Week 2: Explorers/Exploiters, Public Governance and Normals

Stanford GSB Sloan Study Notes, Week 2, Summer quarter

Pages assigned for reading: 310

  • Reminder: think of normals not in their absolute value, but as “how many standard deviations from mean” (Statistics)
  • After going through the theory and visualisations behind probabilities of standard normal distribution (Z) and t-distributions, I have a growing suspicion, that in 95% (pun intended) of real life business cases needing confidence estimates, we’ll be dealing with a simple constant: 2. (In case of 95% probability on standard normal distribution, Z=1.96 and in cases the sample size n < 30, you should technically use t but, it in reality tends to be so close, that all other uncertainties around sampling and data collection would rarely be less than the benefits of simplicity of multiplication by two) (Statistics reading + class discussions)

  • Strategy-related generalizations can easily get buzzwordy, but I have to admit I like the simple clarity of dividing companies as Exploiters and Explorers.
    • What I like is that besides being yet another dichotomy, the framework very clearly shows the logic of next set of derived characteristics: why companies focused on exploiting their existing advantages find value in centralisation, tight coupling and incremental learning whereas explorers need some organisational slack and freedom to wander outside defined domains to be innovative.
    • And most importantly, as the real world never fits these black’n’white dualistic models, there are quite convincing patterns here for how a company can be either an explorer or exploiter, yet still carve out some ways of accommodating the other behaviour (as great innovations are quite pointless business-wise if not taken competitively to market, Xerox PARC for example). Most crucial and notable tool here being a culture that allows for diversity. (Org Design, class discussions & Saloner et al textbook)
    • Googling around for original source of this dichotomy, it is apparently a very “Stanford thing”, created by professor James March, who in turn (like in this article) refers back to as early as Schumpeter in 1934. UPDATE: now checked with professor Soule who confirmed and added the prof emeritus March still spends time on campus these days – should try to look him up!
  • A question “which culture should a company choose when operating in a given market” is inherently wrongly posed. In case of startups, which are inherently the extension of the founder’s bandwidth to execute on their vision – so is the culture an extension of the values and beliefs of the founders. Not much to choose while they (and other culture-setting senior management) is still around. (Org Design, class discussion)
    • Reminded of a great quote heard at the Founders Forum in June: “To be able to change an established culture in an organization, you need a crisis. If you happen to not have a crisis at hand, you have to create one”. Can’t reveal full detail of the story, but the source had just fired ~140 of 150 mid level managers in a recently acquired company to be able to reset the cultural norms there.
  • In case of organizations with loosely coupled design, e.g with low interdependence between structural units, it is obvious pan-company synchronization and communications can become pain points. However, instead of rushing to _solve_ all these pain points, you can choose to buffer against some of them — e.g a production company choosing to keep higher inventory to even out some cycle and sync issues between its units. (Org Design, Saloner textbook)
  • As long as there is no business school case study written yet  (hmm…) on engineering recruitment practices of Toivo – the recruitment section in Cypress Semiconductor: Vision, Values, And Killer Software case is the next best thing. Even if I don’t buy into many other, non-recruitment related aspects of the Cypress culture covered in there. (Org Design)
  • When negotiating a solution to resolve public/social/activist pressure, firms weigh the items to cave on carefully from competitive advantage practice. E.g a bank resorting on some environmental control gateways for projects they finance tries to set the bar to somewhere their organization uniquely can reach it, but it would be as expensive as possible to get to the same place for their competitors. Presuming they will be hit with similar pressure in the future. (Strategy Beyond Markets, prof Jha‘s lecture)
  • To be sustainable, a firm’s competitive advantage must not be owned by a too small subset of people – who can leave (or just threaten to), risk an accident, radically renegotiate their share from value created, etc. A fun example for that argument is Disney’s long-term success over many film companies: it’s animated stars extract zero value to themselves, never act as primadonnas, age nor die… (Org Design)
  • The distinction between position- and capability-based competitive advantage of firms didn’t sound fully logical at first. A position (brand recognition, market dominance, patent count, whatnot) sounds intuitively as just an output metric, a measure of achievement by those capabilities (team, processes, …) that are the “real” competitive advantage. However, after further thinking of situations like inheriting company with a history, M&A activities, etc it seems that the distinction between static and dynamic contributors to advantage does make sense. (Org Design, class discussion + Saloner’s textbook)
  • Existence of collective interest does not imply collective action. Overwhelming “public interest” can be often silent, overrun by much smaller subset of interest groups who are more motivated to be loud. And also, any resulting “public good” is not divisible on individual levels. From here things get quickly into game theory, Prisoner’s dilemma & Tragedy of the commons fun. (various readings for Strategy Beyond Markets)
    • How long can you afford to not speak up against a seemingly small interest group lobbying against your personal interests or beliefs?
    • See also: the Wilson-Lowi matrix for more nuanced motivations, for both benefits (available substitutes to the fight, group-level and per-capita magnitudes) and costs (group size, geographic coverage, political resources, cost of organizing) of entering into the fight.
  • A notable caveat of pluralist politics (that is, governmental outcomes are determined by the relative intensities of preferences and, hence, the mobilization of competing interest groups, rather than more normative “public interest”) is that when in democratic politics conflict is often resolved by voting, pluralism falls silent about how, for example, legislators vote and why. (Strategy Beyond Markets, Interest Group Analysis for Managers by Krehbiel)
  • Comparing the terminology of core mechanism of politics VS economics: “Each pertains to a class of social behavior in which preferences are aggregated.  When preferences are about nontrivial issues — which is to say, when there is conflict of interest — some commonly agreed-upon mechanism or institution of preference aggregation is used.  In economics, the principal mechanisms of preference aggregation are markets. In democratic politics, the principal mechanism of preference aggregation is voting within theelectoral and governmental institutions.” (Strategy Beyond Markets, Interest Group Analysis for Managers by Krehbiel)
  • Good examples of highly customized employee motivation packages at JetBlue case as a) reflection that employee motivations are indeed different (duh), b) blanket pay programs could be HR/backoffice just optimizing to make their own life simpler and c) personalization is the opposite of unionization, which, if it happened, JetBlue leaders believed to be a signal of a major screwup in how they serve their employees interests (HBR case, Organizational Behaviour / Org Design)
  • There is a school of evolutionary economics and organizational ecology (for example: Hannan & Freeman, Organizational Ecology) that argues that success is not determined by a firm purposively developing a strategy that fits in its context, but by the incidentalfit of fairly inert firms to their environment. In this view, adaptation means mimicking the routines of the (accidentally) well adapted firms, which is of course very risky. As a result, older, less-well adapted firms fail and new are born to replace them, without the baggage of routines. (Org Design, Saloner/Shepard/Podolny Strategic Management textbook).
    • This research, presumably built on more “old & established” firms in 80s, would be quite interesting to revisit in the context of nimble, adaptive and fast-moving tech startups of today?

  • – “how many standard deviations from mean” Welcome to the wonderful world of Six Sigma!
    – ” Most crucial and notable tool here being a culture that allows for diversity.” Look into dynamic capabilities:

    @article{teece2005dynamic,
    title={Dynamic capabilities and strategic management},
    author={Teece, D.J. and Pisano, G. and Slwen, A.},
    journal={Knowledge management: critical perspectives on business and management},
    volume={2},
    number={7},
    pages={234},
    year={2005},
    publisher={Taylor & Francis}
    }
    – ” so is the culture an extension of the values and beliefs of the founders” Ha. And since the culture must match the strategy it follows that the strategy must match the founders from which it follows that investors should look into the personalities of the founders at least as carefully as they look at the strategies. I had not thought of that.
    – “However, instead of rushing to _solve_ all these pain points, you can choose to buffer against some of them” It can be argued both ways. In any case, one needs to understand the communication structure before rushing to solve issues. A good source of research on this:

    @article{allen1984managing,
    title={Managing the flow of technology: Technology transfer and the dissemination of technological information within the R&D organization},
    author={Allen, T.J.},
    journal={MIT Press Books},
    volume={1},
    year={1984},
    publisher={The MIT Press}
    }
    – “must not be owned by a too small subset of people” Thus the folks who believe in TMM argue that everybody should be contributing to the learning of the organization. http://hbr.org/product/bayside-controls-inc/an/697004-PDF-ENG is a good case in point
    – “In this view, adaptation means mimicking the routines of the (accidentally) well adapted firms, which is of course very risky” This sounds strange. American automakers, a well-studied bunch, actually tried this with Toyota. They copied a lot of their methods but they failed to show improvements. The point being that managerial practices are rarely plug-n-play and that the cargo cults, while fun, are not particularly successful

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