Making sense of the strategy world

There are numerous perspectives on business strategies and an array of disparate and conflicting classification systems. Mintzberg (1990, 1998) identifies ten schools of strategy theory, and Pecotich et al. (2003) assign strategy studies to three major, but overlapping and increasingly coalescing, disciplines of:

marketing strategies (doing things right) corporate strategies (doing the right things)

industrial economic strategies (structure, conduct and performance).

For the purposes of this dissertation, Ahonen (2004) proposes a more useful classification of the literature:

strategic planning school – strategy as the planned allocation of scarce resources to achieve the long-term goals of the organisation. This grouping of systematic planning typologies includes both neoclassically based theories and bounded rationality variants (Chandler, 1962; Ansoff, 1965, 1979, Cyert and March, 1963)

competitive strategy view – combining desired outcomes and the means to achieve them within the competitive environment (Porter, 1980)

strategy process school – strategy arising out of continuous learning, change and development – a more dynamic but still equilibrium-based view (Miles and Snow, 1978; Mintzberg, 1987, 1988, 1994; Peters and Waterman, 1982)

resource-based view – strategic positioning is based on combinations of resources and capabilities unique to an individual firm and including learning processes and outcomes (Prahalad and Hamel, 1990; Barney, 1991, 1997).

Again, the key common element of all these strategy perspectives is that organisational flexibility leads to better performance than organisational inertia, or at least produces economic returns greater than the total costs of that flexibility. Once more, overlying Ahonen’s classification, strategic choice theory assumes that success lies in the decisions made by individual entrepreneurs and managers, including their ability to bring about the changes demanded by their strategic choices (Child, 1972). Much of the literature and most of the management handbooks are devoted to prescriptive guidelines for success.

Most strategic choice theory makes little distinction between short- and long-term strategies, whereas a successful strategic approach that manages both the long and short term requires firms to exploit existing markets while simultaneously exploring new market opportunities.

Strategic ambidexterity is the ability to follow both exploitation and exploration strategies simultaneously to deliver greater organisational effectiveness over time (Lawrence and Lorsch, 1967). The skills to make both happen simultaneously, however, are often at odds with each other (Judge and Blocker, 2008). This may be because exploitation and exploration strategies are typically associated with dramatically different organisational structures, cultures and systems (Kyriakopoulos and Moorman, 2004). Alternatively, firms that pursue both exploitation and exploration can be perceived as necessarily lacking either a good external organisation/environment match or a good internal/organisational fit (Lawrence and Lorsch, ibid.). To date, empirical studies on ambidexterity are methodologically diverse, comprising case studies, simulations, laboratory studies and field studies (O’Reilly and Tushman, 2008). Some look at the relationship between dynamic capabilities and organisational adaptation (Venkatraman et al., 2006) and others look at the results of ambidexterity such as performance or new product development (Lubatkin et al.,

2006; Markides and Charitou, 2004). None of these studies looks at the potential sources of strategic ambidexterity or the influence of any contextual factors so there is no guidance about how it might be created and how best exploited.

From an organisational science perspective, ‘routines as organisational capabilities’ is also a recurring theme, from the view that capabilities are organisational characteristics that let the organisation select and implement strategy (Barney, 1991), through to the notion that dynamic capabilities build, integrate and reconfigure internal and external competences to allow a firm to address a fast-changing marketplace (Teece et al., 1997). Organisational capacities may also be the learned and stable patterns of collective activity through which the organisation systematically generates and modifies its operating routines in pursuit of improved effectiveness (Zollo and Winter, 2002). Again, the difference in approach from evolutionary economics is that routines for organisation science are largely the actual, customary or regular courses of procedure. They are things done regularly or at specified intervals; prescribed, detailed course of action to be followed repeatedly, or standard sets of customary and often mechanically performed procedures or activities. Given such a definition, it is easy to see why so many empirical studies in the field are of firms engaged in manufacturing, where process is relatively clear, or they are of larger and older firms where routines are more likely to be identifiable and documented in some way.

2.8.3 Entrepreneurship, innovation, firm size and age

Nonetheless, as Witt (2004) stresses, all these various theories still focus on what amount to equilibrium states of institutions, and so the search for optimality makes it hard to get to grips, conceptually and practically, with the systematic changes going on inside firms over time. For many strategy theories, there is no theoretical difference between a newly-founded small entrepreneurial business and a large, multi-division corporation.

But the size of firm can have a major impact on a range of outcomes. Organisations such as banks can become ‘too large to fail’ and larger firms operating above the minimum efficient

scale²² may have lower average cost advantages over smaller ones. While relative size may offer a competitive advantage through increasing returns to scale, smaller firms can compete through ‘niche’ strategies by exploiting market segments that are too small to be exploited profitably by very large organisations (Porter, 1980), or by specialising in goods and services whose appeal comes from their status or brand name (Carroll and Swaminathan, 2000), or focusing on a particular customer segment and offering tailored or customised products (Boone, Broecheler and Carroll, 2000). These strategies all offer some potential selection advantage from an organisational science perspective.

Organisational ecologists, as discussed, are particularly critical that theoretical and empirical work in strategy management and evolutionary economics focuses on larger firms or sub-populations such as engineering or high-growth firms that are relatively easier to identify and study. One empirical study on a wider selection of smaller firms by Gray (2002) shows strong positive links between growth orientation, the setting of financial objectives (as opposed to lifestyle goals), propensity to introduce changes and actual growth. This author’s ethnographic experience is that many small firms simply do not have time to reflect on, or learn effectively from their experiences and they are reluctant to introduce changes until they are forced to do so by circumstances. Skills development is also a much more a functional rather than a formal matter for SMEs, as would be expected. Nooteboom (1994) takes the view that small firms have more flexibility and greater ability to introduce innovation and also have more customer focus than large ones but simply do not have their economies of scale. Nooteboom calls this customisation and innovation effect ‘dynamic complementarity’ and it is this that lets small firms operate effectively in markets where they are not confronted with direct competition from larger firms. An empirical study by Audretch, Prince and Thurik (1999) shows that large and small firms do operate in distinct segments of the market rather than competing directly. Indeed, rather than higher-cost small firms imposing a loss in allocative efficiency, Audretch, Prince and Thurik (ibid.) argue that the process of creating and occupying a strategic niche lets smaller firms act as change agents through their innovative actions.

22 The minimum efficient scale (MES) is the output for a business in the long run where the internal economies of scale have been fully exploited. It corresponds to the lowest point on the long run average total cost curve and is also known as the output of long run productive efficiency.