE – Case Study (1 of 2) Recognize the analogy and identify its purpose Understand the source Assess similarity Translate, decide, and adapt 1 2 3 4 Filler text, filler text, filler text, filler text, filler text • Filler text, filler text, filler text • Filler text, filler text, filler text Filler text, filler text, filler text, filler text, filler text • Filler text, filler text, filler text • Filler text, filler text, filler text Source: THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 24. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 24 Insert headline TEMPLATE – Case Study (2 of 2) Recognize the analogy and identify its purpose Understand the source Assess similarity Translate, decide, and adapt 1 2 3 4 Filler text, filler text, filler text, filler text, filler text • Filler text, filler text, filler text • Filler text, filler text, filler text Filler text, filler text, filler text, filler text, filler text • Filler text, filler text, filler text • Filler text, filler text, filler text Source: THIS IS A PARTIAL PREVIEW You can download the full document at http://PPTLab.com. PPT Lab is a crowdsourced presentation design service.
  • 25. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 25 PPT Lab (www.pptlab.com) is the only crowdsourced presentation design service. Get consulting-quality presentations at a fraction of the cost! Each month, we will create well over 50 slides of for our members. As a member, you will drive what business slides we create by submitting your own presentation projects to our team. All presentations will be created by a team of management consultants and follow the Consulting Presentation Framework. www.PPTLab.com support@pptlab.com

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