Soapbox

October 8, 2012 12:12 am

A discipline in need of a new direction

The traditional definition of strategy no longer sits well in the world in which it finds itself

Strategy has long occupied a prominent spot in business schools. On many MBA courses, it is strategy that provides the capstone course, bringing all the other disciplines together.

Strategy is nearly obligatory for the many students keen to pursue careers in the leading consulting firms. In many business school faculties, strategy and finance rival each other for prestige. This position is deserved. After all, strategy deals with the big questions of what companies choose to do: innovation, diversification, internationalisation and the like.

But its prominence is under threat. The world is changing in ways that make strategy’s self-definition increasingly marginal. As the Strategic Management Society meets in Prague today and tomorrow, it is a good time to reflect on how the discipline can redefine itself for a new kind of world.

Strategy is traditionally defined as about how companies achieve competitive advantage to maximise profit. Strategy researchers typically investigate large numbers of companies to discover the variables associated with superior profitability. In the classroom, we teach our students a host of frameworks for the analysis of competitive advantage. All this is severely limiting, for two principal reasons.

To start with, less and less companies are concerned simply with strategy’s criterion of profit maximisation. According to the Economist magazine, state-controlled companies account for 80 per cent of the national stock market index in China, 62 per cent in Russia and 38 per cent in Brazil. Credit Suisse estimates that about half of the largest listed companies in Asia are family controlled.

ACME Beale cartoon

The strategies of these companies are shaped not just by profit, but also by the interests of families or nation states. Ambivalence about profit is not just an emerging market phenomenon either. Consider how Google, Facebook and LinkedIn have used dual-class shares to keep investors at a distance. And western banking and finance sectors have seen the return of widespread state ownership.

At the same time, many of the world’s most significant markets are far from openly competitive. Google and Facebook dominate their markets of course, but the same is true for the Big Four accounting firms, the bulge bracket investment banks, the energy and mining companies, or the all-embracing Amazon. Strategy in these markets involves at best strange kinds of competition. As BP has discovered, competitive advantage in the Russian oil and gas industry is about superior access to Kremlin support. In these closed and dominated markets, findings from large samples are likely only to distract.

In other words, the discipline of strategy is a poor fit with the world in which it finds itself. Its central assumptions of profit maximisation and open market competition apply problematically to many of the most important and dynamic sectors of today’s economy. These include precisely those sectors that are most attractive to many MBA students – internet businesses and financial services. More worryingly, profit maximisation and open competition are least relevant in those economies where MBA student numbers are growing fastest and business schools are rising most rapidly in the rankings – China, India, Brazil and the like. Already three of the Financial Times’ top 20 ranked global MBA programmes are Chinese or Indian.

Strategy as a discipline is in danger of being left behind. Capstone courses are unlikely to be reserved for a discipline whose assumptions fit so awkwardly with the careers of MBA students.

Three moves can help strategy catch up with the new conditions.

First, we need to relax the assumption of profit maximisation as the driver of business behaviour and the measure of success. We should be open to other interests, such as the intergenerational security of family control or the economic development of nation states. The first question for the teacher and the researcher should be to ask what performance measures really matter to the companies in question.

Second, we should become more wary of the notion of competitive advantage. It directs us to forms of competitive behaviour that are often irrelevant. Anti-competitive strategy can matter more. Competitive advantage may be state-based rather than market-based.

Third, in a world where many markets are dominated by a handful of companies, our theory and teaching should rely less on findings from large sample research studies. We need more in-depth case studies to understand intimately, from the inside, the interactions of giant companies with ambivalent motivations.

The discipline of strategy deserves its traditional prominence in business schools. Ours are the big questions. But the discipline needs to redefine itself for a new reality in which profit and competitive advantage are no longer all that matter in business.

Richard Whittington is professor of strategy at Saïd Business School, University of Oxford. This article draws on a recent publication in Strategic Organization.

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