Bocconi - Duke Longitudinal Strategy Seminar Organizational Learning: Proposition 4 – alt

1. Bocconi-Duke Longitudinal Strategy Seminar Organizational Learning: Proposition 4 – alt Sean Temlett Alex Wilson November 8, 2010

2. Proposition 4-alt: Strong learning ≠ path-dependent learning Focus of this presentation Proposition 1 Proposition 1 alt • Learning increases the path dependence of firm strategy trajectories – forinstance it suggests that early entry to an industry and higher market share confersignificant strategic advantages since they help a firm move further down the learning curve compared to its rivals. • Strong learning effects do not necessarily imply that firm strategy is • constrained by path dependence and local learning. • “Get in early, get in fast” • Experience curve – bigger is better • Other avenues to superior performance • E.g. Porter’s generic strategies Organizations that follow down the experience curve are less likely to have a breakthrough innovation – Focus on cost portion of profit equation

3. Path-dependent learning can be beaten in the marketplace… (I) Case 1: Oracle and Salesforce.com Despite Oracle’s rejection... … the mkt. outlook on CRM is favorable • Salesforce.com founded in March 1999 by Oracle exec Marc Benioff • Oracle “Rookie of the Year” • Youngest VP in co. history Although [Oracle’s] culture prized innovation, the company could no longer respond… - Marc Benioff, Salesforce.com CEO1 Most of the technology at Salesforce.com is ours… - Larry Ellison, Oracle CEO2 The Success Trap: Exploitation drives out Exploration (Levinthal & March, ‘93) • Source: Google Finance (chart includes stock splits), http://blogs.barrons.com/techtraderdaily/2009/10/09/oracle-to-salesforcecom-you-guys-are-useless-come-keynote-our-conference/, 1- Behind The Cloud, 2 - http://www.channelregister.co.uk/2009/05/01/oracle_services/,

4. Path-dependent learning can be beaten in the marketplace… (II) Case 2: Compaq passes on the first MP3 player “The world’s 1st iPod”... … was replaced by the actual iPod • The first hard disk digital audio player, introduced in late 1999 • Preceded the iPod • Developed by laptop engineers through collaboration across Compaq’s Systems Research Center, the Palo Alto Advanced Development Group • The technology was licensed to a Korean company, Hango – not much resulted • Did not have Compaq marketing support ‘99 Compaq invents MP3 player ‘02 - HP buys Compaq 01’ - iPod introduced ‘04 - HP distributes HP branded iPods The PJB-100: “like a brick… [that] held an unprecedented amount of music” Insufficient Internal Variety [leaves organizations] vulnerable to sudden and deadly obsolescence (Levinthal, ‘97) • Source: http://reviews.cnet.com/4520-6450_7-5622055-1.html

5. Path-dependent learning can be beaten in the marketplace… (III) Case 3: Discovery Health / Liberty Life • Liberty Life founder, Donald Gordon recruits Adrian Gore and invests in this young actuary • Adrian recommends that Liberty adopt “Vitality” proposition as it extends the actuarial returns on life policies • Liberty Life response “That’s not how we do things around here” • Discovery Holdings now the largest health and life insurance provider though its “Vitality” programme “Vitality” trumps life insurance Fissioning: when people whose ideas are blocked in one organisation form another to give the ideas a more sympathetic treatment (Zeigler, 1985; Brown & Duguid, 2001)

6. Experience Curve alone misses a dimension of value creation “Technology tree” helps visualize firm’s strategic architecture Improving mean performance McGrath, 01 Exploitation (low discount factor) Routine Routine Exploration (high discount factor) µ - exploitation σ - exploration • Riskiness of routine adoption • (Levitt & March ‘98; McGrath ‘01) • Routinization-Exploitation-Efficiency-Specialization-Competency Trap-Death • Finishing 1st in a large field requires not just doing things well but doing something different (Levintal & March, ’93) Capturing the right-hand tail Of Performance distribution McGrath, 01

7. Exploitation precludes exploration • Competency traps • Levitt and March (1988) – “learning organizations have problems in overcoming the competences they have developed with earlier [routines]” • Baum and Ingram (1998) – Observed U-shape failure rates in infrastructure-heavy industry (hotels in Manhattan) – easy to learn, difficult to implement • Learning curves may not be asymtotic • What happens when the learning curve you are exploiting becomes redundant? Olives and airlines • Temporal myopia - Sacrifices the long run to the short run (Lev & March ‘93) • Spatial myopia – Favours effects occurring nearer the learner (Levinthal & March, ‘93) • Failure myopia - Over samples success (L&M, ‘93) • “Strategic Momentum“ - past practices and strategies keep ‘evolving’ in the same direction Haleblian and Rajagopalan, ‘06 Exploration • Summary • Strategic momentum leads to inertia (Haleblian, Rajagopalan ’06) • Inertia triumphs (Greve, 2003) Exploitation

8. How can managers avoid strategic momentum / inertia? • Organizational variance creates option value (McGrath 2001) • Allows companies to survive in rapidly changing environments • “Conservative” entrant will never be market leader, given enough competitors attempting risky innovations • Mechanisms to prompt exploration (Brown & Duguid 2001) • Firm-threatening crisis • Raise the aspiration rates of managers (Greve ‘03) • “Only the paranoid survive” Exploration Substantial work remains to be done to determine how organizations can be “ambidextrous” The dilemma is that variance does not generate returns without some effort to fix and develop the new knowledge… too much variance and the firm never capitalizes on its discoveries – McGrath ‘01 Exploitation • *Yi-Fen Huang & Chung-Jen Chen (2010). The Impact of Technological Diversity and Organizational Slack on Innovation. Technovation 30, 420-428

9. Connection to Porter’s Generic Strategies Cost Differentiation Cost Leadership (Dove) Broad Differentiation (American) Broad Scope Cost Focus (La Quinta) Differentiation Focus (Cray) Narrow scope

10. Is Learning Theory good theory for the longitudinal study of strategy and innovation? Unity (Core ideas can be applied to a wide range of problems) Fecund/fertile • Has spawned much research and debate with room for new hypotheses: • Organizations operating under environmental uncertainty require superior abilities to manage exploration • Opportunities with higher variance (higher discount rates) have more option value under uncertainty • New management models are required to bring exploitation and exploration capabilities closer • Organizational design and the organisation of practice communities enable exploitation and exploration • Porter is right and wrong?: Efficiency can be strategic • Provides a core of problem solving hypotheses that can be applied to a wide range of learning and management problems – especially innovation • Questionable whether they can be applied to problems of strategy • Overemphasizes efficiency insights over positioning, competitive advantage and differentiation insights • Yes • Yes and No Easy to obtain confirmation/refute, confirmation from genuine attempts to falsify, even when false still admired, testable, forbids a bunch of stuff, if I was unenlightened by the theory I would have expected events which are incompatible with the theory – Popper* • * http://en.wikipedia.org/wiki/Scientific_theory

11. The last word… Microsoft must “go beyond the PC”. The strengths that had helped Microsoft grow in the past now risked holding it back. Ray Ozzie, Microsoft’s chief software architect in a memo penned after he announced he was leaving the company 26 October, 2010 BBC News/Technology