1. chapter 2 Theories of Strategy Richard Whittington

2. 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.

3. 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).

4. 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

5. 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.

6. 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.

7. 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

8. 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 )

9. 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”

10. 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

11. 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.

12. –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.

13. 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.

14. 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.

15. 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)

16. 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 1 st satisfactory option that presents itself, rather than insisting on the best ( no optimal outcomes)

17. 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

18.  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

19. 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.

20. 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 )

21. 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.

22. 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)

23. 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 ).

24. 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

25. 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.

26. 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.

27. 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)

28. 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)

29. ClassicProcessualEvolutionarySystemic StrategyformalCraftedefficientembedded RationaleProfit Maximization Vaguesurvivallocal FocusInternal External ProcessAnalyticalBargaining/ Learning DarwinianSocial Key Influences Economics/ military psychologyEconomics/ biology sociology Key AuthorsChandler, Ansoff, Porter Cyert & march, Mintzberg, Pettigrew Freeman, Williamson Granovetter, Whitley Emergence1960s1970s1980s1990s