Lecturer Presentation S3

8/2/2019 Lecturer Presentation S3

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Dr. Harris [email protected]

harristk.blogspot.com


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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

AGENDA


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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 ofcomplex organizations develop and use a

strategy to coalign their organizations

competences and the opportunities and

constraints in the environment (Jemison, 1981)


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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 managerswho 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 businessenterprise (Teece, 1990)



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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).



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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.


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Strategic Management Elements

StrategicManagement

Manager Firm

External

EnvironmentStrategy

Resources Performance

Globalization

Market Industry

Competition

Technological

changes, etc

Businessorganization

Companies

Corporate, SBU

Enterprise, etc

Profit, return

Growth

Survival

Market share

Domination

Comp. Adv.

Value, etc

Innovation

Alliance, M&A Diversification

Investment

Learning, etc.

Owner

Ownership CEO, TMT

Succession

Incentives

Agency, etc.

Knowledge

Technology

Capabilities

Reputation, etc

Internal

Organization

Decision making process

M&A process

Behavior, routine

Knowledge transfer, etc


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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, isdeveloped from practical or phenomenon that

is worthwhile to codify, teach, and expand.


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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


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Neoclassical Economic

Firm asProduction

Function

Input Output Firms within an industry should conductthe particular certain strategies to

maximize their performance

Firm strategy

(competitive initiatives)

Pricing, R&D, choice of

technology, production,

advertising, collusive

Result:

Social efficiency

Market power

Profitability

Industrial Structure:

Number of sellers and

buyers, entry barriers,

price elasticity, market

domination, etc

Larger number

of firms

Less chance to

collusive

Increase social

efficiency

Perfect

competition

P & Q are set in

order: MC = MRProfit maximization


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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)


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Footprint of Earlier Forerunner

1937 1938

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

1945

Administrative

Behaviors

(Simon, 1945)

1959

The Theory of

the Growth of

the Firm

(Penrose, 1959)

1957

Leadership in

Administration

(Selznick, 1957)

Managers do not

behave fully

rational. They

are limited by

bounded

rationality to

make a decision,

information

processing, and

coalition

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

The critical aspect

in organization is

human. To

coordinate their

activities, each

leader has

distinctive

competence that

influence

organization

performance.


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Cost of ExternalTransaction (CET)

Cost of learning,

Cost of haggling,

Commission, etc.

Management error,

Inefficiency, etc

The world comprises economic exchanges. Each time the economic exchanges carried out, it

needs cost, i.e. transaction cost.

If there is positive cost saving (CIT < CET), firm will

coordinate activities internally.

Transaction

Cost

Cost of Internal

Transaction (CIT)

Transaction Cost(Coase, 1937)


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Firm as bundle of resourceso 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 environmentalcontext

o Productive opportunities

o Environmental changes

The Theory of The Growth of The Firm(Penrose, 1959)


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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.


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Early Development of SM (1960s)

1962

Strategy and Structure

(Chandler, 1962)

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Business Policy: Text and

Cases (Andrew et al, 1965)

1965

Corporate Strategy

(Ansoff, 1965)

How large companies

develop new administrativestructures to accommodate

growth, and how strategic

change leads to structural

change (structure follows

strategy).

Case study from

four bestpractices: Du

Pont, GM,

Exxon, Sears

Roebuck.

Strategy is comprises of four

elements: product-marketscope, growth direction,

competitive advantage, and

synergy.

Based on product-market,

Ansoff (1965) developed

strategy grid: market

penetration, marketexpansion, product

development, and

diversification.

Case study, mostly from Lock

Heed Aircraft Corporation.

Strategy is composed of two

interrelated aspects: formulationand implementation.

After strategy is formulated,

implementation is concerned

with how resources are mobilized

to accomplish the strategy, and

requires appropriate organization

structure, system of incentivesand control, and leadership.

Generalization is practically

infeasible as each case is

assumed to be too complex and

unique

12 Case studies on Olivetti.


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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 ofgeneralization 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).


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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 turngave 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.

o The maturation and predominance of the diversified firm

o 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 andfurther development of strategy consulting practices based on

analytical tools and concepts.


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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 (logicalconclusion), 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.


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Industrial Organization (IO) Economic

1972

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: mobilitybarrier

1980

Competitive Strategy

(Porter, 1980),

Competitive Advantage

(Porter, 1985)

1985

Competitive Dynamics

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 dynamic research

(action initiated by one firm may

trigger a series of actions amongthe 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)


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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


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Old IO and SM Differences

Differences in stability

o IO industry structure (Bain/Mason) is stableo 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

f


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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) assumptionasymmetric information, bounded rationality,

commitment, and reputation.


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Strategic Group

Strategic group is group of firms in an industry that pursuethe 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.


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Strategic Group Example

PRICE

Low

Medium

High

MANUFACTURING

Own Manufacture Import

An Industry Heterogeneous Strategic Groups

Homogenous

Firms

Mobility

barrier


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Critic to Strategic Group Concept

Empirical studies about firms performance intra- and inter-

strategic 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).

o Firms performance is influence greatly by difference of firms

characteristics within strategic group rather than inter-strategicgroup (McNamara et al, 2003).

o 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 Whether strategic group exists?

o Whether a firms performance depends on strategic

group membership?


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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).

l l h


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INVESTMENT CHARACTERISTIC

One-time/

Occasional

FREQU

ENCY

Non-Specific

Purchasing

Standard Equipment

Purchasing

Standard Material

Mixed

Purchasing

Customized Equipment

Purchasing

Customized Material

Highly Idiosyncratic

Constructing

Plant

Purchasing Specific

Intermediate-product

Recurrent

MARKET

GOVERNANCE

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

TCE: Contractual Relationship(Williamson, 1979)


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Firm as a set of feasible production

plans, plus incentive system.

Principals have to align Agents

objective but they lack of information.

Owners (Principal) do not involve

in day-to-day operation but giving

control to professional manager

(Agent) to maximize firms profit.

P Ahire

perform

Self

interest

Self

interest

asymmetric

information

incentive

system

Principals use incentive system to resolve the problem, but it justreduces the conflict of interest (not disappeared it).

BOUNDARIES: Financial Resources and Risk Behavior ?

Agency Theory: Principal-Agent Problem


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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 managementresearches.


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Company as a Bundle of Resources


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Jay Barney (1991):

Firms Resources(source of heterogeneity)

SCA(Sustainable Competitive Advantage)

VRIO Resources(Strategic assets)

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

Resourced-Based View

VRIO R


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Valuable? Rare? Costly toImitate?

Organized bysuperior

capabilities?

CompetitiveImplication

ProfitImplication

NO Disadvantage Below normal

YES Parity NormalNO

YES Temporary

Advantage

Above and

short runYES NO

YES Temporary+

Advantage

Above+ and

short runYES YES NO

YES Sustained

Advantage

Above and

long runYES YES YES

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


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Company SCA Strategic Resources

Toyota Efficient

production cost

Kaizen culture

Lean manufacturing

Walmart Low price Global sourcing

Operational excellent

Apple High margin

product (fromindustry trend

setter)

Innovative culture

Visionary leader

Example

St k A l ti


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Strategic Assets

Stock

Experience, knowledge

creation, acquisition, R&D,

etc

Strategic resources are deterioratedover time.

To maintain VRIO, strategic assets

stock need to be added,

accumulated, expanded, orincreased its quality continuously.

Example:

o

Toyotas lean manufacturing hasadopted by its rivals or different

industries.

o But they can not achieve the quality as

high as Toyota.

Stock Accumulation(Dierickx and Cool, 1989)


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MBV vs. RBV: Process Perspective

Process

Input (production

factors , or resources) 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

MBVs assumption:

firms are homogenous

Inputs are perfectly mobile

(firms can get all inputs

they need to createdifferentiated products)

Isolate unique position in

the market

MBV: More efficient process

(cost leadership),

Select the specificprocesses and decide how

processes are performed

(differentiation)

RBV:

Accumulate stocks tocreate unique resources

Build routines and policies

to combine and process

unique resources more

efficient and effective


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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)

Tangible resources

Intangible resources Capabilities

Stock Accumulation

Dynamic Capabilities

Above normal return

(SCA)

Create VRIO resources

Create unique position or defend position

i i d ( )


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Competitive Advantage (CA)

Definition:o CA is typically defined as superior financial performance (Winter,

1995)

o This idea may be evoked by a range phrase such as: above normal

return, value creation, economic value, making money, etc.

o CA is the creation more economic value than the marginal

competitor in its product market (Peteraf & Barney, 2003)

Economic Cost

Cost (C)

Perceived Benefit (B)

Economic Value

(B C)Price (P)

Consumer Surplus

(Delivered Value)

Producer Surplus

(Residual Value)

C i i Ad (CA)


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Competitive Advantage (CA)

Economic Cost

$ 100

$ 50

Economic Cost

$ 100

$ 80

Price

PerceivedBenefit

$ 150$ 180

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.

S i bl C i i Ad (SCA)


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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).

S i M i Hi


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Neoclassicaleconomic

Macroeconomic

Microeconomic

Industry is group ofhomogeneous firms

Firms performancegreatly depends on

industry structure Firm is black box

(production process) S-C-P (Bain/Mason)

Transaction cost (Coase,1937)

Corporation andorganization (Barnard ,1938)

Distinctive competence(Selznick, 1957)

Firm growth theory

(Penrose, 1959)

Strategy and Structure(Chandler, 1962)

Corporate Strategy(Ansoff, 1965)

Business Policy (Andrew etal, 1965)

IndustrialOrganization (IO)

Economic

Organizational

Economic (OE)

Resource-based view

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)

Transaction Cost Economic(Williamson, 1975, 1985)

Agency Theory (Jensen &Meckling,1976; Fama,1980)

RBV (Wernerfelt, 1984, Barney,1986; Peteraf, 1993)

Strategic leadership & strategicdecision theory (Hambrick&Mason, 1984;Finkelstein &Hambrick, 1987)

KBV (Nonaka, 1994; Zander &Kogut, 1995)

Dynamic Capability (Teece, 1997)

Strategic Management in History

Business

PolicyStrategy

I t ll t l St t f SM R h


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Intellectual Structure of SM Researches

Economic

Psychology

Sociology

RBV

Foundation of SM

(how strategy

affect performance)

Organization

Corporate and

Diversification

IO Economic

20 D t S l t d i S b i d


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20 Documents Selected in Subperiod

1980 1986


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1980 - 1986

Organization

Strategic

Planning

Corporation

Planning

Strategic

Decision Making

1987 1993


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1987 - 1993

Organization

Strategic

Planning

Strategic Decision

Making & Learning

Corporation and

Diversification Organization

Economic

1994 2000


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1994 - 2000

RBV

Strategic

Planning

(MBV)

Organization

Economic

The Pioneers


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Alfred Chandler Igor Ansoff Philip Selznick

The Pioneers

The IO Researchers


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Richard RumeltOliver WilliamsonMichael Porter

The IO Researchers

The RBV Researchers


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The RBV Researchers

Birger Wernerfelt Jay Barney Margareth Peteraf

Critiques to RBV


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Critiques to RBVKraaijenbink, 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


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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


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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 suchas RBV, there are limited number of level, and less

powerful in strategic management.

o Higher order capabilities cannot be treated assource of SCA directly. It may be needed mutual

and interdependent with other supporting

factors

o From Adam Smith to Neuronomic

Critique 3


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Critique-3

RBVs applicability is too limitedo 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


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Critique-4

SCA is not achievableo 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


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Critique-5

RBV is not theory of the firmo 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


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Critique-6

VRIO is neither necessary nor sufficient for SCAo 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 exploitproductive opportunities implicit in them.

Critique-7


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Critique-7

The value of a resources is too indeterminate to

provide useful theory

o

RBVs proposition is tautologyo Value appears as explanan and explanandum

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


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Critique-8

The definition of resources is unworkable

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.

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)

Future Direction


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Future Direction

Redefinition of resourceo Reduce which assets are resources, and which ones are noto Typology of resources

o Differentiation of value from capacity and value from action

o Differentiation of value from resource acquisition, resource building,

resource deployment.

o Incorporate property right aspects

Redefinition of valueo Incorporate subjective aspect, i.e. managers cognitive to define

value of resource

RBV as Theory of SCAo Typology and characteristic of resources, capacity-

process, and acquisition-building-deployment.

o Property right and managers cognitive

o RBV is more complete and powerful to explain SCA


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Definition of Strategy


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Vision

Mission

Goal

Objectives

Strategic Analysis: External analysis (O & P)

Internal analysis (S & W)

Functional

StrategiesSTRATEGY

Strategy is the central integrated andexternally oriented concept of how we

will achieve our objectives (Hambrick &

Fredrickson, 2001)

Definition of Strategy

Implementation

and Review

Elements of Strategy


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Elements of Strategy(Hambrick & Fredrickson, 2001)

ARENA DIFFERENTIATOR

VEHICLE STAGING

ECONOMIC LOGIC

Where will we be in?(which product categories, market

segments, geographic area, core

technologies?)

How will we win?(uniqueness, reputation,

advance technology, low cost?)

How the sequence of our

moves?(penetration, market expansion,

brand awareness, go

international?)

How will we get there?(organic growth, M&A, joint

venture, franchise, licensing?)

How will we obtain our return?(lowest cost, premium price to uncomparable

services, economies of scale?)

Example: IKEA


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Example: IKEA

ARENA DIFFERENTIATOR

VEHICLE STAGING

ECONOMIC LOGIC

Inexpensive contemporaryfurniture

Young, white-collar customers

Worldwide

Very reliable quality Fun, non threatening

shopping experience

Instant fulfilment

Low price

Rapid international

expansion, by region

Early footholds in each

country; fill in later

Organic expansion

Wholly owned store

Economies of scale (global regional, and

individual-store scale)

Efficiencies from replication

Intended and Emergent Strategy


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Realized

Strategy

Intended and Emergent Strategy

Deliberate StrategyIntended

Strategy

Unrealized

Strategy

Emergent

Strategy

The Five Ps of Strategy


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The Five P s of Strategy

Strategy

PerspectivePosition

Plan

PatternPloy

Strategies Ahead and Behind


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Strategy as Pattern

(Look behind)

Strategy as Plan

(Look ahead)

Strategies Ahead and Behind

Strategy

formulation(separate the planning

and implementation)

Strategy formation(planning and

implementation are

developed in the

same time)

Strategies Above and Below


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Strategy as Position

(Look down or outside)

Strategy as Perspective

(Look inside)

Strategies Above and Below

Grand

vision

Strategy is thecreation of a unique

and valuable position,

involving a different

set of activities

(Porter, 1996) Strategy looks in

(inside the company),

indeed, inside the headof manager, but it also

looks up to the grand

vision of company

(Mintzberg et al, 1998)

Strategies as Ploy


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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


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10 Schools of Thought

No Category School of Thought Strategy Design as Strategy as

1 Prescriptive Design School Conception process Plan

2 Prescriptive Planning School Formal process Plan

3 Prescriptive Positioning School Analytical process Position

4 Descriptive Entrepreneurial School Visionary process Perspective

5 Descriptive Cognitive School Mental process Pat + Persp

6 Descriptive Learning School Emergent process Pattern

7 Descriptive Power School Negotiation process Ploy

8 Descriptive Cultural School Collective process Pattern

9 Descriptive Environmental School Reactive process Pattern

10 Configurative Configuration School Transformation process

Source: Mintzberg et al (1998)

The Prescriptive Schools of Thought


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The Prescriptive Schools of Thought

Design School Planning School Positioning School

STEP:

Environment analysis

(usually using SWOT)

Strategy design

Implementation and

evaluation

PREMISE:

Fitness between internal

capabilities and external

opportunities

STEP:



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

STEP:



Identifying, select, and/or

creating unique position in

the market

Implementation andevaluation

PREMISE:

Strategy is generic (create

unique position in market)

Market = competition

Strategy depends on

industry structure

Analysts are key factor in

strategy formulation


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The Descriptive Schools of Thought


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The Descriptive Schools of Thought

Power School Cultural School Environmental 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 thebest strategy rationally

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 membersof organization

Strategy rooted in collective

intentions and reflected in

the patterns by which the

deeply embedded resources

and capabilities

Resist to strategic change

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


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g g

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 configurationand 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.


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Strategic Management Researches


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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, multipointcompetition, M&A, diversification, innovation, etc.)

(Rajagopalan et al, 1993; Schwenk, 1995)

Strategy Process: how strategies are formulated,

implemented, modified, and what factors

influence them (see 10 schools of thought)

The Essence of Strategy Process


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gy

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


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Expected utility

maximizing behavior

Objective

probability Subjective

probability

Bernoulli,

1738

e.g. Laplace, 1795

Peirce, 1910

Mises, 1928

e.g. Keynes, 1921

Knight, 1921

Ramsey, 1926Finetti, 1937Objective expected

utility

Neumann &

Morgenstern, 1944Subjective

expected utility

e.g. Savage, 1954

Ward, 1954

Bounded

Rationality

Simon, 47, 57

e.g. Festinger (1957), Kelley (1967)

Vroom (1964), Staw (1976), Kahneman

& Tversky (1974, 1979, 1982)

e.g. Goldberg.

1970; Gardiner &

Edward, 1975;

Huber, 1980

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

makinge.g. Lindolm, 1959, Newell &

Simon, 1972; Abelson, 1976;

march, 1978, Quinn, 1980,

Montgomery, 1983, Klein, 1989;

Beach, 1990; Lipshitz, 1993.

y g

Decision Making Model


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g

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 fromNewmann & 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


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gy

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

howmanagers perceive strategic problems,

competitive conditions, and the internal and

external environment they face (Huff, 1990;

Porac & Thomas, 1990; Voyer, 1993).

Strategy Process Perspectives


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(Hitt and Tyler, 1991)

Strategy

Process

Strategic

Choice

RationalNormative

External

Control

e.g. Child (1972),

Montanari (1978),

Hambric & Mason

(1984)

e.g. Mintzberg,

Raisinghani & Theoret

(1976)

e.g. Bourgeois

(1984)

Strategy = rational normative + effectof managers characteristics (e.g. age,

experience, education, wealth,

psychology, etc)

Strategy = objective criteria +indentification + development +

selection

Strategy is shapped by industry

characteristics

Model of Decision Process( b )


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(Mintzberg, 1976)

Recognize

Diagnosis

Search Analysis

DesignAuthorizeJudgment

Bargain

Search for ready-

made solutions or

design a

custom-made one

Use of judgment,

bargaining and analysis

to choose a solution.

This is a multistage

iterative process with a

deep investigation

into the alternatives

Examination of

current and new

information

sources todefine the issue

The authorization

of the chosen

solution by

uppermanagement

Recognition that a stimulus or stimuli has

generated an opportunity, threat or crisis

Identification Development Selection

Strategic Choice Perspective


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Strategic choice perspective is developed by assuming

decisions are made by upper managers who are limited bybounded 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 (uppermanagement) 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


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Objective

Situation

Managers

Characteristics

Strategic

ChoicePerformance

Managers

Perception

Upper Echelon Theory (Hambrick & Mason, 1984)

All potential

stimuli, external

and internal

(information or

events)

Psychological

orientation (e.g. risk

propensity)

Cognitive and value

(knowledge aboutfuture 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(H b i k & M 1984)


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(Hambrick & Mason, 1984)

The cognitive process based on bounded

rationality in strategic choice

Strategic Decision Biases


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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(K h & T k 1979)


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Psychology orientation might change within particular

situations (Kahneman & Tversky, 1979)

Within negative frame, one tends to be a risk taker, within

positive frame, one tends to be a risk averter.

(Kahneman & Tversky, 1979)

A : Sure loss $100

B: 50% loss $050% loss $200

A : Sure gain $100

B: 50% gain $050% gain $200

Risk propensity (risk averter and risk taker) is a

critical dimension in formulating strategy

(Papadakis et al, 1998)

Risk Propensity


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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)

Trans-

situational

Factors

Situational

Factors

More stable,

unchanged in

any situations

More easily tochange,

depend on

situation

e.g. age, education, wealth, income (Riley &

Chow, 1992), functional track, financial

position (Hambrick & Mason, 1984)

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)


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(Sitkin and Weingart, 1995)

Outcome

History

Risk

Propensity

Risk

PerceptionFraming

Positive framingNegative framing

Positive outcome historyNegative outcome history

Risk takerRisk averter

Perceive high risk

Perceive low risk

Risky Decision

Making

+

+

Prospect Theory



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Causal attribution: tendency to attribute external factors as

source of poor performance, and internal factors as source ofgood 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 theresults in relation to environmental changes to

ensure the decision maker itself (Huff &

Schwenk, 1990; Clapman & Schwenk, 1991).



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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 begreater in organization or managers with good

historical performance (Hambrick et al, 1993)



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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 informationmake managers unable to learn the appropriate

lessons from past mistakes and will be destined

to repeat them.

Individual and Organizational Mind


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Individual and organizational mind researches relate to the

cognitive mapping, i.e. how manager(s) structure theinformation (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 newunderstanding about certain condition.

Cognitive map tend to change overtime (Huff &

Schwenk, 1990)

Emerging Topics in Strategic DM


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SDM and IT

o IT reduces centralization of DM in centralized company, but increasecentralization in decentralized company.

o IT increases speed and quality in problem identification, especially

under crisis condition.

Competitive Decision Makingo Link cognitive bias with decisions such as over capacity, premium

acquisition, new business failure (Zajac & Mazerman, 1991)

o Deploy strategic decision making model to game theory (Camerer,

1991; Porter, 1991; Saloner, 1991).

International Strategic Decision Makingo Managers cognitive map in global companies are more

complex in local companies (Prahalad & Betis , 1989).

o Decision making conflicts tend to be occur in Japaness

companies than US (Cosier et al, 1992)

Strategic Management at Glance


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From Economic to Strategic Management

From IO to RBV

From Adam Smith to Neuronomic

From developed economy to Africa


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Lecturer Presentation S3

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