Strategic Thinking in Complex Adaptive System: A Case Study of the Passive Component Industry

Tsai, Stephen D.Professor

Chiang, Hong-QueiPhD Candidate

Department of Business ManagementNational Sun Yat-Sen University, Taiwan

12/08/2002

Outlines

1.Introduction 2.CAS and Strategic Management 3.Research Methods 4.Case Study 5.Implications and Discussions 6.Conclusion

1a.Introduction

‘outside-in’ paradigm Porter's (1980) enduring contribution is industrial organization (IO) economics in the field of strategic management.

‘inside-out’ paradigm The resource-based view scholars: Penrose's (1959), Wenerfelt (1984) , Barney (1991) , Grant (1991) , Prahalad and Hamel (1990)

1b.Introduction

MotivationIn Taiwan, formerly there were many small and medium passive component firms, but today have manifested their worldwide influence on the industry. Explore how these firms continuously change in a endemic contextExplore the strategic thinking in the context of continuous change

2.CAS and Strategy

Schemata and Strategic Choices Self-Organization and The Impetus of IndustryCo-Evolution and Far From Equilibrium of Industry Emergence and The Innovation of Industry Fitness Landscape and Ecology of Industry

2.1.Schemata and Strategic Choices

Schemata determine the rules of interaction concerning how information and resources flow internally and externally Strategic choice theory --- top managers choose new strategic directions Learning organization theory --- top managers identify leverage pointsCAS theory --- new directions emerge from both choices and the patterns in self-organizing way

2.2.Self-Organization and The Impetus of Industry

Self-organization is a bottom-up process in which detailed input of the system itself determines what happens subsequently Internal self-organization capability and the external selection statusAt the industry level, CAS can spontaneously self-organize into more complex structure. A firm's decision alter the very structure of the industry, which in turn influences it's future behavior.

2.3.Co-Evolution and Far From Equilibrium of Industry

Continual interaction among complex systems The actions of one firm trigger actions and reactions in other firms, whose actions trigger responsive actions in the first. All CAS evolve to the edge of chaos The payoffs of individual agents depend on the choices that other agents make.

2.4.Emergence and The Innovation of Industry

Macro-level patterns arising in CAS systems of interacting agents Internal, spontaneous self-organization among the agents of a systemProvoked by instability, and potentially leading to emergent order. The generation of novelty through recombination have been generated at several different levels of analysis.

2.5.Fitness Landscape and Ecology of Industry

An image of evolution moving across a landscape consisting of peaks and valleys A hill-climbing process---a journey across a heaving landscape CAS and their agents are always locked into interactive games The success of one strategy always depends upon the strategies of others

3.Research Methods

Grounded theory (Strauss and Corbin 1990)

To generate novel and accurate insights into the phenomenon

A longitudinal study conducted from September 1998 to July 2001

Analyzed the data of in-depth interview with senior officers of 10 different firms

4.Case Study

4.1.Industrial Phase Transition

4.2.Evolution of Industry As a CAS

4.1a.Industrial Phase TransitionTraditional Small and Medium Enterprises Phase

Began in 1950s

By 1987, more than 70% of makers with the capital investments less than NT$10 millions, produced traditional plug-in products.

Neither large amount of capital nor a high degree of technology

Based on the control of production cost

4.1b.Industrial Phase Transition

Clustered Information Industry PhaseA 10-year developing plan by Economic Planning and Development CouncilInfrastructure of electronics industry settled and grew rapidly Moved to Asian countries to maintain profitability, and offered "One-stop-shopping”To reposition the products externally and accumulate and differentiate their capabilities internally

4.1c.Industrial Phase Transition

Emergent Telecommunications Industry Phase

In 1999, an emerging handset demand unforeseeable by firmsThe strategic timing for investing was hard to effectively forecast and control in advance.Began to develop global channels Enter the era of network competition

4.1d.Industrial Phase Transition

Digital Convergence Phase

Current dominating market is in portable productsTwo market trends: component integration and high frequency applications Digital convergence and nano-technologyCompetitive advantages should be evolved effectively

4.2a.Evolution of Industry As a CAS

Increasing Diversity and Complexity

Volatility and quick changes in 3C industries

Different firms have different strategic choice

A diversified combination of small and medium, regional and international enterprises

The entire industry grow steadily, but individual firms need their own bottom-up self-organized driving forces.

4.2b.Evolution of Industry As a CAS

Risk Consciousness and Self-Transcendence

The concepts of “risk consciousness”, “self-transcendence”, and “pursue the first”

Bottom-up creativity inside the firms

Creativity is not only an attribute of an individual but a property of a hierarchy of interlocking systems

4.2c.Evolution of Industry As a CAS

Customer-Orientation and Co-Evolution

To access customers quickly, firms moved overseas to build channels for operations

To provide customers “one-stop-shopping” services

Bring the market to “the edge of chaos”

4.2d.Evolution of Industry As a CASPunctuated Equilibrium and International Co-CompetitionContinuously develop new products and process technologies If invest early, incur higher cost and run the risk of no market. If invest late, lose market shares. Vertical cooperative relationship might become horizontal competitionJnternational coopetition are always locked into an interactive game

4.2e.Evolution of Industry As a CAS

Unpredictability of The FutureThe feedback information of the supply chain was non-linear, and unexpected fluctuation occurred quite frequently In 1998, the Asian economic depression; in 1999, the telecommunications industry emerged; In late 2000, market demand declined hastily again. The volatility and uncertainty of resultant products and technology standard

5.Implications and Discussions

Robust strategy

Competing& evolving

Future opportunities

Portfolio of real options

Profitability

Time pacing

Innovating Transformation

Coherent strategy

5.1.Real Options As Long-Term Strategy Technically defined by an investment decision characterized by uncertainty The provision of future managerial discretion to exercise at the appropriate time In the next decade, what will be influences of the digital convergence and nano-technology? Competitive advantages can evolved effectively over time

5.2.Time Pacing As Short-Term Guideline

Change is triggered by the passage of time, rather than by the occurrence of events Best opportunity and consequence is always embedded in a successful time pacing process One of the least understood facets of strategy in unpredictable and high volatility industries

5.3.Strategic Coherence

Coherent connection between long-term options and short-term guidelines

A self-organized corporation: a high degree of spontaneity; generated from the bottom up; new goods and services are developed; respond to a rapidly changing market

Organized around core competencies

6.Conclusion

We are at a crossroads, which compel us to develop newer and more powerful strategic thinking CAS theory will offer valuable metaphors and methods Influences the way managers see the world and the way they manage their companies To understand the fundamental nature of non-linear, self-organized structures