Economic Institutions of Strategy

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Economic Institutions of Strategy

• Jackson Nickerson
• Frahm Family Chair of Organization and Strategy

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Agenda

• Describe a new book for young scholars interested
  in organization and strategy
• Introduce some current research on Strategic
  Problem Formulation
• Have a brief discussion of processes in NIE
• Provide some tips and tricks on how the book and
  research might advance your research productivity

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Economic Institutions of Strategy

• Volume co-edited with Brian Silverman
• Goals are to
• Acknowledge the role of transaction cost
  economics (TCE) and Oliver Williamson in the
  field of strategy
• Help junior scholars identify promising research
  topics that are feasible empirically
• Suggest that TCE is not just a background
  theory but remains a growth engine for
  understanding organization and strategy
• Publication date September 2009
• Volume part of Advances in Strategic Management

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Table of Contents

• Foreword by Oliver E. Williamson
• Introduction Jackson Nickerson / Brian Silverman
• Part I Development of new technology
• 1. Transaction Costs in Technology Transfer and
  Implications for Strategy, Ajay Agrawal  
• 2. Organizational Economics Insights from
  Acquisitions Research, Jeffrey J. Reuer

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TOC - continued

• Part II Development of new business
  opportunity/business models
• 3. Opportunities and New Business Models
  Transaction Cost and Property Rights Perspectives
  on Entrepreneurship, Nils Stieglitz and
  Nicolai J. Foss 
• 4. The Problem Solving Perspective A Strategic
  Approach to Understanding Environment and
  Organisation, Michael J. Leiblein and
  Jeffrey T. Macher

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TOC - continued

• Part III Competitive advantage and performance
• 5. The Future of Inter-firm Contract Research
  Opportunities Based on Prior Research
  Non-traditional Tools, Libby Weber, Kyle
  Mayer, Rui Wu
• 6. Alliances and performance Joanne Oxley
• 7. A Strategic Look at the Organizational Form of
  Franchising, Steven Michael and Janet
  Bercovitz
• 8. Internal Organization from a Transaction Cost
  Perspective, Nicholas Argyres

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TOC - continued

• Part IV Corporate strategy
• 9.Strategic Organization of RD Bruno
  Cassiman and Alfonso Gambardella
• 10. Limits to the Scale and Scope of the Firm,
  Todd Zenger and Jeffrey Xiaofei Huang
• Part V Industry analysis
• 11.Diversification, Industry Structure, and Firm
  Strategy An Organizational Economics
  Perspective Peter G. Klein and Lasse B. Lien
• 12. Intellectual Property Regimes and Firm
  Strategy Putting Hall and Ziedonis (2001) in
  Perspective Rosemarie ZIEDONIS

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TOC - continued

• Part VI Location, national institutions, and
  strategy
• 13. Value Creation and Appropriation Through
  Geographic Strategy Evidence from Foreign Direct
  Investment Miguel A. Ramos and J. Myles
  Shaver
• 14. Beyond the Economic Institutions of Strategy
  Strategic Responses to Institutional
  Variation Witold Jerzy Henisz
• 15. Integrated Political Strategy John M. de
  Figueiredo
• 16. Contracting with Governments Eric
  Brousseauand Stéphane Saussier

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TOC - continued

• Part VII Dynamics
• 17.New frontiers in Strategic Management of
  Organizational Change Jackson Nickerson and
  Brian Silverman

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A Theory of Strategic Problem Formulation

• Markus Baer
• Kurt Dirks
• Jackson Nickerson

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A Consumer Products Company

• Firm historically performed well with steady but
  low to moderate profit growth
• Few new product/service ideas get developed and
  make it to market, existing-brand refurbishment
• Workforce tends to be older, conservative,
  homogenous in attitude
• Few incentives to reward innovation over long run
• Very lean but productive few slack resources
• High production capacity utilization
• How can the organization profitably grow faster?

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An MBA Curriculum Committee

• Charged with creating curriculum to improve
  student analytical and communication skills
• Recruiters, faculty, and dean report multiple
  instances where skills are lacking
• Committee comprised of faculty from different
  functional areas as well as administrators
• Ex ante, neither dean nor committee members agree
  on causes of symptom
• Yet each constituency has preferred solutions
• How can the school develop these skills?

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A Health Care Company

• A large number of hospitals
• Mission statement centered on providing a
  particular kind of quality care, key point of
  differentiation
• Within-system hospitals differ on patient
  satisfaction metrics
• On average no different from other systems
• No consensus on what quality means
• What is quality care and how can it be
  implemented to differentiate the organization?

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How would you help them?

• Each situation is strategic in that decisions can
  impact the organizations strategy.
• Groups were assigned in each case to solve the
  problem.
• Each situation is a complex, ill-structured
  problem.
• Complexity (Simon 1962)
• Many symptoms
• One symptom does not describe another symptom
• Symptom may interact to produce additional
  effects
• Ill-structured (Fernandes and Simon 1999)
• No consensus approach for addressing symptoms

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Agenda for Problem Formulation

• The strategic problem formulation challenge
• Extant literature on problem formulation
• Definitions
• Formulation objective
• Assumptions
• Impediments
• Design goals
• An illustrative process that satisfies design
  goals
• Implications and future research

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Problem formulation challenge

• Most scholars agree that problem solving requires
  
• Defining the problem
• Generating alternative solutions
• Choosing alternatives
• Implementing choices
• We find vast amounts of research on latter three.
• Almost universally, the research begins with
  assuming an already formulated problem.
• e.g. the behavioral theory of the firm.
• Lets consider research in strategy and policy

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Research on problem formulation

• Problem formulation is rarely researched
• 1970s saw several investigations into problem
  formulation (also called diagnosis and
  structuring)
• Mostly descriptive and atheoretical
• Mostly focused on individuals
• Very little empirical researchstudent
  experiments
• Much of the research died out in the 1980s
• Leading scholars .. Cowan, Lyles, Mitroff, Nutt,
  Volkema, Pounds .. moved on, retired, passed
  away.
• Little progress was made
• Process approaches and OD research diminished

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Research on work group diversity

• Focused on decision-making context
• Many mechanisms identified based on single
  dimensions of diversity
• Largely focuses on positive issues
• Too little development of theoretical frameworks
• Identifies many mechanisms but not which
  mechanisms and how they interact
• Lack of attention to information and
  decision-making processes
• For more detail see Van Knippenberg and Schippers
  (2007) and Horwitz and Horwitz (2007)

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Importance of problem formulation

• The formulation of a problem is often more
  essential than its solution. Einstein and Infeld
  (1938, 92).
• Diagnosis ... determines in large part
  subsequent course of action (Mintzberg et al.
  1972, 274).
• Poor formulation can lead to error of the third
  kind, solving the wrong problem. (Mitroff et al.)
• Problem formulation has the potential for greatly
  affecting problem solving
• quantity and quality of solutions produced, and
• implementation of solutions chosen.

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Our project

• Acknowledges that heterogeneous teams are the
  primary vehicle for solving these problems.
• Theoretically identifies set of core impediments
  arising from teams that lead to limited
  formulations.
• Develops a set of design goals that guide the
  development of mechanisms.
• And offers a structured process that satisfies
  these design goals.

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Definitions

• A Symptom is something the indicates a presence
  of a disorder or opportunity.
• A Web of Symptoms refers to those symptoms for
  which evidence implies correlation among them.
• A Problem is a condition, symptom, or set of
  symptoms that need to be dealt with or solved.
• Problem (re)formulation is translation of an
  initial condition, symptom, or set of symptoms
  into a systematized set of statements that
  identifies a particular cause or causes of a
  symptom or set of symptoms. Equivalent to a
  diagnosis.

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Definitions (contd)

• Structured Process comprises a set of facts,
  circumstances, or experiences that are observed
  and described or that can be observed and
  described and are marked by gradual changes
  through a series of states (Nickerson et al.
  2007).

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Formulation objective

• Problem Formulation Comprehensiveness
• the extent to which alternative and relevant
  problem formulations are identified with respect
  to an initial symptom or web of symptoms
• comprehensiveness increases as the number of
  alternative problem formulations grows
• each alternative must illustrate at least one
  mechanism that causes as least one symptom
• With an optimal formulation unknown and
  unknowable, our objective is to
• improve the comprehensiveness
  of a problems formulation.

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Assumptions

• Humans are boundedly rational
• Individuals face real physiological limits in
  acquiring, accumulating and applying
  knowledge/information
• cognitive capacity (i.e., attention, memory,
  time)
• costly to acquire, accumulate, and apply
  cognitive structures
• Individuals can be self-interest seeking with
  guile
• Relevant knowledge and information is dispersed
  across individuals
• Assembled groups/teams will be heterogeneous in
  motivation, cognitive structures, and information
• Problems are complex and ill-structured

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Impediments

• Theoretical ideal of heterogeneous groups is that
  they lead to more comprehensive formulations
• Recent research indicates heterogeneous groups
  perform no better than homogeneous ones
• Groups experience some type of process loss,
  heterogeneous groups experience more
• Heterogeneity that promises superior performance
  also generates impediments that derive from
• Information
• Cognitive structures
• Motivation

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Heterogeneous information

• (Assume homogeneous motivation to begin with)
• Heterogeneous information sets bounded
  rationality
• Information sampling
• Difficult to judge which informational elements
  are likely to be relevant to a particular problem
  context
• Individuals will begin by sending cues about what
  they believe to be important
• Group members are likely to recognize cues that
  they already posses and understand
• Conversation to transfer and verify information
  sent and received
• Sharing unique information is far costlier in
  terms of cues and communication
• Information sampling narrows formulation
  comprehensiveness

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Heterogeneous cognitive structures

• (Assume homogeneous motivation to begin with)
• Heterogeneous cognitive structures bounded
  rationality
• Representational gaps (concepts, language,
  assumptions)
• Individuals are likely to formulate problems in a
  way that capitalizes on the knowledge that they
  possess
• Differences in knowledge sets likely produce
  problem understandings that are, at least
  partially, incompatible
• Difficult and costly for individuals to share
  knowledge and recombine representations to
  explore additional problem formulations (unless
  drinking together in Cargese)
• Can promote misunderstanding, conflict and
  distrust, which increases cost of communication
• Representational gaps narrow formulation
  comprehensiveness

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Heterogeneous motivation

• Heterogeneous motivations bounded rationality
• Political maneuverings to protect and enhance
  self-interest
• Dominance activities
• High stakes increase effort, low stakes acquiesce
• Propensity to jump to solutions
• Economizes on bounded rationality
• Strategically offered to push desired outcome
• Transfer information and cognitive structures
  strategically
• Attempts to limit alternatives
• Can increase distrust and conflict
• Amplifies information sampling and cognitive gaps
• Heterogeneous motivation narrows formulation
  comprehensiveness

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Design goals

• Mechanism(s) must
• Prevent members from jumping to solutions
• Limit domination/equalize participation
• Reduce information exchange and sampling problems
  
• Motivate individuals to reduce representational
  gaps
• Limit strategic behavior and trust concerns
• Wow! How can this be done?

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How can impediments be overcome?

• Three organizational mechanisms are considered
• economic incentives
• group selections/matching
• structured processes
• Economic incentives
• Comprehensiveness of formulation is not
  contractible ex ante
• Transfer of cognitive structures, which is needed
  to recombine knowledge, is not contractible ex
  ante
• Effort in thinking is not contractible ex ante
  and not verifiable ex post

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Overcoming impediments

• Selection/matching of group members
• Pool of potential group member typically is small
  because of the need for firm-specific knowledge.
• A small pool limits the ability to form a group
  with desirable correlations of motivation,
  cognition, and information.
• Measurement difficulties make it costly to
  verifiably form a group with a desirable
  correlation.
• E.g., Ex ante homogeneous goals and objectives
  with heterogeneous cognitive structures and
  information.
• Selection does not mitigate all impediments.
• We focus our efforts on structured processes.

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A Structured Process

• Finding
• Framing
• Formulating
• Solving
• Implementing
• We will focus on Framing and Formulating

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Finding

• A symptom(s) triggers initiation of a group or
  pre-existing group to take up the problem
• Assume complex, ill-structured problem context
• Other processes might be better suited for those
  problem contexts that are not complex and
  structured
• Group composition is chosen
• Heterogeneous for complex, ill-structured context
• Heterogeneous manifests in motivation, cognitive
  schema, and information
• Management/team commits to process
• Finding is not much informed by our process

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Framing

• Rules
• No discussion of formulation or potential
  solutions allowed in this stage.
• Steps
• Use modified Nominal Group Technique (mNGT) to
  brainstorm and identify all correlated symptoms
• Collect data or vignettes to support (or reject)
  inclusion of symptoms in web of symptoms
• Consensus-based written statement summarizing all
  symptoms and data
• Verify set of identified symptoms by asking
  broader community outside of group to review

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Formulating

• Rules
• No discussion of potential solutions allowed in
  this stage.
• Steps
• Use mNGT to brainstorm all possible mechanisms
  causing the symptoms.
• Evaluate validity of theories using additional
  data collection, analysis, experiments, and other
  tools.
• Consensus-based written statement summarizing all
  alternative, relevant, and legitimate mechanisms
• Verify set of identified mechanisms by asking
  broader community outside of group to review

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Does process satisfy design goals?

• PHASE 1 FRAMING
• Facilitator specifies focus and enforces
  groundrules (i.e., focus on symptoms no
  discussion of formulation or solutions)
• Use modified nominal group technique (mNGT) to
  reveal comprehensive set of symptoms
• Group consensus decision statement summarizing
  symptoms
• Verify validity of set of symptoms via evaluation
  by external stakeholders

DESIGN GOALS Prevent members from jumping to
solutions Limit domination/equalize
participation Reduce information exchange and
sampling problems Motivate individuals to
reduce representational gaps Limit strategic
behavior and trust concerns

• PHASE 2 FORMULATION
• Facilitator specifies focus and enforces
  groundrules (i.e., focus on formulation no
  discussion of solutions)
• Use modified nominal group technique (mNGT) to
  identify possible mechanisms causing symptoms
• Group consensus decision statement summarizing
  formulation of problem
• Verify validity of problem formulations via
  evaluation by external stakeholders

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How has the process worked?

• Consumer products company
• MBA curriculum committee
• Health care company
• Preliminary validation?

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Implications

• New approach to theorizing about problem
  formulationgenerate process design goals
• While economic incentives and selection may
  positively contribute to problem formulation
• they appear neither necessary nor
  sufficient
• Cannot guarantee comprehensiveness, only
  improvement in comprehensiveness
• Process may provide implementation benefits
• Process consumes time
• Implications for group formation
• Facilitator is necessary

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Directions for future research

• Empirical analysis is needed and students wont
  do.
• What are the implications for problem solving?
• What about other types of problems?
• Other factors that may matter on the process
• Credibility of commitment to process
• Time
• Outcome
• Selection of knowledge/team members

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Links to other literatures

• Formulation in operations
• Creativity in psychology, especially in groups
• Insight in psychology and marketing
• Fallibility in economics
• Cognitive biases in psychology and operations
• Organizational development
• Education

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Existing research

• Heiman and Nickerson
• (2002). Towards reconciling transaction cost
  economics and the knowledge-based view of the
  firm The context of inter-firm collaborations,
  International Journal of the Economics of
  Business, 9(1) 97-116.
• (2004). How do firms manage knowledge sharing
  while avoiding knowledge expropriation in
  inter-firm collaborations, Managerial and
  Decision Economics, 25 401-420.
• Nickerson and Zenger (2004). A knowledge-based
  theory of governance choice, Organization
  Science 15(6) 617-632.
• Macher (2006). Technological development and the
  boundaries of the firm A knowledge-based
  examination in semiconductor manufacturing,
  Management Science 52(6) 826-843.
• Hsieh, Nickerson and Zenger (2007). Problem
  solving and the entrepreneurial theory of the
  firm,Journal of Management Studies.
• Nickerson, Silverman and Zenger (2007). The
  problem of creating and capturing value,
  Strategic Organization 5(3) 211-225.

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Processes in NIE

• John Constitutions are processes for making ex
  post adaptations
• Scott Contracts are processes for making ex
  post adaptations
• Ken (But for meta some games) Institutions are
  processes for selecting among selecting among a
  large number of equilibria.
• Is NIE ultimately about the study of processes
  and their ability to shape ex post adaptations?
• Is this what NIE scholars typically claim?
• How can we improve the study of processes?

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Formulation and your research

• Assertion Formulation of problem is central to
  your success
• We often get enamored and locked into solutions
  before insuring a good problem formulation
• Practical tips
• Verify and improve your formulation and approach
  to solution broadly and quickly
• Write a 4-6 page introduction
• As for next day feedback from colleagues and
  faculty, those at your school and those you met
• Refine based on feedback and solicit feedback
  again until readers agree that you will create
  value if you deliver on the introduction

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Thank you for your time today!