Strategic Management S1 Foundations of SM

Art or Science Continuum

3 Characteristics of scientific method:
Reductionism (reduce complexity of real world)
Repeatability (in experiments whose results are validated)
Refutability (knowledge is scientific only if it is falsifiable)
Science in general:
Fragmentation is the only way to describe ungraspable problems Different views on
same issue.
Science involves application of rational thinking to human experience.
im is to concisely express laws which govern the regularities of
the universe.
!he laws being expressed mathematically if possible.
Science of Strategy
Concernded with:
"nderstanding why some firms perform better than others...
#y examining the strategic behavior of firms as they interact with their environment...
$ith a view to identify ways to improve firm performance.
Levels of Analysis:
Individual-actor level (e.g.% cognitive% entrepreneurial & !'! literature)
irm level (e.g.% planning% design% positioning & culture literature)
Intra-firm level (e.g.% consensus% conflict & decision(making literature)
Inter-firm level (e.g.% alliances & networks literature)
Industry level (e.g.% market structure & strategic groups literature)
Country level (e.g.% institutional literature and evolutionary theories)
Strategy Research
ssumptions) Firms Differ% *mployees 'atter% +*,S matter
!escriptive) -ey concepts to understand a wider concept
"#planatory: 'akes links btw. +oncepts
"#ploratory: $hich concepts predict a phenomenon
Article 1: Seth + Thomas
$eneral:
Debate on more or less pluralism in strategy field is ancient & current.
pt article to start with because strategy.s links with economics are deep & prominent.
'any different economic theories of the firm% which can potentially inform study of strategy
formulation(implementation.
/ives insight into relevance of different theories for strategy agenda.
+onsider e.g. how the behavioral & motivational assumptions of the behavioral &
managerial theory make them relevant (cf. Spender).
!heories assuming firm homogeneity & strong(form Darwinism are least useful for strategy
research.
0articulary 1elevant for this course) #ehavioral !heory 2 1esearch #ased view
Definiotion of Strategy) strategy is a pattern or plan that integrates an organi3ation4s ma5or
goals% policies and action se6uences into a cohesive whole. well formulated strategy helps
to marshal and allocate an organi3ation4s resources into a uni6ue and viable posture based on
its relative internal competencies and shortcomings% anticipates changes in the environment
and contingent moves moves by intelligent oppontents (7uinn% 89:;)
*conomic !heories of the firm)
%eoclassical &heory of the irm:
constructed to investigate the way in which prices and the allocation of resources among
different uses are determinded% part of the theory of value
appropriate model of firm describes the forces that determine the prices and 6uantities
produced of particular products by the individual firm.
Firm is represented by production function which captures the underlying technology used
to employ the forces of labour and capital for the purpose of generating goods and services
&raditional Industrial 'rgani(ation )I'* "conomics + Same assumptions as <eoclassical !heory
<ormative orientation towards explaining inter(industry differences in performance% where
performance is the extent to which profitability of the firm in a particular industry differs
from paretrian allocative efficiency ideal.
*xogenous demand and supply structures determine industry structure.
Assumes ,omogeneity of firms) conduct is ignored% performance depends on various
properites of industry (incl. *ntry barriers% degree of concentration% diversification% scale
economies% product differentiation)% #lack #ox metaphor = these firms do not allow for
heterogeneity with the exception of scale.
Assumes Strong form !arwinism: *nvironment rewards with survival those firms which
select strategies which happen to be optimal = deviating firms will tend towards extinction
rigid view on strategy (>ensen% 89:?). *nivronment is seen as immutable given% firms
merely react (moderate darwinism talks about 4 interaction4)
Differences to neoclassical theory of firm)
!he focus in neoclassical microeconomics is the theory of price and in traditional @; the
theory of market structure. new set of explanatory Astructure. variables is introduced
by the @ ; approachB
@; economics has a normative orientation towards the shaping of public policy rather
than the predominantly positive orientation of neoclassical microeconomicsB
@; economics has a more empirical flavour.
&he %ew Industrial "conomics
Stems from the introduction of non(cooperative /ame !heory to @, ecomics as a tool to
mathematically analy3e conflict. +entral concept is the art of outdoing the adversary
knowing the adversary is trying to do the same.
@n /ame !heory the firm is viewed as a player who makes rational and interlligent
decisions. ctions intended to maximise their payoffs. ll players same = substantive
rationality assumption.
+entral concept is e6uilibrium strategy which is a strategy combination consisting of a best
strategy for each player in the game.
!hese concepts enetered S' through concepts such as) first mover advantage% reputation
formation and exploitation and commitment.
-ehavioral &heory of the irm
Focus is to predict price% output and resource allocation decisions of the firm% but also on the
actual process of decision making as its basic research commitment.
Firm Definition) +ollection of individuals with multiple goals who operate in a defined
structure of authority.
#ounded 1ationality) 'anagerial behavior is characteri3ed by limited ability to formulate
comprehensive models of reality) maximising behavior becomes impossible satisficing
(satisfactory level of profits).
Decision making process is se6uential and sub5ect ot learning.
*volutionary theory of economic change) !heory developed to characteri3e and explain
phenomena that involve dise6uilibrium in fundamental ways ie. Significant unforseen
technological change. 'odel seeks to explain the dynamic process of ad5ustment of firms.
Firm is capable of adaptive learning but imperfect memories)
rountines that determinde input and output
rountines that determine search behavioral
routines that determine inverstment behavioral
.anagerial /iew0Resource -ased /iew of the irm
ddresses problems associated with separation of ownership and control of a firm.
Shareholders delegate control to managers with little control over them. 'anagers in turn
has great power and considerable discretion to pursure activities which are beneficial to
them but at the expense of shareholder4s interests.
#lack #ox view #"! goal is managerial utility. 'anagerial utility is postulated to be a
function of variables such as i.e. sales or the rate of change of the firm4s si3e.
1esource #ased Ciew (0enrose)) Firm is a collection of resources. !his implies form an
analytical perspective that a firm4s distinctive competence is based on the speciali3ed
resources% assets and skillss it possesses and focuses attention on optimum utili3ation of
these to build competitive advantage and thus economic wealth. ssets could be tangible or
intangible assets (ie. 0atents)
@ssue) Firm could be seen as bundle of resources% as well as a bundle of market acrtivities
(@, framework).
Agency &heory and the irm: inancial "conomics /iew
!he financial economics view assumes that the firm maximises the discounted value of
future cash flows ie. !he <0C rather than profits. Focus on ob5ective function on longer
term view. !he possibility that positive <0C inverstment opportunities are available to a
firm re6uires that it has some 4special advantage4.
+enter of this center is the assumption of shareholder wealth maximisation. Focus on the
contractual relationship between principal (shareholder) 2 agent (manager) which are
supposed to act in the interest of principal.
+ontractual relationships exist also with suppliers% creditors% customers and other
stakeholders Firm as nexus of contracts.
gency costs include in monitoring% bonding costs together with a residual loss (irreductible
reduction in the firm4s value from the separation of ownership and control).
Dighlights the political and bargaining aspects of interactions among stakeholders of the
firm with conflicting interests.
@ssue) firm should be viewed in terms of a coalition of stakeholders and that the task of the
firm is to maintain itself by negotiating resource exchanges with external interests.
&ransaction Cost ramewor1
'arkets and firms are seen as alternative instrumetns or governance structures for
completing transactions. firms organi3ation4s form develops in an exchange situation that
depends on the efficiency of that form for completing necessary transactions.
ssumes decision maker4s opportunism and bounded rationality.
-ey characteristics of transactions btw firms and consumers which impact how the
exchange process will be conducted are asset specificity% uncertainty and fre6uency.
$hen productive assets are non(specific a market contracting process is seen as most
efficient.
@n this framework as well% principal(agent relationships are key. Dowever% these
relationships are characteri3ed by a structure of authority which is typically embodied by
some sort of hierarchy. Dierarchy is pyramidical = top levels control lower levels. !hus
resolution is not contract but (gency !heory) organi3ational structure of hierarchy.
2hilosophical .ethodology
@nductive uses observations to draw generali3ations (move from the specific to the general)
Deductive uses assumptions & rules of inference to infer generali3ations (move from the
general to each specific).
<ormative reasoning) 0rescriptive arguments 4what should be4
0ositive reasoning) #efore managers are told what they ought to do (normative
perspective)%they would value understanding of how things actually are (positive
perspective).
Article 2: Elfring and Volberda Article
$eneral:
+oncisely presents a cross(sectional view of ma5or schools of thought%contrasting them on
five dimensions
Draws a distinction between the analytical (scientific) approach & the clinical (problem(
solving) approach.
? Features of synthesi3ing schools) based on theories from different base disciplinesB
1elated to a cluster of problem areasB Develop clear problem(solving tools.
Schools of &hought:
0rescriptive
!esign School + process of conception (ndrews 89EF)
pproach) +lear and uni6ue strategies are formulated. !he internal situation of the
organisation is used to match the external environment.
#asis) rchitecture as 'etaphor
+ontributions) ,rder. 1educed ambiguity. "seful in relatively stable environment
Support strong and visionary leadership.
Gimitations) Simplification may distort reality. Strategy has many variables and is
inherently complex. #ypassing learning% inflexible in fast(changing environment. Digh
risk of resistance
!ypical) S$,! model% shridge 'ission 'odel
2lanning School = formal process (nsoff 89EF)
pproach) rigorous set of steps are taken% from the analysis situation to the execution
of the strategy
#asis) "rban planning% system theory% cybernetics
+ontributions) /ives clear direction. *nables resource allocation.+ontrol
Gimitations) +an become too static. 1isk of groupthink. 0redicting is difficult.!op
'anagement must create strategy from an ivory tower
!ypical) !heory of 'echanistic and ,rganic Systems. 0arenting styles. Gevers of
+ontrol. Scenario 0lanning
2ositioning School + n analytical process (0orter 89:;)
pproach) @t places the business within the context of its industry and looks at how the
organisation can improve its strategic positioning within that industry
#asis) *conomics% @ndustrial organisation and military strategy
+ontributions) Strategic 'anagement is a science. 0rovides content in a systematic way
to the existing way of looking at strategy. Focus on hard facts. 0articularly useful in
early stage of strategy development% when date is analysed.
Gimitations) S'* S 0G<<@</ S+D,,G. <eglects power% politics% culture% social
elements. @s biased towards large firms. <umber(oriented.
!ypical) +ompetitive dvantage. Five Forces. Calue +hain. #+/ 'atrix. /ame !heory.
!he rt of $ar (Sun !3u)
Descriptive
"ntrepreneurial School + visionary process (Schumpeter% 89?H)
pproach) !he visionary process takes place within the mind of the charismatic founder
or leader of an organisation. 1ely heavily on intuition% 5udgement% wisdom% experience
and insight
#asis) *conomics
+ontributions) sound vision and a visionary +*, can help organisation to sail
cohesively through muddy waters especially in early or very difficult years for the
organisation. Deliberate in broad line but flexible and emergent in the details.
Gimitations) Sailing a predefined course can blind someone for potential developments
or unexpected dangers. Dow to find the right leaderI *ntrepreneurial% visionary leaders
have a tendency to go too fast. #eing a +*, would be very demanding in this
perspective
!ypical) *ntrepreneurial /overnment Seven surprises for new +*,.s (porter).
Geadership styles
&he cognitive school + a mental process (Simon 89JE)
pproach) nalyses how people perceive patterns and process information. +oncentrates
on what is happening in the mind of the strategist and how it processes the information
#asis) 0sychology
+ontributions) Sees strategy as a cognitive process in the mind of the
strategist.Strategies emerge as concepts% maps% schemas and frames of reality. Stresses
the creative side of the strategy process. Strong at the level of an individual strategist.
Cery useful to explain why our minds are imperfect.
Gimitations) <ot very practical beyond the conceptual stage.<ot very practical to
conceive great ideas or strategies. +urrently not useful to guide collective strategy
processes
!ypical) $hole #rain 'odel% >ohari $indow%/roupthink% +ognitive #ias% 'yers(#riggs
!ype @ndicator
&he learning School + an emergent process (Gindblom 89F9% 7uinn 89:;a)
pproach) 'anagement pays close attention over time to what does work and what does
not work. !hey incorporate Alessons learned. into their overall plan of action. !he world
is too complex to allow strategies to be developed all at once.s clear plans or
visions.Strategies must emerge in small steps as organisation adapts or Alearns..
#asis) *ducation% Gearning% 0sychology
+ontributions) ,ffers a solution to deal with complexity and unpredictability in strategy
formation. 'ore people can learn than 5ust the leader.<o need for omnipotent leader.
+an be combined with emergent views. Strong in complex conditions with continuous
change. Strong professional organisations.
Gimitations) +ould lead to having no strategy or 5ust doing some tactical
manoeuvring.<ot useful at all during crises. <ot very useful in stable conditions. !aking
many sensible steps does not add up to a sound overall strategy.!here are costs
associated with learning.
!ypical) ,rganisational Gearning% Forget(#orrow(Gearn Framework%-nowledge
'anagement% S*+@ 'odel
&he political )power* School + a process of negotiation (llison 89J8% 0errow 89J;)
pproach) !he strategy is developed as a process of negotiation between power holders
within the company% andKor between the company and its external stakeholders.
#asis) 0olitical Science
+ontributions) +an help to let the strongest people survive in the corporate 5ungle. +an
help to ensure that all sides of an issue is fully debated. +an help to break through
obstacles to necessary change. Democratic. +an help to decrease resistance after a
decision is made. 1ealistic.0articularly useful to understand Strategic lliances% >oint(
Centures and to do Stakeholder nalysis.
Gimitations) 0olitics can be divisive% uses a lot of energy% causes wastage and distortion
and is costly. +an lead to aberrations.+an lead to having no strategy or 5ust doing some
tactical manoeuvring. ,verstates the role of power in strategy formation.
!ypical) #ases of Social 0ower% 0ower Distance% Stakeholder Calue 0erspective% +ore
/roup !heory% Force Field nalysis% Stakeholder 'apping
&he cultural school = a collective process (<ormann% 89JJ)
pproach) !ries to involve various groups and departments within the company. Strategy
formation is viewed as a fundamentally collective and cooperative process. !he strategy that
is developed is a reflection of the corporate culture of the organisations
#asis) nthropology
+ontributions) *mphasises the crucial role that social processes% beliefs and values are
playing in decision(making and in strategy formation. *xplains resistance to strategic
change and helps to deal with mergers and ac6uisitions.
Gimitations) Cague% can feed resistance to change and can be misused to 5ustify status(
6uo./ive few clues on how things should become.
!ypical) ppreciative @n6uiry% +ultural Dimensions% +ultural @ntelligence% shridge 'ission
'odel
&he environmental school + reactive process (Dannan and Freeman% 89JJ)
pproach) !he strategy is a response to the challenges imposed by the external
environment.$here the other schools sees the environment as a factor% the *nvironmental
School sees it as an actor
#asis) #iology
+ontributions) /ive a central role to the environment in strategy formation
Gimitations) !he dimension of the environment is often vague and aggregated. !his renders
it less useful for strategy formation.Denies real strategic choice for organisations.
"nrealistic
!ypical) +ontingency !heory Situational Geadership
3 Synthesi(ing schools
-oundary school
1esearch into the boundaries (ie. Firm and its environment) is the focus of this
synthesi3ing school. +entral 6uestions)
$hat are the advantages and disadvantages of doing it yourself and contracting outI
$hen is cooperation preferable to doing it yourself or contracting out and how must
the cooperation be organi3edI
$hat are the strategic implications of make% buy or cooperateI
Dow can make% buy or cooperate decisions be implemented an how should these
dynamic relationships be managedI
!wo basic issues) where to draw the boundaryI KK how to manage the fu33y dividing line
between firm and its dividing lineI
1ooted in various base disciplines) ie. economics% sociology% psychology% history
!ynamic Capabilities School
!his school consides S' as a collective learning process aimed at developing distincitve
capabilities that are difficult to imitate.
@nstead of using an outside in approach (ie. 0orter) where importance lies within the
environment% the dynamic capability school employs an inside out approach. +entral
6uestions)
Doe do organi3ations develop firm(specific capabilitiesI
Dow can organisations develop new capabilities that are complementary ot that
substitute existing capabilitiesI
$hat are determinants of successful development routesI
Dow can one determine or measure collective capabilities of the firmI
Sanche3 0erspective) dynamic capabiliy is the firm4s relative ability to use current
resources to create new resources and the develop new ways of using current resources.
+ompentence based competition
Strategc flexibility by modularity ( ability to substitute components variations
organi3ational learning = modular product architectures my facilitate learning
-ir5avainen) Gearning affects strategy formation and strategic change in knowledge
intensive firms.
+yclical 0rocess
L levels) learning and meta learning = intertwined changes of the knowledge of
individual managers and the development of a collective paradigm of the group of
significant actors. Development of portfolio of competences
&he configuration school + a process of transformation
pproach) Strategy formation is a process of transforming the organisation from one type of
decision(making structure to another in an episodic process depending on environment.
+entral 6uestions)
@n what environment are specific strategy configurations effectiveI
$hate are the relevant dimensions that explain the variety of strategy configurationsI
Dow can an organisation pass through a transition from one configuration to the otherI
#asis) +ontext
+ontributions) Strategy and organisational shape (,rganisational development) are closely
integrated and should be reconciled. n organisation can be described in terms of some
stable configuration of its characteristics% which it adopts for a period of time in a particular
type of context. !his causes it to behave in particular ways% that give rise to a particular set
of strategies.!he period of stability are interrupted occasionally by some process of
transformation.-ey to strategic management is most of the time) to sustain stability% or at
least adaptable strategic change% but periodically there is a need for transformation and to be
able to manage that disruptive process without destroying he organisation.!he way of
strategy formation must adapt to its own time and context% while it takes one or more of the
8; mentioned forms. Dence strategy formation itself has configurations.
Gimitations) @n reality there are many shades of grey% not 5ust a limited number of valid
configurations. !he pattern is in the eye of the beholder% if you describe reality by using
configurations% then you are distorting reality to be able to explain it.
!ypical) ,rganisational +onfigurations% +haos !heory% +atastrophe !heory% Disruptive
@nnovations
Article 3: Spender Article
$eneral:
!races the chronological development of the field from the work of nsoff through
+handler to current day debates.
#ackdrop in classic assumptions about (i) economic rationality & (ii) notion of the firm%
both of which are being challenged.
,pens up a third dimension of analysis centering round the idea of actionKpractice shaping
identity & outcomes.
!evelopment of the iel:
fter $$@@ 6uantitative methods and planning dominated% environment was seen as stable.
( 7uantitative 0lanner and Forecaster.
+handler (89EL) changed the field. @ntroduced 6ualitative research = secondary data and
historical methodology. Showed that managers do not think in terms of old planning and
decision making models
89J;s development of the Strategy(Structure(Fit paradigm. (still prevalant for many today)
+urrent focus on networking and organi3ational learning
<ew categories for strategy research)
+handler relocated the field from substantive rationality and economic machine to broader
framework of economic history of a society and its institutions..
'int3berg (89JE) re5ects economic rationality stating strategy is more an art than a science.
For him strategy is the creative outcome of managerial experience% 5udgment and
introspection% only researchable bc it guides practice and thereby reveals the shape and
working of the managerial or organi3ational unconscious.
Strategic change is not simply the redirection of the enterprise towards different product
markets or levels of performance% it may also be the displacement of one rationality or
culture or one industry recipe for another. ( 'ultiple actors and multiple rationalities might
be active at one time.
S' new paradigms revolve around knowledge and skills% what managers and employees
bring to the workplace. +ombination of ob5ective and tacit knowledge
Gevels of analysis)
1ationality% boundaries and integrity must be explained if we are to identify the firm% for
we can now (without substantive rationality 2 1*') no longer presume its nature
i.e. political theoristsMe6uating the organisation with its dominant coalitionB
cogntitive scientistsMe6uating orgain3ation with its cognitive frame or cultue
@, economics shift level upwards) from firm to strategic group as principal unit of
analysis
!ransaction +osta nalysis (!+) shifts level downwards) from firmKoperating unit to
individual economic transaction.
&owards a !ynamic &heory of 'rganisational Strategy
Field has been extended in two dimensions)
richer understanding of multiple rationalities behind strategic activities
multiple levels% so embracing systemic structures and processes above and below firm.
'anagers are used to working with a two(dimensional analytical matrix)
one deals with rationalities = from universal profit maximising of economics to the
arbitrary and idiosyncratic (ie. Founding entrepreneurs)
another deals with alternative levels of analysis% from the elemental activity of work
study through the transaction and organisational levels up to the industry% national and
global levels
!he Dynamics of ,rgani3ation) -nowledge% 1ountines% Gearning and Deuristics
'ove towards knowledge based theory of the firm) Focus on organi3ational knowledge and
learning shows a new convergence btw. @nstitutional economics% political theory% game
theory% and cognitive theory = especially in the technology strategy area.
-ey 6uestion) Doe do we ac6uire% protect% apply and sustain intangible resourcesI ( @f firms
knowledge is idiosyncratic% scarce and the resource of sustainable competitive advantage% it
is being considered a tangible but essentially static asset.
Dealing with 0ractice = !hird dimension
!hird 4action4 dimension of emerging framework of strategic theori3ing) 'uch of executive
creativity that results in strategic advantage emerges only through action
@mplication) @n order to grasp orgain3ational practive fully% we may have to move away from
the idea of generality. ction is always in context% and strategic advantage always in the
world.
'anagers have been 6uicker to reconceputali3e new ob5ects of attention than have
academics. 'anagers becoming less concerned with the firms tangible assets and their
ownership% the basis of a microeconomic theory% than with the pattern of economic activites
that they can influence to produce appropriate conse6uences.
1esearch 0roblem) ction is difficult to capture in papers and researh as it is immediate and
context based.
,rgani3ation presupposes that orgain3ations can be instead. @nstead they are partially
emerging and 6uasi(autonomous systems of organic order. !he S' manager4s role is
redefined as helping to shape these systems in the light of historical% socio(economic%
technological and institutional contexts in which they are embeded.