Theories of Strategy – Literature summary
Week 1
Thinking about strategy Stoelhorst
Three aspects of strategic management
1. Process: where strategies come from; how are they developed by firms? How can firms
develop strategies more effectively?
2. Content: what a good strategy is; which strategies give firms a competitive advantage?
3. Context of strategy: how does organizational/environmental context affect process/content
of strategy? E.g. differences between industries.
‘Typical’ concept (standard model) of strategic
management is a three-step process. Standard way to
develop strategy would start with formulating
organizational objectives while taking into account
stakeholders.
1. Analytical phase: internal and external analysis.
Goal of the former is understand firm’s
distinctive competence and identify strengths
and weaknesses; goal of the latter is
understanding critical success factors in the
industry and to identify opportunities and
strengths.
this SWOT leads to identification of strategic
issues the firm faces. These issues highlight the main questions a firm needs to confront to
meet its objectives.
2. Generate strategic options/possible strategies to deal with these strategic issues. While
choosing among strategic options, the firm should consider their suitability (does the
strategy deal with the strategic issues?), acceptability (is the strategy acceptable to the
firm’s stakeholders?), and feasibility (will the firm be able to execute the strategy?).
3. Implementation of strategy
a. Chosen strategy is broken down into detailed plans
b. Assign responsibilities and budget
c. Agree upon performance measures to control the strategy implementation
This standard model of strategy is the joint product of the design school and the planning school.
The positioning school and resource-based school have added substance to the way in which
internal and external analyses should be executed. Together, these four prescriptive schools of
thought have inspired the ‘typical’ approach to strategy. The process school, however, has taken
issue with this normative message; this school does not agree on the notion that strategy is only
about rational analysis and top-down implementation. This process school is descriptive: rather than
telling managers what to do, this school tends to observe how strategy actually takes shape in firms’
everyday practice. Their findings often differ from the standard model’s approach.
The prescriptive schools of thought
1960s The design school Kenneth Andrews.
Core: specific characteristics of the firm should be confronted with
the external situation it faces (SWOT).
,Seven assumptions:
1. Strategy formation should be a deliberate process of
conscious thought: developing strategies is not an intuitive
skill, but must be learned formally. Effective strategies are a
result of tightly controlled process of human thinking.
2. Responsibility for that control and consciousness must rest
with the CEO: person highest in the hierarchy is the
strategist.
3. The model of strategy formation must be kept simple and
informal: main goal of strategy development model is
supporting ‘acts of judgment.’ Elaboration and
formalization of the strategy formation process will sap the
design approach of its essence.
4. Strategies should be one of a kind: the best strategies are
result of creative design process that builds on firm’s
distinctive competence. Strategies do not result from
system of general variables but are tailored to the firm’s
specific situation.
5. The design process is complete when strategies appear
fully formulated as perspective: Strategies are the result of
an explicit choice for an overall concept for the business.
These choices appear at a specific point in time, fully
formulated, and ready to be implemented.
6. These strategies should be explicit and simple: strategies
must be clearly articulated so other members of the
company understand them. Strategies are best kept simple.
7. Only after strategies have been formulated can they be
implemented: clear separation of thinking from acting and
sharp distinction between formulation and implementation
Critique Mintzberg: this school underplays the importance of hands-
on learning. E.g., this school assumes strengths and weaknesses of a
firm are generally known, but TM may be too far removed from
daily operations to have a clear image of this, while lower managers
may disagree about what the distinctive competence of their firm
is. Moreover, strengths and weaknesses can be situation specific
and external changes may make specific competences more/less
relevant. Such things require a link between thinking and acting to
learn about strengths and weaknesses as they evolve over time; this
link is severed by separating formulation and implementation.
Limitations of this school can be seen when considering its
assumptions about strategy:
1. One brain can, in principle, handle all of the information
relevant from strategy formation.
2. That brain is able to have full, detailed, intimate knowledge
of the situation in question.
3. The relevant knowledge must be established before a new
intended strategy has to be implemented – in other words,
the situation has to remain relative stable or at least
predictable.
4. The organization in question must be prepared to cope
with a centrally articulated strategy.
, Contribution: foundation for standard model of strategic
management. Introduced important concepts such as
environmental fit and distinctive competence.
1970s The planning school Main difference with design school: the planning school advocates a
formal and very elaborate system for strategy development (in
contrast with informal and simple system). Moreover, here part of
the responsibility for the firm’s strategy lies with the strategic
planning staff. The assumption is still that the CEO is the architect,
but involvement of strategic planning specialists means a shift of
part of the responsibility to this strategic planning staff.
Assumptions:
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, budgets, programs, and operating
plans of various kinds.
Critique Mintzberg: planning approach does not work as a result of
the inflexibility and detached nature of a formal strategy process.
Moreover, the assumption that strategy can ever result from
breaking down the process into ever more detailed analyses is a
fundamental problem, as this denies the fact that the development
of strategy is a matter of synthesizing information. A lot of
checklists and tools are offered as support, but ultimately the
question that needs to be answered is: what does all this info
mean?
Contribution: successful in putting its ideas into practice. However,
limited success of these ideas. Frustration about this limited success
spurred much fruitful empirical research into process of strategy.
1980s The positioning school Porter
Content of strategy was put and centre, complementing the ideas
about process of strategy from the earlier schools. Also
improvement of theoretical foundations for thinking about strategy
research, as it built on well-established economic research
tradition.
Three waves of positioning approach: (1) insights derived from
military strategy; (2) work of strategy consultants (discussed below);
(3) using insights from industrial organization, a research tradition
within economics that studies the nature and outcome of
competition in different industries, ideas of positioning were
developed further. Porter was part of this third wave.
Industrial organization (IO): main interest was relationship between
industry structure and firm performance and the main theoretical
framework was the Structure-Conduct-Performance (S-C-P)
paradigm: structure refers to industry structure, conduct refers to
(strategic) behaviour of individual firms, and performance to
, different possible dimensions on which industries and firms can
differ from each other, e.g. profitability or innovativeness. The basic
idea in this approach to IO is that industry structure determines
much of the performance of firms within an industry, but that
individual firms can do better/worse by choosing successful strategy
Economists are interested in overall welfare rather than individual
firm performance; welfare for society is maximized when markets
are perfectly competitive. Perfect competition occurs when then
following assumptions hold:
1. Large numbers assumption: large number of buyers and
suppliers that are small in relation to the size of the market
– everybody is price taker and can’t affect the market price.
2. Homogeneity assumption: demand is homogeneous; firms
compete only on price.
3. Mobility assumption: all resources needed to enter the
market are widely available and thus entry to and exit from
the market is simple.
4. Rationality assumptions: buyers and suppliers have
complete information about the market (demand, supply,
prices). Buyers maximize their utility, suppliers their profit.
The focus of IO economists is helping governments keep markets
competitive. The central goal of IO research is (1) to understand the
relationship between industry structure and profitability, and (2) to
understand barriers to competition in order to advise governments
about policies to reduce these barriers to increase social welfare.
Porter: whereas IO economists aim research at government policy
makers, Porter aimed his work at managers. Managers are not
concerned with increasing social welfare, but pursue supra-normal
profits by protecting their firms from the forces of competition.
Porter used the results from IO research to increase profitability of
individual firms by raising barriers to competition.
Porters 5-forces model: threat of entry, competitive rivalry, threat
of substitutes, bargaining power of buyers, and bargaining power of
suppliers. This model helps managers understand the ‘S’ of industry
structure. Basic idea: stronger forces lead to more pressure on the
profit margins; industries where the five forces are weak are
therefore more attractive than industries where the forces are
strong.
Porters three generic strategies: cost leadership, differentiation,
and focus. Help managers think about the ‘C’ of conduct. Basic idea:
these strategies can be used to secure favourable positions in which
the firm is better protected from the five forces than competitors.
The ‘P’ of performance that Porter is interested in is the profitability
of firms. Profitable firms are those that occupy favourable positions.
Similar to design and planning school, strategy formation is still
seen as a deliberate and conscious thought process that should
result in fully articulated strategies that are subsequently
implemented.
Main difference: Porter’s work develops thinking about strategy in
much more detail. The five forces model guides industry analysis
