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I NTRODUCTION

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9 Different views of strategy
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trategy is about organizational change.1 An action is strategic when it allows a
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S firm to become better than its competitors, and when this ‘competitive
advantage’ can be sustained. This means that not all decisions are strategic:
some decisions are, for example, simply dedicated to maintaining the status quo.
Others might increase a firm’s competitiveness but in a way that is not sustainable in
16 the future. In answering the question ‘What is strategy?’, some focus more on the
17 role of strategy in allowing a firm to ‘position’ itself in an industry, hence to make
18 choices regarding ‘what game to play’. Others focus more on the role of strategy in
19 determining how well a given game is played. Strategy is about both: choosing new
20 games to play and playing existing games better.
21 One of the biggest disagreements amongst strategy researchers concerns the
22 process by which strategies emerge (see readings in Section 1). Some describe
23 strategy as a rational and deliberate process (the Design school), while others
24 describe it as an evolutionary process which emerges from experimentation and
25 trial and error (the Evolutionary and Processual schools). Some place more
26 emphasis on external factors, like the structure of the industry to which the firm
27 belongs (e.g. the Industrial Organization approach), while others place more
28 emphasis on factors internal to the organization, like the way production is
29 organized (e.g. the Resource-Based approach). Furthermore, some describe a
30 relatively static relationship between strategy and the environment where firms
31 respond to external conditions (the Structure-Conduct-Performance approach),
32 while others describe a dynamic picture of competition, where firms not only are
33 influenced by the environment, but also actively seek to change it (e.g. the
34 Schumpetarian approach). This feedback relationship between firm strategy and
35 the environment is the focus of industry ‘lifecycle’ studies which look at the sources
36 and effects of changes in industry structure.
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39 Internal versus external factors
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41 Today the study of strategic management pays much more attention to intra-
42 organizational dynamics than it did in the past 20 or so years. Strategy is seen as
43 primarily determined no longer by market conditions external to the firm but by
44 organization-specific factors, for example the way that information flows inside an
organization and how new knowledge is created.
1
INTRODUCTION

The competitive forces approach to strategy, developed by Michael Porter 1

in the 1980s (see readings in Section 2), is an example of the view of strategy 2
that places primary importance on external conditions faced by the firm. In this 3
view, strategy is about the firm creating for itself a ‘market position’ whereby it 4
can defend itself from competitive forces and/or influence them in a way that 5
places it at an advantage visà-vis its competitors and suppliers. Porter focuses on the 6
effect of five industry-level forces impacting on strategy and performance: entry 7
barriers, threat of substitution, bargaining power of buyers, bargaining power of 8
suppliers and rivalry among industry incumbents. This framework is connected to 9
the ‘structure–conduct–performance’ approach to industrial organization, where 10
the structure of an industry (e.g. how easy it is for new firms to enter) determines 11
firm conduct/strategy (e.g. innovation strategies) and hence firm performance 12
(e.g. profits). 13
A different way of thinking about strategy is to give primary role to intra- 14
organizational factors. This view is best exemplified by the ‘resource-based theory 15
of the firm’, which has its roots in the work of Edith Penrose. Penrose suggested 16
viewing the firm as a ‘pool of resources’. Resources include not just tangible 17
resources (like buildings, machinery and research labs) but also intangible ones 18
embodied in skills and in the interactions between people and systems. Intangible 19
resources are unique to each firm and, when a firm finds itself with different uses for 20
its excess resources, it will often choose those combinations that are tied most 21
closely with its previous activities. The fact that the firm’s prior experience and 22
history matter means that firm growth is often path-dependent: where the firm goes 23
tomorrow depends on how it got to where it is today (its future path depends on its 24
previous path). The main point is that value is created not only by the quantity of 25
physical capital, land and labour that the firm owns but also, and especially, how it 26
combines its different resources (i.e. how the different resources interact). Modern 27
strategy theorists, inspired by Penrose, have called this ability to combine resources 28
in an innovative and efficient way the firm’s ‘capabilities’ or ‘competencies’. Unique 29
capabilities refer to the productive activities that the firm is very good at. Core 30
competencies refer to those broad capabilities that are essential to the firm’s 31
performance and that allow it to enter different product markets. Competencies 32
are unique, and hence hard to imitate, because they are the results of particular 33
combinations and interactions between different resources. Since different firms 34
have different capabilities, their implementation of strategies will differ. 35
The focus on intra-organizational dynamics is supported by empirical studies 36
which have shown that inter-firm differences in rates of return are primarily due to 37
firmspecific factors. For example, Rumelt (1991) found that 46.4 per cent of 38
a business unit’s profitability can be accounted for by business-specific factors (i.e. 39
choice of strategy) and only 8.3 per cent by general factors related to the industry to 40
which it belongs. The reading by Baden-Fuller and Stopford in Chapter 6 will also 41
support this by providing case study evidence of firms succeeding in industries 42
which are considered no longer profitable (or ‘attractive’). However, the fact that 43
intra-organizational factors are very important does not mean that industry-specific factors, 44

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 INTRODUCTION

1 like industry structure, do not matter! In fact one of the most innovative areas of strategy
2 analysis has to do with how firm strategy changes over the industry life-cycle and
3 how strategy and structure co-evolve (Klepper, 1997). These studies have focused
4 especially on the changing role of firm-led technological change: the structure of an
5 industry will constrain the amount and type of firm innovation at any one moment
6 in time, yet industry structure will itself evolve depending on the characteristics
7 of the innovation activity. One of the biggest challenges in strategy analysis is to find
8 an innovative framework through which firm-level and industry-level factors can
9 both be analysed.
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12 Inter-firm differences
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14 Theories of strategy embody specific explanations for why firms within and
15 between industries differ in their performance. For example, the market posi-
16 tioning framework views differences between firms as resulting from the different
17 characteristics of the markets they operate in. ‘Imperfect competition’ is often
18 blamed for not allowing all firms to achieve the same level of efficiency and hence
19 performance. Examples of market imperfections are barriers to entry which
20 prevent new firms from competing with incumbents, or information asymmetries
21 that allow only some firms access to special information/knowledge. It is assumed
22 that such differences will disappear in the ‘long run’ when ‘perfect competition’ is
23 restored. Instead, in the ‘resource based approach’ firm differences arise not from
24 imperfect markets but from firms actively seeking to differentiate themselves via
25 their unique competencies and capabilities. These differences will persist even in
26 the long run since by definition competencies and capabilities are difficult to imitate
27 and strategy is about renewing core competencies.
28 Since capabilities are developed over time in a cumulative and complex
29 manner, firm differences are accentuated by the dynamics of increasing returns and
30 path dependency: those firms able to develop unique capabilities today are more
31 likely to develop them tomorrow. In fact empirical studies on technological change
32 have found firm innovation to often (not always) be characterized by persistence:
33 successful innovators today are likely to innovate in the future. This is because the
34 ability to innovate depends on prior innovation, prior related knowledge and
35 diversity of background – what Cohen and Levinthal in Chapter 14 call ‘absorptive
36 capacity’. This ‘rich gets richer’ dynamic can lead to concentrated markets until the
37 industry undergoes a fundamental product change (or ‘architectural innovation’
38 as studied in Chapter 11). And yet, sometimes, it is new players who are not
39 burdened by tradition and existing rules that are the best innovators. They are more
40 prone to ‘think differently’ and to thus challenge the status quo. The readings in
41 Sections 4 and 5 will examine under which conditions it is the incumbents or new
42 comers that are more likely to lead the innovation process. The readings in Section
43 6 explore how the path-dependent nature of the development of capabilities is even
44 stronger in knowledge-based sectors, such as information technology.

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INTRODUCTION

Competition 1
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The fact that, in the resource-based perspective, differences between firms are 3
due not to ‘market imperfections’ but to the competitive process by which firms 4
actively try to differentiate themselves, means that what is also at stake in strategy 5
theory is the underlying view of competition. The resource-based perspective 6
is more compatible with a Schumpeterian view of competition where firms are 7
viewed as actively competing against each other for technological superiority. 8
Schumpeter (1934) called this process ‘creative destruction’, i.e. the process 9
by which firms create new products, processes and markets destroys the advantage 10
of firms that built their success with previous, now obsolete, technologies. 11
Technological change thus often leads to turbulence in market shares of firms, 12
especially when new firms enter an industry through the introduction of a radical 13
innovation. The readings in Section 4 study different reasons why large incumbent 14
firms are often not the best innovators. 15
A relatively new branch of economics called ‘evolutionary economics’ 16
has concentrated its efforts in using Schumpeter’s work on technological change 17
to develop a new theory of competition where the focus is on the co-evolution of 18
mechanisms that create differences between firms and mechanisms of competitive 19
selection that winnow firms via those differences (Nelson and Winter, 1982). 20
Competition is described here as a disequilibrium process whereby firm-specific 21
technological change and processes of increasing returns shape both the internal 22
organization of the firm and market outcomes. Nelson (1991) connects the point 23
about inter-firm differences to competition in this way: 24
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I want to put forth the argument that it is organizational differences, especially 26
differences in abilities to generate and gain from innovation, rather than differences 27
in command over particular technologies, that are the source of durable, not easily 28
imitable, differences among firms. Particular technologies are much easier to
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understand, and imitate, than broader firm dynamic capabilities . . . Competition
can be seen as not merely about incentives and pressures to keep prices in line 30
with minimal feasible costs . . . but, much more important, about exploring new 31
potentially better ways of doing things. 32
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Content of volume 35
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The readings in this volume were chosen for their ability to together tell a ‘dynamic’ 37
story about strategy: a story which explores the feedback relationship between firm 38
strategy and the environment. The older pieces are classics in the field of strategy 39
and continue to provide the theoretical background for more recent innovative 40
pieces. The issues addressed by these newer pieces lie at the centre of strategy 41
analysis today. 42
Section 1 introduces the study of strategic management by diving into a 43
particular definition of strategy and then stepping back and looking at various 44

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 INTRODUCTION

1 theoretical perspectives on the processes that determine strategy, each of which

2 embodies specific assumptions on human nature and on the interaction between
3 individual action and the environment. Section 2 introduces a fundamental
4 distinction in strategy analysis: the focus on external industry characteristics versus
5 the focus on the internal organizational dynamics. As reviewed briefly earlier in
6 this introduction, the former looks at the role of industry structure in determining
7 firm strategy and performance, while the latter looks at the role of resources and
8 capabilities developed inside the firm. Section 3 focuses on how the internal organi-
9 zation of the firm affects strategy and performance. It builds on Penrose’s notion of
10 the firm as a ‘pool of resources’ to study the origin of firm-specific capabilities and
11 competencies. Section 4 focuses on a particular type of organizational capability:
12 the capability to innovate. The readings illustrate how technological innovation
13 depends on firm-specific characteristics like firm size (are small firms or large firms
14 better innovators?) and the internal organization of the firm. Section 5 continues
15 the discussion by considering the ways in which organizations can be structured
16 to stimulate individual and organizational learning and the management of new
17 knowledge. Section 6 considers the implication of recent changes in the world
18 economy for strategic behaviour. The changes considered are the rise of infor-
19 mation technology and the increasingly global nature of competition, both of which
20 are considered to be part of the ‘new economy’.
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23 Notes
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25 1 Although the word ‘firm’ (or business) is used here and in most of the read-
26 ings, the unit of analysis in strategy theory is the organization. We use the two
27 words interchangeably.
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30 References
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32 Klepper, S. (1997) ‘Industry life-cycles’, Industrial and Corporate Change, 6 (1):
33 145–81.
34 Nelson, R. (1991) ‘Why do firms differ, and how does it matter?’, Strategic
35 Management Journal, 12: 61–74.
36 Nelson, R.R. and Winter, S.G. (1982) An Evolutionary Theory of Economic Change.
37 Cambridge, MA: Harvard University Press.
38 Rumelt, R. (1991) ‘How much does industry matter?’, Strategic Management
39 Journal, 12: 167–85.
40 Schumpeter, J. (1934) The Theory of Economic Development. Cambridge, MA:
41 Harvard University Press.
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