Economic Institutions of Strategy

Jackson NickersonFrahm Family Chair of Organization and Strategy

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

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 2009Volume part of Advances in Strategic Management

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

TOC - continued Part II: Development of new business

opportunity/business models3. 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

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 Wu6. Alliances and performance

Joanne Oxley7. A Strategic Look at the Organizational Form of

Franchising, Steven Michael and Janet Bercovitz

8. Internal Organization from a Transaction Cost Perspective, Nicholas Argyres

TOC - continued Part IV: Corporate strategy

9.Strategic Organization of R&DBruno 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 PerspectivePeter G. Klein and Lasse B. Lien

12. Intellectual Property Regimes and Firm Strategy: Putting Hall and Ziedonis (2001) in Perspective

Rosemarie ZIEDONIS

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 Shaver14. Beyond the Economic Institutions of Strategy:

Strategic Responses to Institutional VariationWitold Jerzy Henisz

15. Integrated Political StrategyJohn M. de Figueiredo

16. Contracting with GovernmentsEric Brousseauand Stéphane Saussier

TOC - continued Part VII: Dynamics

17.New frontiers in Strategic Management of Organizational Change

Jackson Nickerson and Brian Silverman

A Theory of Strategic Problem Formulation

Markus Baer

Kurt Dirks

Jackson Nickerson

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?

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?

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?

How would you help them? Each situation is strategic in that decisions can

impact the organization’s 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

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

Problem formulation challenge Most scholars agree that problem solving requires

Defining the problemGenerating alternative solutionsChoosing 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.

Let’s consider research in strategy and policy

Research on problem formulation Problem formulation is rarely researched

1970s saw several investigations into problem formulation (also called diagnosis and structuring)

Mostly descriptive and atheoreticalMostly focused on individualsVery little empirical research—student experiments

Much of the research died out in the 1980sLeading scholars .. Cowan, Lyles, Mitroff, Nutt,

Volkema, Pounds .. moved on, retired, passed away.Little progress was madeProcess approaches and OD research diminished

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.

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.

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.

Definitions (cont’d) 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).

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 problem’s formulation.

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

Impediments Theoretical ideal of heterogeneous groups is that

they lead to more comprehensive formulations Recent research indicates heterogeneous groups

perform no better than homogeneous onesGroups experience some type of process loss,

heterogeneous groups experience more Heterogeneity that promises superior performance

also generates impediments that derive from: InformationCognitive structuresMotivation

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

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

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

Design goals Mechanism(s) must

Prevent members from jumping to solutionsLimit 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?

How can impediments be overcome? Three organizational mechanisms are considered:

economic incentivesgroup selections/matchingstructured processes

Economic incentivesComprehensiveness of formulation is not contractible

ex anteTransfer of cognitive structures, which is needed to

recombine knowledge, is not contractible ex anteEffort in “thinking” is not contractible ex ante and not

verifiable ex post

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.

A Structured Process Finding Framing Formulating Solving Implementing

We will focus on Framing and Formulating

Finding A symptom(s) triggers initiation of a group or pre-

existing group to take up the problemAssume complex, ill-structured problem contextOther processes might be better suited for those

problem contexts that are not complex and structured Group composition is chosen

Heterogeneous for complex, ill-structured contextHeterogeneous manifests in motivation, cognitive

schema, and information Management/team commits to process* Finding is not much informed by our process

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

How has the process worked? Consumer products company MBA curriculum committee Health care company

Preliminary validation?

Implications New approach to theorizing about problem

formulation–generate 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

Directions for future research Empirical analysis is needed and students won’t 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 TimeOutcomeSelection of knowledge/team members

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

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.

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?

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

Thank you for your time today!