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Much of the time, executives use analogies to generate strategic alternatives. The best strategists know both power and peril of such side by side comparisons.

How Strategists Really Think

Tapping the Power of Analogy

by Giovanni Gavetti and Jan T. Rivkin

Reprint R0504C

Much of the time, executives employ analogies to generate strategic selections. The best strategists know the power and peril of such reviews.

How Strategists Really Think

Tapping the Power of Example

by Giovanni Gavetti and Jan W. Rivkin

COPYRIGHT LAWS В© 2006 HARVARD ORGANIZATION SCHOOL PUBLISHING CORPORATION. ALMOST ALL RIGHTS ARRANGED.

Strategy is around choice. The heart of a company's strategy is what it chooses to do and not do. The quality of the thinking that switches into such selections is a crucial driver of the quality and success of your company's technique. Most of the time, commanders are so immersed in the specifics of strategy—the ideas, the numbers, the plans—that they will don't take a step back and examine how they think about strategic alternatives. But professionals can gain a great deal by understanding their particular reasoning operations. In particular, reasoning by example plays a role in proper decision making that may be large yet largely forgotten. Faced with a new problem or opportunity, senior managers typically think back to some comparable situation they may have seen or heard about, pull lessons coming from it, and apply those lessons to the current situation. However managers rarely realize that they're reasoning by simply analogy. Because of this, they are not able to make use of observations that psychologists, cognitive scientists, and political scientists include generated about the power and the pitfalls of analogy. Managers who give consideration

to their personal analogical thinking will make better strategic decisions and fewer mistakes.

The moment Analogies Happen to be Powerful

We now have explained the notion of analogical reasoning to executives in charge of strategy in several industries, and virtually every one of them, after reflecting, could point out times when she or he relied intensely on analogie. A few popular examples reflect how prevalent analogical reasoning is: • Throughout the mid-1990s, Intel got resisted featuring cheap microprocessors for inexpensive PCs. During a 1997 training workshop, however , Intel's top management team learned a lesson about the steel market from Harvard Business School professor Clayton Christensen: In the 1970s, upstart minimills established themselves in the steel business by making cheap concrete-reinforcing bars called rebar. Founded players just like U. S i9000. Steel ceded the low end of the business to them, but deeply regretted that decision when the minimills crept in to higher-end products. Intel's CEO at the

harvard business review • the spring 2005

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Just how Strategists Think

Giovanni Gavetti ([email protected] edu) is a great assistant professor and Jan W. Rivkin ([email protected] edu) is an associate professor inside the Strategy Device of Harvard Business College in Boston.

time, Andy Grove, grabbed on the stainlesss steel analogy, talking about cheap Personal computers as " digital rebar. ” The lesson was clear, Grove argued: " If we shed the low end today, we could lose the high end another day. ” Intel soon began to promote its lowend Celeron processor more aggressively to makers and buyers of inexpensive PCs. • Starting in the early 1970s, Circuit City thrived selling off consumer electronics in superstores. A wide selection, professional revenue help, and a policy of not haggling with clients distinguished the stores. In 93, Circuit Metropolis surprised traders by launching that it might open CarMax, a chain of used-car shops. The company contended that the used-car industry with the 1990s lose interest a close similarity to the consumer electronics retailing environment of the 1970s. Mom-and-pop sellers with suspect reputations focused the industry, leaving customers nervous when they purchased and financed complex, big-ticket, sturdy goods. Outlet City's managers felt that its success method from...