Article 1.1 – Stoelhorst (2008): Thinking about strategy
An overview of how the field of strategic management developed up until the year 2000.
The prescriptive schools of thought:
- The design school: strategy as a conceptual process (1960s)
- The planning school: strategy as a formal process (1970s)
- The positioning school: strategy as fit (1980s)
- The resource-based school: strategy as stretch (1990s)
The descriptive school of thought:
- The process school: strategy as collective learning (1980s and onwards)
The design school
- The concept of a firm’s ‘distinctive competence’
- The need to bring the internal situation of the organization in line with external expectations
o SWOT analysis: specific characteristics of the firm should be confronted with the external
situation it faces.
- Assumptions of the design school (Mintzberg):
1. Strategy formation should be a deliberate process of conscious thought
2. Responsibility for that control and consciousness must rest with the chief executive officer
3. The model of strategy formation must be kept simple and informal
4. Strategies should be one of a kind
5. The design process is complete when strategies appear fully formulated as perspective
6. These strategies should be explicit and simple
7. Only after strategies have been formulated can they be implemented
- Criticism/conclusion:
o The design school has laid the foundations of the standard model of strategic management
and introduced important concepts such as environmental fit and distinctive competence.
o At the same time, it makes a number of assumptions that may limit its effectiveness in
guiding complex organizations that operate in dynamic environments.
The planning school
- The main difference is that the planning school advocates a formal and very elaborate system for the
development of strategy (in contrast to the informal and simple system of the design school).
o Support a rational and stepwise approach to strategic management
o Breaking down the overall strategy into more specific strategic plans
- Assumptions of the planning school (Mintzberg):
1. Strategies result from a controlled, conscious process of formal planning, decomposed into
distinct steps, each delineated by checklists and supported by techniques.
2. Responsibility for that overall process rests with the chief executive in principle: responsibility for
its execution rests with staff planners in practice.
3. Strategies appear from this process full blown, to be made explicit so that they can be
implemented through detailed attention to objectives, budges, programs, and operating plans of
various kinds
- Criticism/conclusion:
o The most important contribution of the planning school has perhaps been that it was
successful in putting its ideas into practice, although success of these ideas were limited.
The positioning school
- By using insights from industrial organization (IO), Porter was able to develop his ideas about
positioning much further than had been done before.
o Central goal of IO research:
Understand the relationship between industry structure and profitability
To understand barriers to competition in order to advise governments about policies
to reduce these barriers (in order to increase social welfare).
o Main theoretical framework in IO: S-C-P paradigm
Structure: refers to the structure of the industry
, Porter’s 5 forces model
Conduct: refers to the (strategic) behavior of individual firms
Porter’s 3 generic strategies: cost leadership, differentiation, and focus
Performance: to different possible dimensions on which industries and firms can
differ from each other, such as profitability or innovativeness
o The main idea in this approach to IO is that industry structure determines much of the
performance of the firms within an industry, but that individual firms can do better or worse
than the industry average by choosing successful strategies.
- Perfect competition
o The large numbers assumptions (high number of buyers)
o The homogeneity assumption (demand is homogeneous, competition is on price)
o The mobility assumption (all necessary resources are widely available)
o The rationality assumption (buyers and supplier have complete information)
- Concept of strategy in the positioning school:
1. Strategies as fit
2. There are barriers to competition
3. Strategies are generic positions in the market (favorable positions can be taken on the basis of a
limited number of generic strategies)
4. The essence of strategy is analysis (goal of identifying attractive industries, favorable positions
within these industries, and generic strategies that allow the firm to occupy these positions)
- Criticism/conclusion:
o Economic theory tends to see the firm as a ‘black box’: for economists what goas on inside
firms is hardly relevant to explain how markets work. This carries over to the positioning
school, which also tends to focus on explanations of performance differences in terms of
industry structure, rather than in terms of differences between firms.
The resource-based school
- A reaction to the outside-in approach to strategy developed in the positioning school.
- The main interest 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.
- The different view of the RBV:
o Firms differ from each other
o These differences are relatively stable
o These differences lead to differences in performance
- The RBV opened the black box. Most of RBV is concerned with competitive strategy: how do firms
achieve competitive advantage?
o A firm will be able to make ‘supra-normal’ profits when it has valuable resources that other
firms do not have (VRIN, Barney)
- Prahalad & Hamel’s perspective pays more attention to the dynamics of competition, how is
competitive advantage developed over time?
o They define core competencies as ‘the collective learning of the organization, especially how
to coordinate diverse production skills and integrate multiple streams of technology’.
o The end products are ultimately nourished by the core competencies, even though these core
competencies are often hidden from sight.
A competence can only be called core when: it adds value for buyers in the end
products, it is difficult to imitate, and it gives access to a variety of markets.
- The view of the resource-based school:
1. Strategy as stretch (malleable environment, change the rules in your favor)
2. Resources are the ultimate sources of competitive advantage
3. Strategy is about having a clear vision for the future and developing unique resource combinations
to realize this vision. A firm should have a clear ‘strategic intent’.
- Criticism/conclusion:
o The main criticism on the resource-based school are twofold:
The RBV is not always very clear about what relevant resources are
The tone is often overly voluntaristic
,The process school
- ‘Economic man’ is assumed to have full information and to optimize his decisions given this
information. The process school took issue with these assumptions of the neoclassical model.
o First, they showed that decision making within firms has a political dimension
o Second, they showed that the view of the manager as ‘an economic man’ who is able to
optimize the profitability of his firm is not very realistic.
- The process school found that strategy processes involve much more than ration alone, and that there
is typically a substantial gap between the intended strategy of a firm and the strategy that is actually
realized. But what is the alternative?
o Quinn proposes a synthesis between the planning approach of the standard model and what
he refers to as the ‘power-behavioral approach’.
In the standard model, strategy results from a deliberate, top down, approach to
planning for the future.
o 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 highlights 3 fallacies in the rational planning approach to strategy:
The fallacy of predetermination: you can’t exactly predict the future (like
the planning school thinks)
The fallacy of detachment: it is misleading to think that firms can be
managed without tightly linking hands-on knowledge of the actual business
to developing strategy.
The fallacy of formalization: it is a mistake to think that something that
depends on synthesis can be formalized.
- The view of strategy in the process school
1. Strategy as a collective learning process (complex and unpredictable nature of the organization’s
environment).
2. Linking, thinking and acting (collective learning proceeds in emergent fashion)
3. Process comes before content (role of leadership to manage process of strategic learning)
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.
- Criticism/conclusion:
o The process school has little to say about the content of strategy
o Although the process school clearly has made a very strong case against putting too much
faith in strategic planning, given its merely descriptive nature it cannot claim to have made a
sufficient case to completely discard strategic planning.
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 in terms of process, content and context:
- Process: The role of management in strategy.
o The prescriptive schools stay close to the neoclassical economic model that emphasizes
rationality and optimizing. 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
o The ‘strategy as fit’ approach of the positioning school clearly tends to a view that can be
summarized as ‘environmental determinism’. The ‘strategy as stretch’ approach of the RBV
clearly tends to a view that can be summarized as ‘managerial voluntarism’
- Context: The dynamics of competition
, o None of the five schools has the context of strategy as its main concern. Most of the theories
and concepts in the strategic management field are static in nature.
Article 1.2 – Rumelt (2003): What in the world is competitive advantage?
A precise definition to competitive advantage is elusive, common theme is value creation
Different views on value creation:
- Value is created by favorable terms of trade in product markets
o But: what is the ‘cost’ of a scarce resource?
- Advantage is revealed by ‘super-normal’ returns
o But: are supernormal returns super relative to the expectations of owners, the economy as a
whole, or the rest of the industry?
- Ties advantage to stock market performance
o But: after 9/11, the stocks of defense companies rose dramatically. Does this signal
competitive advantage?
Thoughts on what competitive advantage is:
- Porter: Competitive advantage means having low costs, differentiation advantage, or a successful
focus strategy
- Peteraf: ‘sustained above normal returns’
- Barney: a firm experiences competitive advantages when its actions in an industry or market create
economic value and when few competing firms are engaging in similar actions.
- Ghemawat and Rifkin: a firm such as Nucor, that earns superior financial returns within its industry (or
its strategic group) over the long run is said to enjoy a competitive advantage over its rivals.
Area of confusion:
- How to conceptualize/measure value?
- The meaning of rents
- Appropriate use of the opportunity cost concept
- Is an advantage about winning the game, or staying in the game?
A reasonable measure of competitive advantage would:
- Be resistant to re-capitalization
- Not be subject to the factor-price fallacy
