Strategic Management

Evolution of Strategic Management from the 1950’s to the modern day

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Strategic Management in the 1950’s started with business case studies and the works and theories of Druker, Selznick, Chandler, and Ansof (and others). Industrial economics and industrial organisation provided the basis to develop strategic management theories in the 1950’s. Economic theory based on Industrial-Organizational Approach dealt with issues like the competitive rivalry, resource allocation, and economies of scale and concerned with making rational decisions and profit maximization.

In the 1950’s Druker developed the concept of Management by Objectives (MBO). MBO is a process of defining aims within an organization so that management and employees agree to the goals and understand what they need to do in the organization to meet them. Druker stressed goals as important. An organization without clear goals is like a ship without a rudder. According to Drucker, the procedure of setting objectives and monitoring your progress towards them should permeate the entire organization, top to bottom.

Peter Selznick was the first to model internal and external factors as a basis for measuring strengths and weaknesses of firms. His concept has evolved into what we now call SWOT analysis by Learned, Andrews, and others at the Harvard Business School General Management Group. Strengths and weaknesses of the firm are assessed in light of the opportunities and threats from the business environment.

Alfred Chandler recognized coordinating the various aspects of management under one all-encompassing strategy is important. Prior to this time, the various functions of management were separate with little overall coordination or strategy. Interactions between functions or between departments were typically handled by a boundary position, that is, there were one or two managers that relayed information back and forth between two departments. Chandler also stressed taking a long-term perspective when looking to the future is important. In his 1962 groundbreaking work Strategy and Structure, Chandler showed that a long-term coordinated strategy was necessary to give a company structure, direction, and focus. He says it concisely, “structure follows strategy.”

Igor Ansoff built on Chandler’s work by adding concepts and inventing a vocabulary. He developed a grid that compared strategies for market penetration, product development, market development and horizontal and vertical integration and diversification. He felt that management could use the grid to systematically prepare for the future. In his 1965 classic Corporate Strategy, he developed gap analysis to clarify the gap between the current reality and the goals and to develop what he called “gap reducing actions”.

Strategic Management

In the 1950’s and 60’s stemmed from the works of earlier theorists such as Joseph Schumpeter whose concepts on new value creation through technological change and innovation influenced many new products, new markets, and new sources of supply as well as the reorganization of industries. But the real basis of 1950’s and 1960’s Strategic Management stems from industrial economics and industrial organization.

In the 1970s, much of strategic management dealt with size, growth, and portfolio theory as it shifted away from planning toward a strategy to find ways to increase performance and profitability. Organisations began to favor the PIMS approach to finding the link between profitability and strategy. The PIMS(Profit Impact of Marketing Strategies) study was a long-term study, started in the 1960s and lasted for 19 years, that attempted to understand the Profit Impact of Marketing Strategies, particularly the effect of market share. Started at General Electric, moved to Harvard in the early 1970s, and then moved to the Strategic Planning Institute in the late 1970s, it now has decades of information on the relationship between profitability and strategy. Their initial conclusion was unambiguous: The greater a company’s market share, the greater will be their rate of profit. The high market share provides volume and economies of scale. It also provides experience and learning curve advantages. The combined effect is increased profits. The study’s conclusions continue to be drawn on by academics and companies today: “PIMS provides compelling quantitative evidence as to which business strategies work and don’t work”

The 1980s approach strategy built on many of the ideas and theories of the previous five decades. The Harvard School was the think-tank which comprised the work of many leading writers on strategy at the time. Porter, Andrews, Ghemawat, and consultants from McKinsey and the Boston Consultancy group. The initial output was SWOT which examined internal and external factors and built concepts from industrial economics but a dominant model in the field of the strategy was the competitive forces approach developed by Porter (1980). This approach, rooted in the structure-conduct-performance accepted point of view of an industrial organization and SWOT analysis, emphasizes the actions a firm can take to create defensible positions against competitive forces. The competitive forces approach views the essence of competitive strategy formulation as ‘relating a company to its environment.

The key aspect of the firm’s environment is the industry or industries in which it competes.’ Industry structure strongly influences the competitive rules of the game as well as the strategies potentially available to firms. In the competitive forces model, five industry level forces-entry barriers, the threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among industry incumbents-determine the inherent profit potential of an industry or sub-segment of an industry. The approach helps the firm find a position in an industry from which it can best defend itself against competitive forces or influence them in its favor.

The Five-Forces Model is not useful for understanding the strategies of each firm. To carry out that we look at the Value Chain Model. The Value Chain Model looks at the value adding primary or support activities internal to a firm. This means that competitive advantage can live within an organization and this theme was central to the Resourced-Based View (RBV).

The 1980s also saw the widespread acceptance of positioning theory. The basic premise is that a strategy should not be judged by internal company factors but by the way customers see it relative to the competition. Al Ries and Jack Trout explain the marketing truth of how the first product/person/company that occupies a position in a consumer’s mind will hold it, potentially forever and this approach is still relevant today.

From the 1980s to today we look at the Resource-Based View which came into prominence in the late 1980s and the Dynamic Capabilities approach which came to prominence in the mid-1990s. The resource-based view (RBV) as a basis for the competitive advantage of a firm lies primarily applies a bundle of valuable tangible or intangible resources at the firm’s disposal.

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