Strategic management is one of the most discussed issues in business studies. But what is strategy and does it actually improve business performance? In this essay the role of luck in business performance is discussed in light of strategic management studies.
Life is full of serendipity and much of human culture is in essence a means to deal with the unpredictable. We can not know whether the next harvest will fail, whether we still have a job next year or when we will die. Ancient systems, such as astrology and other forms of divination were developed to reduce uncertainty in people’s lives. After the era of enlightenment, divination was replaced by science and we now rely on weather forecasters, medical professionals, engineers and other professionals to provide information to help us plan our lives.
What is true for life in general is also true for managing an organisation. An organisation is a group of people that are bound together through a common goal. To increase the likelihood that organisations achieve objectives, they require management, i.e. actions of members of the organisation aimed at reducing uncertainty. One of the greatest uncertainties in business is the existence of competitors and their intrinsic unpredictable actions. Strategic management is a specific kind of management that seeks to reduce this uncertainty.
Strategic Management Schools of Thought
In this essay a taxonomy of Schools of Thought in strategic management, as proposed by Henry Mintzberg (1990; 1999), is described. The distinction between prescriptive theories, such as those propounded by Igor Ansoff and Michael Porter, and descriptive schools of strategic thinking are discussed. It is argued that an organisation can not rely solely on formal prescriptive systems to develop and implement strategy and that an integrated approach is required to act strategically and increase the chances of success.
Socially constructed phenomena, such as religion, culture and management are notoriously hard to define. This is certainly the case for business strategy and although many scholars have applied their intellect to this problem, no consensus has thus far emerged (Forster and Browne 1996; Mintzberg 1987). The most productive approach has been to move away from essentialist “strategy is …” type definitions that attempt to capture strategy in one quintessential sentence. Mintzberg (1987) criticises the reductionist approach to strategy definition by comparing it with a group of blind scientists describing an elephant by touch alone. One says it is a trunk, the other might focus on the legs, but nobody is able is to describe the elephant as a whole. To circumvent perceived issues with essentialist definitions, a phenomenological view, describing different perspectives of strategic thinking in a model or taxonomy is preferred.
Several authors have proposed systems to classify strategic approaches for business. For example, Igor Ansoff (1987) defined a matrix of four generic strategies and Michael Porter (1980) defined three generic strategies to achieve competitive advantage.
Igor Ansoff, often credited as the Father of Strategic Management, started his career as a mathematician and later moved into the field of management (Hussey 1999). Mintzberg credits Ansoff as being instrumental in the development of the Planning School (Mintzberg and Lampel 1999). Being trained as a mathematician, it is not surprising that Ansoff’s strategic thinking revolved around structure and order. The subtitle of the first edition of Corporate Strategy was “An analytic approach to business policy for growth and expansion” (Ansoff 1987). The process of strategy formulation is, according to Ansoff, not a creative activity but a formal one, consisting of distinct steps supported by checklists and other control techniques (Mintzberg and Lampel 1999). Ansoff published a great deal on turbulent and discontinuous change (Hussey 1999). But Ansoff, thinking like a mathematician, sought to control the unpredictability of the external environment with checklists, budgets and operating plans. The reality he thus sought to control is, however, not physical and predictable, but social and therefore less likely to be controllable through analytic means.
Almost two decades after Ansoff published his first ideas on strategic management, Michael Porter came on the scene and quickly attained the status of management guru. In his book Competitive Strategies, Porter (1980) argues that only three strategies exist which provide opportunities of success. The differences between these strategies are in the strategic advantage sought from either cost or differentiation and the target aimed at (Speed 1989). Mintzberg and Lampel (1999) place the work of Porter in the Positioning School, a prescriptive view on strategy popular in the 1980s. In Porter’s view, strategy can be reduced to generic position taking based on formal analysis of the external environment. Because of the intuitive appeal of Porter’s work, it quickly picked up by management consultants, who proclaimed it to be a scientific truth (Mintzberg and Lampel 1999). One often heard criticism to Porter’s work is, however, that it is lacking in empirical support, using selective case studies to make his point (Speed 1989).
Henry Mintzberg employs a more philosophical approach when he classifies strategic business thinking in ten Schools of Thought (Table 1), which he describes in their historical and ideological context. Early theorists, such as Igor Ansoff, focused on the analytical aspects of strategy formation. The first three schools in Mintzberg’s taxonomy are therefore prescriptive and focus on how strategy ought to be formulated. On of the major premises of the prescriptive schools is the Performance Claim, which states that the more an organisation engages in systematic strategic planning, the more likely it will result in above average returns. The prescriptive schools have been influential in the discourse of strategy formulation, but have failed to explain the process of strategy execution (Mintzberg 1990).
Table 1: Mintzberg’s Schools of Strategic Thought (Mintzberg and Lampel 1999).
Later developments in strategic management literature moved away from the prescriptive approaches modelled on quantitative exact sciences and their inherent presumption of a controllable world. The descriptive schools of thought are inspired on the qualitative social and cultural sciences and study what businesses actually did to be successful in order for other organisations to learn from their approaches. The descriptive schools move from a focus on a-priori strategic planning to a-posteriori dynamic strategy formulation and execution. For practitioners, the prescriptive schools of thought are very attractive, illustrated by the ubiquity of tools such as SWOT analysis and generic strategies, such as those developed by Ansoff (1987) and Porter (1980). The descriptive schools are somewhat problematic for practitioners of strategic management because they do not provide straightforward recipes for success. Analogous to the Naturalistic Fallacy in moral philosophy, where an ought can not be derived from an is, the descriptive schools (strategy as an is) are not very suitable for managers to determine what strategic decision ought to be made. The question raised by Mintzberg’s taxonomy of strategic thought and other similar taxonomies is how average practitioners can determine what strategy they should employ.
One of the major premises of the prescriptive schools of strategic management thought is the Performance Claim, which can be formally expressed as (Hill et al. 2004: 23):
Strategic planning, on average, has a positive impact on company performance.
Miller and Cardinal (1994) investigated how firm size, capital intensity and environmental turbulence influences performance in firms with different degrees of formal strategic planning. They found that correlations between planning and business results show a fairly large fluctuation (-0.30 < r2 < 0.71), but are skewed towards positive performance. They also concluded that stronger planning-profitability correlations emerge when firms face turbulent environments (Miller and Cardinal 1994). Rogers et al. (1999) investigated whether the relationship between strategic planning processes and organisational performance depends on the content of the strategy pursued and not just the extent of planning. They concluded that formal strategic planning positively influences company performance, as expressed in the Performance Claim. Miller and Cardinal (1994) also support the Performance Claim but argue that companies typically only realise 63% of the potential value of their strategy because of defects in planning and execution. They provide a list of possible causes of performance loss, but do not seem to recognise that unpredictable events can negatively influence performance and imply that any strategy can be realised, as long as planned and executed appropriately.
However, some academics question the idea that formal strategic planning systems are a sufficient condition to improve company performance and argue that luck and serendipity play a critical role in determining competitive advantage (Mintzberg 1979; Hart 1992; Hamel 1996). This criticism is supported by the fact that that the prescriptive view of strategy formation contains a logical inconsistency. In prescriptive schools, strategy is often defined as the actions a company takes to attain superior performance (Hill et al. 2004). However, when strategy is thus defined, the Performance Claim becomes a tautology:
Actions taken to attain superior performance, on average, have a positive impact on company performance.
Another issue with prescriptive schools of thought is the presumed causality from plan to action to success. The definition of strategy discussed above expresses an intent (“Actions taken to attain …”). This intent does, however, not imply a causal link between planning an action and success. Hamel (1996) argues that strategic planning, as practised in business management, is not strategic at all. He claims that strategy development tends to be a reductionist process, based on simple rules and heuristics, working from the present to the future, rather than the other way around. The strategic planning process is largely extrapolative and it is assumed that the future will resemble the past, an assumption that David Hume has shown to be irrational. Hamel therefore emphasises the creative aspects of strategic management and points out that it is not a rote process that can be instrumentalised in neat systems, such as SWOT diagrams and generic strategies. Strategy is in the view of Hamel (1996: 71) a “quest that must be a subversive revolution to improve company performance”.
Logical analysis of the principles of the prescriptive schools of strategic thought shows them to be invalid because the Performance Claim is tautological. However, the empirical fact of the Performance Claim holds at least some truth remains. This seeming contradiction emerges because the relationship between planning and organisational success is more complicated than was assumed in the research. Firstly, the research only used companies still in existence, leaving out those that did employ strategic planning but nevertheless failed. Secondly, without conducting fully controlled studies it is near impossible to prove causality between planning and success. A positive correlation does not imply that planning is the cause of business result.
Hart (1992) summarises the discourse between proponents of strict formal planning and those that stress the limits of this approach. He refers to formal planning as the rational model for strategy formulation. The rational model advocates to consider all available alternatives, identify and evaluate all of the consequences of each alternative and then select the preferred alternative. Researchers challenging this approach argue that organisations can achieve only limited rationality because of individual cognitive limits, heuristics and biases in human judgement (Forster and Browne 1996).
The process of strategy formation is, according to Mintzberg (1979), the interplay between the formal intended strategies and informal emergent strategies, mediated by leadership. He emphasises that strategy is not a fixed plan, nor does it change systematically at prearranged times at the will of management. Mintzberg also emphasises the unpredictability of the external environment. An organisation can find itself in a stable environment for long periods of time, without the need to change its strategy. Sometimes the environment can, however, become so turbulent that even the best planning techniques are useless because of the high level of unpredictability (Mintzberg 1979). This seems to contradict the finding of Miller and Cardinal (1994) that stronger planning-profitability correlations emerge when firms face turbulent environments. This is not unexpected as those companies that succumbed to the turbulent environment were not included in the research. This leaves the question whether to follow prescriptive or descriptive schools of thought open. The most productive answer is that strategic management is a complex synergy of a-priori intended and a-posteriori emergent strategy and positive company performance is brought about by a combination of both. Thus, although formal planning is not a sufficient condition to obtain superior company performance, it is most certainly a necessary condition.
Research into strategy formulation has resulted in a plethora of strategic management theories. The fundamental differences between individual theories and the fact that they come and go in quick succession, supports the claim that there is no firm scientific basis for theories of management (Miller and Cardinal 1994). Strategic management theory is an eclectic field with contributions from military history, engineering, industrial economics, organisational sociology, behavioural, cognitive and social psychology, anthropology and political science (Forster and Browne 1996). Strategic management is thus more aligned with social sciences than the exact sciences and as such needs a methodology suiting the unpredictability of human behaviour, rather than a rational model, feigning predictability.
Management deals with human beings and their social interaction and both the external and internal environment are in a constant state of flux. Strategy will only improve performance if its formulation takes the fundamental unpredictability of the world into account. Strategy can not be formulated through rational systems that model the real world. Formulating strategy is a continuously developing narrative between the organisation and the external environment.
Strategic planning as a means to reduce uncertainty in organisations is a young science in which many different perspectives have been explored. Following a taxonomy based on descriptive and prescriptive strategic management, it has been shown that a formal planning approach by itself can not cause a company to achieve above average returns.
Although empirical research points towards a positive correlation between strategic planning and company performance, these studies suffer from methodological problems. This does, however, not imply that strategic planning as a formal exercise is futile. Formal strategic planning is vital for prudent management. Not as a means to define the course for years ahead, but as a way to be able to anticipate the unpredictability of external influences.
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