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The Three Theoretical Approaches to Strategic Management
Strategic management involves the construction and implementation of major aims and objectives taken by an organisations managers to represent the views of the owners. It is usually based on the consideration of resources, and on an assessment of the internal and external factors affecting the organisation (Nag, et al., 2007). It is an incredibly important factor for company owners to take into consideration as it is directly related to the success of an organisation.
This report will explore the three theoretical approach to strategic management; resource based view, market based view and I/O view. Furthermore, it will also investigate three type of strategy, which are corporate strategy, business strategy and operational strategy.
Resource Based View
The resource based view to strategic management "provides an explanation of competitive heterogeneity based on the premise that close competitors differ in their resources and capabilities in important and durable ways" (Helfat & Peteraf, 2003, p. 997). Furthermore, the resourced based view has become one of the most prominent and influential theories in management. This is because it aspires to explain the internal resources that an organisation can utilise to gain a competitive advantage (Kraaijenbrink, et al., 2009). The central theme of a resource based view to strategic management is that for a firm to achieve sustained competitive advantage it must acquire and control a wide range of resources and capabilities (Barney, 2002). Although the resource based view appears to be an incredibly appealing technique to use, it has been extensively criticised.
The various criticisms of the resource based view can broadly fall under six main categories. These are (Kraaijenbrink, et al., 2009);
- No managerial implications: The resource based view tells managers that certain resources, valuable, rare, inimitable and non-sustainable (VRIN), should be obtained. However, it doesn't give feedback on how managers should go about obtaining these resources (Conner, 2002).
- Implies infinite regress: Many theorists critique the resource based view because it will lead firms into an infinite loop of endlessly searching for the best resources. Collis (1994, p. 148) states "a firm that has the superior capability to develop structures that better innovate products will, in due course, surpass the firm that has the best product innovation capability today…".
- Applicability is too limited: Conner (2002) believes that the resource based view can only be adopted by large firms who have a lot of market power. This alienates many, smaller firms, from being able to benefit from the success that a resources based view can hold.
- Sustained competitive advantage is not achievable: The resource based view is focused on sustaining competitive advantage. However, competitive advantage cannot really be sustained because "Both the skills/resources, and the way organizations use them, must constantly change, leading to the creation of continuously changing temporary advantages" (Fiol, 2002, p. 692).
- Not a theory of the firm: Most academics agree that the resource based view is not a theory of the firm, but with some turning it into a critique. As the resource based view does not take into account operational boundaries, values, internal structure or asset ownerships, it cannot be a theory of the firm (Dosi, et al., 2008).
- Definition of resource is unworkable: Many definitions of resources are extremely broad, and if all were taken account than anything of substance to a company would be considered a resource. As the resource based view does not take into account the different definitions and types of resource, it is hard to apply to specific situations (Kraaijenbrink, et al., 2009).
Market Based View
This perspective focuses on factors "outside the firm on the markets in which it competes". Furthermore, the market based view states that "the sources of value for the firm are embedded in the competitive situation characterizing its external product markets" (Makhija, 2003, p. 437). This basically means that a firms sources of market power is a contributing factor to the organisations performance. Most academics highlight three main sources of market power, these are (Grant, 1991);
- Monopoly: If a firm has market power in the form of a monopoly then they should expect exceptional business performance. This is because they will be the only company operating within a market, and can dictate the pricing of their products at free will. However, they will also be susceptible to new companies penetrating the market.
- Barriers to entry: For a company operating as a monopoly they will want to impose strict barriers of entry to try and maintain control of the market for as long as possible Furthermore, this approach should be taken by most companies in a dominant market position, as they do not want other companies to penetrate the market and steal market share.
- Bargaining Power: The more bargaining power a company has, in regards to both consumers and suppliers, the higher the expected performance would be. This is because if the firm has a low of power over their suppliers and consumers, then the chances are that there are not many substitutes for the suppliers or consumers to choose between. Once again, this allows the company to have dominant impact on the pricing within the market.
Furthermore, because many academics suggest that business markets evolve very slowly (Geroski & Masson, 1987; Mueller, 1986), it means that market power does not erode rapidly, and a company can maintain it for a reasonably long time. However, even if the market were to dramatically change, a company can utilise their current market power to cushion the effects of any detrimental actions that may occur.
The organisation view on strategic management focuses on how an organisation chooses which industries to operate. It suggests that if an industry is performing exceptionally well, then a business can enter that market and reap substantial financial benefits (Chin, et al., 2003). It is centred on Porters Five Forces (1980), as it analyses the different modes and restrictions of entry into a market.
Makhija (2003) takes the view that the I/O view is about manipulating power asymmetries and trying to develop market power. It does this by attempting to minimise the impact of Porters Five Forces, such as industry rivals and threat of new entrants. Furthermore, an I/O view would view market power as a substantial defence against new entrants, and that the industry can have significant impacts on competitive advantage, not so much the market or the organisation. It is a relatively outdated view of competitive advantage, with the resource based view and market based view being preferred by most academics and corporations.
Michael E Porter (1987, p. 1) defines corporate strategy as the concern as business as on "how to create competitive advantage in each of the businesses in which a company competes". In essence, corporate strategy concerns every facet of the business, to add up to more than the sum of its business unit parts. Furthermore, Porter (1987) outlines four generic strategies that exist at a corporate level. These are;
- Portfolio Management: This is a corporate strategy that is in use by most organisations. It is primarily based on a diversification strategy through acquisition. Although acquisitions can be in a completely new market, corporate managers will often limit the differences to focus their own personal expertise. Furthermore, the acquired firms should run autonomous, with teams focusing on their own work and being reward based on unit results.
- Restructuring: This is quite dissimilar to portfolio management, as it involves the complete restructuring of businesses. A corporate manager will usually acquire a company with "unrealised potential" and then seek to actively review and restructure the business operations. This strategy benefits from underperforming companies that are at threat of going into liquidation. When well implemented, the restructuring strategy offers many benefits, it is a cheap mode of acquisition and still leaves a lot of freedom for development.
- Transferring Skills: The previous two strategies both rely on the acquisition or restructuring of companies and leaving them to operate autonomously. However, a transferring skills strategy seeks to build interconnected relationships between each business unit of the corporation. However, sometimes business units will not synergise well together and no matter how hard a corporation tries, the skills cannot be transferred. This can prove costly and timely for an organisation.
- Sharing Activities: The final strategy developed by Porter (1987) is via a sharing activities strategy. This strategy is a blend of the three previous strategies, as it leaves business units to act autonomously, but will seek to share a portion of activities between them. This could be in the form of production, supply chain or distribution. Furthermore, this strategy is becoming more and more prominent as sharing often enhances competitive advantage for a business by lowering costs.
As all four strategies have a variety of benefits, a corporation must decide on what strategy is most beneficial to follow. In general, the sharing activities strategy will be very suitable, as it is a cheap strategic choice, potentially lowering costs, and maintains the autonomy between business units. However, if a company is looking for rapid strategic growth then they may just build up a large portfolio of acquisitions. Unfortunately, this does come with a substantial amount of risk and resource usage.
A business strategy is fundamentally the way in which an organisation will set out to achieve any designated aims or objectives. Furthermore, a business strategy will typically cover a period of around 3-5 years and encompasses three generic strategies. These are; growth, globalisation and retrenchment. Growth and globalisation both look at how an organisation can expand their operations, either domestically or internationally. On the other hand, retrenchment is a defensive strategy, and looks into ways in which an organisation can reduce their operations to focus on what they do best (BCS, 2015).
As with the other strategies, business strategy is still meant to give an organisation competitive advantage. There are a variety of ways in which a business strategy can achieve this, including lowering prices or product differentiation. Business strategy is significantly different to corporate strategy in this regard, as it relates to the finer details of operation and gives individual employees a say on decision making.
Strategy in an operational context is "essentially about how the organization seeks to survive and prosper within its environment over the long-term" (Barnes, 2007, p. 24). Furthermore, Slack, et al., (2004) outline five key attributes that an operational strategy will try and achieve. These are;
- Cost: The ability for an organisation to produce at a low cost.
- Quality: The ability for an organisation to produce within specification and with minimal errors.
- Speed: The ability for an organisation to produce quickly and meet consumer needs and demands, such as offering a short lead time between when a customer orders a product and when it gets delivered.
- Dependability: The ability for an organisation to deliver their products in accordance with any promises made to the consumer.
- Flexibility: The ability for an organisation to be able to change their operations at any given time. This can include changing volume of production or the time taken to produce.
If a company can perform exceptionally well in one or more of these factors, then it allows them to pursue a strategy that uses the factor as a competitive advantage. Barnes (2007) provides a table highlighting the different competitive strategies that a company can pursue dependent on where they are exercising efficient operations.
|Excellent Operations Performance in...||Gives the Ability to Compete on...|
Frequent new products/services
Wide range of products/services
Changing the volume of product/service deliveries
Changing the timing of product/service deliveries
Furthermore, it is highly unlikely that an organisation will be able to act proficiently at every one of the five factors mentioned above, so choosing one to excel it is a preferred method. If a company were to try and focus on all five factors they will likely cause confusion and actually lose their competitive edge. This concept was proposed by Skinner (1969) and is referred to as the 'trade-off' strategy. It basically means that a company can 'trade-off' performance in one facet of their operations to perform exceptionally well in another. Operations can play a fundamental role in strategic decision making, and a company must be clear on where they are performing well in order to market this as a competitive advantage.
There is not really an optimum strategy to pursue for an organisation, as it is dependent on a variety of external factors that could be specific to the organisation. Careful planning and preparation must be conducted before any organisation commits to following a certain strategy, otherwise they may risk losing substantial resources.
Furthermore, the resourced based view and market based view both have their merits, with a combination of the two probably being the most optimum method. An organisation should order their resources to establish a strong market power within an industry. Once this market power has been attained, corporate level members can begin filtering down aims and objectives that can be accomplished by business and operational strategies. Strategic choice involves heavy integration throughout all levels of the business, as strategies can be implement by a number of different departments, all of which offer their own benefits to the overall aims and objectives of the organisation.
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