American Public Five Forces and Customer Bargaining Power Paper Do some research and find an analytical tool that aids in understanding the various competi
American Public Five Forces and Customer Bargaining Power Paper Do some research and find an analytical tool that aids in understanding the various competitive forces that affect strategic planning. Although all organizational sectors potentially face similar kinds of competitive forces, each sector and/or organization may face unique factors that affect competitive pressure at any given time, depending on varying circumstances.
For instance, you may investigate supplier bargaining power from foreign markets or dealing with emerging companies in the cell phone (or tech) industry.
Please start off with this:
As pointed out in this weeks lesson, the 5 competitive forces of strategic planning are:
Competition from rival sellers
Competition from potential new entrants
Competition from substitute products producers
Supplier bargaining power
Customer bargaining power (APUS, n.d.)
and the force I will be talking about is Customer bargaining power. Laseter, T., & Sarasvathy, S. (2012, May 29). Three Games of Strategic Thinking. Retrieved June 17, 2019,
from https://www.strategy-business.com/article/12203?gko=72b74
STRATEGY
May 29, 2012 / Summer 2012 / Issue 67 (originally published by Booz & Company)
Three Games of Strategic Thinking
Decision makers struggling with uncertainty can choose from a trio of probabilistic models to match
the type of risks they face.
by Tim Laseter and Saras Sarasvathy
Illustration by Lars Leetaru
Which of the following three games of chance would you prefer to play? In the first, you have the
opportunity to make 40 blind draws from an urn containing 75 red balls and 25 black balls. You have to
pay US$400 ($10 per draw) up front to play; you earn $20 for each red ball you draw but nothing for
black.
The second game also offers you the chance to win $20 on each blind draw from an urn with red and
black balls. In this case, the mix of red and black is unknown: It could range from 100 red and no black to
100 black and no red. But you pay only $5 per draw and you can bet on either color with each draw. You
can stop anytime you want or draw up to 50 times.
In the third game, you pay only $1 per blind draw from the urn and there are no limits on how many
times you can play. This urn may contain red balls and black balls, but it might also contain yellow
pyramids, diamond rings, dollar bills, or used bubble gum in short, just about anything. In this game
there is no bet and no cash payoff. You simply get to keep what you draw.
Each of these games matches a different strategy paradigm reflecting a different mind-set. All three
paradigms draw upon a rich base of mathematical probability theory and extensive research into
business strategy. And each has proven useful for different companies at different times. The first
captures a model we call Planning and Positioning, in which managers make bets about the future based
on information that provides insight into the degree of uncertainty faced. The second model,
Organizational Learning, sets up managers to dynamically respond to unfolding events when the degree
of uncertainty cannot be predicted. Both of those models assume that strategic decisions should simply
Laseter, T., & Sarasvathy, S. (2012, May 29). Three Games of Strategic Thinking. Retrieved June 17, 2019,
from https://www.strategy-business.com/article/12203?gko=72b74
respond to external events. The third model, Constructive Transformation, is different because decisions
are not just responses to the environment (which is random) or efforts to predict it, but instead focus on
leveraging the players resources and events to shape the environment.
So, which game would you like to play? Your preference probably reflects a combination of your risktaking profile and your business training. More importantly, which urn sounds more like your business
environment? The sense of familiarity you felt for each game likely indicates the maturity of your
industry or at least your companys role within that industry.
The first game (and its urn with relatively predictable contents) represents an expectation that many
managers are trained to have, at least at the beginning of their careers, about the way decisions are
made. But it doesnt quite fit the way business works anymore. The second game (with a predictable
process but unpredictable results) represents the way that many managers make decisions today,
especially in mature companies with developed product lines. The third game (with a chaotic business
environment and a high level of strategic intent) represents the style of decision making best suited to
entrepreneurial managers. When you understand your predisposition to the different decision-making
games and then skillfully match the appropriate paradigm to your circumstances, you can improve your
odds of success in an uncertain world.
Planning and Positioning
To appreciate the roots of these three strategy paradigms, it is instructive to look more closely at
probability theory and its history. Mathematicians and philosophers have been offering up urn
experiments since the time of the ancient Greeks. (Why else would we be drawing from urns?) But the
first written description of an urn model did not appear until the early 18th century, when
mathematician Jacob Bernoulli published a text articulating the emerging science of probability and
statistics. Bernoullis tools provided the capstone to the scientific revolution by allowing explicit
hypothesis testing to discern the truth in the face of uncertainty. Rigorous quantification in the scientific
revolution in turn laid the foundation for the methods of the Industrial Revolution. In 1900, the Tuck
School of Business offered the first graduate degree in commerce, forerunner to the MBA, first offered
by Harvards graduate school of business administration in 1908. Today more than 100,000 MBAs,
known for their analytic training, graduate each year from more than 1,000 institutions in the U.S. alone.
All of those graduates learn about Michael Porters famous Five Forces model of business strategy and
receive training in the quantitative methods of decision analysis and discounted cash flows. In short,
they learn how to play the first urn game: Understand the industry context, measure the uncertainty,
and pick markets with the structural characteristics likely to yield a positive return on the investment.
A prototypical example of a company under this model was the International Telephone and Telegraph
Corporation (ITT) under the leadership of the hard-charging Harold Geneen from 1960 to 1977. Geneen
transformed the midsized maker of telephony equipment and services with sales of $760 million into a
global conglomerate with $17 billion in sales, operating in dozens of countries. Unconstrained by a core
mission, Geneen gobbled up more than 350 companies in industries that included auto parts, cosmetics,
hotels, insurance, and semiconductors. Trained as an accountant, Geneen famously traveled the world
with multiple briefcases stuffed with financial reports, meeting with his business unit managers. He gave
them wide leeway in making strategic decisions, but held them to tightly controlled financial measures.
According to Bruce Wassersteins profile of Geneen in Big Deal: The Battle for Control of Americas
Laseter, T., & Sarasvathy, S. (2012, May 29). Three Games of Strategic Thinking. Retrieved June 17, 2019,
from https://www.strategy-business.com/article/12203?gko=72b74
Leading Corporations (Warner Books, 1998), In Geneens mind, facts were incontrovertible, an
expression of final and reliable reality.
Once true facts were uncovered, management decisions
became easy.
If your formal business education occurred in the 1980s or earlier, this may be the only strategy model
you have explored. But if youve been in business in the decades since, the other two paradigms will
undoubtedly resonate with your own experience more closely, even if you did not receive formal
training in them.
Organizational Learning
University of Chicago economics professor Frank Knight challenged the logic of classic urn problems in
1921. Knight pointed out that the notion of risk as addressed by the science of probability and statistics
was radically distinct from the idea of true uncertainty. Knight used the term risk to describe a
situation in which the underlying probability is known, as in the first urn above. Traditional statistical
tools offer useful insight into the range of possible outcomes from repeating an event such as
drawing a single ball given a known distribution. However, what has become known as Knightian
uncertainty in academia captures the risk of an uncertain distribution, as in the second urn option.
Building upon Knights insight, and drawing upon his own doctoral dissertation in economics at Harvard,
Daniel Ellsberg popularized the notion of ambiguity avoidance in the early 1960s. (Ellsberg, a Rand
Corporation consultant to the Department of Defense, may be best known outside academic circles as
the vocal critic of the Vietnam War who leaked the Pentagon Papers to the New York Timesin 1971.)
Ellsberg identified a paradox in human behavior in a series of urn experiments. He offered up the option
of betting on an urn with a known 50/50 mix of red and black balls versus one with an unknown mix.
Most people are indifferent about choosing between red and black in either case. But if asked whether
they would rather bet on red from the known mix or on red from the unknown mix (or on black from the
known versus the unknown), the majority chose to bet on the second urn implying a belief that the
mix in the second urn was not 50/50. Ellsberg found that when given more complicated choices, people
behave in ways inconsistent with this belief. Based on his analysis of this behavior, he postulated that
most people make choices that appear logically inconsistent because they prefer to avoid ambiguity a
finding known as the Ellsberg Paradox.
Such challenges to the supposedly rational behavior defined by probability theory contributed to the
new field of behavioral economics. Observations of real decision making allowed an integration of
psychology and economics that yielded new predictive insights, as well as a Nobel Prize for Daniel
Kahneman for the work he did with Amos Tversky in the 1970s.
As is often the case, thinking in the more pragmatic field of business strategy drew inspiration from the
hard sciences. By the mid-1980s, scholars had begun to articulate a strategy paradigm involving
organizational learning that parallels the second urn. In a business world full of Knightian uncertainty
that is, unknown probability distributions the tools of Planning and Positioning offer little comfort.
Rather than expending effort predicting the future and positioning themselves within it, companies
should employ an emergent strategy. This term was coined by Henry Mintzberg in a 1985 paper titled
Of Strategies, Deliberate and Emergent. Although Mintzberg did not dismiss the need for deliberate
strategy as articulated in the Planning and Positioning paradigm, he asserted that managers needed a
different approach when faced with the second urn option. Emergent strategy itself implies learning
Laseter, T., & Sarasvathy, S. (2012, May 29). Three Games of Strategic Thinking. Retrieved June 17, 2019,
from https://www.strategy-business.com/article/12203?gko=72b74
what works taking one action at a time in search for that viable pattern or consistency. In other
words, take a guess on red or black, but then adjust your guesses as you see the results of the individual
draws.
Corning Inc., an often-referred-to example of a learning organization, predates the scholarly articulation
of the paradigm. The origins of the company trace back to Amory Houghtons investment in a small glass
company in the town of Corning in upstate New York in 1851. The Houghton family, which continued to
play an active role in managing the company into this millennium, held a near-religious belief in research
and development. From the beginning, the company invested in advancing the science of glassmaking to
avoid competing with low-cost producers. Starting with its first patent for a superior signal glass for the
maritime and railroad industries, Corning produced a string of innovations from its deep knowledge of
glass and ceramics. In 1880, for example, Thomas Edison turned to Corning to make the glass bulb for
his new invention, and the company created a process for high-speed lightbulb manufacturing that
delivered a sustained advantage for the company for decades.
Other innovations included Pyrex, which was introduced in 1915; processes for mass production of TV
tubes in the 1940s; ceramic substrates for catalytic converters in the 1970s; fiber optics, which scaled in
the 1980s; and most recently, Gorilla Glass, which now dominates in the smartphone and tablet market.
However, the technical origins of these innovations typically dated back decades before their successful
commercialization. For example, the fusion process that Corning uses for Gorilla Glass dates to the
companys 1960s efforts to make glass both thinner and stronger for motor vehicles. When automakers
rejected the glass for cost reasons, despite its superior performance characteristics, Corning shelved the
technology until 2006, when Apple CEO Steve Jobs contacted Corning CEO Wendell Weeks in search of a
scratch-resistant, lightweight screen for the iPhone. Gorilla Glass now appears poised to be Cornings
next major growth engine.
Long before C.K. Prahalad and Gary Hamel articulated the concept, Corning management intuitively
understood the need to continuously invest in core competencies. Cornings technological and process
capabilities have responded to a world of Knightian uncertainty for more than 160 years. The company
has played the second urn game exceedingly well.
An Organizational Learning model probably resonates with managers having a liberal arts education, in
which students are trained for nothing, but educated for anything. Planning and Positioning adherents
predict how the industry will unfold and place bets accordingly, and the learning organization
dynamically responds to the unfolding environment. But both of these strategy paradigms assume that
the external environment defines the strategy. The third paradigm applies for individuals seeking to
shape the future environment rather than predict or respond to it.
Constructive Transformation
In contrast to the Ellsberg Paradox which states that most people prefer to avoid ambiguity some,
often those with an entrepreneurial bent, prefer ambiguity. Steve Jobs was a visionary entrepreneur
who famously inspired John Sculley to leave PepsiCo and join Apple by asking, Do you want to spend
the rest of your life selling sugared water, or do you want a chance to change the world? Jobs would
probably have rejected any of our urn games and instead made up his own. (See The Steve Jobs
Way, by Jon Katzenbach.)
Laseter, T., & Sarasvathy, S. (2012, May 29). Three Games of Strategic Thinking. Retrieved June 17, 2019,
from https://www.strategy-business.com/article/12203?gko=72b74
However, most entrepreneurs dont have a single-minded vision, probably because those who do rarely
succeed. Successful entrepreneurs tend to follow a paradigm of Constructive Transformation: They
dont just reactively learn and respond, but instead use the vagaries of fate to help them proactively
shape their environment. They love drawing from the urn of unknown contents and figuring out a way
to use the results to build a business.
Saras Sarasvathy, coauthor of this article, laid the foundation for the strategy of Constructive
Transformation in her 1998 dissertation, supervised by Nobel Prizewinning behavioral economist
Herbert Simon. Drawing from cognitive sciencebased research on 27 founders of companies that
ranged in size from $200 million to $6.5 billion, Sarasvathy found that successful entrepreneurs believe
that the future is fundamentally unpredictable but nonetheless controllable. This mind-set, which she
described as effectual reasoning, offers a fundamentally different approach to strategy-making through
application of four core principles, described here as they apply to Constructive Transformation.
First, the paradigm starts with means-driven rather than goal-oriented action. Rather than beginning
with a clear vision or even product idea, entrepreneurs using effectual reasoning consider who they are
and what they know and then engage their network of potential stakeholders, seeking opportunities to
collaborate. A strategic vision may coalesce as new combinations are discovered and engineered, but
the vision does not drive the process; means, opportunities, and stakeholders do.
Second, the paradigm applies an affordable-loss approach to evaluating opportunity, rather than an
approach based on expected value. In other words, since the future is inherently unpredictable, the
entrepreneurial decision maker spends no time predicting it or calculating the expected value, as the
players in the first two urn games do. Instead, the entrepreneur seeks to structure experiments wherein
failure will not destroy the enterprise. Such repeated experiments only $1 per draw from the third
urn in our analogy produce opportunities for valuable new combinations and accordingly shape the
path forward.
Third, leaders employing the mind-set of Constructive Transformation seek to make use of surprises
rather than avoid them. (For this reason, we sometimes refer to this as the effectual mind-set.) These
decision makers accept that the future is unpredictable and the ultimate path unknowable. Accordingly,
they remain flexible and leverage contingencies to revisit means and goals. Each time they
metaphorically reach into the urn and encounter an unpredictable event, they ask: Does this surprise
open new opportunities? Even when faced with a negative surprise, they simply do not allow it to
squelch their enthusiasm: When they draw a lemon from the urn, they cheerfully look around for sugar
to use in making lemonade.
Finally, the Constructive Transformation paradigm encourages managers to surround themselves with
others willing to join their urn game. They form myriad partnerships, often recruiting initial customers to
become partners; initial suppliers to become investors; and initial investors to become customers,
employees, or anything else. Ultimately they form a crazy quilt of stakeholders investors,
customers, suppliers, employees who share a commitment to working together to co-create the
venture and its environment.
For an example of the Constructive Transformation paradigm in action, consider the digital media
company RealNetworks Inc. Founder Rob Glaser left Microsoft in 1994 after a decade of higher and
higher executive roles that had made him a millionaire. Drawing upon a long-held avid interest in
Laseter, T., & Sarasvathy, S. (2012, May 29). Three Games of Strategic Thinking. Retrieved June 17, 2019,
from https://www.strategy-business.com/article/12203?gko=72b74
progressive political issues and his deep knowledge of technology, in 1995 he started Progressive
Networks to use the nascent World Wide Web to broadcast his liberal views, much as televangelists had
leveraged cable TV in earlier decades.
But when his exploration led him to an examination of the early Web browser Mosaic, he concluded
that the channel could be more important than the message. Glaser also quickly determined that the
limited bandwidth of the early Web would constrain the channel to audio, so he decided to put plans for
video on hold. Applying the affordable-loss principle, he converted Progressive Networks into a software
developer, which created Real-Audio 1.0 in less than a year, largely using his own financial resources.
RealAudio initially broadcast progressive content from ABC News and National Public Radio, and was
soon released as part of the Navigator Web browser package from then-dominant Netscape. RealAudio
served as a general-purpose channel, adapting broadcast media to the computer; it was a precursor to
the audio download models of Apples iTunes music store in 2003 and Amazon MP3 in 2007.
In December 1995, Glaser learned that a two-person startup in San Francisco was forging ahead with an
Internet videoconferencing tool developed while RealNetworks had been focusing on audio. Rather than
letting this negative surprise upset his plans, Glaser simply encouraged the founders of the company to
join RealNetworks, which led to the next product, RealVideo.
Throughout its history, RealNetworks has formed a network of partnerships that allowed it to survive
the constant power struggles of the Int…
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