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Summary articles Strategy & Organization
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An extended summary for the course of Strategy and Organization of the Pre-master Business Administration at UvA.
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1. Competitive strategy, Stoelhorst1.1 Thinking about strategy
Introduction
The purpose of this teaching note is to give an overview of the field of strategic management. Three
aspects of strategic management can be distinguished:
1. The process: where strategies come from.
2. The content: what good strategies are.
3. The context: how specific organizational or environmental contexts affect the process or
content of strategy.
The standard model of strategy
Strategic management is of a three-step process:
1. Strategic analysis; which start with formulating organizational objectives and the moves to
internal and external for a SWOT analysis, with a formulation of the identification of the strategic
issues. The strategic issues highlight the main questions that a firm needs to confront to meet its
objectives.
2. Strategic choice; possible strategies to deal with the strategic issues, with the consideration of
acceptability and feasibility.
3. Strategy implementation: draw up a detailed business plan, assign responsibility and budget and
determine performance measures.
Strategy is the joint product of two prescriptive schools of thought within the field of strategic
management:
1. The design school. It is a conceptual process and more informal. At the core of this approach is the
idea that the specific characteristics of the firm should be confronted with the external situation it
faces. The design school assumes that these strengths and weaknesses are generally known. It has
also separated the strategy formulation from strategy implementation. It argues that one brain can
handle all of the detailed information relevant for strategy formulation. Therefore situation of
implementing and formulating strategy is the same.
2. The planning school. Advocates a formal and very elaborate system for the development of
strategy, with using flowcharts, checklists and other analytical tools as support for a rationale
decision. It is a controlled, conscious process of formal planning, decomposed into distinct steps,
each delineated by checklists and supported by techniques. Responsibility for its execution rests
with staff planners in practice. Empirical research shows that the planning approach simply does
not work and that this is the result of the inflexibility and detached nature of a formal strategy
process. Moreover, there is a fundamental problem with the idea that strategy can ever result from
breaking down the process into ever more detailed analyses.
Note that the standard model has little to say about the content of strategy. Its focus is mainly on the
process by which strategies should be developed. The standard model advocates a rational, deliberate,
and stepwise approach to the development of strategy. But it does not give any guidelines to what the
strategies resulting from this process could, or should, be. In contrast to the process focus of the design
and planning school, portfolio models were very much about the content of strategy and were meant to
specify what a good strategy was
Two more prescriptive schools of thought:
3. The positioning school. The first positioning wave is linked to insights derived from military
strategy. The second positioning wave is linked to the work of the strategy consultants. The basic
idea in this approach to industrial organization is that industry structure determines much of the
performance of the firms within an industry, but that individual. The basic idea in economics is
that welfare for society as a whole is maximized when markets are perfectly competitive perfect
competition is a situation where there is a large number of buyers and supplier, homogeneity
assumptions of demand, mobility assumptions and rationality assumptions. This will lead to supra-
normal profits. Porter’s five forces model help managers understand the s of industry structure,
with the generic strategies thinking about the c of conduct and p is interested in profitability,
1
, which occur in favourable attractive industries. In the design school, the idea is to design strategies
that are unique. In the positioning school the idea is to select strategies that are generic.
4. The resource-based school. The main interest of the resource-based school is to understand the
relationship between differences among firms in terms of their resources, competencies, and
capabilities on the one hand, and performance differentials among these firms on the other hand.
According to the RBV, a firm will be able to make ‘supra-normal’ profits when it has valuable
resources that other firms do not have. Moreover, the abnormal profits can be sustained over time
when competitors cannot imitate these valuable and rare resources and when there are no
resources available that can substitute the resources by performing the same function. Strategy is
therefore about having a clear vision for the future and developing unique resource combinations
to realize this vision. Firms realize superior performance with core competences, which is defined
as the collective learning of the organization, especially how to coordinate diverse production
skills and integrate multiple streams of technology’.
The focus of the positioning school on the importance of the external environment meant that concepts
and models to conduct an in depth internal analysis remained underdeveloped. The resource-based
school sought to fill this gap. Whereas the emphasis of the positioning school is on taking favourable
positions in product markets, the resource-based school calls attention to the resources that underlie
these product market positions.
The implicit message is that the standard model is the right way to develop strategy. A fifth school of
thought:
5. The process school, has taken issue with this normative message. The process school is primarily
descriptive in nature: rather than telling managers what to do. Decision-making is guided by
‘bounded rationality’ and is aimed at ‘satisficing’. The standard model sees strategy as a very
rational process that leads to clear plans that are subsequently implemented. In contrast, the
studies of the process school found that strategy processes involve much more than ratio alone and
that there is typically a substantial gap between the intended strategy of a firm and the strategy that
is actually realized. In other words, reality is simply too complex for a purely rational planning
approach to strategy. There is a need for a synthesis between planning approach and the power-
behavioural approach which provide the powerbehavioural approach, and results in effective
strategies developed incrementally. Logical incrementalism’ is not ‘muddling through’. It is a
goal-oriented, active, and effective approach to the integration of analytical and behavioral aspects
of strategy formation.
In the standard model strategy results from a deliberate, top down, approach to planning for the future.
In contrast, in Mintzberg’s view strategy is a process by which firms arrive at a coherent and
successful set of activities through learning by doing without much top-down control. Mintzberg
brings these three fallacies together in what he calls the grand fallacy of strategic planning: ‘
1. Strategy as a collective learning process The complex and unpredictable nature of the
organization’s environment precludes deliberate control.
2. Linking thinking and acting.
3. Process comes before content.
4. Strategies appear first as patterns out of the past, only later, perhaps, as plans for the future, and
ultimately, as perspectives to guide ultimate behavior
In addition to purely rational concerns, there are a host of cognitive, political, and socio-cultural
components to strategy that may distract from the realization of the intended strategy (‘unrealized
strategy’). Moreover, the environment may not be as malleable as managers would like and may
impose part of the strategy on the firm. And, a stream of ongoing, unplanned actions (‘emergent
strategy’) can also lead to important contributions to the strategy that is ultimately realized. The
process school has little to say about the content of strategy. Given its emphasis on the process of
strategy, it has not added much to our understanding of the sources of competitive advantage.
Strategic management field: taking stock
2
,Mintzberg, Ahlstrand en Lampel (1998) list the following points of agreement across different schools
of thought:
Strategy concerns both organization and environment
The substance of strategy is complex
Strategies exist on different levels
Strategy involves issues of both content and process
Strategy involves various thought processes
Strategies are not purely deliberate
Points of disagreement and issues that are currently on the research agenda can be understood in terms
of different views of the ‘process’, ‘content’ en ‘context’ of strategy:
Process: The role of management in strategy
According to the standard model, managers should, by their mere brainpower, be able to come up with
grand strategies that are so clear and convincing in their consequences that implementation by the
organization is guaranteed. In contrast, the descriptive process school emphasizes cognitive limits and
the importance of socio-cultural processes and power relationships.
Content: The relationship between the firm and its environment
The ‘strategy as fit’ approach of the positioning school clearly tends to a view that the environment
determines what a successful strategy is and firms will therefore need to adapt to their environment. In
contrast, the ‘strategy as stretch’ approach of the resource based school, clearly tends to a view that
managers can change the world and build competitive advantage for their firms by changing the rules
of the game and creating entirely new barriers to competition.
Context: The dynamics of competition
When different types of context are explicitly recognized it is not clear how these contexts may
change. Such questions highlight the fact that most of the theories and concepts in the strategic
management field are static in nature and do not incorporate an explicit time dimension.
1.2 Are there any general strategy principles?, Buzzel and Gale
Principles can provide a foundation for the situation-specific analysis that is always needed to arrive at
good decisions.
The profit impact market strategy approach
In order to conduct a statistical analysis and the application of logic to find differences in business
performance, strategy principles are sought, with the information of:
1. A description of the market conditions.
2. The business unit’s competitive position.
3. Financial and operating performance.
Key differences between PIMS and portfolio planning
The logic of the PIMS database is similar to that of the popular portfolio approaches. Reasonable
financial objectives for a business and at least some of the general characteristics of the strategy it
should adopt, depend on:
1. Its strategic position.
2. Characteristics of its marketplace.
Portfolio systems attempt to explain business performance in terms of market growth rate and relative
market share. In contrast the PIMS program was designed from its inception to explore many possible
dimensions of strategy and of the market environment that might influence performance.
The reaction against strategic planning
3
, Strategy consultants, have misled managers by making recommendations that are based on excessively
broad generalizations or principles. The pims perspective involves a mechanistic application of
formulas to complex management problems, with predictably unhappy consequences. We reject the
notion that there are formulas for management decision-making or that easy wins can be had by
applying general rules to specific problems. We suggest that there are general relationships that can
provide valuable guidance to managers. Our view it that there are principles that can help managers
understand and predict how strategic choices and market conditions will affect business performance.
Strategy principles: some examples
The most important linkages between strategy and performance:
1. In the long run, the most important factor affecting SBU performance is the quality of its products
and services, relative to those of competitors. Businesses usually achieve quality advantages first
by innovating in product/service design and later via product improvements.
2. Market share and profitability are strongly related. The primary reason for share-profitability
linkage, is that large-share businesses benefit from scale economies. The fact that market share
and profitability go together does not mean that every business can or should strive to increase its
share.
3. High-investment intensity acts as a powerful drag on profitability. Investment-intensive businesses
are those that employ a great deal of capital per dollar of sales. As investment intensity rises,
pretax profit margins on sales change only modestly. Even a large addition to a business unit’s
investment based need not affect capital intensity adversely, as long as sales and value added grow
commensurately.
4. Many so-called dog and question mark businesses generate cash, while many cash cows are dry.
However, forecasts of cash flow based solely on the growth-share matrix are often misleading,
since not only market growth and relative share are linked to cash flows.
5. Vertical integration is a profitable strategy for some kinds of businesses but not for others. For
small-share businesses, roi is highest when the degree of vertical integration is low. But for
businesses with average or above-average share positions, ROI is highest when vertical integration
is either low or high, and lowest in the middle.
6. Most of the strategic factors that boost ROI also contribute to long-term value. Businesses with
high ROIs usually also performed well on the long-term value enhancement index.
1.3 How competitive forces shape strategy, Porter (1979)
The essence of strategy formulation is coping with competition. Competition in an industry is rooted
in its underlying economics and competitive forces exist that go well beyond the established
combatants in particular industries. The state of competition in an industry depends on five basic
forces. The collective strengths of these forces determine the ultimate profit potential of an industry.
The corporate strategist’s goal is to find a position in the industry where his or her company can best
defend itself against these forces or can influence them in its favour. Porter’s five forces model,
describes the attributes of an attractive industry and thus suggests that opportunities will be greater,
and threats less, in these industries
Contending forces
A few characteristics are critical to the strength of each competitive force.
Threat of entry The seriousness of the threat of entry depends on the barriers present and on the
reaction from exiting competitors that the entrant can expect. There are six major sources of
barriers to entry:
1. Economies of scale: these economies deter entry by forcing the aspirant either to come in on a
large scale or to accept a cost disadvantage.
2. Product differentiation: brand identification creates a barrier by forcing entrants to spend
heavily to overcome customer loyalty.
3. Capital requirements: the need to invest large financial resources in order to compete creates a
barrier to entry.
4. Cost disadvantages independent of size.
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