Abstract and Keywords
This article defines strategic management and outlines various approaches to strategy. Strategic management is about charting how to achieve a company's objectives, and adjusting the direction and methods to take advantage of changing circumstances. It was taught in the 1950s and 1960s under the title of Business Policy. The book addresses some of the most important issues in the field of strategic management at the beginning of the twenty-first century. The book aims to provide a well-informed and authoritative guide to the subject and to the current debates taking place in the field of strategy. It aims to be a blend of mature thinking and cutting-edge speculation.
The Oxford Handbook of Strategy is a compendium of chapters by prominent academics addressing some of the most important issues in the field of strategic management at the beginning of the twenty-first century. It is produced in six parts. All the contributors are practising academics, mostly currently researching in the area in which they have written their chapters for the Handbook. The book is part of an important new series of Handbooks that Oxford University Press is developing across the social sciences and humanities, including several in business and management. The first of these is The Oxford Handbook of International Business edited by Professor Alan Rugman and Professor Thomas Brewer. These Handbooks aim to address key topics in their field and to identify the evolution of debates and research on these topics.
The Oxford Handbook of Strategy is targeted at an advanced group of academics, researchers, and graduate students for whom it aims to be a useful resource, sitting between the specialist journal article or monograph and the extensive range of established textbooks in the field. It is intended to provide the graduate student, researcher, or strategy lecturer with a well-informed and authoritative guide to the subject and to the current debates taking place in the field of strategy. It aims to be a blend of mature thinking and cutting-edge speculation. For example, it revisits the (p. 2) traditional issue of the boundaries of the firm in the light of the New Economy, focuses on dynamic capabilities and organizational learning as issues vital to the maintenance of competitive advantage, and considers the impact on the mainly static tools of strategic analysis of the turbulent economic conditions inherent in the globalized world of today. In addition to these ‘state of the art’ issues, the Handbook also deals with the more traditional subjects of competitive analysis, the role of the corporate centre, and international strategy amongst others. Teachers of strategy will find both much of the traditional material for their presentations contained in the Handbook, as well as illustrations of how to introduce the newer issues of debate into their teaching.
What Is Strategic Management?
Strategy or strategic management applied to business problems evolved from a number of sources, including those of the taught case study and the discipline of economic theory. In the view of some writers (e.g. Kay 1993), it evolved as a theoretical discipline in response to the frustrations of managers at the limited help the study of economics was able to give them in running their businesses. Economics, even the industrial organization field, still operates on a very restricted set of assumptions, many of which are somewhat unrealistic in many areas of actual business life. Examples of these assumptions are that markets tend inexorably to move towards equilibrium; that decision-takers are always rational and try to profit-maximize all the time, and that decision-making is always based on all available information and is necessarily rational. Economics, especially in its neoclassical form, also holds that in the long run supernormal profits are not sustainable, except where there are unscalable barriers to entry, and that the differences between products in a given market, and between companies, tend to become minimal over time. Finally, and this is perhaps the key factor, economic decisions are taken deterministically in response to economic forces, and not as a result of discretionary management judgement. One unit of management becomes therefore much like another, and the concepts of entrepreneurship or even idiosyncratic management style do not sit easily even in modern economic theory.
Clearly, operating under such a set of assumptions, economists were of limited help in assisting managers in building profitable companies. However, the need was clearly there to help the entrepreneur tackle the complexity of the present, and the uncertainty of the future, by providing theories against which they could measure their decisions, when tackling strategic problems concerning the survival and (p. 3) prosperity of the firm. This is where the discipline of strategic management found its raison d'être.
However, despite the emergence of strategic management as a subject in its own right, and the self-imposed limitations of traditional economics, the academic discipline of economics in the sense of the study of the allocation of scarce resources and the analysis of supply and demand still underlies many of the frameworks that strategic thinkers have developed. Their aims are different, of course, in that economists are ideologically inclined towards the admiration of perfect markets, whereas strategists actively seek market imperfections to help them in their unending search for the perfect product that no competitor can touch. Yet the economic underpinnings of much strategic thinking are clearly visible in many of the contributions to this Handbook.
However, the degree to which economics should be regarded as the one fundamental intellectual discipline informing the study of strategic management is still a key issue engendering heated discussion amongst theorists from varied background disciplines. Much of the thinking behind the papers in Part I of this volume reflect the unwillingness of psychologists, technologists, sociologists, and demographers to concede too much intellectual hegemony to the economists. For example, the current most popular approach to achieving strategic change tends to focus more on cognitive and psychological barriers to change than on the structural or organizational difficulties of implementing plans for change. Similarly the thinking of evolutionary biology and Darwinist survival theory is increasingly becoming influential in the determination of views of the future of particular industries.
Strategic management is about charting how to achieve a company's objectives, and adjusting the direction and methods to take advantage of changing circumstances. It was taught in the 1950s and 1960s under the title of Business Policy. This often involved ex-senior executives teaching case studies with which they were familiar and attempting to draw out lessons with more than idiosyncratic relevance. Out of this developed the Long-Range Planning movement of the 1970s, which became a fashionable process, but often involved little more than the extrapolation of recent trends, or in negative situations the development of the optimistic ‘hockey stick’ approach to future performance. Not surprisingly, most long-range plans either gathered dust on shelves or merely failed to meet their declared targets.
The focus then switched to the portfolio matrix as a corporate tool to evaluate the health of the corporate portfolio of Business Units. The Boston Consulting Group, McKinsey & Co. and Arthur D. Little were the consulting companies in the vanguard of developing the most popular of these tools in the 1970s. However, it soon became apparent that the use of such tools was very mechanistic and a somewhat unsubtle approach to attempting to develop a corporation, and the stage was set for academic contributions to strategy development to be provided in the form of intellectual frameworks, and not merely in the form of case study (p. 4) anecdotes. Michael Porter (1979) soon arrived on the scene thereafter, and began turning what had by now come to be renamed Strategic Management into a subject with some claims to being an academic discipline with a degree of the required academic rigour. It soon became an established part of the Business School MBA curriculum replacing Business Policy courses, and came to be seen by many as the central core from which all other subjects fanned out. Thus, a generic strategy was chosen, e.g. focused differentiation, which, in order to achieve the detail necessary for implementation, then needed to be developed into a financial strategy, a marketing strategy, an operations strategy, an R&D strategy, and so forth.
Porter's background was in industrial organization economics and his most famous framework, the five forces competitive intensity of industry tool (1980) has considerable affinities with that discipline, as a means of assessing the importance of key factors in the industry environment as determinants of the potential profitability of that industry. He followed his industry analysis book Competitive Strategy (1980) with a subsequent one focusing on company analysis, Competitive Advantage (1985), which introduced the value chain as a key tool for the internal analysis of a company. Although the subsequently named ‘Resource-based Approach’ is more commonly traced back to Penrose (1959) or Selznick (1957) rather than to Porter, it is interesting to note that in his 1985 book on competitive advantage Porter does move away from the traditional economists' emphasis on the dominance of markets, and focuses on the actual make-up and activities of the firm seeking such advantage. This internal analysis side of strategic management was to come increasingly to the fore in the 1990s as the limitations of the market positioning approach for achieving differentiation and hence advantage became apparent, and the work of Prahalad and Hamel (1990) and of Teece, Pisano, and Shuen (1997) became particularly salient in taking the thinking beyond simple value chain analysis, and focusing on what the firm could do better than others and which was difficult to imitate.
Setting the strategic direction for a business is the most complex task facing any top management team. The complexity arises for a variety of reasons that are peculiar to strategy-making. Strategy is about the future, which is unknown and unknowable; there are many paths that a firm could follow, and firms operate in dynamic competitive environments. But because strategy-making involves people, complexity is compounded, since each executive involved has his/her own views and motives, which may or may not be explicit, and in deciding upon a particular strategy, individuals are constrained by their past experiences, taken-for-granted assumptions, biases, and prejudices (Bailey and Johnson 1992).
There are, of course, ways of dealing with these layers of complexity. One is to avoid the problem of strategy altogether by running the business on an ad hoc, day-to-day basis. This can work as long as the things the firm is doing continue to be relevant to the markets it operates in. Another might be to engage in some form of (p. 5) long-term planning, extrapolating known trends and discovering their numerical resource and profit implications. This can be a more or less elaborate process: at the simpler end of the spectrum, planning can be merely a form of extended budgeting. More elaborate planning systems would involve scenario building; extensive market, competitor, and company analysis; generation of options; evaluation and selection from a range of possible strategies; and detailed action plans, budgets, and control systems. Planning processes do not eliminate complexity, but they can provide a structured way of coping with an uncertain future.
Complexity can be dealt with by taking a broad view of what the organization should look like some time in the future. This can be captured in a mission and/or vision statement of intent, and allowing people to evolve strategies within these broad guidelines. This approach might be favoured in organizations facing more turbulent environments in order to provide at least some benchmarks for judgement. The development of broad-based organizational learning capabilities aims to deal with this issue to some extent as John Child emphasizes in Chapter 15.
Knowing that the company has a strategy is important for employees to feel that at least up to a point they know where they are going, and how they are trying to get there. In this sense, it is essential to the management of successful businesses. A shared understanding of where the firm is trying to go can be liberating and empowering. Some view of where and how the firm is trying to compete gives confidence to managers from the top downwards. It assists managers in making resourcing decisions, and it can instil a sense of purpose. Because the future is uncertain, it is impossible to analyse the firm's situation completely rationally, in a way which produces a single ‘correct’ strategy for the business. However, faced with uncertainty and complexity, some sense of direction is better than no sense of direction. A well thought through and well argued strategy will not necessarily be the optimal strategy for the business, and there may be several viable alternatives, each with their advantages and disadvantages as a real options approach (cf. Kogut and Kulatilaka in Chapter 30) is set up to acknowledge. The future may indeed be different from that envisaged at the outset, nevertheless a shared and agreed view of where the management is trying to take the firm is an essential ingredient for the successful management of today's activities.
Strategy-making can be approached from a descriptive and a theoretical perspective. In the last two decades a number of excellent academic books have ably set out the major issues involved, and have comprehensively reflected the ever-widening range of theoretical perspectives that have been brought to bear on strategic management (cf. Johnson and Scholes 1989; Grant 1991; de Wit and Meyer 1994; Kay 1993; Quinn, Mintzberg, and James 1988). Insights from economics have now been augmented (and sometimes contradicted) by contributions from cognitive psychology, social anthropology, organization sociology, and political theory. The problems of ‘rational planning’ are by now all too evident, and why it often does not lead to successful change.
However, senior managers do have to make strategic decisions. They are not in the comfortable position of an academic observer, who whilst being able to point out how complex everything is, can always walk away from the problem. The essence of senior management work is to wrestle with the problems of strategy. The concepts, models, and techniques presented by the chapter authors in this book should be regarded as tools for thought, and aids to decision-making. None of them gives the certain right answer to the strategy problem. They are designed to help executives to structure a strategy debate; they do not take the place of the debate.
The tools and techniques have evolved over the last two decades. Some are slight adaptations of existing methods. Others have been newly created to address a particular problem encountered in facilitating strategy debates with top teams. Benefits are derived from the thinking and discussion involved in applying the tools, as well as from the insights generated through the analysis. None of the techniques is a substitute for the exercise of judgement. The techniques covered force important questions to be asked which are not routinely discussed. This prompts a search for better information (e.g. on customers' real needs), and it usually provokes a more critical evaluation of the firm's situation.
Varying Approaches to Strategy
During the early crystallization of the strategic management field of study, the only approach to the creation of strategy was the rational approach. This was generally embodied in a sequential process of strategy formulation which involved setting objectives, analysing the external environment, identifying the company's strengths and weaknesses and those of its competitors, generating a number of possible strategies, selecting the best one, and proceeding to implement it. This process was associated in the early days of Strategic Management with the names of Learned, Christensen, Andrews, and Guth (1965), and with Ansoff (1965), all significant figures in the US business school world dating back to the 1960s and 1970s. Along a different track but equally important to the history of strategy was the work of Chandler (1962), who linked together the selection of a strategy with the subsequent organization of the company to implement it.
However, two problems developed with this somewhat determinist and very rational approach to the development of strategy and organization. First, it was observed that companies rarely implemented strategies formed in this way. Secondly, many companies did not form their strategies in this way anyway. It was (p. 7) much more common for strategies to emerge through a fine-tuning process of trial and error with subsequent adjustments to meet the needs of changing circumstances. The name of Henry Mintzberg (1973; Mintzberg and Waters 1985) became closely associated from the 1970s and onward with the movement to question the idea and practice of rational strategic planning and indeed what a manager actually did in his job, as opposed to what the traditional writers on organizations claimed that he did. Mintzberg proposed the replacement of the rational well thought out approach to strategy formulation with the more pragmatic, trial and error process of emergent strategy, and so stimulated writers to focus on the actual strategic process rather than merely the content of strategy, assuming a rational process as was the traditional case.
Since then a number of authors have published ‘definitive’ taxonomies of planning schools including: Bailey and Johnson's (1992) rational, political, visionary, ecological, interpretive, and logical incremental approaches with as many hybrids as companies employing them; Whittington's (1993) classical, processual, evolutionary, and systemic styles; Chaffee's (1985) linear, adaptive, and interpretive schools; and ultimately the tenfold strategy schools taxonomy of Mintzberg, Ahlstrand, and Lampel (1998), namely the design school, the planning school, the positioning school, the entrepreneurial school, the cognitive school, the learning school, the power school, the cultural school, the environmental school, and finally the configuration school. Clearly many of these supposed schools overlap in concept. We would defy anyone, for example, to distinguish between Bailey and Johnson's rational, Whittington's classical, Chaffee's linear, and Mintzberg's design schools. Similarly, it is commonsense that a strategy put together in a linear, rational, classical way will then be adapted and emerge as something at least slightly different over time.
Without wishing to add to the confusion over strategic planning schools, we would opt for a broadly conceived taxonomy of four strategic methods which can be used by a company without risk of self-contradiction when it is developing its strategy: the rational planning process, the logical incremental process, the evolutionary imperative, and the cultural constraint.
The Rational Planning Process
Many companies, especially the larger ones, do indeed have strategic planning departments and processes during which they review past plans and develop new ones on a rational analytic basis. The planning cycle is normally carried out on a regular basis during the year, and both line managers and planning staff spend considerable time in market analysis, and in formulating appropriate strategies for the future. They identify planning gaps between the firm's numerical objectives and (p. 8) the results believed likely to emerge if present strategies are continued with. They then devise new strategies to fill the supposed planning gap, and develop action plans with timetables and responsibilities to make sure the plan is carried out correctly and on time.
The Logical Incremental Process
Due to such thinking as real options theory (Dixit and Pindyck 1994), companies often do not take actions on plan implementation until they absolutely need to, thus keeping their options open until the last minute, and taking decisions based on the latest available information. This enables the implementation of plans to be adaptive, and to emerge to meet an existing situation, rather than one forecast earlier, and no doubt different in actuality from what was expected when the original plan was developed. The logical incremental approach also leads to a more flexible mindset than might be the case with a strict classical planning process. However, a key issue in the use of this approach is the degree to which major schemes involving complex and high fixed cost planning can be embarked upon by means of it. If everyone were logical and incremental, would the major periodic ‘punctuating of the equilibrium’ (cf. Tushman and Anderson 1986) ever take place; would competence destroying changes ever happen or would all progress be based eternally on minor competence-enhancing efficiency improvements?
The Evolutionary Imperative
Whatever is planned, only what works will succeed, so a natural selection element enters into the interaction between all planning and subsequent decision-making. Thus, although a company may plan to achieve certain targets, this may be beyond its abilities, and if it is sensitive to what happens to it as it pursues its business, it will soon adjust its strategic behaviour to enable it to achieve results that are within its compass. This requires its strategic management approach to include some elements of evolutionary adjustment behaviour in the interests of survival. Evolutionists, however, frequently raise the issue of whether major changes in companies in response to evolving forces are really possible (Hannan and Freeman 1989), or whether path dependency is dominant in constraining the actions companies can and will take (Ghemawat 1991), thus inhibiting firms from achieving major strategic change. There is certainly ample evidence to suggest that the market leader with an existing technology rarely finds it possible to make the necessary adjustments and remain market leader when a new technology takes over (cf. the history of IBM and of Microsoft for interesting case studies on this subject).
(p. 9) The Cultural Constraint
Whatever the company's espoused planning system, it will inevitably include cultural constraints in its thought processes and strategic behaviour. Executives in Shell behave differently from those in say the old-style Hanson and have different value systems at work; a Japanese company typically behaves differently from an American or a British one. The reasons for this are to be found in the corporate and national cultures of the companies, and these are reflected in their strategic management systems whether or not the decision-makers are aware of the fact. So the cultural element enters into strategic management in providing a set of implicit, and often only subliminally perceived constraints to a firm's strategic management. A key issue in the field is therefore the issue of convergence. To what extent is there a best practice worldwide for the performance of particular activities, and to what extent are companies constrained by their national origins and their administrative heritage (Bartlett and Ghoshal 1989), and therefore doomed to exhibit only such limited strategic behaviour as those constraints allow?
Thus, strategic management in the modern age can be characterized as frequently having a strong rational aspect to it, at least at the planning stage, and then, due to the increasing turbulence of many markets, to be likely to take on aspects of the logical incremental philosophy to avoid errors due to the unpredictability of the movements of market. Evolutionary forces will inevitably operate on it, exhibit aspects of natural selection, and constrain the range of possible decisions made, and company and national culture will exercise different but probably equally powerful constraints.
More recently we face the problem of the growing turbulence in world markets as globalization, or at least regionalization makes a small percentage change in demand or supply lead to strongly fluctuating national fortunes. In such circumstances the strategies appropriate to stable conditions, and even the methods of strategy formulation become questionable in turbulent ones, and the need for a dynamic approach and for robust strategic flexibility become necessary for survival, rather than a narrowly defined focused strategy. The issue of what the boundary of the firm should be in such circumstances is a key one. To what extent does it make sense to regard the integrated legal entity as the firm, or is the enterprise in business reality from many viewpoints that composed of the core firm, its strategic allies, and its subcontracting suppliers?
Part I: Approaches to Strategy
The Handbook opens with a chapter by John Kay, Peter McKiernan, and David Faulkner on the history of strategy in which they concentrate on the last thirty years in which strategy has been a distinct subject of theoretical and empirical study. They (p. 10) deal with the 1960s growth of corporate planning through the 1970s with its emphasis on diversification by means of portfolio planning to the late 1980s when the concept of the core business began to become predominant. Finally they come up to date with the consideration of the application of chaos and complexity theory to strategic issues and the problems for strategy of facing an increasingly turbulent business environment. The authors emphasize the need, if the study of strategy is to be effective in outcome, to develop a fruitful blending of deductive logic, game theory, and empirical observation.
In Chapter 3 Martin Slater goes to the core of the difference between the study of economics and strategy in identifying the firm and its logical boundaries as critical to the work of the strategist. In so doing he unearths the economic roots of this investigation in the early work of Coase (1937) and the continuing line of enquiry in the work of the transaction cost economists, notably Oliver Williamson (1975, 1985). In all this, it becomes very apparent that it is the firm, its boundaries and its essential nature, differentiated from one firm to another, that is the true study of strategic management.
Chapter 4, contributed by David Barron, illustrates the importance of evolutionary forces in the development of firms in markets. He emphasizes the important work of Hannan and Freeman (1989) in this regard and of Nelson and Winter (1982) in demonstrating how Darwinian, and indeed Lamarckian, theories of evolutionary development, through fit and adaptation, provide a strong force in determining the way in which markets and firms develop irrespective of the more newsworthy role of great industrial leaders.
Not only is the development of strategy constrained by evolutionary forces, but also by the forces of institutionalism, as Ray Loveridge points out in Chapter 5. Regulative, normative, and cognitive pillars of social order exist in society in the form of organizational rules that we accept in a utilitarian way; rinciples that we feel we ought to be committed to, and cognitive values that become part of our ‘taken for granted’ views of the world. These factors limit the degree to which we have effective free choice in our selection of strategies.
In Chapter 6 David Teece tackles the increasingly important area of technology strategy and the question of how to profit from innovation. He stresses the three prime requirements, if one is to make profits and hold market share as a result of a technological innovation. First, you need a strong appropriation regime to protect your innovation from would-be pirates; then you need your new product or service to be adopted as the dominant design paradigm in its niches; and thirdly, you need sufficiently strong complementary assets to ensure that you can produce the product at lowest cost, to a sufficient volume, and distribute it effectively. If you lack any of these three factors, a strong technology strategy may well lead to a weak profit performance, as some stronger company steals your innovation.
Strategy rarely leads to valuation in the conventional books on the subject. Peter Johnson remedies this omission in Chapter 7. He outlines the relevance of financial (p. 11) theory to strategy formulation, describes the major developments in valuation techniques, commenting on their strengths and weaknesses. He then proposes a new valuation framework for assessing the strength of specific competitive strategies in financial terms, so providing the decision-taker with the necessary financial information to decide whether to adopt the proposed strategy or not.
Robert Grant describes in Chapter 8 how the knowledge-based approach to the firm allows corporations to be looked at in an entirely new way to the traditional fixed asset approach; one which may be more relevant to the modern knowledge-dominated economy. He emphasizes the importance of ensuring that decisions are taken where the knowledge is, and in setting up systems for retaining knowledge in the firm. The development of a modular approach to organizational structure also helps to identify where knowledge needs to pass from one part of the firm to another, and where the module is knowledge self-sufficient, in which latter case the possibility of running that part of the firm as a separate unit arises.
Part II: Competitive Strategy
Competitive strategy is what business was about before the development of the multi-SBU corporation. It is about finding a strategy that is better than that of your competitors, and that thus enables you to make repeatable profits from selling your products or services. Whereas the corporate strategist need never see a product or a customer, such matters are the lifeblood of the competitive strategist, and the achievement of sustainable competitive advantage with his products is what he dreams about.
Competitive strategists concern themselves with such issues as how to configure their value chain optimally, what products and services to offer to what specific market segments, how to achieve differentiation from the offerings of their competitors, and how to control costs in order to be able to be price-competitive. They also need to identify what is the business idea that distinguishes their company from others, and to appreciate early what are the forces for change in the industry, so that competitive strategy can be adjusted in time to accommodate them. A business can survive with a mediocre corporate strategy, and even if it has a poor one, the individual business units may still survive under new ownership, when the poorly performing corporation is taken over and broken-up. A company cannot survive with a poor competitive strategy however. In that event it will make no profit and eventually cease to exist.
The overriding strategic issue at the level of an individual business unit or firm is how can the firm gain sustainable competitive advantage over other firms producing similar products or services. This is not a new argument. However, there is a great deal of debate in the competitive strategy literature that stems, (p. 12) largely, from two different economics-based traditions. On the one hand, there are theories of competitive strategy that derive from industrial organization (10) economics (Caves and Porter 1977; Caves 1980; Porter 1980, 1985). In these theories superior profits stem from the firm positioning itself well within the structure of the industry. Where firms face few competitors, and where it is difficult for firms to enter the industry, the incumbent firms should make reasonable profits. An individual firm's profit performance can be further enhanced where it can successfully implement a strategy of either cost leadership or differentiation (these are Porter's ‘generic strategies’). The lowest cost producer in an industry must earn above average profits if he prices at industry average levels. Above average profits can also be achieved where the firm can successfully differentiate its products. Here superior profits are generated because the successful differentiator can charge premium prices.
More recently, a competing school of thought (which actually can be traced back to Penrose 1959) which focuses attention on the firm's unique resources has emerged. This resource-based theory (Wernerfelt 1984; Barney 1991) holds that above average profits stem from resources controlled by the firm that not only combine to deliver valued products, but that are also difficult for other firms to imitate or acquire. Both sets of theories get a very adequate airing in the book, and they are by no means mutually incompatible, and many theorists and practical strategists attempt to combine both approaches.
In Chapter 9 Robert Pitkethly outlines the first stage of the rational planning process of developing a competitive strategy, namely environmental analysis. He starts with a description of the by now traditional Porter five forces model (1980) used for estimating the competitive intensity of a specific market, and describes its strengths and limitations. He then introduces the value net of Brandenburger and Nalebuff (1995) in which a game theoretic approach is taken to the other actors which interact with the planning company in a market. Pitkethly also alludes to the existence of evolutionary forces in competitive markets building on the views of David Barron in Chapter 4
One of the limitations of the five forces model is the difficulty in determining the boundaries of the market that is relevant for the analysis. In Chapter 10 John McGee shows how an analysis of the strategic group to which the planning company belongs helps in this definition. He also shows other ways in which the analysis of strategic groups can help the strategic manager in focusing his attention in the areas where the competitors important to his company are to be found, and in identifying areas of strategic space where the strategist may find switching the focus of his strategy to be advantageous.
In Chapter 11 Geoff Coyle shows how by means of scenario planning the limitations of single point forecasting can be overcome. By developing a number of alternative scenarios a wider range of options and possibilities can be considered and a greater understanding of what might happen developed. The advantage of (p. 13) scenario planning is that it enables the planner, whilst still selecting one fixture, to also build contingency plans to cope with some of the possible alternative futures that may come about.
Chapter 12 by Ron Sanchez focuses on the internal analysis of a firm and its competences. It describes the way in which the company needs to develop core competences that are difficult to imitate or substitute for, and that thereby provide the foundation for sustainable competitive advantage. In this chapter Sanchez clarifies the roles of resources, capabilities, and management processes in creating such organizational competences.
In Chapter 13 Stephen Tallman builds further on the capabilities needed by a company for competitive advantage particularly in high technology markets. He introduces the concept of basic processes needed to build and exploit dynamic capabilities, emphasizing that, since such capabilities are concerned more with process than specific performance, they are thereby more difficult to imitate than other capabilities, and also more likely to continue to be valuable and a source of competitive advantage even in volatile changing markets.
Having analysed both the external environment or market and the internal capabilities of the firm, the time has arrived in Chapter 14 to formulate a competitive strategy. Cliff Bowman introduces the customer matrix as a tool to aid the strategist in the selection of a strategic direction that is likely to succeed in relation to his competitors in delivering higher perceived use value at a competitive price. This chapter deals with strategy formulation for existing products in current markets, and does not consider the options for product or market diversification. This, as a corporate strategy, is dealt with in Volume II of the Handbook.
One of the dynamic capabilities discussed in Chapter 13 is that of being able to learn as an organization faster and more effectively than your competitor. John Child analyses the nature of organizational learning in Chapter 15. He indicates the different forms of learning, and how they can be achieved. He stresses the critical importance of organizational as opposed to merely individual learning, if a company is to stay ahead of its rivals even when key personnel leave. This builds on the ideas of Rob Grant in Chapter 8 on the knowledge-based approach to the firm, where he emphasizes the need for knowledge-integrating mechanisms in the firm if all learning is not to remain individual and to disappear with the departing executive.
Much of the book so far has implicitly dealt with strategic management in relation to product-based organizations. In Chapter 16 Susan Segal-Horn considers what changes need to be made to the strategic mindset when running a service organization. She concludes that the traditionally held differences between service and manufacturing organizations are diminishing as high technology is fast entering the service sector and leading to scale and scope economies and other cost advantages not generally associated with services. The remaining critical difference, however, will always be that services are an ‘experience’, and hence recognition of the dominant importance of strategic implementation is the key to success.
(p. 14) Part III: Corporate Strategy
So far as corporate strategy has existed as a topic separate from business-level strategy, it has had a chequered existence. Only in the last ten years has a rigorous consensus emerged.
Chapter 17 by Goold and Luchs provides a valuable scan of thinking in the corporate strategy area over the last forty years. The topic rises to prominence with the arrival of the conglomerates. Before the creation of highly diverse companies such as Harold Geneen's ITT, the issue of multi-business companies was only addressed in passing. In the 1960s the topic of strategy itself was only just taking form and there was little understanding of the distinction between strategy at the marketplace level and strategy at the firm level.
The concept of general management skills that could be applied across a range of businesses did exist as did the concept of synergy. In fact for the next thirty years these two concepts were two paths along which thinking developed, with very little attempt at integration. In trying to understand conglomerates, the Boston Consulting Group developed the BCG Matrix, Boston Box, or growth/share matrix. Its elegance, managerial language (cash cows, dogs, etc.), and simplicity caused the Boston Box to dominate the teaching of corporate-level strategy. This tool was followed by other major consultancies with their own variants, notably McKinsey and Arthur D. Little, who were determined not to be left behind in the race to acquire prestigious multinational clients.
With hindsight the ideas spawned by the matrix—portfolio balance and diver-sification—proved to be disastrous. Many companies in the 1970s and 1980s set off on the path of diversification eager to create a portfolio that could finance itself while delivering a stream of ‘quality earnings growth’. The strategy was attractive to managers, because it suggested that they could create a portfolio that would not be subject to the vagaries of the capital markets. But they also believed that this was the right thing to do based on the best academic thinking.
The story of failure is best illustrated by the major oil companies, who energetically entered new businesses starting with the first oil crisis in 1974/5 Having tried almost every industry, these companies spent the last years of the 1980s and the early part of the 1990s licking their wounds and returning to the only business they had proved competitive in—the oil industry.
While the world was experimenting with diversification, the synergy logic was still alive. The frustration was that it continuously failed to submit to the rigours of academic thinking. Rumelt (1982) showed that ‘related’ diversification out-performed ‘unrelated’ diversification, demonstrating a critical flaw in the Boston Box. But the results were hard to replicate. The case for relatedness had the same tautological attractiveness as the case for portfolio balance, but, since neither could be demonstrated to be superior to the satisfaction of the academic world, they existed alongside each other, allowing managers to find a theory (p. 15) to support whatever they wanted to do and academics to teach whatever they wanted to.
Enlightenment was slow in coming. It was given a huge indirect boost by the re-emergence of the resource-based view of strategy after a gap of twenty-five years from its first introduction by Penrose in 1959. Picked up by Wernerfelt (1984) and later by Prahalad and Hamel in the form of ‘core competencies’ (1990), the synergy school now had some managerial language and better theory with which to fight the portfolio school. Prahalad and Hamel were pushing on an open door. Managers found that their diversification efforts were underperforming and desperately needed a new logic for guiding their decisions.
The merging of the synergy and portfolio schools came in the early 1990s. The three leading teams working on the topic (Prahalad and Doz, Goold and Campbell, and Collis and Montgomery) came to the same conclusion: that corporate-level strategy was about achieving a fit between three elements:
(1) the value creation logic for having multiple businesses under one management team;
(2) the choice of businesses to have in the portfolio; and
(3) the skills, processes, and structures used to manage the portfolio.
The portfolio school did not make sense if the logic was balance or risk spreading. These rationales were demonstrated not to be a value-creating logic. The share-holder is in a better position than managers to balance and spread risk. The portfolio school did make sense if the logic was based on added value.
The synergy school was also challenged. Instead of looking for relatedness in the nature of the businesses, synergy could depend on skills, processes, and structures of the parent company. Success occurred when the businesses were ‘related’ to the skills of the parent, which were themselves built on an understanding of how to create value. Each team inevitably developed its own language and framework, but a robust intellectual framework had finally been agreed.
In Chapter 18, Prahalad and Doz explore the different kinds of economic logic that can sustain a diversified company and link these to different governance mechanisms. One of the messages from this work is the importance of the CEO, a theme that also runs through the work of Goold and Campbell. Since the economic logic for the company must come from the top, there is a tough strategy demand put on the CEO. Moreover, since the economic logic must fit with the skills of the corporate centre, the skills of the CEO being a dominant element, the economic logic is often constrained by the CEO's personal skills. Corporate strategy starts to look almost like career strategy for the CEO.
This tight link between the concept of corporate strategy and the skills of the individuals in the corporate parent is taken up in Chapter 19 by Andrew Camp-bell— ‘The Role of the Parent Company’. This chapter summarizes the contributions made by Goold and Campbell to the theory of corporate strategy. This (p. 16) version—parenting theory—places equal emphasis on value destruction and value creation. The task, Campbell argues, is not only to develop a value creation logic but also a logic for avoiding ‘Value destruction’. There must not only be a fit between the businesses in the portfolio and the skills of the parent, there must also be an absence of major misfit.
This might seem like playing with words. But the theory is based on many years of observation, which pointed out that parent companies have a big impact on the decisions made in the businesses they own. This creates the potential for value creation and destruction. In fact value neutrality is the one state that is most rare. Value destruction is avoided by ensuring that parent managers have ‘sufficient feel’ for the businesses they own. The most engaging analogy is that of the specialist doctor. He or she develops some medicine or way of interacting with patients that have a particular health issue. Value is created when this medicine is applied to a patient with the health issue. Value is destroyed if the medicine has side effects and is applied to patients without the health problem or if the side effects are more severe than the beneficial effects in certain patients. The best doctors only give the medicine to patients who will experience a net gain, and the ideal situation is to give the medicine only to patients for whom the net gain is greater than that available from other solutions to their health problem. Parenting theory is, therefore, built on the concept of ‘parenting advantage’ just like competitive strategy theory is built on the concept of competitive advantage.
With agreement about the integrated view of corporate-level strategy, much of the interesting work currently underway takes these evolving theories and applies them to particular issues such as acquisitions, alliances, organization design, and organization renewal.
Schoenberg's ‘Mergers and Acquisitions’, Chapter 20, provides further evidence for the integrated view. Acquisitions frequently fail. In fact the numerous studies on success rates come to a remarkably consistent view that less than half of acquisitions succeed. Much of the blame can be laid at the feet of ambition, hubris, and incompetence. But for many it is a lack of a sufficient understanding of the rules of the game—of the integrated view of corporate-level strategy.
To add a business to the portfolio through acquisition, the buyer must believe that he or she can outbid other interested buyers without overpaying for the business. Assuming the other bidders are rational, they will be prepared to pay a price close to the value of the business to them. To outbid others, the buyer must believe that the target business is worth more to the buyer than to any other bidder. In the language of parenting theory, the buyer must believe that he or she has parenting advantage. The 1999 nght between Royal Bank of Scotland and Bank of Scotland for National Westminster Bank was a classic. The Royal Bank won because it was able to convince the institutions that it could do more with the National Westminster assets.
Schoenberg also describes the importance of integration management. Integration is the mechanism by which the buyer creates additional value from the acquisition. But too much integration can destroy value and too little can leave value on the table. Knowing the appropriate level of integration is an essential part of a parent company's skill set—a skill that the parent must be better at than others at least for certain kinds of acquisitions. As Schoenberg points out, the handling of employee resistance following an acquisition is one part of integration management that requires particular attention.
A similar logic can be used to address cooperative strategies, such as alliances and networks: only network or ally with businesses where the combined value is greater than that available to any other combination of partners. However, as Faulkner points out, in Chapter 21, there are other forces at work. In acquisitions, the buyer typically pays full value plus a premium for the target company. In alliances and networks there is often no payment as such, just an agreement to commit to work together. Advantage can, therefore, be gained by choosing partners with as much attention on how to deprive competitors as on how to maximize value from the partnering. In fact a game theory perspective as illustrated by Powell in Chapter 29, is a useful one not only in understanding the rationale for cooperation but also in thinking about partners.
Faulkner notes the rapid growth in popularity of alliances in response to the increase in globalization of markets in recent years. The growth of international strategic alliances has in fact been one of the phenomena of the last decade. Apart from finding a partner with complementary assets able to realize synergies, he emphasizes the importance of trust and commitment by the partners to the enterprise, if the alliance is to be successful in the longer term. The chapter also considers the allied but distinct area of strategic networks, and their importance in assisting the globalization of enterprises. This view leads us to the next section of the book—international strategy.
Part IV: International Strategy
International strategy can be viewed as being a subset of corporate-level strategy, on the one hand, and competitive strategy, on the other. As a part of competitive strategy, international strategy is about situations where the international sources of advantage make it impossible for locally focused businesses to survive. In most cases this is because the economies of scale from serving multiple markets are critical to competitive success. For companies in small countries, most businesses need to be international to survive. For companies in the United States or Germany the number is much smaller.
Viewed as part of corporate strategy, international strategy is about diversifying into other countries in order to create additional value. The operations in the other (p. 18) countries are additional units in a portfolio and can be analysed with the same framework as corporate-level strategies. Is there a value-creating logic for having multiple units in one portfolio? Does the parent organization have skills, resources, structures, and processes that are well designed to exploit the value opportunity? Do the businesses in the portfolio benefit significantly from the medicine the parent organization is offering? Finally, does the benefit exceed that available from any other parent company?
Unfortunately, the field of international strategy has developed largely independent of corporate strategy Hence few writers in international strategy are attempting a synthesis. When this comes, it will give a big boost to the topic of corporate strategy, because there are many more academics studying international issues than corporate issues.
In Chapter 22, Faulkner attempts to provide some answers to the question of how multinational corporations configure and coordinate their international strategies, by examining various approaches to internationalization as a strategy process. This analysis includes considering the stages models of internationalization, studies of the link between strategy and structure in MNCs, and more recent organizational models of multinational organizational forms, including that of the most modern, the transnational. Finally Faulkner introduces a model to summarize and discuss the four basic multinational forms described.
Since the terrorist attacks on the World Trade Center in September 2001 and the protests at Summits of world leaders, much has been written about the pros and cons of globalization. What Faulkner's chapter shows is that the forces of globalization are simple economic ones connected with scale and skill benefits. The result is greater value creation, which should make it possible to benefit all stakeholders. The tragedy of the anti-capitalist and anti-internationalist forces is that they may slow the process of value creation.
We should recall that challenges to economic forces have been made many times before. The market economy was viewed with great suspicion as recently as the 1940s. In 1942, Joseph Schumpeter, along with other economists, commentators, and even industrialists, forecast the demise of capitalism. In Capitalism, Socialism and Democracy Schumpeter wrote in the preface: ‘a socialist form of society will inevitably emerge from an equally inevitable decomposition of capitalist society’. Later in the book he reinforces the thought: ‘Can capitalism survive? No, I do not think it can. One may hate socialism or at least look upon it with cool criticism, and yet foresee its advent.’ At the time, there was a strong view that capitalism = competition = waste.
Yet we have learned since that competition is the engine of progress: the fuel of value creation. We should hold faith with globalization for the same reasons.
Rugman and Verbeke, in Chapter 23, criticize Porter by showing that his generic global strategies are ‘neither global nor generic’. In their place Rugman and Verbeke offer a new framework of four generic strategies based on distinguishing between location bound and non-location bound sources of value on one (p. 19) dimension and the number of home bases on the other. There have been many attempts to develop generic strategies and Rugman's certainly has value. However, like the others, there is a danger of oversimplifying. In practice each company needs to understand the sources of internationalization value, and develop strategies that are stronger the more they are uniquely tailored to the company's specific resource endowment.
Rugman and Verbeke also develop a framework for understanding the role that transnational networks can fulfil in a context of global competitiveness. This framework distinguishes between intra-organizational and inter-organizational networks. It also looks at the number of home bases. The weakness in the Porter frameworks is the assumption of only one home base, whereas ‘most of the interesting research issues in international business stem from the complexities of organizing a multinational enterprise across multiple home bases’.
Buckley, in Chapter 24, uses standard economic theory to examine the impact of multinational companies on the global economy and vice versa. He notes that the global economy has more shocks than it used to have, and these shocks are more rapidly distributed around the world system. Multinationals play a role not only in responding to these shocks, but also in generating them and transmitting them. The implication for the multinational is a need for increased flexibility in strategies, organization, and firm boundaries. The issue of flexibility is picked up again in the last section of this book.
First, however, there are four chapters on the subject of change.
Part V: Change
Change is a topic of such importance to strategy that it is almost synonymous with management itself. If management is anything other than the creation of bureaucracies, it is about the management of change. Change is not, therefore, a topic limited to corporate-level issues. It is central to almost all strategy. If all changes were possible, there would be very few constraints on the strategy development process. At the business level, it would be possible to analyse the needs of each marketplace, identify what competencies are needed to succeed, and put the competencies in place. At the corporate level, it would be possible to analyse the needs of each business, determine what parenting skills are needed, and put them in place. Unfortunately, resources and competencies are hard to change and the marketplace is competitive. Hence the management of change is about the implementation of strategy; how to build the resources and skills needed to outperform competitors in the marketplace or other parent companies seeking to own similar businesses? If the changes needed are too difficult, the strategy will fail. If the strategy is not ambitious enough, competitors will get ahead. The problem is (p. 20) never ending and, as such, never completely solvable. This is why, despite huge improvements in the management of change, the task does not appear to get any easier. Managers still find it difficult to achieve the changes they need. In fact they always will. However good our change technology, the challenge is fundamentally a competitive one. Unless a company has major advantages over its competitors, it will find the management of change to be a tough challenge.
Whipp, in Chapter 25, underlines this point with the words, ‘It is apparent that managers continue to regard strategic change as an area fraught with problems, notwithstanding the rhetoric on some book covers which would seem to indicate otherwise.’ Whipp argues that those trying to understand change need three perspectives. First, the discipline has a long and intertwined history. It is important to locate authors in their contexts, if the reader is to understand and use their insights. Second, the reader needs to be aware that many writers fail to distinguish sufficiently between different points on the continuum of change—from the status quo at one end to transformational change at the other. Prescriptions and observations of one type of change are often of little use if applied to another type of change. Third, the reader needs to be sensitive to the process view of change.
This view has become the bedrock of many of the most notable examinations of strategic change. The main benefit has been to show that a step by step approach to change is not relevant. It is a much more serendipitous and chaotic activity. Managers can be ambitious to nudge the change process and even provide conditions favourable to the direction of change desired. But managers cannot be ambitious to be in control of change.
McKiernan, in Chapter 26, addresses the question of change in the specific conditions of a turnaround situation. He is interested in change when the survival of the company is at stake. He develops a six-stage model for the turnaround process-causes, triggers, diagnosis, retrenchment, recovery, and renewal. Stage process models are now a generally accepted approach to the subject. McKiernan adds causes, triggers, and renewal to the more normal diagnosis, retrenchment, recovery model.
McKiernan gives particular attention to the behaviour of the dominant coalition, explaining what actions to expect and when, but, more importantly, why they occur. He uses the lenses of learning systems and complexity theory. He points out that each situation needs a unique solution. Corporate cultures and learning systems differ for each firm calling for a different approach to turnaround, a theme at the root of most good thinking about strategy as well.
Whittington, in Chapter 27, tackles the issue of organization structure. Whittington's chapter illustrates the limited state of theory on the subject of structure. Contingency theory is the bedrock of structural analysis, but contingency theory says very little in theory terms. It denies the idea that there is one right structure for all organizations. But it fails to define the variables that managers should use to design their organizations. Whittington identifies some of the variables that are commonly cited as relevant—size, technology, environment, strategy, degree of (p. 21) internationalization—but all of these variables are too imprecise and unqualified to give specific guidance to a manager faced with a tough design decision.
Certainly there are plenty of models of types of organization, but there is as yet no generally agreed theory. It is generally agreed that organizations should be less hierarchical, more networked, and more customer focused, but not why. We do not have a theory that explains why these variables are the right ones to focus on.
Whittington's discussion of future organization structures underlines the problem. Unable to predict the direction of organizational development from an understanding of the theory, he focuses on current trends: ‘If present trends provide at least a hint about the future…’. One might speculate that some of the problems encountered in the field of change generally may lie in our poor understanding of what is often referred to as one of the ‘hard Ss’. If we do not know how to design the hard Ss, how are we going to manage the soft ones?
Williamson, in Chapter 28, tackles the topic of strategic renewal. He demonstrates that strategies decay, and provides four measures of strategic decay:
(1) divergence between revenue growth and earnings growth;
(2) rising ROCE but falling P/E multiple;
(3) a high ratio of rents to new value creation; and
(4) convergence of strategies in the industry.
Avoiding strategic decay is about having a portfolio of options to expand both capabilities and markets. While the work on corporate strategy and international strategy emphasizes value creation logic for expanding markets or capabilities, Williamson's logic is that of strategic renewal. Unless the company grows in some direction it will die. The synthesis between the two ways of thinking is missing, but some of the ideas from the strategic renewal school are compelling.
One such idea is the innovation pipeline. Companies it is argued need a pipeline of options at different stages of development. The concept fits well with the financial tool of ‘real options pricing’. The options are valued either with financial tools or using management judgement. As their value increases, more can be invested in them, the objective being to avoid investing too much in creating the options that will provide the solution to the renewal problem. The pipeline consists of:
(1) a portfolio of ideas;
(2) a portfolio of experiments;
(3) a portfolio of ventures;
(4) a portfolio of businesses.
These four portfolios match the four stages that take an idea from ‘imagination’, through ‘testing’, ‘launching’, and ‘investing’. The skill is to move the options through the pipeline at the right speed, so matching the investment with the rate of customer acceptance and technical development.
(p. 22) Part VI: Flexibility
Part VI contains three chapters associated with the concept of flexibility. Like the management of change, flexibility is a topic that seems always to be receding rather than arriving. As companies learn to be more flexible, the demands for flexibility seem to increase another notch, so that the prize is always out of reach. Flexibility also has a cost. Undoubtedly the best way of exploiting today's environment is to choose a strategy and build an organization that best fits with it. Unfortunately, the strategy and organization quickly become less than perfect as the environment, competitors, or strategic priorities change.
Powell, in Chapter 29, demonstrates how a successful strategy depends not just on what makes marketplace sense, but also on the response of competitors. Game Theory recognizes that a game takes place between the main players. In economist terms this is a theory that applies only to oligopolistic situations. In perfect or commodity markets there is no game. A game only exists where a few players can influence the decisions that the others take. Since success in oligopolistic situations is determined as much by the behaviour of competitors (remember that one of Porter's five forces is ‘rivalry’), strategies need to be developed for the game as much as for the marketplace. Developing an advantage over competitors is only part of the battle. The other part is persuading the competitors to act sensibly.
Kogut and Kulatilaka, in Chapter 30, deal with real option theory. This is about decision-making in the face of options. It has been developed from finance theory and it involves analysing when to make a decision, rather than keep options open. Since new information is arriving all the time, there is a strong logic for avoiding choices until the last possible moment. Flexibility is gained by waiting. Investment decisions should not be made according to a planning cycle, but only when necessary. The trick is to calculate when a decision needs to be made.
Chapter 31 is by Volberda. He points out that ‘there are several equally good ways to match high variety and speed of managerial capabilities with an adequate organization design to resolve the constructive tension between developing capabilities and preserving stability within the organizational conditions’. He develops a strategic framework of flexibility that identifies three drivers of the choice of flexibility solution. The drivers are the ‘managerial task’ (variety and speed), the competitive forces (dynamism, complexity, and unpredictability) and the organization design task (controllability). This leads to four types of organizational form—rigid, planned, flexible, and chaotic. The ideal is to have a mix of planned and flexible solutions. He claims that there are four ways of achieving this mix—the network corporation, the dual corporation, the oscillating corporation, and the balanced corporation. All of these are acceptable solutions to the flexibility challenge.
It is appropriate that we end with a discussion of flexibility. Few issues can be more perplexing. Probably the biggest source of flexibility is the market economy. It (p. 23) provides for birth and death in a way that ensures value destroying firms do not hold us back for too long, and new ideas and forms can quickly gain support. Are we even asking the right question as we pursue flexibility within the firm?
An alternative view is to rely much more heavily on the market. An analogy is that of the theatre business on Broadway. Each play is written, cast, and presented. Adjustments may be made to the script or the casting, but the basic play does not change: there is only incremental not transformational change. The play may have a run of a few weeks or several years, but at some time the audiences start to decline and the play is withdrawn. At that point the cast disperse, the director looks for a new script, and the theatre for a new play. The resources are put back into the marketplace and a new combination is created. In this way New York presents a stream of excellent theatre.
We could aim for a similar solution in business in general. Each organization would be built around a strategy and designed to fit that strategy as closely as possible. Once the strategy starts to fail, the organization should be dissolved and the resources recombined into other organizations. Flexibility within the firm would not even be a management preoccupation.
The purpose of this last example is not to try to undermine the work of all those mastering flexibility, but rather to point out that we are in the very early days of thisparticular topic. We should expect some radical twists in the road ahead, before we can claim to understand how to design an economic system that is nimble and responsive to the needs of all the stakeholders involved.
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