The Evolution of Business Strategy
Strategy is about competing successfully. More specifically, it is about finding a way to beat present and potential competitors through superior execution while making a profit at the same time.
The theory of business strategy has undergone profound changes in the past 50 years. Exhibit A.1 shows how different fields within strategic theory have converged to produce today’s sophisticated approaches.
The Influence of Porter
The work done by Michael Porter in the 1980s, notably in his book Competitive Strategy, stands as a milestone in the development of business strategy. It marks a shift away from corporate planning toward strategy formulation. Porter introduced the concept of generic strategies to represent the different options that can be pursued by players in a particular industry. In simple terms, these are cost leadership and the pursuit of differentiation. Which option a particular player chooses to pursue will depend on its circumstances and position in the market. Porter also explored the role that organizational capabilities—defined as the capacity for undertaking a particular productive activity—play in a company’s success and introduced the value chain framework to help managers understand the structure and determinants of these capabilities. Over time, as this approach was refined, the concept of sustainable strategy came to include position (choosing to perform activities in a different way from rivals), trade-offs (the need to decide to do some things, but not others), and control (locking out imitators by creating a value delivery chain that is unique and hard to copy).
Exhibit A.1. A Concise Overview of Evolution of Business Strategy
The Resource-Based View
In the late 1980s and early 1990s, strategy researchers turned their attention from a company’s competitive environment and positioning to its internal resources and capabilities (Wernerfelt, 1984). This shift was due in part to the increasing instability of the macroeconomic environment, which often invalidated strategies based on external factors, and in part to the realization that profitability seems to be linked to differences between firms rather than between the industries in which they compete (McGahan & Porter, 1997).1 The resource-based view emphasizes the importance of managing a company’s resources as elements in a system of stakeholders and taking into account the interactions between these resources during performance evaluation.
Adding the Dynamic Perspective
More recent developments in strategy research combine the resource-based view and its concept of stock accumulation (Dierickx & Cool, 1989) with leading-edge strategic modeling tools and concepts (Sterman, 2000). They recognize that resources are not just a way of explaining past and present performance; they also play an important part in sustaining performance over time. As a result, a company’s ability to leverage and grow its resources is inherently dynamic.
Competitive Strategy Dynamics
The starting point for this discipline is the challenge any leadership team faces: building performance through time. Since performance is determined more by management controls than by external conditions, management matters. It is the resources that have been built up and sustained through an organization’s history that drive its performance today. The key to competitive advantage thus becomes a company’s ability to accumulate and combine resources more effectively or faster than its rivals (Warren, 2002).
Resources—customers, dealers, products, staff, cash, capacity, and so on—are finite and measurable, so strategy must be built on solid facts, not elusive concepts. Competitive strategy dynamics uses simple frameworks to capture the way in which resources accumulate and decay over time, the way they interact, and their impact on performance.
The strategic architecture produced by these efforts explains why an organization is performing as it does, thus eliminating much of the dispute that so often gets in the way of strategic decision making. The architecture also clarifies who needs to do what and when to improve performance, and makes it easy to communicate the findings to staff, business partners, investors, and any other groups who need to understand and participate in business development. Finally, it allows strategy and performance to be constantly updated to take account of changes in the organization and its environment.
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Strategy has evolved from early static approaches focusing on competitive advantage to much more dynamic approaches that recognize the interdependencies both within any business resource system and between a company and its external environment. Customers and other stakeholders now occupy a much more prominent place in strategy formulation. At last, the consumer has made it into the boardroom.