Explain strategy highlights how the aforementioned trifocal

 

Explain and critically evaluate the following statement

“…studying strategy involves perspectives
and insights from a range of academic disciplines…a complete analysis will
typically need the insights of economics, psychology and sociology.” (Johnson et al, 2017:
19)

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Introduction

Strategic
management has evolved from humble beginnings into a large area of academic study,
which draws on a myriad of different disciplines. Knowledge of the Trifocal
approach, mentioned above (economics, psychology and sociology) is essential to
understanding how and why firms implement strategy. To understand the full
range of strategic issues it is important to consider perspectives from those
three areas. “Competitive strategy is about being different. It means
deliberately choosing a different set of activities to deliver a unique mix of
value.” Michael Porter (Johnson, Scholes and Whittington, 2011, p 4) This
definition from Michael Porter is an example of how strategy requires knowledge
from many different academic backgrounds.

 

In
2002 Richard Whittington outlined four approaches to strategy. These approaches
depict how strategy has evolved over the last fifty years. Whittington first
explains the classical approach to strategy. The oldest and most influential
approach, it holds an economic view of strategy. It encompasses the bedrock of
all economic schools of strategy: Rational analysis, separation of strategy
conception from execution and of course maximising profits. A decade later in
the 1970’s the Processual approach was born. This strategy is a product of
internal political compromises. This approach takes a psychological view of
strategy and uses routines and heuristics to develop strategies. The
evolutionary approach followed this in the 1980’s, which was an
economic/biological approach to strategy; a belief that regardless of the
strategy only the best suited to the environment will survive. In the 1990’s came
the Systemic approach, one of the first sociological approaches to strategy. This
approach believes culture, family and professions all influence strategy. (Whittington,
2001) Whittington’s insightful investigation of these approaches to strategy
highlights how the aforementioned trifocal approach to strategy came about.
These three disciplines all went on to influences and contribute to the study
of strategy.

 

Economics

In
strategic management’s early days as a field of study, economic views and
perspectives dominated the field. Many believed that a firm’s sole focus should
be on profits and efficiency. “The social responsibility of a business is to
increase it’s profits” Milton Friedman. (A-Z quotes, 2017) Most strategists
were heavily influenced by economic factors such as costs, industry, supply and
demand etc.

 

Richard
Whittington’s four approaches to strategy previously mentioned, can act as a
useful timeline for examining the evolution of the economic approach to
strategy. The classical approach was heavily concerned with profitability.
Famous classicalist Alfred Sloan believes the fundamental strategic problem of
a business is putting it in a position to max profits. Classicalists believe a
top down rational approach to strategy formation coupled with rigorous planning
is the way to achieve this. It focuses on the ‘rational economic man’.
(Whittington, 2001) The behavioural theory of the firm helped progress the
economic view. The work of James March and Richard Cyert helped distinguish how
firms make economic decisions and defined a firm as a coalition of participants
rather than a single entity. Herbert Simon’s theory of bounded rationality was
also adopted. This psychological perspective went on to be accepted in economic
approaches and challenged the previous belief of the ‘rational economic man’. (Lecture 2 economics and strategy
BU4501, 2017) The early work of Alfred Chandler and Igor Ansoff in the mid
sixties offered a contingency based framework concerned with internal strengths
and weaknesses. (Hoskisson et al., 1999)

 

In the 1980’s the work of
Michael Porter who developed models such as Porters 5 forces led to more
scientific methods of measure and study of strategic management. A swing toward
industrial organisation economics followed, strategic groups formed. Firms in
the same industries began to follow similar strategies. This can be seen in the
Formula 1 case study in the exploring strategy textbook. When Formula 1 teams
began copying the strategy of the most succesful team to adapt to new rules and
regulations. (Johnson, Scholes
and Whittington, 2011) The economic approach to strategy was no longer internal
looking. This is evident in the prior mentioned evolutionary approach where
markets not managers were seen as determinates of a successful strategy.
(Whittington, 2001) Henry Mintzberg’s design school framework is apparent at
this stage of the evolution of the economic approach to strategy. The design
school started the need for both internal and external analysis. Laying the
foundations for strategic thinking. (Mintzberg, Ahlstrand and Lampel, 2009)

 

This was followed by a swing back towards firm organisational economic
approaches with the rise of the Transaction Cost Economics Theory. (Hoskisson
et al., 1999) Oliver Williamson
built on Robert Coase’s idea that a number of transaction costs exist such as
those incurred in deciding whether the required good is available on the
market. An in depth analysis of this can help a firm determine if vertical
integration is a suitable strategy. Transaction Cost Economics holds a belief that
the costs and difficulties associated with market transactions may favour
hierarchies and sometimes markets as an economic governance structure. There is
a belief in ‘hybrids’, organising models between two polarities of markets and
hierarchies, such as joint ventures, franchising and licensing. (Williamson,
1981) The diagram below gives an accurate desciption of
Transactional Cost Ecomics.

(Is.theorizeit.org,
2017)

 

 

Using
Hoskisson’s phraseology, the pendulum swung once again this time toward the Resource
Based View (RBV), which placed emphasis on firm’s internal strengths and
weaknesses relative to external opportunities and threats. This theory holds
the view that a firm must acquire and control valuable, rare, inimitable and
non-substitutable resources and questions how organisations exploit and handle
these resources. Achieving this will supposedly result in sustained competitive
advantage. The RBV assumes that firms are profit driven and directed by bounded
rational managers operating in distinctive markets that are to a reasonable
extent predictable. (Barney, 2001) The RBV is not without its critics. Critics
believe that the RBV community has clung on to an inappropriately narrow
neoclassical economic rationality and has thereby diminished its opportunities
to progress over past decades. (Kraaijenbrink, Spender and Groen, 2009).

 

As more and more research
is continually added to the economic perspective of strategic management, new
theoretical paradigms and methodological approaches will replace outdated ones.

 

Psychology

Psychology has played a pivotal role in strategic management. Psychology
is concerned with cognition, the information processing view of an individual. The
psychological perspective sees industries and strategic groups as socio
cognitive constructions created through a shared interpretation of reality
among business rivals. (Jenkins, Ambrosini and Collier, 2007) Henry
Mintzberg’s cognitive school described strategy formation as a cognitive
process that takes place in the mind of the strategist, inputs flow through
distorting filters perceived by the strategist, which are then decoded by
cognitive maps or else are simply interpretations of the world that exists only
as it is perceived. Strategies emerge as perspectives that shape how people
deal with environmental inputs. (Mintzberg, Ahlstrand and Lampel, 2009).

 

 People are seen to store knowledge in the form
of cognitive maps formed over time through experience, education and
interaction with others. Early psychological views of strategy felt humans are
limited by their processing capacity, storage capacity and cognitive bias. Cognitive
theory and research in strategic management directly challenged the economic
assumption of raionality. These mental bias’s can be described as mental
shortcuts, ‘jumping to conclusions’. Examples of these are overestimating
confirmatory and underestimaing confirmatory bias, where the individual will
jump to conclusions seeking the desired answer. ‘Groupthink’ is another example
of human limitations. This is when a group desires confirmatory to such an
extent an irrational decision is made in order to satisfy all parties. Strategist
are bounded rationally, they act intentionally rational but are limited so.
(Simon,1999) If we return to whittington’s earlier discussed theories of
strategy the Processual approach is undoubtedly the psychological theory of the
four . This approach disagreed with the classical economic approach that
proceeded it and felt it was biased due to bounded rationality and was prone to
selecting the first satisfactory option. This approach holds the view that
succesful strategy is not achieved by putting the organisation in a position to
max profits but by cultivating internal competencies. (Whittington,
2001)

 

In
my opinion the biggest contribution made by this academic discipline is the
tools it has provided to strategic management. It has provided strategists with
causal/cognitive maps and scenario planning to name. Causal maps aim to capture
actor’s causal belief systems. These maps are a type of mental representation, which gives
organisation or individuals information about the relative influences, and
attributes of phenomena in their everyday.
(Jenkins, Ambrosini and Collier,
2007). These maps began to be used more and more for strategy and have became
very influential.

(Slideshare.net, 2017)

 

Scenario planning has
also proved to be a useful tool for strategiests. Firms seek to develop a
series of stylised portraits of the future, capturing what may or may not
happen. This in turn will help them provide a basis for developing a strategy.
In theory this helps firms overcome cognitive bias and cognitive inertia. In
the long term they aim to develop robust organisational systems that can handle
the unexpected. In the short term they hope to lead to increased adaptability.

 

Psychology has
undoubtedly contributed a lot to the study of strategy and I am of the opinion
it has a lot more to contribute in the coming years.

 

Sociology

Sociology has influenced
the field of strategy greatly. It has given insights into the behaviour within
firms and organisations. Sociology introduced the study of human behaviour into
the field. As well as introducing organisational sociology, studying formal
groups organised to achieve their goal efficiently. The Resource Dependence
Theory was a revolutionary sociological approach with a belief that in order
for an organisation to survive it needs resources from its environment, usually
coming from other organisations. This results in management developing a
strategy for how to cope with external constraints. Power is considered a
driver of behaviour and success can be achieved by organisations maximising
their power. The Resource Dependence Theory has resulted in strategies being
employed by organisations to change and adapt to environments. (BU4501
strategic management; theory and practice Lecture 3 Sociology, 2017) This can
be done through many different ways, an example of this is when Price Waterhouse
and Coopers Lybrand merged into one in 1998 to become Price Waterhouse Coopers.
This maximised their power in the accountancy industry.

 

The sociological
perspective rejects markets and contributed the idea of networks, organisations
are seen to be embedded in social ties. Firms behaviour is seen to be
controlled by relationships with other firms. The Sociological perspective
believes that organisation are not surrounded by an abstract concept called the
environment but are surrounded by a collection of other organisations. This
perspective introduced the idea of social inertia and how organisations feared
change. Organisations rarely change fundamental structural features because of
this inertia.

 

Henry Mintzberg’s
Cultural school is the most applicable to the sociological perspective. This is
the idea that strategy formation is a result of an organisations subjective
perspectives , styles of decision manking and unique value. Strategy can be
seen as the perspective, rooted in the intentions and reflected in the patterns
by which the embedded resources of the organization are protected and used for
competitive advantage. Much like the cognitive process culture acts as a
filter thet influences decision making. (Mintzberg, Ahlstrand and Lampel, 2009)

 

Richard Whittington’s
last of the four theories he presents is the Systemic Approach. This approach
is heavily influenced by sociological factors. Whittington conveys to the
reader how this sociological approach considers many different influences such
as culture, family and professions. (Whittington, 2001) An example of this
diference in culture in organisations can be found in Silcon Valley where some
firms have begun to offer staff payment in crypto currencies. This type of
payment may entice employees in these type of firms but would be laughed at by
employees in other regions.

 

The Sociological
perspective has long influenced many economic theories. In Ronald Coases nature
of the firm he states how economics could not only be used to explain the
market but also the firm. He awcknowledged the sociological perspectives such
as culture, environment and power elements. Coase showed a sociological
perspective which later led to the theorising of Transaction Cost Analysis. (Swedberg, 1996) In the past few decades sociology has
become one of the main disciplines influencing the field of strategy and this
looks set to continue.

 

Conclusion

To conclude,  when carrying out my research for this essay
I began to notice that the economic perspective seemed to have the most
empirical research on the study of strategy, which also dated back the
furthest. Psychology and Sociology did influence the economic perspective in
the early days with influences like ‘Bounded Rationality’ and the sociological
perspective influencing Transactional Cost Economics respectively but I believe
that the importance of these two disciplines to the study of strategy has only
really been realised in the last few decades. A knowledge of all three of these
disciplines is imperative to be able to even begin to give a complete analysis
of the study of strategy.

 

 

 

 

 

 

 

 

 

Bibliography

 

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(2017). Milton
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27 Dec. 2017.

 

2. Barney, J. (2001).
Resource-based theories of competitive advantage: A ten-year retrospective on
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3. BU4501 Lecture 2
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4. BU4501 Strategic
management: Theory and Practice. (2017). Lecture

 

5. BU4501 strategic
management; theory and practice Lecture 3 Sociology. (2017).

 

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9. Johnson, G., Scholes,
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10. Kraaijenbrink, J.,
Spender, J. and Groen, A. (2009). The Resource-Based View: A Review and
Assessment of Its Critiques. Journal of Management, 36(1), pp.349-372.

 

11. Mintzberg, H.,
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12. Simon, H. (1999).
Bounded Rationality and Organizational Learning. Reflections: The SoL Journal, 1(2), pp.17-27.

 

13. Slideshare.net.
(2017). Spm unit 3. online Available at:
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14. Swedberg, R.
(1996). Economic
sociology. 2nd ed. Cheltenham, Glos, UK: E. Elgar Pub. Co., p.chapter 13.

 

15. Whittington, R.
(2001). What is
strategy, and does it matter?. London: Thomson Learning.

 

16. Williamson, O.
(1981). The Economics of Organization: The Transaction Cost Approach. American Journal of Sociology, 87(3), pp.548-577.