For some companies, profi tability is the clear goal, and the content therefore addresses this objective;
over the long term, this is likely to override all other objectives. Industry- and environment-based theories of strategy argue that profi ts are delivered by selecting the most attractive industry and then competing better than other companies in that industry. Importantly, the word ‘environment’ here is not used in the sense of ‘green, sustainability’ but means the external factors acting on the organisation , markets, competitors, governments, etc. Such concepts derive from the assertion that organisations are rational, logical and driven by the need for profi tability. They can be related back to three areas
- the eighteenth-century Scottish economist, Adam Smith, and his view that man was rational,logical and motivated by profi t;
- the concepts of military warfare quoted earlier in this chapter that show how the competitive war can be won
- the industrial organisational (I/O) model of above-average returns to a company deriving from the concept that the most important determinant of company profi ts is the external environment. In terms of the development of strategy theory, much of this material only came together in the 1960s. Igor Ansoff , 28 Alfred Chandler 29 and Alfred Sloan 30 all had an early infl uence in this area. More recently, writers such as Wheelen and Hunger 31 have laid out the model for rational, analyticaland structured development of strategy.
During the 1980s, the work of Professor Michael Porter 32added signifi cantly to this material; he was a dominant infl uence during this period. Much of hiswork was based on the study of large companies and the application of industrial economic concepts to strategy, as has been pointed out by Rumelt, Schendel and Teece. 33 Porter’s approach relied essentially on the view that the industry in which a fi rm chooses to compete and the way that it competes in that industry are the prime determinants of its long-run profi tability.
In fairness, it should be pointed out that earlier researchers such as Ansoff never saw their work
in quite such stark prescriptive terms. For example, an Ansoff 1968 research paper on strategic
management 35 refers with approval to the emergent strategy work of Cyert and March on human
resources strategies, which we explore later in this chapterFor all these writers, strategy involves formal, analytical processes. It will result in a specifi c set of documents that are discussed and agreed by the board of directors (or the public sector equivalent) of an organisation – a tangible strategic plan for some years ahead. Typically, the plan will include sections predicting the general economic and political situation; exploring industry characteristics including economies of scale and degree of concentration; analysing competitors, their strengths and weaknesses; identifying customer demand; considering the resources available to the organisation; and recommending a set of strategies to meet these requirements. The strategy will primarily (but not exclusively) be driven by the objective of maximising the organisation’s profi tability in the long term (such profi ts may particularly accrue to the shareholders) by seeking and exploiting opportunities in particular industries.
The major argument of the theorists is that the purpose of strategy is to develop sustainable competitive advantage 36 over competitors through choosing the most attractive industry 37 and then resolving how to compete within that industry. Although these views were broadly endorsed by Kenichi Ohmae, 38 head of the Japanese part of the well-known consulting company, McKinsey, it has been pointed out by Wilks that they remain largely Western and Anglo-American in their orientation. 39 They are primarily concerned with profi t and leave only limited room for social, cultural, governmental and other considerations. This view of strategy is therefore unlikely to appeal to countries which demand a higher social content from company plans – for example, within Europe: France, Poland, the Netherlands and Scandinavian countries.
Outside Europe, India has insisted on a strong social content to plans for many years and has
only in the past few years come to accept that strong social policies need to be tempered by market
forces. 40 Japanese companies also have other criteria, as we have already seen. Malaysian and
Singaporean companies with their strong relationships with the governments of their respective
countries might well also sacrifi ce profi tability to other objectives, such as building market presence
or providing extra training for workers
These nation-state arguments are, however, a matter of degree and do not deny the need to make
long-term profi ts in order to ensure the survival and growth of the enterprise. A more fundamental
criticism of profi t-maximising theories has been made by Hamel and Prahalad 42 and Kay. 43 They
argue that, although competitors are important, the emphasis on competitive industry comparisons
essential to such theories is misleading: it simply shows where organisations are weak. Such theories
do not indicate how the company should develop its own resources and skills – the key strategic task
in their view. Moreover, as soon as all companies have access to Porter’s writings on industry analysis,
Hamel and Prahalad 44 and Kay 45 have argued that the advantage ceases since all companies have the
same knowledge and no company has an advantage.
Hannan and Freeman 46 took a diff ering view: they argued that markets are so powerful that seeking
sustainable competitive advantage for the majority of companies is not realistic; only the largest
companies with signifi cant market share can achieve and sustain such advantage. For all the others,
complex and detailed strategies are a distraction
From a diff erent perspective, Mintzberg 47 and others have criticised the industry-based approach
by arguing that this is simply not the way that strategy is or should be developed in practice. In
contrast, human-resource-based theories of strategy suggest that seeking to maximise performance
through a single, static strategic plan is a fallacy. There are no clear long-term mission statements
and goals, just a series of short-term horizons to be met and then renewed. Techniques that purport
to provide long-term insights may be too simplistic. Using such arguments, Mintzberg in particular
has been highly articulate in his criticisms of the formal strategic planning process. However, he has
subsequently modifi ed his criticisms and accepted that some strategic planning may be benefi cial to
the organisation.
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