Strategic management and Organization Theory: A Merging of Disciplines

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Dr. John Psarouthakis, Executive Editor,
The Business Thinker and co-author of Dynamic Management of  Growth Firms, University of Michigan Press.

Apart from experience in the field of entrepreneurship, here we straddle two disciplines: strategic management and organization theory. Until the late 1980s, the fields of strategic management and organization theory appeared quite distinct. Though both are interdisciplinary outgrowths of other disciplines, strategic management was more heavily influenced by the fields of marketing and finance, whereas organization theory was an outgrowth of social psychology and sociology. But it is logical and inevitable that researchers from each field would begin to pay attention to one another while searching for common truths. Both attempt to predict a common set of dependent variables—organizational success and effectiveness.

Strategic management has shifted since the 1950s from a focus on long-term corporate resource planning toward a focus on competitive advantage. Through the 1980s, much of strategic management research looks outward from the organization for competitive advantage: A company’s success depends upon its choice of industry, markets, and products. The three generic competitive strategies —cost leadership, differentiation, and focus— outlined by Michael Porter in his seminal work, Competitive Strategy each define an aspect of a company’s product advantage vis-a-vis its competitors. Led by Prahalad and Hamel, in the late 1980s and early 1990s, strategic management shifts again to look beyond the product/market mix toward the underlying core competencies, sets of skills, or capabilities that make new product development and process improvements possible. Rather than build strategy exclusively around products or customers, Prahalad and Hamel urge companies to build around a central set of corporate skills. Although their essays focus primarily on technical capabilities underlying a stream of products or services in large manufacturing corporations, other authors have subsequently picked up on the core competency theme, identifying an ever-broadening set of underlying capabilities thought to provide competitive advantage. Ulrich and Lake identify four sets of capabilities—financial, marketing, technological and organizational learning—the last referring to an organization’s ability to engage employees in problem-solving that helps it change. In 1994, Pfeffer identifies a trend in strategic orientation away from product and process technology, protected and regulated markets, and access to financial resources, toward organizational capabilities—in particular, how the work force is managed.

As a sub discipline of sociology, the field of organization theory evolved in a fairly isolated manner from the field of strategic management, with little crossover between the two fields until the late 1980s or early 1990s. To illustrate the subtle shift taking place at the time, consider the changes made to the popular organization-theory text, Daft’s Organization Theory and Design, between its 1992 and 1995 edition. In the 1992 edition, the chapter on organization effectiveness makes no mention of strategy. In the 1995 edition, Daft combines strategic management and organization effectiveness in a newly titled chapter reflecting this change, and includes a new chapter on organizational learning that further expands on strategic management themes. In the book Managing the Growing Firm, by Loraine Hendrickson and John Psarouthakis, originally published in 1992, is also representative of an effort to integrate organization theory and strategic management.

Open-systems theory is one of the most important theories to cross over from organization theory into the general management literature. Though open-systems theory has long been a part of the body of knowledge in organization theory, popular interest in it has only recently reemerged. Apart from our book, several widely-read management books published in the early 1990s brought renewed attention to that perspective. Senge’s book, The Fifth Discipline, based extensively on open-systems theory principles, highlights the importance to managers of mental models such as open-systems theory to foster more creative problem-solving. He points out that by breaking problems into smaller parts, we often lose sight of the whole organization, advocating instead a total-system view of the organization. The books, including The Boundary-less Organization and The Death of Competition both emphasize the importance of viewing an organization as a social system, that, in turn, is part of a larger business ecosystem. Another popular book, A Simpler Way, takes a somewhat more anthropomorphic view of organizations as living systems. Explaining system dynamics in more physical terms, Goldstein’s The Unshackled Organization elaborates on the internal qualities of the organization as a nonlinear system: Its capacity for synergy—the whole being greater than the sum of the parts; its capacity for self-organization—spontaneous and radical transformation of the system; the multidirectional and mutual interaction among elements; and the growth potential of the system as a result of a far-from-equilibrium process—the tendency of nonlinear systems to change, rather than to seek equilibrium.

In sum, this work is influenced by a convergence between strategic management and organization theory. The view from strategic management that visioning, direction-setting, and the identification of core competencies and competitive advantage are useful in building the effective organization. Also there is benefit from the long-standing body of research on open-systems theory, helping us to identify more clearly what some of those internal core capabilities ought to be.

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