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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 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.

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Analogical Strategic Reasoning Analogical Strategic Reasoning Presentation Transcript

  • Crowdsourced Business Presentation Design Service Analogical Strategic Reasoning How Strategists Really Think 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. July 29, 2013 ORIGINAL PROJECT DETAILS http://pptlab.com/ppt/Business-Framework-Analogical-Strategic-Reasoning-39
  • 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 PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 3
  • 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. Source Problem Candidate Solution Target Problem Application Our Solution 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. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 5
  • Another example is when Circuit City launched CarMax, driven by similarities it saw between the used-car market and consumer electronics Example – Circuit City and CarMax BACKGROUND In the 1970s, Circuit City thrived by selling consumer electronics in superstores—a wide selection, professional sales representatives, and a policy of not haggling with customers distinguished the electronics retailer ANALOGY / COMPARISON In the 1990s, Circuit City recognized an opportunity in the used-car industry, because this industry bore a close resemblance to the electronics retailing environment of the 1970s: • Mom-and pop dealers with questionable reputations dominated the use-car industry • Consumers were nervous when purchasing and financing these complex, big-ticket, durable products BUSINESS DECISION In 1993, Circuit City announced it would open CarMax, a chain of used-car outlets Circuit City’s management felt its success formula from electronics retailing would work well in an analogous setting in used-cars. Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005) PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 7
  • Contents  Overview  Strength and Pitfalls  Deduction vs. Trial and Error  Approach to Forming an Analogy  Case Example  PowerPoint Templates PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 9
  • To avoid a faulty analogy, it is critical to avoid superficial similarities when constructing the analogy… Pitfalls of Analogical Strategic Reasoning (1 of 3) WARNING There are numerous pitfalls that we may lead us to draw problematic analogies on the basis of superficial similarity—and not deep casual traits. COMMON PITFALL 1 Difficulty in determining structural features OVERVIEW EXAMPLE • It can be very difficult to distinguish between a problem’s deep, structural features and its superficial characteristics • In the early days of the Internet portal industry, players adopted analogies that reflected differences in how management perceived the deep traits to be: • This is particularly true in new and largely unknown markets • 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 PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 11
  • … and, as humans, are prone to Anchoring and Confirmation Bias Pitfalls of Analogical Strategic Reasoning (3 of 3) COMMON PITFALL 3 Psychological principle of Anchoring OVERVIEW EXAMPLE • Once an analogy (or any other idea) ―anchors‖ itself in a person’s mind, it is very difficult to dislodge • 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 • Studies have shown this is true even when decision makers obviously have no reason to even believe that initial idea • He then spun a roulette wheel with numbers from 0 to 100 • This suggests early analogies (even incorrect) can have lasting influences 4 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 • 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% • 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) PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 13
  • 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 vs  When manager apply deduction, they apply general administrative and economic principles to a specific business situation TRIAL AND ERROR  On the other hand, trial and error involves the process of learning after the fact, rather than thinking in advance  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 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 Both deduction and trial and error play important roles in strategy—but each is effective only in specific circumstances. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 15
  • Likewise, on the analogical spectrum, we need to rely on Deduction and Trial and Error to improve on the analogical comparison Analogical Spectrum Universe of Analogies Analogies lie on a spectrum Problematic Analogy Perfect Analogy Some analogies are seemingly perfect—e.g. Toys R Us and the grocery business. Others can be profoundly problematic and destructively misleading—e.g. Enron’s comparison of broadband and natural gas trading. Most analogical comparison lie in the middle—they are imperfect, but useful. The best way to utilize analogy is to harness deduction and trial and error to test, iterate, and improve on those analogies that lie in the middle of the spectrum. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 17
  • Analogical Strategic Reasoning takes 4-step approach Approach to Forming an Analogy It is impossible to make analogies 100% safe—however, these four steps below can improve our odds of using analogies correctly and skillfully 1 Recognize the analogy and identify its purpose 2 Understand the source 3 Assess similarity 4 Translate, decide, and adapt Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005) PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 19
  • Step 2. Understand the source Approach to Forming an Analogy 1 2 Recognize the analogy and identify its purpose ILLUSTRATIVE PROCESS 3 Understand the source 4 Assess similarity Translate, decide, and adapt DESCRIPTION Source Problem Target Problem • 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: Candidate Solution • In-depth analyses of the source competitive environment 2 Understand the source PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service • The solution of strategy that worked well in the original context • The link between the source environment and the winning strategy 21
  • Step 4. Translate, decide, and adapt 1 Approach to Forming an Analogy 2 Recognize the analogy and identify its purpose 3 Understand the source ILLUSTRATIVE PROCESS Assess similarity Translate, decide, and adapt DESCRIPTION Source Problem Candidate Solution 4 Target Problem Application Our Solution Adjust the solution for glaring differences—finetune the solution using market feedback 4 Translate, decide, and adapt • 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 Nogo 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 PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 23
  • Contents  Overview  Strengths and Pitfalls  Deduction vs. Trial and Error  Approach to Forming an Analogy  Case Example  PowerPoint Templates PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 25
  • 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) 1 2 Recognize the analogy and identify its purpose 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. 3 Understand the source 4 Assess similarity Translate, decide, and adapt 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) PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 27
  • CarMax was launched with many operating and strategic similarities to Circuit City, but with key adjustments and important changes made Case Example – Circuit City Launching CarMax (4 of 4) 1 2 Recognize the analogy and identify its purpose 3 Understand the source 4 Assess similarity Translate, decide, and adapt CarMax’s translated strategy had a deep resemblance to its parent company’s electronics retailing operation. On lots of up to 14 acres, each CarMax superstore offered an extremely broad inventory of 200 to 550 vehicles. It also took special efforts to build consumer trust: • Sold cars at fixed, posted prices with no haggling; • Hired salesmen with retail experience, but NOT auto retailing experience and gave them extensive training; • Paid salesmen with a flat fee per vehicle sold, instead of the traditional model of a percentage of sales price; • Implemented advanced inventory tracking system (similar to the Circuit City retailing system); and • Offered money back guarantees and warranties (similar to those in Circuit City stores) Numerous adjustments were also made to CarMax’s strategy, so that it is tailored to the new business and market. These included: • Finding a reliable source of used cars—to this end, began purchasing used cars from customers. BY 2002, individual customers were CarMax’s single largest source of used cars. • CarMax developed a computer system that allowed customers to peruse the company’s full inventory, since each superstore could show the full array of vehicles in CarMax’s inventory. The system also provide the cost to transfer a car to the customer’s locale. It took Circuit City most of a decade to tailor its strategy formula to the used-car market. By 2004, CarMax had revenues of $4.6B with a return on sales of 2-3%. This positive outcome shows the strong resemblance between the electronics retailing vertical and the used-car vertical, particularly in features relevant to the casual logic of the original model’s success. Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005) PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 29
  • Insert headline TEMPLATE – Analogical Strategic Reasoning Approach/Process [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 Source Problem Candidate Solution Target Problem Application Our Solution • Filler text, filler text, filler text • Filler text, filler text Insert bumper. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 31
  • Insert headline TEMPLATE – Analogical Strategic Reasoning Approach/Process 1 2 3 4 Recognize the analogy and identify its purpose Understand the source • 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 Assess similarity Translate, decide, and adapt Insert bumper. PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 33
  • Insert headline TEMPLATE – Analogical Strategic Reasoning Approach/Process (Variant) 1. Recognize the analogy and identify its purpose 2. Understand the source Source Problem Source Problem Candidate Solution Candidate Solution 3. Assess similarity Source Problem Target Problem 4. Translate, decide, and adapt Similarity Mapping Target Problem Candidate Solution PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service Source Problem Candidate Solution Target Problem Application Our Solution 35
  • Insert headline TEMPLATE – Case Study (2 of 2) 1 2 Recognize the analogy and identify its purpose Filler text, filler text, filler text, filler text, filler text 3 Understand the source 4 Assess similarity Translate, decide, and adapt 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: PPT Lab (www.PPTLab.com) – Crowdsourced Business Presentation Design Service 37