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Introduction to the special issue on strategic dynamics.

Article Excerpt
Introduction

The strategy field has long emphasized the importance of understanding the interactions or interdependence among firms' policy choices. However, for a long time (longer than strategy has been formally studied as a field in business) center stage has been occupied by the interactions among a firm's choices at a point in time. A partial description of the Business Policy course offered in 1917 at the Harvard Business School will supply an example:

An analysis of any business problem shows not only its relation to other problems in the same group, but also the intimate connection of groups. For example, not only is any problem of factory management related to other problems in the factory, and any problem of selling related to other problems in the sales department, but also the groups of problems are interdependent. Few problems in business are purely intradepartmental. (Harvard University 1917, pp. 42-43)

A focus on the cross-sectional links among choices crowded out early attempts--often from the periphery of the field--to emphasize the importance of also attending to the longitudinal linkages among choices. Thus, Selznick (1957), a sociologist, highlighted the commitments and distinctive competences characteristic of different organizations. And Chandler (1963, p. 13), a business historian, emphasized that

Strategy can be defined as the determination of the basic long term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.

Such ideas got picked up to some extent in Andrews's (1971) classic textbook statement of strategy, which noted the importance of aspects of firm behavior that are "enduring and unchanging over relatively long periods of time." But the extent of dynamization was limited in the sense that Andrews posed the problem of strategy as one of relating fixed strengths and weaknesses to market opportunities in a uniquely valuable way, i.e., focused on firms making their decisions in the operational short run.

Practice supplied more stimulus to adding the time dimension to strategy. Perhaps the most obvious manifestation was the diffusion, in the early 1980s, of techniques for value-based management that connected measures of competitive positioning to shareholder value using spreadsheet models of discounted cash flows. It quickly became clear that such valuations were very sensitive to dynamic considerations that went beyond the discount rate applied: the length of the time horizon over which positive spreads could be sustained on the assets in place, and the reinvestment opportunities or growth options afforded by a strategy.

This work, and the ongoing revolution in industrial organization (IO) economics in applying game theory to the study of strategic commitments (more on this below) prompted the first contributions to strategy with a fully dynamic flavor, e.g., Ghemawat's (1986) taxonomies of barriers to imitation, which focused on the possibilities for sustaining superior returns when one allows for long-run investments by competitors as well as short-run operating decisions. (1) Early empirical work also indicated that sustainability was limited, i.e., that a focus on competitive position was incomplete.

Since the second half of the 1980s, this trickle of interest in dynamic issues has turned into a flood. Important contributions with an explicitly dynamic flavor, to cite just a few, include work on dynamic capabilities (which dynamizes the evolution of capabilities instead of treating them as fixed factors), on options-based strategy, and on patterns in industry evolution. Much has been learned from this work. However, from the perspective of the strategy department of Management Science, much of this work is relatively weak on the theoretical underpinnings and the formal account of processes underlying observed empirical phenomena toward which the department is strongly biased.

But dynamics is precisely one of those areas in strategy where formalization is needed the most. In economics, Arrow (1968) pointed out that in the absence of the kind of irreversibility/intertemporal linkages implied by time's arrow, decisions--even resource-allocation decisions of the sort focused on by Chandler--could be made entirely "independent of future developments in technology, demand, or anything else" (p. 3). Such myopia strains common sense, suggesting that something essential is lacking if we ignore dynamics. The same point has been made in other social sciences (see, for example, Turchin 2003, p. 3). Mathematical models are particularly important in the study of dynamics, because dynamic phenomena are typically characterized by nonlinear feedbacks, often acting with various time lags. Informal verbal models may be adequate for generating predictions in cases where assumed mechanisms act in a linear and additive fashion (as in trend extrapolation), but they can be very misleading when we deal with a system characterized by nonlinearities and lags.

The one area in which significant formalization has been attempted is the enormous amount of work in noncooperative game theory. But for noncooperative game theory to be usefully applied to strategy requires important informational and structural assumptions. First, one needs to clearly specify the rules of the game, limiting the range of situations considered and restricting the generality of the findings. Second, models without simplifying assumptions on demand and cost functions and competitive interactions become hardly tractable even without any explicit dynamic content. Finally, the rationality requirements and common knowledge assumptions imposed on the players of the game are at times unreasonable. As a result, the game-theoretic revolution has not had an enormous impact on the applied field of business strategy--despite some obvious affinities between business-strategic concerns and game-theoretic contributions (Caves 1984). The mismatch can be explained by the focus of economics and noncooperative game theory on the average behaviour of firms that--for simplicity--is often assumed to be symmetric, while strategy exactly cherishes asymmetry and heterogeneity in decision making. Nevertheless, interest of...

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