FormalPara Definition

The concept of strategy plays a proactively adaptive role in organizational evolution through the rational determination of the organization’s purposes and objectives, its product (and/or service) market-positioning, and the planning of the use of its resources and the deployment of its capabilities to achieve success in competition and/or collaboration in the context of a highly dynamic external selection environment.

On the Nature and Role of Strategy

In the broadest sense, the concept of strategy concerns the rational determination of an organization’s purposes and objectives, the strategic positioning of the company in its external environment and the planning of the use of resources and the deployment of capabilities so as to achieve purposes and objectives and achieve success in competitive and/or collaborative endeavours. Strategy is concerned with the external and internal forces that have the potential to materially affect the company’s destiny. Destiny is an archaic idea, indicating a fixed and inevitable future. Strategy, by contrast, is a modern idea, indicating an open-ended future that can be determined by strategic choice. It implies degrees of freedom and the possibility, to some extent, to choose one’s future (Burgelman 2002a).

Strategy has a strong thinking component. It is forward-looking and concerned with exploring multiple scenarios, alternatives and real options. It is externally focused and tries to anticipate states of nature and the behaviour of the relevant actors – competitors and partners – in a situation. Incisive strategic thinking at its best requires considerable intellectual effort. But senior executives sometimes view strategy with scepticism, because great strategies are just that: great strategies, or plans. From the perspective of key players, strategy becomes real when significant resources are committed, when strategy is turned into action. Strategic action is consequential: it involves commitments that cannot easily be undone and moves the company in a direction that is not easily reversible. Waiting to act, however, can also have strategic value if it allows useful additional information to become available. This suggests a criterion for distinguishing strategy from tactics: action is tactical if its outcomes do not significantly affect subsequent degrees of freedom to act. In dynamic environments, however, this distinction is often difficult to know in advance. Hence, alertness to the potential consequences of actions taken or not taken is one key attribute of strategic leadership.

Strategy in Structured and Unstructured Situations

Strategy in large, established organizations takes the form of strategy-making, a complex process involving the thinking and action of key actors situated throughout the organization. In today’s global competitive environment such complex organizations usually face other complex organizations.

The study of strategic interaction between, and strategy-making within, complex organizations involves unstructured situations and is somewhat different from the study of strategic behaviour in well-structured situations. In well-structured situations all the competing players are known and each player is a rational actor whose strategic moves are drawn from a predetermined set. Particular combinations of players’ strategic moves have clearly defined, if sometimes probabilistic, payoffs. Such strategic situations lend themselves well to the quantitative methods of decision theory and game theory (Saloner 1994). In the case of unstructured situations, all potential players (organizations) may not be known in advance, the strategies of differently positioned actors within each competing organization may not be well aligned, strategic moves are not limited to a predetermined set of options and payoffs in competitive interaction between players (organizations) are not always clearly defined. The study of strategy-making involving complex organizations is therefore likely to be relatively untidy, and more difficult to capture in relatively simple analytical models.

Strategy and Organizational Evolution

The concept of strategy can be usefully linked with the organizational learning and organizational ecology perspectives of evolutionary organization theory (Hannan and Freeman 1989; Mintzberg et al. 1998). The organizational learning perspective focuses on how organizations search for information to try to adapt; that is, proactively manage their fit with the external selection environment, through internal variation, selection and retention processes. While organizational learning does not necessarily lead to organizational adaptation – organizations can learn the wrong lessons! – this perspective leaves room for cognitive processes and knowledge development that is purposeful, even if only myopically so, in driving organizational change. Strategy-making as adaptive organizational capability is one manifestation of the organizational learning perspective in evolutionary organization theory.

The organizational ecology perspective, on the other hand, suggests that organizational change must be understood at the level of entire populations of similar organizations, and as the result of replacement and selection rather than of adaptation. Incumbent companies fail in the face of environmental change because inertia prevents them from adapting and are replaced with new ones that do different things or the same things differently (‘better’, in the eyes of the majority of customers). The study of Intel’s exit from the DRAM business, for instance, adds some empirical evidence in support of organizational ecology. Organizational ecology, however, leaves little room for adaptation based on strategy. Yet strategy-making processes clearly helped Intel transform itself from a memory company into a microprocessor company, thereby preventing its demise (Burgelman 1991, 1994). Hence, organizational ecology does not always provide a complete explanation of organizational change.

Established organizations continue to remain subject to the selection force of the external environment. Many do in fact succumb to it in the long run (Burgelman and Grove 2007). But established organizations have also gained the opportunity to substitute, to some extent, internal selection for external selection. This is the central idea of the internal ecology model of strategy-making (see further below). An established company can be viewed as an ecological system in its own right, and its survival and continued success depend on the functioning of this internal ecology. While ecological processes at the level of organizational populations (industries) involve organizational founding and disbanding rates, the internal ecology of strategy-making involves entering new businesses – or other types of organizational activities – and exiting from failing ones over time. Different parts of the internal ecology of strategy-making can be linked to different forms of adaptation, and this helps reconcile opposing ideas about various consequences of strategic change.

Analysis based on the internal ecology model of strategy-making asks questions, such as: how does an organization’s strategy come about and how does it evolve? What is the link between strategy-making and inertia? Which sorts of strategy-making processes lead to major strategic change that is survival enhancing?

A Brief History of Strategy

This author’s interest in the concept of strategy arose from studying the issue of ‘optimal firm size’ through the lens of business economics (Burgelman 1969). In the course of that study it became clear that optimal size was a highly static concept, and also an ephemeral one that could be thought of but not demonstrated given internal organizational and external environmental dynamics. Firm size could be more usefully viewed as the by-product at a particular moment in time of firm growth (Burgelman 1969: 93). And, to the extent that an optimum size could in fact be determined, it would have to be a temporary one. This drove attention away from the extensive economics-based literature on firm size to the newly emerging literature at the time about the role of strategy in the development and growth of firms (Penrose 1959; Chandler 1962; Ansoff 1965). In light of the novel insights produced by this new literature, the problem of optimum firm size could be redefined in terms of an evolving process of developing an optimal strategy and the ongoing optimal adjustment of the organization’s structure (Burgelman 1969: 149).

Selected Normative (Prescriptive) Foundations

Chandler’s pathbreaking historical study Strategy and Structure (1962) offered ‘strategy’ as the unifying theoretical concept for studying the managerial actions that guide a company’s development: ‘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’ (Chandler 1962: 15–16).

Chandler offered insight into the process through which companies develop internal competencies and capabilities in response to exogenously arising external growth opportunities. He argued that companies then seek to deliberately exploit these further through diversification and that they develop new structural and administrative arrangements to support their diversification strategy. Chandler’s historical study of major US-based companies spawned a series of empirical studies in various developed countries to test his core proposition that ‘structure follows strategy’. This line of research culminated in Richard P. Rumelt’s Strategy, Structure and Economic Performance (1974). Almost contemporaneously, industrial economist Edith T. Penrose’s The Theory of the Growth of the Firm (1959) provided another path-breaking study that elucidated the internal dynamics of a company’s growth. Penrose offered novel insights the ‘entrepreneurial services’ that constitute a company’s internal impulse to grow and in the nature of the limitations of a company’s management team that constrain the rate of growth at any moment in time. Chandler was apparently unaware of Penrose’s work in preparing his manuscript, but in his endnotes (Chandler 1962: 453) recognizes the important complementarities between her findings and his own.

H. Igor Ansoff’s Corporate Strategy (1965) drew on Chandler’s pioneering study to distinguish strategic from administrative and operating decisions. He viewed strategic decisions as primarily focused on how the firm positions itself in the external environment and as different from administrative and operating decisions. He considered Chandler’s study to be especially relevant for administrative decisions and Richard Cyert and James. G. March’s A Behavioral Theory of the Firm (1963) for operational ones. Building on a series of earlier, more fragmentary contributions, Ansoff went on to construct the first comprehensive normative analytical framework for strategically managing an enterprise in the competitive environment. His framework comprises a series a concepts such as ‘objectives’, ‘strategy’ (including product-market scope, growth vector, synergy, competitive advantage), ‘capabilities’, ‘strengths and weaknesses’ and ‘gap analysis’ that are still of great relevance in today’s research, teaching and practice of strategic management.

Kenneth B. Andrews’ The Concept of Corporate Strategy (1971) built on a long tradition of case-based research and teaching of ‘Business Policy’ at Harvard Business School and extended the normative strategy framework. This extended framework encompasses not only the rational analytical foundation of strategy formulation (in line with Ansoff) but also key administrative issues related to strategy implementation (in line with Chandler), as well as the corporate value system that forms the foundation for acknowledging the corporation’s societal obligations other than to its stockholders, and the personal values and aspirations of the top executives that shape the relative uniqueness of a corporation. In part inspired by Philip Selznick’s concept of ‘distinctive competence’ in Leadership in Administration (1957), Andrews views the role of the CEO in terms of enlightened balancing of internal capabilities (in terms of Strengths and Weaknesses) and external demands (in terms of Opportunities and Threats), and of societal and corporate interests. The SWOT analysis associated with these balancing acts has remained a useful strategic management tool.

Related, but somewhat separately, field studies of strategy in the multinational sphere, such as John Stopford and Louis T. Wells in Managing the Multinational Enterprise (1972) and Christopher A. Bartlett and Sumantra Ghoshal’s Managing Across Borders (1989) provided important insight in the complex matrix-type relationships involving functional, product and geographical dimensions of organizational structures and their interplays with strategy-making processes.

Outside academia, management consulting firms developed normative frameworks with an emphasis on portfolio management in multi-business strategy. The Boston Consulting Group, for instance, proposed the ‘growth-share matrix’ – a tool based on the implications of learning curve theory – to more effectively guide financial resource allocation among a company’s different businesses as they move through their lifecycle. These sorts of efforts on the part of the many large and small players in the strategy consulting industry are ongoing. The emergence of a ‘strategy-as practice’ research stream during the 2000s motivated by a renewed interest in the contributions of strategy professionals such as strategic planners and strategy consultants to strategy is noteworthy (e.g., Golsorkhi et al. 2010).

In parallel to the development of normatively oriented strategy frameworks in business schools and consulting firms, from the 1950s to the 1970s industrial organization (IO) researchers and game theorists in university economics departments had been moving beyond the classical model of perfect competition (and perfect information) to develop powerful mathematical and econometric tools for analysing the implications of information asymmetries between economic actors that made the role of strategy in modern economic competition meaningful. Michael Porter’s Competitive Strategy (1980) and Competitive Advantage (1985) summarized the key insights of this intellectual tradition in a set of relatively simple frameworks that helped business executives address more sharply and systematically two important questions: (1) What determines industry attractiveness?, and (2) What determines competitive advantage? Porter’s answers to these questions highlight the importance of top management seeking to understand the so-called ‘five forces’; that is, the bargaining power of customers and suppliers, the nature of the rivalry among competitors (e.g., country-club like or bare-knuckle), the threat of potential new entrants and substitution. In view of this, strategy involves seeking a favourable strategic position for the firm in the industry by choosing a product-market scope (industry-wide or focused), adopting a generic strategy focused on differentiation or on cost leadership to provide unrivalled customer value, and carefully managing the value chain associated with the chosen generic strategy. Porter’s seminal contribution spawned the so-called ‘positional school’ in the strategic management literature.

Porter in ‘Toward a dynamic theory of strategy’ (1994) further discusses the important but limited role that a wide range of situation-specific and relatively simple mathematical models – mostly gametheoretic – can play in furthering the development of a comprehensive theory of strategy and argues in favour of more complex ‘frameworks’ that encompass many variables and seek to capture much of the complexity of actual strategic competition. He suggests that the development of such frameworks will require detailed longitudinal case studies of companies, industries and nations.

Rooted in Penrose’s theory of the growth of the firm, Birger Wernerfelt in ‘A resource-based view of the firm’ (1984) proposed an alternative to the position-based view of competitive advantage. Resources in the context of the resource-based view (RBV) framework are broadly defined to encompass technical, commercial as well as knowledge, administrative and cultural factors. Competitive advantages may derive from resource heterogeneity among firms and from the sustainability of resource-based advantages (e.g., Barney 1986, 1991; Dierickx and Cool 1989). C. K. Prahalad and Gary Hamel’s ‘The core competence of the corporation’ (1990) provided a contribution to the RBV that resonated strongly among practitioners – so strongly that Michael Porter with ‘What is strategy?’ (1996) came back to argue in favour of strategic positioning implemented in terms of a relatively unique set of tightly integrated value activities as the sustainable basis for a company’s competitive advantage. Nevertheless, the RBV continued to spawn a large body of research and theorizing (e.g., Peteraf 2005; Kraaijenbrink et al. 2010) with special interest in the competitive role of so-called ‘dynamic capabilities’ (e.g., Eisenhardt and Martin 2000; Teece 2007).

Selected Positive (Descriptive) Foundations

While many original treatises of strategy were normatively oriented and focused strongly on the singular role of the CEO as enlightened ‘rational actor’, the empirical study of strategy did not quite support this somewhat idealized and heroic view. Based on systematic field research in a variety of organizations Brian Quinn in Strategies for Change (1980) realized the limitations of the top executive in leading strategic change and introduced the concept of ‘logical incrementalism’ as a more realistic approach. Quinn, however, continued to emphasize the dominant role of top management in the strategy-making process.

Joseph L. Bower in Managing the Resource Allocation Process (1970) and Henry Mintzberg in ‘Patterns in strategy formation’ (1978) were among the first academic researchers to pay systematic attention to strategy-making as an organizational process. Bower identified the role of ‘structural context’ in shaping the behaviour of managers at different levels in the organization involved in strategic capital investment projects, which suggested – in contrast to Chandler – that strategy may also follow structure. Bower and Yves L. Doz in ‘Strategy formulation: a social and political process’ (1978), and Bower and Clark G. Gilbert in From Resource Allocation to Strategy (2005), summarized a long series of academic field studies of various substantive areas related to strategy, mostly carried out at the Harvard Business School, that highlighted the cognitive and political complexities of the strategy-making process. Mintzberg defined strategy as a ‘pattern’ – consistency of behaviour – over time, and identified four types of patterns in strategy formation: ‘deliberate’, ‘emergent’, ‘realized’, and ‘non-realized’. Mintzberg and Waters (1985) further explored the patterns associated with deliberate and emergent strategy.

Robert A. Burgelman in A model of the interaction of strategic behavior, corporate context and the concept of strategy’ (1983a) integrated some of Chandler’s, Penrose’s and Bower’s insights with findings about the role of multiple levels of management in internal corporate venturing into a framework that distinguishes induced strategic behaviour (driven by the current strategy) and autonomous strategic behaviour (indeterminate relative to the current strategy) in the strategy-making process. In this framework, the concept of strategy is viewed as representing the more or less explicit articulation of the firm’s theory about its past and current achievements, which provides a basis for maintaining its identity and for securing continuity in its strategic activities through the induced strategy process. This view of the concept of strategy is somewhat related to C. K. Prahalad and Richard A. Bettis’ ‘The dominant logic: a new linkage between diversity and performance’ (1986), which emphasizes the importance of ‘unlearning’ what has made the company previously successful in order to be able to change strategic action. Internal entrepreneurial initiatives associated with the autonomous strategy process are an alternative source of strategic renewal (Burgelman 1983b).

Further efforts to link the induced/autonomous strategy processes framework to the variation-selection-retention processes of evolutionary organization theory suggested that strategy-making could be viewed as an intra-organizational ecological process nested in higher-level (organization, population, community) ecological systems (Burgelman 1991). This also offered insight into novel sources of strategic inertia, notably the phenomenon of “co-evolutionary lock-in” (Burgelman 2002b), and additional insight into the role of path dependence in organizational strategy. These insights are somewhat related to Pankaj Ghemawat’s Commitment: The Dynamic of Strategy (1991), which focuses on the relatively rare major strategic actions that are difficult to reverse (a somewhat similar view as the one discussed earlier) but does not examine how these might be potential causes of path dependence. Burgelman and Andrew S. Grove in ‘Let chaos reign, then rein in chaos – repeatedly: managing strategic dynamics for corporate longevity’ (2007) indicate how strategy-making can be related to complexity and chaos theories and may help companies cope with various types of nonlinear strategic dynamics by effectively balancing concerns of maintaining ‘fit’ with the dynamics of the current environment (through the induced strategy process) and ‘evolvability’ by seeking out new environments (through the autonomous strategy process).

Throughout the late 1990s and 2000s important research streams sought to combine ideas from complexity and chaos theories (e.g., Brown and Eisenhardt 1997), exploration and exploitation in organizational learning (March 1991) and the concept of ‘organizational ambidexterity’ (e.g., O’Reilly and Tushman 2008) to further illuminate the strategy conundrums related to innovation, entrepreneurship, renewal, transformation and the like. These and related research streams used qualitative methods (e.g., Martin and Eisenhardt 2010), computational models (e.g., Levinthal and Posen 2007) and a very wide variety of large-sample empirical studies.

An Integrative Framework of Strategy

In the 50 years since the publication of Strategy and Structure, the field of strategic management has blossomed into many different theoretical views. Henry Mintzberg, Bruce Ahlstrand and Joseph Lampel in Strategy Safari (1998), a synthesis of the field of strategic management, identified five different meanings of strategy, and ten different schools of thought. This shows the fertility of the strategy field but can be mind boggling for academics and practitioners alike. The remainder of this essay presents a simple framework – the ‘strategy diamond’ – to integrate some of the major ideas from the strategic management literature related to strategy.

The strategy diamond framework encompasses five dynamic forces: (1) official corporate strategy, which defines the nature and the scope of the business(es) a company wants to be a winner in and its intended competitive advantage relative to the other players in the industry with respect to value creation for customers; (2) basis of competitive advantage in the industry associated with the company’s chosen product-market position in the industry, which is determined by the industry forces; (3) distinctive competencies, which encompass the technical, commercial, and administrative and managerial competencies in which the company excels and which, by combining them in capabilities, serve to create customer value relative to competitors; (4) strategic actions, which refer to the consequential actions; that is, actions that involve binding trade-offs, commit a company in a strategic direction and are not easily reversed, and through which it actually uses its product-market position and distinctive competence to achieve competitive advantage; and (5) internal selection environment, which can be viewed as reflecting the company’s strategic leadership culture and comprises the organizational contextual elements that help maintain alignment of the other four forces (e.g., personnel selection, organization structure, planning and control systems, resource allocation, measurement and reward systems, corporate values and norms). Figure 1 shows the strategy diamond framework.

Concept of Strategy and Organizational Evolution, Fig. 1
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The strategy diamond: dynamic forces driving company evolution (Source: Adapted from Burgelman 1994, 2002)

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As shown in Fig. 1, the strategy diamond combines linkages between strategic position (emphasized in the positional school) and distinctive competence (emphasized in the resource-based view), and between official corporate strategy (strategy formulation) and strategic action (strategy implementation) into one framework. In addition, a company’s internal selection environment (reflecting the company’s strategic leadership culture) serves to maintain alignment in the face of the dynamics of internal and/or external forces. Such dynamics may cause pressures on the company’s profitable growth performance and misalignment in the linkages between the key forces in the framework. The associated tension creates ‘strategic dissonance’ in the organization, which signals that the company may be facing a ‘strategic inflection point’. Resolving strategic dissonance and realigning the key forces in novel ways to take advantage of strategic inflection points is a key strategic leadership task (Burgelman and Grove 1996).

Integrated frameworks such as the strategy diamond may help guide the strategic management field toward a dynamic theory of strategy (Porter 1994) and serve to examine the micro-foundations of dynamic capabilities (Teece 2007). First, the scalability of the strategy diamond framework – it can be scaled up and down: functional, single business, multi-business – may help facilitate integration across levels of strategy in the organization. Also, the strategy diamond framework alerts researchers and managers to two potential strategic traps. Companies that rely heavily on positional advantages shield themselves from competitive pressures but face a potential ‘position trap’: the security of their positional advantage may relax their diligence in continuing to hone and develop their distinctive competencies. As a result, their existing competencies may lose some of their efficiency or strength, which may make them potentially vulnerable to new, fitter competitors attacking their strategic position. On the other hand, companies that rely heavily on distinctive competence to compete vigorously with similar others may be able to sharply hone these competencies and become best in class. However, such efforts potentially create a ‘competence trap’: the relentless efforts to hone existing distinctive competence may make the company vulnerable to new competitors with different distinctive competencies as competitive dynamics in the industry change (e.g., Levitt and March 1988; Leonard-Barton 1992; Barnett 1997; Siggelkow and Levinthal 2005), or they may simply fail to appreciate the competitive importance of achieving a dominant strategic position (e.g., in the face of increasing returns to adoption). The strategy diamond framework may help prepare top management to better face the transient nature of all sources of competitive advantage in dynamic environments (e.g., D’Aveni 1994).

Finally, explicitly drawing attention to both official corporate strategy and strategic action highlights the reality that the effectiveness of strategic position and dynamic capabilities ultimately depends on human actors engaging in strategic action. Favourable competitive positions must be recognized and acted upon by strategic actors; and capabilities in and of themselves only constitute a potential until deployed by strategic actors. The strategy diamond may thus help researchers and managers appreciate better that in the end strategy is only as good as strategic action (execution); and that while strategy without capabilities is powerless, capabilities without strategy are aimless.

See Also