Analogical Strategic Reasoning

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Analogical Strategic Reasoning
How Strategists Really Think
July 29, 2013
Executives often use analogies to make strategic choices, a technique known as
Analogical Strategic Reasoning. This document discusses the Analogical Strategic
Reasoning methodology. Topics include approach, strengths, pitfalls, examples,
deduction, and trial and error. Also includes case examples and PowerPoint
templates to be used in your own analyses and presentations.
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Contents
 Overview 4
 Strengths and Pitfalls 9
 Deduction vs. Trial and Error 14
 Approach to Forming an Analogy 18
 Case Example 25
 PowerPoint Templates 30

Executives often use analogies to make strategic choices using a
technique called Analogical Strategic Reasoning
Executive Summary
Strategy is about choice. Oftentimes, executives use analogies
to make strategic choices, known as Analogical Strategic
Reasoning. Using this technique plays a role in strategic
decision making that is large, but largely overlooked.
Strategists who pay attention to their own analogical thinking
will make better strategic decisions and fewer mistakes.
Analogical Strategic Reasoning is described in the HBR article
“How Strategists Really Think,” authored by Giovanni Gavetti and Jan Rivkin. Much of this document is based on the
thinking proposed by these authors. Analogical Strategic Reasoning is often used by strategists for the following
purposes:
• The amount of information available in many strategic situations is similar to the information required to draw
analogies.
• The wealth of managerial experience matches the need for that experience in analogical reasoning.
• The need for creative strategies can be fulfilled through analogy's ability to spark creativity.
Successful strategy consultants and firms are known for their ability to draw lessons from one industry and apply them to
another—i.e. apply Analogical Strategic Reasoning.
This document discusses the merits and methodology to Analogical Strategic Reasoning, including its strengths,
common pitfalls, and other problem solving methods: Deduction and Trial and Error. This document also contains case
examples and PowerPoint templates to be used in your own analyses and presentations.
Source
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A great example of Strategic Analogical Reasoning is when Intel referred to
cheap PCs as the “digital rebar”
Example – Intel
Intel has renowned strategist Clayton Christensen to thank for learning about the steel
industry case study.
BACKGROUND
Throughout the mid-1990s, Intel had
resisted providing cheap
microprocessors for inexpensive PCs
During a training seminar in 1997,
Intel’s executive management team
learned a lesson about the steel
industry:
• In the 1970s, upstart minimills
established themselves in the steel
business by making cheap concrete-
reinforcing bars known as rebar
• Established businesses, such as
U.S. Steel, ceded the low end
business to them
• However, they regretted this
decision when the minimills moved
up into high-end products
ANALOGY / COMPARISON
Intel’s CEO Andy Grove seized on the
steel analogy and referred to cheap
PCs as the “digital rebar”
Grove argued:
“If we lose the low end today,
we could lose the high end
tomorrow.”
BUSINESS DECISION
Intel soon began
to promote its
low-end
processor, Intel
Celeron, more
aggressively to
makers and
buyers of
inexpensive PCs
Source: How Strategists Really Think, HBR, Gavetti and Rivkin (2005)
THIS IS A PARTIAL PREVIEW
You can download the full document at http://PPTLab.com.
PPT Lab is a crowdsourced presentation design service.

The Supermarket is a popular analogy—that sparked the business models
behind Merrill Lynch, Toys R Us, and Staples
Examples – The Supermarket Analogy
The supermarket is a retail format that was pioneered in the 1930s. It has served as an
analogical source countless times successfully since then. Here are a few examples:
• Charlie Merrill relied heavily on
his experience as a
supermarket executive, as he
developed the “financial
supermarket” Merrill Lynch
• Charles Lazarus was also
inspired by the supermarket
when he founded Toys R Us in
the 1950s
• Thomas Stemberg is the
founder of Staples and former
supermarket executive
• In his autobiography, he stated
Staples began with an
analogical question: “Could we
be the Toys R Us of office
supplies?”

To avoid a faulty analogy, it is critical to avoid superficial similarities when
constructing the analogy…
Pitfalls of Analogical Strategic Reasoning (1 of 3)
WARNINGWARNING
There are numerous pitfalls that we may lead us to draw problematic
analogies on the basis of superficial similarity—and not deep casual traits.
Difficulty in
determining
structural features
• It can be very difficult to
distinguish between a
problem’s deep, structural
features and its superficial
characteristics
• This is particularly true in new
and largely unknown markets
• In the early days of the Internet portal industry, players
adopted analogies that reflected differences in how
management perceived the deep traits to be:
• Lycos saw the market as a high-tech battle field and
felt the company wit the best search technology would
win
• Magellan sough to build “the Michelin guide to the
Web” and thus developed editorial capabilities
• Yahoo saw it as a media business and invested
heavily in the company’s brand and the look and feel
of its sites
1
COMMON PITFALL OVERVIEW EXAMPLE

… and, as humans, are prone to Anchoring and Confirmation Bias
Pitfalls of Analogical Strategic Reasoning (3 of 3)
Psychological
principle of
Anchoring
• Once an analogy (or any
other idea) “anchors” itself in
a person’s mind, it is very
difficult to dislodge
• Studies have shown this is
true even when decision
makers obviously have no
reason to even believe that
initial idea
• This suggests early analogies
(even incorrect) can have
lasting influences
• Nobel Prize winner Daniel Kahneman demonstrated this
principle when he asked study participants to estimate the
percentage of African countries in the membership of the
United States
• He then spun a roulette wheel with numbers from 0 to 100
• Surprisingly, the outcome of the roulette wheel had a drastic
affect on final estimates:
• When subjects saw 10% on the wheel, the average
estimate was 25%
• When they saw 65%, the average response was 45%
3
COMMON PITFALL OVERVIEW EXAMPLE
Psychological
principle of
Confirmation Bias
• Confirmation Bias asserts we
tend to seek out information
that confirms our beliefs and
ignore contradictory data
• Thus, strategists will seek
evidence that their analogy is
legitimate, not evidence that it
is invalid
• In the 1970s, a study asked participants one of two
questions:
• Which pair of countries is more similar, West Germany
and East Germany; or Sri Lanka and Nepal?
• Which pair of countries is more different, West
Germany and East Germany; or Sri Lanka and Nepal?
• In both cases, most people answered “West Germany and
East Germany”
• When asked to test their hypothesis, subjects all sought out
evidence to confirm the similarity or dissimilarity (depending
on their response)
4

Commonly, credit for a strategic decision goes to one of two approaches:
Deduction and the process of Trial and Error
Deduction vs. Trial and Error
DEDUCTION
 When manager apply deduction, they apply
general administrative and economic principles to
a specific business situation
 They weigh alternatives and then make a
rational, informed choice
 They choose the alternative that, per their
analysis and data, would lead to the best
outcome
TRIAL AND ERROR
 On the other hand, trial and error involves the
process of learning after the fact, rather than
thinking in advance
vs
Both deduction and trial and error play important roles in strategy—but each is
effective only in specific circumstances.
Deduction typically requires a lot of data and is
likewise most powerful in information-rich settings—
e.g., mature and stable industries
Trial and error is a relatively effective way to make
strategic decisions in settings that are ambiguous,
novel, and/or complex

For most problems, we can’t apply purely Deduction nor Trial and Error—
for these issues, Analogical Strategic Reasoning serves us best
Between Deduction and Trial and Error – Analogical Strategic Reasoning
Very familiar and
modular
Very novel and
complex
Universe of Strategic Problems
The vast majority of problems fall in this middle ground,
where neither pure Deduction and pure Error and Trial are
viable approaches—it is in this middle ground that
Analogical Strategic Reasoning has its greatest power
Use
Deduction
Use
Trial and Error
In analogical strategic reasoning, managers do not need to understand every aspect of
the problem—they only need to apply the analogy to select features of it.

Analogical Strategic Reasoning takes 4-step approach
Approach to Forming an Analogy
Recognize the
analogy and identify
its purpose
Understand the
source
Assess similarity
Translate, decide,
and adapt
1 2 3 4
It is impossible to make analogies 100% safe—however, these four steps
below can improve our odds of using analogies correctly and skillfully

Step 2.
Understand the source
Approach to Forming an Analogy Recognize the
analogy and
identify its
purpose
Understand the
source
Assess similarity
Translate, decide,
and adapt
1 2 3 4
Source
Problem
Source
Problem
Target
Problem
Target
Problem
ILLUSTRATIVE PROCESS
DESCRIPTION
Understand the source
2
• Begin by examining why the strategy
worked in the industry from which the
analogy was drawn
• Classic tools of strategy analysis (e.g.
Porter’s Five Forces, SWOT, BCG
Matrix) are extremely useful here
• The keys are to lay out:
• In-depth analyses of the source
competitive environment
• The solution of strategy that worked
well in the original context
• The link between the source
environment and the winning strategy
Candidate
Solution
Candidate
Solution

Step 4.
Translate, decide, and adapt
Approach to Forming an Analogy Recognize the
analogy and
identify its
purpose
Understand the
source
Assess similarity
Translate, decide,
and adapt
1 2 3 4
Source
Problem
Source
Problem
Target
Problem
Target
Problem
ILLUSTRATIVE PROCESS
DESCRIPTION
Translate, decide, and adapt
4
• The final step is to decide whether the
original strategy—properly translated—
will work in the target industry
• This step requires that we state clearly
what the strategy would look like in the
new setting
• This requires some adjustments
• Even the best analogies involve
some differences between the source
and target settings
• After the translation, there is a Go or No-
go strategic decision on whether to
pursue the analogy in the market
• If the decision is “Go,” there is another
round of adjustments:
• The strategy must be adapted to
feedback from customers, rivals,
suppliers, and other key players
Candidate
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Adjust the solution for glaring
differences—finetune the
solution using market
feedback

Let’s walk through the 4-step approach to Analogical Strategic Reasoning
by looking at the case of Circuit City launching CarMax
Case Example – Circuit City Launching CarMax (1 of 4)
Source
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Source
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Target
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Target
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Our
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Application
In 1993, Circuit City announced to investors it would launch CarMax.

When Circuit City launched, the retail environment was very fragmented,
there were untapped efficiencies and unmet customer needs
Recognize the
analogy and
identify its
purpose
Understand the
source
Assess similarity
Translate, decide,
and adapt
1 2 3 4
When Circuit City launched
CarMax in the earl 1990s,
management recognized
significant parallels between the
competitive environment of the
used car market and that of
consumer electronics in the
1970s (when Circuit City
launched).
The goal was to leverage this
similarities to duplicate its
retailing business model in an
entirely new vertical market.
Let’s start by analyzing the source environment.
When Circuit City began its rise to success in the 1970s, the consumer electronics industry was
dominated by mom-and-pop retailers of varying quality and effectiveness. Demand kept these small
retailers in business, despite three key issues with their businesses:
• Consumer were more committed to national brands than to retailers;
• The switching cost from one retailer to another was very low; and
• Customers often feared that retailers were preying on their ignorance of high-tech products.
The environment was also marked by untapped efficiencies (e.g. economies of scale) and unmet
customer needs (e.g. stores carried limited selections of brands and products, products were
oftentimes out of stock).
Circuit City developed a highly successful strategy to take advantage of these market opportunities
and neutralized the threats in this situation.
Key to its success were a series of fixed investments: 1) large stores that could provide a wide
selection of products, 2) technology that could track sales patterns closely, 3) automated distribution
centers that were tied to the sales-tracking technology, and 4) significant branding efforts.
Additionally, through economies of scale and scope, Circuit City offered lower, competitive prices.
These scale-driven cost advantages also put up barriers to entry. (Analysis continued on next slide.)

The used-car market shared many similarities to the environment
characterizing consumer electronics in the 1970s
Recognize the
analogy and
identify its
purpose
Understand the
source
Assess similarity
Translate, decide,
and adapt
1 2 3 4
(Analysis continued.)
Our goal is to figure out whether the casual logic holds up in the target environment.
In preparing this analysis, it is helpful to create 2 lists of industry features:
• Those that play a crucial role in the causal logic; and
• Those that don’t.
For Circuit City, these are the crucial elements:
• Unsatisfied customer needs, especially for product selection, product availability,
and trustworthy retailers;
• Untapped economics of scale and latent, but largely unrealized, barriers to entry;
• Unexploited opportunities to apply information and distribution technologies for
better inventory management;
• Fragmentation of competitors (many of them weak);
• Brand, powerful, reliable suppliers;
• Low customer switching costs; and
• Absence of goods that are close substitutes at the high end of the market.
There were numerous similarities between the
source and target environments:
• Many customers were unsatisfied with and
distrustful of current retailers (till this day,
there is still stereotype of the sleazy used car
salesman);
• Economics of scale and barriers to entry
were limited;
• The industry was fragmented;
• Information and distribution technologies
remained primitive, even though the
inventory was very diverse; and
• There was low customer switching costs.
All these similarities match crucial elements of
the casual logic in the electronics retailing
model, which suggests a strong analogy.
Note that important differences also exist.

Contents
 Overview
 Strengths and Pitfalls
 Deduction vs. Trial and Error
 Approach to Forming and Analogy
 Case Example
 PowerPoint Templates

Insert headline
TEMPLATE – Analogical Strategic Reasoning Approach/Process
Application
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Insert headline
Recognize the
analogy and
identify its purpose
Understand the
source
Assess similarity
Translate, decide,
and adapt
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Insert headline
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Recognize the
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Assess similarity
Translate, decide,
and adapt
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1. Recognize the analogy and identify its
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2. Understand the source
3. Assess similarity 4. Translate, decide, and adapt
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Insert headline
TEMPLATE – Analogical Strategic Reasoning Approach/Process (Variant)
1. Recognize the analogy and identify its
purpose
2. Understand the source
3. Assess similarity 4. Translate, decide, and adapt
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Target
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Candidate
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Insert headline
TEMPLATE – Case Study (1 of 2)
Recognize the
analogy and
identify its
purpose
Understand the
source
Assess similarity
Translate, decide,
and adapt
1 2 3 4
Filler text, filler text, filler text, filler text, filler text
• Filler text, filler text, filler text
Source:

Insert headline
TEMPLATE – Case Study (2 of 2)
Recognize the
analogy and
identify its
purpose
Understand the
source
Assess similarity
Translate, decide,
and adapt
1 2 3 4
Source:

PPT Lab (www.pptlab.com) is the only crowdsourced
presentation design service. Get consulting-quality
presentations at a fraction of the cost!
Each month, we will create well over 50 slides of for our members.
As a member, you will drive what business slides we create by
submitting your own presentation projects to our team. All
presentations will be created by a team of management
consultants and follow the Consulting Presentation Framework.
www.PPTLab.com
support@pptlab.com

Analogical Strategic Reasoning

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