TOWARDS A DYNAMIC THEORY OF STRATEGY

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Nov 16, 2013 (3 years and 8 months ago)

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TOWARDS A DYNAMIC THEORY OF
STRATEGY

AUTHOR

Michael E. Porter is the C. Roland Christensen Professor of Business
Administration at Harvard Business School and Director, Institute for
Strategy and Competitiveness

He is the author of many seminal books on competition and
strategy, including
On Competition, The Competitive Advantage of
Nations, Competitive Advantage: Creating and Sustaining Superior
Performance, etc




REFERENCES


On Competition (
Michael Porter, 1998 edition
)


The Competitive Advantage of Nations (
Michael Porter, 1998 edition)


The origin of Strategy, Harvard Business Review (
Henderson,B 1989)


Dynamic Strategic Resources (
Michael A Hitt, et al .1999
)


Corporate Strategy. A Resource
-
Based Approach (
Collis &
Montgomery,1998
)


Arriving at a Strategic Theory of the Firm. International Journal of
Management Review, 2000 (
Phelan, Steven E and Peter Lewin
)


Using Simulation for Theory Generation in Strategic Management (
Paper
presented at 2
nd

Australian Conference by Phelan, Steven, 1995)


Explicating Dynamic Capabilities: Asset Selection, Coordination, and
Entrepreneurship in Strategic Management Theory (
Draft paper: David
J.Teece, 2003)


Strategic Thinking and Strategy Analysis in Business
-

A Survey on the Major
Lines of Thought and on the State of the Art (
Working paper: Gert Bruche,
1999
)


ABSTRACT

Review the progress of the strategy field


towards developing a truly dynamic theory strategy


Theory of Strategy

Cross sectional

problem

Longitudinal

problem

Review 3 traditional theory

Fall short of
exposing
true origin
of
competitive
success

A Dynamic Theory

Local


environment

Challenges for future

research

Why firm succeed or fail

Theory of

the firm

Theory of

strategy

EARLY LITERATURE ON
STRATEGIES

TERM & DEFINITION


Success


Attaining a competitive position(s) that lead to superior
and sustainable financial performance


Sustainable Competitive Advantage


When a firm implements a value creating strategy of
which other companies are unable to duplicate the
benefit or find it too costly to imitate (Hitt, Ireland &
Hoskisson in Strategic Management, 1999)


Dynamic Capabilities


The firm’s ability to integrate, build, and reconfigure
internal and external competences to adress rapidly
changing environments



EARLY ANSWERS: DETERMINANTS
OF FIRM SUCCESS

FIRM’S SUCCESS

Develop internally
consistent set of goals
and policies

Align SWOT

Create/
exploite
distinctive
competencies




Only broad principles !



Companies and environment in a state of constant change!




No theory for examining firm and competitive environment!

FUNDAMENTAL ISSUES IN
CREATING A THEORY OF STRATEGY

1. Approach to Theory Building

MODELS

FRAMEWORKS

2. Chain of Causality

3. Time Horizon

4. Empirical Testing

TOWARDS A THEORY OF
STRATEGY

THE DETERMINANTS OF SUCCESS

Firm

Success

Relative

Position

Industry

Structure

S. Competitive

Advantage


Activities / Value

System


Drivers

Initial

Condition

Managerial

Choices

1.
Lower cost

2.
Differentiate

ORIGINS OF COMPETITIVE
ADVANTAGE


P

O

S

I

T

I

O

N


CROSS
-
SECTIONAL
PROBLEM:



What makes some

industries, and some

positions within them,

more attractive than

others?




through underlying




choices a firm makes in


term of its industry,




positioning, and




activities


LONGITUDINAL PROBLEM:



Why firms able to get into

the advantaged positions,

and why did they sustain or

fail to sustain them?




through initial condition and


pure managerial choices

Weakness: Built on aggregate understanding of the industry, in
term of cost leadership or broad differentiation, rather than on
understanding consumer preferences (Jonathan Wilson in Dynamic
Strategic Resources)

TOWARDS

A DYNAMIC THEORY

DYNAMIC THEORY


Dynamic requires longitudinal perspective, which
allow examining the changes and the continuity
in the pattern of organizational behavior over
time


During the last decades, there has been an
intensive request for the search of dynamic
theory of strategy


“ …detailed longitudinal case studies, covering
long periods of time, are necessary to study
these phenomena” (Porter, 1991)

TRADITIONAL THEORY

THREE PROMISING LINES OF INQUIRY HAVE BEEN
EXPLORED:




GAME
-
THEORETIC MODEL



COMMITMENT AND UNCERTAINTY



RESOURCED BASED VIEW



HYPERCOMPETITION
(Strategic Thinking and Strategy

Analysis in Business …., by Gert Bruche, 1999)



GAME THEORY



RESTRICTED TO ONE OR A FEW VARIABLES




Many variables that characterize most industries



ENVIRONMENT (TECHNOLOGY, PRODUCTS, ETC)
ASSUMED TO BE FIX




Environment keep changing



HOMOGENEITY OF STRATEGIES





Trade
-
off/interaction in configuring the entire set of

activities in value chains



MANY FIXED VARIABLES





Changing variables

COMMITMENT AND UNCERTAINTY


STRATEGY IS MANIFESTED IN A RELATIVELY FEW
INVESTMENT DECISIONS, HARD TO REVERSE AND TEND
TO DEFINE CHOICES IN OTHER AREAS OF THE FIRM
(COMMITMENT UNDER UNCERTAINTY)


Ghemawat’s book
in 1991



CONSIDERS THE ENVIRONMENT AS RELATIVELY STABLE
(THOUGH UNCERTAIN)




Commitments have long lived consequences and

possibilities for reconfiguring the value chain are limited



FOCUSING ON DISCRETE CHOICES




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respond to environmental changes, or define entirely

new positions

RESOURCE
-
BASED VIEW


Firm differ in fundamental ways because each firm
possesses a unique bundle of resources


The origin of competitive advantage are valuable
resources that firm possess i.e. assets( such as skill,
reputation, etc) and organizational capabilities


RBV will have the greatest significance in environments
where change is incremental, number of strategic
variables and combination is limited and the time period
is short to intermediate term



RBV cannot be an alternative theory of strategy, it

cannot be separated from cross sectional

determinants of competitive advantage

HYPERCOMPETITION


Hypercompetition takes place in fast cycle
environments where any single
competitive advantage is eroded very
quickly


TRADITIONAL THEORY

THREE + ONE PROMISING LINES OF INQUIRY
HAVE BEEN EXPLORED:



GAME
-
THEORETIC MODEL


COMMITMENT AND UNCERTAINTY


RESOURCED BASED VIEW


HYPERCOMPETITION



STILL LACK OF A DYNAMIC THEORY OF
STRATEGY !!

IMPORTANT ISSUES TO BE ADRESSED


A THEORY MUST DEAL WITH FIRM/INDUSTRY AND ENVIRONMENT





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A THEORY MUST ALLOW FOR EXOGENOUS CHANGE IN AREAS SUCH AS
BUYER NEED, TECHNOLOGY AND INPUT MARKET




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灲o扬敭潲攠捯浰汩捡瑥c



A THEORY MUST GIVE LATITUDE NOT ONLY TO CHOOSE AMONG WELL
DEFINED OPTIONS BUT TO CREATE NEW ONES




Ability to shift the constraints through creative strategy

choices, innovative activities, skills, capabilities



A THEORY MUST TAKE INTO ACCOUNT ROLE OF HISTORICAL
ACCIDENT OR CHANGES




Luck has an important influence on how one develops a theory of

strategy

FIRM AS THE ORIGIN OF
ADVANTAGE


SINCE THE NUMBER OF VARIABLES IS
SUBSTANSIAL AND ENVIRONMENTAL
CHANGE IS CONTINUOUS, THEN THE
PROBLEM IS NOT SELECTING GOOD
STRATEGIES BUT
CREATING A FLEXIBLE
ORGANIZATION THAT LEARN AND ABLE
TO CONTINUALLY REDEFINE ITS
STRATEGY



IT LIES IN
THE ABILITY TO MAKE GOOD
STRATEGY CHOICES AND IMPLEMENT
THEM

ENVIRONMENT AS ORIGIN OF
ADVANTAGE


True origin of competitive advantage may be found in firm’s
proximity or local environment



Competitive advantage in particular industries tended to be
strongly concentrated in one or two countries, often with
several/many successful home
-
based competitors



Successful firms were also geographically concentrated
within nations



Firm create and
sustain competitive advantage

because of
their capacity to continuously improve, innovate and
upgrade their competitive advantage overtime



Successful firms are those that improve and innovate in
ways that are valued not only at home but elsewhere


PERSPECTIVES ON FIRM
COMPETITIVENESS

TRADITIONAL



Competitive advantage

resides solely
inside

a

company/industry



Competitive success

depends primarily on

company choices

EMERGING



C.A. resides partly in the

locations

at which

company’s business units

are based



Cluster participation

is an

important contributor to

competitiveness

Michael Porter “ On Competition” , 1998 edition

THE DIAMOND AS

A DYNAMIC SYSTEM

DETERMINANTS OF NATIONAL
COMPETITIVE ADVANTAGE

Firm Strategy,

Structure and

rivalry

Demand

Condition

Factor

Condition

Related and

Supporting

Industries



Presence of high quality,

specialized inputs:


Human/capital/natural

resources


Physical/administrative/info

rmation/technological

infrastructure



Access to capable, locally based suppliers and firms in related fields


Presence of clusters instead of isolated industries



A local context and rules

that encourage

investment and sustained

upgrading e.g. intellectual

property protection



Open and vigorous
competition among
locally based rivals



Sophisticated and demanding

local customers



Local customer needs that

anticipate those elsewhere



Unusual local demand in

specialized segments

Chance

Government

ORIGIN OF COMPETITIVE
ADVANTAGE


Competitive advantage originates in
the local environment in which the
firm is based


The four attributes (“diamond”) in a
firm’s home market promote or
impede a firm’s ability to achieve
competitive advantage


DIAMOND AS DYNAMIC SYSTEM



Aspects of the local environment

constitute

a dynamic system. The effect of one

determinant depends on the others



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Sustained success requires the interaction

of favorable conditioned of determinants




Firms lose competitive advantage due to

weakness in their local environment or

other internal problem



ENVIRONMENTAL INFLUENCES ON
DYNAMIC OF STRATEGY


The environment, via diamond, affects
firm’s initial condition and its managerial
choices


The diamond address a dynamic theory of
strategy early in the chain of causality


Firms must understand and exploit their
local environment to achieve competitive
advantage

ISSUE FOR FURTHER RESEARCH


Need to better understand the balance between
environmental determinism and company choice
in shaping competitive outcome


Need to better understand the degree of
stickiness or inertia in competitive positions once
a firm stop progressing


Need to know how necessary or helpful it is to
push even further back in the chain of causality


Challenge of crafting empirical research to make
further progress in understanding this dynamic
of strategy

EMERGING THEORY

Challenge of crafting empirical research

to make further progres


in understanding this dynamic of strategy

DYNAMIC CAPABILITY

THEORY

A DYNAMIC THEORY

Resourced Based Theory



Emphasizing on internal
analysis/specific asset of the firm
where resources/capabilities
/uniqueness, etc, as source of
sustainable competitive advantage



Static due to not anticipating
environmental change


Dynamic Capability Theory



Extension of Resourced Based Theory



Seeks to explain how firm achieve and sustain
competitive advantage despite an ever
-
changing
environment



Appropriately adapting, integrating, and re
-
configuring internal and external organizational
skills, resources, and functional competencies
toward a changing environment


Competitive advantage from
managerial/organization processes, positio, path


DYNAMIC THEORY OF STRATEGY

Adapting effectively

to changing

environment

Longitudinal view

(answering WHY)

COMPLEMENTARY OR
COMPETITOR?

Factor

Condition



Related

and supporting

Industries


Firm Strategy,

Structure,

Rivalry

Demand

Condition

Dynamic Capability

Theory

Industrial Based

Resourced Based

DISCUSSION + CONCLUSION

DISCUSSION


An analogy from other field to answer why firm
success


Limitation to Porter’s theory


-

Theory of strategy should provide the

predictive function (
Phelan,1995
)


-

Lack of experimental method condition i.e.

observation, manipulation and replication


To establish a theory of strategy need a
reconciliation of the different perspective
between economist and strategist (
Phelan, 2000
)



CONCLUSIONS


Success of the firm depends on initial condition
and managerial choice, and explained through
chain of casualty


There is no theory of strategy that can be
applied for all situation over time. Environmental
and technological changes require a dynamic
theory of strategy


Strategy implemented in one firm, might not
success if adopted by other firm


Dinamic Capability theory is one of the
alternatives developed to answer the need for a
dynamic theory of strategy


ORIGINS OF COMPETITVE
ADVANTAGE


THE FRAMEWORK BUILD LINK BETWEEN
MARKET OUTCOMES AND UNDERLYING
CHOICES A FIRM MAKES (IN TERM OF
INDUSTRIES,
POSITIONING

AND ACTIVITIES)


SUCCESS REQUIRES THE CHOICE OF A
RELATIVELY ATTRACTIVE POSITION
, FIRM’S
CIRCUMSTANCES, AND
POSITIONS

OF
COMPETITORS


ALL FIRM’S ACTIVITIES MUST CONSISTENT
WITH
THE CHOSEN POSITION

TERM & DEFINITION


Success


Attaining a competitive position(s) that lead to
superior and sustainable financial performance


Competitive Advantage


When a firm earns a higher rate of economic
profit than the average rate of economic profit
of other firm competing within the same market,
the firm has a
competitive advantage
in that
market



Sustainable Competitive Advantage


Dynamic Capabilities

DYNAMIC CAPABILITY THEORY


The dynamic capability theory seeks to explain how firm
achieve and sustain competitive advantage despite an
ever
-
changing environment


Dynamic capabilities emphasized the key role of strategic
management in appropriately adapting, integrating, and
re
-
configuring internal and external organizational skills,
resources, and functional competencies toward a
changing environment




Dynamic Capabilities are those competencies that

allow the firm to respond to and exploit changing

market environment