Timo Ehrig

For phone, office and adress information, please click here .

Unawareness and the Shaping of Industry Architectures

Observing the current strategic practice of successful global firms like Apple and Google suggests that shaping new business environments is a process over time that often starts with a new insight on the future nature of a business, or stated differently, an insight on 'new business models', not only a technological innovation. The innovators 'see' how value can be captured and how the architecture of business models in the industry can be changed and shaped.
In my work, I attempt to find new formal expressions of knowledge, and its strategic use to shape the evolution of a business field. The tools offered by standard decision theory (Savage, 1954) and the behavioral decision theory program may be useful normative and descriptive tools in environments of low complexity. But we are lacking a decision and interaction theory (both normative and descriptive) that accounts for decision environments of high complexity. Correspondingly, I am exploring which formal structures are useful to provide the theoretical foundation of such decision and interaction theory. Moreover, I am working on these formal structures.
Games with unawareness are one formal structure which appears to have potential to be applied to business strategy questions. (Games with unawareness are nicely introduced at the webpage of Burkhard Schipper at UC Davis).
A stunning and interesting question is how industries change over time, how they can be shaped by strategic moves. Indeed, Jacobides et al (2006) even suggest that it may be more favorable for a firm to focus on wealth generation over time than on securing current profits. For example, in the interaction between Apple and the music publishers in 2002 regarding the iTunes portal, the publishers were mostly focusing on securing their current profits, while Apple was focusing on wealth creation, and, as an arguable consequence, reshaped the music industry.
However, we are just at the very beginning of modeling the shaping of industry architectures that drive profit migrations over time. There are many battles that are fought over the later architecture of industries, involving many detailed decisions that require foresight regarding potential future complementarities among resources (Jacobides et al., 2006). A superior ability to foresee complementarities among resources may be one key skill that drives success in shaping a new business field. Unawareness structures in games may be applied to model asymmetric foresight abilities among interacting players that both cooperate and compete in shaping a business field.
Perhaps most generally spoken, games with unawareness allow to express that different players reason using different descriptions of the world. In the real world, a puzzling question is 'how language shapes interaction'. If games with unawareness are an adequate tool to express how language shapes interaction is a question that needs attention. A related conceptual questions is how (if at all) the differences in the imagination of possibilities of interacting players can be accounted for using unawareness structures.
And how do differences in the awareness of interacting firms relate to competitive advantages? Recently, in the strategy field, it has been discussed if differences in the languages (more precisely: differences in the abilities to represent a strategic problem) of interacting firms can account for superior decision-making (Brandenburger and Vinokurova, 2011). But how exactly do superior cognitive abilities (judged by strategic success) relate to differences in the languages of firms?
In Juergen Jost's group, we are ongoingly discussing formal structures like games with unawareness. I am working on the further development of such formal structures. I am also working on conceptual questions involved in making such formal structures useful for the analysis of actual business strategies.
Corresponding questions will also be discussed at a workshop that I am co-organizing (click here).