VUCA Revision Notes

WHAT DOES VUCA MEAN?
These elements present the context in which

organizations view their current and future state.
They present boundaries for planning and policy
management. They come together in ways that
either confound decisions or sharpen the capacity
to look ahead, plan ahead and move ahead. VUCA
sets the stage for managing and leading.
REVISION NOTES
MGMT005
[Document subtitle]
Week 1
• Megatrends
Week 2
Define the terms, explain their present context, understand implications
on management and consequently on decision making.
• Putting Organisational Complexity in Its Place
• Strategy Under Uncertainty
Week 3
Practices and processes that organisations are putting in place to deal with
the pace of change and the magnitude of change.
• Adaptability – The New Competitive Advantage
• Time pacing – Competing in Markets That Won’t Stand Still
Week 4
What is disruption, how does it impact management and its landscape?
What practices and processes are organisations putting in place to deal with the disruption?
• Meeting The Challenge of Disruptive Change
• The Disruptive Opportunity
Week 5
As borders get blurred and value chains disaggregate, what does it mean for decision
makers?
• Flat World, Hard Boundaries – How to Lead Across Them
• How a Firm’s Capabilities Affect Boundary Decisions
Week 6
How do organisations and individuals learn?
• Understanding Organisations as Learning Systems
• Analytics 3.0
VUCA MGMT005 Notes -TYL

Week 7
What will organisations in the future look like? Can scenarios and systems determine their
readiness for tomorrow’s challenges?
• Scenario Planning – A Tool for Strategic Thinking
• Strategy as Options on The Future
Week 9
How can managers and organisations address issues of adaptability, agility and flexibility in
order to be future ready?
• How Successful Leaders Think
• Why Hard-Nosed Executive Should Care about Management Theories
Week 10
How can organisations build appropriate levels of resilience and foresight in order to
prevent failure in implementation?
• How to Thrive in Turbulence Markets
• The Quest for Resilience
Week 11
What are the critical issues and challenges of managing in a VUCA environment? We review
the lessons learnt and analyse the potential pitfalls and mistakes that can occur in a
turbulent VUCA environment.
• Opening Up the Boundaries of the Firm

• Competing on the Edge

Week 1
Mega Trends
What is a mega trend?
• Large transformative global force that impact everyone on the planet
• A large scale change in circumstances or fashion
• A major trend or movement
• Once in place, megatrends influence a wide range of activities, processes and
perceptions, both in government and in society, possibly for decades.
• They are the underlying forces that drive trends
6 Mega Trends:
1. Global Market Place
- Gulf between ‘mature’ and ‘rapid-growth’ countries continues to shrink
- New tier of nations driven by their own middle classes has come to the front
Ø Local ‘re-regionalisation’
Ø Hot spots for innovation
Ø War for talent
- Increasing dependence of nations on each other
Ø Interdependence through trade investments, financial system linkages, supple
chains etc. (British economy has extremely close economic ties with the other
countries in EU, which would be jeopardised after Brexit)
Ø Balance the tensions between local and global priorities
2. Changing Demographics
- Diversity in workforce
- A younger workforce in parts of the world (India is home to world’s largest &
youngest workforce including a skilled workforce of some 270m people)
- Aging workforce in other parts (Japan, Italy, Greece)
Ø Silver tsunami
Ø Sandwich generations (a generation of people responsible both for bringing up
their own children and for the care of their ageing parents)
- Women in the workforce
3. Rise of the middle class: Urbanization

- More people living in cities than ever before (almost two-thirds of the world’s
population will reside in cities by 2030)
- Increased consumption
- Double income families (money-rich, time-poor; DINK)
- Pressure on natural resources (Environmental crises)
4. Enabling Technology
- Mobile penetration (food eats first)
- Increased technology in the workforce (Half of the jobs in US are at the risk of
computerisation over next 2 decades)
- More than 70% of data that exists today was only created in the last 5 years
- Only 0.5% of that data is being analysed

- Convergence of Nano, bio, information and cognitive sciences are generating new
product markets, making others obsolete in the world
5. Rise of the individual

- Rising income, rising expectation (higher demands)
- Interconnected population (Faster dissemination of information through social
media)
- Empowerment through education
Ø Greater entrepreneurial ventures
Ø Arab Spring, Umbrella Revolution
- Blurring of public and private boundaries
- Power heading back to consumer (voice it through social media, can bring company
to a ‘stand down’)
6. Economic Power Shift

- Asia’s resurgence
- Africa the next Asia
- BRIC, BRICS, N-11, CIVETS, E7
BRIC: similar stage of newly advanced economic development

Brazil, Russia, India, China
BRICS: leading developing or newly industrialised countries, all 5 are G-20 members
Brazil, Russia, India, China, South Africa
N-11: next-11, having a high potential of becoming, along with BRICS, among the world’s
largest economies in the 21st century (by PWC)
Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South
Korea, Vietnam
CIVETS: 6-favoured emerging market countries

Columbia, Indonesia, Vietnam, Egypt, Turkey, South Africa
E7: emerging 7, emerging economies, predicted to have larger economies than G7 countries
by 2020
BRIC + Mexico, Indonesia and Turkey
F7: frontier 7
Nigeria, Columbia, Peru, Morocco, Vietnam, Bangladesh, Philippines
What mega trends teach us?

Even though megatrends say something about what we know about the future, it is not
certain how society, companies or any of us will react to these forces. It may be a probable
future. It is not a certain future. Even Megatrends can change direction or stop.

Example: Arab Spring
- A revolutionary wave of demonstrations and protests, riots and civil wars in the Arab
world that began on 18 December 2010 in Tunisia with the Tunisian Revolution, and
spread throughout the countries of Arab League and it surroundings
Social media’s role

- Egyptians organized protests through communicating with each other through
Facebook and Twitter
- Government shut down social media and whole internet
- But Google provided a service to them where they could call a number and leave a
voice message and that message would be posted to Twitter
- Helped to organise protests, spread messages, setup meeting points and change if
saw authorities coming
Black Swan Events (Nassim Nicholas Taleb, 2001)

Event or occurrence that deviates beyond what is normally expected of a situation and is
extremely difficult to predict.
3 characteristics:
a) Hard to predict
b) High consequence (of large magnitude, considered as extreme outliers, “Silent Risk”)
c) After occurrence, they are rationalised by hindsight
Management theories
1) Classical Theory
a. Scientific Management
- Focus on workflows e.g. Time and Motion study, to enhance labour productivity
- Applied to the engineering process
b. Administrative Management
- Focuses on role of management
- 5 elements to help manage the org – Planning, organizing, command,
coordination, control
- 14 Principles of Management – Specialization of Unity, Authority, Discipline,
Unity of Command, Unity of Direction, Subordination of Individual Interests,
Remuneration, Centralization, Scalar Chain (line of Authority), Order, Equity,
Personal Tenure, Initiative, Esprit De Corps
2) Behavioural Theories
a. Factors that affect human behaviour looked at as companies found that meeting
the social needs of workers could enhance productivity
b. Informal communication and leadership styles playing a big role
c. Some theories
- Maslow’s Hierarchy of needs – (from the bottom) Physiological, Safety,
Love/Belonging, Esteem, Self-Actualization
- Theory X – Assumption that employees dislike work, are lazy, dislike
responsibility, and must be coerced to perform

- Theory Y – assumption that employees like work, are creative, seek
responsibility, and can exercise self-direction
3) Systems Approach
a. Treats the org. like open or closed system – a set of distinctive parts that work
together in an interrelated matter to form a complex whole
b. Org as a system receives input, transforms it through process for output
4) Contingency Approach
a. Builds on systems approach but finds each company is different and has to be
managed differently
b. “It depends” – each org has own set of variables – problems, challenges, and
environmental factors
Week 2
VUCA
Volatility – Flexible
Uncertainty - Create scenarios, answering questions
Complexity – Interconnected, interdependent
Ambiguity – Unknown causes and relationships
In a world of “unknown” unknowns

Strategies: Predictable system – Analysis – Goal
Volatility
- Unstable or unexpected change
- For an unknown duration (e.g. war duration)
- Usually know what has caused it
Ø Not hard to understand (e.g. know that the war might happen)
Ø Knowledge about it is often available
Ø But unknown intensity/ impact/ outcome
E.g. Stock market, commodity price fluctuation, price fluctuation after natural resources
(know that earthquakes can happen but don’t know about the intensity/ impact)
- Nature, speed, volume and magnitude of change that is not in a predictable pattern
- It is turbulence, a phenomenon that is occurring more frequently than in the past
E.g. Financial turbulence has increased in intensity and persisted longer than in the past
Black Swans Events are volatile events that result in complexity, while complex situation can
also create volatility.
Volatility is not always bad

- Good for investors (e.g. during recession don’t advertise but some companies think
otherwise, so that they will be at the top when the market revives)
- Gives companies to change and be innovative, come up with new strategies

Dealing with volatility
- Build in slack in the system
- Diversify, have more stocks (hedging: protect oneself against loss on (a bet or
investment) by making balancing or compensating transactions, reduce risk)
- Devote resource in order to prepare
Ø Stock pile inventory (a supply stored for future use, usually carefully accrued
and maintained)
Ø Have bench strength (capabilities and readiness of potential successors to move
into key professional and leadership positions)
- These are typically expensive interventions, your investment should match the risk
- Build in Agility, learn to work with Change
E.g. Foxconn decides to go on strike, affected Apple, need to be agile
Uncertainty
(E.g. pick balls from a covered box, picking more will only reduce the level of uncertainty)
- Lack of knowledge, inability to know things fully
- Lack of predictability
- Cause and effect are understood
- Not knowing how to plan the best response
- Difficult for leaders to use part issues and events as predictors of future outcomes
- Makes forecasting extremely difficult and decision making challenging
- Volatility may make things more uncertain
- Form multiple simulations and scenarios to see how things play out on the ground,
ensure diversity and flexibility
Forms of Uncertainty:
Level 1: A clear-enough future
- Single forecast prediction precise enough for strategy development
- Forecast sufficiently narrow to point to a single strategic direction
- Residual uncertainty 1 is irrelevant to making strategic decisions
- Know which line you are going into, direct relationship
E.g. Executives need to know the new entrant’s competitive objectives to anticipate how it
would respond to any strategic moves their company might make. The information is
inherently knowable and it can be obtained through market research. Once the information
is known, residual uncertainty would be limited, and the company would be able to build a
confident business case around its strategy.
Michael Porter’s 5
Strategic analysis: forces
Standard traditional strategy tool kit – market research, analyses of competitors’ costs and
capacity, value chain analysis, Michael Porter’s five-forces framework, and so on. 1. Competition in
the industry
Posture and moves: 2. Potential of new
entrants
3.Power of
1
The uncertainty that remains after the best possible analysis has been done. suppliers (Supply)
4. Power of
consumers
(Demand)
5. Threat of
substitute products
Adapters
In predictable business environments, most companies are adapters. Analysis is designed to
predict an industry’s future landscape, and strategy involves making positioning choices
about where and how to compete. When the underlying analysis is sound, such strategies
are by definition made up of a series of no-regrets moves.
The best level 1 adapters create value through innovations in their products or services or
through improvements in their business systems without otherwise fundamentally changing
the industry.
Shapers
It is possible to be a shaper in level 1 situations, but that is risky and rare, since level 1
shapers increase the amount of residual uncertainty in an otherwise predictable market –
for themselves and their competitors – in an attempt to fundamentally alter long-standing
industry structures and conduct.
E.g. Consider Federal Express Corporation’s overnight-delivery strategy. When it entered the
mail-and-package delivery industry, a stable level 1 situation, FedEx’s strategy in effect
created level 3 uncertainty for itself. Even though the CEO commissioned detailed
consulting reports that confirmed the feasibility of his business concept, only abroad range
of potential demand for overnight services could be identified at the time. For the industry
incumbents like United Parcel Service (UPS), FedEx created level 2 uncertainty. FedEx’s
move raised 2 questions for UPS: Will the overnight-delivery strategy succeed or not? And
Will UPS have to offer a similar service to remain a viable competitor in the market? Over
time, the industry returned to level 1 stability, but with a fundamentally new structure.
FedEx’s bet paid off.
Like most shaper strategies, even in level 1 situations, this one required big bets. That said,
it often makes sense to build options into a shaper strategy to hedge against bad bets. The
CEO of FedEx stuck mainly to big bets in implementing his strategy, which drove him to the
brink of bankruptcy in his first 2 years of operation but ultimately reshaped an entire
industry.
Level 2: Alternate Futures

- A few alternate outcomes or discrete scenarios define the future
- Known cause and effect
- Analysis CANNOT identify which outcome will occur, although it may help establish
probabilities
- The course of action depends on which outcome occurred
a. Businesses that are facing regulatory and legislative change (depends on which outcome
occurred)
E.g. Whether or not a legislation is going to pass and how quickly it would be implemented
in the event it did pass were uncertain. No amount of analysis would allow companies to
predict those outcomes and the correct course of action – for example, the timing of
investments – depended on which outcome occurred.

b. Depending on competitor’s strategies
E.g. The value of a strategy depends mainly on competitors’ strategies. For example, in
oligopoly markets, such as those for pulp and paper, chemicals and basic raw materials, the
primary uncertainty is often competitors’ plans for expanding capacity: Will they build new
plants or not? Economies of scale often dictate that any plant built would be quite large and
would be likely to have a significant impact on industry prices and profitability. Therefore,
any one company’s decision to build a plant is often contingent on competitors’ decisions.
A classic level 2 situation: The possible outcomes are discrete and clear. It is difficult to
predict which one will occur. And the best strategy depends on which one does occur.
Strategic analysis:
Steps for managers to take
1) Develop a set of discrete scenarios based on their understanding of how the key residual
uncertainties might play out
2) Establish an appropriate valuation model for each possible outcome and determine how
probable each is likely to be
3) Evaluate the risks and returns inherent in alternative strategies using a classic decision-
analysis framework
It is important to (i) identify the different possible future outcomes and (ii) think through
the likely paths the industry might take to reach those alternative futures in order to
determines which market signals or trigger variables should be monitored closely.
i. Decision analysis
ii. Systems dynamics and agent-based simulation models
Ø Help in understanding the complex interactions in the market
iii. Option valuation models
Ø Help in correctly valuing investments in learning and flexibility
iv. Game theory
Ø Help managers understand uncertainties based on competitors’ conduct
Posture and moves:

Shapers
Shaping strategy is designed to increase the probability that a favoured industry scenario
will occur. A shaper in a capital-intensive industry like pulp and paper, might commit their
companies to building new capacity far in advance of an upturn in demand to pre-empt the
competition or they might consolidate the industry through mergers and acquisitions.
Consider the Microsoft Network (MSN). A few years ago, one could identify a discrete set of
possible ways in which transactions would be conducted between networked computers.
Either proprietary networks such as MSN would become the standard, or open networks
like the Internet would prevail. Uncertainty in this situation was thus at level 2, even though
other related strategy issues – such as determining the level of consumer demand for
networked applications – were level 3 problems.

Microsoft could reasonably expect to shape the way markets for electronic commerce
evolved if it created the proprietary MSN network. The strategy was a big bet: the
development costs were significant and, more important, involved an enormously high level
of industry exposure and attention. Microsoft’s activities in other areas – such as including
one-button access to MSN from Windows95 – were designed to increase the probability
that this shaping bet would pay off.
But even the best shapers must be prepared to adapt. When it became clear that open
networks would prevail, Microsoft refocused the MSN concept around the Internet.
Microsoft’s shift illustrates that choices of strategic posture are not carved in stone, and it
underscores the value of maintaining strategic flexibility under uncertainty. Shaping
strategies can fail, so the best companies supplement their shaping bets with options that
allow them to change course quickly if necessary.
Because trigger variables are often relatively simple to monitor in level 2, it can be easy to
adapt or reserve the right to play.
Adapters
E.g. Companies that generate electricity – and others whose business depends on energy-
intensive production process – often face level 2 uncertainty in determining the relative cost
of different fuel alternatives. Discrete scenarios can often be identified – either natural gas
or oil will be the low-cost fuel. Many companies thus choose an adapter strategy when
building new plants: they construct flexible manufacturing processes that can switch easily
between different fuels.
Reserve the right to play

E.g. Chemical companies often choose to reserve the right to play when facing level 2
uncertainty in predicting the performance of a new technology. Most companies are
reluctant to bet several hundred million dollars on building new capacity and retrofitting old
plants around a new technology until it is proven. But if they don’t make at least
incremental investments in the short run, they risk falling too far behind competitors should
the technology succeed. Thus many will purchase options to license the new technology
within a specified time frame or begin retrofitting a proportion of existing capacity around
the new technology.
Level 3: Range of Futures

(e.g. know that it is a ball, a range of outcomes, but not sure which one)
- A range of futures can be identified
- The range is defined by a limited number of key variables, but the actual outcome
may lie anywhere along a continuum bounded by that range
- No natural discrete scenarios
- Can do scenario planning
a. Companies in emerging industries or entering new geographic markets (India)

Consider a European consumer-goods company deciding whether to introduce its products
to the Indian market. The best possible market research might identify only a broad range of
potential customer-penetration rates – says, from 10% to 30% - and there would be no
obvious scenarios within that range.
Such a broad range estimates would be common when introducing completely new products
and services to a market, and therefore determining the level of latent2 demand is very
difficult. Something that is hidden and not obvious at the
moment, but may develop further in the future
E.g. Uber when they first entered the industry, entering new geographic markets
E.g. Airbnb, whether they will be embraced when first started
b. Developing or acquiring emerging technologies in consumer electronics
Exist for companies deciding whether to invest in a new technology or not. Producers can
often estimate only a broad range of potential cost and performance attributes for the
technology, and the overall profitability of the investment depends on those attributes.
Strategic analysis:
Similar to that in level 2 more less straightforward.
- Identify a set of scenarios that describes alternative future outcomes
- Analysis should focus on trigger events signalling that the market is moving toward
one or another scenario
Since there are no other natural discrete scenarios, deciding which possible outcomes
should be developed fully into alternative scenarios is a real art.
General rules:
1) Develop only a limited number of alternative scenarios (too many will hinder
decision making)
2) Avoid developing redundant scenarios that have no unique implications for strategic
decision making, ensure each scenario offers a distinct picture of industry’s
structure, conduct and performance
3) Develop a set of scenarios that collectively account for the probable range of future
outcomes and not necessarily the entire possible range
It is impossible to define a complete list of scenarios and related probabilities, hence

expected value of different strategies cannot be calculated. However, establishing the range
of scenarios should allow managers to determine how robust their strategy is, identify likely
winners and losers, and determine roughly the risk of following status quo strategies.
Posture and moves:

Shapers
2
Something which is hidden and not obvious at the moment, but may develop further in the
future.
Shapers are trying to move the market in a general direction because they can only identify
a range of possible outcomes.
E.g. Consider the battle over standards for electronic cash transactions, a level 3 problem
since one can define a range of potential products and services that fall between purely
paper-based and purely electronic cash transactions, but it is unclear whether there are any
natural discrete scenarios within that range. Mondex International is attempting to shape
the future by establishing what it hopes will become universal electronic-cash standards. Its
shaping posture is backed by big-bet investments in product development, infrastructure,
and pilot experiments to speed customer acceptance.
Adapters
E.g. Regional banks are mainly choosing adapter strategies. An adapter posture at
uncertainty levels 3 or 4 is often achieved primarily through investments in organisational
capabilities designed to keep options open. Adapters need quick access to the best market
information and the most flexible organisational structures since they must make and
implement strategy choices in real time.
Reserving the right to play

Common posture in level 3.
E.g. Consider a telecommunications company trying to decide whether to make a $1 billion
investment in broadband cable networks in the early 1990s. The decision hinged on level 3
uncertainties such as demand for interactive TV service. No amount of solid market research
could precisely forecast consumer demand for services that didn’t even exist yet. However,
making incremental investments in broadband-network trials could provide useful
information, and it would put the company in a privileged position to expand the business in
the future should that prove attractive. By restructuring the broadband-investment decision
from a big bet to a series of options, the company reserved the right to play in a potentially
lucrative market without having to bet the farm or risk being pre-empted by a competitor.
Level 4: True Ambiguity

- Multiple dimensions of uncertainty interact to create an environment that is virtually
impossible to predict
- Range of potential outcomes CANNOT be predicted, let alone scenarios within that
range
- No pattern to predict, no basis to forecast the future due to lack of knowledge
- Quite rare, tend to migrate towards one of the other levels over time when industry
begins to take shape (Transitional)
Consider a telecommunications company deciding where and how to compete in the

emerging consumer-multimedia market. It is confronting multiple uncertainties concerning
technologies, demand and relationships between hardware and content providers, all of
which may interact in ways so unpredictable that no plausible range of scenarios can be
identified.

However, it is transitional in nature. The uncertain about strategic decisions in the consumer
multimedia market will migrate to level 3 or to level 2 as the industry begins to take shape
over the next several years.
Strategic analysis:
- Catalogue systematically what they know and what is possible to know
- Identify at least a subset of variables that will determine how the market will evolve
over time (e.g. customer penetration rates or technology performance attributes)
- Identify favourable and unfavourable indicators of these variable that will let them
track the market’s evolution over time and adapt their strategy as new information
becomes available
- Identify patterns indicating possible ways the market may evolve by studying how
analogous markets developed, determining the key attributes of the winners and
losers in those situations and identifying the strategies they employed
- Although it is impossible to quantify the risks and returns of different strategies,
managers should be able to identify what information they would have to believe
about the future to justify the investments they are considering (early market
indicators and analogies from similar markets will help sort out whether such beliefs
are realistic or not)
Posture and moves:

Shapers
Even though it contains the greatest uncertainty, it may offer higher returns and involve
lower risks for companies seeking to shape the market.
Since no player necessarily knows the best strategy in these environments, the shaper’s role
is to provide a vision of an industry structure and standards that will coordinate the
strategies of other players and drive the market toward a more stable and favourable
outcome.
Shapers need not make enormous bets to be successful. All that is required is the credibility
to coordinate the strategies of different players around the preferred outcome.
E.g. Netscape Communications Corporation did not rely on deep pockets to shape Internet
browser standards. Instead, it leveraged the credibility of its leadership team in the industry
so that other industry players thought, “If these guys think this is the way to go, they must
be right.”
Reserving the right to play

This is common, but potentially dangerous in level 4 situations. It is extremely difficult to
determine whether incremental investments are truly reserving the right to play or simply
the right to lose. A few general rules apply. First, look for a high degree of leverage. Second,
don’t get locked into one position through neglect. Options should be rigorously re-
evaluated whenever important uncertainties are clarified – at least every 6 months.
Remember level 4 uncertainties are transitional.

Under uncertainty, traditional strategic-planning process can be downright dangerous. It
can lead executives to view uncertainty in a binary way – to assume the world is either
certain, and therefore open to precise predictions about the future, or uncertain, and
therefore completely unpredictable. Planning and capital-budgeting processes that require
point forecasts force managers to bury underlying uncertainties in their cash flows. Such
systems clearly push managers to underestimate uncertainty in order to make a compelling
case for their strategy.
Underestimating uncertainty can lead to strategies that neither defend against the threats
nor take advantage of the opportunities that higher levels of uncertainty may provide. In
one of the most colossal underestimations in business history, Kenneth H. Olsen, then
president of Digital Equipment Corporation, announced in 1977 that “there is no reason for
any individual to have a computer in their home.” The explosion in the personal computer
market was not inevitable in 1977, but it was certainly within the range of possibilities that
industry experts were discussing at the time.
Postures (what is your direction) and Moves (how to do it)
Postures is your strategic intent (desire of what you want to do)

1. Shaping to the future
• Play a leadership role in establishing how the industry operates
• E.g. setting standards, creating demand
Create new opportunities in a market – either by shaking up relatively stable level 1

industries or by trying to control the direction of the market in industries with higher levels
of uncertainty.
E.g. Kodak, through its investment in digital photography, is pursuing a shaping strategy in
an effort to maintain its leadership position. Although its product technology is new,
Kodak’s strategy is still based on a traditional model in which the company provides
cameras and film while photo-processing stores provide many of the photo-printing and
storage functions for the consumer.
E.g. Hewlett-Packard also seeks to be a shaper in this market, but it is pursuing a radically
different model in which high-quality, low-cost photo printers shift photo processing from
stores to the home.
2. Adapting to the future

• Win through speed, agility and flexibility in recognising and capturing opportunities
in existing markets
Take the current industry structure and its future evolution as givens, and they react to the
opportunities the market offers. In environment with little uncertainty, adapters choose a
strategic positioning – that is, where and how to compete – in the current industry. At
higher levels of uncertainty, their strategies are predicated3 on the ability to recognise and
respond quickly to market developments. dependent on previous situations
E.g. In the highly volatile telecommunications-service industry, service resellers are

adapters. They buy and resell the latest products and services offered by the major telecom
providers, relying on pricing and effective execution rather than on product innovation as
their source of competitive advantage.
3. Reserve the right to play

• Invest sufficiently to stay in the game but avoid premature commitments
• Making incremental investments that puts company in a privileged position
This posture is only relevant in levels 2 through 4. It involves making incremental

investments that puts company in a privileged position, through either superior
information, cost structures, or relationships between customers and suppliers. That allows
3
If you say that one situation is predicated on another, you mean that the first situation can
be true or real only if the second one is true or real.
the company to wait until the environment becomes less uncertain before formulating a
strategy.
E.g. many pharmaceutical companies are reserving the right to play in the market for gene
therapy applications by acquiring or allying with small biotech firms that have relevant
expertise.
Moves is portfolio of actions

1. No regret moves
- Strategic decisions that have positive payoffs in any scenario
- E.g. initiatives aimed at reducing costs, gathering competitive intelligence, or building
skills
2. Options
- Decisions that yield a significant positive payoff in some outcomes and a (small)
negative effect in others
- E.g. conducting pilot trials before the full-scale introduction of a new product
- Entering into limited joint ventures for distribution to minimise the risk of breaking
into new markets, and licensing an alternative technology in case it proves to be
superior to a current technology
- Those reserving the right to play rely heavily on this
- Shapers also use this move, either to shape an emerging but uncertain market as an
early mover or to hedge their big bets
3. Big Bets
- Focused strategies with positive payoffs in one or more scenarios but a negative
effect in others
- Shaping strategies usually involve big bets
- E.g. major capital investments or acquisitions
Different approaches should be used as these decisions are highly dependent on the level of
uncertainty facing a given business.
Uncertainty
- Lack of information which would be necessary to make decisions with certain
outcomes
- Limitations on computational and knowledge based capabilities, given the available
information
- Invest in information (from other sources that are beyond expectations, but just
current ones)
• Collect, interpret and share (E.g. Nokia too slow to react although they knew it at
first)
• Gather from new sources, create new information networks (E.g. speak to people
who are not part of the network etc.)
• Look at new perspectives as well (New innovations)
E.g. mc Donald signature burger in fine dining

Complexity
Interconnected elements (e.g. bidding, many factors that make something complex)
- Many interconnected parts or variables forming an elaborate network of information
or procedures
- Defy conventional modeling and challenge traditional management practices
- Three properties of complexity
• Multiplicity: Number of potentially interacting elements
• Interdependence: How connected those elements are
• Diversity: The degree of heterogeneity
- Need to understand the constant interactions of numerous elements and the impact
of rare but extreme events
(Brexit last time uncertain, now complex)
Complex vs. Complicated

- Complicated systems have many parts but they operate in patterned ways – e.g.
flying an aircraft (can usually predict outcomes by knowing the starting conditions)
- Complex systems on the other hand, may have interactions that are constantly
changing, interacting continuously and unpredictably – e.g. air traffic control
situation (same starting conditions can produce different outcomes, depending on
the interactions of the elements in the system)
Institutional vs. individual complexity

- Institutional: the number of countries the company operates in, the number of
levels or people they manage, the number of partners they have
- Individual: poor processes, confusing role definitions, or unclear accountabilities
(e.g. unclear instructions)
- Removing complexity that doesn’t add value (E.g. can use 2 hands)
- Channelling what’s left to employees who can either handle it naturally or be trained
to cope with it
(Some people can work during crisis and work when complexity arises, can blossom
in time of crisis)
Types of Complexity
Imposed Complexity Includes laws, industry regulations and

interventions by non-governmental
organizations
E.g. In World Bank, employees cannot

touch the photocopy machine and need to
wait for it to be approved (in days) and

photocopied by an uncle. As such,
employees rather go out of the office and
photocopy outside = time-consuming, make
things redundant
Inherent Complexity Is intrinsic to the business and can only be
jettisoned by exiting a portion of the
business
Designed Complexity Results from choices about where the

business operates, what it sells, to whom,
and how. Companies can remove, alter
some of these but this may impact control
systems and business models
Unnecessary Complexity Arises from growing misalignment between

the needs of the organization and the
processes supporting it. Once identified, it
is easily managed
Problems of complexity
1. Unintended consequences
Even small decisions can have surprisingly effects, 3 situations in which this is likely to
happen:
a) Events interact without anyone meaning them to
E.g. Nintendo’s Wii provides a recent example when it designed innovative motion-
sensing feature to significantly expand the gaming market. Nintendo succeeded in its
immediate goal of pulling in new customers and over time, third-party developers
increasingly released titles for Xbox 360 and PlayStation 3.
b) Based on an aggregate of individual elements, not a single occurrence
E.g. The 2008 financial meltdown can be traced to numerous distinct but
interconnected events: the relaxation of banking regulations, the invention of
instruments that allowed lenders to shift risk off their balance sheets, monetary
policies that kept interest rates low, the evaporation of reasonable credit standards
and conventional down-payment requirements, ignorance on the part of borrowers
and so on. Many observers could see some of these elements, but almost no one
saw them all or anticipated the consequences of a drop in housing prices on the
entire economic system.
c) Policies and procedures remain in place long after the reason for their creation
becomes obsolete
E.g. By then the logic underlying the procedures has often been forgotten.
Employees at a major New York financial institution had to key in a code to enter

restrooms because of concerns about uninvited people gaining access. After 9/11
the firm instituted security screening at the building’s entrance, making the
restroom key codes unnecessary – but it took years to get rid of them.
2. Difficulty making sense of a situation

It is difficult for an individual decision maker to see an entire complex system. This is
essentially a vantage point problem: It’s hard to observe and comprehend a highly
diverse array of relationships from any one location.
We are further hampered by cognitive limits to our understanding of the effects of other
people’s actions and our own. Most executives believe they can take in and make sense
of more information than research suggests they actually can. As a result, they often act
prematurely, making major decisions without fully comprehending the likely
consequences for the system.
Dealing with complexity

- Complexity within the organization: Reduce, Restructuring and Manage
- Complexity in the environment: Adapt and be flexible, aligning to new
environmental complexity
- Defy conventional modeling and challenge traditional management practices
- Use better tools for anticipating how these systems will behave – tools that can help
us understand the constant interactions of numerous elements and the impact of
rare but extreme events
- By taking steps to mitigate risks, making measured trade-offs that keep early failures
small (does not mean avoid failure), and gathering diverse thinkers who can deal
creatively with variation
Improved forecasting method

Instead of extrapolating from irrelevant medians, look for modeling that will give insight
into the system and the ways in which its various elements interact. Examples include the
customer-relationship-management models used by telecommunications companies to
anticipate a person’s vulnerability to defection, and the data-mining tools used to predict
consumer responses to various types of advertising.
Further, make sure the forecasting models incorporate low-probability but high-impact
extremes.
Use three types of predictive information

Managers to be explicit about what they think will be applicable from past experience and
what might be different this time around. Do so by dividing the data among 3 buckets:
• Lagging: data about what has already happened. Most financial metrics and key
performance indicators fall into this bucket
• Current: data about where you stand right now. Your pipeline of opportunities might
be in this bucket
• Leading: data about where things could go and how the system might respond to a
range of possibilities
If the bulk of the information is in the lagging bucket, that’s a warning sign. Basing decisions
mainly on lagging indicators is essentially betting that the future will be like the past.

E.g. For an example of how leading bucket prompted action to avert a possible system
failure, recall the Y2K dilemma – the concern that computers would go haywire at the turn
of the century because many used a two-digit year format. The catastrophic scenarios in the
leading bucket were so vivid and plausible that enormous efforts were made to bring
complex computer systems into compliance before the year 2000 arrived (the plans to this
end would be placed in the current bucket. When the time came, only a handful of
problems surfaced, most of them minor.
Better risk mitigation

Limit or even eliminate the need for accurate predictions
It is possible to eliminate this guesswork by designing a system that puts users in charge of
the decisions, allowing them to create the outputs they want.
E.g. Boeing’s wildly successful 777 aircraft series exemplifies this principle at a much higher
level of product complexity. The company engaged 8 major airlines to help with the
development process, producing iterative models whose design evolved according to these
customers’ input.
Use decoupling and redundancy

Sometimes elements of a complex system can be separated from one another to decrease
the system consequences if something goes wrong. Decoupling yields 2 benefits:
(i) Shields parts of the organisation from the risks of an unexpected event
(ii) Preserves parts that may be needed to mount a response
E.g. Contrast the Windows operating system with Software as a Service (SaaS) applications.
With Windows, the operating system and your data are tightly entwined; when you upgrade
to a new version of the system, all your information is erased, meaning that you need to
back it up and reload it to your computer. With SaaS, uniform interfaces tell the computer
where your data are. You can upgrade away, and the data won’t be touched. And because
the software and the data are uncoupled, the risk that both will be harmed simultaneously
is significantly reduced.
Draw on storytelling and counterfactuals

Another aspect of mitigating risk is making sure that people view unlikely but potentially
catastrophic future events as real. Sharing anecdotes about near misses and rehearsing
responses to hypothesised negative event can help focus attention on a possibly significant
future occurrence. Posing counterfactuals – asking “What if?” – is a terrific but surprisingly
underutilised way of coming up with scenarios that are unlikely to be surfaced by traditional
techniques. Stories can give us great insights into complex systems, partly because the
storyteller’s reflections are not restricted by the available data.
Triangulate
Triangulation means attacking a problem from various angles – using different
methodologies, making different assumptions, collecting different data, or looking at the
same data in different ways.

E.g. Comparing snapshots of various elements taken at a given point in time yields a
different understanding than looking at how a single element evolves over time.
Strategies to make good trade-offs:

Take a real-options approach
This means making relatively small investments that give you the right, but not the
obligation, to make further investments later on. The goal is to limit your downside while
maximising the value you can capture on the upside. Gradually building a portfolio of small
investments keeps the stakes low until you’re able to reduce the most significant
uncertainties you face. A real-options strategy helps you manage failure by containing costs,
not by eliminating risks. The idea isn’t to avoid making mistakes but to make them cheaply
and early, learning from them and increasing your resilience as you go.
Ensure diversity of thought

Complex systems are organic; you need to make sure your organisation contains enough
diverse thinkers to deal with the changes and variations that will inevitably occur.
Ambiguity
- A situation where there is a doubt about the nature of cause and effect relationship
- Lack of knowledge about the basic rules of the game
- No precedent for making decisions as to what to expect
- Unknown-unknowns
- A company launches a new product outside its core competence in a new
unexplored market, completely don’t know what the market will accept
(E.g. McDonald were to come up with customized salads, research on whether
customers would want to buy salad from them or other markets, need to
understand the consumer segment and markets
- Experimentation helps in reducing ambiguity
- Intelligent experimentation helps leaders determine what strategies can be
beneficial or not in situations where former rules of business do not apply
(Do not know what to do since no precedence, then break problems down, move it
from ambiguous to uncertain at least)
Difference between Level 4 True Ambiguity VS Ambiguity

Level 4: When you demystify the problem, transit it to lower level of uncertainties
Ambiguity: move it to uncertainty or complex, need to put it into tangible
experiments first
In Summary
- The world is turbulent
- It’s not fully predictable
- The world isn’t just complicated. It is complex.
- It often involves more than one interpretation
- Simple actions may produce unintended consequences.
- Rare events can be more significant than average ones — and may occur more often
than we think

Volatility - Is turbulence
- Unstable or unexpected change
- For an unknown duration
Uncertainty - Lack of predictability

- Lack of knowledge
- Difficult for leaders to use past issues and events as
predictors of future outcomes
Complexity - Many interconnected parts or variables forming an

elaborate network of information or procedures
- Multiplicity, Interdependence, Diversity
Ambiguity - A situation where there is a doubt about the nature of

cause and effect relationship
- Unknown-unknowns
What can be done?

Embrace It:
- Change is the only constant
- Learn to live with not knowing all the outcomes
- Being Flexible, adaptive and agile
- Managing trade-offs
- Look for multiple perspectives
Activity: VUCA challenges for Apple

Volatility:
1. FBI asked Apple to give back pass, invade privacy problems, affect stocks
2. Successor (Steve Job’s death)
3. Outcome of decision of making iPhone 5C
4. Losing lawsuits
Uncertainty:
1. Launch of Xiaomi (new entrant into the industry)
2. Whether to enhance current product or come up with new product (apple watch) as
they need to compete with our brands whether consumers will accept
3. Leaders of the industry no gauge of consumer demands, launch first and see how it
goes
4. Consumers’ preference might be fixed, consumer base, not sure how to win over the
users of other brands (loyalty)
5. Apple in UK (Brexit) not sure how the trades there will go, uncertain with the
currency etc.

Complexity:
1. Institutional:
- They operate in many different countries, tier launch, so if countries that fall in the
3rd launch, are they un-deserving?
- Sourcing from many countries, can create complexity e.g. producing different parts
and assembling it in another country
2. Individual: Unclear instructions from the top levels to employees
3. Imposed complexity: different countries, different laws, working ages
4. Intervention of government, mind their public relation image, how their production
plants due with environment, need more regulations to manage
5. Inherent complexity: Steve Job wants the products to be smaller but a change in CEO
makes the products even bigger, they do not have directions to follow
6. Designed complexity: Outsourcing or not e.g. chips, Samsung may find ways to beat
apply if outsource
7. How to expand customer base, different age groups
Ambiguity:
1. When Apple launching touch screen phone
2. Design or performance come first, venture into new products e.g. electric cars
project
Week 3
Speed of Change
Speed
- the rate at which someone or something moves or operates
- sometimes overwhelming
Products that we don’t use anymore

- Photo films
- Phone book
Markets that phone has disrupted

- Conventional entertainment business
- Alarm clock
- Music business
- Gaming business
- Education business
Then what is the business strategy? To thrive in this business world that doesn’t have
defined boundaries.
What businesses do?

- Differentiate from their competitors (differentiation advantage -> niche)
- Core competency to create barrier to block out competitors
Static world

- as long as have enduring competitive advantage, can survive (old assumption)
- E.g. Coca cola, recently not growing as faster as they could, environment has changed,
people become health conscious, hence the capabilities and competencies they built
over the years are not lasting/sustainable anymore
Uncertainties
- From market leader to market follower
- Scope of industries (E.g. Amazon.com starts delivering their own orders by drones, going
to tumble down DHL, because they can forward integrate, closer to customers, E.g.
books no longer need to buy physically, can be downloaded online-> disrupting
business)
Sustainable competitive advantage no longer arises exclusively from position, scale, and
first-order capabilities in producing or delivering an offering. All those are essentially static.
Increasingly, second-order capabilities foster rapid adaptation. Instead of being really good
at doing some particular thing, companies must be really good at learning how to do new
things. To deal with rapid change (volatility) and uncertainty, must be good at second-order
organisational capabilities.
Second-order capabilities
- Foster rapid adaptation (learning to be good to doing new things)
Ability to read and act In order to survive, companies must have its antennae tuned to
on signals signals of change from the external environment, decode them
and quickly act to refine or reinvent its business model and
even reshape the information landscape of the industry.
(E.g. Think back to when Stirling Moss was winning Formula

One car races: The car and the driver determined who won. But
today the sport is as much about processing complex signals
and making adaptive decisions as about the mechanics and
driving prowess. They also need to process data on several
thousand variables such as weather, road conditions and angles
of curves.)
In this information-saturated age, when complex, varying

signals may be available simultaneously to all players, adaptive
companies must similarly rely on sophisticated point-of-sale
systems to ensure that they acquire the right information. And
they must apply advanced data-mining technologies to
recognise relevant patterns in it.
• With Google, we all equally know everything (Differentiator

1: Select the relevant information, D2: Analyse the selected
information)
• Big Data Analytics 2.0 and 3.0

• Can data analytics give you the wrong answer?
• Store and mine information, identify and analyse
information, patterns, to create customized insights, results
• Data analysis gives you insights, but which part to pick up is
based on human intelligence, and the function of algorithm
is manmade, not 100% fool proof, cannot bank 100% on
data analytics, correlates things
• E.g. Passion card and NTUC card, will be used for shelving
purpose
• E.g. Flu cycle in October, stock up in 7-11 etc.
Companies are also leveraging their signal-reading capabilities

to make operational interventions in real time, bypassing slow-
moving decision hierarchies. This counters designed complexity,
making decisions earlier to allow trickle to frontline.
Innovation is not exclusive. Rivals can try to emulate and data

can be sold.
E.g. The rich databases and analytical capabilities of Tesco can

produce a stream of direct revenue. Tesco allows other
enterprises to access its technologies and insights.
E.g. Google uses its algorithms to update the position of an ad

on the basis of the ad’s relevance to an individual search or
website as well as the advertiser’s bids on key words. The more
relevant the ad, the higher the click-through rate – and because
advertisers pay per click, this means more revenue for Google.
By linking its advertising data directly to its operations, Google
can respond to changing ad conditions on a split-second basis,
without the intervention of human decision makers.

Ability to experiment That which cannot be deduced or forecast can often be
discovered through experimentation. The traditional
approaches to experimentation can be costly and time-
consuming. Adaptive companies should use new approaches
and technologies, especially in virtual environments, to
generate, test and replicate a larger number of innovative ideas
faster, at lower cost, and with less risk than their rivals can.
(Enabling technology improve cost and efficiency)
E.g. Procter & Gamble uses a walk-in 3D virtual store to run

experiments that are quicker and cheaper than traditional
market tests. In one year 10 highly skilled P&G employees
generated some 10,000 design simulations, enabling the
completion in hours of mock-ups that might once have taken
weeks.
In addition to changing the way in which they conduct

experiments, companies need to broaden the scope of their
experimentation. Traditionally, the focus has been on a
company’s offerings such as new products and services. But in
an increasingly turbulent environment, business models,
strategies and routines can also become obsolete quickly and
unpredictably. Experimentation can also be done for them.
E.g. Tesco illustrates the power of experimenting with business

models as well as with product range. Ikea, like Tesco, leverages
existing assets and capabilities to experiment with business
models. After the company entered Russia, managers noticed
that whenever it opened a store, the value of nearby real estate
increased dramatically. So Ikea decided to explore 2 business
models simultaneously: retailing through its stores and
capturing the appreciation in real estate values through mall
development.
Finally, experimentation necessarily produces failure. Adaptive

companies are very tolerant of failure, even to the point of
celebrating it.
E.g. The software company Intuit, launched a marketing

campaign in 2005 to reach young tax filers through a website
called rockyourrefund.com. The site offered discounts at
Expedia and Best Buy and the opportunity to get tax refunds in
the form of prepaid gift cards. The campaign was a flop, and
practically no one used the site. But the marketing team
documented what it had learned from the failure and won an
award from company chairman Scott Cook, who said, “It is only
a failure if we fail to get the learning.”

• Used to uncover and deduce situations
• E.g. P&G 3D
• E.g. DBS traditionally has customers who are 40s, ventured
into youth market
• Traditional methods may be costly, time-consuming and not
accurate
• Experimentation means that failure will happen: idea of
learning (quotes)
• Adaptive companies must be very tolerant of failure
Ability to manage With an increasing amount of economic activity occurring

complex multicompany beyond corporate boundaries – through outsourcing,
systems offshoring, value nets, value ecosystems, peer production and
the like – we need to think about strategies not only for
individual companies but also for dynamic business systems.
Adaptive companies push activities outside the company

without benefiting competitors and design and evolve
strategies for networks without necessarily being able to rely
on strong control mechanisms.
Typically, adaptive companies manage their ecosystems by

using common standards to foster interaction with minimal
barriers. They generate trust among participants – for example,
by enabling people to interact frequently and by providing
transparency and rating systems that serve as “reputational
currency.” The company is not the single unit of analysis for
determining strategy. Nokia would still be leading the
smartphone market if the experience curve and the scale curve
were the key indicators of success. But Nokia was attacked by
an entirely different kind of competitor: Apple’s adaptive
system of suppliers, telecom partnerships, and numerous
independent application developers, created to support the
iPhone. Reputation and credibility is important within the
ecosystem.
• Different parties; suppliers, customers

• Business ecosystems: interdependent networks
• E.g. If not good for certain area, outsource it to someone
else

• E.g. Apple treats Foxconn as a part outside, but after strikes
happened, they bring Foxconn to the table and ask for their
needs, need to take their viewpoints
• The company is not the single unit of analysis for
determining strategy
• E.g. eBay and Toyota
• “Our competitors aren’t taking our market share with
devices; they are taking our market share with an entire
ecosystem”
Ability to mobilise Adaptation is local as well as global. Adaptive companies have

to encourage the knowledge flow, diversity, autonomy, risk
taking, sharing and flexibility.
A flexible structure and the dispersal of decision rights are

powerful levers for increasing adaptability. Adaptive companies
have to replace permanent silos and functions with modular
units that freely communicate and recombine according to the
situation at hand. It is important to have weak or competing
power structures and a culture of constructive conflict and
dissent.
• Dispersal of decisions (listen to what the workers and

customers say, what we are missing out fundamentally,
information flows up to down and down to up more fluidly)
• Culture of constructive conflict (agree or disagree,
encourage ideas of differing/ opposing views as long as they
are backed with data)
As companies create more-fluid structure, they drive decision

making down to the front lines, allowing the people most likely
to detect changes in the environment to respond quickly and
proactively. E.g. Whole Food: Managers can decide where to
source and what to sell for their individual stores.
Adaptive companies should create decentralised, fluid, and

even competing organisational structures that destroy the rigid
hierarchy. Everyone knows precisely what he or she should be
doing. What is needed is some simple, generative rules to
facilitate interaction, help people make trade-offs, and set the
boundaries within which they can make decisions. E.g. Netflix
values 9 core behaviours and skills in its employees: judgement,
communication, impact, curiosity, innovation, courage, passion,
honesty and selflessness. Hence, Netflix has only 2 types of
rules: those designed to prevent irrevocable disaster and those
designed to prevent moral, ethical and legal issues. The

company’s focus is on what needs to get done, not how many
hours or days are worked.
• No more certainty of role instead, simple, generative rules

for adaptation
Challenge for Big Business

Typically, large and established companies are oriented towards managing scale and
efficiency, and their hierarchical structures and fixed routines lack the diversity and
flexibility needed for rapid learning and change.
Steps to be taken:
1. Look at the mavericks. Fast-changing industries are characterised by the presence of
disruptive mavericks – often entirely new players, sometimes from other sectors.
Companies should shift their focus from traditional competitors’ moves to what the
new players are doing and to think of ways to insure the company against this new
competition or neutralise the effect. They should also look at what is happening in
adjacent or analogous industries and markets and ask, “What if this happened in
mine?” Although pattern recognition is harder in an uncertain environment, it has
tremendous competitive value.
2. Identify and address the uncertainties. Managers should put aside the traditional
single-business forecast and instead examine the risks and uncertainties that could
significantly affect the company. Companies need to distinguish “false knowns”
(questionable but firmly held assumption) from “underexploited knowns”
(megatrends that you may recognise and perhaps have acted on but without
sufficient speed or emphasis) and “unknown unknowns” (intrinsic uncertainties that
you can prepare for only by hedging your bets).
3. Address every significant risk. Most companies have a portfolio of strategic
initiatives. In managing these initiatives, companies should be as disciplined with
metrics, time frames, and responsibilities as it would be for the product portfolio or
the operating plan.
4. Examine multiple alternatives. Every change proposal should be accompanied by
several alternatives to surface a more varied and powerful set of moves and
legitimise and foster cognitive diversity and organisational flexibility.
5. Increase the clock speed. In a fast-moving environment, companies need to
accelerate change by making annual planning processes lighter and more frequent
and sometimes by making episodic processes continual.
Time Pacing (Proactive, has own rhythm) Event Pacing (Reactive, react to others’
rhythm)
A strategy for competing in fast-changing, - Changing only when some event
unpredictable markets by scheduling happened in the environment
change at predictable time intervals.
Constitutes the familiar and natural order
of things. Companies change in response

E.g. About every 9 months, Intel adds a to events such as moves by the
new fabrication facility to its operations. competition, shifts in technology, poor
CEO Andy Grove says, “We build factories financial performance, or new customer
2 years in advance of needing them, demands.
before we have the products to run in
them and before we know that the Event pacing is about creating a new
industry is going to grow.” By expanding product when a promising technology
its capacity in this predictable way, Intel comes out of the R&D laboratory,
deters rivals from entering the business entering a new market in response to a
and blocks them from gaining a toehold (a move by a competitor, or making an
certain amount of power) should Intel be acquisition because an attractive target
unable to meet demand. becomes available.
Even though time-paced companies can Managers who event-pace follow a plan
be extraordinarily fast, it is important not and deviate from it only when
to confuse time pacing with speed. By performance weakens. In markets that
definition, time pacing is regular, are stable, event pacing is an
rhythmic, and proactive. opportunistic and effective way to deal
with change.
For example, 3M dictates that 30% of
revenues will come from new products By definition, however, it is also a
every year, Netscape introduces a new reactive and often erratic strategy.
product about every six months, British
Airways refreshes its service classes every
five years, and Starbucks opens 300 stores
per year to hit the goal of 2,000 outlets by
the year 2000.
Time pacing creates a predictable rhythm

for change in a company.
Time pacing creates a relentless sense of

urgency around meeting deadlines and
concentrates individual and team energy
around common goals. People become
focused, efficient, and confident about
the task at hand, which leads to enhanced
performance.
Time pacing disciplines managers to excel

at two critical. The first is managing
transitions, or the shifts from one activity
to the next. The second is managing
rhythm, or the pace at which companies
change.

Managing Transitions Managing Rhythm
Common transitions include - Create momentum for change in time
- Shifts in product development project pacing
- Advertising campaign - Help companies align and synchronise
- Entering or leaving markets organisational rhythm with important
- Launching new alliances rhythms in the market/ industry
- Mergers and acquisitions
E.g. The 3M dictum, for example, that 30%
Transitions typically involve a large number of its revenues must come from new
of people, many of whom are not used to products every year lets people gauge what
working with one another. Communication they need to do and when they need to do
easily breaks down. Missteps often turn it. Without rhythm, managers tend to be
into costly delays. reactive and to see change as an
unwelcome surprise.
Companies that manage by time pacing
learn to choreograph important transitions E.g. Consider one cold-beverage business,
– and to shorten the time it takes to ThirstCo. Summer is the peak buying
execute them. E.g. Gillette smoothly season. ThirstCo decided to exploit this
executes about 20 new-product transitions seasonality by creating a rhythm of new-
per year. Not only does this hasten the product introductions to coincide with the
company’s revenue flow, but it also peak in demand. In order to execute its
prevents competitors from copying rhythm, ThirstCo developed a
Gillette’s products in one market and choreographed process to make the
introducing them into another before transition to its new products. Now each
Gillette does. spring, the company begins by test
marketing three or four new flavours, a
Transition between products – having a process that takes about two months.
second product as backup before Managers then select the one or two most
launching first. E.g. Gillette does not promising offerings in time for a June
release a product prototype into volume product launch.
production until a mock-up of the next
product to follow is available. E.g. sales happen in January because most
companies give bonus in march, so people
- Mergers and transitions must be quick, tend to spend a lot on shopping (mentality)
if not bound to fail (acquire -> inquire
process) organization who manages
transition is more nimble and agile
E.g. In Buccaneer, managers identified a

promising multimedia opportunity but did
not have a formal way to enter new
markets. Managers needed 8 months to
“resource” the opportunity. In the interim,
3 competitors entered the market,

preempting Buccaneer and demoralizing
the team that had worked on the project.
Companies can only time-pace as fast as their internal capabilities will allow them to move.
After all, time pacing requires not just setting a rhythm but also executing it.
Time pacing helps managers avert the danger of changing too infrequently. By setting a
regular pace for change, managers avoid becoming locked into old patterns and habits.
If managers change with every signal, then they fail to accomplish tasks and send confusing
messages to customers and employees. But if managers don’t change, they run the risk of
waiting too long and falling too far behind to catch up. Appropriate time pacing helps
resolve this dilemma.
Time pacing helps ensure that managers persist long enough to avoid over-reacting to
“noise” in new ventures as some products need time to mature and prove themselves.
Preferred solution is to time pace but if events suddenly occur, need to event pace as well.
Combination of both. USE BOTH TGT
Only time pace- regular, but still not very good because they are not agile and did not figure
out what the customers need and where the trend is moving to, hence need to be
ADAPTIVE, disruptive innovation might take over them.
Discussion question: if desktop computer, notebook computer, and a printer, not time-
paced
- Costly
- Lose sales as people who buy desktop might want printer too (but not launched yet)
- It is about mobility
- Half ready product should be launched, can enter market earlier than competitors,
gather greater market share, glue the consumers to us, then slowly add on, gather
feedback from customers, improve and relaunch
- Rhythm can be external (people get their bonus, seasonal change, trend changes) or
internal
Week 4
Disruption in a business context:
“Lower performance according to what mainstream customers want and other
performance attributes (smaller, simpler) which are not valued by current customers that
make it prosper in a new value network”
Lower performance: does not provide the mainstream customer their needs/ serve their
purpose (can be high-end or low-end)

Types of Innovation
Christensen argued, that one must look at whether innovations satisfy a firm’s current
customer base or not
- Sustaining innovations are those which mainstream customers demand
- Disruptive innovations are those innovations which do not satisfy current customers are
regarded as disruptive
Disruptive Innovation is innovation that is lower performance made from lower technology
compared to mainstream market, and targets a different market segment from mainstream
competitors. It combines new market + old market to increase existing market.
Disruption is sometimes mistakenly thought of as an all-at-once phenomenon, as if the new

technology or business model came out of nowhere to upset the established market. But
disruption actually develops in three distinct phases. In the first, the innovation creates a
new, non-competitive market independent of the established business. In the second, the
new market expands and slows the growth of the established business. In the third phase,
the disruptive innovation, having improved greatly over time, significantly reduces the size
of the old market.
- not a breakthrough innovation

- transform a product that is more expensive to more affordable one for larger population
to access
- everybody has access
- is a process, not one-off
- when it “finished”, mainstream market will be taken over and disappear
- needs to undertake the sustaining process to become mainstream product (enter
mainstream product)
- at first only addresses a particular (small) market, over time might take over become
mainstream product (E.g. auto-driving car)
[E.g. cellphone, last time used to be only rich people can afford, slowly become more
affordable, mass production, entering mainstream market]
Start off in a market that is not the main market (not the niche), because I would not want
to destroy my own main market. (E.g. does not need all the functionalities that were in the
mainstream market, stream down)
Phases of disruption (Gilbert)

- A new, non-competitive market is created (e.g. 1 & 2 in different markets)
- The new market expands and slows growth in the traditional market
- The disruption has improved so much that it takes over the traditional market
Innovation dilemma
-should we make better product that customers can afford or product that caters to even
better people
-future: need strong theory since it is unclear

Sustaining Innovation is the incremental improvement to established technologies in
response to evolutionary changes in markets. 
Radical Innovation is an innovation that utilises higher technology in order enable

consumers to do what established technology is currently unable to do. (Sustaining
improves established technology, but radical uses totally different technology all together)
(E.g. 1. Mosquito repellent

- repel mosquito
- air freshener
- 2 functions
- but need 24-hour electric supplier
-in developed market
E.g. 2. Mosquito paper (burn)

- only 1 function
- last 4 hours
1 and 2 different markets currently

but long term, might be a disruptive innovation: longer paper to burn, control rate of
combustion, started in emerging market, but can take over after some years)
Why have companies failed?

“Companies went bankrupt listening to their customers and giving them what they wanted”
“A lot of times, people don’t know what they want until you show it to them”
One of the reasons it is so difficult for managers in established companies to recognize

disruptions as opportunities is that the new markets lie outside their existing resource
base. They may see a market developing but incorrectly conclude that it is outside their
company's scope for products or customers.
E.g. In the early days of the minicomputer, for example, IBM Corp. hired a leading consulting
firm to gauge the size of the emerging market. The firm's report concluded that no
opportunity existed for IBM — a predictable outcome, given that the firm had surveyed
IBM's leading customers, who were happy with the functionality provided by IBM's
mainframes. Five years later, minicomputers were a billion-dollar business.
Incumbents fail to see how they might take advantage of the new market and often
mistakenly assume that the disruption will immediately displace their established business.
E.g. Eastman Kodak has spent billions responding to digital photography. Fearing that digital
newcomers would attack directly, Kodak was thus competing head-on with its own chemical
film business. But the initial customer adoption of digital photography came through home
and game applications — new customers seeking new applications. Digital photography will
eventually attack the chemical film market, but it is growing initially in an area entirely
outside the established market.

Consequence:
Although a disruptive business will eventually attack established markets (the area of
displacement), it originates in a space outside the existing markets. This creates a large area
of new net growth, even as the new business expands.
In every industry changed by disruption, the net effect has been total market growth.
Moreover, disruption can be a powerful avenue for growth through new market discovery
for incumbents as well as for upstarts.
Examples of Disruption Innovation

1. ECG Machine (cheaper and more portable)
2. Tesla Power
3. Nano (failed marketing campaign, but good product “you can’t afford, buy this”,
revamped: “Buy a mobile car)
4. Skype (lagging initially, but now improved
[Video 2 GOOD] Disruptive innovation

Why everything seems right but market leaders still fail when it comes to disruptive
technologies?
E.g. Typewriter
- at first demanding typewriter disapprove the function of “delete” claiming that people are
bad at typing (only serve a specific market but not the demanding ones)
- over time it eventually took over
Challenges
1. Difficult to identify as competing in different market segments
2. Even if identify, conflict with processes/values 
3. Responding at a wrong timing, before disruptive innovation
attacks mainstream market
How to compete
- Identifying new markets outside current market 
1. Find out what current customers are undervaluing 
2. Target non-consumers, compete against non-consumption
3. Target pain points of current products
- Reinvent business model to fit new market segment and customers
- Discipline to persevere in disruptive markets, tolerant to initial failure, not be sucked
into mainstream market segments e.g. Teradyne
*Disruptive Innovation is never disruptive to the new market
Finding New Customers

The first step in locating new customers is identifying a new market. Managers can use 3
criteria to do that:
First, the disruptive innovation must be undervalued by current customers.

Second, it must compete against non-consumption; that is, it must allow people to do things
they couldn't do in the past for lack of money or skill.
And third, it must help people accomplish things that they are already trying to do but can't
with the available products or services.
By using these criteria, executives can develop the intuition they need to look outside their
established markets for customers in a disruptive market. An example from the health care
industry demonstrates how this can work.
E.g. Consider how treatment of heart disease has evolved. Before the 1960s, the operation
performed by a highly trained cardiac surgeon, was very invasive and recovery period was
lengthy. When Andreas Gruentzig, a young German physician, performed the first balloon
angioplasty procedure in 1974 which was less invasive with less painful recovery period, the
cardiac surgeons were not interested. But the procedure was embraced by another group,
cardiologists, who valued the approach for its potential to expand their very different scope
of practice. Eventually balloon angioplasty created an entirely new market for patients
unable to tolerate complex and invasive surgery and for those with less serious blockages.
New Customers, New Business Models

Customers in a disruptive market can’t be served according to the established market’s
business model.
Sticking with the New Customers

Companies that wish to succeed in new markets need to be disciplined. They have to learn
how to stick with the identified new customers so that the business models and product
design rules fit the new market.
Meeting the Challenge of Disruptive Change

A disruptive innovation is an innovation that creates a new market and value network and
eventually disrupts an existing market and value network, displacing established market leading
firms, products and alliances. -Clayton M. Christensen beginning in 1995.
With the internet and globalization, it is even harder for companies to deal with disruptive
changes.
Managers in big companies can see disruptive changes and they have the resources to
confront them. Most big companies have talented managers and specialists, strong product
portfolios, first-rate technological know-how and capitals. However, their problem is that
they lack the habit of thinking about their organisation’s capabilities as carefully as they
think about individual people’s capabilities. (Problem)
Great managers can identify the right person for the right job and train employees to
succeed at the jobs they are given.
But, it is wrong to assume that the organization will also work well when each person
working on a project is well matched to the job.

Reason: Organisations themselves – independent of the people and other resources – have
capabilities too. Hence, good managers need to be skilled in assessing not only the people,
but also the abilities and disabilities of their organization as a whole.
Sometimes, a company’s disabilities will become more sharply defined even as its core
capabilities grow.
Managers need to recognize different kinds to change and make appropriate organizational
responses.
Managers need to know what types of change the existing organization is capable and
incapable of handling.
[Where capabilities reside] 3 factors that affect what an organization can and cannot do:
A) Resources (tangible and intangible ones)
• Tangible: people, equipment, technologies, cash
• Intangible: product designs, information, brands, relationships with suppliers, distributors,
customers
(True that high-quality resource increases an organisation’s chances of coping with change but
resource analysis doesn’t come close to telling the whole story)
B) Processes
• Patterns of interaction, coordination, communication, decision making
• Formal: they are explicitly defined and documented (more visible)
• Informal: they are routines or ways of working that evolve over time (less visible)
• By their nature, set up for people to perform task consistently
• Perform efficiently when it is used to do the task it was designed for
• Conversely, when the same process is used to tackle a very different task, it is likely to fail
• Processes are where many organisation’s most serious disabilities in coping with change
reside
**A process that creates capability to execute one task concurrently defines disabilities in
executing other tasks.
C) Values
• Standards by which employees set priorities that enable them to judge and make decisions:
Prioritisation decisions
(whether an order is attractive or unattractive, whether a customer is more important or less

important, whether an idea for a new product is attractive or marginal)
• Made by employees at every level (Salesperson: which product to push with customers;
executive tiers: decision of investing or not, in new products, services and processes)
• Important to make independent decisions that are consistent with the strategic direction
and the business model of the company, such that these consistent values can permeate the
organisation
• Values increase as size of business increase, making it  difficult to satiate big companies and
forgo business opportunities smaller companies would grab. This makes it hard for them to
enter small emerging markets.

However, consistent values can also define what an organisation cannot do.
• A company’s values reflect its cost structure or its business model as those define the rules
its employees must follow for the company to prosper
Example: A company’s overhead costs require it to achieve gross profit margins of 40%, managers
will have to KILL ideas that promise gross margins below 40%. Such an organisation would be
incapable of commercialising projects targeting low-margin markets.
(might be taken away by another organisation who has values that driven by different cost structure
and might facilitate the success of the same project)
Because a company’s stock price represents the discounted present value of its projected
earnings stream, most managers feel compelled not just to maintain growth but to maintain
a constant rate of growth.
It follows that an opportunity that excites a small company is not big enough to be
interesting to a large company -> they lose the ability to enter small, emerging markets.
The problem is magnified when companies suddenly become much bigger through mergers
or acquisitions. Although their merged research organisations might have more resources to
throw at new product development, their commercialised organisations will probably have
lost their appetites for all but the biggest blockbuster drugs. This constitutes a very real
disability in managing innovation.
[THE MIGRATION OF CAPABILITIES]

Start-up stages: resources - people, in particular
Big companies: processes and values
(Criteria: as long as organisation continues to face the same sorts of problems that its processes and
values were designed to address, managing the organisation can be str8 forward)
“As people address recurrent tasks, processes become defined. And as the business model takes
shape and it becomes clear which types of business need to be accorded highest priority, values
coalesce.”
Evolve over time: Resources -> Processes and values -> cultures (use cross to illustrate no more
conscious choice)
Example of failed company for not having a defined process:

Avid Technology, at first their well-received technology removed tedium from the video-editing
process, but they lack of effective processes for consistently developing new products and (or
controlling quality, delivery and service)
Example of successful company for having defined process-values:

McKinsey & Company, their processes and values have become so powerful that it almost
does not matter which people get assigned to which project teams
*As successful companies mature, employees gradually come to assume that the processes
and priorities they have been using so successfully so often sure the right way to do their

work -> when this happens, employees would not work by conscious choice -> those
processes and values come to constitute the organisation’s culture.
When it is hard to get hundreds and thousands of employees to agree on what needs to be
done and how, culture is a powerful management tool. It enables employees to act
autonomously but causes them to act consistently.
[SUM] Hence, the factors evolve over time – they start in resources; then move to visible,
articulated processes and values; and migrate finally to culture.
When the organisation’s capabilities reside in its people, changing capabilities to address
new problems is relatively simple; but when capabilities reside in processes and values or
embedded in culture, change can be extraordinarily hard.
SUSTAINING VERSUS DISRUPTIVE INNOVATION

Large companies VS small companies + reasons
Sustaining innovations Disruptive innovations
Innovations that make a product or Innovations that create an entirely new market
service platform better in ways that through the introduction of a new kind of product or
customers in the mainstream market service, one that is actually worse, initially, as judged
already value (E.g. Compaq or Merrill by the performance metrics that mainstream
Lynch) customers value (E.g. Charles Schwab)
These innovations sustained the best Capable of improving rapidly and addressing the needs
customers of these companies by of customers in the mainstream of the market
providing something better than had
previously been available.
Nearly always developed and introduced Smaller companies are more capable of pursuing as
by established industry leaders (see their values embrace small markets, and their cost
page 11-12 to elab) structures can accommodate low margins
(Resources-processes-values framework Their market research and resource allocation

Industry leaders are organized to processes allow managers to proceed intuitively; every
develop and introduce sustaining decision need not be backed by careful research and
technologies where they launch new analysis.
and improved products to gain an edge
over the competition
Often surrender emerging growth
markets because smaller, disruptive
companies are actually more capable of
pursuing them)
Nearly always promise higher profit Occurs intermittently that no company has a routine
margins process for handling them
(Fits in with the values of leading Nearly always promise lower profit margins
companies in that they promise higher (Inconsistent with the established company’s values)

margins from better products sold to
leading-edge customers) E.g. Merrill Lynch
CREATING CAPABILITIES TO COPE WITH CHANGE (Proposed solutions)
Creating New Capabilities Internally

• Create new organisational structure within corporate boundaries in which new processes
can be developed to tackle new challenges
• Pull the relevant people out of the existing organisation and draw a boundary around a new
group
• New team boundaries facilitate new patterns of working together that ultimately can
coalesce as new processes
• Team members are physically located together and entirely dedicated to the new challenge
• Each member is charged with assuming personal responsibility for the success of the entire
project
• In Revolutionising Product Development (The Free Press, 1992), Steven Wheelwright and Kim
Clark referred to these structures as “heavyweight teams”
• E.g. Chrysler, Medtronic, IBM, Eli Lilly (used heavyweight teams for creating new processes
so they could develop better products faster) (pg14)
Creating Capabilities Through a Spin-out Organisation

• When the mainstream organisation’s values would render it incapable of allocating
resources to an innovation project, the company should spin it out as a new venture
• Large organisations cannot be expected to allocate the critical financial and human
resources needed to build a strong position in small, emerging markets
• Difficult for large company whose cost structure is tailored to compete in high-end markets
to be profitable in low-end markets as well
• Spin-out organisation is established only when a disruptive innovation requires a different
cost structure in order to be profitable and competitive, or when the current size of the
opportunity is insignificant relative to the growth needs of the mainstream organisation
• E.g. Hewlett-Packard (p.g. 14)
NOTE THAT:
Primary requirement: The project not to be forced to compete for resources with projects in the
mainstream organisation. Since they are inconsistent with the company’s mainstream values, they
will be naturally accorded lowest priority. Whether the independent organisation is physically
separated is less important than its independence from the normal decision-making criteria in the
resource allocation process.
Managers think that developing a new operation necessarily means abandoning the old one, and
they loathe to do that since it works perfectly well for what it was designed to do. But when
disruptive change appears, managers need to assemble the capabilities to confront that change
before it affects the mainstream business. They actually need to run 2 businesses simultaneously –
one whose processes are tuned to the existing business model and another that is geared toward
the new model.
**Retain the old processes when working with the existing business and create additional
processes to deal with the new problems.

Creating Capabilities Through Acquisitions
• Recognise where the capabilities reside in the acquisition and assimilate them accordingly
• If the capabilities being purchased are embedded in an acquired company’s processes and
values, let the business stand alone and to infuse the parent’s resources into the acquired
company’s processes and values
(integration will vapourise the processes and values of the acquired film, its capabilities will
disappear)
• If the acquired company’s resources were the reason for its success and the primary
rationale for the acquisition, then integrate it into the parent
(Plugging the acquired people, products, technology, customers into the parent’s processes)
• E.g. IBM’s 1984 acquisition of the telecommunications company Rolm (failed)
There wasn't anything in Rolm's pool of resources that IBM didn't already have. Rather, it
was Rolm's processes for developing and finding new markets for PBX products that
mattered. However, in 1987 IBM decided to fully integrate the company into its own
corporate structure. IBM's managers soon learned the folly of that decision. It was
impossible for a computer company whose values had been whetted on profit margins of
18% to get excited about products with much lower profit margins. IBM's integration of
Rolm destroyed the very source of the deal's original worth.
• E.g. Cisco System’s acquisitions process (successful)
Cisco Systems' acquisitions process has worked well because it has kept resources,
processes, and values in the right perspective. Cisco primarily acquired small companies and
early-stage organizations whose market value was built primarily upon their resources,
particularly their engineers and products. Cisco plugged those resources into its own
effective development logistics, manufacturing, and marketing processes and threw away
whatever nascent processes and values came with the acquisitions because those weren't
what it had paid for. Also, Cisco did not integrate StrataCom and let it stand alone and
infused Cisco's substantial resources into StrataCom's organization to help it grow more
rapidly.
Take-home message
• The very capabilities that make the organisations effective also define their disabilities
• Understanding a problem (i.e. types of change) is the most crucial step and make
appropriate organisational responses
• Recognise the capabilities of the organisation
When an organisation needs to react to or initiate an innovation, managers need to understand

what kind of team should work on the project and what organisational structure that team needs
to work within

Vertical axis: measure the extent to which the organisation’s existing processes are suited to getting
the new job done effectively
Horizontal axis: assess whether the organisation’s values will permit the company to allocate the
resources the new initiative needs
Functional team: works on function- specific issues, then passes the project on to the next function
(do daily and regular job)
Lightweight team: is cross-functional, but team members stay under the control of their respective
functional managers (do regular functional job + additional job)
Heavyweight team: has members who work solely on the project and are expected to behave like
general managers, shouldering responsibility for the project’s success- usually designed so that new
processes and new ways of working can emerge (if you want the processes to fix, only focus on
the job, pull out from the team (more capable ones), their regular job will be put aside or
done by others)
In region A: (s. innovation)

- project is a good fit with the company’s processes and values, so no new capabilities are
called for
- a functional or lightweight team can tackle the project within the existing organisational
structure
In region B: (s. innovation)

- project is a good fit with the company’s values but not with its processes
- it presents the organisation with new types of problems and requires new types of
interactions and coordination
- a heavyweight team is a good bet, but the project can be executed within the
mainstream company
In region C: (disruptive change)

- faces a disruptive change that does not fit the company’s existing processes and values
- create a spin-out organisation and commission a heavyweight team to tackle the
challenge
(the spin-out allows the project to be governed by different values- different cost structure etc;
heavyweight team ensures new processes can emerge)

In region D: (disruptive change)
- faces a disruptive change that fits the company’s current processes but doesn’t fit its
values
- commission heavyweight team to work in a spinout
- however, development may occasionally happen successfully in-house, but successful
commercialization will require a spinout
***DO NOT EMPLOY A ONE-SIZE-FITS-ALL ORGANISING STRATEGY

Companies should tailor team structure and organisational location to the process and values
required by each project
2 main parameters that a company considers before making an investment

- Gross margins
- Growth volume
Moving products from non-competing zone into competing zone (disruptive innovation)
Failed disruptive innovation: iPhone 5C
Incumbent companies do not have the values to invest in disruptive technologies due to the
very reason that makes them successful!
Some managers disagree because they feel that they do not have the expertise in the
market + they promise a lower profit margin + after that too late, already lost their market
If you don’t have defined framework -> can be agile dealing with problems
If you have defined framework -> cannot be agile
More problems for incumbents:

Competence-enhancing- innovations build on the firm’s existing knowledge base.
Example: Sony is an electronics manufacturer. Sony could start manufacturing digital

photography sensors building on their existing electronics know-how.
Competence-destroying- innovations renders a firm’s existing competencies obsolete.

(Need to know, build it up or move quickly)
Example: Kodak built a 100+ year business in chemical photography sensors (a.k.a. “film”.).
The era of digital photography sensors made this accumulated competence obsolete.
Whether an innovation is competence-enhancing or competence-destroying depends on
the perspective of a particular firm.
E.g. Yahoo, Nokia

-yahoo didn’t seize the chance to buy FB, back then was too focused on other things and
lost the chance

Reality bites: Other reasons for resistance to change (too obsessed with own technology
and believe it can work)
- Firms may have significant investment in incumbent technology
- Firms often cease to invest in learning about alternative designs and instead focus on
developing competencies related to the dominant design.
E.g. Nokia should’ve learnt in 2007 when market dropped, but they were slow and in 2009 it
was too late
Gilbert: Realizing new growth

- Disruption creates new growth (e.g. more taxis when you need)
- New customers must be found outside the existing market (Uber only found customers
within the market, not different one, so Uber is not a disruptive innovation)
- Disruption does not feel like disruption to the customer
- The needs of the new customer dictate the new business model (driven by their new
needs, new demands, and cater to them)
Week 5
Recap:
Disruptive innovation: can be cheap or expensive
Takes place outside of mainstream market, not meant for mainstream consumers
They do not know the innovation is going to be disruptive
Some companies think that it is outside of the company scope and did not want to invest
Firm’s capabilities can be firm’s disabilities too (Processes-values framework, no conscious
decision)
R-V-P Framework, do not consider it as disruptive and values (cost structure and gross profit
do not fit)
Create capabilities thru lightweight (values in line) or heavyweight (values not in line) team,
or spin out
What are boundaries?

- What you outsource or what you create in-house
- Dividers that separate business
- Something you use to distinguish yourself from other people
- Looking at common differentiator and denominator
Firms that bring the wrong business activities within their boundaries risk losing strategic
focus and becoming bloated and bureaucratic. Firms that fail to bring the right business
activities within their boundaries risk losing their competitive advantages and becoming
“hollow corporations”.
Transactions cost economics (TCE) specifies the conditions under which firms should
manage a particular economic exchange within their organisational boundary as well as the
conditions under which it should be outsourced. This approach requires managers to
consider only a single characteristic of an economic exchange – the level of transaction-

specific investment – in order to decide whether to include an exchange within a firm’s
boundary.
TCE does not focus on the capabilities of a firm or on the capabilities of its potential
partners when deciding which economic exchanges to include within a firm’s boundary and
which to outsource.
What are organisational boundaries?

- Is a legal and business term
- Used essentially to distinguish a business from another but yet related to one another
- Organizational boundaries are imaginary dividers meant to distinguish a unit/company
from external but nearby influences
(Different jobs doing different things)
- Traditionally, marketing people (know where consumers want), finance (have the
capital) and production people are the loudest
- HR people are the quietest but now are voicing opinions too
- Boundaries too tight, no communication, dysfunctional -> disruptive
- E.g. Uber, Facebook (produces no content), Alibaba (does not keep a single inventory),
Airbnb (does not own a single property) -> avoid unhappiness from consumers, so
outsource them, let others do, different boundaries. They only own a bit of
administration, a small marketing team, operation can be outsourced. Most
organisations do this, do not want to own the whole universe, set up their boundaries
How do you decide the organizational boundary?

What factors help you decide, what is to be included and what is to be excluded?
What are you managing when deciding on organizational boundaries?
3 concepts aid in understanding TCE as applied to firm boundary decisions: governance,

opportunism and transaction-specific investment.
In TCE, governance is the mechanism through which a firm manages an economic

exchange. These mechanisms can be grouped into 3 broad categories: market governance,
intermediate governance and hierarchical governance.
o Market governance- (one-off transaction, shorter term compared to intermediate,

outside of company’s boundaries) cheapest option, most economical e.g. bidding
system, with a list of criteria and they go for the cheapest one (E.g. The video on
Chifukool in India, Harvard workshop -> cheapest, one-off transaction)
Firms use market governance to manage an exchange when they interact with other firms
at arm’s length across a nameless, faceless market and rely primarily on market-determined
prices to manage an exchange. For example, oil refineries use market governance to gain
access to crude oil purchased on the spot market; electronics firms use market governance
to obtain standardised electrical components from component distributors.

o Intermediate governance- (buying their stake in an option, but in long-term
relationship, although not involved in everyday operation, only interested in the return
of investment, more popular nowadays because legal framework is tight, can prevent
people from taking advantage, that’s why most popular nowadays, normally outside
company’s boundaries too) Form some sort of transactional relationship, long term
contractual arrangement, outsourcing etc. (E.g. Apple bought part of Foxconn, bought a
minority state, make the business work, but not investing too much, not majority
investment) (E.g. The video on Chifukool in India, postal service)
Firms use intermediate governance when they use complex contracts and other forms of
strategic alliances, including joint ventures, to manage an exchange. For example, retail
firms use intermediate governance to obtain products by negotiating long-term supply
contracts with suppliers, by establishing electronic data interchange linkages with those
supplies, and when those suppliers locate critical operations near a retail firm’s
headquarters. Firms use intermediate governance when partnering to form a joint venture
and when they use complex franchise agreements to manage an exchange. In all these
cases, more complex contractual forms of governance replace independent arm’s-length
market relations.
o Hierarchical governance- (If you start doing something in your company’s boundary and
normally acquisition and merger) Instead of contractual relationship, buy you out,
acquire you OR manufacture on your own, do not need you OR form a spin-out, owned
by main company but just purely doing 1 thing, nothing else OR can be outsourcing too
but most cases of outsourcing is classified under Intermediate governance (E.g. Apple
acquire Beats, let Beats stand alone, leverage Beats; Microsoft & Nokia) (E.g. The video
on Chifukool in India)
Firms use hierarchical governance when they bring an exchange within their boundary. For
example, a manufacturing firm uses hierarchical governance when it owns and operates a
factory supplying the products that it sells. A retail firm uses hierarchical governance when
it owns and operates its own stores. A diversified firm uses hierarchical governance when it
operates a sales and distribution network that two or more of the businesses it owns use to
sell and distribute their products. In these cases, the parties to an exchange are no longer
independent. Rather, some third party (the boss) has the right to direct actions and decision
making.

According to TCE, managers determining their firm’s boundary must constantly ask
themselves: “Given the attributes of this exchange, what is the most efficient way to govern
it?” TCE suggests that 2 issues are relevant when answering this question: the cost of a
governance mechanism and the threat of opportunism in an exchange. In general, the
more elaborate the governance, the more costly the governance. Hence, the cost of using
market governance is the lowest. If minimising the cost of governance were the only goal,
managers would always choose non-hierarchical forms of governance and they would
always narrowly draw the boundary of their firm.
- Opportunism
o One party takes an unfair advantage of the other
- Transaction specific investment
o Investment that is significantly more valuable in a particular exchange than in any
alternative exchange (E.g. SG NEWater, need to be self-sufficient, basic necessity,
do not want to be threaten, Msia took advantage, knew SG needed, SG at the
threat of opportunism)
o Investment is really big, if can’t work, will suffer losses
Opportunism exists when a party to an exchange takes unfair advantage of other parties to
that exchange. For example, if a firm promising high-quality supplies instead delivers low-
quality goods, it is behaving opportunistically. If a firm is consistently late in delivering a
promised product or service or charges a price higher than originally promised, it is being
opportunistic.
TCE suggests that when one party to an exchange has made a large transaction-specific
investment in that exchange, other parties to that exchange have a strong incentive to
behave opportunistically. A transaction-specific investment is any investment that is
significantly more valuable in a particular exchange than in any alternative exchange. For
example, suppose that an oil pipeline company has built a pipeline from an oil field to
supply an oil refinery owned by a second firm. Presumably, this pipeline is valuable if it is
used to pump crude oil to the refinery. What is its value if it does not pump crude oil?
Assuming there are no other refineries that could be supplied by the pipeline, the value of
the pipeline drops significantly if it is not supplying this one refinery. Thus, this pipeline is a

transaction-specific investment, since its value in a particular transaction is much greater
than its value in alternative transactions.
The threat of opportunism exists when one party to an exchange has made a transaction-
specific investment, while others have not made such an investment. Continuing with the
pipeline example, suppose the refinery has alternative supplies of crude oil. If the refinery is
not receiving crude oil through the pipeline, its value remains almost unchanged. The firm
owning the refinery has not made a transaction-specific investment. In this setting, the
refinery could demand that the pipeline company reduce the price of its crude oil, increase
the quality of crude oil or share in some upgrade expenses in the refinery. The pipeline
company would have few alternatives but to do what the refinery asked. The refining
company could behave opportunistically.
When high levels of transaction-specific investment characterise exchanges, the high cost of
hierarchical governance is offset by its ability to reduce the threat of opportunism. When
moderate level of transaction-specific investment characterise exchanges, intermediate
governance can reduce the threat of opportunism without the extra cost of hierarchical
governance. Exchanges characterised by low levels of transaction-specific investment are
not prone to opportunism, so firms should use the least costly form of governance – market
governance.
All 3 are linked
Capability Consideration in Boundary Decisions

If a firm finds that it does not possess all the capabilities it needs to be successful, the firm
has 3 ways it can gain access to the capabilities it needs.
- Cooperate with firms that already possess the capabilities (Market OR intermediate)
- Develop these capabilities on its own (Hierarchical)
- Acquire another firm that already possesses the capabilities (Hierarchical)
Transactions cost logic suggests that the choice among these alternatives should depend on
the level of transaction-specific investment required to gain access to the capabilities a firm
needs. If required transaction-specific investment is high, then the firm should use
hierarchical governance. In this setting, firms should either develop the necessary
capabilities on their own, or they should acquire another firm that already possesses these
capabilities. But if the cost of developing these capabilities and cost of acquiring another
firm is high, a firm might also want to choose non-hierarchical approaches to gain access to
the capabilities even if the transaction-specific investments are significant.

Creating capabilities (4 issues)
There are numerous reasons why it might be costly for a firm to create a particular
capability on its own. 4 important reasons are:
• Historical context: The ability to create a capability in a cost-effective way may
depend on unique historical conditions that no longer exist.
o Sometimes a firm’s ability to create capabilities in a cost-effective way depends
on being in the “right place at the right time.” Years later or under different
circumstances, recreating certain opportunities may be impossible.
o E.g. Caterpillar was able to create at low cost a worldwide service and support
network for its heavy construction equipment business because it was the
major supplier of this equipment to Allied forces during World War II. Being the
only heavy construction equipment firm with such a network in place,
Caterpillar had an enormous competitive advantage immediately after the war.
For competing firms to create the same kind of network at the same low cost as
Caterpillar, the unique conditions that had existed for Caterpillar during WWII
would have had to be recreated and it was obviously not possible.
• Path dependence: The creation of a capability may be “path dependent”.

o Sometimes to create a particular capability, a firm must go through a long,
difficult learning process. When no way to short-circuit this learning process
exists, it is said to be path dependent. While other firms may want to create
path-dependent capabilities for themselves, they must first go through the
experiences that make it possible to develop those capabilities. This can be a
time-consuming process that greatly increases the cost of creating a capability.
o E.g. Consider the capability that some Japanese firms have to work
cooperatively with their suppliers. Many U.S manufacturers have coveted these
capabilities to gain access to the low-cost, high-quality supplies that seem to be
available to some of the Japanese firms. However, quick creation of these
capabilities among many U.S. manufacturers has been elusive. This difficulty is
understandable when it is recognised that these Japanese firms have been
working with the same network of suppliers for over 500 years. The experience
that develops over 500 years is costly to create in a short period of time.
• Social complexity: A capability may be socially complex, something works well in one
context but can’t in another
o The capabilities can work in another company’s social context but might not be
in yours (E.g. cannot work in Asian context, need approval, consensus, social
complexity)
o Sometimes it is costly for a firm to create a particular capability because that
capability is socially complex in nature. Examples of these socially complex firm
capabilities include a firm’s culture, its reputation among customers and
suppliers, its trustworthiness, and so forth. These kinds of capabilities can
enable a firm to pursue valuable business and corporate strategies. Socially
complex capabilities are generally beyond the ability of managers to change in
the short term. Rather, they evolve and change over time.
o E.g. Consider the well-known firms such as Hewlett-Packard, Johnson &
Johnson, Sony, Disney and Wal-Mart, they are organised around unique visions
of their roles in the economy, their responsibilities to their customers and
suppliers, and their commitment to their employees. These socially complex
visions have profoundly affected the decisions made by these firms and the
strategies they have pursued.
• Causal ambiguity: The actions that a firm would need to take to create a capability
may not be fully known. (multiple hypotheses to create the capability but do not
know how to go about doing it, where to start it, unknown unknowns)
o When the relationship between actions a firm takes and the capabilities it
creates is casually ambiguous, it can be difficult to create a particular set of
capabilities. Causal ambiguity about how to create capabilities exists whenever
there are multiple competing hypotheses about how to create those
capabilities and when these hypotheses cannot be tested. These conditions are
particularly likely when the sources of a firm’s capabilities are taken-for-
granted, unspoken, and tacit attributes of a firm. Such organisational attributes
have been described as “invisible assets.” However, when the assets needed to
create capabilities are invisible, it can be difficult for firms seeking to create
these capabilities to know what they should do to create them.
Difficulties in Acquiring Capabilities

If firms cannot create capabilities on their own, they can still use hierarchical governance to
gain access to those capabilities by acquiring other firms that already possess them. There
are 5 reasons that it can be costly to use acquisitions:
• Legal constraints on an acquisition
o Efforts to acquire a firm for its capabilities can be foiled by antitrust and local
ownership restrictions.
o E.g. Microsoft wanted to purchase Intuit, which had developed and marketed
the most successful home accounting software on the market – Quicken.
Undoubtedly, this acquisition would have benefited Microsoft. However, this

acquisition did not pass antitrust scrutiny, and Microsoft had to find another
approach for entering this market.
o For political reasons, nations can restrict foreign ownership of domestic firms,
making it illegal for a non-domestic firm to acquire a domestic firm. The non-
domestic firm will then have to find some alternative to acquisition to gain
access to those capabilities that domestic firm possesses.
• Effect on the Value of Capabilities: An acquisition may reduce the value of the
capabilities held in the acquired firm
o E.g. Consider Publicis, the French advertising agency. One of this firm’s
greatest assets was its long-term contracts with several large French
companies, many of which were at least partially owned by the French
government. These clients strongly preferred working with a French
advertising agency. Publicis had been acquired by, say, a U.S. advertising
agency, the very thing that the U.S. agency may have been trying to purchase
– Publicis’ relationship with large French companies – would have been
jeopardised.
• Strategic Flexibility and Uncertainty: An acquisition can be costly to reverse if it turns

out not to be valuable.
o People don’t get along, processes don’t get integrated, culture not integrating
o Under conditions of high market uncertainty, a firm may not know what
capabilities are needed for long-term success. In this situation, it has strong
incentive to maintain its flexibility, so it can move quickly to develop the
required capabilities after uncertainty is resolved.
o In an uncertain environment, acquiring another firm to gain access to its
capabilities is a less flexible governance than market or intermediate
governance (E.g. strategic alliances). One firm may acquire another firm only to
discover that the capabilities it was seeking are not valuable. As a result, this
firm may have to sell the newly acquired firm away. If a firm had used
intermediate or market governance, the cost of withdrawing would have been
much lower.
• Unwanted “Baggage” and Diffused Capabilities: Substantial “unwanted baggage”

bound with the desired capabilities in the acquired firm
o Acquire the senior management as well, they have a particular process of
handling certain stuff, due diligence not enough to do that (detect unwanted
baggage) when acquiring
o Research indicates that most acquisitions fail. The most important reason for
this failure is the inability of acquiring firms to take full advantage of newl
acquired capabilities. Integration difficulties stem from differences in culture,
systems, approach and so forth. Such differences raise the cost of using
acquisitions to gain access to capabilities.
o Firms are bundles of capabilities that are often hard to disentangle from each
other. Rarely are desired capabilities conveniently located in a single division or
group. Rather, they are often spread globally across multiple individuals,

divisions and groups. Such diffused capabilities cannot be easily extracted from
their operating environments.
o Whenever a firm is acquired, both desirable and undesirable capabilities are
acquired. In principle, this problem can be solved by spinning off those parts of
the acquired firm that are not important to acquire the firm. However, when
the capabilities are diffused throughout its organisation, it may be impossible to
separate the desirable from undesirable. In this setting, acquiring the baggage
to access important capabilities significantly increases the cost of acquisition.
• Costly to leverage acquired capabilities throughout an acquiring firm

o E.g. WhatsApp & Facebook: hard to integrate completely
Most acquisitions actually fail!
A firm seeking capabilities it needs for success must weigh the cost of any opportunism that
might arise through gaining access to these capabilities via non-hierarchical means against
the cost of gaining access to these capabilities through hierarchical forms of governance.
Understanding the conditions under which capabilities are costly to gain access to through
hierarchical governance thus becomes an important determinant of a firm’s boundary
choices. While the threat of opportunism stemming from transaction-specific investment is
an important consideration in making this boundary decision, it is certainly not the only
consideration.
Flat World, Hard Boundaries

In a flat world, we need boundary spanning leadership – the ability to create direction,
alignment and commitment across group boundaries in service of higher vision or goal.
Direction is a shared understanding of common goals and strategy.
Alignment is the joint coordination of resources and activities.
Commitment is a dedication to collective success that is at least as great as the dedication
to any one group’s success.
Boundaries that keep us apart!

1. Vertical Boundaries (hierarchy) are the floors and ceilings that separate groups
according to rank and privilege
o A number of low-level subordinates under a higher-level supervisor being the
traditional approach for managing the boundaries between levels. Strategy
flows down, with production flowing up. Yet today’s flat world is transforming
vertical boundaries, enabling greater degree of interaction up and down.
2. Horizontal Boundaries (departments) are found across organisational functions and

units, or when 2 organisations merge into one. They are walls that separate groups
according to areas of experience and expertise.
o The negative costs of horizontal boundaries manifest themselves when one
function is favoured over another, when the work of one unit or product line
threatens another’s viability or when departments work at cross-purposes.
Under such conditions, intergroup conflict rather than collaboration rules the
day.

3. Stakeholder Boundaries (ecosystem and partners) are the doors and windows of
organisation. Organisations are increasingly tied up with a dizzying array of stakeholder
groups, including but not limited to shareholders, boards of directors, vendors,
networks, customers, governments and local and global communities.
o Stakeholder boundaries have potential to create divides when organisations
seek to serve their individual interests at the exclusion or expense of the
interests of their external partners.
o Value chains are the primary mechanism for managing the boundaries
between an organization and its stakeholders. The traditional view is that each
link in the chain defines its own process independently, with little thought given
to interdependence with partners elsewhere along the chain. But a flat world
requires organizations’ leaders to rethink how value is created between
participating enterprises in the chain, their employees and the broader
communities they serve.
4. Demographic Boundaries (Gen X & Y, citizenship) results when workers are defined
according to classifiers such as gender, race, education or ideology.
5. Geographic Boundaries (different office locations) are represented by the physical office
location, as well as the phone, email and internet connection used to bridge time zones
and distances.
o In the past, organizations were the product of, and created products for, their
local consumer markets. Today’s markets, as well as organizational operations
and labour pools, manifest themselves in all corners of the globe.
o E.g. An American sports apparel company might obtain its fabric from China,
design and market its clothing in the United States, manufacture the products in
Bangladesh and sell them through a chain of stores with locations worldwide.
Strategies
Nexus effect is groups working together to create new possibilities and achieve inspired
results beyond what they could individually achieve.
There are 6 types of practices that enable boundary spanning leadership: buffering,
reflecting, connecting, mobilising, weaving and transforming. Each successive pair of
practices constitutes one of 3 interrelated strategies:
Managing boundaries (buffering and reflecting)

• Buffering (shield groups to make them secure)
Group members cannot collaborate effectively across boundaries unless they first
feel protected within their own group. Thus the practice of buffering involves
shielding group members from threats or undue outside influences so that they can
develop and maintain a clear group identity. If boundaries become too weak or
disappear altogether, a group’s purpose will weaken or disappear as well.
E.g. For example, Lisa, a manager at a telecommunications company, was struggling

to lead a cross- functional team tasked with rolling out a new smart phone product
line. The team had not been making progress because its members were subject to

too many external and often competing demands. Finally, Lisa decided to pull the
team together, clarify its mission and determine each member’s area of
responsibility. Each person came to know what he or she should and should not be
doing. By thus buffering the team and strengthening its boundaries, Lisa facilitated
the accomplishment of the team’s mission.
• Reflecting (see both sides of a divide) 

This practice enables a group to see both sides of a boundary and allows other
groups to do likewise. Much as a mirror’s image is available for all to see, the
practice of reflecting involves informing one group about another. By illuminating
the differences and similarities between groups and helping each one understand
the identities of the other groups — through attending some of their meetings, say,
or reading postings on their Intranet site — reflecting involves sensitizing group
members to their counterparts’ values, priorities, expertise, roles and needs. With
this practice in place, groups can begin to see common ground in goals and
objectives, and the way is cleared for intergroup respect and collaboration.
Forging common ground (connecting and mobilising)

• Connecting (baby steps in neutral territory, forge relationship) 
This practice, which seeks to forge relationships by creating person-to-person
linkages, occurs when group members temporarily put aside their group identities
and step inside a neutral zone where people can interact with one another as
individuals. f such connecting is sustained over time and new relationships are built,
the boundaries that created rigid borders between groups become more porous and
intergroup trust may grow. With this practice in place, groups may create a shared
direction, develop common expectations and maintain a mutual confidence that
each group is committed to shared overall interests.
E.g. Take the “Googleplex” — Google’s headquarters in Mountain View, California.

Everything from the entry-level “town square” to the “village library” beckons
employees to leave their desks and mingle. For example, employees eat for free in
an open cafeteria, which also boasts a giant white board to capture ideas that may
emerge from casual lunchtime conversations.
• Mobilising (create common purpose and identity for the greater goal, redraw
boundaries)
This practice seeks to reframe boundaries and craft common purpose. It encourages
groups to transcend their smaller group identities and create a new and larger
identity that is shared by all. Mobilizing enables groups to look beyond the
differences that divide them into factions and to instead form coalitions for working
together productively. The result is intergroup community — a state of mutual
belonging and ownership that develops when boundaries are reconfigured and
collective action taken. When this practice is in place, groups may realize a
galvanizing higher purpose — share an inclusive identity, coordinate resources and
take collective action — even when outside forces try to pull them apart.
Difference between Connecting and Mobilising:

Mobilising is similar to connecting in that both practices enable the forging of
common ground. A distinction, however, is that whereas connecting is about
suspending the dividing lines between individual group members, mobilising redraws
the lines to include both groups.
E.g. When the Chinese computer company Lenovo purchased IBM’s global personal
computer operation in 2005, senior leaders moved quickly to craft a narrative of
Lenovo as a “new world company” that synthesizes the best of East and West. This
narrative transmits values to guide and instruct behaviour. In particular, it
encourages disparate groups to work together as members of a shared community.
Discovering new frontiers (weaving and transforming)

• Weaving (e.g. lightweight team and heavyweight team from finance, marketing etc.)
This practice occurs when group boundaries interlace yet remain distinct, much like
an accomplished weaver bringing together different threads to create larger
patterns. In an organization, each group has a unique role or contribution that is
integrated in the pursuit, say, of the next big product or service.
While weaving meets the need for differentiation by respecting varied experience
and expertise, it also meets the need for integration by forming new collaborations
across groups that utilize their differences to achieve a common purpose. The result
is intergroup interdependence — a state of mutual reliance and collective learning.
When this practice is in place, the groups involved not only enhance their own
effectiveness but also can co-create a single overall direction, work together to
realign collective resources as business requirements change and exploit diverse
perspectives to enhance the effectiveness of the larger organization.
• Transforming (reinventing groups)

o Hardest, usually triggered by certain events (falling market)
o Costly and time-consuming, not day-to-day basis
o Seldom used by organisations
o Only needed when its reactive (not proactive) because it is costly etc.
o May need substantial amount of change, sometimes their goals
This is about intergroup reinvention — the state of renewal that develops when
groups create new identities, and new possibilities, by reworking the boundaries be-
tween them. Essentially, transforming occurs when time and space are provided for
group members to open themselves to change.
Conclusion:
The 6 boundary spanning practices result in safety, respect, trust, community,

interdependence and reinvention — outcomes needed to create a Nexus Effect, when
groups achieve inspiring results together that far exceed what they could have achieved on
their own. When an organization becomes a place of mutual trust, interdependence and
collective action, new avenues for creativity and innovation can come into view.

Breakthroughs and inspiring applications may occur, and alternative futures can be realized.
And if enough boundary spanning leaders were to emerge in enough organisations, entire
economies could be energized.
Eventual aim:
WHY?
-to remove divides and move towards Nexus
The Nexus
... when groups achieve much more together that they could have done on their own.
- Not easy with all leadership challenges, silos happen because you are drawn by your
own KPI, task given, boundaries -> disaster
- Leader of GE trying to achieve it
Boundary-less Organisation
Seeks to remove vertical, horizontal and external barriers so that employees, managers,
customers and suppliers can work together, share ideas and identify the best course for the
organisation.

Week 6
Embedded analytics (a means to get to prescriptive analytics)

Prescriptive analytics (end result)
Analytics 3.0 (do not know how to do with it, volume of data is too intimidating)
Analytics
The field of business analytics was born in mid-1950’s, with the advent of tools that could
produce and capture a larger quantity of information and discern patterns in it far more
quickly than the unassisted human mind ever could.
3 Eras: 
Ø Analytics 1.0: The era of ‘business intelligence’ 
Ø Analytics 2.0: The era of big data 
Ø Analytics 3.0: The era of data-enriched offerings
Analytics 1.0 (internal data only, very reactive)

- Gain an objective, deep understanding of important business phenomena and give
managers the fact-based comprehension to go beyond intuition when making
decisions.
- E.g. data about production processes, sales, customer interactions etc.

- New computing technologies were key. Information system were at first custom-built
by large enterprises; later, they were commercialised by outside vendors in more-
generic forms (were generalized and sold to other organizations)
- Data sets were small and relatively static (not real time data, happened already) to be
segregated in warehouses for analysis
- A lot of time was spent in preparing for analysis but very little time on analysis itself
(little time spent on what they going to do about it because 3 months might have
passed after they are done) (by the time you can do anything, the new cycle comes up
again)
- The majority of business intelligence activity only addressed what had happened in the
past; they offered no explanation or predictions
Analytics 2.0
- Big data came to be distinguished from small data because it was not generated purely
by a firm’s internal transaction systems. It was externally sourced as well, coming from
the internet, sensors of various types, public data initiatives such as the human
genome project, and captures of audio and video recordings.
(Data generated by the firm + externally sources)
- Big data couldn’t be analysed fast enough in-house, companies turned to a new class
of databases known as NoSQL
- New methods were developed to analyse this data fast enough. Much information was
stored and analysed in public or private cloud-computing environments
- The competencies required for 2.0 were quite different from those needed for 1.0. The
next generation quantitative analysts were called Data Scientists, and they possess
both computational and analytical skills
Analytics 3.0 – the era of data-enriched offerings

- Internet of things
- Every transaction, interaction and consumer leaves a trail. To be able analyse those
sets of data for the benefit of the customer and for creating more valuable products
and services
- Information providers become insights providers
- Make decisions easier
- They observed that companies emit “information exhaust” that could be captured and
used to “turbocharge” their offerings.
- Any company, in any industry, that is willing to exploit the possibilities—can develop
valuable products and services from their aggregated data.
Google, Amazon, and others have prospered not by giving customers information but by
giving them shortcuts to decisions and actions.
Ten requirements for Analytics 3.0

1. Multiple types of data, often combined
Organisations will need to integrate large and small volumes of data from internal and
external sources and in structured and unstructured formats to yield new insights in
predictive and prescriptive models—ones that tell frontline workers how best to
perform their jobs.

2. New set of data management options 
In the 1.0 era, firms used data warehouses as the basis for analysis. In the 2.0 era, they
focused on Hadoop clusters and NoSQL databases. Today the technology answer is “all
of the above”: data warehouses, database and big data appliances, environments that
combine traditional data query approaches with Hadoop (these are sometimes called
Hadoop 2.0), vertical and graph databases, and more. Organisations will end up with a
hybrid data environment.
3. Faster technologies and methods of analysis
4. Embedded analytics (e.g. google: report crash, feeding into another loop, tracking,
cookies)
Consistent with the increased speed of data processing and analysis, models in Analytics
3.0 are often embedded into operational and decision processes, dramatically increasing
their speed and impact.
5. Data Discovery
To develop products and services on the basis of data, companies need a capable
discovery platform for data exploration along with the requisite skills and processes.
Data discovery environments make it possible to determine the essential features of a
data set without a lot of preparation.
6. Cross-disciplinary data teams 

In online firms and big data start-ups, data scientists are often able to run the whole
show (or at least to have a lot of independence). In larger and more conventional firms,
however, they must collaborate with a variety of other players to ensure that big data is
matched by big analytics. Companies now employ data hackers, who excel at extracting
and structuring information, to work with analysts, who excel at modeling it.
7. Chief Analytics Officers (sourcing the numbers and making sense out of it)
When analytics are this important, they need senior management over- sight.
Companies are beginning to create “chief analytics officer” roles to superintend the
building and use of analytical capabilities.
8. Prescriptive Analytics
There have always been three types of analytics: descriptive, which reports on the past;
predictive, which uses models based on past data to predict the future; and
prescriptive, which uses models to specify optimal behaviours and actions. Although
Analytics 3.0 includes all three types, it emphasizes the last. Prescriptive models involve
large-scale testing and optimisation and are a means of embedding analytics into key
processes and employee behaviours. They provide a high level of operational benefits
but require high-quality planning and execution in return.
9. Analytics on an industrial scale

For companies that use analytics mainly for internal decision processes, Analytics 3.0
provides an opportunity to scale those processes to industrial strength. Creating many
more models through machine learning can let an organization become much more
granular and precise in its predictions.

10. New ways of deciding and managing
Massive amounts of data can send confusing signals, organisations need to learn to
experiment with it and extract out useful warnings and learnings the information can
bring. Correlation vs Causation
In order for analytics to power the data economy in your company, you’ll need new
approaches to decision making and management. Many will give you greater certainty
before taking action. Managers need to become comfortable with data-driven
experimentation.
Data Analytics can also be classified...

- Descriptive: Understanding what happened in the past, looking at historic data
- Predictive: Provides actionable insights based on the data and the likely future
- Prescriptive: Not only foresees what will happen and when it will happen, but also why
it will happen and provides recommendations how to act upon it in order to take
advantage of the predictions.
Challenges of Big Data Analysis

- Figuring out what data to use, when to use and how to use
- Volumes of data we sit on only give correlation but do not give causation, and
sometimes they occur by chance, might look at the wrong correlation
- The use of prescriptive analytics often requires changes in the way frontline workers
are managed. Companies will gain unprecedented visibility into the employees’
activities. Workers will undoubtedly be sensitive to this monitoring. Just as analytics
that are intensely revealing of customer behaviour have a certain “creepiness” factor,
overly detailed reports of employee activity can cause discomfort. In the world of
Analytics 3.0, there are times we need to look away.
- Analytics itself: modeling 
- Transforming the data into actionable plans
- Do need to have a hypothesis
Understanding Organisations as Learning Systems

Learning orientations:
1. Knowledge Source
2. Product-process Focus
3. Documentation Mode
- On personal term
- As more objective, social terms as a general consensus due to information sharing
4. Dissemination Mode
- Formal and informal
5. Learning Focus
- Single-loop learning (building on what is already existing)
- Double-loop learning (creating and developing innovation, takes longer time and a lot
questions, sometimes go down to company’s value)

6. Value Chain Focus
7. Skill Development Focus
3 stages of learning
1. Acquiring knowledge
2. Sharing of knowledge
3. Utilizing of knowledge
It is cyclic, can happen in any order
Facilitating factors (expedite the learning)

1. Scanning imperative (Organisations need to know the environment)
2. Performance gap
3. Concern for measurement
4. Experimental mindset
5. Climate of openness
6. Continuous education
7. Operational variety
8. Multiple advocates
9. Involved leadership
10. System perspective
How do you become a learning organisation?

1. Focus on improving learning orientation
2. Focus on improving facilitating factors
3. Both
Learning can happen at four different levels

1. Individual learning 
2. Group learning (put together feedbacks)
3. Organisational learning
4. Inter-organisational learning (between 2 organisations, suppliers, stakeholders)
Organizational Learning
“The intentional practice of collecting information, reflecting on it, and sharing the findings,
to improve the performance of an organisation”
Organizational learning can include:

- Single and double loop learning
- Learning organisations
- Analytics
There are 3 learning-related factors important for success:
1. Well-developed core competencies that serve as launch points for new products and
services
2. An attitude supports continuous improvement in the business’s value-added chain
3. The ability to renew and revitalise, keep up with times

Important to have double-loop learning (generative, tackling underlying problem) vs single-
loop learning (corrective/adaptive, correcting what is wrong). Adaptive learning is used to
consolidate and refine generative learning.
Single Loop Learning

- Concept developed by Chris Argyris and Donald Schon
- Is the repeated attempt at the same problem with no variation of method and without
ever questioning the goal (E.g. Faith’s idea of breakfast is just restaurant, not the
banana, hence she is only going back to the process that you used to, with no
modification in hope that it can work)
- Process of altering the situation to meet your expectation without questioning:
avoiding the problem
- Have a target, then go faster, no changes
- E.g. Toyota: manufacturing quicker, cheaper, no inventory, status quo still continue,
have not done any modifications
Double Loop Learning

Double-loop learning is when an individual, organisation or entity is able, having attempted
to achieve the goal on different occasions, to modify the goal in the light of experience or
possibly even reject it
- Examining the perceptions of the situation

- Improvising, better way to go a same target
- E.g. Note 7, avoid making batteries, to make sure the same mistake doesn’t happen to
that company again
- E.g. Pokémon GO (variation they made in different countries, outside US, use this
technology to something else if cannot work)
- Triggered when certain failure or competition arise, if not normally using single-loop
What hinders double loop learning?

- Challenge the ‘status quo’ 
- In a manager’s day job, he/she is allowed very little time to think about bigger issues 
- Power and social equation dynamics
- Harder because it takes very long to realise and understand the situation
- Single-loop (habit) is harder to be changed as it is too comfortable with status quo
hence the reluctance to change
- Whistle blower: identify shortcoming of system and raise it up (seldom have such
people in company)
There is a trade-off, some use double loop, some use single loop as double loop is costly
Learning Organizations
Skilled at two things:
- Creating, acquiring, interpreting, transferring and retaining knowledge
- Acting, modifying its behaviour to respond to those new knowledge insights

How do organizations learn?
Three stages of learning
• Knowledge acquisition – the development or creation of skills, insights, relationships
• Knowledge sharing – the dissemination of what has been learned
• Knowledge utilization – the integration of learning so it is broadly available and can
be generalized to new situation (can be used by other departments, e.g. create
different ways to fit in to different customer profiles)
Organizational Learning
- All organizations are learning systems (learning takes place, just that in different forms)
- Learning conforms to culture 
- Style varies between learning systems (E.g. Pixar and J.P. Morgan styles are very
different)
- Generic Processes facilitate learning
Ø Learning Orientations:
Values and practices that reflect where learning takes place and the nature of what
is learned.
Ø Facilitating Factors:
Structure and processes that affect how easy or hard it is for learning to occur and
the amount of effective learning that takes place
Learning Orientation
• Knowledge source: Internal/ External: Preference for developing knowledge
internally v/s preference for acquiring knowledge developed externally; innovation
v/s imitation
• Product- Process Focus: What? - How? : Emphasis on accumulation of knowledge
about what products/ services are v/s how organization develops, makes and
delivers its products and services
• Documentation Mode: Personal-Public: Knowledge is something individuals possess
versus publicly available know-how (can even use voice recording, the point is to
voice out the knowledge, so that when someone leaves the company, the
knowledge stays)
• Dissemination Mode: Formal-Informal: Formal, prescribed, organization wide
methods of sharing learning versus informal methods, such as casual daily
interaction
• Learning Focus: Incremental- Transformative: Incremental or corrective learning
versus transformative or radical learning
• Value-Chain Focus: Design-Deliver: Emphasis on learning investment in engineering/
production activities (design and make functions) v/s sales/service activities (market
and deliver functions)
• Skill Development Focus: Individual-Group: Development of individuals’ skills versus
team or group skills
There are all continuum, not either or. Just a balancing act e.g. 50%-50% etc.
Learning Orientation (Cheat Sheet)

- Do you develop knowledge internally or acquire it?
- Are you product- or process-focused?
- Is knowledge held by individuals or publicly available?
- Do you have a formal knowledge system or is learning informal?
- Do you learn by evolution (incremental) or revolution (transformative)?
- Do you focus on design and make or market and deliver? Do you develop individuals or
groups?
Ten Facilitating Factors

1. Scanning Imperative 
2. Performance Gap (willing to acknowledge there is a gap and do sth about it)
3. Concern for measurement (what matrix are important for the company, what are the
important things I will reward for, sth valuable to a company might not be valuable to
the other
4. Experimental Mind set (focus on status quo or changes in processes or products)
5. Climate of Openness
6. Continuing Education
7. Operational Variety (allowing and rewarding ideas to come from different people)
8. Multiple Advocates (no time to document, no brownie points for documenting sth they
you have done, keep procrastinating, hence need advocates to ask people document
because it is institutional knowledge)
9. Involved Leadership
10. Systems Perspective
Enhancing Learning
- Improve learning orientation
- Improve facilitating factors
- Change both learning orientation and facilitating factors
Three guidelines for achieving desired results

- Before deciding to become something new, study and evaluate what you are now
- Look at multiple perspectives, undertake modest, focused and specific changes
- Understand cultural factors
Must be contextual to what you are doing
However, learning orientations limited by contingents like nature of

organisation/industry. Organisations trying to improve their ability to learn should take the
following into consideration,
1. Know capabilities and disabilities first 
2. Fit scale of change to learning curve of organisation
3. Fit learning orientations to prevalent national culture

Week 7
Recap
Organisational learning
- Single loop learning (no modification, keep doing the same thing)
- Double loop learning (modify, involve questioning mechanism)
3 stages
- Acquisition of knowledge
- Dissemination of knowledge
- Utilisation of knowledge
Learning orientation is on continuum
Analytics
- A means of learning
- Macro-decision, tell you correlation
- Limitations as a means of learning: large quantity, too much, might draw wrong
correlation since it is depending on algorithm
Strategic Thinking vs. Strategic Planning

• Minztberg (1994) (like studying literature must know Shakes Speares)
• Different stages in the strategy development process
Ø Strategic Thinking: synthesis, using intuition and creativity to create an integrated
perspective of the enterprise, divergent, creative (macro level from organisation
perspective)
Ø Strategic Planning: analysis and articulation, elaboration and formalisation of existing
strategies

The problem. Predictions are hard... (and often wrong)
Towards a solution... 
Create an options portfolio using...

Ø A holistic understanding of self and environment (who?)
Ø A strategic foresight capability (what are you creating those capabilities for?)
Ø An exploration of all possible futures (where those options come from?)
Ø A vision for the future path to take (why are you going to create?)
Understanding the Future

• Why do we need to plan?
• How do you plan the future of a firm?
Ø Single Forecast (cannot be single forecast anymore)
Ø Multiple Options
By making investment decisions on “single line” forecasts, a company risks becoming a

prisoner of its existing investments in capabilities and market understanding. Contrast this
with a company that has invested in experiments to understand potential new markets and
in seeding new capabilities. These investments, and the learning they produce, effectively
create a portfolio of strategic options on the future, a series of alternative “launching pads”
that the company can use to rapidly change its strategic direction in response to market
developments. A competitor that has aligned its investments with a single, and different,
trajectory will struggle to catch up in the race to reposition.
Options
In trading, options are a kind of insurance policy on future price developments. You pay a
small price now to be sure to cover unexpected price moves.
In corporate strategy, options give you possibilities if the future demands new behaviours.
Options are a kind of investment. They have a cost, but don’t give you immediate returns.
They just create possibilities. (must have multiple options, does not matter if you take all or
not)
Building a portfolio of future options involve 4 main steps:

1. Uncover the hidden constraints (Traders or Prisoners?) (Walmart and Daiso are
disruptive to Woolworth)

Two constraints faced by Woolworth
• Didn’t understand the customers they needed to attract to achieve a new, broader
strategy
• Didn’t have the capabilities to compete with rivals that were already established
The company had become a prisoner of its past. When they decided to respond to lost sales
caused by market changes, well-established Woolworth managers kept hitting the dual
constraints. They had not invested in real options soon enough to replace their dying profit
engine and were caught in a box.
Solution?
To avoid becoming a prisoner of hidden constraints, a company must build new capabilities
AND simultaneously expand its knowledge of new market segments and customer
behaviour. If the outcome of uncertain market developments falls within the range of that
portfolio of options, the company will then be able to exercise one or more relevant
options. Thus, the company will be able to outperform the competitors that have not made
these investments.
Capability constraints AND market knowledge constraints

• A well balanced expansion of the company’s knowledge about new, potential
markets or customer behaviours (Trader; restricted by capabilities)
The “trader” is a company with potentially valuable market information, but no capability to
use it to create value except by trading the information or using it to arbitrage a commodity.
Some companies are the opposite. They have created formidable capabilities but are
prisoners of their lack of knowledge. E.g. AT&T had capabilities in technology,
communications infrastructure, and experience in sales and customer service. As a result of
domestic regulation and government monopolies overseas, however, the potential of
AT&T’s capabilities was imprisoned by a lack of market experience outside the long-
distance, voice and data sector in the United States.
To develop new strategic options, therefore, 2 sets of processes are required:

(a) Processes that fundamentally expand the company’s capabilities and;
(b) Processes that expand the company’s knowledge of new markets and market
behaviour
It is not that companies should develop an infinite number of capabilities or exploit them
across every possible market. Such approaches would eventually drown in diseconomies of
complexity as the variety of activities increased. There is an optimal portfolio of options
that a company can create in order to strike the right balance between the cost of creating
and maintaining an option and the payoffs in the ability to reposition itself more rapidly
and at lower cost.
2. Establish processes for building new strategic options

• Minimize the cost of building and maintaining the portfolio of strategic options
• Cost-effective methods of expanding knowledge include leveraging customers’ and
suppliers’ knowledge and learning from “maverick” competitors and related
industries (E.g. take Uber’s model and put into retail sector)
• Build a company’s capabilities base through
Ø Problem solving 
Ø Experimentation 
Ø Importing knowledge (can be through collaboration etc.)
Ø Implementing and integrating new capabilities (stand alone or integrate into
company)
3. Optimizing the portfolio of strategic options

• How does the manager know if he or she has created the right portfolio of strategic
options for the future? Managers need to consider 2 factors:
Ø What alternative capabilities might profitably meet probable customers’ needs?
(E.g. digital or analog technology, localisation or individual customisation etc.)
Ø Which potential future markets or new customer behaviour does the company need
to know about?
• Various techniques exist to develop needed alternative capabilities and to understand
market environments or customer behaviour (such as scenario planning)
• Once a company lists alternative new capabilities and market environments and
behaviour, it can create a table of its main alternatives.
• Not all combinations of options are feasible
Three major considerations 

1. The costs of creating and maintaining the option
Ø has to be cheap, and weigh according to the value of it
2. The estimated probability that the company will exercise the options

Ø Not about whether you want to use it, just tap on it when you want, cannot have
the mindset that this is not my area or forte and will not get into it, must create
options that traditionally not meant to be
Ø E.g. Pepsi transforming from junk food industry to healthy food industry, 3M too
3. The probability that creating the option will itself spawn future options, even if it
remains unexercised
Ø When moving on, will create more options
Ø E.g. a company may value option 3 or option 8, not for its direct profit-making
potential, but because of its capacity to open future options
Ø McDonald’s customised burger, will be served to you (initially experimenting if it
were to go to fine dining, what will happen; but did not really work, now changed
to only premium product for fixed period of time)
The decision whether to include a particular option in a portfolio should be made by

comparing the estimated value of that option with the cost of creating the option, not with
the costs of exercising it.
4. Combining planning and opportunism

Bounded opportunism
One critical element is to
Ø Keep tactical opportunism within the bounds of the company’s overall direction and
Ø To rule out the options that would cause it to wander from its long- term mission
Strategic: long term

Tactical: short term
To make “bounded opportunism” work in practice, every manager should ask the following
question about each tactical opportunity: “Is it a week or a flower?” An unexpected
opportunity that diverts the company from pursuing its long-term mission is a “weed”.
Meanwhile, opportunities that allow it to take advantage of its options to accelerate
progress toward long-term goals are “flowers”.
LV caters to premium customers, luxury products, moving to lower-income market is not a

good move (weed)
Flower: leads you to a direction that is more lucrative, more in-line with company’s vision
Weed: Move away

(Cheat-sheet but over-simplified) How to build an options portfolio
Find what is currently missing (constraints)
• In corporate capabilities
• In knowledge of markets
Minimize the cost of option building (processes)
• R&D, market research, business intelligence, partnerships...

• Know what to learn
Stay within broad high-level trends (optimization)
• Compare costs of an option with its value
Wait for the future (planning + opportunism)
• When opportunity strikes, you are ready

• Bounded opportunism: not all opportunities are worth taking
**Need to have a portfolio of strategic options!
Scenario Planning
• Scenario planning is disciplined method for imagining possible futures that companies
have applied to a great range of issues
• Scenarios should describe generically different futures rather than variations on one
theme
• Gives multiple options of distinct features
• Attempts to capture the richness and range of possibilities, stimulating decision makers
to consider changes they would otherwise ignore
• Organises those possibilities into narratives that are easier to grasp and use than great
volumes of data
• Good scenarios challenge tunnel vision by instilling a deeper appreciation for the myriad
factors that shape the future
• Requires intellectual courage to reveal evidence that does not fit our current conceptual
maps, especially when it threatens our very existence
Different planning methods

Scenario planning differs from other planning methods, such as contingency planning,
sensitivity analysis and computer simulations.
Contingency planning examines only one uncertainty, such as “What if we don’t get the
patent?” It presents a base case and an exception or contingency. Scenarios explore the
joint impact of various uncertainties, which stand side by side as equals.
Sensitivity analysis examines the effect of a change in one variable, keeping all other
variables constant. Moving one variable at a time makes sense for small changes. However,

if the change is much larger, other variables will not stay constant. Scenarios change several
variables at a time, without keeping others constant. They try to capture the new states that
will develop after major shocks or deviations in key variables.
Scenarios are more than just the output of a complex simulation model. Instead they
attempt to interpret such output by identifying patterns and clusters among the millions of
possible outcomes a computer simulation might generate. They often include elements that
were not or cannot be formally modeled, such as new regulations, value shifts or
innovations. Hence, scenarios go beyond objective analyses to include subjective
interpretations.
Reasons for Scenario Planning
• Uncertainty is high relative to managers’ ability to predict or adjust 

• Too many costly surprises have occurred in the past 
• The company does not perceive or generate new opportunities 
• The quality of strategic thinking is low (i.e. too routinized or bureaucratic)
• The industry has experienced significant change or is about to
• The company wants a common language and framework, without stifling diversity
• There are strong differences of opinion, with multiple opinions having merit
• Competitors are using scenario planning
Scenario planning attempts to compensate for 2 common errors in decision making –

underprediction and overprediction of change. It helps expand the range of possibilities we
can see, while keeping us from drifting into unbridled science fiction. Scenario planning does
this by dividing our knowledge into 2 areas:
Ø Things we believe we know something about

Ø Elements we consider uncertain or unknowable
Nothing is ever absolutely certain but to leave everything uncertain will cause paralysis in
most organisations. The challenge is to separate aspects you are very confident about from
those that are largely uncertain.
Since scenarios depict possible futures but not specific strategies to deal with them, it
makes sense to invite outsiders into the process, such as major customers, key suppliers,
regulators, consultants and academics. Or you can start with trends and scenarios that
others have developed. The objective is to see future broadly in terms of fundamental
trends and uncertainties. The overall purpose is to build a shared framework for strategic
thinking that encourages diversity and sharper perceptions about external changes and
opportunities.
• Scenarios are imagined futures – NOT predictions! (may or likely to happen)

• It helps avoiding the errors of under and/or over prediction

Process for developing scenarios:
1. Define the scope

- Set the time frame and scope of analysis
2. Identify the major stakeholders

- Obvious stakeholders include customers, suppliers, competitors, employees,
shareholders, government and so forth. Identify their current roles, interests and
power positions and ask how they have changed over time and why.
3. Identify basic trends

- What political, economic, societal, technological, legal and industry trends are
sure to affect the issues you identified in step one? Briefly explain each trend,
including how and why it exerts its influence on your organisation. Everyone
participating in the process must agree that these trends will continue; any trend
on which there is disagreement belongs in the next step.
4. Identify key uncertainties

- What events, whose outcomes are uncertain, will significantly affect the issue
you are concerned with? For each uncertainty, determine possible outcomes.
Keep these outcomes simple, with a few possibilities at most. Identify
relationships among these uncertainties, since not all combinations may occur.
5. Construct initial scenario themes

- Once you identify trends and uncertainties, next is to identify extreme worlds by
putting all positive elements in one and all negatives in another. (Positive and
negative is defined here relative to the current strategy. What seems to be a
negative scenario at first may later prove to be one of innovation and hidden
opportunity.) Another method is to select the top 2 uncertainties and cross
them.
6. Check for consistency and plausibility

- There are 3 tests of internal consistency, dealing with the trends, the outcome
combinations and the reactions of major stakeholders.
7. Develop learning scenarios

- Identify themes that are strategically relevant and then organise the possible
outcomes and trends around them. This should help you find your blind spot.
8. Identify research needs

- Need to do further research to flesh out your understanding of uncertainties and
trends.
9. Develop quantitative models

- Re-examine the internal consistencies of the scenarios and assess whether
certain interactions should be formalised via a quantitative model. As managers
imagine different outcomes of key uncertainties, they can use formal models to

keep from straying into implausible scenarios. The models can also help to
quantify the consequences of various scenarios, say, in terms of price behaviour,
growth rates and market shares.
10. Evolve toward decision scenarios

- Retrace step 1 through 8 to see if the learning scenarios address the real issues
facing your company. Are these the scenarios that you want to give others in the
organisation to spur their creativity or help them appreciate better the up-and-
downside risks in various strategies? If yes, you’re done. If not, repeat the steps
and refocus on your scenarios.
How you determine if your final scenarios are good?

The first criterion is relevance. To have impact your scenarios should connect directly with
the mental maps and concerns of the users. Second, the scenarios should be internally
consistent to be effective. Third, they should be archetypal. That is, they should describe
generally different futures rather than variations on one theme. Fourth, each scenario
should ideally describe an equilibrium or a state in which the system might exist for some
length of time, as opposed to being highly transient.
In short, the scenarios should cover a wide range of possibilities and highlight competing
perspectives, while focusing on interlinkages and the internal logic within each future.
Scenario Planning Stages
Stage 1: Orientation
Stage 2: Exploration
Stage 3: Scenarios and Narrative Creation
Stage 4: Options Consideration (start talking about the company only here)
Stage 5: Integration of scenarios into current management processes
Practical scenario planning
Start with external drivers, untangle the external issues into underlying trends and
uncertainties and repackage them into broad-ranging and fundamentally different
scenarios.
• Intuitively – Once all pieces all laid out, find major themes and storylines around which
to organise all the elements
• Heuristically – Select 2 most important uncertainties and place them in a matrix to get
some starting points for the scenarios, and then layer in other elements. (pick the most
strategical one, highest probability etc.)
• Statistically – Systematically combine the outcomes of all the key uncertainties into
internally consistent strings to provide feasible boundaries and build likely scenarios

Do scenarios work?
• Experimentally, scenarios widen the range of confidence of predictions

• Biases persist (people remain either over- or under- confident in trends they already
believed in before they built scenarios, people sometimes also presume correlations
among the uncertainties that are inconsistent.)
• But the vision of the future broadens.
Conjunction fallacy: people often deem the conjunction of 2 events to be more likely than
the occurrence of either of these events alone. Conjunction fallacy can increase the
perceived plausibility of unlikely scenarios, especially if they offer concrete detail and are
causally coherent.
When we contemplating the future, it is useful to consider 3 classes of knowledge:
1. Things we know we know.

2. Things we know we don’t know.
3. Things we don’t know we don’t know.
Discussion question:
A fast food pizza company has entered a country, where the variety of local food is
immense, and is also the preferred choice. So far the uptake of the fast food company’s
products has been limited. In similar countries where it has entered its primary focus has
been the youth and significant menu adaptation. The company is a little puzzled about why
its product is not making much head way and its senior management team has gathered to
evaluate their plan for the country.
Scope:
- Increase market share

- Find a market
- Stakeholders: customers, suppliers, competitors, shareholder, government, health
NGOs
First step: identify problems (Uncertainties)

Consumers’ taste and preferences
Business models/ practices (how they different from the country)
Disposable income (customer purchasing power)
Rules and regulations in the new country they are in
Demographics
Brand awareness
Public expectations
Consumption patterns (online, store, timing etc)
Technology
Next step: lump similar ones together

e.g.:
Consumption patterns + consumers’ preference

Business practices + Rules and regulations
Brand awareness + Public expectation
Demographics + Disposable income
Technology – stand alone
-> make a cluster of uncertainties
Next step: Pick 2 most critical uncertainties
1. Consumption patterns + consumers’ preference

2. Disposable income + demographics
[Brand awareness + Public expectation (cannot because cannot talk about company at this
stage)]
High
Premium pizza
Local taste Wide variety of pizza
Adaptation Premium pricing
International cuisine
Local food
Bite-sized pizza
? Standard menu
Mass produce
Low
Choose box 1, since they prefer local food
Week 9
RECAP
Disadvantages of scenario planning:
-biasness (look for things that are likely to happen)
-over-invest, forgot options available
Understanding the Future

- Why executives should care about management theory
- Integrative Thinking
Best practices: certain practices that a company does and become a conventional practice
Should you care about management theory?

- Do managers care about management theories? Why or why not?
Subconsciously using but did not aware
Might be too busy to use it

Circumstance-contingent theory
- Any examples of management theory you know?

Ø Theory X and Theory Y
It is influenced by beliefs about worker attitudes.
Managers who believe workers naturally lack ambition and need incentives to
increase productivity lean toward the Theory X management style. Theory Y believes
that workers are naturally driven and take responsibility. While managers who
believe in Theory X values often use an authoritarian style of leadership, Theory Y
leaders encourage participation from workers.
Why do managers need a theory?

- A theory is a statement predicting which actions will lead to what results and why
(Theory gives you a ground work (skeleton) how things are going to move around, gives
easier predictability)
- Why managers care about theory

Ø Sound theories help us interpret the present, to understand what is happening
and why? 
Ø They help us make predictions
- Theory plays a central role in managerial decision making
Ø However, must be cautious (one size doesn’t fit all)
Imagine this situation. A patient goes to a doctor because he is not feeling well. Before he
has a chance to describe his symptoms, the doctor says: “Take 2 of these 3 times a day and
call me next week.” The patient then wonders how does the doctor know this will help him
when he hasn’t told him what is wrong with him. The doctor then says that “Why wouldn’t
it? Since it worked for my last 2 patients.” Sound ridiculous isn’t it? But this exactly the
problem that most managers face today.
Most managers perceive that theories that work well for other companies might not be
good for another. There are no one-size-fits-all theories. They might work for some
companies but not all. We need to consider the specific individual circumstances before
applying them.
E.g. A case in point will be Lucent Technologies, which is a telecommunications equipment

provider. In the late 1990s, the company’s senior executives follow the belief which was
very much in fashion; decentralisation and autonomy appeared to have helped other
companies. Surely what was good for them would be good for Lucent. However, it turned
out that it wasn’t. Lucent became slower and less flexible in responding to its customers;
needs and it added a whole new layer of costs. How could this happen? This is because
Lucent was using a theory that was not appropriate to their circumstance since their system
is fundamentally different from those other companies.
Where does theory comes from? Stages of constructing a solid theory

1. Observation and Description of the phenomenon
2. Classifying aspects of the phenomenon into categories
3. Formulation of hypothesis of what causes the phenomenon to happen and why: The
theory (Have been disproved -> value add -> knows where doesn’t work -> cycle back ->
improve)
The construction of a solid theory proceeds in 3 stages.

It begins with a description and observation of a phenomenon we wish to understand. The
phenomenon must be carefully observed and described in its breadth and complexity. Next,
the second step will be to classify the phenomenon into categories to allow researchers to
organise complex and confusing phenomena in ways that highlight their most meaningful
differences. It is then possible to tackle stage three, which is to formulate a hypothesis of
what causes the phenomenon to happen and why. And that is a theory.
An iterative process: researchers use theory to predict what they will see when they
observe further examples of the phenomenon in the various categories, if the theory
accurately predicts what they are observing, they can use it with increasing confidence,
theory gets confirmed, if not, which is defined as anomaly that suggests something else is
going on, they must cycle back to the categorization stage and add or eliminate categories
(Start with hypothesis, observe it, certain stage confirms its success or failure, build on
failure)
E.g. Countries rich in natural resources (from articles); countries augmented the theories
and used it, companies created clusters
Where does theory comes from?

An iterative process with 3 important aspects
1. The importance of explaining what causes an outcome (instead of just describing
attributes empirically associated with that outcome)
2. The process of categorization that enables theorists to move from tentative
understanding to reliable predictions
3. The importance of studying failures to building good theory (failure is essential to
make it a more robust theory, able to explain why in certain circumstances it cannot
work because of what etc.)
It was long thought that countries with cheap, abundant resources would have an
advantage competing in industries in which such resources are used as important inputs of
production. This theory prevailed until Michael Porter saw anomalies the theory could not
account for. Japan, with no iron ore and little coal, became a successful steel producer. His
insights did not mean that prior notions of advantages based on low-cost resources were
wrong, merely that they didn't adequately predict the outcome in every situation. The
competitive advantage that certain industries in Japan have achieved can be explained only
in terms of industry clusters. Porter's refined theory suggests that in one set of
circumstances, where some otherwise scarce and valuable resource is relatively abundant, a

country can and should exploit this advantage and so prosper. In another set of
circumstances, where such resources are not available, policy makers can encourage the
development of clusters to build process-based competitive advantages.
Good theories are circumstance contingent, showing how the causal mechanism will
produce different outcomes in different situations. Circumstances fall back to resource-
process-values approach, know what you are and what you are not, do not apply theories
that will destroy your capabilities.
Pinpointing Causation
The correlations of attributes and outcomes do not lead to causality
Yield in 10-year Greek government bonds VS number of active FB users (correlation)
Theories that don’t give causality are not theories, they are mere facts.
Don’t data mine, don’t dive into a company or industry, need to have multiple and
diversified perspectives from research. Those get validated will improve it and failure makes
u study again and be improved again. Both value add.
An understanding of fundamental causality generally come from highly detailed field

research NOT data mining
Moving towards predictability

Theory needs to make predictions
• To be useful at all
• To allow to test and sometimes falsify the theory (observe where it fails)
• To be able to improve from failures
To show how the causal mechanism will produce different outcomes in different situations
– circumstance contingent
Ø Good theory defines not just what causes what and why, but also how the causal
mechanism will produce different outcomes in different situations –
circumstance contingent
Ø This defines the critical question that will lead to the predictability stage of the
theory- building cycle: Under what circumstances will it work? When will it stop
working and call upon another way of working?
Ø Circumstance-contingent theories enable managers to understand what it is
about their present situation that has enabled their strategies and tactics to
succeed. And they help managers recognize when important circumstances in
their competitive environment are shifting so they can begin “piloting their plane”
differently to sustain their success in the new circumstance.
Ø Theories have advanced to this stage can help make success not only possible and
predictable but sustainable. The work of building ever-better theory is never
finished

The Importance of failure
The question, “when doesn’t it work?” is a magical key that enables statements of causality
to be expressed in circumstance-contingent ways.
Other Questions on similar lines:
• Does this apply to my industry?
• Does it apply to service businesses as well as product businesses?
***To know unambiguously what circumstance they are in, managers need also to know
what circumstance they are not in
No single prescription cures all ills
Becoming a discerning consumer of Theory

• Avoid descriptive researches: Phenomenon description is a good starting point (Is that
theory only a description or facts?)
• Beware of one-size-fits-all prescriptions
• Beware of revolutionary changes recommendations
• Classification of a phenomenon on its attributes is a step towards the theory (must have
causal links)
• Look for causation not correlation: Correlations that masquerade as causation often
take the form of adjectives... ‘humble CEO... Venture capital funding leads to success...’
A real theory should include a mechanism – a description of how something works
Theory Making!! (cheat sheet)

Science builds models of the real world. It proceeds by:
Ø Making observations
Ø Inferring an idea (“hypothesis”) about how these observations may be linked
(“explained”) in a model
Ø Making predictions using the hypothesis: what would happen if...?
Ø Testing the hypothesis with further observation or experiment
o If the observation does not contradict the hypothesis, we say it has been
corroborated (NOT “proven”!!)
o If the observation contradicts the hypothesis repeatedly, we say it has been
falsified (needs to be modified or discarded)
Ø A theory is a string of consistent statements describing a complete model
Integrative Thinking (It is not what they do, it is how they think)
• The ability to hold two opposing ideas in mind and creatively resolve the tension
between those two ideas by generating a new one that contains elements of the others
but is superior to both
• 4 Stages of Decision Making

“One decision should open more doors for you instead of shutting down.”
“Integrative thinkers don’t mind messy problems. In fact, they welcome complexity because
that’s where the best answers come from.”
Integrative Thinking
• Generates options and new solutions 
• Creates a sense of limitless possibility 
• Welcome the challenge of shaping the world for the better
• The more you exercise it, the more innate it becomes
**Can only achieve resolution if you identify the salient points appropriately (understand
everything well)
There are situations where you only need conventional thinking, do not complicate life.

Week 10
In the past, executives had the luxury of assuming that business models were more or less
immortal. Companies always had to work to get better, but seldom had to get different –
not in their core, not in their essence. Today, getting different is the imperative. Continued
success no longer hinges on momentum. Rather, it rides on resilience – on the ability to
dynamically reinvent business models and strategies as circumstances change.
To be resilient, need to be agile and nimble. Need to know when to move etc. in order to
achieve resilience.
What is resilience? 
- The ability of a substance or object to spring back into shape; elasticity
- The capacity to recover quickly from difficulties; toughness
Glossary for turbulent times:

Revolution – Whether newcomer or old timer, a company needs an unconventional
strategy to produce unconventional financial returns. Industry revolution is creative
destruction. It is innovation with respect to industry rules.
Renewal – Newcomers have one important advantage over incumbents – a clean state. To
reinvent its industry, an incumbent must first reinvent itself. Strategic renewal is creative
reconstruction. It requires innovation with respect to one’s traditional business model.
Resilience – refers to a capacity for continuous reconstruction. It requires innovation with

respect to those organisational values, processes, and behaviours that systematically favour
perpetuation over innovation.
Strategic resilience/Organisational resilience is not about responding to a onetime crisis.

It’s not about rebounding from a setback. It’s about continuously anticipating and adjusting
to deep, secular trend that can permanently impair the earning power of a core business.
It’s about having the capacity to change before the case for change becomes desperately
obvious.
Organisations are now more than ever in need of resilience!
Zero Trauma
Trauma: a shock. 
Turnaround: the recovery from the shock, it is transformation tragically delayed
The turnaround was necessary because of previous failures to adapt
Companies must begin with an aspiration: zero trauma

The goal is a strategy that is forever morphing to meet emerging opportunities and trends
The goal is an organization that is constantly making its future rather than defending its past
In truly resilient organisation, there is plenty of excitement but there is no trauma.

Four challenges to resilience
1. The cognitive challenge
- Companies often deny or are not willing to consider how those changes are likely to
affect its current business
- Companies must become entirely free of denial, nostalgia and arrogance. It must
deeply conscious of what’s changing and perpetually willing to consider how those
changes are likely to affect its current success.
2. The strategic challenge

- Resilience requires alternatives as well as awareness – the ability to create a plethora
of new options as compelling alternatives to dying strategies
3. The political challenge

- Companies often fail to divert resources (both financial and human capital) from
yesterday’s products and programs to tomorrow’s
- It means building an ability to support a broad portfolio of breakout experiments with
the necessary capital and talent
4. The ideological challenge

- Few companies question the doctrine of optimization
1. Conquering Denial
- Denial puts the work of renewal on hold
- Organizations must reduce the time it takes to go from “that can’t be true” to “we
must face the world as it is”
- Make a habit of visiting the places where change happens
- Filter out the filterers (identify people of value in recognising changes) + periodically
review the proposals that never made it to the top (often it’s what doesn’t get
sponsored that turns out to be most in tune with what’s changing, even though the
proposals may be out of tune with prevailing orthodoxies)
- Accept the inevitability of strategy decay
o No strategy works forever, 4 reasons
o Over time, they get replicated, lose their distinctiveness and their power to
produce above-average returns
o Good strategies also get supplanted by better strategies
o Strategies get exhausted as markets become saturated, customers get bored or
optimisation programs reach the point of diminishing returns
o Strategies get eviscerated (deprive of vital or essential parts)
An honest and accurate review of strategy decay is a powerful antidote to denial
Honest review of Strategy

Ø Replication: Is our strategy losing its distinctiveness
Ø Supplantation: Is our strategy in danger of being suspended?
Ø Exhaustion: Is our strategy reaching the point of exhaustion?
Ø Evisceration: Is increasing customer power eviscerating our margins

E.g. Motorola was startled by Nokia's quick sprint to global leadership in the mobile phone
business; executives at the Gap probably received a jolt when, in early 2001, their
company's growth engine suddenly went into reverse; and CNN's management team was
undoubtedly surprised by the Fox News Channel's rapid climb up the ratings ladder.
But they should have been able to see the future's broad outline - to anticipate the point at
which a growth curve suddenly flattens out or a business model runs out of steam. The fact
that serious performance shortfalls so often come as a surprise suggests that executives
frequently take refuge in denial.
2. Valuing Variety
Resilience depends on Variety
- If the range of strategic alternatives your company is exploring is significantly
narrower than the breadth of change in the environment, your business is going to be
a victim of turbulence
- The importance of broad-based, small-scale strategic experimentation, can never be
over-emphasized
- The funnel-shaped process of moving projects from idea to successful product
determines that only with variety companies are more likely to create alternatives to
dying strategies
E.g. Big companies are used to making big bets – Disney’s theme park outside Paris,
Motorola’s satellite-phone venture Iridium, HP’s acquisition of Compaq, and GM’s gamble
on hydrogen-powered cars are but a few examples. Sometimes these bets pay off; often
they don’t. When audacious strategies fail, companies often react by imposing draconian
cost-cutting measures (no learning values). But neither profligacy nor privation leads to
resilience. They should steer clear of grand, imperial strategies and devote themselves
instead to launching a swarm of low-risk experiments.
3. Liberating Resources
- Free up the resources to support a broad array of strategy experiments within its core
business
- Resource reallocation process 
- Institutions falter when they invest too much in “what is” and too little in “what could
be”. There are many ways companies overinvest in the status quo: they devote too
much marketing energy to existing customer segments while ignoring new ones; they
pour too much money into incremental product enhancements while underfunding
breakthrough projects
- Why do managers typically resist reallocating resources to new initiative?
o Their power tends to correlate directly with the resources they control: to lose
resources is to lose stature and influences
o Reward system is designed in a way that solely depend on the performance of
their own unit or program
- Avoid overinvesting in the status quo
- Avoid reallocation rigidity
- Minimize the propensity to overfund legacy strategies
- To be resilient, need to design the allocation process in a way that promote free flow
of both capital and talent to support new initiatives
Solutions
1. Minimise overfunding of legacy strategies
2. Pushing the idea
- Bring it to the boss
3. Corporate crowdfunding
- Access to many angel investors inside and/or outside of the company
- Resulting profits should be turned into dividends
4. Embracing Paradox
- Break away from solely emphasize on operational optimization: Do more, better,
faster and cheaper!
- An accelerating pace of change demands an accelerating pace of strategic evolution
- Companies should care more about resilience
- Embrace the inherent paradox between the relentless pursuit of efficiency and the
restless exploration of new strategic options
Key to success lies in:

- Sensing the environment 
- Generating options 
- Realigning resources faster than its rivals
Discussion
- Why do firms fail?
o Change happens externally
o Internally they don’t accept it because of commitments
- What can firms do to avoid failure?

Agile absorption
- So far everything seems to point to one word: flexibility, Speed,
But how?
- One solution seems to be agile absorption
- The combination of agility and absorption
Companies can employ agility to spot and exploit changes in the market. Alternatively, they
can rely on their powers of absorption to withstand market shifts. Some, however, combine
both approaches and display “agile absorption” – the ability to consistently identify and
seize opportunities while retaining the structural characteristics to weather changes. In
unstable times, cultivating and using both capabilities in combination can help companies
not only survive but emerge as true market leaders.
Three ways to be agile

1. Operational Agility
It is a company’s capacity, within a focused business model, consistently identify and seize
opportunities more quickly than rivals to improve operations and processes. The crucial
factors here are speed and execution. It is about the ability to move from insight to action.
The importance is to be faster and execute it better than rivals.
E.g. The case of Companhia Cervejaria Brahma. In less than two decades, the company rose
from the struggling number-two brewer in Brazil to drive the creation of the world’s largest
brewer, by merging first with its domestic rival, Antarctica Paulista, then with Belgium’s
Interbrew, and finally with Anheuser-Busch.
2. Portfolio Agility
It is the ability to quickly and effectively shift resources, including cash, talent and
opportunities. It requires disciplined processes of evaluating individual units and
reallocating key resources. Diversification is not enough, also need versatile managers with
high adaptability and central control over key resources.
Portfolio agility also demands that leaders make difficult and often unpopular choices.
E.g. The late Reginald H. Jones, Jack Welch’s predecessor at GE was willing, for instance, to
invest heavily in GE Capital, although he did not always see eye-to-eye with the leadership
of that business. But he fired the head of Kidder, even though that executive was an old
friend.
3. Strategic Agility: identify and seize game-changing opportunities when they arise
Business opportunities are not distributed evenly over time. Firms typically face a steady
flow of small opportunities, intermittent midsize ones, and periodic golden opportunities to
create significant value quickly. The ability to spot and decisively seize the last kind of
opportunity, the game changers, is the essence of strategic agility. The agility to make a big
bet quickly does not guarantee that the gamble will pay off – recall AT&T’s cable
acquisitions. However, companies that avoid big bets altogether risk falling behind more
aggressive competitors.

Absorption
Boxers like George Foreman rely on absorption – compensating for their lack of “bob-and-
weave” dexterity with the size, physical strength, and toughness to withstand nearly any
punishment opponents can mete out. Foreman could weather his opponent’s blows, round
after round, patiently waiting for his adversary to run out of steam or make a mistake – and
that’s when he’d let loose the knockout punch.
In a business context, firms can build absorption in several ways. The obvious levers include
size, diversification, and a war chest of cash. Other factors (high customer switching costs,
low fixed costs, and a powerful patron) can also buffer a firm against environmental
changes.
E.g. Emirates had structural strengths other airlines lacked. To begin with, it was owned by
the government of Dubai, which is ruled by the Al-Maktoum family, so it was free to make
bets that might pay o in years, not quarters. The air- line also had diversified its profitability
across regions and cargo, which le it less susceptible to a drop-o in travel; possessed a large
war chest; and maintained low fixed costs – which put it in a good position to ride out tough
times.

Some sources of absorption tend to kill agility while other allow a firm to weather a wide
range of threats without necessarily impeding its ability to seize opportunities
Agile Absorption
Strike the right balance! (depending on timing and type of industry company working in)
Managers should similarly view agility and absorption as complements, with the balance
shifting as circumstances change. Getting the mix right, instead of relying heavily on one or
the other, increases the effectiveness of these two approaches during volatile times.
• Managers should examine sources of absorption carefully to keep good fats and
trim bad fats. Executives should recognize that sources of absorption vary in terms
of their effect on agility. Absorption is a store of energy for hard times – much like
fat on the human body. And like dietary fats, some sources of absorption are more
healthful than others. Low fixed costs, for example, are an outstanding source of
absorption. They allow a firm to weather a wide range of threats without necessarily
impeding its ability to seize golden opportunities.

• Managers should actively manage trade-off between agility and absorption. These
units can move quickly, increase transparency and therefore accountability for
performance, and foster a sense of ownership among managers and employees. The
great attraction of this approach is that it offers the potential to combine all three
types of agility with high levels of absorption. However, it potentially carries high
costs as well
• Managers should maintain a culture of agility

- Organizations tend to lose culture of agility as they grow their absorptive capacity
- Need to maintain a strict focus on the handful of values they deem critical to agility
- The right balance varies from industry to industry
During the start-up phase, firms generally are agile but incredibly short on absorptive
capabilities. Their small size and lack of legacy allow these firms to turn on a dime, but they
can also find themselves at a disadvantage to heavyweight incumbents. As firms enter
corporate adolescence, they maintain some agility but also accumulate absorption as they
launch new products, expand geographically, bolster brand value, or firm up customer
relationships. Over time, absorption stabilizes while agility deteriorates.
Absorption will erode agility over time due to the induced complexity
Reasons:
Internal
- Bureaucracy
- Silos (Doesn’t want to share information etc.)
External
- High switching costs
- Complacency
Worse, a company’s absorptive strengths can erode the culture of agility that once
enlivened it as a start-up: Size often engenders bureaucracy and silos. Switching costs give
incumbents a false feeling of invulnerability, which can lead to high-handed arrogance in
dealing with customers and competitors. A protected core market can lull firms into
complacency. The biggest threat facing absorption heavyweights such as General Motors,
Coca-Cola, Microsoft, Royal Dutch Shell, and Sony is the slow erosion of their once vibrant
cultures, rather than threats from new technologies, competitors, or regulators.
How to maintain agility?

- Maintain a strict focus on the handful of values
- Minimised the role of hierarchy
- Transparency
- Attract and retain employees who share the same values

Week 11
Competing on the Edge
- What kind of strategy is competing on the edge?
- What is so special and different about this strategy?
- What are the assumptions about the competing environment for such a strategy?
Key Assumption:
The environment is rapidly and unpredictably changing; therefore, the central strategic
challenge is managing change.
Need to have semi-coherent strategy (see the presentation slides)

Central strategic challenge: change
Strategy is how to get to where an organisation wants to go (organisational aim). Competing

on the edge creates relentless flow of competitive advantages, taken together, form a semi-
coherent direction. Change/Uncertainty is complicated making it hard to plan effectively but
managers also cannot wait and see, or it would be too late.
Traditional strategy is about building long-term defensible positions or sustainable

competitive advantages. In contrast, a competing on the edge strategy is fundamentally
fleeting, complicated, and unpredictable. It recognizes that successful strategy today may
not work well tomorrow.
Characteristics of competing on edge: Where do you want to go?

- Unpredictable (prepared to handle surprises, embrace uncertainty and ambiguity,
experiments have unpredictable results)
- Inefficient (failure is commonplace, study failure)
- Proactive (Taking initiative on your own, make the change in the industry, first-
mover)
- Continuous (perpetually on-going, continuous effort to renew and revamp your
operation)
- Diverse (allow for diversity, diverse portfolio of experiments)
ð Semi coherent strategy
How do you get there?

- Edge of chaos
o Structure 
o chaos
- Edge of time
o Past (focus on the present, learn from the mistake in the past, keep an eye on
the future)
o future (create a lot what if scenario but nothing is executed, too much
paranoia leads to inaction)
- Time pacing
o Transitions (week 3)
o Rhythm (the pace for the company to keep align)

E.g. Apple creates the change: came in and lead the market because they have some
innovations in place
E.g. Samsung anticipates change
E.g. Nokia is just reactive
Competing on the Edge

- The marketplace is in constant flux
- The assumption of static equilibrium no longer applies
- Competitors come and go, markets emerge, close, shrink, split, collide and grow
- Today’s collaborators are tomorrow’s competitors
- Technology is constantly shifting, getting to the market early matters
- The marketplace is a continuously deforming landscape which is continuously
reshaped by fast change
- Firms are composed of numerous parts or agents, or businesses

- When these parts are linked together at the edge of chaos and time, they form
complex adaptive systems
- These systems are complex not because they are complicated. They are actually
quite simple.
- Rather, “complex” describe the interdependent, innovative and self-organized
behaviour that emerges from them
- They are adaptive because they can change effectively
Complex Adaptive Systems

Many diverse interacting agents in a dynamical system
No central control
Interactions generate changes: adaptation
Larger structures emerge by themselves = self-organisation

Behaviour of such systems cannot be fully predicted. They constantly create novelty and
adapt.
Examples: life, evolution, the economy
Traps from Competing on Edge

Chaos trap, with a lack of formal structure, increases personal complexity for employees.
Bureaucratic trap, overly structured and low adaptability for fast- moving companies.
Star trap, corporate politics that do not allow dissemination of knowledge as everyone tries
to compete with each other and the biggest earner does not share knowledge.
Obsession with speed of rhythm, neglecting external rhythms and whether internal
capabilities can support the rhythm.
The “laws” of competing on the edge

Rule 1: Advantage is temporary 
Rule 2: Strategy is diverse, emergent, and complicated 
Rule 3: Reinvention is the goal 
Rule 4: Live in the present 
Rule 5: Stretch out the past 
Rule 6: Reach into the future 
Rule 7: Time pace change 
Rule 8: Grow the strategy
Rule 9: Drive strategy from the business level 
Rule 10: Re-patch businesses to markets and articulate the whole
Lesson: In summary
- Advantage is temporary 
- Strategy is emergent and multi-faceted
- Consider past, present and future 
- Time pace 
- Strategy is a living thing. Let it grow by itself.
Some Questions!
- What are the two innovations at P&G? What problems were solved by the two
innovations?
- Why P&G hesitated to launch the two products?
- What was P&G’s experience with Citrus Hill in the 1980s?
- What are the two options faced by P&G? Why P&G is not happy with either options?
- What was the solution that P&G came up with? 
- What steps from integrative thinking are used to create the solution? 
- Implications?

VUCA Exam Scope
2 hours, online exam

23 Nov 2016, 1-3pm
No papers would be allowed
Rough sheets would be provided
Save as your progress (don’t press save all)
Essential readings
slides
application and understanding of concepts and knowledge
Kind of questions:
⁃ MCQ (10)
⁃ Fill in the blanks (20)
⁃ Short Answers (6-7)
⁃ Application-based questions (3)
Define a mega trend? (any one e.g. demographic - explain)

Define VUCA
⁃ overcome problems which depict the above
Understanding of adaptability
⁃ why is it important
⁃ how do you achieve it (4 capabilities)
Understanding what is time pacing
⁃ distinguish with event pacing
⁃ understanding of rhythm and transitions
What is disruption? Where does it stem from? Differentiate between sustaining and
disruptive innovation?
⁃ why do organisation fail to respond to disruption
What are organisational boundaries?
⁃ factors that help u make boundary decisions
⁃ what kinds of boundaries exist
⁃ what kind of strategies can organisations follow
What is organisational learning?
⁃ stages and types
⁃ Learning orientation and facilitating factor (MCQ/ Fill in the blank, each point means
what)
⁃ analytics 1.0,2.0,3.0 (is there a link between 1.0 and 2.0? how they go together?
(learning and analytics go hand in hand,3 stages of learning, various transitions that
analytics have gone through, 3.0 is more prescriptive)
What are Options and Scenarios?
⁃ process of option generation
⁃ process of scenario creation (don’t have to create entire thing)
Management theory
⁃ process of theory development

⁃ 3 traits of good theory
Integrative thinking
⁃ steps of integrative thinking
Define Resilience
⁃ 4 challenges organisations face in order to be resilient
⁃ solutions
What is agile absorption?
⁃ 3 ways for organisations to be agile?
⁃ How can organisation enhance absorption? (at least 5)
⁃ how to strike a balance between agility and absorption
What kind of strategy is Competing on the Edge?
⁃ components of competing on edge
⁃ what are complex adaptive systems?

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WHAT DOES VUCA MEAN?

These elements present the context in which

VUCA MGMT005 Notes -TYL

• Opening Up the Boundaries of the Firm

VUCA MGMT005 Notes -TYL

3. Rise of the middle class: Urbanization

VUCA MGMT005 Notes -TYL

5. Rise of the individual

6. Economic Power Shift

BRIC: similar stage of newly advanced economic development

CIVETS: 6-favoured emerging market countries

What mega trends teach us?

VUCA MGMT005 Notes -TYL

Social media’s role

Black Swan Events (Nassim Nicholas Taleb, 2001)

VUCA MGMT005 Notes -TYL

In a world of “unknown” unknowns

Volatility is not always bad

VUCA MGMT005 Notes -TYL

E.g. Foxconn decides to go on strike, affected Apple, need to be agile

Level 2: Alternate Futures

VUCA MGMT005 Notes -TYL

Posture and moves:

VUCA MGMT005 Notes -TYL

Reserve the right to play

Level 3: Range of Futures

a. Companies in emerging industries or entering new geographic markets (India)

VUCA MGMT005 Notes -TYL

b. Developing or acquiring emerging technologies in consumer electronics

It is impossible to define a complete list of scenarios and related probabilities, hence

Posture and moves:

Reserving the right to play

Level 4: True Ambiguity

Consider a telecommunications company deciding where and how to compete in the

VUCA MGMT005 Notes -TYL

Posture and moves:

Reserving the right to play

VUCA MGMT005 Notes -TYL

Postures is your strategic intent (desire of what you want to do)

Create new opportunities in a market – either by shaking up relatively stable level 1

2. Adapting to the future

E.g. In the highly volatile telecommunications-service industry, service resellers are

3. Reserve the right to play

This posture is only relevant in levels 2 through 4. It involves making incremental

Moves is portfolio of actions

VUCA MGMT005 Notes -TYL

Complex vs. Complicated

Institutional vs. individual complexity

Imposed Complexity Includes laws, industry regulations and

E.g. In World Bank, employees cannot

VUCA MGMT005 Notes -TYL

Designed Complexity Results from choices about where the

Unnecessary Complexity Arises from growing misalignment between

b) Based on an aggregate of individual elements, not a single occurrence

VUCA MGMT005 Notes -TYL

2. Difficulty making sense of a situation

Dealing with complexity

Improved forecasting method

Use three types of predictive information

VUCA MGMT005 Notes -TYL

Better risk mitigation

Use decoupling and redundancy