Current Trends in Strategi c M anagement

1. Current Trends in Strategic Management • The New Economy • New Directions in Strategic Thinking • Redesigning the Organization • New Modes of Leadership OUTLINE

2. The Turbulent 21st Century • Collapse of New Economy • Dot.com bubble bursts • TMT recession • Corporate Scandals • Enron, WorldCom, Parmalat • Jack Welch’s retirement package • War • Invasion of Afghanistan • & Iraq • Civil wars in Congo, Liberia, Sudan, Somalia • International • competition intensifies • China as Workshop of the World • Outsourcing to LDCs • The Curse ofTerrorism • Sept. 11, 2001 • Suicide bombings in • Israel, Iraq, Saudi Arabia, Turkey, Afghanistan • Decline of • Multilateralism • Collapse of Doha round • Trade wars between US, EU, China • Weakening of UN Age of Disbelief • Fear of Disease • SARS, Mad Cow, Bird Flu Unstable Currencies US$ declines by >50% against Euro 2002-04

3. Directions in Strategic Management Practice—Trends of the 1990s • Key Trends of the 1990s: • Quest for shareholder value • Adjusting to increased • turbulence & more intense competition • Major Themes of Business Strategy: • Cost cutting—squeezing • overhead,business process re- • engineering, increasing labor • productivity • Outsourcing/refocusing/ • divestment • Performance management and • incentive alignment • Influential Strategy Concepts: • Modern financial analysis • —shareholder value, economic profit, • option theory • Core competences and intangible • assets • Dynamically competitive markets • —“hypercompetition” • Competitive advantage through • alliances, networks, and standards

4. Forces Shaping Company Strategies 2001-04 • The Business • Environment • Uncertainty • Stalling of economic • liberalization • Intense competition Future Sources of Profit Limits of downsizing/cost cutting Where are future sources of profit? • Concepts & Theories • Resources & capabilities as • basis for competitive advantage • Knowledge-based theory • of the firm • Option theory • Complexity theory Technology Continued advances in ICT • Demands of society • Social & environmental responsibility • Ethics & fairness • Quest for meaning

5. Emerging Developments • STRATEGY • Multiple competitive advantages/multiple capabilities • Innovation / New Product Development / New • Business Development • Alliances & networks • ORGANIZATION • STRUCTURE • Reconciling flexibility • & integration • Modular structures • Multidimensional structures • Informal organization & • self-organization • MANAGEMENT SYSTEMS • Knowledgemanagement • (incl. best-practice transfer) • Redesigning incentive systems • Rethinking performance management • Capturing human creativity

6. The Need to Redesign Organizations THE PAST THE FUTURE Emphasis on control Emphasis on co-ordination Single performance goal Multiple performance goals Decisions located centrally Decisions located where relevant knowledge exists Simple structures, unified line of command Multidimensional structures Diffused authority, but clear responsibilities Organization by design Self organization

7. Emerging Organizational Forms Organizing for capability Shifting emphasis of organization developmentdesign from control to coordination From unitary to parallelSeparate coordination structures for structuresdifferent processes.E.g. 3M’s product development structure; separate structures for TQM and change management Process-based Organizing around business processes organizations Organizing around corporate processes - entrepreneurial process - competence building process - renewal process Project-based organization E.g. engineering cos., consulting firms, also manufacturing cos. e.g.Oticon Network and virtual E.g. electronics in Silicon Valley, clothing organization and packaging equipment in Italy

8. New Models of Leadership:What Competencies do Top Managers Need? • THE REQUIRED • COMPETENCIES OF • BUSINESS LEADERS • business literacy • creativity • cross-cultural • effectiveness • empathy • flexibility • proactivity • problem-solving • relation-building • teamwork • vision THE LEADERSHIP NEEDS OF ORGANIZATIONS The ability to: • build confidence • build enthusiasm • cooperate • deliver results • form networks • influence others • use information

9. The Current Best-Seller • Raynor, The Strategy Paradox • Corporate manages uncertainty (5+ year timeframe), divisions manage commitments/deliverables • Corporate must create “strategic options” rather than growth options • “Strategic Flexibility” • identify scenarios, build capabilities, manage portfolios of options • the ability to pursue alternative strategies that could be useful, depending on how key uncertainties are resolved • the most appropriate exposure to strategic risk and opportunity • A strategic option is an option on an element of an alternative strategy that might or might not be implemented, not simply an option on further investment in a new business that might or might not succeed.

10. What is complexity theory? • Based on an agent…an ant in a colony, an electron in an atom, a worker in a company... • A complex system is defined asany network of interacting agents (or processes or elements) that exhibits a dynamic aggregate behavior as a result of the individual activities of its agents. • An agent in such a system is adaptive if its actions can be given a value (performance, utility, payoff, fitness etc.) and the agent behaves so as to increase this value over time.

11. Complex Adaptive System • A complex adaptive system is one in which agents adapt to higher levels of fitness over time • A fitness landscape is simply a visual representation of the payoffs from taking different strategies • Fitness landscapes can be rugged (with many peaks or troughs) or smooth • Co-evolution creates a ‘dancing fitness landscape’

12. Key Result Areas • Some key results in complexity theory have proved important for management • Emergence • Agent-Based Search • Patches

13. Emergence • Emergence • Simple rules can produce complex behavior! • See logistic equation, for example • “Order for free” – no need for central control! • Just find the right simple rules for agents to follow • Artificial Life Example • Craig Reynold’s Boids Program • Eisenhardt uses this principle in “Strategy as simple rules” • How-to, boundary, priority, timing, exit rules

14. Agent-Based Search • Exploring a rugged fitness landscape by trial and error to try and find the highest peak can take a long time • Using agents to explore the landscape and zero in on promising regions may be faster • Beinhocker uses this principle in “Robust Adaptive Strategies” • Keep moving • Deploy platoons of hikers • Mix short and long jumps • “Populations of strategies”

15. Patches • Stu Kauffman found that dividing an NK lattice into several patches and minimizing the energy in each patch without reference to the global energy level gave better solutions than global search on very rugged (i.e. complex) landscapes • Having sub-units optimize their part of the problem may be better than trying to find an optimal solution for the whole organization • Kauffman suggests that multi-divisional organizations might benefit from less rather than more centralized control

16. Complexity as Metaphor • Complexity theory has been extended from biology and physics into other arenas • Undoubtedly, societies, economies, and organizations are complex adaptive systems, too. • If an organization is like an NK model then…

17. Interpretation • Adaptation (biology) rather than efficiency (machine) should be promoted • A variety of small experiments should be undertaken to explore the “fitness landscape” • Rely less on central controls • Recognize that change can yield big (or small) results and solutions can emerge from the interaction of agents (workers)

18. Case: Jack Welch • What were the principal strategic and organizational changes introduced by Welch at GE? • Why has the strategy, structure, and systems created by Welch been successful in delivering shareholder value and insulating GE from the fashion for breakup to which most other conglomerates succumbed? • Can you detect a theory of management or set of general principles that link together Welch’s various initiatives? • To what extent should other large, diversified corporations imitate the management systems and leadership style developed by Welch at GE?

19. Case: AES • What’s unusual about AES’s structure, management systems, and leadership style? • Has AES’s success been because of, or despite, these practices? • Given the current challenges that AES faces, should it adopt more conventional management systems and processes,or should it maintain the values, principles, and management methods established by Sant and Bakke? • What can other firms learn from AES?

20. Conclusion • Strategy of the future: • Complexity theory • Dynamic capabilities • Blue ocean • Strategic options • Efficient design – people, decisions, rewards, structure, process