History of firm strategy and strategic management

From military studies, the concept of firm strategy was developed and applied in modern management science since the 19th century. Although originating from military strategy, firm strategy exhibits significant differences. In nature, military strategy is to defeat the enemy in a win-lose battle. Meanwhile, firm strategy can pursue different goals, albeit always linked to financial ones. To achieve these goals, it is not necessary for any enterprise or competitor to go bankrupt or dissolve since business is a continuous process of creating value. Enterprises facing challenges in one area can always succeed in another or through a new approach. Therefore, firm strategy is not a world of destruction but a world of creation and innovation.

The development history of firm strategy is generally divided into two main periods: the first one from the 1960s to the early 1980s, and the second one from the late 1980s to the present.

1. The period from 1960s to the early 1980s

Firm strategy in this period is heavily influenced by the ideology of “The Invisible Hand” of Adam Smith and “The Visible Hand” of Alfred Chandler.

“The Invisible Hand” is first mentioned in Adam Smith’s work The Wealth of Nations, published in 1776. Studying economic models, Adam Smith introduce the concept of “The Invisible Hand”, closely associated with the processes of production, mobilization, and utilization of financial capital to promote the economic development of each nation. The theory of the “Invisible Hand” is the first one addressing the market mechanisms and the functioning of the economy. According to Adam Smith, the government of each nation does not need to intervene in individuals and firms; instead, it should allow them the freedom to conduct business. He concluded that the wealth of nations is not achieved by strict regulations of the state but by the freedom of business. He encouraged that the best government is the one that governs the least – a philosophy that dominated the world economy throughout the 19th century. This is also the reason why Adam Smith is considered the father of economics and management. Although the concept of firm strategy is not explicitly mentioned by him, his ideas laid the foundation for the strategic perspective of environmental adaptation, which was strongly developed in the late 19th and early 20th centuries.

In the late 19th century, in certain industries with a multi-divisional structure (M-form), the “Invisible Hand” of Adam Smith became less relevant and was gradually replaced by the “Visible Hand” of Alfred Chandler. The concept of “Visible Hand” first appeared in Chandler”s book The Visible Hand: The Managerial Revolution in American Business, published in 1977. In which, the arguments were entirely contrary to previous theories, specifically the “Invisible Hand” one: “Modern business enterprise took the place of market mechanisms in coordinating the activities of the economy and allocating its resources. In many sectors of the economy the visible hand of management replaced what Adam Smith referred to as the invisible hand of market forces” (Chandler, 1977, p.1).

Chandler argued that the perfect competition model did not allow a clear understanding of the structure and operations of modern enterprises. Because it is a market structure model in which: (1) both sellers and buyers lack the ability to significantly influence the market; (2) both parties are well aware of transaction opportunities, understand the methods of determining the supply and demand of products; (3) and differentiated products do not exist. In other words, in the absence of competition, enterprises do not innovate, do not update technology, do not adopt the most efficient methods of production and operation; and they do not necessarily have to reduce prices.

Therefore, before 1960s, the concept of “strategy” was primarily understood in association with warfare and political activities. In the 1950s-1960s, many firms established specialized departments dedicated to formulate and implement strategic plans. Studies on firm strategy emerged during this period, initially in the works of Ansoff and Chandler, building upon the researches of Peter Drucker, Philip Selznick, and Bruce Henderson.

Among the researchers of this period, Peter Drucker is a multidisciplinary management theorist and author of famous management works. In his influential book The Practice of Management, published in 1954, he posed strategic questions: “… the first responsibility of top management is to ask the question ‘what is our business?’ and to make sure it is carefully studied and correctly answered” (Drucker, 1954); and the ultimate answer consists of customer evaluation. Drucker emphasized 8 goals that a firm should focus on: market standing, innovation, productivity, physical & financial resources, profitability, managerial performance & development, worker performance & attitude, and public responsibility. Peter Drucker’s significant contribution lies in highlighting the importance of goals and management activities in the firm.

The following is Philip Selznick – professor of sociology and law at the University of California, who laid the foundation for organizational theory, social law, and public administration management. At the same time, he was the first to mention the concept “distinctive competence” in his famous work Leadership in Administration in 1957. In which, he specifically analyzed how the company Navy differentiated its services from other competitors. He also laid the foundation for the strategic perspective of adapting a firm’s internal factors to the external environment, which Kenneth R. Andrews later developed into the SWOT model.

In general, the strategic thinking during this period follows the SCP (Structure – Conduct – Performance) paradigm, initially proposed by Joe S. Bain (1959). Accordingly, the firm performance, particularly demonstrated through their success in meeting and satisfying customer needs, relies on the behavior of both sellers and buyers (firms, suppliers, customers), which in turn is influenced by market structure. In the SCP paradigm, a firm’s competitive advantage is considered as the only long-term equilibrium situation that brings success to the firm.

The two fundamental principles of firm strategy in this first period consist of: (i) ensuring sustainable development, as firm must adapt to the environment in which they operate, and (ii) for success, firm must obtain a competitive advantage and resolutely defends that advantage. Many strategic models were developed during this period, such as SWOT analysis, the Ansoff product-market matrix, the BCG matrix, the McKinsey matrix …, and ended with the pinnacle strategic analysis models of Michael E. Porter (1980, 1985), considered to encompass all previous strategic models.

2. The period from the early 1980s to the present

Birger Wernerfelt officially ushered in this strategic period with his groundbreaking research on A Resource-based View of the Firm in 1984. Developing previous studies by Penrose (1959), Wernerfelt (1984) argued that: “The traditional concept of strategy […] is phrased in terms of the resource position (strengths and weaknesses) of the firm, whereas most of our formal economic tools operate on the product-market side”. He depicted “resources and products are two sides of the same coin” (p.171); and according to the resource-based view, a firm’s market position is determined by its ownership of scarce resources.

In the Resource-Based View (RBV), scholars (Wernerfelt, 1984; Barney, 1991) refuse the assumption of the homogeneity of firms under the SCP paradigm; and support that the analysis of a firm’s strategic capabilities must start from its internal resources. When a firm possesses sufficient resources that are aligned with its strategy, it can obtain and maintain a sustainable competitive advantage. RBV focuses on the relationship between internal resources and addresses the ability to link internal capabilities with external environmental factors to create a competitive advantage for the firm.

Scholars (Barney, 1991; Grant, 1991) in the resource-based view emphasize the ability to maintain superior performance based on owning scarce and non-imitable internal resources of the firm. This is due to several reasons, such as unique situations experienced by the firm that competitors cannot replicate; or the unclear, complex, and difficult-to-understand nature of the relationships between resources and the sustainable competitive advantage of the firm; or resources that are too complex, exceeding the capabilities and management boundaries of the firm, such as corporate culture.

The resource-based view of Birger Wernerfelt has been continuously developed into the resource-based theory with four main perspectives: resource-based view, knowledge-based view, dynamic capabilities and core competencies, and the relational view. The central idea during this period is that firms, based on their existing and self-developed resources, can develop strategies to (i) control the current business environment in their favor and/or (ii) create their own business environment – a playground for themselves by modifying the existing business rules.

In the competitive approach of the modern business environment, Richard D’Aveni developed the hypercompetitive theory. In his book Hypercompetition in 1995, he emphasizes that in a hypercompetitive environment, firms compete not only to achieve temporary competitive advantages but also to create and maintain highly unique and difficult-to-imitate competitive positions. Firms compete not only on price but also through factors such as speed (time) of reaction, innovation, risk management, and the ability to reshape the competitive environment. To do this, firms should focus on upgrading, restructuring, and creating new capabilities, products, and services to achieve sustainable competitive advantage in four areas: price/quality, timing and know-how, strongholds, and deep pockets (D’Aveni, 1998). Competitive strategies firms can use in a hypercompetitive environment include rapidly shifting between product lines, enhancing market power, and applying advanced technology to create a competitive advantage.

The hypercompetitive approach is the foundation for disruptive business strategies, which either render existing markets obsolete or make them outdated due to superior features and entirely replace existing products. These strategies are built on D’Aveni’s 7S model (1995, 1998), in which the first two factors (stakeholder satisfaction and strategic soothsaying) constitute a vision of market disruption or an entirely new market to replace the current one; the third (speed) and fourth (surprise) factors are crucial capabilities enabling firms to execute the disruptive strategy; and the last three factors (shifting the rules, signaling, simultaneous and sequential strategic thrusts) constitute disruptive tactics in the hypercompetitive environment.

Also following the perspective of market control, Chan Kim and Renée Mauborgne (2005) propose that firms are successful not because of competition with rivals in the current competitive market, but rather by creating “blue oceans” within the market space. This strategy makes a leap in value for the business, customers, and employees, by creating new needs and markets virtually no competition. In their renowned book Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, Kim and Mauborgne (2005) emphasize that firm should focus on creating new market spaces – blue oceans, where competition becomes unimportant or less significant due to the differentiation and unique value of the products or services provided. The blue ocean strategy requires firms to be innovative, carefully analyze the market, and be flexible enough to create unique value, avoiding direct competition with rivals, thus achieving rapid growth and high profits for the firm.

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