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TOWARDS A DYNAMIC THEORY OF STRATEGY

TOWARDS A DYNAMIC THEORY OF STRATEGY. AUTHOR. Michael E. Porter is the C. Roland Christensen Professor of Business Administration at Harvard Business School and Director, Institute for Strategy and Competitiveness

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TOWARDS A DYNAMIC THEORY OF STRATEGY

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  1. TOWARDS A DYNAMIC THEORY OF STRATEGY

  2. AUTHOR Michael E. Porter is the C. Roland Christensen Professor of Business Administration at Harvard Business School and Director, Institute for Strategy and Competitiveness He is the author of many seminal books on competition and strategy, including On Competition, The Competitive Advantage of Nations, Competitive Advantage: Creating and Sustaining Superior Performance, etc

  3. REFERENCES • On Competition (Michael Porter, 1998 edition) • The Competitive Advantage of Nations (Michael Porter, 1998 edition) • The origin of Strategy, Harvard Business Review (Henderson,B 1989) • Dynamic Strategic Resources (Michael A Hitt, et al .1999) • Corporate Strategy. A Resource-Based Approach (Collis & Montgomery,1998) • Arriving at a Strategic Theory of the Firm. International Journal of Management Review, 2000 (Phelan, Steven E and Peter Lewin) • Using Simulation for Theory Generation in Strategic Management (Paper presented at 2nd Australian Conference by Phelan, Steven, 1995) • Explicating Dynamic Capabilities: Asset Selection, Coordination, and Entrepreneurship in Strategic Management Theory (Draft paper: David J.Teece, 2003) • Strategic Thinking and Strategy Analysis in Business- A Survey on the Major Lines of Thought and on the State of the Art (Working paper: Gert Bruche, 1999)

  4. ABSTRACT Why firm succeed or fail Theory of strategy Theory of the firm Review the progress of the strategy field towards developing a truly dynamic theory strategy Cross sectional problem Longitudinal problem Theory of Strategy Fall short of exposing true origin of competitive success Local environment Review 3 traditional theory A Dynamic Theory Challenges for future research ?

  5. EARLY LITERATURE ON STRATEGIES

  6. TERM & DEFINITION • Success Attaining a competitive position(s) that lead to superior and sustainable financial performance • Sustainable Competitive Advantage When a firm implements a value creating strategy of which other companies are unable to duplicate the benefit or find it too costly to imitate (Hitt, Ireland & Hoskisson in Strategic Management, 1999) • Dynamic Capabilities The firm’s ability to integrate, build, and reconfigure internal and external competences to adress rapidly changing environments

  7. EARLY ANSWERS: DETERMINANTS OF FIRM SUCCESS Develop internally consistent set of goals and policies 1 FIRM’S SUCCESS Create/ exploite distinctive competencies 3 2 Align SWOT • Only broad principles ! • Companies and environment in a state of constant change! • No theory for examining firm and competitive environment!

  8. FUNDAMENTAL ISSUES IN CREATING A THEORY OF STRATEGY 1. Approach to Theory Building MODELS FRAMEWORKS 2. Chain of Causality 3. Time Horizon 4. Empirical Testing

  9. TOWARDS A THEORY OF STRATEGY

  10. THE DETERMINANTS OF SUCCESS Firm Success Industry Structure Relative Position • Lower cost • Differentiate S. Competitive Advantage 5 FORCES CROSS-SECTIONAL PROBLEM Activities / Value System Drivers Initial Condition Managerial Choices LONGITUDINAL PROBLEM

  11. ORIGINS OF COMPETITIVE ADVANTAGE • LONGITUDINAL PROBLEM: • Why firms able to get into the advantaged positions, and why did they sustain or fail to sustain them? • ☛ through initial condition and pure managerial choices • CROSS-SECTIONAL PROBLEM: • What makes some industries, and some positions within them, more attractive than others? • ☛ through underlying choices a firm makes in term of its industry, positioning, and activities P O S I T I O N Weakness: Built on aggregate understanding of the industry, in term of cost leadership or broad differentiation, rather than on understanding consumer preferences (Jonathan Wilson in Dynamic Strategic Resources)

  12. TOWARDS A DYNAMIC THEORY

  13. DYNAMIC THEORY • Dynamic requires longitudinal perspective, which allow examining the changes and the continuity in the pattern of organizational behavior over time • During the last decades, there has been an intensive request for the search of dynamic theory of strategy • “ …detailed longitudinal case studies, covering long periods of time, are necessary to study these phenomena” (Porter, 1991)

  14. TRADITIONAL THEORY THREE PROMISING LINES OF INQUIRY HAVE BEEN EXPLORED: • GAME-THEORETIC MODEL • COMMITMENT AND UNCERTAINTY • RESOURCED BASED VIEW • HYPERCOMPETITION (Strategic Thinking and Strategy Analysis in Business …., by Gert Bruche, 1999)

  15. GAME THEORY • RESTRICTED TO ONE OR A FEW VARIABLES ☛Many variables that characterize most industries • ENVIRONMENT (TECHNOLOGY, PRODUCTS, ETC) ASSUMED TO BE FIX ☛Environment keep changing • HOMOGENEITY OF STRATEGIES ☛Trade-off/interaction in configuring the entire set of activities in value chains • MANY FIXED VARIABLES ☛Changing variables

  16. COMMITMENT AND UNCERTAINTY • STRATEGY IS MANIFESTED IN A RELATIVELY FEW INVESTMENT DECISIONS, HARD TO REVERSE AND TEND TO DEFINE CHOICES IN OTHER AREAS OF THE FIRM (COMMITMENT UNDER UNCERTAINTY) – Ghemawat’s book in 1991 • CONSIDERS THE ENVIRONMENT AS RELATIVELY STABLE (THOUGH UNCERTAIN) ☛ Commitments have long lived consequences and possibilities for reconfiguring the value chain are limited • FOCUSING ON DISCRETE CHOICES ☛ Limit the discretion a firm has to shape its environment, respond to environmental changes, or define entirely new positions

  17. RESOURCE-BASED VIEW • Firm differ in fundamental ways because each firm possesses a unique bundle of resources • The origin of competitive advantage are valuable resources that firm possess i.e. assets( such as skill, reputation, etc) and organizational capabilities • RBV will have the greatest significance in environments where change is incremental, number of strategic variables and combination is limited and the time period is short to intermediate term ☛RBV cannot be an alternative theory of strategy, it cannot be separated from cross sectional determinants of competitive advantage

  18. HYPERCOMPETITION • Hypercompetition takes place in fast cycle environments where any single competitive advantage is eroded very quickly

  19. TRADITIONAL THEORY THREE + ONE PROMISING LINES OF INQUIRY HAVE BEEN EXPLORED: • GAME-THEORETIC MODEL • COMMITMENT AND UNCERTAINTY • RESOURCED BASED VIEW • HYPERCOMPETITION STILL LACK OF A DYNAMIC THEORY OF STRATEGY !!

  20. IMPORTANT ISSUES TO BE ADRESSED • A THEORY MUST DEAL WITH FIRM/INDUSTRY AND ENVIRONMENT ☛ Environment both constrains and influences outcome • A THEORY MUST ALLOW FOR EXOGENOUS CHANGE IN AREAS SUCH AS BUYER NEED, TECHNOLOGY AND INPUT MARKET ☛ In a world where exogenous change is rapid, analytical problem more complicated • A THEORY MUST GIVE LATITUDE NOT ONLY TO CHOOSE AMONG WELL DEFINED OPTIONS BUT TO CREATE NEW ONES ☛Ability to shift the constraints through creative strategy choices, innovative activities, skills, capabilities • A THEORY MUST TAKE INTO ACCOUNT ROLE OF HISTORICAL ACCIDENT OR CHANGES ☛ Luck has an important influence on how one develops a theory of strategy

  21. FIRM AS THE ORIGIN OF ADVANTAGE • SINCE THE NUMBER OF VARIABLES IS SUBSTANSIAL AND ENVIRONMENTAL CHANGE IS CONTINUOUS, THEN THE PROBLEM IS NOT SELECTING GOOD STRATEGIES BUT CREATING A FLEXIBLE ORGANIZATION THAT LEARN AND ABLE TO CONTINUALLY REDEFINE ITS STRATEGY • IT LIES IN THE ABILITY TO MAKE GOOD STRATEGY CHOICES AND IMPLEMENT THEM

  22. ENVIRONMENT AS ORIGIN OF ADVANTAGE • True origin of competitive advantage may be found in firm’s proximity or local environment • Competitive advantage in particular industries tended to be strongly concentrated in one or two countries, often with several/many successful home-based competitors • Successful firms were also geographically concentrated within nations • Firm create and sustain competitive advantage because of their capacity to continuously improve, innovate and upgrade their competitive advantage overtime • Successful firms are those that improve and innovate in ways that are valued not only at home but elsewhere

  23. PERSPECTIVES ON FIRM COMPETITIVENESS • EMERGING • C.A. resides partly in the locations at which company’s business units are based • Cluster participation is an important contributor to competitiveness • TRADITIONAL • Competitive advantage resides solely inside a company/industry • Competitive success depends primarily on company choices Michael Porter “ On Competition” , 1998 edition

  24. THE DIAMOND AS A DYNAMIC SYSTEM

  25. DETERMINANTS OF NATIONAL COMPETITIVE ADVANTAGE Firm Strategy, Structure and rivalry • Open and vigorous competition among locally based rivals • A local context and rules that encourage investment and sustained upgrading e.g. intellectual property protection Chance Demand Condition Factor Condition Government • Presence of high quality, specialized inputs: • Human/capital/natural resources • Physical/administrative/info rmation/technological infrastructure • Sophisticated and demanding local customers • Local customer needs that anticipate those elsewhere • Unusual local demand in specialized segments Related and Supporting Industries • Access to capable, locally based suppliers and firms in related fields • Presence of clusters instead of isolated industries

  26. ORIGIN OF COMPETITIVE ADVANTAGE • Competitive advantage originates in the local environment in which the firm is based • The four attributes (“diamond”) in a firm’s home market promote or impede a firm’s ability to achieve competitive advantage

  27. DIAMOND AS DYNAMIC SYSTEM • Aspects of the local environment constitute a dynamic system. The effect of one determinant depends on the others  Mutual reinforcement of all determinants • Sustained success requires the interaction of favorable conditioned of determinants • Firms lose competitive advantage due to weakness in their local environment or other internal problem

  28. ENVIRONMENTAL INFLUENCES ON DYNAMIC OF STRATEGY • The environment, via diamond, affects firm’s initial condition and its managerial choices • The diamond address a dynamic theory of strategy early in the chain of causality • Firms must understand and exploit their local environment to achieve competitive advantage

  29. ISSUE FOR FURTHER RESEARCH • Need to better understand the balance between environmental determinism and company choice in shaping competitive outcome • Need to better understand the degree of stickiness or inertia in competitive positions once a firm stop progressing • Need to know how necessary or helpful it is to push even further back in the chain of causality • Challenge of crafting empirical research to make further progress in understanding this dynamic of strategy

  30. EMERGING THEORY Challenge of crafting empirical research to make further progres in understanding this dynamic of strategy DYNAMIC CAPABILITY THEORY

  31. A DYNAMIC THEORY • Dynamic Capability Theory • Extension of Resourced Based Theory • Seeks to explain how firm achieve and sustain competitive advantage despite an ever-changing environment • Appropriately adapting, integrating, and re-configuring internal and external organizational skills, resources, and functional competencies toward a changing environment • Competitive advantage from managerial/organization processes, positio, path • Resourced Based Theory • Emphasizing on internal analysis/specific asset of the firm where resources/capabilities /uniqueness, etc, as source of sustainable competitive advantage • Static due to not anticipating environmental change DYNAMIC THEORY OF STRATEGY Adapting effectively to changing environment Longitudinal view (answering WHY)

  32. COMPLEMENTARY OR COMPETITOR? Resourced Based Industrial Based Firm Strategy, Structure, Rivalry Dynamic Capability Theory Demand Condition Factor Condition Related and supporting Industries Complementary !

  33. DISCUSSION + CONCLUSION

  34. DISCUSSION • An analogy from other field to answer why firm success • Limitation to Porter’s theory - Theory of strategy should provide the predictive function (Phelan,1995) - Lack of experimental method condition i.e. observation, manipulation and replication • To establish a theory of strategy need a reconciliation of the different perspective between economist and strategist (Phelan, 2000)

  35. CONCLUSIONS • Success of the firm depends on initial condition and managerial choice, and explained through chain of casualty • There is no theory of strategy that can be applied for all situation over time. Environmental and technological changes require a dynamic theory of strategy • Strategy implemented in one firm, might not success if adopted by other firm • Dinamic Capability theory is one of the alternatives developed to answer the need for a dynamic theory of strategy

  36. THANK YOU

  37. ORIGINS OF COMPETITVE ADVANTAGE • THE FRAMEWORK BUILD LINK BETWEEN MARKET OUTCOMES AND UNDERLYING CHOICES A FIRM MAKES (IN TERM OF INDUSTRIES, POSITIONING AND ACTIVITIES) • SUCCESS REQUIRES THE CHOICE OF A RELATIVELY ATTRACTIVE POSITION, FIRM’S CIRCUMSTANCES, AND POSITIONS OF COMPETITORS • ALL FIRM’S ACTIVITIES MUST CONSISTENT WITH THE CHOSEN POSITION

  38. TERM & DEFINITION • Success Attaining a competitive position(s) that lead to superior and sustainable financial performance • Competitive Advantage When a firm earns a higher rate of economic profit than the average rate of economic profit of other firm competing within the same market, the firm has a competitive advantage in that market • Sustainable Competitive Advantage • Dynamic Capabilities

  39. DYNAMIC CAPABILITY THEORY • The dynamic capability theory seeks to explain how firm achieve and sustain competitive advantage despite an ever-changing environment • Dynamic capabilities emphasized the key role of strategic management in appropriately adapting, integrating, and re-configuring internal and external organizational skills, resources, and functional competencies toward a changing environment ☛ Dynamic Capabilities are those competencies that allow the firm to respond to and exploit changing market environment

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