Strategic Management

Session - 2
 What is a Strategy
• Strategy is an organisations plan for the
future. Its a way of establishing the long range
goals and action plans for implementation.

• A strategy is a pattern in a stream of decision

(as opposed to a random series of
behaviours).
 Perfect Competition
When studying idealized perfect competition (when the
invisible hand theorem applies), these assumptions are
made
1) There are many buyers and sellers, each with a “small”
share of the total market size.
2) The product of each firm is homogeneous.
3) Buyers and sellers have perfect information.
4) There is free entry and exit in markets.
5) There are no transactions costs.
 Reality
Though they facilitate analysis, each of the
above assumptions can be challenged on how it
reflects reality.

Violation of 5) is frequent. It is often caused by

violations of 2), 3), or 4), but may be due to other
reasons.
 Transaction Cost
• Ronald Coase (1937) posed two Nobel-prize
puzzles :
– Why do any firms emerge in a market economy?
– Why not just One Big Firm for whole economy?
 Transaction Costs
Transaction costs are costs associated with acquiring an
input that are in excess of the amount paid to the input
supplier (Coase).

Obvious examples: Insurance, freight, damage, own time.

Other important examples: cost of searching for a supplier

willing to sell a specific input, negotiations costs incl. legal
costs, costs of maintaining assets required to engage in the
transactions.
 At Arm’s Length
Defn: An arm’s length transaction occurs when
autonomous parties exchange goods or services with no
explicit or implicit agreement that the relationship will
continue into the future.

Examples: Purchasing at BigBazar, staying at Best

Western for a night.
 Contracts
A contract is a legal agreement which defines the
conditions of an exchange or series of exchanges.

Examples: Bank loan, futures contract, etc.

 Making Contracts Work
• For contracts to work well, the Judiciary must not
be either corrupt or incompetent.
• To the extent that contracts are limited by law,
the law should be geared (at least partly) to
promote economic efficiency.
 Incomplete Contracts
Complete contracts eliminate the possibility of
holdup.
So why are contracts incomplete?
 Why Incompleteness?
To complete it, parties must
• be able to identify all relevant possibilities during the duration,
then
• agree on what action to take, and by whom, in each possible
scenario, then
• be able to outline what constitutes satisfactory performance,
and
• measure that performance, and
• enforce the contract.
Crime organizations have very effective informal
contracts.
 Incompleteness: Examples
A fruit grower contracts to deliver x apples/year at
$y/box for five years.
Then the MCF bans Calcium Arsonate, a very important
insecticide.
Is it reasonable to expect to be able to foresee all such
events?
If renegotiations do not raise the price, the supplier may
go bankrupt.
 Problems with Achieving
Completeness
• Bounded rationality: The world is complex and
stochastic. Parties cannot identify all
contingencies.
• What is deemed satisfactory? Measurement
issues.
• Asymmetric information: Not all parties have
equal access to information;
– hidden action problems
– hidden information problems
 Contracting Scheme

Source: Williamson, 1999

 Main Contents
Six key moves of Competence
• Human Actors
 Bounded rationality
 Myopia rather than foresighted
• Unit of Analysis
 Routine is the basic unit analysis
 Three routines(Nelson and Winter 1982): Short run; investment;
long-run
• Describing the Firm
 Reject that firm is a production function
 Emphasizes management and organization features
• Purposes Served
 The distinctive competence of the firm resides in making better use of its
resources
 To operationalize, first address: Which firms are more and which are less
competent in deploying their institutional capabilities to protect their
knowledge?
• Empirical
 Much of the competence perspective entails ex post rationalizations for
success and has been remiss in predictive respects.
 Williamson 1996: view transaction cost economics as feeding into the
competence perspective in much the same way as organization theory is
grist for the study of governance
• Efficiency Criterion
 Claim that competence deals with dynamic efficiency --- essential about
learning and innovation
 But criteria about how to judge dynamic efficiency has never been posted
 Deliberate and Emergent
Strategies
• What we are looking at is the difference
between leaders intentions and what they
actually did.
 What’s the difference?
• By comparing intended strategy with
realised strategy it is possible to
differentiate:
– deliberate strategy – realised as intended
strategy - from
– emergent strategy – patterns of consistencies
realised in the absence of intention.

– The difference being intention.

 Types of strategy

Intended Deliberate Realised

Strategy Strategy Strategy

Unrealised Emergent
Strategy Strategy
Pure Intended Pure Emergent

To be deliberate: To be emergent:

Precise and clear The complete absence

intentions, before of intention. There
action is taken. must be no strategy,
not just an unrealised
Shared vision, common strategy.
to all actors.

Outcome must be
realised as intended.
Most organisations are somewhere on the continuum.
 Planned Strategy

Leader at the centre, precise intentions exist,

formulated and articulated by the centre.

High level of control and direction.

The environment must be stable and predictable

– usually based on industry standard
programme.

Long in gestation and then adhered to.

 The Entrepreneurial
Strategy

Vision

• One individual, the person in control. Has a strong view of the

organisations position in the world.

• May articulate the vision, may not, but can impose their vision
on others. Intentions may exist, but may be difficult to identify.

• Market must be favourable, probably niche and safe. Might

see this pattern in larger organisation in crisis, where people
will follow the leader.
 The Entrepreneurial
Strategy
Vision may have planned as
well as emergent
characteristics. Vision 1
It provides a general sense
of direction, which may shift
as the entrepreneur spots a
new opportunity.

Adaptability, control,
flexibility – providing that Vision 2
the individual is willing to
learn.

Articulated strategy locks it

in place – which is why it Planned strategy often follow
may not be expressed entrepreneurial strategies.
clearly.
 Ideological Strategy

• A collective vision. While in planned and

entrepreneurial strategy emerge from one strong
person, these are embraced by all members.

• People will resist changing the strategy, but may look

for different interpretations.

• They are highly deliberate.

 Umbrella Strategy

• A more relaxed approach, where control may be less tight.

• Guidelines are set and boundaries clear, but people have

room to manoeuvre.

• From the perspective of the leader, strategies are allowed

to emerge, within the boundaries. This might be seen as
deliberately emergent.

• Professional organizations may adopt this approach.

 Process Strategy
Process

content

Influence is indirect, the process is guided, but the content

emergent. Centrally leadership defines the process, but lets
people emerge within it.
 Why have one?
• Encourages entrepreneurs to assess and articulate a
vision.
• Ensures that you are auditing the environment and
the organisations capabilities and resources.
• May highlight new possibilities and opportunities.
• Provides organisational focus.
• Guide the structure formation as the business
grows.
• Guides decision making.
• Provides a starting point to set objectives.
• Acts as a common language.