As we know the field of strategic management focuses aroundchoices made in regards to the direction management wish to take theirrespected companies.
We can see from one of the definitions provided to usduring the studying of this subject that strategy is “…the creation of a uniqueand valuable position, involving a different set of activities” (Barney &Hesterly, 2006). This definition shows us that top management will use manytheories and frameworks to assist them to create a “unique and valuableposition” for their company. Due to the importance of these decisions andseverity of their outcomes it is understood that the subject of strategicmanagement is interdisciplinary. As a base to this essay, I shall be usingRichard Whittington’s four generic approaches to strategy to be able to provideproof that an insight to economics, psychology and sociology is indeed requiredto perform a complete analysis of this field. When concluding this essay I shallgive my analysis and conclusive opinion on how best to use these threedisciplines in strategy.Economic theory and practice has been vital in the developmentof strategic management, most evidently in the development of the “classicalapproach to strategy” (Whittington, 2001: 33-37).
This approach came to fruitionin the 1960s, with the writings of A. Chandler (1962), Igor Ansoff (1965) andA. Sloan (1963), but the idea of this approach dates back its origins to 18thcentury Scotland and even the militaristic ideals of Ancient Greece. Thesethree writers established the key basis of this approach to be profit maximisation.
A. Sloan commented on the importance of profit in his biography “My years withgeneral motors” which became known as the classical profit-oriented goal of strategy,stating that “the strategic aim of a business is to earn a return on capital,and if in any particular case the return in the long run is not satisfactory,the deficiency should be corrected or the activity abandoned”. (1963: 49)The prominence of economics emerged again due the 1970s, duea number of factors effecting markets, most noticeably due to the oil priceshock. Rising oil prices, inflation and the worsening of the global economycaused many academics and managers to doubt the classical approach to long termplanning (Mintzberg 1994). The Evolutionary approach (2002: 37-41) incorporates thethree disciplines of economics, psychology and sociology while also contrastingto the Classical approach by placing less confidence in the managers ability tosecure profit maximisation.
Bruce Henderson founder of BCG states that “classiceconomy theories of competition are so simplistic and sterile that they havebeen less contributions to understanding than obstacles.(1989 :143) andfurthers his negative opinion of the Classical approach by stating that “Darwinis probably a better guide to business competitions than economists are”. Inreality, many economists had reached an almost identical conclusion beforeBruce Henderson. R.C. Hall and Hitch’s (1939) simple field study had uncoveredthat business practices were far from what was deemed to be prescribed by therational economic man; not only did managers fail to set their output at the theoreticallyprofit maximising level where marginal costs exactly equal marginal revenues,but they also had no idea of what these costs and revenues were. Economists thereforeallowed the competitive markets to weed out the weak.
We see glimpses of psychology in this strategic approach,Whittington gives a more in-depth insight into the managers and employees of acompany from a more psychological perspective. “The Behavioural theory of thefirm” (Cyert and March 1963) states that the firm is made up of a coalition of participantsrather than a single entity. Rather than having one single goal, the firm nowhas several goals, which each group of participants will set for themselves. Meaningthat the firm will satisfy rather than maximise. Due to the fact that there isno one single goal, problems arise in the form of bounded rationality (H. Simon1982).
This means that the managers and employees of the firm must make decisionsunder three unavoidable constraints. Firstly, the information availableregarding possible outcomes and their risks are limited or are unreliable.Secondly, the human mind only has the capacity to evaluate and process theinformation that is available and finally, decisions have to be made as soon aspossible. Therefore even individuals who intend to make rational choices arebound to make satisficing (rather than maximizing or optimizing) choices incomplex situations. These illogical decisions known as personal biases are referredto as cognitive biases in Mintzberg’s and Lampel’s (1999: 23) “cognitiveschool.”Aspects of psychology can also be seen intertwining economicaspects in the Evolutionary approach when analysing Oliver Williamson’s (1979)Transaction cost framework.
This framework examines the relative costs andbenefits of managing activities internally or externally. The purpose of thisframework is to give the firm an understanding about bringing other activitiesinto the organisation and understanding the costs associated with them i.e.bounded rationality and opportunism. If these costs are lower inside the firmthan they would be by relying on the marketplace than they should keep theactivities within the organisation. Relying on subcontractors, who may bewilling to take advantage of the firm over time can add to long term costs whichshould not be underestimated.
A prime example of this is Boeing’s 787 “Dreamliner”which suffered from many malfunctions due to poor quality components are comingfrom subcontractors. Boeing’s engineers have stated that the parts which weresupplied from subcontractors were “cheap, plastic and prone to failure.” Thisis due to “cognitive bias” as a senior engineer stated that “The suppliermanagement organization (at Boeing) didn’t have diddly-squat in terms ofengineering capability when they sourced all that work,” (Seattle Times 2013).This had major implications for the company and its reputation.