Strategy of Business : chapter 2
Theories of strategy
Why we study theories of strategy?
Theories are important. They contain our basic assumption about key relationships in business life. Theories tell us what to look out for, what our first steps should be, and what do expect as result of our actions. Saving us from going back to first principles at each stage, they are actually short-cuts to actions.
There is four Theories of Strategy:
· The Classical Approach (approach, the oldest and perhaps most influential, relies on rational and deliberative approaches to strategy and planning)
· Evolutionary Perspectives on Strategy (approach draws on the metaphor of biological evolution, while substituting the discipline of the market for the law of the jungle)
· Processual Approaches to Strategy (approach, being more pragmatic, emphasizes the need to accommodate the imperfect nature of all human life, including the fallible processes which surround organizations and markets.)
· Systemic Perspectives on Strategy (approach is relativistic, regarding the ends and means of each particular strategy as linked to the cultures and powers of the local systems in which that strategy is devised)
ý All the four theory explain what mean by strategies referring to different period of time.
ý As its clear form the above figure the four theory build on two element; process and outcomes.
Classical Approach To Strategy (1960):
The classical view of strategy is based on the military tradition, in which the world is a rigid hierarchy with a solitary general who makes decisions. The military model is complemented by an intellectual inheritance from economics. This view of individuals in tandem with Smith’s view that ‘each individual is continual exerting himself to find out the most advantageous employment of whatever capital he can command’, creates a stereotype of the manager who is focused on maximising return on investment.
Classical strategy places great confidence in the readiness and capacity of managers to adopt profit-maximising strategies through rational long-term planning. Porter is easily placed in the classical mould, especially as his books offer advice on obtaining ‘above average industry profits’.
For classical, profitability is the supreme goal of business and rational planning the means to achieve it. Chandler shares Sloan's faith in the superiority of the top-down, planned and rational of strategy approach to strategy-making. According to Chandler, strategy is: the determination of the basic, long-term goals and objectives of an enterprise, ands the adoption of courses action and the allocation of resources necessary for those goals. So the contribution of economics : the core of assumptions is "rational economic man". strategy formation should be a controlled conscious process of thought, derives directly form the notion of rational conomic man. responsibility for control and consciousness must rest with the chief executive officer
Processual Approaches To Strategy (1970):
Unlike classical approach, evolutionary approach emphasize on competition between firms driven by the co-evolution of mechanisms that create variety and selection. A policy prescription that emerges from this view is for managers to maintain diversity within their organizations, so that the probability is higher that one of the activities in the organization matches the needs of the unpredictable environment.
A processual view of the firm is one which postulates organizations as coalitions of individuals, each of whom brings their own personal objectives and cognitive biases to the organization. strategy is a continuing process of negotiation because rational economic man is a fiction and people are only ‘boundedly rational’ (no more rational).
Processual scholars argue that because of these limitations strategy becomes the gradual adjusting of routines to awkward messages from the environment which eventually force themselves on the manager’s attention. Strategy is not only planned not only because of the cognitive limitation but also from the micro-politics of organizations and followed action, but it is also a way to make sense of the chaos of the world. Thus, strategies are often ‘emergent’, their coherence accruing through action and perceived in retrospect, while successive small steps eventually merge into a pattern.
The micro-political view of organizations was established by the Carnegie School's recognition of the individual interests represented in any enterprise. So firm consider as coalitions of individuals each of whom brings their own personal objectives and cognitive biases to the organization. Organizational members bargain between each other to arrive at a set of joint goals. The bargaining process involves both many compromises and policy side-payment in return for agreements. The combination of political bargaining and bounded rationality strongly favors strategic conservatism.
People are Bounded Rationality, There are significant limits to human CEOs ability to; Gather information; Process information into a decision and Do this in real-time. These put significant limits on his ability to be ‘rational’. Because of bounded rationality, Most decisions do not yield optimal solutions, so Rather the solutions are good enough, strategy have to made To satisfy all affected parties
Evolutionary Approaches To Strategy (1980):
However, it seems that business is not peopled with the ‘ideal of economic man’. Not only do managers fail to set output at the theoretically profit-maximizing level where marginal costs exactly equal marginal revenue, but most managers have no idea what their marginal cost and revenue curves are!
Enter the experts! Economists adjusted to this business ‘stupidity’ by letting ‘the markets’ do the ‘thinking’. With this view of the world, ‘markets’ not managers choose the prevailing strategies within a particular environment. For those strategists who adhere to the evolutionary view of competition, survivors may appear to be those who have adapted themselves to the environment. Competition is the most effective form of ‘weeding out inefficiency’ or lack of adaptation, thus easy entry into markets is the way to ensure healthy industries.
So in short, Evolutionary approaches to strategy are less confident bout top management's ability to plan and act rationally, as well relying on manager to secure profit maximization. Investing in long-run strategies can be counter-productive. Organizations maximize their chance of survival in the short term by achieving in the perfect fit against their current environment. In a competitive environment, flexibility is evolutionary inefficient. Strategy is too expensive; the investor in long-term strategies of innovation, diversification and change can always be undercut by the short-term, inflexible, low-cost procedure.
Systemic Perspectives On Strategy (1990):
Systematic perspectives argue that economic activity cannot be placed in a separate sphere of impersonal financial calculation because of our social embeddedness. Economic behaviour is embedded in a network of social relations; families, the state, professions. These networks influence both the means and the ends of action, defining what is appropriate and reasonable behaviour for their members. Thus, personal histories which include educational background, religion, gender, family position, and ethnicity all shape economic activity.
This social constructivist view suggests that the norms which guide strategy are not cognitive (Huff 1990), but cultural. Culture, defined as a series of social systems, effects and is affected by firms, industries and economies (Gergen 1994). Whittington (1993) argues that even with the growth in overseas trade and foreign investment, the peculiarities of history and society still matter. It may be that the very notion of ‘strategy’ may be culturally particular to the conditions in the United States during the 1950s and 60s.
The four approaches to strategy introduced in this chapter differ widely in their advice to management. The classical school confidently prescribe a rational detached and sequential approach offered as a universal norm. The evolutionary and proccessual perspectives are more cautious, each skeptical of strategist capacity to direct strategy effectively in this rational hierarchical way. For evolutionists, environmental change is typically too fast, too unpredictable and too implacable to anticipate and pre-empt; their advice is to concentrate on day-today viability while trying t keep options opens. Proccessualists doubt whether either organizations or markets work with the ruthless efficiency that classicists and evolutionists respectively claim, and incline therefore towards patient strategies of incremental adjustment and cultivation of core competence. Finally, systemic theorists take a more relativistic stance, insisting that both the ends and means of strategy depend on the character of prevailing special systems, and that therefore even the hyper-rationality of the classical school may be appropriate in some social contests-but only some.