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Dr.

Harris Turino
harristk@indo.net.id harristk.blogspot.com

AGENDA
1. Theory and Research in Strategic Management
2. Shifting Trends of Researches in Strategic Management 3. Strategic Management Schools of Thought 4. Emerging Strategy as Strategic Decision Making

Definition of Strategic Management


SM is a process that deals with the entrepreneurial work of the organization, with organizational renewal and growth, and, more particularly, with developing and utilizing the strategy which is to guide the organizations operations (Schendel & Hofer, 1979) SM entails the analysis of internal and external environments of firms to maximize the utilization of resources in relation to objectives (Bracker, 1980) SM is the process by which general managers of complex organizations develop and use a strategy to coalign their organizations competences and the opportunities and constraints in the environment (Jemison, 1981)

Definition of Strategic Management


SM is essentially work associated with the term entrepreneur and his function of starting (and given the infinite life of corporations) renewing organizations (Schendel & Cool, 1988) SM is concerned with those issues faced by managers who run entire organizations, or their multifunctional units (Fredrickson, 1990) SM is the formulation, implementation, and evaluation of managerial actions that enhance the value of a business enterprise (Teece, 1990)

Definition of Strategic Management


SM is about the direction of organizations, most often, business firms. It includes those subjects of primary concern to senior management, or to anyone seeking reasons for success and failure among organizations (Rumelt, Schendel & Teece, 1994) SM field can be conceptualized as one centered on problems relating to the creation and sustainability of competitive advantage, or the pursuit of rents (Bowman, Singh & Thomas, 2002).

What is Strategic Management


The field of strategic management deals with (Nag et al, 2007):
the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of the firms in their external environments.

Strategic Management Elements


Innovation Alliance, M&A Diversification Investment Learning, etc. Owner Ownership CEO, TMT Succession Incentives Agency, etc. Globalization Market Industry Competition Technological changes, etc

Strategy

External Environment

Manager

Strategic Management

Firm

Business organization Companies Corporate, SBU Enterprise, etc Profit, return Growth Survival Market share Domination Comp. Adv. Value, etc

Resources

Internal Organization

Performance

Knowledge Technology Capabilities Reputation, etc

Decision making process M&A process Behavior, routine Knowledge transfer, etc

Introduction
SM, often called 'policy' or nowadays simply 'strategy,' is about the direction of organizations, and most often, business firms. The aim is wealth creation. The development of SM is influenced by other academic field, such as: economic, psychology, sociology, marketing, statistic, mathematic, finance, organization, etc. All of them, the economic provides the greatest contribution. While economic grew from ancient root in philosophy, SM, like medicine or engineering, is developed from practical or phenomenon that is worthwhile to codify, teach, and expand.

Why Economic?
Economic and SM have similar interest and focus, i.e. strategy and performance.

As a new emerging field, SM needs infusion from economic field to understand: o The need to interpret performance data o Experience curve o The problem of persistent profit o The changing nature of economic o The changing climate within business school

Neoclassical Economic
Input

Firm as Production Function

Output

Firms within an industry should conduct the particular certain strategies to maximize their performance

Industrial Structure: Number of sellers and buyers, entry barriers, price elasticity, market domination, etc Larger number of firms Perfect competition

Firm strategy (competitive initiatives) Pricing, R&D, choice of technology, production, advertising, collusive Less chance to collusive P & Q are set in order: MC = MR

Result: Social efficiency Market power Profitability

Increase social efficiency Profit maximization

Footprint of Earlier Forerunner (prior 1960)


Strategic Management has a rich tradition and long history as a teaching area in business schools.

The teaching area focused on functional integration, i.e. the policy to coordinate specialized knowledge within the broader perspectives. There are two perspectives developed in that time, i.e. (1) from firm view as a whole, including its performance, and (2) from the role of general manager.
Together with an intellectual style that stress pragmatic realism, the SM field distinguished itself from other fields, especially economic, tough the core issues are similar (e.g. maximize performance)

Footprint of Earlier Forerunner


1937 1938 1945 1957

1959

The Nature of the Firm (Coase, 1937)


Firm exists because there is cost saving to manage transaction internally

The Function of Executive (Barnard, 1938) Company is a system of cooperation of human activities. Executive functions to formulate goal, and maintain communication system

Administrative Behaviors (Simon, 1945)

Leadership in Administration (Selznick, 1957)

The Theory of the Growth of the Firm (Penrose, 1959) Firm is a bundle of resources. Firms within same industry are heterogeneous. They differ in how the resources endowed and combined. They grow by exploiting excess resources in order to fulfill productive opportunities

Managers do not behave fully rational. They are limited by bounded rationality to make a decision, information processing, and coalition

The critical aspect in organization is human. To coordinate their activities, each leader has distinctive competence that influence organization performance.

Transaction Cost
(Coase, 1937)

The world comprises economic exchanges. Each time the economic exchanges carried out, it needs cost, i.e. transaction cost.
Cost of External Transaction (CET)

Transaction Cost

Cost of learning, Cost of haggling, Commission, etc.

Cost of Internal Transaction (CIT) Management error, Inefficiency, etc

If there is positive cost saving (CIT < CET), firm will coordinate activities internally.

The Theory of The Growth of The Firm


(Penrose, 1959)

Firm as bundle of resources o Resource and capabilities o Differentiate among firms Firm growth is driven by excess resources o Entrepreneurial spirit o Zero marginal cost o Growth limit Firm growth relates to the environmental context o Productive opportunities o Environmental changes

Early Development of SM (1960s)


The focus of SM is broader, not just on policy (how to integrate different functions), it introduced strategy (how to joint selection of the product-market arenas in which firm would compete, and the key policies defining how it would compete). Strategy was not necessarily a single decision or a primal action, but was a collection of related, reinforcing, resource-allocating decisions and implementing actions. Several vocabularies were introduced, e.g. corporate strategy, distinctive competence, strategy and structure relationship, synergy, competitive advantage.

Early Development of SM (1960s)


1962 1965

1965/69

Strategy and Structure (Chandler, 1962) How large companies develop new administrative structures to accommodate growth, and how strategic change leads to structural change (structure follows strategy). Case study from four best practices: Du Pont, GM, Exxon, Sears Roebuck.

Corporate Strategy (Ansoff, 1965) Strategy is comprises of four elements: product-market scope, growth direction, competitive advantage, and synergy. Based on product-market, Ansoff (1965) developed strategy grid: market penetration, market expansion, product development, and diversification. Case study, mostly from Lock Heed Aircraft Corporation.

Business Policy: Text and Cases (Andrew et al, 1965)


Strategy is composed of two interrelated aspects: formulation and implementation. After strategy is formulated, implementation is concerned with how resources are mobilized to accomplish the strategy, and requires appropriate organization structure, system of incentives and control, and leadership. Generalization is practically infeasible as each case is assumed to be too complex and unique 12 Case studies on Olivetti.

No Generalization?
Most researches in Business Policy field are conducted by case study, with in-depth analysis. Generalization is one of the goals that it is primarily achieved through induction (Rumelt et al, 1991). Heavy emphasis on the case approach and lack of generalization did not provide the base necessary for continued advancement of the field. As such, the work in this area was not well accepted by other academic fields. A broader view of SM need to emphasize the development of new theories that is empirically tested (Schendel & Hatten, 1972).

The SM in 1970s
Where the 1960s gave rise to basic concepts, the decade of the 1970s brought their development and application to practice, and in turn gave rise to research in the field as we now know it. Three forces helped strategy flourish o The hostility and instability of the environment of the 1970s led to a disenchantment with 'planning' and the search for methods of adapting to and taking advantage of the unexpected.

The 1970s were marked by the rapid expansion of consulting firms specializing in strategy (e.g. BCG), the establishment of professional societies, and the advent of journals publishing material on strategy (e.g. SMJ). They continued to expand and further development of strategy consulting practices based on analytical tools and concepts.
o The maturation and predominance of the diversified firm

The Research Methodology in 1970s -1980s


The need to develop a strong generalization influenced researchers to use new different methods: o From inductive to deductive o Small sample firms to larger sample firms (group of firms or industry itself) o Empirical studies using philosophy of Popper (logical conclusion), statistical method, econometric, and multivariate analysis. Researchers attempted to develop theoretical building based on empirical work. The use of S-C-P paradigm spread with several modifications.

Industrial Organization (IO) Economic


1972 1980

1985

Competition in the Major Home Appliance Industry (Hunt, 1972)


Strategic group as analytic concept by identifying some group of firms that pursue similar strategy and characteristics. Source of CA: mobility barrier

Competitive Strategy (Porter, 1980), Competitive Advantage (Porter, 1985) Based on S-C-P framework, Porter (1980) developed Five Forces Model to analyze industry structure, and proposed three generic strategies. Source of CA: unique market position

Competitive Dynamics Competitive dynamic research (action initiated by one firm may trigger a series of actions among the competing firm) becomes more popular as the changes of competitive landscape. Multipoint competition (Karnani & Wernerfelt, 1985), Hypermarket (DAveni, 1994), strategic conflict in capacity investment (Dixit, 1980), in R&D (Gilbert & Newberrt, 1982), in advertising (Schmalensee, 1983), and contestable market (Boumol, 1982)

Old IO and SM Differences


Differences in reference o IO social performance (SM firm performance) o IO reduce entry barrier (SM increase entry barrier) Differences in analysis unit o IO industry (SM firm) o IO firms are homogeneous (SM firms are heterogeneous) Differences in decision makers view o IO DMers = organization as a whole o SM DMers = TMT (cognitive, perception, power & politics) Differences in company view o IO Coy = free standing entity compete in single business o SM Coy might be part of diversified group

Old IO and SM Differences


Differences in stability o IO industry structure (Bain/Mason) is stable o SM industry structure is dynamics Differences in determinism o IO industry is fixed exogenous factor o SM company might change its industry structure Differences in industry elements o IO industry elements = firm size and entry barrier o SM industry elements are broader, such as: bargaining position, growth, international trade, etc. Differences in strategic conflict o IO based on rational behavior and symmetrical assumption o SM based on practical behavior

New Paradigm of IO Contribute to SM


(Porter, 1981)

Analysis unit industry, strategic group, or companies Company view investigate the inter-relation among companies, and also companies vs. corporation

Static tradition expand to analyze dynamic condition


SCP concept has been modified i.e. SCPCS Industry elements including international trade Strategic conflict (oligopoly) assumption asymmetric information, bounded rationality, commitment, and reputation.

Strategic Group
Strategic group is group of firms in an industry that pursue the similar strategies along key strategic dimension (e.g. size, type of distribution channel, product homogeneity), and competitive behavior (e.g. level of service, price similarity, resource commitment, etc). The concept indicates that firms performance in a strategic group is relatively similar, and their performance is different inter strategic group.

The concept of strategic groups became a central theme in SM field because of its ability to explain the dynamics of competitive environment.

Strategic Group Example


An Industry
High

Heterogeneous Strategic Groups

Homogenous Firms

PRICE

Medium

Mobility barrier
Low Own Manufacture Import

MANUFACTURING

Critic to Strategic Group Concept


Empirical studies about firms performance intra- and interstrategic group are inconsistent.
o By pursuing similar strategy, working together, and access same resources, firms in a strategic group tend to achieve similar performance (Caves & Porter, 1997). Firms performance is influence greatly by difference of firms characteristics within strategic group rather than inter-strategic group (McNamara et al, 2003). Strategic group membership might change overtime as a result of changes in mobility barrier, resource structure, competitive scope (Boyd, 2004).

Barney and Hoskisson (1990) challenged two questions in strategic groups theory:
o o Whether strategic group exists? Whether a firms performance depends on strategic group membership?

Organization Economic (OE)


Along the same period (1970s 1980s), some researchers tried to move from IO economic to boundary of the firm, i.e. organization economic (OE). The OE paradigm focus on institutional details and managerial actions. It is different from economic field (that displays mathematical method) and IO paradigm (that uses industry or group of firms as analysis unit). Two seminal works in this paradigm are Transaction Cost Economic (Williamson, 1975, 1979), and Agency Theory (Jensen & Meckling, 1976).

TCE: Contractual Relationship


(Williamson, 1979)

INVESTMENT CHARACTERISTIC
Non-Specific Mixed Highly Idiosyncratic

FREQUENCY

One-time/ Occasional

Purchasing Standard Equipment

Purchasing Customized Equipment

Constructing Plant

MARKET GOVERNANCE
Recurrent
Purchasing Standard Material

TRILATERAL GOVERNANCE
BILATERAL GOVERNANCE UNIFIED GOVERNANCE

Purchasing Customized Material

Purchasing Specific Intermediate-product

Market governance: sales contract, short-term, generic products. Trilateral governance: agreement, longer-term, more specific and complex items, 3rd party needed to evaluate the performance and resolving disputes in the future. Bilateral governance: strategic alliance, joint venture Unified governance: merger & acquisition

Agency Theory: Principal-Agent Problem


Firm as a set of feasible production plans, plus incentive system.
asymmetric information hire
Self interest

Owners (Principal) do not involve in day-to-day operation but giving control to professional manager (Agent) to maximize firms profit.

P
perform incentive system

Self interest

Principals have to align Agents objective but they lack of information.

Principals use incentive system to resolve the problem, but it just reduces the conflict of interest (not disappeared it). BOUNDARIES: Financial Resources and Risk Behavior ?

Back To Internal Side (1980s - )


Another new stream though began to emphasize the importance of resources in sustaining firm performance, i.e. resource-based view (Wernerfelt, 1984; Barney, 1986, 1991) This stream then influence the emergent of new sub stream, such as, strategic leadership (Finkelstein & Hambrick, 1986), strategic decision theory (Hambrick & Mason, 1984), and knowledge-based view (Zander & Kogut, 1995, Nonaka, 1994) All RBV-oriented works now dominate strategic management researches.

Company as a Bundle of Resources

Resourced-Based View
Jay Barney (1991):
SCA (Sustainable Competitive Advantage)
Strategic advantages of the firm that are superior among its rivals, and make firm gains long term superior profit Strategic resources (and capabilities) that significantly contribute to build firms SCA

VRIO Resources (Strategic assets)

Firms Resources (source of heterogeneity)

VRIO Resources
(Barney, 1991; Barney & Hesterley, 2008)

Valuable?

Rare?

Costly to Imitate?

Organized by Competitive superior Implication capabilities?


Disadvantage

Profit Implication

NO YES YES YES YES NO YES YES YES NO YES YES NO YES

Below normal Normal Above and short run Above+ and short run Above and long run

Parity Temporary Advantage Temporary+ Advantage Sustained Advantage

Example
Company
Toyota

SCA
Efficient production cost
Low price High margin product (from industry trend setter)

Strategic Resources
Kaizen culture Lean manufacturing
Global sourcing Operational excellent Innovative culture Visionary leader

Walmart Apple

Stock Accumulation
(Dierickx and Cool, 1989)

Strategic resources are deteriorated over time. To maintain VRIO, strategic assets stock need to be added, accumulated, expanded, or increased its quality continuously. Example:
o Toyotas lean manufacturing has adopted by its rivals or different industries. o But they can not achieve the quality as high as Toyota.

Experience, knowledge creation, acquisition, R&D, etc

Strategic Assets Stock

MBV vs. RBV: Process Perspective


Input (production factors , or resources)

Process

Output (Product)

RBVs assumption:
firms are heterogeneous (in terms of their resources and capabilities) Inputs are imperfectly mobile (Some inputs may not be traded, bought, imitated, mobilized easily) Isolate unique resources

MBV:

MBVs assumption:

firms are homogenous More efficient process Inputs are perfectly mobile (cost leadership), (firms can get all inputs Select the specific processes and decide how they need to create differentiated products) processes are performed Isolate unique position in (differentiation) the market

RBV:
Accumulate stocks to create unique resources Build routines and policies to combine and process unique resources more efficient and effective

MBV vs. RBV: Strategic Perspective

SWOT Analysis Five Forces Model Rivals Behavior Analysis Strategic Group

Game Theory Generic Strategy Multi points competition

Above normal return (SCA)

Create unique position or defend position

Tangible resources Intangible resources Capabilities

Stock Accumulation Dynamic Capabilities

Above normal return (SCA)

Create VRIO resources

Competitive Advantage (CA)


Definition:
o o o CA is typically defined as superior financial performance (Winter, 1995) This idea may be evoked by a range phrase such as: above normal return, value creation, economic value, making money, etc. CA is the creation more economic value than the marginal competitor in its product market (Peteraf & Barney, 2003)
Perceived Benefit (B)

Consumer Surplus (Delivered Value)


Price (P) Cost (C) Producer Surplus (Residual Value) Economic Cost

Economic Value (B C)

Competitive Advantage (CA)


Perceived Benefit Price
$ 80
Economic Cost

$ 100

$ 100

$ 180
$ 50 Economic Cost

$ 150

Firm A has competitive advantage over Firm B. Firm A has positive differential in residual value (rent) of $ 30. It provides a protective cushion for A against competition from B.

Sustainable Competitive Advantage (SCA)


SCA does not depend upon the period of calendar time during which a firm enjoys a competitive advantage (e.g. 5 years, 10 years, 30 years, and so on) A competitive advantage is sustained only if it continues to exist after (repeated) efforts to duplicate by current competitors, substitute, or potential new comers (Lippman & Rumelt, 1982). It may be the effort to duplicate the unique position in the market (MBV) or VRIO resources (RBV). Empirically, SCA may, on average, last a long period of calendar time (Barney, 1991).

Strategic Management in History


Neoclassical economic Macro economic Industrial Organization (IO) Economic
Industry is group of homogeneous firms Firms performance greatly depends on industry structure Firm is black box (production process) S-C-P (Bain/Mason) Strategic Group (Hunt, 1972) Five Forces & Generic Strategy (Porter 1980) Contestable market (Boumol, 1982) Strategic conflic (Shapiro, 1989) Competitive dynamic (hypercompetition, multi market competition, coopetition)

Micro economic

Organizational Economic (OE)


Transaction Cost Economic (Williamson, 1975, 1985) Agency Theory (Jensen & Meckling,1976; Fama, 1980)

Business Policy
Transaction cost (Coase, 1937) Corporation and organization (Barnard , 1938) Distinctive competence (Selznick, 1957) Firm growth theory (Penrose, 1959)

Strategy

Resourcebased view

Strategy and Structure (Chandler, 1962) Corporate Strategy (Ansoff, 1965) Business Policy (Andrew et al, 1965)

RBV (Wernerfelt, 1984, Barney, 1986; Peteraf, 1993) Strategic leadership & strategic decision theory (Hambrick &Mason, 1984;Finkelstein & Hambrick, 1987) KBV (Nonaka, 1994; Zander & Kogut, 1995) Dynamic Capability (Teece, 1997)

Intellectual Structure of SM Researches


RBV Economic Corporate and Diversification IO Economic Sociology

Foundation of SM (how strategy affect performance) Psychology Organization

20 Documents Selected in Subperiod

1980 - 1986

Strategic Decision Making Organization

Strategic Planning

Corporation Planning

1987 - 1993

Corporation and Diversification

Organization Economic

Strategic Planning Organization

Strategic Decision Making & Learning

1994 - 2000

Organization Economic RBV Strategic Planning (MBV)

The Pioneers

Alfred Chandler

Igor Ansoff

Philip Selznick

The IO Researchers

Michael Porter

Oliver Williamson

Richard Rumelt

The RBV Researchers

Birger Wernerfelt

Jay Barney

Margareth Peteraf

Critiques to RBV
Kraaijenbink, J.; Spender, J.C.; Groen, A. J., 2010
RBV has no managerial implication RBV implies infinite regress RBVs applicability is too limited SCA is not achievable RBV is not a theory of the firm VRIO is neither necessary nor sufficient for SCA Value of resources is too indeterminate to provide for useful theory Definition of resources is unworkable

Critique-1
RBV has no managerial implication (technical guidance)
o RBV is silent on how to obtain VRIO resources and appropriate organization o RBV trivializes the property right isue

Comment:
RBV is a theory to explain the SCA of some firms over others RBV was never intended to managerial implication Not every theory should have managerial implication

Critique-2
RBV implies infinite regress (looking for higher order ad infinitum)
o It leads firm into an endless search for higher order capabilities

Comment:
o It is true in logical theory, but in applicative theory such as RBV, there are limited number of level, and less powerful in strategic management. o Higher order capabilities cannot be treated as source of SCA directly. It may be needed mutual and interdependent with other supporting factors o From Adam Smith to Neuronomic

Critique-3
RBVs applicability is too limited
o Unique resource may be different in any industry prevent RBV any potential to generalization o RBV applies only for large firms with significant market power (small firms SCA can not be based on their static resources)

Comment:
o Generalization of uniqueness is possible. One may generate useful insight about degrees of resource uniqueness.

o Small firms may have capabilities to generate unique CA. o RBV applies only to firms striving to attain SCA

Critique-4
SCA is not achievable
o Both resource and capabilities, and the way firms use them constantly change, leading to temporary CA.

Comment:
o CA can be sustained through dynamic capabilities and organizational learning, enabling firm to adapt faster than its competitors. o SCA can not last forever, but in the short run it remains a powerful strategic concept.

Critique-5
RBV is not theory of the firm
o Kogut and Zander (1992) and Conner (1991) proposed that RBV is indeed striving to be a theory of the firm. But Foss (1996) rejected that proposition.

Comment:
o RBV is theory to explain why a firm better at rent creation than others o It is more powerful for RBV as theory to explain SCA rather than to explain why firm exists.

Critique-6
VRIO is neither necessary nor sufficient for SCA
o Lack of empirical evidences to support VRIO resources as determinant of SCA (can be used fully to explain SCA). o Empirical research has generated only modest support, implying other factors must be considered when explaining SCA o RBV does not sufficiently recognize the role of the individual judgment or mental model of managers. To create SCA, firm needs both a bundle of resources and managerial capabilities to exploit productive opportunities implicit in them.

Critique-7
The value of a resources is too indeterminate to provide useful theory
Resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency or effectiveness. (Barney, 1991a: 105) A firm is said to have a competitive advantage (CA) when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitor. (Barney, 1991a: 102)

o RBVs proposition is tautology o Value appears as explanan and explanandum

Critique-8
The definition of resources is unworkable
Firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness. (Barney, 1991a: 101)

o Lack of clear differentiation about resource as input and resource as capabilities o No clear differentiation about characteristic of any types of resources (e.g. human, financial, physical), and how they contribute to SCA.

Future Direction
Redefinition of resource
o o o o o o Reduce which assets are resources, and which ones are not Typology of resources Differentiation of value from capacity and value from action Differentiation of value from resource acquisition, resource building, resource deployment. Incorporate property right aspects Incorporate subjective aspect, i.e. managers cognitive to define value of resource

Redefinition of value

RBV as Theory of SCA


o o o Typology and characteristic of resources, capacityprocess, and acquisition-building-deployment. Property right and managers cognitive RBV is more complete and powerful to explain SCA

Definition of Strategy
Strategic Analysis: External analysis (O & P) Internal analysis (S & W)

Vision Mission

Goal Objectives

STRATEGY

Functional Strategies

Strategy is the central integrated and externally oriented concept of how we will achieve our objectives (Hambrick & Fredrickson, 2001)

Implementation and Review

Elements of Strategy
(Hambrick & Fredrickson, 2001)

ARENA Where will we be in?


(which product categories, market segments, geographic area, core technologies?)

DIFFERENTIATOR How will we win?


(uniqueness, reputation, advance technology, low cost?)

ECONOMIC LOGIC

How will we obtain our return?


(lowest cost, premium price to uncomparable services, economies of scale?)

How will we get there?


(organic growth, M&A, joint venture, franchise, licensing?)

How the sequence of our moves?


(penetration, market expansion, brand awareness, go international?)

VEHICLE

STAGING

Example: IKEA
ARENA
Inexpensive contemporary furniture Young, white-collar customers Worldwide

DIFFERENTIATOR
Very reliable quality Fun, non threatening shopping experience Instant fulfilment Low price

ECONOMIC LOGIC
Economies of scale (global regional, and individual-store scale) Efficiencies from replication

Organic expansion Wholly owned store

Rapid international expansion, by region Early footholds in each country; fill in later

VEHICLE

STAGING

Intended and Emergent Strategy

Intended Strategy

Deliberate Strategy

Realized Strategy

Unrealized Strategy Emergent Strategy

The Five Ps of Strategy


Plan

Ploy

Pattern

Strategy
Position
Perspective

Strategies Ahead and Behind

Strategy formation
(planning and implementation are developed in the same time)

Strategy formulation
(separate the planning and implementation)

Strategy as Pattern (Look behind)

Strategy as Plan (Look ahead)

Strategies Above and Below


Strategy is the creation of a unique and valuable position, involving a different set of activities (Porter, 1996)

Grand vision
Strategy looks in (inside the company), indeed, inside the head of manager, but it also looks up to the grand vision of company (Mintzberg et al, 1998)

Strategy as Position (Look down or outside)

Strategy as Perspective (Look inside)

Strategies as Ploy
Strategy as ploy is specific maneuver intended to outwit a competitor.

Example: a company may buy land to give the impression it plans to expand its capacity, in order to discourage a competitor from building a new plant. As a ploy, strategy relates to market signal, strategic conflict, game theory, action to preempt competitive response, the use of fighting brand, etc.

10 Schools of Thought
No 1 2 3 Category Prescriptive Prescriptive Prescriptive School of Thought Design School Planning School Positioning School Strategy Design as Conception process Formal process Analytical process Strategy as Plan Plan Position

4
5 6 7 8 9

Descriptive
Descriptive Descriptive Descriptive Descriptive Descriptive

Entrepreneurial School
Cognitive School Learning School Power School Cultural School Environmental School

Visionary process
Mental process Emergent process Negotiation process Collective process Reactive process

Perspective
Pat + Persp Pattern Ploy Pattern Pattern

10 Configurative Configuration School

Transformation process <All>


Source: Mintzberg et al (1998)

The Prescriptive Schools of Thought


Design School
STEP: Environment analysis (usually using SWOT) Strategy design Implementation and evaluation PREMISE: Fitness between internal capabilities and external opportunities

Planning School
STEP: Environment analysis (usually using SWOT) Vision, Mission, Goal, and Strategy design Implementation and evaluation PREMISE: Strategy as output of formal planning from several sub processes Its used as strategic planning in company (formal model of Design School) Implementation = SOP, policies, budgeting, audit, CEO and managers responsible

Positioning School
STEP: Environment analysis (usually using SWOT) Identifying, select, and/or creating unique position in the market Implementation and evaluation PREMISE: Strategy is generic (create unique position in market) Market = competition Strategy depends on industry structure Analysts are key factor in strategy formulation

The Descriptive Schools of Thought


Entrepreneurial School Cognitive School
CHARACTERISTICS: Strategy is malleable (deliberate + emergent) Simple structure and flexible PREMISE: Strategy lies in leaders mind (vision or sense of long-term direction) Strategy design based on experience & knowledge CHARACTERISTICS: Focus on how strategy created (not the content of strategy itself) Bias is one of the topic discussed in this school of thought PREMISE: Strategy is output of cognitive process in managers mind (framing, information processing, perception) Strategy is a series of strategic decision making

Learning School
CHARACTERISTICS: Mostly strategies is emergent Focus on how organization learns new knowledge or insights to fit internal and external environment Its managed through strategic change

PREMISE: Strategy is output of learning process (learning by doing) Learning is conducted by all members of organization Leader is responsible to manage strategic learning and change (not visionary)

The Descriptive Schools of Thought


Power School
CHARACTERISTICS: Power relation surround organization (regulation, competition, internal conflict, coalitions) PREMISE: Strategy is a bargaining and negotiation process Because of many interests surround organization, it is difficult to design the best strategy rationally

Cultural School
CHARACTERISTICS: Culture influence the style of thinking and perceive environment Culture act as perceptual filter in information processing to make decisions PREMISE: Strategy formation is a process of social interaction, based on belief and shared understanding by members of organization Strategy rooted in collective intentions and reflected in the patterns by which the deeply embedded resources and capabilities Resist to strategic change

Environmental School
CHARACTERISTICS: Strategy is used to ensure the existence of organization within changing environment This school is influenced by organizational evolution and isomorphism theory PREMISE: To survive, organization has to respond (react) to environmental changes (otherwise, it doesnt exist) Leaders are passive element Their roles: (1) capture the changes, and (2) ensure the effective reactions

The Configuration Schools of Thought


CHARACTERISTICS: Most of time, organization can be described in terms of some kind of stable configuration. The stability of configuration is interrupted occasionally by some process of transformation. The successive state of configuration and periods of transformation may order themselves over time into patterned sequence. Strategy can take the form of plan or pattern, position of perspective, or ploy, depend on its situation PREMISE: Strategy is output of the transformation process from one configuration to another configuration This school of thought focuses on how SM sustain stability or at least adaptable strategic change most of the time, but periodically to recognize the need of transformation, and be able to manage that disruptive process without destroying organization Accordingly, the process of strategy making can be one of conceptual designing or formal planning, systematic analyzing or leadership visioning, cooperative learning or competitive politicking, focusing on individual cognition, collective socialization, or just simple response to the force from environment.

Strategic Management Researches


(Rajagopalan et al, 1993; Schwenk, 1995)

SM = Strategy Content + Strategy Process


Strategy Content: providing rules and guidelines on the types of strategies which lead to the best performance for different types of organizations in different competitive conditions (e.g. generic strategy, game theory, multipoint competition, M&A, diversification, innovation, etc.)
Strategy Process: how strategies are formulated, implemented, modified, and what factors influence them (see 10 schools of thought)

The Essence of Strategy Process


Strategy Process = cognitive perspective in strategic management and strategic decision making (Schwenk, 1995). Strategy process research should adopt a decision making perspective, rather than planning perspective (Fredrickson, 1983). Strategy formulation is treated as a decision making process (Burgeois, 1980; Quinn, 1980, Mintzberg, 1978).

Strategy Process Strategic Decision Making

History of Decision Making Theories


Bernoulli, 1738 Expected utility maximizing behavior Objective probability e.g. Laplace, 1795 Peirce, 1910 Mises, 1928 Objective expected utility Neumann & Morgenstern, 1944 Real Word Condition Ill-structured problem Uncertain & dynamic environment Shifting or competing goal Action of feedback loop Time stress High stakes Multiple players Organizational goals and norms Naturalistic decision making e.g. Lindolm, 1959, Newell & Simon, 1972; Abelson, 1976; march, 1978, Quinn, 1980, Montgomery, 1983, Klein, 1989; Beach, 1990; Lipshitz, 1993.

Subjective probability e.g. Keynes, 1921 Knight, 1921 Ramsey, 1926 Finetti, 1937 Subjective expected utility Bounded Rationality

e.g. Savage, 1954 Ward, 1954


e.g. Goldberg. 1970; Gardiner & Edward, 1975; Huber, 1980

Simon, 47, 57

e.g. Festinger (1957), Kelley (1967) Vroom (1964), Staw (1976), Kahneman & Tversky (1974, 1979, 1982)

Decision Making Model


Decision Making Model: o Normative : how decisions should be made (ideal) o Descriptive : how decisions are made (actual) o Prescriptive : how decisions should and can be made (pragmatic normative)
The normative model is developed by rational axiom from Newmann & Morgenstern (1944) identification, development, evaluation, and selection. It needs the complete information and ability to proceed those information effectively. Simon (1957) argued complete information is impossible, and human is limited by bounded rationality

Research Areas of Strategy Process


Strategic decision model and characteristics offer the decision making typologies

Upper echelons describe the process of how individual or group of executive make a strategic decision (TMT as analysis unit)
Bias in strategic decision making tendency to make a decisions beyond full rationality (e.g. framing, causal attribution, escalation of commitment, recollection) Individual and organizational minds how managers perceive strategic problems, competitive conditions, and the internal and external environment they face (Huff, 1990; Porac & Thomas, 1990; Voyer, 1993).

Strategy Process Perspectives


(Hitt and Tyler, 1991) Rational Normative

e.g. Mintzberg, Raisinghani & Theoret (1976)

Strategy = objective criteria + indentification + development + selection

Strategy Process

Strategic Choice
e.g. Child (1972), Montanari (1978), Hambric & Mason (1984)

Strategy = rational normative + effect of managers characteristics (e.g. age, experience, education, wealth, psychology, etc)

External Control
e.g. Bourgeois (1984)

Strategy is shapped by industry characteristics

Model of Decision Process


(Mintzberg, 1976) Identification Development Selection

Recognition that a stimulus or stimuli has generated an opportunity, threat or crisis

Recognize Search Diagnosis Design


Examination of current and new information sources to define the issue

Analysis Judgment Bargain


Use of judgment, bargaining and analysis to choose a solution. This is a multistage iterative process with a deep investigation into the alternatives
The authorization of the chosen solution by upper management

Authorize

Search for readymade solutions or design a custom-made one

Strategic Choice Perspective


Strategic choice perspective is developed by assuming decisions are made by upper managers who are limited by bounded rationality, so it involves their psychological and cognitive factors (See cognitive school of thought). Strategic choice is classified in descriptive model of decision making, because it focuses on the behavior of human (upper management) in relation to make a strategic decision. Rather than assuming human is rational (like in normative model), strategic choice assumes upper managers may be rational or irrational, depend on situation surround them

Strategic Choice Framework


Upper Echelon Theory (Hambrick & Mason, 1984)

Objective Situation

Managers Characteristics

Managers Perception

Strategic Choice

Performance

All potential stimuli, external and internal (information or events)

Psychological orientation (e.g. risk propensity) Cognitive and value (knowledge about future event, alternatives, result) It is usually observed through: education, age, experience, education, etc)

Limited vision and bounded rationality Framing and bias Interpretation Perception

Decision (product innovation, M&A, financial leverage, diversification, restructuring, capital allocation, high technology investment, etc)

Cognitive Process
(Hambrick & Mason, 1984)

The cognitive process based on bounded rationality in strategic choice

Strategic Decision Biases


Anchoring bias (framing): tendency to judged heavily on particular value or information (Tversky & Kahneman, 1974)

It depends on how information are offered and managers cognitive level (functional track, financial position, experience, knowledge, age, education, etc.)
Because of limited rationality, managers tend to simplify their information receiving and processing, so that it is potential to provide deviation of the best option.
1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 = . 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = .
He failed in the last 2 of 5 projects. He succeeded in the last 3 of 5 projects.

Prospect Theory
(Kahneman & Tversky, 1979)

Psychology orientation might change within particular situations (Kahneman & Tversky, 1979) A : Sure loss $100 B: 50% loss $0 50% loss $200 A : Sure gain $100 B: 50% gain $0 50% gain $200

Within negative frame, one tends to be a risk taker, within positive frame, one tends to be a risk averter. Risk propensity (risk averter and risk taker) is a critical dimension in formulating strategy (Papadakis et al, 1998)

Risk Propensity
Risk propensity: basic characteristics that describe tendency to take or avoid risk (Sitkin & Weingart, 1995). Risk propensity is influenced by two factors, i.e. situational factors and trans-situational factors (Nicholson et al, 2002)
More stable, unchanged in any situations More easily to change, depend on situation Transsituational Factors
e.g. age, education, wealth, income (Riley & Chow, 1992), functional track, financial position (Hambrick & Mason, 1984)

Situational Factors

e.g. prospect theory (Kahneman & Tversky, 1979), information search (Dunegan et al, 1995; Klein et al, 1993), outcome history (March & Shapira, 1987)

Risky Decision Making Behavior


(Sitkin and Weingart, 1995)
Positive outcome history Negative outcome history Risk taker Risk averter

Outcome History

Risk Propensity

Positive framing Negative framing

Risk Perception
Perceive high risk Perceive low risk

Framing

Risky Decision Making

Prospect Theory

Strategic Decision Biases


Causal attribution: tendency to attribute external factors as source of poor performance, and internal factors as source of good performance (Salancik & Meindl, 1984; Huff & Schwenk, 1990; Clapman & Schwenk, 1991; Lant et al, 1992; ) Causal attributions are used by managers to build good perceptions in front of stakeholders, so that they are potential to provide illusion of management control (Slancik & Meindl, 1984).

Causal attribution is one way to rationalize the results in relation to environmental changes to ensure the decision maker itself (Huff & Schwenk, 1990; Clapman & Schwenk, 1991).

Strategic Decision Biases


Escalation of Commitment (Strategic Persistence): tendency to persist the failing course of actions (Staw, 1976; Brockner, 1992). Executives with longer working period tend to more commit the status quo, and persist their strategy (Finkelstein & Hambrick, 1990) The influence of working period within industry is greater than that of working period in company (Hambrick et al, 1993). The commitment to status quo tend to be greater in organization or managers with good historical performance (Hambrick et al, 1993)

Strategic Decision Biases


Recollection: the process of regenerating information (retrieval) in the past, and it is used to base current decisions (learning from the past). Recollection potentially provides bias because the deficiency to retrieve detail and complete information in the past (Golden, 1992). The bias tend to be greater because of overwriting new information in relation to old information (overlapping). The distortion and overlapping information make managers unable to learn the appropriate lessons from past mistakes and will be destined to repeat them.

Individual and Organizational Mind


Individual and organizational mind researches relate to the cognitive mapping, i.e. how manager(s) structure the information (problem, condition, etc) they receive in their minds, select the relevant aspects, and connect their relationship Example: understanding competitors behavior, analysis and understand the crisis situation and appropriate initiatives. Managers cognitive map might combine with organizational knowledge so that it creates new understanding about certain condition. Cognitive map tend to change overtime (Huff & Schwenk, 1990)

Emerging Topics in Strategic DM


SDM and IT
o o IT reduces centralization of DM in centralized company, but increase centralization in decentralized company. IT increases speed and quality in problem identification, especially under crisis condition. Link cognitive bias with decisions such as over capacity, premium acquisition, new business failure (Zajac & Mazerman, 1991) Deploy strategic decision making model to game theory (Camerer, 1991; Porter, 1991; Saloner, 1991).

Competitive Decision Making


o o

International Strategic Decision Making


o
o

Managers cognitive map in global companies are more complex in local companies (Prahalad & Betis , 1989). Decision making conflicts tend to be occur in Japaness companies than US (Cosier et al, 1992)

Strategic Management at Glance


From Economic to Strategic Management

From IO to RBV
From Adam Smith to Neuronomic

From developed economy to Africa