«PROACTIVE ENVIRONMENTAL STRATEGIES IN SMALL BUSINESSES: RESOURCES, INSTITUTIONS AND DYNAMIC CAPABILITIES Jan Lepoutre Promotor: Prof. Dr. Aimé Heene ...»
The role of strategy in all this is a much debated topic within Population Ecology. An important notion for population ecologists is “structural inertia” (Hannan & Freeman, 1984).
Hannan and Freeman take the premise that “individual organizations are subject to strong inertial forces, that is, that they seldom succeeded in making radical changes in strategy and structure in the face of environmental threats” (1984: 149). The possibilities to engage in radical changes are small because of “sunk costs in plant, equipment and personnel, the dynamics of political coalitions and the tendency for precedents to become normative standards (…) legal and other barriers to entry and exit from realms of activity” (Hannan & Freeman, 1984: 149). Organizational survival is thus entirely the result of environmental selection processes, which are hard to adapt to given the structural inertia of many organizations. Taken as such, strategy is a completely irrelevant discipline, given that organizational survival is “largely a matter of luck” (Kaufman, 1985).
2.2.2. Inside-Out Perspectives of Strategic Management Contrasting with the focus of the aforementioned outside-in perspectives, are the inside-out perspectives of strategic management. Instead of focusing on the external environment as the source of performance, these latter perspectives emphasize features internal to the firm in explaining organizational performance. Interestingly, the focus here is on exploiting the heterogeneity of firms and its opportunities, drawing on concepts of “comparative advantage”, “learning” and “rejuvenation”.
188.8.131.52. Upper echelon theory The central theme in the upper echelon theory is that “organizational outcomes – both strategies and effectiveness – are viewed as reflections of the values and cognitive biases of powerful actors in the organization” (Hambrick & Mason, 1984: 193). The way in which the environment is perceived by the firm’s decision makers and how they act upon their insights are considered more important than the environment itself. Especially, the complexity, ambiguity and the information overload that decision-makers get from their environment makes managers guide their organizations based on their personal frames of reference, experience in different functions and careers, education, socioeconomic roots and other personal characteristics (March & Simon, 1958). As such, the upper echelon theory resonates with the findings of behavioral decision-making theories that individuals are constrained by their “bounded rationality” (Simon, 1982): decision-makers are limited in the amount of information they can process in complex settings and therefore make strategic choices based on their cognitions and values. As a result, organizations are a reflection of their top managers
(Hambrick & Mason, 1984), and organizational competition becomes a competition between the sensemaking processes of their decision-makers (Daft & Weick, 1984). In this perspective, upper echelon theory and its associated theories of strategic leadership (Mintzberg, 1973; Kotter, 1982) and strategic choice (Child, 1972) have laid bare the necessity of strategy to incorporate a “missionary zeal”, to infuse the organization with meaning and direction which will guide future decision-making processes based on the strategy.
Although upper echelon theory was part of the rediscovery of the importance of managerial “free will” (Bourgeois, 1984) and has reemphasized the role of strategic management in organizational performance, it has acknowledged the constraints that both organizational and environmental factors may nevertheless impose. An important concept in this context is “managerial discretion” (Hambrick & Finkelstein, 1987): the latitude of decision spectrum the manager has within the organization and is allowed in the environment, but also the degree to which the chief executive is able to develop and envision multiple courses of action. As such, managerial discretion has the potential to bridge the theoretical explanations of organizational performance as an interplay between the cognitive and personal characteristics of strategists and the context in which they operate.
184.108.40.206. The Resource-Based View Reacting to the somewhat deterministic role attributed to the industry structure in the “industrial organization economics” (I/O) and building on the work of Edith Penrose (1959), the “resource-based view” (RBV) redirected the strategist’s orientation to the inside of the organization and stressed the importance of an organization’s resources and capabilities in yielding competitive advantage (Wernerfelt, 1984; Dierickx & Cool, 1989; Barney, 1991;
Grant, 1991; Amit & Schoemaker, 1993; Peteraf, 1993). Thus, whereas the Resource Dependence Theory was influenced by the market failures stemming from power asymmetries, the basis of the Resource Based View lies with incomplete factor markets (Peteraf, 1993). Here, sustained superior performance draws from firm-specific resources and capabilities that are valuable, rare, inimitable and non-substitutable (Dierickx & Cool, 1989;
Barney, 1991; Grant, 1991; Amit & Schoemaker, 1993), the so called “VRIN”-conditions (Eisenhardt & Martin, 2000).
In contrast to assumption in the “industrial organization economics” literature that resources are distributed homogenously among firms, resources and capabilities are
distributed heterogeneously among firms. Resources include both tangible and intangible assets and capabilities that the organization uses to achieve its goals (Grant, 1991).
Capabilities are generally defined as “the firm’s capacity to deploy resources, usually in combination, using organizational processes, to effect a desired end” (Amit & Schoemaker, 1993: 35). The VRIN conditions are essentially met in the presence of incomplete factor markets (Peteraf, 1993), but also when the acquiescence of resources or capabilities is path dependent (e.g. tacit knowledge) (Dierickx & Cool, 1989).
Although the RBV is considered one of the most important theoretical frameworks in the strategic management literature, it has been criticized for its overly static description of strategy, its predominant focus on internal resources and capabilities and its tautologic nature (Priem & Butler, 2001; Powell, 2001). The latter criticism becomes clear that, in a way, the resource-based view suggests that the source of competitive advantage can be brought back to those resources and capabilities that give the firm competitive advantages. From a theoretical point of view, such a statement makes the theory redundant, since it results in analytic propositions, i.e. statements that cannot be falsified.
The role of strategy here is not in seeking monopolistic rents through its positioning in the market and a deliberate restriction of output, but rather to look for Ricardian rents from its unique access to or possession of resources (Grant, 1991; Peteraf, 1993; Priem & Butler, 2001): to identify the best use of the firm’s resources and capabilities so that they generate a return that is superior relative to the returns other firms may get from them.
220.127.116.11. Dynamic capabilities Emerging from the RBV and tackling the criticism that it was too static in its explanations about performance (Priem & Butler, 2001), the “dynamic capabilities” approach conveys a more dynamic approach to the effect of internal characteristics of the organization on sustained competitive advantage: “overall, dynamic capabilities are best conceptualized as tools that manipulate resource configurations” (Eisenhardt & Martin, 2000: 1118). Since the RBV did not explain where resources and capabilities come from, nor explained that they can become obsolete due to changes in the context of an organization (Priem & Butler, 2001), the dynamic capabilities literature suggested that there was more than just the resources to explain superior performance (Teece, Pisano, & Shuen, 1997; Eisenhardt & Martin, 2000). Whereas the dynamic capabilities perspective agrees that the resource configuration of a firm ultimately determines its performance (Eisenhardt & Martin, 2000), dynamic capabilities are needed to adjust this resource base in the event of changing circumstances. Strategy then
becomes constant process of altering the resource base “sooner, more astutely, or more fortuitously than the competition to create resource configurations that have that [competitive] advantage”. As such, sustained superior performance is appropriated to the Schumpeterian rents that come with the constant renewal of the firm’s practices to cope with the changes in the environment (Teece et al., 1997; Eisenhardt & Martin, 2000; Powell, 2001).
The dynamic capabilities perspective thus builds on the emphasis in the RBV on organizational capabilities as the explanatory factor for sustained superior performance, but refines the theory by replacing static capabilities with more dynamic versions of capabilities.
In contrast to the RBV, however, which maintains that superior performance comes from heterogeneous resources configurations across firms, dynamic capabilities have commonalities across firms. Although they may be manifested differently depending on the particular circumstances the firm is in, the same dynamic capability may be present in different firms. As such, the dynamic capabilities perspective presents a first step in combining the interaction between the environment outside the firm and the configuration inside the firm in explaining organizational performance. More elaborated perspectives of this kind, however, are the focus of the next subsections.
2.2.3. Synthesizing Perspectives of Strategic Management Given that some of the aforementioned theories on strategy assume quite different sources of sustained superior performance, a number of scholars have attempted to reconcile these differences. The product of these efforts are interesting overarching theoretical frameworks that offer more comprehensive worldviews, where one theory is used to inspire for solutions on the inconsistencies of the other.
18.104.22.168. Grass-roots models of strategy formation A number of descriptive accounts of organizational strategy have been developed over time that reject a strategy as the sole result of a deliberate and rational process (Mintzberg, 1978; Mintzberg & Mchugh, 1985). Whereas the majority of the inquiry and theory-building in both inside-out and outside-in strategy research has tended to follow a normative and causal logic, other organizational theorists have given more descriptive accounts of strategy (Mintzberg, 1978; Sarasvathy, 2001; Farjoun, 2002). These authors mostly draw Mintzberg’s work in the late 1970s and early 1980s, in which he rejected the idea that strategies are the result of a deliberate process, but emerge as an interplay between a planning process and its
testing in the environment instead (Mintzberg, 1978). Since the context of most organizations is in permanent flux, and the inability of people to process all the information that it receives (Simon, 1982), strategies will often be infused by unforeseen influences and processes. As such, realized strategies are the result of both intended and emergent strategies. Yet Mintzberg and McHugh were not entirely pessimistic about the way this influenced the job of the
“The inability to dictate fundamental strategic direction – establish target markets, select products or services – does not, of course, preclude management from trying to influence it. Managers can, for example seek to define broad boundaries around what is done (…). They can also exercise their influence on the emerging patterns, encouraging or discouraging the ones in which they find promise or danger.” (Mintzberg & Mchugh, 1985: 192-193).
Along those lines, a number of scholars have progressively embedded these less deliberate types of strategy processes in their theoretical frameworks (Sarasvathy, 2001; Farjoun, 2002).