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 companys 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

Copied by Charlie Merrill (Merrill Lynch) & Charles Lazarus (Toys R Us)

1950s

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).

Analogical reasoning requires:

Should pay attention to select features of a problem. Need not understand every aspect of the problem.

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

Dells key strategic principle Ford Executives Think Here? Is there is possible for us
Ford existing supply chain if changed then bear high cost due to increase or decrease prices of inputs .

How analogy Fails

Ford vs Dell

ENRON
Many

factors contributed to Enrons startling collapse(falling Down) also this due to use loose analogies
markets for other goods ranging from coal, steel, paper to weather derivatives and broadband telecom capacity.

Enron executives moved rapidly to enter or create

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.

SPECTRUM OF ANALOGIES
Perfect analogies
(Toy retailing industry of the

Problematic analogies
(Enrons comparison of

1950s deeply
resembled the grocery business)

broadband and
natural gas trading)

The vast majority of analogies fall

somewhere in betweentheyre imperfect but useful. The challenge is to get the most out of them. deduction and trial and error to test and improve the analogies that lie in the middle of the spectrum.

The best users of analogy harness

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

Teaching managers with cases, and

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 isnt 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