The Systemic Strategy Process in Dynamic Markets

Table of contents

Table of figures

Table of abbreviations

1 Introduction
1.1 Background and objectives
1.2 Outline and structure of the paper

2 The traditional strategy process
2.1 Paradigms of the traditional strategy process
2.2 Deficiencies of the traditional strategy process

3 The systemic strategy process
3.1 The systemic strategy paradigm: complexity theory of strategy
3.2 General characteristics of the systemic strategy process

4 Stages of a systemic strategy process
4.1 Business ecosystem interpretation
4.2 Business model review
4.3 Strategy options review
4.4 Strategy implementation
4.5 Strategy performance measurement

5 Evaluation of the systemic strategy process

6 Conclusion and implications for research and management

References

Table of figures

Illustration 1: The traditional strategy process

Illustration 2: The systemic strategy process

Table of abbreviations

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1 Introduction

1.1 Background and objectives

Today’s business environment is becoming more complex and unpredictable (D’Aveni, 1994). The economy is becoming intertwined and actions of one organisation can have a significant impact on other organisations, on the industry as a whole and on the organisation itself. Thus the outcomes of an organisation’s strategic behaviour can hardly be foreseen.

Traditionally strategy creation has been built upon economic drivers, past experiences, and behavioural patterns, which all do not have great predictive value in today’s complex economic systems (Voelpel, Leibold & Tekie, 2003). Therefore it is not possible for organisations to generate strategy on a premeditated and deliberate basis of the company and its environment. Environmental and industry changes constantly challenge the validity of existing strategies.

This paper is picking up a combination of three perspectives on strategy that are trying to perform a shift of paradigm towards a new way of strategic thinking. This combination has been termed the complexity theory of strategy by Jason Davis and Kathleen Eisenhardt (2004). This theory is a combination of the dynamic capabilities view which recommends using simple capabilities (Eisenhardt & Sull, 2001) that enable quick, flexible, and creative improvisation, combined with systemic thinking, which perceives organisations and the economy as systems (Gharajedaghi, 1999) and Austrian economics (Kirzner, 1997; Shane, 2000), which perceives markets as a rapid flow of heterogeneous and surprising opportunities that need to be discovered by managers. This way of thinking has proposed several ideas and tools to overcome the shortcomings of traditional strategic thinking. The question this paper is aiming to answer is how systemic elements have to be combined to design a systemic strategy process. This strategy process needs to meet the requirements of today’s dynamic markets and environments in a better way than the traditional strategy process.

1.2 Outline and structure of the paper

This paper is composed of six chapters. Subsequent to this introduction the second chapter will present the traditional strategy process with its underlying strategic paradigms and illustrate the deficiencies this process shows in dynamic markets. Considering these deficiencies the strategic paradigm of the complexity theory of strategy will be introduced in the third chapter. This new paradigm provides the theoretical underpinning for a systemic strategy process, whose general characteristics will be described in the second part of the third chapter. The fourth chapter is devoted to the course of the systemic strategy process with its particular stages – namely business ecosystem interpretation, business model review, strategy options review, strategy implementation, and strategy performance measurement. In the following chapter differences of the new systemic strategy process compared to the traditional strategy process will be pointed out to show whether it is apt to compensate the deficiencies of the traditional strategy process in dynamic markets. The closing chapter presents a summary of the key findings of the paper and the corresponding implications for researchers and managers

2 The traditional strategy process

2.1 Paradigms of the traditional strategy process

There are two approaches to strategy that have been dominating strategic management processes over the past decades. The first approach is strategic positioning (SP), which is suggesting organisations to strive for a unique fit with the corporate environment. It is mainly concerned with choosing industries and markets, and positioning within them in order to gain a sustainable competitive advantage and superior performance (Porter, 1980; 1990). This approach has proved especially useful in stable markets with certain industry conditions where defensible competitive positions can be clearly recognised and there is sufficient time to build such positions and exploit them (Pisano, 1994). The second approach, the resource-based view of the firm (RBV), centres on how resources can be leveraged effectively to build a sustainable competitive advantage (Barney, 1991a; Grant, 1991). It is supposed that the sources of competitive advantage can be found within the firm and that they are valuable, rare, inimitable and non-substitutable (Peteraf, 1993; Barney, 1991b) enabling superior performance through a strategic fit both in current markets and – via leverage – into new ones (Amit & Shoemaker, 1993). The RBV has proved especially useful in incrementally changing markets.

The consequence of these two approaches is a mechanistic strategy process divided into four distinct stages: environmental analysis, strategy choice, strategy implementation and strategic change (Bea & Haas, 2001), that are depicted in the following illustration.

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Illustration 1: The traditional strategy process, Source: own adaptation according to Bea & Haas, 2001

During the internal and external environmental analysis existing strategies, key success factors, core competencies, resources and capabilities, competitors and environmental forces are examined. Subsequently, strategists determine which strategic options are available to them and decide for one option. On this basis a business vision, mission, goals, values and long-term objectives are elaborated. The selected strategic options are then translated into a number of concrete activities and implemented. Short-term objectives and functional tactics are set, functions are designated, and structures and networks are established. The documented strategy is then periodically reviewed; results are compared and changed if required. The result of this process is mainly one strategy, which is then adopted for the functional, the business, the corporate, and the network level of an enterprise. It assumes that one strategy fits the entire business environment of an organisation and every hierarchical level the same way. Because the process takes place only once and basically progresses in a linear way through its four distinct steps, a strategy remains active once it is implemented and is only changed when efficiency needs to be improved. But a review of the existing strategy and business model does not take place. Only by applying reengineering and restructuring techniques inefficiencies can be abolished and profitability maximized. By this means companies keep applying old solutions to new problems.

2.2 Deficiencies of the traditional strategy process

Strategic positioning and resource-based view are very well suited to understand how competitive advantage is achieved through positioning and leveraging strategic logics in static markets. But it has been shown by Rindova & Kotha (2001) as well as Siggelkow (2001) that neither leveraging resources nor building a defensible industry position is always sufficient to ensure success. The true nature of strategic thinking is now emerging as more holistic and especially dynamic rather than analytical and rational (Voelpel, Leibold & Tekie, 2003). In increasingly dynamic markets this traditional view of the strategy process is now being seriously challenged due to the realities of the global knowledge economy and its major forces. According to Marius Leibold, Gilbert Probst and Michael Gibbert (2002) these major forces are:

a shift from information to knowledge,

a shift from bureaucracies to networks,

a shift from development to learning,

a shift from local and national to transnational and global,

a shift from competitive to collaborative thinking, and

a shift from single- and multi-connective relationships to bio-corporate systems.

These include the critical significance of timing for strategic action (Gersick, 1991; Zott, 2003), the necessity for managing complex situations (Brown & Eisenhardt, 1997), a loss of predictability, and enhanced attention for improvisation (Weick, 1998; Miner, Bassoff & Moorman, 2001). These considerations are particularly relevant in highly dynamic markets, where superior performance is often a result of diverse and surprising opportunities that entail a series of competitive advantages of unanticipated value and duration (Rindova & Kotha, 2001). In this context, the logic of strategic positioning and the RBV have certain deficiencies, which are transferred to a strategic management process and are inadequate in a discontinuously shifting, ambiguous, and unpredictable industry structure that moves markets towards higher dynamism and complexity (D’Aveni, 1994). They focus on (Leibold, Probst & Gibbert, 2002):

tangible assets, such as labour, land and financial capital;

hierarchical organisational designs and authority;

passive orientation towards a trainer;

regional or national competitive environments;

competitive strategy thinking;

uni- or bilateral relationships with other business partners.

Despite the value of these two approaches and the traditional strategy process they might be less applicable in highly dynamic markets (Eisenhardt & Martin, 2000; D’Aveni, 1994; Chakravarthy, 1997; Eisenhardt & Brown, 1999), where organisations with significant resources and/or sustainable competitive positions will loose to more dynamic competitors (Hill & Rothaermel, 2003).

Jason Davis and Kathleen Eisenhardt (2004) describe the peculiarities of dynamic markets in terms of four distinct dimensions. These are velocity, complexity, ambiguity and entropy. The velocity of a market describes its pace of opportunity flow, which has been found to be a key factor affecting strategic decision making and firm performance (Eisenhardt, 1989; Hickson et al., 1986). The complexity of a market expresses the difficulty of capturing opportunities. Ambiguity describes how difficult key features of a market can be understood and entropy expresses the unpredictability in the features of opportunity flow over time. Higher entropy conditions characterise a market with random configuration of opportunity flow. The higher these four conditions the more dynamic a market is.

It can be derived from these conditions that an organisation in dynamic markets needs to be able to:

adapt to the pace of opportunity flow,

be highly adaptable to capture complex opportunities,

understand the key features of its market, and

develop a high variety to respond to a multitude of different opportunities.

Due to its prescribed features the traditional strategy process is hardly able to meet these requirements. It is a linear process which is repeatedly conducted within a fixed time frame – usually once a year. It looks at certain fixed periods of time in a short-term, mid-term and long-term examination and does not implicate the systemic interactions that follow out of its strategic behaviour. Due to the centralisation of the process the variety that can be reached with the traditional strategy process is only as high as the input variety. The need for a high input variety makes the process significantly more complex by at the same time failing to create a high output variety

3 The systemic strategy process

3.1 The systemic strategy paradigm: complexity theory of strategy

In her recent article Jason Davis and Kathleen Eisenhardt proposed a new systemic strategic paradigm, which they term complexity theory of strategy (Davis & Eisenhardt, 2004). This theory is a further development of the dynamic capabilities approach (Teece, Pisano & Shuen, 1997) aiming to expand it towards a new strategic paradigm. This approach addresses the systemic dynamism of organisations and their environment and puts an emphasis on them as a whole. This perspective has become known as systemic, as opposed to systematic (Leibold, Probst & Gibbert, 2002). The complexity theory of strategy furthermore perceives markets as a rapid flow of heterogeneous and surprising opportunities that need to be discovered by managers (Kirzner, 1997; Shane, 2000). The view utilizes complexity theory to describe how “simple” systems can produce complex and adaptive responses to environmental change (Anderson, 1999; Gell-Mann, 1994; Kauffmann, 1993). It recommends using simple capabilities that enable quick, flexible, and creative improvisation to execute attractive but perishable market opportunities (Eisenhardt & Martin, 2000; Zott, 2003). Accepting this paradigm leads to a fundamental shift for the strategy process. The next section will describe the general characteristics that a systemic strategy process according to the strategic paradigm developed by Kathleen Eisenhardt will have to consider.

3.2 General characteristics of the systemic strategy process

The systemic strategy process is about envisioning opportunities and threats, strengths and weaknesses, and creating or shaping the future, for which sensemaking, imagination and judgement are more important than analysis and logic and where the four conditions that an organisation should meet in dynamic markets are considered. It is aiming at achieving a strategic advantage through a systemic or holistic view of an organisation and its environment.

One major characteristic is that it is not a temporarily limited linear process. Instead it is fuzzy, non-linear and on-going with the particular stages intertwined and not necessarily following one another. Strategies are formed incrementally through various forms of interaction and feedback, including inter-related processes and emergence. A constant review and re-evaluation of past findings serves by correcting potential inefficiencies and at inventing new and reinventing existing business models.

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