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Fundamentals of Strategic Management Theory

written by: Ksingh • edited by: Ginny Edwards • updated: 7/31/2010

Strategic management theory deals with resources and business relationships which gives a dynamic competitive edge to businesses operating in the current scenario. Continue reading.....

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    Business policies aim at the survival and success of business enterprises and strategic management theories are central to the formulation of such business policies. Nevertheless, such strategies are more empirical than theoretical because they have been formulated based on empirical studies. To that extent, it can be said that fundamental strategic management theories follow practical experiences and do not precede them. It can be defined as a bundle of dynamic unique resources and relationships, dynamic because any management has to constantly adjust and renew them to remain competitive in the chosen area of operations.Strategic Management Theories 

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    The Origin

    In the earlier years, the fundamental strategy theories were isolated from the discipline of Economics because of the positions held by micro economic theory pronouncers (neo-classical theorists) that a theory of the firm is not required for describing an actual behavior of the firm. With the advent of such management academicians, as Coase, Stigler, Porter etc., this notion has given way to the belief that economic concepts can describe business strategic fundamentals. This has further strengthened the contentions that such fundamentals are more empirical in nature which can be summarized to consist of the following:

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    The Components

    Consider variables that have multi-functional scope but not necessarily recurring. An example could be in the selection of the product market areas in which, say, firm X would compete and it would be non-recurring because firm Y, though it may possess similar characteristics as firm X in terms of its products, would choose strategies that are dissimilar to those of firm X. It may explicitly appear that both have similar characteristics but in reality they would act in dissimilar ways (strategies) because each one has its own bundle of resources, uniquely allocated and optimized. In other words, managements seek asymmetric competitive positions.

    Entrepreneurship and resource heterogeneity are central to such business strategies. Entrepreneurship, because, entrepreneurs are believed to possess special information, unique to their own enterprises in order to create profits and resource heterogeneity because without it there is little incentive for them to invest in risky methods of production to embed value in their products.

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    What Essential Concepts Strategic Management Theories Teach

    • Firms would decide to enter a market based on the functions of market growth rather than industry profitability.
    • Firms that do not possess imitable-skills would not enter into markets just because they offer high profitability.
    • Firms would choose related endeavors in which they have been hither to successful wherein they have demonstrated their special competencies in achieving success. However, the above would hold good only until the basis of success is defined by the same functions. Once it shifts to new functions, the very same firms which have been successful in the past may find themselves in a disadvantaged position vis-a-vis outside firms that may possess better skills relating to the new competence.
    • Profitability and growth would generally be correlated.

    It is the competitive environment and not the equilibrium that would drive the firms to seek innovations in growth. In fact, innovation can be seen as a core concept in any strategic management theory whether it is explicitly spelled out or not.

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    Conclusion

    From the foregoing it is clear that Strategic Management Theories fall in the category of "grounded theories", because they are actually the real world business practices that have gone major in their modern evolvement. Any student of business management studying management theory cannot do without reading the works of accomplished scholars as Schumpeter, Cohen, Spencer, Potter and Stigler to mention a handful among them.

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