Whittington (2001) in his book ‘What is Strategy – and Does it Matter?’ has discussed a number of approaches to strategy other than the four of his own (Classical, Evolutionary, Processual and Systemic). The alternate approaches pointed by him that are compared here are Transactional Cost Economics, Game Theory, the resource based view, Henry Mintzberg’s and Water’s classification (1985) and Michael Porter’s (1980, 1985) positioning school. These can be associated to the modern or postmodern methods of strategic thinking depending on the differences in priorities of the approaches and this will also aid in contrasting the basic premises of each approach. First, the modern and postmodern way of strategic thinking is discussed.
Lowendahl and Revang (1998) in their article mention that all organisations are faced by varying levels of internal and external complexities that push managers to shape business strategies. In the modern or industrial era, these complexities were low and strategies were rational (bounded) and cost leadership oriented. Organisational structures were hierarchical bureaucracies with non-interactive functional divisions. Mass production pushed sales and managers only wanted profits. Measures of cost efficiency and economies of scale were used to maximise profitability.
Complexities increased with the globalisation of markets, social transformations (e.g. break-up of the Soviet Union), introduction of knowledge based products and services and changed the ways of strategic thinking. Customer satisfaction and innovation guided production. Managers were challenged by the changing environments of business. Mass customisation by creativity and innovation replaced mass production using machinery. The organisational structures became more bottom-up where employees were consulted in strategic decisions. This is the postmodern or post-industrial way of thinking. (Lowendahl and Revangg 1998).
Michael Porter’s (1980, 1985) school of positioning is concerned with maximising the advantages of the capabilities of an organisation that distinguish it from its competitors. He held managers responsible to assess the external competition (using the 5 forces model) and internal processual efficiencies (using the value chain assessment) and accordingly position the business to maximise profitability. His school was dependent upon deliberate planning and futuristic calculations. He prescribed that an organisation had to select one of his five positions or be stuck in the middle forever. This was a modern way of strategising wherein complexities were low, environment was considered to be stable and organisations were expected to adapt to this environment. The positioning school strategies are considered to be deliberate and planned (Mintzberg and Waters 1985).
The resource based view (RBV) (Wernerfelt 1984, 89; Barney 1991; Conner 1991) entailed determination of the amount and process of resource usage for production as analysts realised that efficient usage of available resources brought about profitability. RBV analysis is mainly confined to labour, capital and land. Economists constructed models that followed the mathematics of declining returns with increase in scale but as newer resources such as technological skills became important; these models were losing its significance. In contrast to the positioning school, the focus shifted from competition and internal processes to resources of the firm rendering Porter’s school obsolete (Nonaka and Takeuchi 1995 cited in Lowendahl and Revang 1998). RBV answers questions to ‘how’ rather than ‘where’ a firm should compete (Lowendahl and Revang 1998).
The dynamic nature of business and its environment directed researchers to think of strategic and organisational change as bottom-up, emergent and incremental (Minzberg 1978 and Mintzberg and McHugh 1985) rather than planned and rational. As pointed by Mintzberg and Waters (1985), there are differences between intended and realised strategies and they are normal and expected. These authors have advocated learning organisations that adapt to the needs and challenges of the environment as and when required. Much like the software firms mentioned in the essay above. Mintzberg and Waters (1985) have provided a spectrum of strategies with deliberate on one end and emergent on the other with six others in between with varying degrees of the two extremes. The description is overarching and encompasses all possible varieties of strategies both modern and postmodern but their loyalties are with learning organisations that tend towards the emergent side of their strategy spectrum.
Game theory (GT) entails identifying and specifying a game among firms in competition. GT aims at solving that conspiracy using the non-cooperative solution concept of Nash Equilibrium and other such equilibriums. Analysts have to be precise about the assumptions, conditions and rules of the game. Some equilibriums used are Cournot (1838 cited in Shapiro 1989) in quantities, Bertrand (1883 cited in Shapiro 1989) for prices, Stakelberg (1934 cited in Shapiro 1989) for another outcome etc. but they donot always produce the same results even in the same economic conditions. Critics find this uncertainty as the evidence that the theory has failed (Shapiro 1989). GT is complex and it threatens to explain anything, it generates customised models of local settings rather than general regularities, and it offers only part of the advice a manager needs (Camerer 1991). In conctrast to the modern way of thinking, it is not futuristic or rational (bounded), rather it is impulsive. Opposed to other modern strategies, GT is driven by the motive of defeating the opponent at any cost and that need not always mean efficiency of the business.
Transaction Cost Economics (TCE) considers transactions as the basic unit of analysis which differ in respect to frequency, uncertainty and asset specificity, to these ease of measurement was added later (Willamson 1971, 1979, 1991). All transactions have a cost and the opportunistic human being uses their rationality (bounded) to make these costs as advantageous as possible for themselves. But there is also scope for error by humans. To minimise this scope of error, TCE advocates that market interactions should be minimised and business processes should be brought under direct ownership. Vertical integration can eliminate market interactions and horizontal integration can build synergetic transactions between parallel businesses. The critic of TCE by Ghoshal and Moran (1996) states that TCE is local not general and its validity is reduced to contexts in which hierarchical controls reduce opportunistic behaviour. In contrast to the RBV, economising transactions rather than assessment of resources is the central premise of TCE. Also, sub-contracting is unadvisable and business activities are to be under direct supervision. Like the positioning school, TCE is planned, futuristic and dependent on the rational (bounded) strategic thinking. It does not believe in emergent or incremental way of strategic thinking and thus it is difficult to apply in the post modern firms.
In conclusion, these alternate approaches to strategy vary according to the context of implementation and whether they belong to the modern or post modern way of strategic thinking. Which one suits a business the most will depend upon its selected priorities and desired results.
References
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Camerer C.F. (1991) Does Strategy Research Need Game Theory? Strategic Management Journal, Vol 12, pp 137-152
Conner K.R. (1991) A Historical Comparison of Resource Based Theory and Five Schools of Thought within Industrial Organisation: Do we have a New Theory of the Firm, Journal of Management, Vol 17, No. 1, pp 121-154
Ghoshal S. and Moran P. (1996) Bad for Practice: A Critique of the Transaction Cost Theory, Academy of Management Review, Vol 21, No. 1, pp 13-47
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Whittington R. (2001) What is Strategy – and Does it Matter? 2nd Ed., Cengage Learning EMEA, Cheriton House, Hampsire, UK
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