A selection of interesting findings from academic studies

2. A selection of interesting findings from academic studies B290

3. Some useful ideas • Traditional (‘neo-classical’) Economics • Efficient market hypothesis • Asymmetric information • Moral hazard • Game theory (e.g., PD) • TCE • Psychology / social psychology / sociology • Decision biases and attribution • Roles (Stanford Prison experiment) • Team dynamics • Network perspective

4. Efficient Market Hypothesis • In an ‘efficient’ market, prices reflect all publicly available information • Prices reflect the expected value of assets • Present value of cash flow • Or liquidation • Prices change quickly (‘instantly’) to reflect any new information.

5. Asymmetric information • Asymmetric information : buyer (or seller ) has more information than the counter party • Adverse selection • Only sick people sign up for health insurance • Market failure (market for lemons) • Owners of ‘non-lemons’ do not put their cars up for sale • Principal agent problem • Managers and owners with different goals

6. Moral hazard • “Any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly”(Paul Krugman) • When the downside consequences of a choice are borne by others, people take greater risk • Driving a rental car • Bank speculation with a guarantee of government financial bailout (“too big to fail”)

7. Game Theory • Mathematical representation of rational people faced with interdependent choices • Choice set for each participant (player) • Payoff matrix for all possible outcomes (combinations of choices) • Prisoner's dilemma

8. Transaction cost economics • Vertical integration (make or buy) • High cost of contracting leads to in-house production • Cost of contracting • Transaction specificity • Uncertainty -> incomplete contracting • Assumption of opportunism

9. Decision making and bias • Availability (saliency) heuristic • Statistical thinking (base rates, distributions) • Attribution bias • “If it’s bad it’s your fault, if it’s good, I did that” • A logic of consequence vs. a logic of appropriateness • Identity and roles: Intel

10. Roles • People behave as they believe they are expected to • Stanford Prison Experiment • Milgrom experiment • Attribution • Bad apples or organizational culture?

11. The Network Perspective • Relationships between people, firms countries for a network • Knowledge of the structure of that network provide insights into power and influence • Who is central, who is peripheral? • Who is powerfully connected? • Who acts a broker between groups? • Where are the groups or cliques?

12. More key concepts • Strategy • Value creation vs value appropriation • The value chain • Industry structure • Population ecology and industry evolution • Requisite variety, slack, exploration and exploitation • Barriers to imitation and transient rents • KBV • Innovation and recombination • Innovation and search • Absorptive capacity

13. Value creation and value appropriation Value Value appropriated by buyer Value created by seller Price Value appropriated by seller Cost

14. The Value Chain Value Value Price Price Cost Cost

15. Industry structure • How to define / delineate an industry? • Analysis of structural forces • Porter’s model • Concentration • Commodity, signaling and tacit collusion • Segmentation, differentiation and market niche selection • Bargaining power

16. Population ecology and industry evolution • Industries with lots of firms change through natural selection • Firms enter (born), struggle and exit (die) • Some ‘mutations’ are better suited to the environment • Those that are less fit exit (die) • Attempts to change increase likelihood of failure • Firms that don’t change die. Firms that try to change die too. • Firms that ‘stash for a rainy’ day are inefficient • In periods of stability, stable lean firms prosper • Create the appearance of inertia • Puts them at risk when the environment changes • Requisite variety; exploration vs exploitation

17. Requisite variety, Slack, Exploration and Exploitation • Being ready for many possible futures is costly • Developing multiple capabilities • Exploiting existing resources • Maximizes short term returns • But may sacrifice long term adaptation • Michael Jensen – poor return to investors • Being the best fit firm

18. Barriers to imitation and Transient rents • Imitation reduces profits • Focus on value appropriation • Build and maintain barriers to imitation (sustainable rents) • Defending the turf (disk drive industry?) • Focus on value creation • Worry less about barriers to imitation and more about innovation (transient rents)

19. Innovation and recombination • New ideas are generally novel combinations of existing knowledge • Special relativity • Population ecology • Swatch: fashion concepts applied to a timepiece • Lou Gerstner at IBM: customer centric marketing • Maintaining internal knowledge heterogeneity • External search: read / talk widely

20. Innovation, networks and search • Networks (internal and external) with heterogeneous knowledge support innovation • Search is costly but necessary • Absorptive capacity is key to learning, innovation and adaptation

21. Absorptive capacity • Learning a language - gets easier the more words you know • Absorbing knowledge from outside the firm is easier with a boarder set of internal (R&D) capabilities • R&D creates ‘real options’