Economic Institutions of Strategy Jackson Nickerson Frahm Family Chair of Organization and Strategy.
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Transcript of Economic Institutions of Strategy Jackson Nickerson Frahm Family Chair of Organization and Strategy.
Agenda Describe a new book for young scholars interested
in organization and strategy Introduce some current research on Strategic
Problem Formulation Have a brief discussion of processes in NIE Provide some tips and tricks on how the book and
research might advance your research productivity
Economic Institutions of Strategy Volume co-edited with Brian Silverman Goals are to:
Acknowledge the role of transaction cost economics (TCE) and Oliver Williamson in the field of strategy
Help junior scholars identify promising research topics that are feasible empirically
Suggest that TCE is not just a “background” theory but remains a growth engine for understanding organization and strategy
Publication date: September 2009Volume part of Advances in Strategic Management
Table of Contents Foreword by Oliver E. Williamson Introduction: Jackson Nickerson / Brian Silverman Part I: Development of new technology
1. Transaction Costs in Technology Transfer and Implications for Strategy,
Ajay Agrawal 2. Organizational Economics’ Insights from
Acquisitions Research, Jeffrey J. Reuer
TOC - continued Part II: Development of new business
opportunity/business models3. Opportunities and New Business Models:
Transaction Cost and Property Rights Perspectives on Entrepreneurship,
Nils Stieglitz and Nicolai J. Foss 4. The Problem Solving Perspective: A Strategic
Approach to Understanding Environment and Organisation,
Michael J. Leiblein and Jeffrey T. Macher
TOC - continued Part III: Competitive advantage and performance
5. The Future of Inter-firm Contract Research: Opportunities Based on Prior Research & Non-traditional Tools,
Libby Weber, Kyle Mayer, Rui Wu6. Alliances and performance
Joanne Oxley7. A Strategic Look at the Organizational Form of
Franchising, Steven Michael and Janet Bercovitz
8. Internal Organization from a Transaction Cost Perspective, Nicholas Argyres
TOC - continued Part IV: Corporate strategy
9.Strategic Organization of R&DBruno Cassiman and Alfonso Gambardella
10. Limits to the Scale and Scope of the Firm, Todd Zenger and Jeffrey Xiaofei Huang
Part V: Industry analysis 11.Diversification, Industry Structure, and Firm
Strategy: An Organizational Economics PerspectivePeter G. Klein and Lasse B. Lien
12. Intellectual Property Regimes and Firm Strategy: Putting Hall and Ziedonis (2001) in Perspective
Rosemarie ZIEDONIS
TOC - continued Part VI: Location, national institutions, and strategy
13. Value Creation and Appropriation Through Geographic Strategy: Evidence from Foreign Direct Investment
Miguel A. Ramos and J. Myles Shaver14. Beyond the Economic Institutions of Strategy:
Strategic Responses to Institutional VariationWitold Jerzy Henisz
15. Integrated Political StrategyJohn M. de Figueiredo
16. Contracting with GovernmentsEric Brousseauand Stéphane Saussier
TOC - continued Part VII: Dynamics
17.New frontiers in Strategic Management of Organizational Change
Jackson Nickerson and Brian Silverman
A Consumer Products Company Firm historically performed well with steady but low
to moderate profit growth Few new product/service ideas get developed and
make it to market, existing-brand refurbishment Workforce tends to be older, conservative,
homogenous in attitude Few incentives to reward innovation over long run Very lean but productive; few slack resources High production capacity utilization How can the organization profitably grow faster?
An MBA Curriculum Committee Charged with creating curriculum to improve student
analytical and communication skills Recruiters, faculty, and dean report multiple
instances where skills are lacking Committee comprised of faculty from different
functional areas as well as administrators Ex ante, neither dean nor committee members
agree on causes of symptom Yet each constituency has preferred solutions How can the school develop these skills?
A Health Care Company A large number of hospitals Mission statement centered on providing a particular
kind of quality care, key point of differentiation Within-system hospitals differ on patient satisfaction
metrics On average no different from other systems No consensus on what “quality” means What is quality care and how can it be implemented
to differentiate the organization?
How would you help them? Each situation is strategic in that decisions can
impact the organization’s strategy. Groups were assigned in each case to solve the
problem. Each situation is a complex, ill-structured problem.
Complexity (Simon 1962)• Many symptoms• One symptom does not describe another symptom• Symptom may interact to produce additional effects
Ill-structured (Fernandes and Simon 1999)• No consensus approach for addressing symptoms
Agenda for Problem Formulation The strategic problem formulation challenge Extant literature on problem formulation Definitions Formulation objective Assumptions Impediments Design goals An illustrative process that satisfies design goals Implications and future research
Problem formulation challenge Most scholars agree that problem solving requires
Defining the problemGenerating alternative solutionsChoosing alternatives Implementing choices
We find vast amounts of research on latter three. Almost universally, the research begins with
assuming an already formulated problem.e.g. the behavioral theory of the firm.
Let’s consider research in strategy and policy
Research on problem formulation Problem formulation is rarely researched
1970s saw several investigations into problem formulation (also called diagnosis and structuring)
Mostly descriptive and atheoreticalMostly focused on individualsVery little empirical research—student experiments
Much of the research died out in the 1980sLeading scholars .. Cowan, Lyles, Mitroff, Nutt,
Volkema, Pounds .. moved on, retired, passed away.Little progress was madeProcess approaches and OD research diminished
Importance of problem formulation The formulation of a problem is often more essential
than its solution.” Einstein and Infeld (1938, 92). Diagnosis ... determines in large part … subsequent
course of action” (Mintzberg et al. 1972, 274). Poor formulation can lead to error of the third kind,
solving the wrong problem. (Mitroff et al.) Problem formulation has the potential for greatly
affecting problem solving:quantity and quality of solutions produced, and implementation of solutions chosen.
Our project … Acknowledges that heterogeneous teams are the
primary vehicle for solving these problems. Theoretically identifies set of core impediments
arising from teams that lead to limited formulations. Develops a set of “design goals” that guide the
development of mechanisms. And offers a structured process that satisfies these
design goals.
Definitions A Symptom is something the indicates a presence of
a disorder or opportunity. A Web of Symptoms refers to those symptoms for
which evidence implies correlation among them. A Problem is a condition, symptom, or set of
symptoms that need to be dealt with or solved. Problem (re)formulation is translation of an initial
condition, symptom, or set of symptoms into a systematized set of statements that identifies a particular cause or causes of a symptom or set of symptoms. Equivalent to a diagnosis.
Definitions (cont’d) Structured Process comprises a set of facts,
circumstances, or experiences that are observed and described or that can be observed and described and are marked by gradual changes through a series of states (Nickerson et al. 2007).
Formulation objective Problem Formulation Comprehensiveness
the extent to which alternative and relevant problem formulations are identified with respect to an initial symptom or web of symptoms
comprehensiveness increases as the number of alternative problem formulations grows
each alternative must illustrate at least one mechanism that causes as least one symptom
With an “optimal” formulation unknown and unknowable, our objective is to …
…improve the comprehensiveness of a problem’s formulation.
Assumptions Humans are boundedly rational
Individuals face real physiological limits in acquiring, accumulating and applying knowledge/information
• cognitive capacity (i.e., attention, memory, time) • costly to acquire, accumulate, and apply cognitive structures
Individuals can be self-interest seeking with guile Relevant knowledge and information is dispersed
across individuals Assembled groups/teams will be heterogeneous in
motivation, cognitive structures, and information Problems are complex and ill-structured
Impediments Theoretical ideal of heterogeneous groups is that
they lead to more comprehensive formulations Recent research indicates heterogeneous groups
perform no better than homogeneous onesGroups experience some type of process loss,
heterogeneous groups experience more Heterogeneity that promises superior performance
also generates impediments that derive from: InformationCognitive structuresMotivation
Heterogeneous information (Assume homogeneous motivation to begin with) Heterogeneous information sets + bounded rationality Information sampling
Difficult to judge which informational elements are likely to be relevant to a particular problem context
Individuals will begin by sending cues about what they believe to be important
Group members are likely to recognize cues that they already posses and understand
Conversation to transfer and verify information sent and received
Sharing unique information is far costlier in terms of cues and communication
Information sampling narrows formulation comprehensiveness
Heterogeneous cognitive structures (Assume homogeneous motivation to begin with) Heterogeneous cognitive structures + bounded rationality Representational gaps (concepts, language, assumptions)
Individuals are likely to formulate problems in a way that capitalizes on the knowledge that they possess
Differences in knowledge sets likely produce problem understandings that are, at least partially, incompatible
• Difficult and costly for individuals to share knowledge and recombine representations to explore additional problem formulations (unless drinking together in Cargese)
• Can promote misunderstanding, conflict and distrust, which increases cost of communication
Representational gaps narrow formulation comprehensiveness
Heterogeneous motivation Heterogeneous motivations + bounded rationality Political maneuverings to protect and enhance self-interest
Dominance activities• High stakes increase effort, low stakes acquiesce
Propensity to jump to solutions• Economizes on bounded rationality• Strategically offered to push desired outcome
Transfer information and cognitive structures strategically• Attempts to limit alternatives• Can increase distrust and conflict• Amplifies information sampling and cognitive gaps
Heterogeneous motivation narrows formulation comprehensiveness
Design goals Mechanism(s) must
Prevent members from jumping to solutionsLimit domination/equalize participation Reduce information exchange and sampling problems Motivate individuals to reduce representational gaps Limit strategic behavior and trust concerns
Wow! How can this be done?
How can impediments be overcome? Three organizational mechanisms are considered:
economic incentivesgroup selections/matchingstructured processes
Economic incentivesComprehensiveness of formulation is not contractible
ex anteTransfer of cognitive structures, which is needed to
recombine knowledge, is not contractible ex anteEffort in “thinking” is not contractible ex ante and not
verifiable ex post
Overcoming impediments Selection/matching of group members
Pool of potential group member typically is small because of the need for firm-specific knowledge.
• A small pool limits the ability to form a group with desirable correlations of motivation, cognition, and information.
Measurement difficulties make it costly to verifiably form a group with a desirable correlation.
• E.g., Ex ante homogeneous goals and objectives with heterogeneous cognitive structures and information.
Selection does not mitigate all impediments.
We focus our efforts on structured processes.
A Structured Process Finding Framing Formulating Solving Implementing
We will focus on Framing and Formulating
Finding A symptom(s) triggers initiation of a group or pre-
existing group to take up the problemAssume complex, ill-structured problem contextOther processes might be better suited for those
problem contexts that are not complex and structured Group composition is chosen
Heterogeneous for complex, ill-structured contextHeterogeneous manifests in motivation, cognitive
schema, and information Management/team commits to process* Finding is not much informed by our process
Does process satisfy design goals?PHASE 1: FRAMING
Facilitator specifies focus and enforces groundrules (i.e., focus on symptoms no discussion of formulation or solutions)
Use modified nominal group technique (mNGT) to reveal comprehensive set of symptoms
Group consensus decision statement summarizing symptoms
Verify validity of set of symptoms via evaluation by external stakeholders
DESIGN GOALS
Prevent members from
jumping to solutions
Limit domination/equalize
participation
Reduce information exchange and
sampling problems
Motivate individuals to reduce
representational gaps
Limit strategic behavior and trust
concerns
PHASE 2: FORMULATION
Facilitator specifies focus and enforces groundrules (i.e., focus on formulation; no discussion of solutions)
Use modified nominal group technique (mNGT) to identify possible mechanisms causing symptoms
Group consensus decision statement summarizing formulation of problem
Verify validity of problem formulations via evaluation by external stakeholders
How has the process worked? Consumer products company MBA curriculum committee Health care company
Preliminary validation?
Implications New approach to theorizing about problem
formulation–generate process design goals While economic incentives and selection may
positively contribute to problem formulation …
…they appear neither necessary nor sufficient Cannot guarantee comprehensiveness, only
improvement in comprehensiveness Process may provide implementation benefits Process consumes time
Implications for group formation Facilitator is necessary
Directions for future research Empirical analysis is needed and students won’t do. What are the implications for problem solving? What about other types of problems? Other factors that may matter on the process
Credibility of commitment to process TimeOutcomeSelection of knowledge/team members
Links to other literatures Formulation in operations Creativity in psychology, especially in groups Insight in psychology and marketing Fallibility in economics Cognitive biases in psychology and operations Organizational development Education
Existing research Heiman and Nickerson
(2002). “Towards reconciling transaction cost economics and the knowledge-based view of the firm: The context of inter-firm collaborations,” International Journal of the Economics of Business, 9(1) : 97-116.
(2004). “How do firms manage knowledge sharing while avoiding knowledge expropriation in inter-firm collaborations,” Managerial and Decision Economics, 25: 401-420.
Nickerson and Zenger (2004). “A knowledge-based theory of governance choice,” Organization Science 15(6): 617-632.
Macher (2006). “Technological development and the boundaries of the firm: A knowledge-based examination in semiconductor manufacturing,” Management Science 52(6): 826-843.
Hsieh, Nickerson and Zenger (2007). “Problem solving and the entrepreneurial theory of the firm,”Journal of Management Studies.
Nickerson, Silverman and Zenger (2007). “The ‘problem’ of creating and capturing value,” Strategic Organization 5(3): 211-225.
Processes in NIE John: Constitutions are processes for making ex
post adaptations Scott: Contracts are processes for making ex post
adaptations Ken: (But for meta some games) Institutions are
processes for selecting among selecting among a large number of equilibria.
Is NIE ultimately about the study of processes and their ability to shape ex post adaptations?
Is this what NIE scholars typically claim? How can we improve the study of processes?
Formulation and your research Assertion: Formulation of problem is central to your
success We often get “enamored” and locked into solutions
before insuring a “good” problem formulation Practical tips
Verify and improve your formulation and approach to solution broadly and quickly
• Write a 4-6 page introduction• As for next day feedback from colleagues and faculty, those
at your school and those you met• Refine based on feedback and solicit feedback again until
readers agree that you will create value if you deliver on the introduction