Henry Mintzberg was right when he declared ‘we need better practice, not neater theories’. Three theoretical paradigms provide an overarching framework for strategic thinking. And these were part of the economics discourse 50 years ago. But any one of these by themselves is insufficient.
The best known today is Professor Michael Porter’s five forces model[i]. It is reflective of the industry-organisation theory of competition, and posits that industry structure explains differences in profitability across industry sectors. In the 1930’s micro-economic theories explored ‘barriers to entry’ in industries, one of Porter’s key themes. Ironically, the original theoretical work was developed to assist Government in designing policy settings which would optimise competition. Business turned it upside down in pursuit of economic rents.
The model re-frames competitive strategy as ‘capturing value’: beating your rivals frames the strategic question too narrowly. The real competition involves players across the entire industry value chain, not just your rivals.
The second overarching theory is the 'resource based view of the firm’ of the mid 1980’s. The essence of the theory is that competitive advantage arises not from industry structure, but from the ‘idiosyncratic’ resources and capabilities of the firm. The theory led to a profusion of terms all posited around this same underlying principle. Thus we saw core competencies – the ‘what’ of our core production technologies – versus core capabilities – the ‘how’ of our business. Later came dynamic capabilities – the ability to learn and adapt to exploit opportunities. This theory, too, had an earlier formulation in the 1930’s, when Chamberlin argued that the firm’s idiosyncratic assets and capabilities shaped strategies.
The reality is that if you look across almost any industry there is substantial overlap of the resources and capabilities, and yet each firm in an industry has some level of uniqueness. Consider, for example, the big 4 accounting firms. In many respects their overlap of resources and capabilities creates near perfect competition within their sector. But each player has its own idiosyncratic resources and capabilities. The strategic question is: “Do these idiosyncratic resources and capabilities create economic value? Are they valuable, rare, inimitable, and non-substitutable?”
The strategist’s role is to identify ways to exploit this individuality and uniqueness. But how far can the company’s valuable resources stretch across markets? Executives often over-estimate the transferability of specific resources and capabilities. The irony is that their ‘hard to imitate’ nature applies even to the ‘owner’ of the resources.
The third overarching theoretical paradigm is ‘creative destruction’. In essence Schumpeter (1934) argued that competition is far less stable and predictable than suggested in the other economic theories. He argued the essence of competition is not competition within a traditional conception of modus operandi “but competition from the new commodity, the new source of supply, the new type of organisation … it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly”. As such, Schumpeter focused on the major revolutionary technological, product and market shifts. Today’s digital world is the poster child of disruption, but it has been happening forever.
The modern parallel is Professor Clayton Christensen’s ‘theory of disruption’. This is one area where the theory remains unsettled, and it arguably represents the most exciting area of strategy development.
In practice, the challenge of disruption remains despite these theories. The challenge is three fold: seeing the weak signals in a sea of noise; knowing when to move; and having the capacity to move. Christensen’s theory was developed off 75 case studies where an incumbent seemingly ‘lost’ to an insurgent.
So what? Each of these paradigms offer a view into the future challenges and opportunities for your company: the external macro forces; the industry dynamics; and the unique resources and capabilities of the firm. Together they create the framework for building the case for change: the first step in the strategy process.
The strategic option space is created at the intersection of these three paradigms. Any one lens onto the strategic canvas will necessarily miss key insights that could be vital to the future of the firm.
Fifty years ago we used SWOT to evaluate these drivers. Today there are many more valuable tools. Each paradigm – industry structure; resource based view of the firm; and creative destruction – is supported by an array of tools and techniques that can help firms unpack the complexity of each dimension. Over the weeks ahead I will post a series of blogs on these tools.
In the meantime ask yourself how well your organisation understands these drivers:
- What are we doing today that has been largely unchanged for 20-30 years in your industry sector? Disruption is more likely in the absence of a strong innovation culture.
- What are the strategic drivers operating within each part of the industry value chain? How are they changing?
- How is your value chain differentiated from your competitors? Is this a real lever of strategic advantage?
[i] The five forces are: the intensity of competitive rivalry; the bargaining power of buyers; the bargaining power of suppliers; the threat of new entrants; the threat of substitutes