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Advanced Strategy
COURSE HOME SYLLABUS CALENDAR READINGS LECTURE NOTES ASSIGNMENTS DOWNLOAD COURSE MATERIALS Instructor(s)
Prof. Rebecca Henderson

MIT Course Number

15.963

As Taught In
Spring 2008

Level
Graduate
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This course pays particular attention to relational contracts; here, several examples of relational contracts for a mature, highperforming organization are show n. (Image by Prof. Rebecca Henderson.)

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Course Description
This course draws on a wide range of perspectives to explore the roots of long term competitive advantage in unusually successful firms. Using a combination of cases, simulations, readings and, most importantly, lively discussion, the course will explore the ways in which long term advantage is built from first mover advantage, increasing returns, and unique organizational competencies. We will focus particularly on the ways in which the actions of senior management build competitive advantage over time, and on the strategic implications of understanding the roots of a firm's success.

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Home Courses Sloan School of Management Advanced Strategy Syllabus

Syllabus
COURSE HOME SYLLABUS Course Overview CALENDAR READINGS LECTURE NOTES ASSIGNMENTS DOWNLOAD COURSE MATERIALS
This course draws on a wide range of perspectives to explore the roots of long term competitive advantage in unusually successful firms. Using a combination of cases, simulations, readings and, most importantly, lively discussion, the course will explore the ways in which long term advantage is built from first mover advantage, increasing returns, and unique organizational competencies. We will focus particularly on the ways in which the actions of senior management build competitive advantage over time, and on the strategic implications of understanding the roots of a firm's success. A central hypothesis of the class is that the ability to build and maintain relational contracts relationships deeply rooted in mutual trust and shared understanding is central to long term advantage since it enables firms to grapple successfully with the challenges of worse before better the unfortunate fact that many important investments do not pay off immediately indeed that in the short term they often appear to reduce performance. We will thus be grappling with many of the "soft" issues of management leadership, culture, competence, trust but from a relatively "hard" perspective. A central activity for the semester will be the detailed study of a single high performing firm and a plausible rival/laggard to it. Working in teams of 2-3 people, during the first half of the semester I will ask you to write a sequence of "two pagers" short papers that apply the concepts we will be exploring in class to the firm that you find interesting. During the second half of the semester I will ask you to write a final paper that both analyzes the historical performance of your chosen firm and its rival and that recommends a strategy for both going forward. Grades will be determined by class participation, by the short papers and by the final paper, with roughly equal weight given to all three activities.

Course Meeting Times

Lectures: 2 sessions / week, 1.5 hours / session

On Reading
There are two books that are required reading for the class: Roberts, John. The Modern Firm: Organizational Design for Performance and Growth. New York, NY: Oxford University Press, 2007. ISBN: 9780198293750. Collins, James. Good to Great: Why Some Companies Make the Leap and Others Don't. New York, NY: Collins Business, 2001. ISBN: 9780066620992. The Modern Firm is available in the campus bookstore. My assumption is that most people will have a copy of Good To Great, but if you don't have one please buy yourself a copy. There is also required reading for (almost every) class. This is often a case, but it is sometimes an article or two. Doing this reading is a "non negotiable requirement" for participation in the class, and I've highlighted it clearly in the syllabus below. If for some reason you come to class without having had a chance to do the reading, please let me know that way we'll both avoid embarrassment should I call on you. Beyond these two books, there are two kinds of additional reading I shall ask you to consider doing for the class. The first is related to the company that you choose to focus on. You should choose a company that you can explore in depth either because you have worked there for many years, or because there is considerable literature about the firm. My hope is that you may also become quite intrigued by the ideas that we will explore in class and will want to explore them further. I've given "recommended readings" for nearly every session these are there for you if you're intrigued by a particular topic and want to dive a little deeper into it. I'd also recommend again, only if you're curious that you consider learning a little more about Toyota, Southwest and Wal-Mart, three companies that we will explore in some depth, by reading more about them. Good sources include: Liker, Jeffrey. The Toyota Way. New York, NY: McGraw-Hill, 2003. ISBN: 9780071392310. Gittell, Jody. The Southwest Airlines Way: Using the Power of Relationships to Achieve High Performance. New York, NY: McGrawHill, 2005. ISBN: 9780071458276. Fishman, Charles. The Wal-Mart Effect: How the World's Most Powerful Company Really Works and How It's Transforming the American Economy. New York, NY: Penguin, 2006. ISBN: 9780143038788.

Overlap with Other Classes

There are several other classes which are complementary to this one. Professor Wernerfelt's course on strategy (15.834 Marketing Strategy), for example, also focuses on the sources of long run competitive advantage. Professor Diane Burton's course on entrepreneurial organizations (15.394 Designing and Leading the Entrepreneurial Organization) and Emilio Castilla's course (15.660 Strategic Human Resource Management) both explore ideas that we'll also be exploring, albeit from a different perspective. If you're interested in long term advantage and the role of organizational competence in sustaining it, I strongly recommend that you take as many of these complementary courses as you can. You'll find that we use a few of the same cases where that is the case I've provided alternative readings for those who may be already familiar with the case. I think that you will find the overlap fruitful. It's very difficult to understand the Toyota production system in any depth, for example, during a single class session, so that taking a little more time to think through its origins and its strength and weaknesses will prove to be, I believe, extremely useful.

Missing Class
I have designed this class as an integrated whole. My hope is to invite you to join me in an extended conversation about what makes a firm successful, and about the strategic implications of the answer to that question. If you miss class it makes it very difficult to maintain a coherent conversation. You'll miss ideas and concepts many of them raised by your colleagues that are not in the reading and you'll have a more difficult time contributing to the discussion. So if for some reason you are forced to miss class and I hope that this will be a very rare occurrence please let me know in advance. I'll ask you to write up a "two pager" a brief response to the discussion questions for the day that you will miss and we'll also talk about how to keep you current with the conversation.

Written Assignments
There will be two kinds of assignments: a final paper and a sequence of "two pagers". Both should be written in a team of 2-3 people, and both should be focused upon a company that you believe to have demonstrated sustained competitive advantage and about which you would like to know more. You should pick a company that you know very well or about which you can become deeply informed. Be aware that for much of the course we will be focusing upon a company's "culture" and "leadership" its incentive systems, organizational structure, norms, values, myths and tacit understandings so that you need to pick a company for which it's possible to learn something about what it's been like "inside". A one paragraph description of your chosen company, explaining why you think it will make a good focus for your semester's work and including the name of everyone on your team, is due in class in Ses #3. More detailed information is available in the assignments section.

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Home Courses Sloan School of Management Advanced Strategy Calendar

Calendar
COURSE HOME SYLLABUS CALENDAR READINGS LECTURE NOTES ASSIGNMENTS DOWNLOAD COURSE MATERIALS
SES # TOPICS I. Introduction 1 Does sustained performance exist?

II. What drives sustained performance? 2 3 4 5 Reviewing 15.900: Strategy fundamentals: position vs. competencies C ase: Wal-Mart C ase: Southwest Pause for reflection

III. Organizational Competence and Relational Contracts 6 7 8 9 10 11 Revisiting 15.311: Lincoln Electric in C hina C ase: The HP-C isco Alliance C ase: Toyota C ase: BP C ase: BP and the Baker report Pause for reflection

IV. Changing Relational Contracts 12 13 14 C ase: Best Buy and C ircuit C ity C ase: Delta and Song Pause for reflection: Toyota's expansion

V. Doing Strategy when Competence Matters 15 16 17 18 19 20 21 22 C ase: Good to Great C ase: Lilly (A) C ase: Lilly (B) C ase: C orning C ase: Paul Levy C ase: Paul Levy (B) C ase: Simmons C ase: Simmons (B)

VI. Wrap Up 23 24 Student presentations of highlights from term projects C onclusions

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Home Courses Sloan School of Management Advanced Strategy Readings

Readings
COURSE HOME SYLLABUS
SES # TOPICS READINGS

Keyword
HBS = Harvard Business School Case. Boston, MA: Harvard Business School Publishing

CALENDAR READINGS LECTURE NOTES ASSIGNMENTS DOWNLOAD COURSE MATERIALS

I. Introduction Gawande, Atul. "The C hecklist." The New Yorker, December 10, 2007. Liker, Jeffrey. "The Toyota Way." C hapter 1 in The Toyota Way . New York, NY: McGraw-Hill, 2003. ISBN: 9780071392310. Suggested further reading: Gawande, Atul. Better: A Surgeon's Notes on Performance . Iowa C ity, IA: Picador, 2008. ISBN: 9780312427658.

Does sustained performance exist?

II. What drives sustained performance? 2 Reviewing 15.900: Strategy fundamentals Yoffie, David, and Yusi Wang. "Wal-Mart in 2002." HBS C ase: 9-702-466, October 20, 2005. Recommended (required for those who have read a Wal-Mart case in another class): 3 Wal-Mart stores in 2002 Fishman, C harles. "Sam Walton's Ten-Pound Bass." C hapter 2 in The Wal-Mart Effect: How the World's Most Powerful Company Really Works and How It's Transforming the American Economy . New York, NY: Penguin, 2006. ISBN: 9780143038788.

Heskett, James. "Southwest Airlines-2002: An Industry Under Siege." HBS C ase: 9-803-133, March 11, 2003. 4 Southwest Airlines 2002: an industry under siege Recommended (required for those who have read a Southwest case in another class): Gittell, Jody. "Southwest versus American Airlines: The Power of Relational C oordination." C hapter 3 in The Southwest Airlines Way: Using the Power of Relationships to Achieve High Performance . New York, NY: McGraw-Hill, 2005. ISBN: 9780071458276.

Siggelkow, Nicolaj. "Evolution Toward Fit." Administrative Science Quarterly 47 (2002): 125159. Roberts, John. "Strategy and Organizations," and "Key C oncepts for Organization Design." C hapters 1 and 2 in The Modern Firm. New York, NY: Oxford University Press, 2007. ISBN: 9780198293750. 5 Pause for reflection You may also find it useful to review: Saloner, Garth, Andrea Shepard, and Joel Podolny. "Internal C ontext: Organization Design." C hapter 4 in Strategic Management. New York, NY: Wiley, 2005. ISBN: 9780470009475. Teece, David. "Explicating Dynamic C apabilities: The Nature and Microfoundations of (sustainable) Enterprise Performance." Strategic Management Journal 28, no. 13 (2007): 13191350.

III. Organizational Competence and Relational Contracts Siegel, Jordan. "Lincoln Electric." HBS C ase: 9-707-445, August 25, 2008. Recommended (required for those that have read the Lincoln case before): Johnson, H. Thomas, and Anders Broms. "Relationships (MBM) versus Quantity (MBR)." C hapter 2 in Profit Beyond Measure: Extraordinary Results Through Attention to Work and People . New York, NY: Free Press, 2000. ISBN: 9780684836676. You may also find helpful: "Agency Theory." Lecture Note 1, Professor Robert Gibbons, Sloan School of Management, MIT

Revisiting 15.311: Lincoln Electric in C hina

"Relational C ontracts." Lecture Note 2, Professor Robert Gibbons, Sloan School of Management, MIT

C asciaro, Tiziana, and C hristina Darwall. "The HP-C isco Alliance (A)." HBS C ase: 9-403-120, April 16, 2003. You may also find helpful: 7 C ase: The HP-C isco Alliance (A) "C ontrol Rights." Lecture Note 3. C ourtesy of Professor Robert Gibbons, Sloan School of Management, MIT. Used with permission. (PDF) "Make, Buy or C ooperate." Lecture Note 4. C ourtesy of Professor Robert Gibbons, Sloan School of Management, MIT. Used with permission. (PDF)

Mishina, Kazuhiro. "Toyota Motor Manufacturing, U.S.A., Inc." HBS C ase: 9-693-019, September 5, 1995. Recommended (required if you are familiar with the Toyota case): 8 Toyota Motor Manufacturing USA Inc. Spear, Steven, and H. Kent Bowen. Decoding the DNA of the Toyota Production System. Boston, MA: Harvard Business Review, 2008. Womack, James, Daniel Jones, and Daniel Roos. "What We Have Learned About Lean Production Since 1990." Afterword from The Machine That Changed the World. New York, NY: Free Press, 2007. ISBN: 9780743299794.

BP: Organizing for performance at BPX

Podolny, Joel, and John Roberts. "British Petroleum (A1): Organizing for Performance at BPX." Stanford Business School C ase. Stanford, C A: Stanford University Publishing. C ase: IB16A1, July 4, 1999.

10

C ase: BP and the Baker report

Baker, James, et. al. "The Report of the BP U.S. Refineries Independent Safety Review Panel." January 2007. "Executive Summary" and "Findings," pages viii-xv and 59-94 from The Report of the BP U.S. Refineries Independent Safety Review Panel, January 2007.

Repenning, Nelson, and John Sterman. "Nobody Ever Gets C redit for Fixing Problems that Never Happened." California Management Review 43, no. 4 (2001): 44-63. 11 Pause for reflection Repenning, Nelson, Paulo Gonalves, and Laura Black. "Past the Tipping Point: The Persistence of Firefighting in Product Development." California Management Review 43, no. 4 (2001): 6468.

IV. Changing Relational Contracts Wells, John, and Travis Haglock. "Best Buy C o., Inc.: C ompeting on the Edge." HBS C ase: 9706-417, October 25, 2007. Wells, John. "C ircuit C ity Stores, Inc.: Strategic Dilemmas." HBS C ase: 9-706-419, September 16, 2005.

12

C ase: Best Buy and C ircuit C ity

13

Delta Air Lines (A): the low cost carrier threat, and Delta Air Lines (B): Song

Rivkin, Jan, and Laurent Therivel. "Delta Air Lines (A): The Low-C oast C arrier Threat." HBS C ase: 9-704-403, January 25, 2005. . "Delta Air Lines (B): The Launch of Song." HBS C ase: 9-704-439, January 24, 2005.

"Briefing Toyota: A Wobble on the Road to the Top." The Economist, November 10, 2007, pp. 85-87. 14 Pause for reflection: Toyota's expansion Welch, David, and Ian Rowley. "What's Next: Toyota's All-Out Drive to Stay Toyota." Business Week , December 3, 2007, pp. 54-56. "At Toyota, A Global Giant Reaches for Agility." New York Times, February 22, 2008.

V. Doing Strategy when Competence Matters C ollins, James. Good to Great: Why Some Companies Make the Leap... and Others Don't. New York, NY: C ollins Business, 2001. ISBN: 9780066620992. Read: - C hapter 1: "Good is the Enemy of Great" - C hapter 2: "Level 5 Leadership" - C hapter 9: "From Good to Great to Built to Last" Also (highly) recommended: "Work of a Modern Leader: An Interview with Ron Heifetz." Boston, MA: Harvard Business Review, 1997.

15

Deconstructing Jim C ollins's Good to Great

16

Eli Lilly's Project Resilience (MIT authored

Henderson, Rebecca. "Eli Lilly's Project Resilience (A): Anticipating the Future of the Pharmaceutical Industry." MIT Sloan School C ase 07-041, April 30, 2007. Recommended:

16

Resilience (MIT authored case)

Recommended: C ornelius, Peters, Alexander van de Putte, and Mattia Romani. "Three Decades of Scenario Planning in Shell." California Management Review 48, no. 1 (2005): 92-109.

17

Lilly (B) (MIT authored case)

Henderson, Rebecca, and C ate Reavis. "Eli Lilly: Recreating Drug Discovery for the 21st C entury (B)." MIT Sloan School C ase 07-043, March 21, 2008.

Henderson, Rebecca, and C ate Reavis. "C orning Incorporated: The Growth and Strategy C ouncil." MIT Sloan School C ase 08-056, April 15, 2009. 18 The Leadership C ouncil at C orning (MIT authored case) Recommended: Rock, David, and Jeffrey Schwartz. "The Neuroscience of Leadership." Strategy and Business, Summer 2006.

19

Paul Levy and the Deaconess Hospital

Garvin, David, and Michael Roberto. "Paul Levy: Taking C harge of the Beth Israel Deaconess Medical C enter (A)." HBS C ase: 9-303-008, January 14, 2003 (revision).

20

C ase: Paul Levy (B)

Boston Globe. "Paul Levy: Taking C harge of the Beth Israel Deaconess Medical C enter (B)." HBS C ase: 9-303-080, December 10, 2002.

21

C ase: Simmons

C asciaro, Tiziana, et al. "Leading C hange at Simmons (A)." HBS C ase: 9-406-046, May 3, 2007.

22

C ase: Simmons (B)

C asciaro, Tiziana, et al. "Leading C hange at Simmons (B)." HBS C ase: 9-406-047, May 3, 2007.

VI. Wrap Up Student presentations of highlights from term projects Pounds, William. "The Process of Problem Finding." Industrial Management Review 11 (Fall 1969): 1-19. 24 C onclusions Scharmer, Otto. "Addressing the Blind Spot of Our Time: An Executive Summary of Theory U." (PDF - 4.4 MB)

23

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Home Courses Sloan School of Management Advanced Strategy Lecture Notes

Lecture Notes
COURSE HOME SYLLABUS CALENDAR READINGS
1

This section includes both discussion questions for cases and occasional slide presentations. For the (B) cases in sessions 17, 20, and 22, discussion questions are intentionally omitted so that the classroom discussions of the (A) cases are not influenced.
SES # TOPICS DISCUSSION QUESTIONS

I. Introduction If hospitals were all "for profit", would the kinds of checklists described in Atul Gawande's article be more widely adopted? Have you ever seen a managerial or organizational process that could be improved through the use of something like a checklist? Why do you think Toyota is arguably still the most successful competitor in the automobile industry? C an things like "checklists" or "the Toyota way" be a sustained source of competitive advantage? Why or why not?

Does sustained performance exist? (PDF)

LECTURE NOTES ASSIGNMENTS

II. What drives sustained performance?

DOWNLOAD COURSE MATERIALS

(Each student was asked to read one of the following cases: Rockwell International, C oke, Dell, Airborne Express, Husky, Mark Twain, Sun Power, C oors, and Nintendo.) As you review your case, think about the following questions: - What are the sources of competitive advantage for your firm? - Are they largely structural or organizational? - If they exist, identify the structural sources of advantage in detail. Do they stem from first mover advantage? From economies of scale or scope? From network effects? - If they exist, identify the organizational sources of competitive advantage in detail. C an they be imitated? Why or why not?

Reviewing 15.900: Strategy fundamentals (PDF)

3 4 5

Wal-Mart stores in 2002 Southwest Airlines 2002: an industry under siege Pause for reflection

III. Organizational Competence and Relational Contracts 6 7 8 Revisiting 15.311: Lincoln Electric in C hina C ase: The HP-C isco Alliance (A) Toyota Motor Manufacturing USA Inc. BP: Organizing for performance at BPX C ase: BP and the Baker report Pause for reflection

9 10 11

IV. Changing Relational Contracts Why was C ircuit C ity initially so successful? How much of its success was driven by structural advantage and how much by organizational competencies? By other factors? 12 C ase: Best Buy and C ircuit C ity Why has Best Buy been so successful? How much of its success was driven by structural advantage and how much by organizational competencies? By other factors? Why was Best Buy able to surpass C ircuit C ity? Why did C ircuit C ity not "simply copy" Best Buy's strategy?

Why has it historically been difficult for the established airlines to respond effectively

Why has it historically been difficult for the established airlines to respond effectively to the challenges presented by low cost carriers? 13 Delta Air Lines (A): the low cost carrier threat, and Delta Air Lines (B): Song (PDF) Is Song well positioned, in your view, to challenge Southwest and other low cost competitors? If you were running Song, what would you be worried about? What would be your top three priorities for action for the coming year?

14

Pause for reflection: Toyota's expansion

How much of Toyota's success is now dependent on structural dynamics, and how much on organizational competence? Why is Toyota experiencing difficulties as it expands? What would you do if you were running Toyota?

V. Doing Strategy when Competence Matters How does C ollins's analysis of the roots of strategic success differ from the analysis we have been developing in class? What is the role of a leader in an organization in building competitive advantage?

15

Deconstructing Jim C ollins's Good to Great

Which of the scenarios outlined in the case seem to you the most likely? Why? 16 Eli Lilly's Project Resilience (MIT authored case) What should Lilly do in response to Peter's analysis? Where should they invest? How would you implement your recommendation?

17

Lilly (B) (MIT authored case)

C ase and questions will be handed out in session 16 What problem is the Leadership C ouncil designed to solve?

18

The Leadership C ouncil at C orning (MIT authored case)

What are its major strengths? What are its potential weaknesses? If you were Peter Volunakis, would you change the way in which the C ouncil operates or the way in which resources are allocated at C orning? Why or why not?

How would you describe the situation Levy inherited at the Beth Israel Deaconess Medical C enter? What challenges did he face? Why did previous turnaround efforts fail? How did Levy get started in his new job? In particular, what were his objectives and what did he accomplish: - prior to his first day at work? - on his first day? - during his first week? What (if anything) was distinctive about the way Levy went about formulating, announcing, and implementing the recovery plan? What is your evaluation of his approach to staffing the task forces? What is your prognosis going forward? What has Levy accomplished in his first two months, and what challenges remain? What is your evaluation of his management style? How should he proceed?

19

Paul Levy and the Deaconess Hospital

20

C ase: Paul Levy (B)

C ase and questions will be handed out in session 19 What are the challenges faced by Simmons in December 2001? How has C harlie Eitel's leadership affected the company in his first six months as C EO? What should be the management team's top priorities heading into 2002?

21

C ase: Simmons

What is Eitel attempting to accomplish with the Great Game of Life program? What is the premise of the GGOL program? How is it supposed to help Simmons or other companies? Should Simmons roll out the GGOL program? If so, how, and how would you justify the $7.2 million investment to the New York investors? If not, why not, and what would you do instead? Be specific.

22

C ase: Simmons (B)

C ase and questions will be handed out in session 21

VI. Wrap Up 23 24 Student presentations of highlights from term projects C onclusions (PDF)

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Assignments
COURSE HOME SYLLABUS CALENDAR READINGS LECTURE NOTES ASSIGNMENTS DOWNLOAD COURSE MATERIALS The Two Pagers
There are three "two pagers." For Ses #5, please answer the following questions: What evidence do you have that your chosen company has been outstandingly successful? What lies at the root of their competitive advantage? Has it changed over time? Who is their most important rival? Why has their rival been unable to duplicate their success? For Ses #8, please answer the following question: What are the organizational competencies of your firm? For Ses #11, please answer the following questions: Does your chosen firm show any signs of having built "relational contracts" within the firm or with key suppliers/partners/buyers? If so, what do they look like? How were they built? Why are they important? Does your chosen firm show any signs of being able to deal with the "worse before better" problem? If so, why is it important and how do they appear to deal with it? In all three cases, you have only two to three pages to explore these questions, so your answers will be necessarily brief. Nevertheless, please make them as thoughtful as you can!

Instructor Comments
Reflections on Relational Contracts (PDF)

The Final Paper

The final paper is due in class in Ses #24. A brief slide deck no more than 6-7 slides outlining your core conclusions is due in class in Ses #23. The final paper should draw on the "two pagers" you have written in the first half of the class to analyze the strategic position of your chosen firm. You should imagine that you have been asked by the CEO and his/her senior team to brief them as to the strategic and competitive threats that the firm faces and the actions that you recommend they should take to combat them and to position the firm for future success. A wide variety of formats are appropriate for this paper, but if I were you I'd focus on the following questions: What are the roots of the firm's competitive advantage? Why has it been as successful as it has been? What are the key factors that sustain that advantage today? What are the important forces for change in the firm's strategic and competitive environment? What are the major opportunities? The major threats? Who are the firm's most important competitors? Are new competitors likely to emerge? Who are they likely to be? Are there other major players in the environment complementors, channels, suppliers whose role may change or shift? What would you recommend that the firm do to maintain and/or improve its position? (Be as specific as you can here the equivalent of "buy low and sell high" or "watch key competitors and take action as appropriate" are not useful.) If you were running "your" firm, what would you do? It's fine to make contingent recommendations if x happens then do y but please be specific as to the nature of both "x" and "y". Your paper should be no more than about twenty pages in length, plus exhibits and figures. I would be delighted to review early drafts, and will be positively ecstatic if you can get me the finished paper by one day after Ses #22 any such "early bird" papers will be graded with particular interest and appreciation, and will be back in your hands by Ses #23.

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