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Summary

Kappa Consulting is a boutique consulting firm, operating in London, UK. They employ a small team of five consultants and ten analysts who over the years have become very adept at working together; the analysts have become skilled at understanding the requirements of the consultants, and can prepare analyses and reports to their specifications. The firm has a small set of clients who value and trust the consultants. On a recent trip to Bengaluru in India, the CEO met up with a former MBA classmate who tells him that he runs a Knowledge Process Outsourcing outfit, that employs graduates with talents and skills comparable to Kappa's consultants, but with wages 40 percent lower than what Kappa pays its analysts. He recommends that Kappa offshore and outsource analytics work to his unit, and so cut costs in the London operations, and instead scale up its consultants. What should the CEO do?

Outsourcing occurs when an organization hands over part of the value chain it owns to a different firm, while maintaining the number of business it is active in. In contrast, a divestiture occurs when the firm reduces the number of businesses it is active in by completely pulling out of a value chain and ceasing to offer the products from that value chain to the relevant customers. In other words, in outsourcing, the firm continues to offer the products and services based on inputs from the outsourced value chain activities to the relevant customers, but these parts of the value chain are no longer done in-house.

Offshoring occurs when part of a value chain moves to another geography, usually one with lower cost. Offshoring may or may not involve outsourcing. The same firm could merely relocate operations to a new location (see Figure 8.1). Thus decisions on whether to move the process out of the firm's boundary as well as out of the current geographical boundary occur together, if only implicitly (i.e., we may be implicitly choosing not to offshore, when we outsource to a local vendor).

The canonical outsourcing situation is one where before a company owned an entire value chain and, afterwards, only parts of it. For example, a company active in the footwear business can outsource manufacturing while continuing to do design and distribution, see Figure 8.2.

Summary

MultiDevice, a maker of PC peripherals who used to be organized by function – marketing, manufacturing, R&D departments – recently undertook a dramatic re-organization towards a matrix organization with the two dimensions being product and customer. Polyton, a rival of MultiDevice which is also organized by function, has hired you to help them understand why MultiDevice made this change, and whether they should follow suit. How would you proceed?

Corporations that comprise multiple businesses ultimately compete with actors in the capital markets who can put together similar portfolios of businesses through stock ownership. The central issues in corporate strategy therefore pertain to how managers can create the most value from the portfolio of businesses they can stitch together with organizational and governance linkages (in a way that investors and mutual fund managers cannot). The overlap between issues in corporate strategy and organization design is thus naturally very high.

In previous chapters we considered which businesses should be in the corporate portfolio (Parts II and III, Chapters 4–8). This chapter provides a framework for thinking about the choices we face in organizing this portfolio of businesses, their relative merits, and the circumstances for changing from one to another. Our focus here is on “organizational macro-structures,” by which we mean the stable pattern of interactions between groups of individuals specified at high levels of aggregation – for instance, as seen in organization charts. We will refer to these macro-structures simply as “structures.” This sets the stage for more fine grained decisions about organization design pertaining to how individuals within the same group or across groups interact (or the “micro-structure”).

Understanding the structure of the multi-business firm is critical for corporate strategists and those analyzing corporate strategies; in fact, we will show how to read the corporate strategy of the firm in its structure. Yet, it can seem hard to know where to begin, given the wide variations and complexities in organizational structures. Those complexities arise even within a single country. MNCs have added layers of complexity relative to one-country firms because they operate across geographies. With the simple ideas presented here, we hope to help you see why organizational structures are, to paraphrase the organizational economist Bob Gibbons, sometimes a mess, but seldom a mystery.

Summary

Burger Behemoth Plc has decided that the best way for it to diversify into the theme park business is to form a non-equity alliance with Mighty Monkey. Burger Behemoth is a successful chain of fast-food restaurants, with a large network of restaurants around the country, some of which are franchised and others fully owned. Its brand has come to stand for standard, tasty, convenient, and quick meals, and it has enormous customer loyalty among families with young children below 12, and also among busy executives on the road. Mighty Monkey is an experienced player in the theme park business. How should this alliance be implemented?

Strategic alliances are temporary, lateral forms of collaboration between organizations. They are temporary because the alliance typically has a finite life (after which it may or may not be renewed). They are lateral because neither partner has final authority over the other (unlike in an acquisition, when the acquirer's managers effectively have authority over the target firm's employees after the deal is completed). Alliances lie between simple arm's-length market relationships and a merger or acquisition. Unlike in M&As, in alliances the parties remain legally independent and both sides know that the relationship is not necessarily permanent. Unlike in simple market relationships, in alliances intensive collaboration between partners is essential, and a contract alone does not suffice. Something additional is needed in the form of organizational linkages between partners, which may be based on prior or expected interactions between the partners, or equity stakes of one (or both) in the other. The term “alliance” thus covers a wide spectrum of non-equity and equity based relationships (including joint ventures), as shown in Figure 12.1. This chapter covers the general principles that apply to all of them.

There are several stages in the process of setting up an alliance involving several people from within and outside the partner firms (see Figure 12.2). Much of the strategic thinking on diversification described in Chapters 4, 5, and 6 must be completed before and overlaps partly with Step 1 (partner selection) of the alliance process. In the remainder of the chapter we assume that this thinking has been done – i.e., there's an understanding of the potential synergies (Chapter 2) and transaction costs (Chapter 3), and an alliance is deemed a superior alternative to an M&A or organic growth (Chapters 4–6).

Summary

Despite his scientific approach to detective work, Sherlock Holmes had a peculiar idea about human memory. Watson was surprised to discover that Holmes knew nothing of astronomy and was going to try to forget what Watson had told him. Holmes thought that humans could remember only a limited amount of information and that he shouldn't waste any space on facts irrelevant to solving crimes. In fact, there is no evidence that human memory ever becomes completed filled. Furthermore, as long as information is organized efficiently, it barely matters how much there is, as long as access is available to all of it rapidly. As children learn about the world, they organize the information into categories that make it possible to rapidly generalize actions to new targets in new contexts that share some features with old ones. Once knowledge of the world is organized by hierarchy of categories, it provides an efficient guide to learning ever more about the world, because new information is encoded by elaborating the existing representation.

Organization is essential to cognition. It turns mere information into knowledge. However, organization involves a choice. To organize one's knowledge of the world in a particular way that makes some relationships easy to comprehend necessarily makes other relationships difficult or impossible to comprehend. It is also difficult to begin a new topic and to start to learn about something you know nothing about. However, for different reasons, it may be just as difficult to learn something new about a topic you know a lot about. For example, at the end of my course on human cognition, I give my students the same final examination twice in a row. It is a multiple-choice exam. First, the students answer the questions without having access to their textbooks or notes. So, this test is a retrieval test, based on what the students learned during the semester in the course. Immediately after the first test the students again answer the same questions, but this time each question is accompanied with a paragraph that contains the answer. So, now it is a reading comprehension test. The proportion correct is exactly the same on both the retrieval test and the comprehension test (Glass and Sinha, 2012). Once you think you know something, it is difficult to accurately comprehend something that contradicts what you think you already know.

Summary

I once heard two students talking after an exam. One student said to the other, “It's amazing how much clearer things are if you study when you are sober.” The student had discovered an important fact about alcohol intoxication: its devastating effect on learning. However, it is also interesting that it took a sober episode to produce this insight. Often even good students have no insight into what makes learning easy or difficult.

As first described in Chapter 2, and repeatedly mentioned throughout the text, two distinct but integrated brain systems, the instrumental system and the habit system, make declarative learning possible. The human declarative learning system is remarkably sophisticated at remembering what is important and forgetting what is not. The representation of the immediate experience is immediately classified as familiar or novel. Novel experiences that may be important for future action are remembered but already familiar experiences that contain nothing new are not. Consequently, we all know how to order food from the drive-up speaker of a fast food restaurant without remembering every occasion on which we have done so.

Declarative learning begins with an initial encoding stage followed by either rapid forgetting or long-term retention. Long-term term retention of the episode is the result of the following.

Summary

Mario had worked hard to become CEO of MoveIt, a large diversified producer of planes, trains, and tractors. Since he took over three years ago, things have gone well: revenues increased every year by at least 15 percent and profits are at an all-time high. But he has this nagging feeling that more is possible. At the same time, he does not know what that is. What should Mario strive for, and how can he know if he is doing a good job as CEO?

Corporate strategy refers to the strategy that multi-business corporations use to compete as a collection of multiple businesses. It is qualitatively different from strategy for a single business firm, or “business strategy.” The number of businesses, goals, the nature of competition, and, consequently, the concepts used in analysis, all differ between business and corporate strategy.

Difference 1: Single vs. multi-businesses

Business strategy involves a single business, whereas corporate strategy involves multiple businesses. For instance, a corporation could have multiple businesses that make appliances, software, mining instruments, turbines, jet engines, and healthcare products. Each business has its own business strategy. The corporate strategy of the corporation cuts across and affects all these businesses.

The questions “what is a business?” and “how do we distinguish businesses from each other?” are inescapable if we think of corporate strategy as the strategy of multi-business firms. We find it useful to think of a business as uniquely identified in terms of its business model. A business model comprises the set of choices about customers, products, and value chain activities that every business must make. These choices are also sometimes referred to as the “who/what/how” choices: who are the customers, what are we selling them, and how do we produce what we are selling and get it into the hands of the customers? Two businesses are different if their business models differ from each other on at least one of these dimensions. Thus, a business selling furniture out of local warehouses to customers in the UK is a different business than one selling to customers in India (different “who”). A business offering sushi for lunch from a small restaurant to busy professionals is a different business than one offering hamburgers (different “what”).

Summary

Carolyn Rovee-Collier gave birth to her first son while she was a graduate student. She was faced with the difficulty of taking care of a newborn and writing a dissertation at the same time. As she attempted to write at her desk, her son was in the crib by her side. Hanging from the crib was a mobile that was intended to hold his attention. However, every time she tried to write a sentence, her son would cry, and she would have to stop writing to shake his mobile for him, which quieted him. Was there any way that she could get her son to entertain himself, so that he would stop interrupting? After all, she was a psychologist. She should be able to think of something.

What she thought of was to tie a ribbon from her son's ankle to the mobile hanging over the crib (Figure 8.1, top). Now, when the boy squirmed and moved his leg, the mobile moved as well. The movement instantly caught his attention, distracting and quieting him. Within a few minutes he learned that he could make the mobile shake by moving his leg. This delighted him no end. Transfixed, he would give his leg a quick jerk, observe the result, and laugh. Soon he laughed and squealed even before he kicked, anticipating what was going to happen. This left his mother free to complete her work. What was more remarkable was that, when Rovee-Collier attached the ribbon to his foot the next day, he started kicking straight away. He remembered how to make the mobile move.

This simple tale of infant learning illustrates the close connection between learning and action. From infancy, people remember the consequences of their actions. Then, in similar circumstances, it is possible to act effectively. After his initial discovery, every time Rovee-Collier's son saw the mobile to which he had been tethered he tried to move it with a kick.

This discovery of the learning ability of a newborn (Rovee and Rovee, 1969) was a major surprise. Anyone who has ever taken care of a newborn can be excused for considering it to be little more than a digestive tract.

Summary

If you dropped a newborn infant into a swimming pool, do you think that it would swim? Remarkably, it would. A newborn infant cannot roll over and can barely manipulate its fingers. Yet, when placed in a pool, the infant swims both vigorously and happily. I can still remember the first time I saw this, in a grainy movie shown in an undergraduate developmental psychology class. It seemed almost too amazing to believe. I had to wait many years to confirm it, and then my son was born, and as soon as we got him home I took him to a pool, placed him in it, and let go. He swam from one end to the other. So, I can assure you from my own experience. Infants can swim!

Why infants can swim illuminates one of the important milestones in the evolution of cognition. The evolution of cognition begins with the control of action. Almost all animals, except for the very simplest, are born with a set of automatic responses to things they will encounter in the world. Though not of importance to human survival, the infant swim reflex is a reminder that we evolved from creatures for which automatic action was a larger portion of their behavior than it is of ours. Initially, the nervous system evolved to automatically control action. Little learning was possible and reasoning was unnecessary.

The control of action

Cognition evolved from the control of action. An action is the movement of a body part in response to some target perceived by an animal. So, falling off a cliff and being blown in the wind do not count as actions. Rather, action implies sensation, because the animal must be able to detect the stimulus that the action is in response to. If you cannot move about and have an effect on your place in the world then there is no value to you in perceiving and thinking about the world. That is why there is a psychology of animals but there is not a psychology of plants. There is no survival value in being able to perceive the world around you if you cannot respond to what you perceive. The sole purpose of cognition is to make action more effective (Barsalou, 2008).

Summary

As an expert in corporate strategy, you are asked to advise the CEO of Very Good, Inc., a maker of children's toys. The company is considering acquiring one of three companies. With company A, a maker of plastic components, the goal is to share manufacturing facilities and therefore achieve better capacity utilization for both firms. With company B, another toy manufacturer, Very Good wants to work together to develop new products, as well as create a common procurement department that sources the components they need for their products in larger volumes. With company C, which owns a retail distribution network, the plan is for C to distribute Very Good's products and support them through in-store advertising. The CEO wants to know how the synergies differ and what the valuation and management challenges in each of these acquisitions are likely to be.

In Chapter 1, we stated that the goal of the corporate strategist is to pursue corporate advantage – to create more value from jointly owning a portfolio of businesses than the sum of their values when they are owned independently. When investors have equivalent investment opportunities, the threshold for the extent of corporate advantage that a corporate strategist must create is higher, and can only be met through synergies. In this chapter, we describe a systematic approach to analyzing synergies.

Despite their centrality to corporate strategy, synergies have remained hard to describe, value, and extract, and the word “synergy” itself is in great peril of becoming a mere buzzword. To a large extent, this is because we have lacked sophistication in being able to classify and distinguish different kinds of synergies, and their organizational implications. This chapter aims to rectify this.

What are synergies?

In its simplest form, an operational synergy potentially exists if two businesses operated jointly are more valuable than the two businesses operated independently. “Operated jointly” implies that decisions across the two businesses are coordinated with the aim of enhancing joint value. The degree of coordination required exceeds simple price-taking behavior such as in a market transaction.

In this book, when we say synergy, we will always mean operational synergy. Other forms of synergy that do not require joint operation (e.g., financial synergies or gains from trade) are also feasible. For instance, scale economies in financing may be a driver of alliances or acquisitions.

Summary

You know a lot of things that you have never learned. If a pair of jeans are too small for you, then you will try on a larger size, not a smaller size, because you know that an even smaller size cannot fit you. Such a deduction is obvious, but it is not trivial. After all, it provides you with a strategy for finding a pair of jeans that fit. Deductive reasoning greatly expands what an individual knows about the world by making explicit information that is implicitly encoded in semantic memory. Reasoning involves both visual and verbal representation. The visual representation provides the intuitions that make many inferences possible, such as which jeans might fit.

Deductive reasoning may be contrasted with inductive reasoning. Inductive reasoning is based on the intuition that things that are similar in some ways are similar in other ways as well, so that any one golden retriever will be as friendly as any other. As this example indicates, inductive reasoning is often used to predict behavior, and so is a core social skill.

Human reason is directed by the prefrontal cortex. This should be obvious, since the prefrontal cortex directs all forms of cognitive processing, and human deduction and induction are forms of voluntary (mental) action. The decision system in the prefrontal cortex supplies the “Why?” to the “What?” of the instrumental system and the “How?” of the habit system.

Human reason provides information about the world that supports effective voluntary action. A decision is a choice among different actions.

Summary

At an intuitive level, everyone knows what kinds of tasks require problem solving. All problem-solving tasks have a goal, which is a description of what would constitute a solution to the problem. What makes a problem a problem is that the statement of the goal does not act as a cue for its own solution. If your friend asks you to get her a can of diet Coke from the refrigerator in your room, that is not a problem. But, if your friend asks you to get her something to drink, that is a problem statement, because there are several ways that you can formulate and solve your task. Problems vary in the extent to which they are well defined (Newell, 1969; Reitman, 1964; Simon, 1973). In a well-defined problem, such as solving a crossword puzzle or selecting a good chess move, the set of possible actions and the goal are all completely specified. In ill-defined problems there may be uncertainty concerning the possible actions that can be taken, and a variety of solutions may therefore be possible. Despite the slightly negative ring to the term “ill-defined,” many ill-defined problems are very creative tasks, such as painting a picture, designing a house, and writing a story. Virtually all real-life problems, from preparing dinner to losing weight, are ill-defined in some way. In a crime story, both planning a murder and solving it describe solutions to ill-defined problems.

Problem solving is a special case of decision making tasks requiring reasoning, which were described in general in Chapter 14. What all problems have in common is that an ad hoc action must be taken in a novel situation. The neural decision-making system described in Figure 14.1 engages in the reasoning necessary for problem solving.

The process of solving a problem has three major steps (Figure 15.1). The first step is forming an initial representation of the problem. The second and third steps are the same as described for physical action in Chapter 3: planning and execution. The second step is generating and evaluating potential solutions. The third step is executing a procedure to carry out the planned solution that appears to be correct. The execution of a plan has already been described in Chapters 3, 4, and 5. Here, the first and second steps are described.

Summary

Burger Behemoth Plc is a successful chain of fast-food restaurants, with a large network of restaurants around the country, some of which are franchised, and others fully owned. Its brand has come to stand for standard, tasty, convenient and quick meals, and it has enormous customer loyalty among families with young children below 12, and also among busy executives on the road. However, growth is slowing, and greater health awareness among consumers has led to a general disenchantment with fast food. The CEO of Burger Behemoth is contemplating some new businesses that they might enter. A candidate has emerged from internal discussion: the children's theme park business.

After examining possible modes of inorganic growth into these businesses, one candidate has emerged for non-equity partnership – Mighty Monkey, Inc., an established player in the theme parks business. Should Burger Behemoth go for this non-equity partnership or should it instead go on its own?

Recall that the basic modes available for a company to expand into a new business are captured in what we call the “growth tree” (see Chapter 4). At the first branch of the growth tree lies the choice between organic (internal) and inorganic (external) growth. Under inorganic growth the choice lies between non-equity alliances, equity alliances (including joint ventures), and acquisitions. These were the focus of Chapter 5. In this chapter we focus on comparing organic growth to these inorganic growth modes (see Figure 6.1).

What is organic growth?

We refer to organic growth as the process by which a company enters a new business on its own – hiring, creation of a new project or business unit, repurposing an existing business unit, etc. If we think of the new business as possessing its own value chain, the goal of organic growth is to build up the resources and capabilities that this value chain entails, without recourse to other firms.

The choice of organic vs. inorganic growth is distinct from the traditional “make or buy” analysis, which refers to a choice between making a product or service internally (and assumes that you have the capability to do this) or procuring it from an external supplier (who is also capable of producing the product or service, but at a different cost). This depends on a comparison of transaction costs and production cost differences (Chapter 9).

Summary

The psychologist Jean Piaget began his book on memory with a story from his own life. When he was a young boy, he remembered when he had nearly been kidnaped in the park except for the alertness of his nanny. The one problem with this dramatic event is that it never happened. Years later the nanny admitted that she had made it up to explain a bruise he had received while playing. Piaget's vivid memory of an event that had not occurred makes an important point about the relationship between confidence and accuracy in autobiographical memory. The core of what we mean by memory is our own autobiographies, which we carry around with us all the time and are constantly updating. You may forget what you learned in school today but there is almost no chance that you will forget who you are. People have tremendous confidence in the accuracy of many of the autobiographical details that we all can recall. However, autobiographical memory is not a fixed record of the past but constantly subject to revision from the incorporation of post-event information.

Summary

The modern study of cognition began with the associative theory in the eighteenth century. According to this theory, spatial contiguity and temporal contiguity cause more simple visual and auditory features to be combined into more complicated representations, and the manipulation of these representations corresponds to thoughts. Associative theory motivated the experimental studies that began the science of cognitive psychology in the nineteenth century. In the early twentieth century behaviorism provided an alternative theoretical framework for psychology, whose content was observable behavior instead of mental states. The focus on behavior led to important advances in the experimental methodologies for observing behavior coupled with a complete lack of progress in explaining the mental processes causing the behaviors. This non-mental psychology came to an abrupt end with the publication of Ulric Neisser's (1967) Cognitive Psychology. Although the theories that followed its publication were much more sophisticated, they were within the associative tradition. Thought was represented as the manipulation of sensory features. My contribution at that time was a textbook that was a best-seller and certainly influenced those that came after it. Even the most recent textbooks published today still follow the same basic organization and cover the same basic topics.

Because of their theoretical orientation, all current cognitive textbooks are now out of date. The theoretical framework is not wrong but it is incomplete. The conceptualization of cognition in terms of the combination of sensory features suggests that a good place to begin is with perception – i.e. with the construction of a representation of the world from sensory features. Unfortunately, this means that we begin with a passive description of cognition. An observer is not doing anything other than constructing a representation of the surrounding environment. This leads to analogies with passive mechanical recording devices such as cameras. The passive, perception-first, approach to the study of cognition has dominated introductory psychology textbooks, as well as much research, ever since Neisser's (1967) seminal work. This was not Neisser's fault. The theory he presented, called analysis-by-synthesis, was an active approach to all of cognition, including perception. However, it was difficult to understand and not as influential as the classical organization of the material around perception.

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8 - Outsourcing: make or buy

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Bibliography

9 - Designing the multi-business corporation

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12 - Managing the alliance process

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9 - Categorization and causal learning

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Index

10 - Semantic learning

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1 - Corporate advantage

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Acknowledgments

8 - Infant learning and language learning

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1 - The evolution of the pre-cognitive control of action

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2 - Synergies: benefits to collaboration

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Figure credits

14 - Reasoning

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15 - Problem solving and intelligence

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Contents

6 - Organic or inorganic growth?

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13 - Autobiographical memory

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Preface

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List of tables

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