The Fundamental Questions in Strategy

There are 4 fundamental questions that define the field of Strategy:

1. How do firms behave?
2. Why are firms different?
3. What is the function of, or the value added by, the headquarter unit of a diversified firm?
4. What determines success or failure in international competition?

How do firms behave?
Or, do firms really behave like rational actors, and if not, what models of their behaviour should be used by policy makers?

Strategy is about choice of direction for the firm. But what assumptions should the strategist entertain about the choices made by competitive firms, choice that inevitably are interdependent? Is it even reasonable to think of the behaviour of a firm as reflecting "choices", or should a much less rational model be used? The question has two components: (1) the empirical issue of the actual patterns of behaviour observed among firms and (2) the more abstract question of what modeling assumptions are most fruitful in explaining observed patterns or guiding competitive strategy. The dominant assumption used by economists is that the firm behaves like a rational individual. Therefore the question directs attention towards situations in which the dominant assumption is unwise.

• What are the foundation assumptions that differentiate among various models of a firms behaviour?
• Are there predictable biases in firm or organizational behaviour? What do we know about the relationships between organizational size (or other stable characteristics) and behaviour?
• Is a firms behaviour follow the "rational" models of competitive interaction among players engaged in very subtle and complex reasoning?
• Can strategist's deal with the biased behaviour or with the nonrational aspects of a firm's behaviour?

Why are firms different?
Or, what sustains heterogeneity in resources and performance among close competitors despite competition and imitative attempts?

Firms within the same industry differ from one anther, often dramatically. The source of this heterogenity lies at the root of competitive advantage, and understanding why it arises and translating that into how it can be acheived is the central concern here. Competition, it is normally thought, should eliminate differences between competitors. Good practices and successful techniques will be imitated and firms that cannot or will not adopt good practices will be driven from the field. The challenge is therefore to retain the power of equilibrium thinking and still correctly explain the observed differences among competitors. Differences among firms may arise from intention, or they may be created and sustained through property rights, active prevention of imitation, or thorugh natural impediments of limitation and resource flows. In addition these differences may also arise and be sustained throguh differing conceptual views, theories or causal maps, differing organizational processes within firms, different levels of organizational learning and team skills and/or through the action of ambiguity.

• To what extant are differences among firms the result of purposeful differentiation rather than unavoidable heterogeneity in resources and their combinations? That is, should strategy be thought of as the exploitation of existing asymmetry, or the search for and creation of unique resources or market positions?
• Are the most important impediments to equilibrium rooted in market phenomena (eg, first-mover advantages) or are they chiefly rooted in internal organizational phenomena (eg, cultural differences or learning)?
• Is the search for economic rents based on resource heterogeneity contrary to public welfare, or does it act in the public's welfare?

What is the function of, or value added by, the headquarters unit in a diversified firm?
Or, what limits the scope of the firm?
The diversified corporation is the dominant form of business firm in the industrialized world, yet the relative strengths and weaknesses of this organizational form remains poorly understood. In particular, the question of what is, or should be, the value added by the headquarter unit of such firms is of central concern to strategy. Two common views exist - the first emphasizes value creation, and the second emphasizes loss prevention. According to the first viewpoint, the headquarter unit formulates the overall strategy for the corporation including its degree of diversification and organizational form, manages the process of resource allocation among constituent businesses apparently better than unaided capital markets, and maintains the existance of key shared resources and manages the processes by which business units share these resources. By contrast, the loss prevention school sees management as reviewing the strategies of the business units to make sure that logical errors are not made, it monitors the operations of subunits, providing surer supervision of the agents operating the business than would independent board of directors or the competitive marketplace, and can extract free cash flow from a mature business unit at much lower cost.

Subsidiary questions include:

• What is primary, strategy or structure?
• What is primary, the entrepreneurial (value-creating) role or the headquarter unit, or the administrative (loss preventing) role?
• What, if any, are the limits to the amalgamation of business units in multibusiness firms?
• Do firms that impose "strategic management" on portfolios of businesses add value, and if so, what is the mechanism?
• Are there corollaries to headquarters units in nonbusiness organizations and, if so, what are the comparative lessons to be learnt?

What determines success or failure in international competion?
Or, what are the origins of success and what are their particular manifestations in international settings or global competition?
This question has two parts of interest. One part is the more fundamental issue of why some firms enjoy more success than others. What is the dynamic competitive process that leads to the relative success of some firms, and what causes some to decline and some to fail? Another part of the question deals with international competition and the competitiveness of firms, and indeed, of nations and cultures. At stake is not just the survival of the firm or its success, but the quality of life in economies and their respective cultures.

• To what extent do firms from different countries (cultures) possess inherent competitive advantages in certain areas?
• Are there "strategic" industries and if so, what makes them strategic?
• Are there rules for global competition that are not simply the extension of rules for competition within a large nation-state or continent?

Conclusion
These are the four questions that will help define the field of strategy.

BIBLIOGRAPHY
1. Fundamental Issues in Strategy; A Research Agenda by Rummelt, Teece

What is strategy?

Strategy includes those subjects of primary concern to senior management, or to anyone seeking reasons for success and failure among organizations. Firms are in competition - competion for factor inputs, competition for customers, and ultimately, competions for revenues that cover the costs of their chosen manner of surviving.

Because of competition, firms have choices to make if they are to survive. Those that are strategic include: the selection of goals; the choice of products and services to offer; the design and configurationof policies determining how the firm positions itself to compete in product markets (eg, competitive strategy); the choice of an appropriate level of scope and diversity; and the design of organization structure, administrative systems and policies used to define and coordinate work.

It is a basic proposition of strategy, that these choices have critical influcence on the success of failure of the enterprise, and that they must be integrated.

It is the integration (or reinforcing pattern) among these choices that makes the set a strategy.

Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals - Alfred Chandler [Strategy and Structure; 1960]

Strategy is a pattern of objectives, purposes, or goals and major policies and plans for acheiving these goals, stated in such a way asto define what business the company is in or is to be in and the kind of company it is or is to be - Kenneth Andrew [Business Policy: Text and Cases, 1965]

Strategy, or defining what an organization will be, and why, and to whom that will matter, is at the heart of a leader's role. The strategist is the meaning maker, the voice of reason. The strategist rely's on hard data to ensure that design, product lineup, pricing, marketing, distribution, manufacturing, and logistics, not to mention organizational culture and management are tightly coordinated, internally consistent and interlocking. He creates a system of resources and activiies that worked together and reinforced each other to create value. For every moving part in the system there are two choices - either it contributes to system end goals or it does not and has to be rebuilt. Strategists call such choices identity-conferring committments. They are central to what an organization is or wants to be and reflect what it stands for.

References:
1. Montgomery, Cynthia A: How strategists lead, McKinsey Quarterly July 2012