Professional Documents
Culture Documents
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
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
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
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
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)
1959
The Function of Executive (Barnard, 1938) Company is a system of cooperation of human activities. Executive functions to formulate goal, and maintain communication system
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
If there is positive cost saving (CIT < CET), firm will coordinate activities internally.
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
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.
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
1985
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)
Analysis unit industry, strategic group, or companies Company view investigate the inter-relation among companies, and also companies vs. corporation
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.
Homogenous Firms
PRICE
Medium
Mobility barrier
Low Own Manufacture Import
MANUFACTURING
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?
INVESTMENT CHARACTERISTIC
Non-Specific Mixed Highly Idiosyncratic
FREQUENCY
One-time/ Occasional
Constructing Plant
MARKET GOVERNANCE
Recurrent
Purchasing Standard Material
TRILATERAL GOVERNANCE
BILATERAL GOVERNANCE UNIFIED GOVERNANCE
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
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 use incentive system to resolve the problem, but it just reduces the conflict of interest (not disappeared it). BOUNDARIES: Financial Resources and Risk Behavior ?
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
(Barney, 1991; Barney & Hesterley, 2008)
Valuable?
Rare?
Costly to Imitate?
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
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.
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
SWOT Analysis Five Forces Model Rivals Behavior Analysis Strategic Group
Economic Value (B C)
$ 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.
Micro economic
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)
1980 - 1986
Strategic Planning
Corporation Planning
1987 - 1993
Organization Economic
1994 - 2000
The Pioneers
Alfred Chandler
Igor Ansoff
Philip Selznick
The IO Researchers
Michael Porter
Oliver Williamson
Richard Rumelt
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)
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
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)
Elements of Strategy
(Hambrick & Fredrickson, 2001)
ECONOMIC LOGIC
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
Rapid international expansion, by region Early footholds in each country; fill in later
VEHICLE
STAGING
Intended Strategy
Deliberate Strategy
Realized Strategy
Ploy
Pattern
Strategy
Position
Perspective
Strategy formation
(planning and implementation are developed in the same time)
Strategy formulation
(separate the planning and implementation)
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)
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
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
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)
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
Subjective probability e.g. Keynes, 1921 Knight, 1921 Ramsey, 1926 Finetti, 1937 Subjective expected utility Bounded Rationality
Simon, 47, 57
e.g. Festinger (1957), Kelley (1967) Vroom (1964), Staw (1976), Kahneman & Tversky (1974, 1979, 1982)
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
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)
Authorize
Objective Situation
Managers Characteristics
Managers Perception
Strategic Choice
Performance
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)
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)
Outcome History
Risk Propensity
Risk Perception
Perceive high risk Perceive low risk
Framing
Prospect Theory
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).
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)
From IO to RBV
From Adam Smith to Neuronomic