Explain and critically evaluate the following statement “…studying strategy involves perspectivesand insights from a range of academic disciplines…a complete analysis willtypically need the insights of economics, psychology and sociology.” (Johnson et al, 2017:19) IntroductionStrategicmanagement has evolved from humble beginnings into a large area of academic study,which draws on a myriad of different disciplines.
Knowledge of the Trifocalapproach, mentioned above (economics, psychology and sociology) is essential tounderstanding how and why firms implement strategy. To understand the fullrange of strategic issues it is important to consider perspectives from thosethree areas. “Competitive strategy is about being different. It meansdeliberately choosing a different set of activities to deliver a unique mix ofvalue.” Michael Porter (Johnson, Scholes and Whittington, 2011, p 4) Thisdefinition from Michael Porter is an example of how strategy requires knowledgefrom many different academic backgrounds. In2002 Richard Whittington outlined four approaches to strategy.
These approachesdepict how strategy has evolved over the last fifty years. Whittington firstexplains the classical approach to strategy. The oldest and most influentialapproach, it holds an economic view of strategy.
It encompasses the bedrock ofall economic schools of strategy: Rational analysis, separation of strategyconception from execution and of course maximising profits. A decade later inthe 1970’s the Processual approach was born. This strategy is a product ofinternal political compromises.
This approach takes a psychological view ofstrategy and uses routines and heuristics to develop strategies. Theevolutionary approach followed this in the 1980’s, which was aneconomic/biological approach to strategy; a belief that regardless of thestrategy only the best suited to the environment will survive. In the 1990’s camethe Systemic approach, one of the first sociological approaches to strategy. Thisapproach believes culture, family and professions all influence strategy. (Whittington,2001) Whittington’s insightful investigation of these approaches to strategyhighlights how the aforementioned trifocal approach to strategy came about.
These three disciplines all went on to influences and contribute to the studyof strategy. EconomicsInstrategic management’s early days as a field of study, economic views andperspectives dominated the field. Many believed that a firm’s sole focus shouldbe on profits and efficiency. “The social responsibility of a business is toincrease it’s profits” Milton Friedman. (A-Z quotes, 2017) Most strategistswere heavily influenced by economic factors such as costs, industry, supply anddemand etc. RichardWhittington’s four approaches to strategy previously mentioned, can act as auseful timeline for examining the evolution of the economic approach tostrategy.
The classical approach was heavily concerned with profitability.Famous classicalist Alfred Sloan believes the fundamental strategic problem ofa business is putting it in a position to max profits. Classicalists believe atop down rational approach to strategy formation coupled with rigorous planningis the way to achieve this. It focuses on the ‘rational economic man’.(Whittington, 2001) The behavioural theory of the firm helped progress theeconomic view. The work of James March and Richard Cyert helped distinguish howfirms make economic decisions and defined a firm as a coalition of participantsrather than a single entity. Herbert Simon’s theory of bounded rationality wasalso adopted. This psychological perspective went on to be accepted in economicapproaches and challenged the previous belief of the ‘rational economic man’.
(Lecture 2 economics and strategyBU4501, 2017) The early work of Alfred Chandler and Igor Ansoff in the midsixties offered a contingency based framework concerned with internal strengthsand weaknesses. (Hoskisson et al., 1999) In the 1980’s the work ofMichael Porter who developed models such as Porters 5 forces led to morescientific methods of measure and study of strategic management. A swing towardindustrial organisation economics followed, strategic groups formed.
Firms inthe same industries began to follow similar strategies. This can be seen in theFormula 1 case study in the exploring strategy textbook. When Formula 1 teamsbegan copying the strategy of the most succesful team to adapt to new rules andregulations. (Johnson, Scholesand Whittington, 2011) The economic approach to strategy was no longer internallooking. This is evident in the prior mentioned evolutionary approach wheremarkets not managers were seen as determinates of a successful strategy.(Whittington, 2001) Henry Mintzberg’s design school framework is apparent atthis stage of the evolution of the economic approach to strategy. The designschool started the need for both internal and external analysis.
Laying thefoundations for strategic thinking. (Mintzberg, Ahlstrand and Lampel, 2009) This was followed by a swing back towards firm organisational economicapproaches with the rise of the Transaction Cost Economics Theory. (Hoskissonet al., 1999) Oliver Williamsonbuilt on Robert Coase’s idea that a number of transaction costs exist such asthose incurred in deciding whether the required good is available on themarket. An in depth analysis of this can help a firm determine if verticalintegration is a suitable strategy. Transaction Cost Economics holds a belief thatthe costs and difficulties associated with market transactions may favourhierarchies and sometimes markets as an economic governance structure. There isa belief in ‘hybrids’, organising models between two polarities of markets andhierarchies, such as joint ventures, franchising and licensing. (Williamson,1981) The diagram below gives an accurate desciption ofTransactional Cost Ecomics.
(Is.theorizeit.org,2017) UsingHoskisson’s phraseology, the pendulum swung once again this time toward the ResourceBased View (RBV), which placed emphasis on firm’s internal strengths andweaknesses relative to external opportunities and threats. This theory holdsthe view that a firm must acquire and control valuable, rare, inimitable andnon-substitutable resources and questions how organisations exploit and handlethese resources.
Achieving this will supposedly result in sustained competitiveadvantage. The RBV assumes that firms are profit driven and directed by boundedrational managers operating in distinctive markets that are to a reasonableextent predictable. (Barney, 2001) The RBV is not without its critics. Criticsbelieve that the RBV community has clung on to an inappropriately narrowneoclassical economic rationality and has thereby diminished its opportunitiesto progress over past decades. (Kraaijenbrink, Spender and Groen, 2009). As more and more researchis continually added to the economic perspective of strategic management, newtheoretical paradigms and methodological approaches will replace outdated ones.
PsychologyPsychology has played a pivotal role in strategic management. Psychologyis concerned with cognition, the information processing view of an individual. Thepsychological perspective sees industries and strategic groups as sociocognitive constructions created through a shared interpretation of realityamong business rivals. (Jenkins, Ambrosini and Collier, 2007) HenryMintzberg’s cognitive school described strategy formation as a cognitiveprocess that takes place in the mind of the strategist, inputs flow throughdistorting filters perceived by the strategist, which are then decoded bycognitive maps or else are simply interpretations of the world that exists onlyas it is perceived.
Strategies emerge as perspectives that shape how peopledeal with environmental inputs. (Mintzberg, Ahlstrand and Lampel, 2009). People are seen to store knowledge in the formof cognitive maps formed over time through experience, education andinteraction with others. Early psychological views of strategy felt humans arelimited by their processing capacity, storage capacity and cognitive bias. Cognitivetheory and research in strategic management directly challenged the economicassumption of raionality.
These mental bias’s can be described as mentalshortcuts, ‘jumping to conclusions’. Examples of these are overestimatingconfirmatory and underestimaing confirmatory bias, where the individual willjump to conclusions seeking the desired answer. ‘Groupthink’ is another exampleof human limitations. This is when a group desires confirmatory to such anextent an irrational decision is made in order to satisfy all parties. Strategistare bounded rationally, they act intentionally rational but are limited so.(Simon,1999) If we return to whittington’s earlier discussed theories ofstrategy the Processual approach is undoubtedly the psychological theory of thefour . This approach disagreed with the classical economic approach thatproceeded it and felt it was biased due to bounded rationality and was prone toselecting the first satisfactory option.
This approach holds the view thatsuccesful strategy is not achieved by putting the organisation in a position tomax profits but by cultivating internal competencies. (Whittington,2001) Inmy opinion the biggest contribution made by this academic discipline is thetools it has provided to strategic management. It has provided strategists withcausal/cognitive maps and scenario planning to name. Causal maps aim to captureactor’s causal belief systems. These maps are a type of mental representation, which givesorganisation or individuals information about the relative influences, andattributes of phenomena in their everyday.
(Jenkins, Ambrosini and Collier,2007). These maps began to be used more and more for strategy and have becamevery influential.(Slideshare.net, 2017) Scenario planning hasalso proved to be a useful tool for strategiests. Firms seek to develop aseries of stylised portraits of the future, capturing what may or may nothappen. This in turn will help them provide a basis for developing a strategy.In theory this helps firms overcome cognitive bias and cognitive inertia. Inthe long term they aim to develop robust organisational systems that can handlethe unexpected.
In the short term they hope to lead to increased adaptability. Psychology hasundoubtedly contributed a lot to the study of strategy and I am of the opinionit has a lot more to contribute in the coming years. Sociology Sociology has influencedthe field of strategy greatly. It has given insights into the behaviour withinfirms and organisations. Sociology introduced the study of human behaviour intothe field. As well as introducing organisational sociology, studying formalgroups organised to achieve their goal efficiently.
The Resource DependenceTheory was a revolutionary sociological approach with a belief that in orderfor an organisation to survive it needs resources from its environment, usuallycoming from other organisations. This results in management developing astrategy for how to cope with external constraints. Power is considered adriver of behaviour and success can be achieved by organisations maximisingtheir power. The Resource Dependence Theory has resulted in strategies beingemployed by organisations to change and adapt to environments. (BU4501strategic management; theory and practice Lecture 3 Sociology, 2017) This canbe done through many different ways, an example of this is when Price Waterhouseand Coopers Lybrand merged into one in 1998 to become Price Waterhouse Coopers.
This maximised their power in the accountancy industry. The sociologicalperspective rejects markets and contributed the idea of networks, organisationsare seen to be embedded in social ties. Firms behaviour is seen to becontrolled by relationships with other firms. The Sociological perspectivebelieves that organisation are not surrounded by an abstract concept called theenvironment but are surrounded by a collection of other organisations. Thisperspective introduced the idea of social inertia and how organisations fearedchange.
Organisations rarely change fundamental structural features because ofthis inertia. Henry Mintzberg’sCultural school is the most applicable to the sociological perspective. This isthe idea that strategy formation is a result of an organisations subjectiveperspectives , styles of decision manking and unique value. Strategy can beseen as the perspective, rooted in the intentions and reflected in the patternsby which the embedded resources of the organization are protected and used forcompetitive advantage. Much like the cognitive process culture acts as afilter thet influences decision making. (Mintzberg, Ahlstrand and Lampel, 2009) Richard Whittington’slast of the four theories he presents is the Systemic Approach. This approachis heavily influenced by sociological factors.
Whittington conveys to thereader how this sociological approach considers many different influences suchas culture, family and professions. (Whittington, 2001) An example of thisdiference in culture in organisations can be found in Silcon Valley where somefirms have begun to offer staff payment in crypto currencies. This type ofpayment may entice employees in these type of firms but would be laughed at byemployees in other regions. The Sociologicalperspective has long influenced many economic theories. In Ronald Coases natureof the firm he states how economics could not only be used to explain themarket but also the firm. He awcknowledged the sociological perspectives suchas culture, environment and power elements.
Coase showed a sociologicalperspective which later led to the theorising of Transaction Cost Analysis. (Swedberg, 1996) In the past few decades sociology hasbecome one of the main disciplines influencing the field of strategy and thislooks set to continue. ConclusionTo conclude, when carrying out my research for this essayI began to notice that the economic perspective seemed to have the mostempirical research on the study of strategy, which also dated back thefurthest. Psychology and Sociology did influence the economic perspective inthe early days with influences like ‘Bounded Rationality’ and the sociologicalperspective influencing Transactional Cost Economics respectively but I believethat the importance of these two disciplines to the study of strategy has onlyreally been realised in the last few decades. A knowledge of all three of thesedisciplines is imperative to be able to even begin to give a complete analysisof the study of strategy. Bibliography 1.
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