Flashcards

Marvos

N P German 109 cards

What changes if new firms enter the market? (Graphically)

Cards in this deck (109)

1Market-Based View of Strategy• Focus on opportunities and threats of the environment (external analysis)
• Competitive advantage through selecting an industry with low competitive pressures
• Structure-conduct-performance paradigm
2Resource-Based View of Strategy• Focus on strengths and weaknesses of the firm (internal analysis)
• Sustainable competitive advantage through the accumulation and application of valuable, rare, imperfectly imitable and non-substitutable resources
3Institution-Based View of StrategyGood governance reduces transaction costs and helps to exploit the productivity advantages from the division of labor and specialization
4Structure-conduct-performance paradigmMarket structure influences firm behavior, which in turn affects firm performance
(Bei einer Monopolstellung kann man sein Produkt zum Monopolpreis anbieten.
Bei perfektem Wettbewerb ist der Gewinn nicht so hoch, d.h. es kommt auf die Marktstruktur an, wie man performt.)
5Who are Competitors and how can we identify them?Competitors are firms whose strategic choices affect one another and that produce substitutes
Identification of competitors through the identification of substitutes
6How can we identify substitutes qualitative?Qualitative identification of substitutes:
‒ Similar product characteristics
‒ Similar occasions for use
‒ Same geographic market
7How can we identify substitutes quantitative?‒ Two products are substitutes if an increase in price of one product leads to an increase in demand for the other product (positive cross-price elasticity)
‒ Competitor definition of the U.S. Department of Justice (DOJ) and the European
Commission: The competitors within a market are identified if a merger among them would lead to a small but significant nontransitory increase in price (SSNIP criterion)
8How are markets often characterized?Markets are often characterized according to the degree of seller concentration
• Seller concentration refers to the number and distribution of firms in a market
• Common measures of market structure:
‒ n-firm ratio: Market share of the n largest firms
‒ Herfindahl index: H = Σ (Si)²
9What are the ideal-typical market structures?• Perfect competition
• Monopolistic Competition
• Oligopoly
• Monopoly
10What are the characteristics of perfect competition?• Herfindahl < 0.2
• Many sellers
• Homogenous products (perfect substitutes)
• Free market access
• Perfect information
• Excess capacity
-> Firms are only price takers
11What changes if new firms enter the market? (Graphically)- At first, firms may realize positive profits
-New entrants intensify price competition.
- Price decreases to the minimum of the average cost curve
12What are the characteristics of monopolistic competition?• Herfindahl < 0.2
• Many sellers
• Free market access
• Products are no perfect substitutes (differentiated products)
• Imperfect information
-> Price elasticity of demand is not infinitely high
-> Intensity of price competition depends on the degree of differentiation
13What are the characteristics of an oligopoly?• 0.2 < Herfindahl < 0.6
• Few sellers
• Intensity of competitive rivalry depends on the type of competition (Cournot quantity competition vs Bertrand price competition) and the degree of differentiation between the competitors
14What are the characteristics of a cournot quantity competition?• Substantial set-up investments
• High fixed costs
• Once set-up investments have been made, production capacity is inflexible
• Limited storekeeping possibilities: voluminous, dangerous, and volatile products
Examples: Steel production, energy sector
15How is the firm behavior in a Cournot quantity competition with homogeneous products?• Firms know that price cuts are inefficient, bec. the price follows the quantity decision
• Competitors will immediately imitate price cuts to utilize the capacity
• Firms in a Cournot competition select the output level they choose to produce
• Once the firms are committed to certain production output, they set whatever price is necessary to “clear the market”
16What are the characteristics of a Bertrand price competition?• No capacity restriction
• Easy storekeeping possibilities
Example: Soft drinks (Coke vs. Pepsi), media products
17How is the firm behavior in a Bertrand price competition?• Firms first choose the price and stand ready to meet all the demand for their products at that price
• Because capacity is unrestricted, firms have incentives to steal market share by decreasing prices
• The more homogenous the products, the tougher the price competition
• With perfectly homogenous products, price competition decreases prices so that firms earn zero profit
18What are the characteristics of the Stackelberg Quantity Competition?• Substantial set-up investments
• High fixed costs
• Once set-up investments have been made, production capacity is inflexible
• Limited storekeeping possibilities: voluminous, dangerous, and volatile products
• Unlike in the Cournot Competition, firms do not determine their quantity simultaneously
• The Stackelberg leader makes a strategic commitment and determines its quantity first, the follower determines its quantity considering the quantity of the leader
19What are the characteristics of a monopoly?• Herfindahl > 0.6
• One large and dominant seller
• Few or no competition
20How does Monopoly pricing look like graphically?There is no strategic interaction in perfect competition and in monopoly
‒ Perfect competition: P = MC = ACmin
‒ Monopoly: PM, QM
21What does market entry and exit mean?Market entry = a new firm enters a market
Market exit = an incumbent firm leaves the market
22When is the market less attractive?The attractiveness of the market decreases with the increasing threat of entrants, bec. they “steal“ market share, if overall market demand remains the same.
• Market share generally decreases with the number of firms in a market
• Entrants reduce market concentration, which intensifies price competition
23When does a risk-neutral profit-maximizing firm decide to enter a market?if the following condition holds:
Net-present value of post-entry profits are higher than Sunk costs of market entry
-> Net-present value of postentry profits largely depends on the post-entry rivalry
-> Sunk costs of market entry are specific investments
24Bain‘s Typology of Entry Conditions1. Do we have Structural entry barriers?
-> Yes: Blockaded Entry
-> No:
2. Do we have Entry-Deterring Strategies?
-> Yes: Deterred Entry (abschreckend)
-> No: Accommodated Entry (you can enter)
25What are Structural Entry Barriers?• Control of essential resources (specific knowledge)
• High sunk costs:
‒ High economies of scale
‒ Network effects
26Show graphically the Sunk costs as entry (and exit) barriers
27What is meant with Entry-Deterring Strategies?- Incumbent firms generally earn higher profits in a concentrated market than in an unconcentrated market
- so incumbents want to deter the entry of new firms with Entry-deterring strategies
- These strategies are aimed to change entrants‘ expectations about the intensity of post-entry competition and profit
28What Entry-Deterring Strategies do we know?• Limit pricing
• Predatory pricing
• Excess capacity
29What is limit pricing?• an incumbent firm charges a low price to keep new firms from entering
• Potential new entrants assume that post-entry price will be equal or even lower
• They conclude that entry is not profitable
30is limit pricing rational?• Intuitive explanation: Entrant sees the low incumbent price and reasons that it cannot increase by entering. The incumbent can again set the monopoly price in the next period
• A closer look reveals some problems with this intuition: An entrant can stay infinitely, forcing the incumbent to set the limit price in each period
• Depending on costs and demand, the incumbent may be better off as a duopolist than as a constant monopoly limit pricer
-> Limit pricing only works if potential entrants are not informed about the incumbent‘s costs and demand
31What is predatory pricing?• Predatory pricing is setting a low price to get other firms out of business
• The predatory firm expects that any losses they make from driving competitors out of the market can later be made up through the exercise of market power
• While limit pricing is aimed at firms that have not yet entered the market, predatory pricing is aimed at firms that have already entered
• if the incumbent‘s costs and demand is publicly known, the threat of predatory is incredible
• So predatory pricing can only work, if there is uncertainty about the incumbent‘s costs and demand
32What is excess capacity?• By holding excess capacity, an incumbent can change the potential entrant‘s expectation about post-entry competition and thereby deter entry
• When an incumbent builds excess capacity, it can quickly increase output at low costs
• Unlike with limit pricing and predatory pricing, excess capacity also works with perfect information
33Contestable Markets• The theory of contestable markets states that the risk of entry can force the incumbent to lower prices
• The key is a “hit-and-run entry“ (zero or insignificant sunk costs):
‒ Hit-and-run entry is profitable if the entrant‘s average variable costs are under the incumbent‘s price
‒ The result is that the incumbent monopolist has to charge a price not higher than the entrant‘s average variable cost
• Sunk costs of entry are in the most markets not trivial (e.g., opening a new airline route)
34What is static and what Dynamic Competition?the Cournot model of quantity competition and the Bertrand model of price competition are static models
Dynamic competition refer to the evolution of competition over time.
The following aspects are important for that:
‒ The strategic benefits of commitments
‒ The informational benefits of flexibility
‒ Competitive discipline
35Strategic Commitments• A strategic commitment influences the competitors‘ expectations and behaviors in such a way that the competitive situation of the firm that makes the strategic commitment is improved
• A strategic commitment must be visible, understandable, and credible
• The key to credibility is irreversibility, e.g., through:
‒ specific investments, incentive contracts, reputation
• In a situation where one firm makes a strategic commitment first and then the rival selects its reaction, the effect of a commitment depends on whether:
- Actions are strategic substitutes or complements
- The commitment is though or soft
36What would be an example for a strategic committment?‒ A larger firm 1 and a smaller firm 2 can select between an aggressive strategy (e.g., increasing capacity) and a passive strategy choice (e.g., decreasing capacity)
‒ Firm 1 can increase its payoff when making a strategic commitment of being aggressive
37What is a Nash-equlibrium?In a Nash equilibrium each player’s strategy is an optimal response to the other players’ strategy
--> You cannot improve your profit by changing your strategy
38When is an action a strategic substitute?An action is a strategic substitute if the optimal reaction of firm 2, to an increase of firm 1, is a decrease
• Example: Cournot quantity competition
• Falling reaction curve: ?q2 /?q1 < 0
39When is an action a strategic complement?An action is a strategic complement if the optimal reaction of firm 2, to an increase of firm 1, is an increase as well
• Example: Bertrand price competition
• Rising reaction curve: ?p2 /?p1 > 0
40What effects do commitments have on a firm's profitability?• The direct effect of the commitment is its impact on the present value of the firm‘s profit (if the competitor‘s behavior does not change)
• The strategic effect takes the competitive side effects of the commitment into account
• Both effects are important to evaluate decisions
41How are Tough commitments characterized?Tough commitments are characterized by an aggressive competitive behavior, which is bad for the competitors
42How are soft commitments characterized?Soft commitments are characterized by a defensive competitive behavior, which is good for the competitors
43Characteristics of Tough commitment and strategic substitutes--> Top Dog (Assert dominance,
force rivals to back off)
Capacity expansion in a Cournot competition (e.g., due to the adoption of a new process innovation that decreases marginal costs)
The strategic effect is positive as the rival reduces quantity
44Characteristics of Soft commitment and strategic substitutes--> Lean & hungry look (Actively submissive to avoid conflict)
Capacity reduction in a Cournot competition (e.g., because the firm enters a new market and its capacity is restricted)
The strategic effect is negative because the rival increases capacity
45Characteristics of Tough commitment and strategic complements:--> Puppy Dog (Placate top dog, enjoy available scraps)
Price reduction in a Bertrand competition (e.g., reduction of product differentiation, lower production costs and quality)
The strategic effect is negative because rival also decreases price
46Characteristics of Soft commitment and strategic complement--> Fat Cat (Confidentially take care of self; share the wealth with rivals)
Price increase in a Bertrand competition (e.g., higher product differentiation, higher production costs and quality)
The strategic effect is positive because the rival also increases the price
47The Information Benefit of Flexibility• The strategic effects of commitments are based on inflexibility
• Under conditions of uncertainty, inflexibility also has a price if expectations are not fulfilled
• By delaying important decisions, firms can always learn more about market conditions
• The concept of real options helps to choose the best time to make a strategic investment
• A real option exists when a decision maker has the opportunity to tailor a decision to information that is unknown today, but will be revealed in the future
48The Information Benefit of Flexibility in an ExampleTwo scenarios: High-acceptance or Low-acceptance of the product
• Assume that the firm can learn, by waiting a year, which scenario will occur (e.g., observing the demand for the product in another geographically distinct market)
‒ If the product turns out to have high level of market acceptance, the firm can still invest and obtain the NPV
‒ If the product has low acceptance, the firm is better off putting its money in the next best alternative, which we will assume is a zero NPV investment
• Assuming a 10% annual discount rate, if the firm waits, its expected NPV is still higher than the NPV from immediate investment
49Competitive Discipline under which conditions firms might unilaterally arrive at prices that approach collusive levels? (implicit cooperative pricing) --> Assumptions• Antitrust laws prohibit/forbid open coordination of market prices and quantities
• Penalties for collusion are severe/immense
• Firms compete over long periods of time
• Investment decisions are not always irreversible
• Decisions can be profitable short-term but unprofitable long-term because rival firms can counter
--> A realistic theory of competition should allow for repeated interactions of firms over a longer period of time
50What trade-off do firms face? (66)Defection and near-term profit increase through market share expansion and lower profits afterwards
vs.
Cooperation and constant shared monopoly profits in the long-run
51What Nash equilibrium do we have and Do repeated interactions solve the prisoners’ dilemma? (67f)• In a one time interaction it would always be best to defect. Defection is for both the dominant strategy. Here ist the Nash-equilibrium
But it is not the pareto efficient situation bec. it would be for both better if they implicity collude the monopoly price
• Do repeated interactions solve the prisoners’ dilemma?
‒ If interactions are finite, backward induction prevents cooperative pricing
‒ If interactions are infinite or if the interaction’s end is unknown, the prisoner’s dilemma is solved if discount rates are sufficiently low
52Folk theoremIf firms expect to interact indefinitely and have sufficiently low discount rates, then any price between the monopoly price and marginal costs can be sustained as an equilibrium
• The folk theorem implies that cooperative pricing behavior is a possible outcome in an oligopolistic market, even if all firms act unilaterally/one-sided
53Tit for tatThe tit-for-tat strategy reached the highest score in a repeated prisoners‘ dilemma game
Cooperate in the first period and then replicate/repeat the opponent's/others previous action
• Niceness: Never be the first to defect
• Provocability: Get mad quickly at defectors and retaliate
• Forgiveness: Do not stay mad if the other cooperates now
• Clarity: Act in ways that are straightforward for others to understand
54Trigger strategysimilar strategy as tit-for-tat but easier to model
Cooperate in the first period and in all future periods, if the rival also cooperates. If the rival deviates, deviate also in the next period and forever
55Market structures that facilitate/encourage cooperative pricing --> What are characteristics that increase pricing?• High market concentration
• High frequency of price adjustments (quick reaction)
• High price transparency
• Low volatility/variation of market demand (low price elasticity)
• Low asymmetries between firms
56High market concentration• The more concentrated the market, the higher the benefit of cooperation because the monopoly profit is shared among only a small number of firms
• The lower the number of firms, the easier it is to find a cooperative equilibrium
57High frequency of price adjustments (quick reaction)• The higher the frequency of price adjustments, the quicker price deviations can be punished. This increases the probability of cooperative pricing
• In contrast, lumpy orders reduce the frequency of competitive interactions between firms. They lengthen the time it takes competitors to react to price cuts, making price cuts more attractive
58High price transparency• Deviations from cooperative pricing are easier to detect when sales transactions are “public”, than when prices are secret
• Deviations from cooperative pricing are difficult to detect:
1. when prices are privately negotiated (e.g., industrial goods markets)
2. when product attributes are customized to individual buyers (e.g., airframe manufacturing)
3. when transaction terms and the product itself are complex (rival can implicitly cut price by providing additional extras)
59Low volatility in market demandHigh volatility in market demand makes cooperative pricing less likely:
• it is more difficult to determine deviation prices because it is unclear whether price cuts are due to the change in market demand or due to deliberate strategic actions,
• High volatility increases the probability that cooperative pricing collapses in boom periods, because deviation profits are very high and future profits uncertain
• In times of excess capacity (e.g., in recession periods), the temptation may also be high to cut price to gain market share
60Low asymmetries between firms• The lower the asymmetries between firms, the more likely is cooperative pricing
• «Focal Price»
‒ If firms are identical, a single monopoly price can be a focal point
‒ If firms differ, there is no single focal price, and it thus becomes more difficult for firms to coordinate their pricing strategies toward common objectives
• Small firms often have more incentives to deviate from cooperative pricing than larger firms
‒ Small firms gain more in new business relative to the loss due to the revenue destruction effect
‒ In a Cournot-quantity competition large firms often have weak incentives to punish a smaller price cutter (also related to the revenue destruction effect)
61Case Study: Coffee Capsule MarketCapsule market is currently the fastest-growing coffee segment with a huge profit potential
• Market entry was blockaded for many years due to patent protection
• Nespresso‘s sales increased even after the entry of competitors due to the strong market growth and Nespresso‘s successful differentiation strategy
• Nespresso‘s differentiation strategy encourage brand loyalty
‒ Image of exclusivity: Capsule can only be purchased via the e-commerce platform and a network of high-end boutiques
‒ Consumers believe that buying Nespresso products makes them members of an exclusive club of like-minded “coffee connoisseurs”
62Resource-Based-View of Strategy• The resource-based view of strategy focuses on the internal analysis of strengths (S) and weaknesses (W) of a firm, while the market-based view of strategy focuses on the external analysis of opportunities (O) and threats (T)
• The market-based view of strategy typically assumes that firm resources are homogenous and mobile. The resource-based view of strategy, assumes that firms have heterogeneous and not perfectly mobile resources
• Thus the strengths and weaknesses of a firm are determined by its resources
• Resources are physical assets, capabilities, knowledge, organizational processes or other firm characteristics, which help a firm to increase its efficiency and effectiveness
63What is the Sustained Competitive Advantage?It is a value creating strategy that is not simultaneously implemented by any other (potential) competitor
+
Plus the inability of the competitors to duplicate this strategy
-> Performance
(sustainable competitive advantage if the competitor is not able to imitate the resources)
64Definitions of Resources• Stocks of available factors that are owned or controlled by the organization
• “Strengths the firms can use to conceive of and implement their strategies”
• “All assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness.”
65Attributes/Characteristics of Resources• Heterogeneity:
Resources can be unequally distributed even within the same industry
• Imperfect mobility:
It can be difficult to develop or purchase resources by firms
• Strategic relevance:
Persistent differences in resource endowments can lead to a sustained competitive advantage
66What are Characteristics and Indicators of Tangible resources?
67What are Characteristics and Indicators of Intangible resources?
68What are Characteristics and Indicators of Human resources?Characteristics:
• Training, experience, adaptability, commitment and loyalty of employees
• External network
Indicators:
• Employee qualifications,
• Pay rates, turnover
• Quality of partners
69Strategic Resources and Capabilities What are the five requirements for resources to create sustainable competitive advantage?• Valuable resources and capabilities
• Rare resources and capabilities
• Imperfectly imitable resources and capabilities
• Non-substitutable resources and capabilities
• Transferable resources and capabilities
70Valuable Resources and Capabilities• Valuable capabilities allow the firm to take advantage of opportunities or neutralize threats in its external environment
• Valuable resources help the firm to increase the efficiency and effectiveness to produce products that offer higher consumer surplus than the products of competitors
71Rare Resources and Capabilities• Rare resources and capabilities are assets that no or only a few competitors own
• Valuable but common (i.e. not rare) resources and capabilities are sources of competitive parity but not competitive advantage
72Imperfectly Imitable Resources and Capabilities• Valuable and rare resources and capabilities can still be imitated by competitors
• Resources and capabilities have to be imperfectly imitable to create a sustainable competitive advantage
• Determinants of the imperfect imitability:
‒ Unique historical conditions
‒ Causal ambiguity
‒ Social complexity
73Unique historical conditions:• The own past experiences and actions influences firms.
• This unique idiosyncratic history shapes the firm's perceptions, evaluations and decisions (unique path dependency)
• The idiosyncratic history of a firm is difficult to imitate
74Causal ambiguity:• Causal ambiguity exists when the link between the resources and capabilities and the sustained competitive advantage of a firm is not or only very imperfectly understood
• Causal ambiguity occurs when resources and capabilities are largely intangible and interwoven into the firm’s routines and structures
75Social complexity:• When competitive advantages are based on complex social phenomena, the ability of other firms to imitate these resources and capabilities is significantly limited
• Resources and capabilities are interwoven into the firm’s social network
76Non-Substitutable Resources and Capabilities• Non-substitutability is given if no similar resources exist, that lead to the same firm performance
• There must be no strategically equivalent valuable resources that are themselves rare and non-imitable
77Transferable Resources and Capabilities• Prahalad and Hamel define a capability a core competency if the capability is also transferable to other markets
• A core competency offers potential access to a wide variety of markets
78Summary
79Dynamic Capabilities• Firms often face a competency trap, bec. they believe that past successful behavior will also lead to future success
• Incremental changes can lead to slight adjustments to the resource base, while radical changes can make relevant resources valueless
• fundamental “shocks” or “discontinuities” can destroy old sources of advantage and replace them with new ones
• Schumpeter speaks about “creative destruction” --> Sometimes you have to destroy old structures to be able to create sth new
• Consequences:
‒ Static efficiency is less important than dynamic efficiency: innovation and long-term growth
‒ With a truly sustainable CA fundamental shocks can be overcome
--> only firms that are able to adjust and change their resource base in periods of radical change can be successful over a longer period of time even after the fundamental shocks
80What are examples for radical changes?• Digital photography
‒ Kodak missed the radical change and exited the photography industry
• Smartphone
‒ The former market leader Nokia missed the radical change towards smartphones and sold the phone branch 2013 to Microsoft
‒ Since January 2017 Microsoft does no longer sell any smartphones to private clients
81What is VUCA?We are living in a VUCA world:
• Volatility (strong fluctuations, unstable conditions)
• Uncertainty (low predictability)
• Complexity (multiple interdependent influencing factors)
• Ambiguity (Unclear causal effects)
„When the wind of change is blowing, some people build walls, while others build windmills.“
82Dynamic Capabilities - Definition and ComponentsDynamic Capabilities as “the ability to sense and then seize new opportunities, and to reconfigure and protect knowledge assets, competencies and complementary assets to achieve sustained competitive advantage.”
83Dynamic Capabilities - Description of the Components• Component 1: Sensing
Identify new opportunities and threats through environmental scanning and information interpreting
• Component 2: Seizing
Responding to new insights through new product development, business model innovation and strategic investments
• Component 3: Reconfiguring
Changing internal and external resource configurations of the organization
84Blue Ocean Strategy• Blue Ocean Strategy: Firms can succeed by creating “blue oceans” of uncontested market spaces, as opposed to “red oceans”, the analogy of an ocean that turned red due to vicious competition
• „Success comes not from battling competitors, but from making the competition irrelevant by creating “blue oceans” of uncontested market space.“
• Classical competitive strategies try to outperform rivals concerning differentiation or cost aspects. This leads to the development of products or services that go far beyond the actual customer demand
85Distinction of the characteristics: Red Ocean vs. Blue Ocean Strategy:1. Red Ocean Strategy
- Compete in existing market space
- Beat the competition
- Exploit existing demand
- Make the value-cost trade-off
- Align all activities of a company with its strategic choice of differentiation OR low cost
2. Blue Ocean Strategy
- Create an uncontested market space
- Make the competition irrelevant
- Create and capture new demand
- Break the value-cost trade-off
- Align all activities of a company with differentiation AND low cost
86Steps to reach a blue ocean strategy1. Describe the current situation in the known market space via strategy canvas
- > The strategy canvas is important for building a blue ocean strategy.
2. Create a new value curve via the four actions framework
- Reduce: Which factors should be reduced well below the industry’s standard?
- Create: Which factors should be created that the industry has never offered?
- Raise: Which factors should be raised well above the industry’s standard?
- Eliminate: Which of the factors that the industry takes for granted should be eliminated?
3. Implement blue ocean strategy through tipping point leadership
87Ways to find a new value curveLook across:
• alternative industries
• strategic groups within industries
• the chain of buyers
• complementary products and service offerings
• time
• and identify new business models
88Business models1. Add-On model
2. Belt and Hook model
3. Advertising model (most important)
4. Franchise model
5. Freemium model
6. De-facto-standard model
89The sequence of blue ocean strategy
90Tipping point leadershipTipping point leadership concentrates on people, acts, and activities that exercise a disproportionate influence on performance
91Hurdles that tipping point leadership overcomesBreak through the cognitive hurdle (an organization that is linked to the status quo)
• See the ugly truth. Seeing is believing
• Meet with disgruntled customers
Jump the resource hurdle (limited resources)
• Redistribute resources to hot spots and redirect them from cold spots
Jump the motivational hurdle (unmotivated employees)
• Zoom in on the key influencers and place them in a fishbowl
Knock over the political hurdle (Opposition from powerful vested interests)
• Secure a consigliere (a trusted and respected senior insider) on your top management team.
92The power of a fair process
93Knowledge Creation - Data, Information and Knowledge
94Dimensions of Knowledge• Explicit knowledge: is codified knowledge that is transmittable in formal, systematic language. Explicit knowledge can be formulated and reproduced.
• Tacit knowledge: has a personal quality, which makes it hard to formalize and communicate. Tacit knowledge is deeply rooted in action and involvement in a specific context.
95The Knowledge Spiral of Nonaka and Takeuchi
96The Knowledge Spiral of Nonaka and Takeuchi - Dimensions• Socialization
‒ Individuals acquire/get tacit knowledge directly from others without using language
‒ Shared experiences are the foundation/basis
‒ Learning-by-doing: Observation, imitation, and practice
• Externalization: Process of articulating tacit knowledge into explicit concepts through metaphors, analogies, concepts, or models
• Combination
‒ Reconfiguration of explicit knowledge into new explicite knowledge through sorting, adding, recategorizing, and recontextualizing
‒ Making standardized knowledge accessible in the whole organization through meetings, calls, Emails..
• Internalization
‒ Learning-by-doing: When explicit knowledge turns into wisdom of experience
‒ Use of iterative “trial-and-error” processes
97What are the enabling conditions for organizational knowledge creation?• Intention
• Autonomy
• Creative Chaos
• Redundancy
98Knowledge Creation and MotivationExtrinsic motivation
• Employees are extrinsically motivated if they are able to satisfy their needs indirectly especially through monetary compensation
• To achieve this motivation the monetary motives of the employees have to be linked to the organization’s objectives (pay-for-performance)
Intrinsic motivation
• Motivation is intrinsic if an activity is valued for its own sake and leads to an immediate need satisfaction
• A fulfilling work content is the best incentive system for intrinsic motivation
99Pros and Cons of extrinsic motivation• Pros
‒ Easier to generate
‒ Appropriate for explicit knowledge creation
• Cons
‒ Only works if output is measurable and not manipulable
‒ Multi-tasking problem: extrinsically motivated people focus on activities whose outcome is measurable
‒ Increasing external rewards may lead to an adverse selection
‒ Extrinsic motivation crowds-out intrinsic motivation
100Pros and Cons of intrinsic motivation• Pros
‒ Promotes creativity
‒ Enables the creation and the transfer of tacit knowledge
‒ Increases performance even when performance is not measurable
• Cons
‒ Much more difficult to generate than extrinsic motivation
‒ Determinants of intrinsic motivation are more heterogeneous
‒ Intrinsic motivation can also have a harmful content (e.g., envy, revenge)
101What are characteristics of good managers?Hierarchical superiors have a strong impact on the motivation and performance of employees
1. Is a good coach
2. Empowers the team and does not micromanage
3. Expresses interest in and concern for team members’ success and personal well-being
4. Is productive and results-oriented
5. Is a good communicator—listens and shares information
6. Helps with career development
7. Has a clear vision and strategy for the team
8. Has key technical skills that help him or her advise the team
9. Collaborates across Google
10. Is a strong decision maker
102Facilitation of intrinsic motivation: Self-Determination Theory• According to the Self-Determination Theory, the satisfaction of three psychological needs supports the individual growth process which facilitates intrinsic motivation:
1. Autonomy: When people act autonomously they have internal control, which increases intrinsic motivation
2. Competence: Positive feedback increases the feeling of competence, which increases intrinsic motivation
3. Relatedness: Social belonging is a fundamental psychological need. A secure relational base provides a needed backdrop for intrinsic motivation
103Facilitation of intrinsic motivation: Design of work• The overall motivating potential of a job depends on the Motivating Potential Score (MPS):
• The individual growth need strength plays the role of a moderator in this model
104Knowledge Creation and Organization - the specific propositionsThe organization of a firm should encourage the transfer of internal and external knowledge
Three specific propositions:
1. The Hypertext Organization
2. Communities of Practice
3. Work-Out
105The Hypertext Organization (an example of a knowledge creating organization)• “the hypertext organization combines the efficiency and stability of a hierarchical bureaucratic organization with the dynamism of the flat, cross-functional task-force organization.”
• Employees change between three different layers:
1. Business-system layer (day-to-day operations, efficient processes)
2. Project-system layer (self-organizing, cross-functional teams that are developing new products)
3. Knowledge-base layer (continuous generation and communication of experiential knowledge)
106Communities of Practice (CoP)“Communities of Practice are groups of people who share a concern, a set of problems, or a passion for a topic, and who deepen their understanding and knowledge about it through continuous interaction.“
• Through interaction individual knowledge becomes collective knowledge with both tacit and explicit elements
• Idea is based on two premises:
1. Knowing and doing are inseparable: Specific tasks require embodied knowledge
2. Organizational activities are collective: Every task requires the interactions of groups of workers
• Due to the shared activity CoP members have a shared tacit knowledge base that guarantees for a correct interpretation and implementation of the explicit story
• CoP-members are connected with each other through personal relationships and they enjoy high autonomy. This strengthen the intrinsic motivation to share tacit knowledge
107Work-out• Tool that was developed by General Electric (GE) to reduce bureaucracy and with a strong commitment to implement good ideas
108Work-out process• 20 to 100 employees are invited to participate in a work-out for two to three days
• Administrative tasks are accomplished by work-out-consultants
• Group leader starts the session with a presentation and afterwards leaves the facility
• Work-out-consultants explain the procedures and rules (no “holy cows”, no “silo mentality”, no accusations, a solution-oriented mentality instead of a problem-oriented mentality)
• The group is split up in smaller subgroups
• Each subgroup develops ten ideas for improvements and presents them in front of the group
• The best ideas are determined by vote
• The best four ideas of each subgroup are specified and developed further
• Group leader returns to listen to the improvement ideas
• Group leader has to immediately decide for or against the idea in 80% of the propositions
109Conclusion of the MBVOS and the RBVOS• Both external and internal factors influence the competitive situation of a firm in an industry
• The market-based view of strategy largely concentrates on the external opportunities and threats. According to this view, firms achieve a competitive advantage through selecting an industry with low competitive pressure
• The resource-based view of strategy primarily focuses on the internal strengths and weaknesses of the firm. According to this view, firms achieve a sustainable competitive advantage through the accumulation and application of valuable, rare, imperfectly imitable, non-substitutable and transferable resources