Evolution of Strategic Management

Strategic management slowly blossomed into a distinct and important discipline over a five-
decade period. During the 1950s it was in the embryonic stage, where the focus of the top
management team was on budgetary planning and controls and key concepts revolved
around financial control. To achieve control over the budgeting, management made use of
accounting tools such as capital budgeting and financial planning. At this time companies
achieved competitive advantage through coordination and control of budgetary systems.
During the 1960s through 1970s, management teams started focusing on corporate
planning. Most companies initiated corporate planning departments to plan for growth and
diversification and used forecasting as the primary tool to visualize growth. Companies
embarking on growth attempted to seek opportunities for diversification. By the 1970s,
strategic management started evolving on a more serious note, extending beyond the
budgetary planning and control, and corporate planning, to include positioning companies in
relation to competitors. Corporations tried to jockey for power and focused on selecting
particular market segments and positioning for leadership. During this period, companies
analyzed industry to determine attractiveness in terms of entry barriers, available suppliers,
and potential buyers. Companies attempted to diversify and expand through entry into the
global arena during this period. To align structure with strategy, companies started slowly
moving toward hybrid and matrix structures. By the late 1980s through 1990s, the growth of
strategic management as a separate discipline started taking its own shape. This can be
seen in terms of companies attempting to secure competitive advantage. The key concepts
of the companies concerned the sources of sustained competitive advantage (i.e., ways and
means of gaining success over potential rivals). Table 2.1 captures the timeline of evolution
of strategic management.

In the early stages of development, strategic management concepts revolved around

microeconomics. As the theory of firm addresses the question of why firms exist and what
determines their scale and scope,1 other theories also revolved around this basic theme.
The initial answer was in terms of the neoclassical theory of perfect competition that
considers the firm as a combiner of inputs to produce desired outputs. Firms aim at
achieving the least among the cost combinations of inputs in the production process,
equating the marginal cost to the marginal revenue to determine the level of output that
maximizes profit. The inherent and highly restrictive assumptions are that resources are
perfectly mobile and the buyers and sellers have all necessary information. Most
importantly, firms are small in size and produce single products, and hence all firms are
assumed to be identical. The firm's size is determined by technological and managerial
factors.

Gradually, researchers realized that these highly restrictive assumptions may not be
applicable in real life. Some degree of monopoly power exists in industry. The firms that
have monopoly power are capable of restraining output to maximize their profits. When
power gets diluted, which can be seen in terms of low industry concentration, firms compete
for market share and engage in different strategies depending on the context and purpose.
The industry structure (called structure) as determined by the number
of buyers and sellers, entry barriers, product differentiation, and proportion of fixed to
variable costs sets the tone for the strategy (called conduct), which may be seen in
advertisement wars and price wars between firms. Performance is a close combination of
these forces' structure conduct. Therefore, subsequent scholars (e.g., Bain 1954) in
strategic management focused on examining the structure-conduct-performance
relationship.

The first and foremost scholar who brought recognition to strategic management as a
separate discipline was Chandler after he wrote the book titled Strategy and Structure in
1962. Chandler explained how giant corporations (such as General Motors, Standard Oil,
and DuPont) have grown over the years in such a way that senior managers had to direct
their energies to make long-term decisions and move away from daily routine decisions. He
was the first to label a formal term—strategy—for these long-term plans. The term actually
was derived from the Greek word strategies (which means "art of the general").

Following Chandler, corporations resorted to making use of long-range planning in their

strategic decision-making agendas. The main focus was to examine budgetary proposals in
light of the past data on expenditures. Chandler also argued that organizations need to
change their structure to follow the changes in strategy. Firms gradually moved to organic
structures (from traditional functional structures), which were centered on work teams and
groups to enhance productivity and performance.

Almost at the same time, Schumpeter (1950) argued that firms should try to capture the
market by innovation and make rivals' positions vulnerable. He was of the view that
competition over innovation would be more effective than the price competition. It is
important to note that firms seeking radical innovation eventually enjoy monopoly power.
But a significant point is that this radical innovation is often risky and the financial
commitments involved in innovation may prohibit firms from venturing to implement the
innovation. In the process of innovation, firms are engaged in "creative destruction."

It is also important to take note of Ronald Coase's notion of the costs of negotiating
contracts for the factors of production. Based on Coase's framework, Williamson elaborately
explained the transaction cost economics (TCE) as relevant to strategic management. Most
importantly, firms avoid the costs of transactions through price mechanisms. The
transaction cost approach is very much relevant under the conditions where the potential for
opportunistic behavior by the members in the transaction is very high. Williamson
emphasizes the existence of three conditions for this opportunistic behavior: asset
specificity, a small number of people involved in transactions, and imperfect information.
Early in the 1980s, some other scholars, such as Klein and Leffler, extended the framework
of Williamson by stating that existence of opportunistic potential is not adequate for deriving
monopoly power. It is likely that both the parties may engage in cooperative relationships to
avoid diseconomies stemming from the mutual exploitation.

As history reveals, firms moved away from simple long-range planning to craft and
implement strategies to deal with the changing environment. Until the 1970s, companies did
not face challenges from global competition. Onset of technology paved the way for the
Information Age and most of the U.S. companies lost their ground to international firms. For
example, the automobile industry in United States experienced rapid decline in their market
share due to intense competition from Japanese automobile compani