chapter
2
Theories of Strategy
Richard Whittington
Introduction
• Theories contain our basic assumptions about
key relationships in business life & are
important.
• They represent our assumptions about how
things work and tell us what to expect as result
of our actions . Theories tell us what to look out
for and what our first steps should be.
• Four theories of strategy will be presented in this
chapter: the classical approach, evolutionary
perspectives, processual approaches and
systemic perspectives on strategy.
History
• “Bracker” traces the concept of strategy to the Greek word
“strategos”, a General, which in turns come from roots
meaning army and lead
• Presiding at the top of a rigid hierarchy, it is the General
who ultimately makes the decision where:– Plans are conceived
– Plans are executed according to commands transmitted through
obedient hierarchies to the officers & their men at the front . It is
not for them to reason why, but simply execute their orders . The
men are sent to do battle, and the objective is simple: VICTORY
– Socrates saw the duties of a General and a businessman as
equivalent: they both plan for the use of resources in order to
achieve objectives (the main objective is victory).
I.
The classical approach to strategy
• For classicists, optimization of outcomes ( profit
maximization , market share ,technological
superiority ) is the supreme goal of business, and a
rational long term planning is the means to
achieve it.
• The classical approach to business strategy
emerged in the 1960s, with the writings of
– Businessman Alfred Sloan
– Business historian Alfred Chandler
– Theorist Igor Ansoff
The classical approach
• Alfred Sloan, former president of General Motors .To him:– The strategic aim of a business is to earn a return on capital, and if
in any particular case the return in the long run is not satisfied, the
deficiency should be corrected or the activity abandoned.
– He believed in positioning the firm in markets thru which
maximum profits could be earned. Rational analysis was of central
importance to Sloan (top-down planning)
• Alfred Chandler is the first academic researcher of strategy. He
defined strategy as: “the determination of the basic, long-term goals
and objectives of an enterprise, and the adoption of courses of action
and the allocation of resources necessary for those goals”.
• Ansoff:
– Links his notion of strategy directly to both military practice and
academic economics.
The classical approach
• The central problem
– How to build the organizational structures that allow top
management to focus on strategic responsibilities and to attain
their clear cut assigned goals
• The solution
– Removing the executives responsible for the destiny of the entire
enterprise and from the routine operational activities
– give them the time, information and psychological commitment
for long term planning and appraisal
• The result
– Strategy formulation & control confirmed as the prime task of
the top manager
– Strategy implementation is the responsibility of the operational
managers in the divisions.
The classical approach
• Mintzberg (1990) identifies what are the “Basic
premises “ of classical thoughts
– Strategy formulation should be a controlled
conscious process of thought that derives directly
from the notion of rational economic man
– Responsibility for control & conscious must rest with
the CEO, “The strategist”
– Strategies emerge from decision making process
fully formulated, explicit and articulated .They are
orders for others to carry out ( Deliberate strategy)
– Implementation is a distinct phase in the strategy
process, only coming after the earlier phase of
explicit & conscious formulation
The classical approach
• Conclusion
– The classical approach to strategy places great
confidence in the readiness & capacity of
managers to adopt profit maximizing strategies
through rational L.T. planning.
– Managers have control over internal and
external resources. ( environments to them are
controlled )
II.
•
•
•
•
•
Evolutionary perspectives on strategy
• Emerged in 1980’s .
Evolutionary approaches to strategy are less confident
about top management’s ability to plan and act rationally.
Strategy is not and could not be sustainable.
Evolutionary theory believes that markets, not managers,
can secure profit maximization. The best performers
among competitors will only survive (influence:
Darwinian Biology). Environment are efficient selectors
Environmental fit becomes more important than
managerial strategy.
Incompetent managers are eliminated, and incompetent
companies are eliminated
Managers need not to be rational optimizer because
“evolution is thru nature's cost-benefit analysis”
• Bruce Henderson (1989) complains that:– Classical economic theories of competitions are too
abstract & unrealistic
– Competition is not a matter of detached calculation but a
constant struggle for survival in an overpopulated, dense
and steamy jungle
– His conclusion is that business survival in a competitive
environment depends on strategies of differentiation and
adaptation for survival.
• Alchian
– The most appropriate strategies within a given market
emerge as competitive processes allow the relatively better
performers to survive and flourish
– The weaker performers are irresistibly squeezed out of the
ecological niche
– EX: the French and the UK automobile industries
• the most fit survived
• Aldrich (1979)
– Environmental fit is more likely to be the result of
chance & good fortune, even error, than the outcome of
deliberate strategic choice ( of the classicists )
– He warns against overestimating the power of strategy
– Business success is generally the result of
happenstance, just being at the right place at the right
time.( idiosyncratic events )
– Investing in L.T. strategies could be counterproductive
– Organizations maximize their chances of survival in
the S.T. by achieving perfect fit against their current
environment
– Strategy is too expensive to adopt.
– Oliver Williamson “Economy is the best Strategy”
– Only real competitive advantage is relative
efficiency.Managers must concentrate on their costs.
Abundance of diverse new initiatives from which the
environment can select the best.Rates of new firm
formation & failure are equal & complementary
indicators of economic health & dynamism
• Differentiation is a sound principle in competitive environments.
Managers should make sure that what they do is done as efficiently
as possible. Managers should not invest heavily in one single major
plan. According to Evolutionists, managers should experiment with
many small initiatives, and they should build on successes and
eliminate the failures.In searching for the best strategy, evolutionists
allow the environment to do the selecting, not the managers. For
Sony’s Walkman, the company launched 160 versions in the US
market, and at the end kept only 20.
• Evolutionists
– Hold that markets are too efficient to permit
the creation of any sustainable advantage
• Elaborate strategy can only deliver a
temporary advantage . Competitors will
quickly imitate & erode any early benefits
– Strategy can be a dangerous delusion .
– Evolutionary theorists emphasize the limited
capacity of organizations to anticipate and
respond to environmental shifts and changes.
– It is not one manager but the mix between the
forces of market selection and random events
that determines outcomes.
III. Processual approaches to strategy
• Emerged in 1970’s .Processual approaches to
strategy share the Evolutionary skepticism about
rational strategy-making but are less confident
about markets ensuring profit maximizing
outcomes. ( evolutionary perspective)
• Both organizations & markets are often sticky,
messy phenomena, from which strategies emerge
with much confusion & in small steps.
• The American Carnegie School laid the
foundations of the Processual approach (Cyert,
March, Simon), rejecting the rational economic
man and the perfections of competitive markets.
Processual approaches
• Processualists believe in the internal complexity
of organizations. They talked about two
themes: (sources of market failure )
1- The cognitive limits on rational action
(Mintzberg)
2- The micro-politics of organizations
(Pettigrew)
Processual approaches
A. Cognitive Limits
•
•
•
Emphasizing the limit of human cognition
Rational economic man is a fiction
People are
–
–
–
–
–
boundedly rational
unable to consider more than a handful of factors of time
Reluctant to embark on unlimited searches for relevant
information
Biased in the interpretation of data
Prone to accept the 1st satisfactory option that presents itself,
rather than insisting on the best ( no optimal outcomes)
Processual approaches
B. The micro-political view
• Recognition of the individual interest
• Firms are not united in optimizing a single utility such as profit.
Coalitions of individuals each of whom brings
• their own personal objectives
• cognitive biases to the organization
• Organizational members bargain between each other to arrive at a
set of joint goals more or less acceptable to them all
• Bargaining process involves many compromises and “Policy side
payments” in return for agreement
• Result is
– A combination of political bargaining & bounded rationality
which strongly favors strategic conservatism and inert inertia
– Strategy is therefore the product of political compromise, not
profit-maximizing calculation
Processual perspective
– Radically downgrades the importance of rational analysis
– It limits the search for strategic flexibility (because
managers depend on heuristics since it is less costly)
– Reduces expectations of success
• In practice (Nelson & Winter)
– Strategy makers do not strive (devote) ceaselessly for the
optimal solution ( they can’t continuously change every
time environment change)
– Satisfy themselves with established routines and
heuristics of the organization
• Develop a strategy
• Become routinized heuristics
• Constrain the field of opportunity & guiding decisions into an
established path
• There is strategic conservatism in the
Processual approach. Change is suspected, and
routines and standard operating procedures
are followed.
• There is ‘adaptive rationality’: gradual adjusting
of routines in response to messages from the
environment.
• According to Cyert and March, markets are
tolerant of under-performance. Firms ‘satisfice’
rather than profit-maximize.
• Strategy statements can become reutilized
heuristics. Strategies are not chosen; they are
programmed. Managers try to simplify things.
• Weick 1990 : strategic plans give managers
confidence and sense of direction: what matters is
that they are present, and it does not matter if they
are wrong . The company will acquire experience
as it goes along.
• Mintzberg 1987 : proposes the metaphor of
strategy as “craft”
– Strategy needs to retain the closeness, the awareness
and the adaptability of the craftsperson, rather than
indulging in the hubris (self confidence) of long-range
planning
– Crafting strategy is a continuous and adaptive process.
With formation & implementation in a complicated
maze( complex interconnected confusing parts )
• Processualist focus on the imperfections of
organizational and market processes . This focus
yields at least four conception of strategies different
from the classical perspective
– Strategy may be a decision-making heuristics, a device to
simplify reality into something managers can actually
cope with
– Plans may just be managerial security blankets, providing
reassurance as much as guidance
– Strategy may not precede action but may only emerge
retrospectively, once action has taken place . Strategies
emerge en route.
– Strategy is not just about choosing markets and then
policing performance, but it is about carefully cultivating
internal competences.
• Firm structure should not be too rigid. Strategy is
discovered through action and flexibility.
• This gradual adaptive approach committed to
experimenting and learning is called ‘logical
incrementalizm’ (Quinn, 1980). Strategies are often
‘emergent’.
• According to Processualists , market imperfections inhibit
the opportunity-maximizing strategies proposed by
Classicists.
• Processualists believe that core competencies are sources
of competitive advantage. Actions and competences are
more important than goals and strategy.
• Knowledge is embedded in the company’s routines,
culture and teams of employees. Strategy can emerge
bottom-up as well as top-down. Internal skills and
resources are very important.( firm-specific factors)
IV. Systemic perspective on strategy
• It emerged in 1990’s . Systemic theorists retain faith in
the capacity of organizations to plan forward and to act
effectively within their environments
• Differ from the classics by their refusal to accept the
forms and ends of classical rationality as anything more
than a historically and culturally specific phenomena.
• Decision makers are not simply detached individuals
.They are people rooted deeply in densely mixed social
system
• This theory emphasizes that decision-makers are not
simply calculating individuals interacting through
transactions, but people rooted in social systems
(strategy is embedded in social systems).
• Granovetter (1985)
• Notion of social embeddedness
– People’s economic behavior is embedded in a
network of social relations that may involve
their families, state, their professional and
educational backgrounds, even their religion and
ethnicity
– Firms
• differ according to the social and economic
system in which they are embedded
• They are not all perfect profit-maximizers
• They are obliged to be in evolutionary theory
• Systemic perspective challenges the universality of any single
model of strategy
• The objectives of strategy and the modes of strategy-making
depend on the strategist’ social characteristics and the social
context within which he operate.
• Systemic theory finds that the norms that guide strategy derive
from the cultural rules of the local society (modus operandi),
and politics of individuals and departments.
• Despite globalization, company structures that are appropriate
for certain countries might not be appropriate for other countries.
A lot of multinational companies still have most of their sales in
their home country.
• Some cultures interpret events as being the result of God, faith,
luck or history.
• The US and UK rely on individualistic free-enterprise model.
Japan, Germany, and France enlist state resources as natural part
of strategic management.
• American executives put a lot of importance on profit as a
goal.( culture base)
• Managerial capitalism witnessed a split between ownership
and control in Western companies. Executives had high
salaries and compensation, but they are not as dedicated to
shareholders’ interests as Classicists think.
• Managers, according to Systemic theorists, should be
sociologically sensitized. They should analyze competitors’
social structures as well as their industry structures. Also,
an international competitor’s political power can be as
important as its market power.
• Hence the systemic approach uncovers the ideological
biases that are embedded in particular notions of strategy.
Conclusion
• The four approaches differ widely in their advice to
management
• The classical school prescribes a rational detached and
sequential approach, offered a universal norm,it prescribes
a rational approach and consider that success or failure is
determined internally (through planning, analysis and
calculation).
• Processual theory doubts the efficiency of firms or
markets, and favor patient strategies of incremental
adjustment and cultivation of skills & core competences. It
maintains that the process of strategy hinges on the
interactions between individuals and their environment.
This theory is focused on the internal . Processualists look
into political bargaining processes and the adjustment of
managerial cognitive biases.( such as the heuristics)
• The evolutionary like processual perspective is
more cautious and is skeptical of strategist’
capacity to direct strategy effectively in this
rational hierarchical way the theory emphasizes
day-to-day viability while keeping options open.
It believes in Darwinian natural selection.
• Systemic theory emphasizes social systems and
that the strategist should be sociologically
sensitive. Competitive strategy in complex
environments requires a systemic sensitivity to
the diversity of modern economic practices.
• ( next is a table)
Classic
Processual
Evolutionary Systemic
Strategy
formal
Crafted
efficient
embedded
Rationale
Profit
Vague
Maximization
survival
local
Focus
Internal
Internal
External
External
Process
Analytical
Bargaining/
Learning
Darwinian
Social
Key
Influences
Economics/
military
psychology
Economics/
biology
sociology
Key Authors
Chandler,
Cyert &
Ansoff, Porter march,
Mintzberg,
Pettigrew
Freeman,
Williamson
Granovetter,
Whitley
Emergence
1960s
1980s
1990s
1970s