I.

Why a New Strategic Management Theory

1.1 Limitations of Current Theories

How does the world work? What makes things in the world occur the way they do?
Since ancient Greek times and beyond, the intellectually gifted have put these questions to the
test with varying degrees of success. Over the past three hundred years or so, Newton and
his mode of thinking has served as the dominant framework for explaining the natural order of
things. Such being the case, mechanistic models pervaded the realm of thinking and of
thought processes. One of the most striking notions of mechanistic modeling and Newtonian
thinking is reductionism; that is, the sum of the parts always equals the whole. In this
framework, understanding the parts translates into understanding the whole. This means that
things, rather than relationships among them, are more important considerations.

More recently, the dominant trend has been to take a holistic approach, that is, to
emphasize the whole rather than just the parts. The holistic approach examines a given
system by looking at the system itself and placing value on the existence of relationships among
the parts, although they may initially seem to be distinctively separate. This movement
requires an entirely new perspectiveto move beyond causal relationships in explaining
observations and to consider the dynamic processes involved. According to Quantum
Physics, events mainly determined by the relationships among different parts.1 A given part
always exists in relation to something else; it itself does not exist wholly of its own accord.
Another such example is modern Chemistry, which asserts that a system possesses some
degree of resilience that enables it to reach higher levels of self-organizing structures,
depending upon the demands placed on it by the external environment. In contrast to the
mechanistic model in which change and disturbance in a system is treated as problematic, the
new scientific paradigm states that a system can pursue higher levels of order. It also implies
that chaotic conditions can play a beneficial role in giving rise to new, higher forms of order.

The world as depicted by New Science is a system of relational holism and a self-organizing
system that is able to overcome disorder by means of higher levels of order. In micro-
physics, however, while a definite causal effect exists at the atomic level, at the sub-atomic
level probability and chance exist under uncertain, chaotic conditions. Moreover, the
relationship between order and chaos consists of a continual process in which one contains the

1
Margaret J. Wheatley, Leadership and the New Science, Berrett-Koehler Publishers, 1992, p.32.
other. This explains why a system can enter the realm of chaos and unpredictability, yet in
that state be held within parameters that are well-ordered and predictable. Accordingly, a
system can reach new, higher levels of order through self-resilience.2 The upward process
occurs not by complex, tight control but by a few guiding principles or formulas. In other
words, regardless of whether the system is as large as an entire ecological system or as micro-
cosmic as a leaf, a system survives and perpetuates itself according to a few key patterns or
principlesblueprints in a senseof the systems overall identity combined with highly
independent behavior of individual elements.

Then, from the viewpoint of New Science, what principles or patterns can explain the firm's
survival and prosperity in a rapidly changing, dynamic environment? Until now, in strategic
management and evolutionary economics, much effort has been made to answer some
important questions: Concerning an industry, why do some countries succeed where others
fail? Within a country, why do certain industries grow and develop more rapidly than other
industries? And within a certain industry, why do some firms grow whereas others decline?
Furthermore, what are the determinants of a firms success or failure?

In economics there has been a rising number of attempts to explain gaps across countries
and industries. Some such issues are: Why do growth rates differ?; 3 Do the economic
gaps across countries exhibit convergence or divergence?; 4 and What are the causes of
industrial hegemony shifts in the world?.5 Especially in the 1980s, the limitations of neo-
classical economic theory, which assumes homogeneity of firms, has been challenged by the
neo-Schumperian school, which opts instead to recognize the heterogeneity of firms. Along
these lines, many theories such as New Growth Theory, National Innovation System
theory, and Evolutionary Economics Theory have tried to explain the economy using

2
Prigogine and Isabelle Stengers, Order Out of Chaos, Bantam Books, New York, 1984.
3
In Neo-Schumpeterianism, the competitiveness of a country's system or structure implemented to lead
corporate innovation was recognized as the source of differences in growth rates across countries; also, a
national innovation system was emphasized.
4
Through case studies of various countries after WWII, many researchers based on OECD have pointed
out the limitations of the neo-classical economics idea of absolute convergence and advocated a
conditional convergence.
5
In Ho Kim, "Principles of Shifting World Industrial Hegemony," Korea Economic Newspaper Co., 1993.
This work shows the exploratory research results of attempting to explain the vicissitudes of the world
industry's leading countries and firms in a theoretical framework.
technological change and competition as the major explanatory factors.

In the field of strategic management, the firms performance has been explained with
various concepts such as competitive advantage, sustainable com
core competence, distinctive competence, and resource-based management.
However, this field is not developed enough to be able to explain the dynamic processes and
mechanisms which lead to competitive advantage. This field is especially unable, as of yet, to
explain the relationship between the firm level and the industry level in a comprehensive
manner.

In order to explain the firm performance, the factors of strategy should be defined upon a
complete understanding of the dynamic structure and process of competitive advantage, while
taking into account both the firm level and the industry level. Notwithstanding the rapid
progress made in the field of strategic management theory, there are some fundamental
limitations of this approach in explaining the causes of firm performance.

First, conventional strategic management theories take a reductionistic approach, which

can be traced back to the mechanistic viewpoint of Newtonian thinking. Strategic
management theories recognize strategy as existing at the firm, business, and functional
levels, where firm-level strategies are a combination of business strategies, and business
strategies are a combination of functional strategies. To some extent, this approach is
valuable for pursuing synergy effect through combinations of different strategies at the relevant
levels. Ultimately, however, this approach can be summed up as being based on
reductionism. For example, SWOT analysis is widely used in strategic management theory.
In this method, possible strategic alternatives are explored by examining combinations of SO,
ST, WO, and WTStrengths (S), Weaknesses (W), Opportunities (O), and Threats (T).
This representative method of strategic management theory is, again, based on Newtonian
thinking. Reductionism can also be found in various efforts to study strategic management
issues, since each issue is treated as a separate sub-field of study. For such reasons,
conventional strategic management theories lag behind the New Science trend, which places
greater emphasis on holism.

Second, the field of strategic management has advanced rapidly in the 1980s to the point of
recognizing the firm's performance as being affected by specific characteristics of the industry
and by the firm's distinctive competence. Strategic management theory is concerned with the
realization of performance amidst the struggle to survive and grow. A key issue in this field
concerns how the industry's attributes and the firm's distinctive competences affect the firm,
and how these various factors can be addressed in a comprehensive manner. According to
this theory, the harmonious relationship between an industry's characteristics and the firm's
distinctive competence is the source of sustainable competitive advantage. Meanwhile, there
has been an emerging movement to explain performance as a function of sustained competitive
advantage. Thus, in strategic management theory,

Firms Financial Performance = f [Industry-specific Characteristics, Firm's Distinctive Competence],

or
Firms Financial Performance = f [Sustainable Competitive Advantage , ].

However, these methods not only are based upon merely intuitive or inductive approach
with a static framework, but also are ambiguous in defining the concepts of industry traits,
distinctive competence and sustainable competitive advantage. In addition, because a
framework linking the industry level to the firm level has not yet been established, it is safe to
infer that the strategic management theory is still in an early stage.

In another respect, if a theory is to possess greater explanatory and forecasting capability, it

should be based upon not just inductive or intuitive reasoning but also deductive reasoning.
But, the existing theories are limited in this respect as well. Moreover, the approach of such
theories to treat the industry level as being separate from the firm and business levels is another
reason for their limitations. Even in cases where the theories treat these levels together, a
comprehensive picture is not offered.

At any rate, the emergence of the WTO era marks the beginning of rapid shifts in
technological, economic, and social paradigms on a worldwide scale. As paradigms begin
shifting, they result in industrial and corporate fusions, in turn creating a greater emphasis on
networking among companies. Hence, the firm's "soft" aspects (as opposed to the "hard"
aspects) are increasingly seen as key factors of success. Sad to say, however, they are not
being sufficient attention. In short, conventional theories do not offer a total mechanism of the
business and industry levels, even though such a mechanism is a necessary consideration in
forming and implementing strategies. Therefore, there is, albeit in its early stages, a strong
movement to formulate a comprehensive synthesis of the evolutionary economics theory at the
economy and industry levels, and resource-based theory at the firm level.6 The arrival of a

6
Cynthia A. Montgomery, Resource-based and Evolutionary Theories of the Firm: Towards a
truly comprehensive theoryone which can integrate the business, firm, and industry levels
while clearly representing the firm's logic for adapting to its environmentis admittedly long
overdue.

7
, most strategic
management theories are under-developed, that is to say, at the static stage. Ironically,
such theories are static despite the fact that strategic management is a field which by definition
must treat both the situation at a specific point in time and the dynamic process which occurs
for a duration of time. Thus, the current theories are the source of much confusion and
difficulties when they are applied to real life situations, because they attempt to explain
dynamic phenomena with a static framework.

As pointed out in detail, despite the rapid progress made in this field, conventional strategic
management theories continue to be limited for the following reasons:

1. They are unrealistic due to their foundation on a reductionistic standpoint;

2. They are constrained by the reliance of research methods on inductive and intuitive
reasoning;
3. The lack a mechanism that connects and combines the business and firm with the
industry; and
4. Their approach is static, which impedes the ability to address dynamic relationships
and processes.

In light of this, the firms adaptation can no longer be appropriately addressed with a static
framework, Newtonian thinking, and intuitive or inductive methods. Conventional theories
are also handicapped in their treatment of the business, firm and industry levels as being
separate from each other. An entirely new strategic management theoryone which is based
upon a new theoretical foundationis needed to explain the firms performance and its key
determinants. (See Figure 1.1.)

Figure 1.1 The Need for a New Strategic Management Theory

Limitations of Existing Strategic Management Theories due to the Rapid Advancement of Science

Synthesis, KAP, 1995.

7
Michael Porter, ibid.
 Technology and a Techno-economic Paradigm Shift.

Existing Paradigm New Paradigm

Industrial Society Information Society

Mass Production Mass-Customization

Emphasis on hard factors Emphasis on soft factors

GATT System WTO System

Newtonian Mindset New Science Approach

Existing Strategic Management Theory New Strategic Management Theory

Rising need for a New Strategic Management Theory which befits New Science, Information Society,
and WTO.