Strategy in Practice
- In what ways does strategy differ in theory and practice?
- What are some of the main psychological and behavioural obstacles to effective strategic
decision-making? Is knowing about these obstacles helpful to managers?
- ‘Strategy as Practice’ scholars take issue with rational choice theory and the concept of
bounded rationality which has dominated thinking in strategic management. Explain
their criticisms and what alternative models exist
Introduction
There are vast amounts of strategic management literature, but its applicability is
questioned due to the strong assumptions it has that may no replicate in reality.
Strategy differs in theory and practice because, in the real world, agents have bounded
rationality, biases which lead to inertia and overoptimism and conflicting interest, all of
which strategy theory assumes away.
Sibony et al. (2017): What managers really need is not a longer list of “Thou shalt nots”
but a positive set of tools for designing a behaviourally informed decision architecture of
the firm.
o As such, strategy in practice is associated more with incremental changes,
reaction to problems.
o It also expresses itself through diligence practices and behavioural nudges
Unlike the theory, strategy as practice is descriptive for it simply explains what happens.
P1: Reason for theory not translating to practice: Bounded Rationality
Bounded rationality is the concept that, with limited available information, time and
cognitive ability organisational choices arise only in a limited contexts.
Cyert & March (2013): Cognitive limits mean that information is condensed and
summarised as it goes through the organisation which leads to individuals using implicit
mental methods to evaluate financial outcomes, rather than complex models.
This leads to cognitive Shortcuts (Heuristics) which dominate the decision-making
process and, as such, organisational behaviour is based on what Nelson & Winter (1982)
refer to as semiautomatic rules and routines
Baumeister et al (1998): Individuals faced with numerous choices often become
exhausted and mentally fatigued and are more likely to give up on their search for a
solution and so trivial responses can be automated/routinized to ration cognitive
engagement for more important decisions
BUT this does not mean they are less effective: Carroll & Harrison’s (1994) study showed
that less-efficient incumbents continue to dominate more efficient entrants 1/3 of the
time
The RBV/Positioning theories assume managers are fully-informed/rational so can make
optimal decisions which is not realistic. Effect of this is:
Unilever and Proctor & Gamble: consumer preference data became an inappropriately
significant source of reasoning for strategic decisions makers, who believed that
, whatever was successful in an experimental format would also be successful on the shelf
and resulted in a large number of failed products and incurred large costs for each firm.
P2: Reason for theory not translating to practice: biases leading to inertia
Ariely (2008): Systematic biases can lead us to be predictably irrational
Kahneman (2011): Most decisions are ‘System 1’ thinking which is
fast/automatic/subconscious
Ross & Staw (1993): individuals tend to irrationally lock themselves into losing situations
because of emotional, psychological, and financial commitments.
For example, decision-makers tend to make further decisions to justify their previous
choices and actions
There are different types of biases
Status Quo and Availability Bias: People tend to choose the default/pre-set option and
this leads to inertia
o Starbuck & Milliken (1988): Vigilance quickly dissipates with repeated success
o Stresses idea of Confirmation Bias where, when an individual has a hypothesis,
they subconsciously notice/collect evidence and information that supports their
hypothesis. If an individual’s beliefs are inconsistent with data, this is explained
away to fit with beliefs.
o Argyris (1977): Norms/routines inhibit double-loop learning
(challenging/changing the original goal)- Camouflaging of errors can become
normalised/routinised
o Gavetti & Rivkin (2005) Yet managers rarely realize that they’re reasoning by
analogy and so are unable to make use of insights that psychologists, cognitive
scientists, and political scientists have generated about the power and the pitfalls
of analogy. While reasoning by analogy may work, Gavetti & Rivkin (2005) say
that dangers arise when strategists draw an analogy on the basis of superficial
similarity, not deep causal traits.
Ford: In overhauling its supply chain, Ford looked at Dell’s key strategic
principle of “virtual integration” with its suppliers as a possible source for
an analogy. BUT, in PC business, prices of inputs decline by as much as 1%
per week—much, much faster than in the auto industry and so play a role
in Dell’s success formula so overlooking this underlying difference could
seriously undermine the usefulness of the analogy.
o Powell (2017): Managers prefer to invest in the capabilities that made them
successful initially, and organisational politics/cultural inertia make it hard to
invest less in current strengths
o Kahneman & Tversky (1974): judgements are based on representative heuristics
where predictions follow the closest pattern to previous patters, without paying
attention to the likelihood that the new event will follow the past patterns
o Strategic recalibration tends to be stimulated only by poor performance
o Whittington (2006: “practices are typically emergent from praxis”
- In what ways does strategy differ in theory and practice?
- What are some of the main psychological and behavioural obstacles to effective strategic
decision-making? Is knowing about these obstacles helpful to managers?
- ‘Strategy as Practice’ scholars take issue with rational choice theory and the concept of
bounded rationality which has dominated thinking in strategic management. Explain
their criticisms and what alternative models exist
Introduction
There are vast amounts of strategic management literature, but its applicability is
questioned due to the strong assumptions it has that may no replicate in reality.
Strategy differs in theory and practice because, in the real world, agents have bounded
rationality, biases which lead to inertia and overoptimism and conflicting interest, all of
which strategy theory assumes away.
Sibony et al. (2017): What managers really need is not a longer list of “Thou shalt nots”
but a positive set of tools for designing a behaviourally informed decision architecture of
the firm.
o As such, strategy in practice is associated more with incremental changes,
reaction to problems.
o It also expresses itself through diligence practices and behavioural nudges
Unlike the theory, strategy as practice is descriptive for it simply explains what happens.
P1: Reason for theory not translating to practice: Bounded Rationality
Bounded rationality is the concept that, with limited available information, time and
cognitive ability organisational choices arise only in a limited contexts.
Cyert & March (2013): Cognitive limits mean that information is condensed and
summarised as it goes through the organisation which leads to individuals using implicit
mental methods to evaluate financial outcomes, rather than complex models.
This leads to cognitive Shortcuts (Heuristics) which dominate the decision-making
process and, as such, organisational behaviour is based on what Nelson & Winter (1982)
refer to as semiautomatic rules and routines
Baumeister et al (1998): Individuals faced with numerous choices often become
exhausted and mentally fatigued and are more likely to give up on their search for a
solution and so trivial responses can be automated/routinized to ration cognitive
engagement for more important decisions
BUT this does not mean they are less effective: Carroll & Harrison’s (1994) study showed
that less-efficient incumbents continue to dominate more efficient entrants 1/3 of the
time
The RBV/Positioning theories assume managers are fully-informed/rational so can make
optimal decisions which is not realistic. Effect of this is:
Unilever and Proctor & Gamble: consumer preference data became an inappropriately
significant source of reasoning for strategic decisions makers, who believed that
, whatever was successful in an experimental format would also be successful on the shelf
and resulted in a large number of failed products and incurred large costs for each firm.
P2: Reason for theory not translating to practice: biases leading to inertia
Ariely (2008): Systematic biases can lead us to be predictably irrational
Kahneman (2011): Most decisions are ‘System 1’ thinking which is
fast/automatic/subconscious
Ross & Staw (1993): individuals tend to irrationally lock themselves into losing situations
because of emotional, psychological, and financial commitments.
For example, decision-makers tend to make further decisions to justify their previous
choices and actions
There are different types of biases
Status Quo and Availability Bias: People tend to choose the default/pre-set option and
this leads to inertia
o Starbuck & Milliken (1988): Vigilance quickly dissipates with repeated success
o Stresses idea of Confirmation Bias where, when an individual has a hypothesis,
they subconsciously notice/collect evidence and information that supports their
hypothesis. If an individual’s beliefs are inconsistent with data, this is explained
away to fit with beliefs.
o Argyris (1977): Norms/routines inhibit double-loop learning
(challenging/changing the original goal)- Camouflaging of errors can become
normalised/routinised
o Gavetti & Rivkin (2005) Yet managers rarely realize that they’re reasoning by
analogy and so are unable to make use of insights that psychologists, cognitive
scientists, and political scientists have generated about the power and the pitfalls
of analogy. While reasoning by analogy may work, Gavetti & Rivkin (2005) say
that dangers arise when strategists draw an analogy on the basis of superficial
similarity, not deep causal traits.
Ford: In overhauling its supply chain, Ford looked at Dell’s key strategic
principle of “virtual integration” with its suppliers as a possible source for
an analogy. BUT, in PC business, prices of inputs decline by as much as 1%
per week—much, much faster than in the auto industry and so play a role
in Dell’s success formula so overlooking this underlying difference could
seriously undermine the usefulness of the analogy.
o Powell (2017): Managers prefer to invest in the capabilities that made them
successful initially, and organisational politics/cultural inertia make it hard to
invest less in current strengths
o Kahneman & Tversky (1974): judgements are based on representative heuristics
where predictions follow the closest pattern to previous patters, without paying
attention to the likelihood that the new event will follow the past patterns
o Strategic recalibration tends to be stimulated only by poor performance
o Whittington (2006: “practices are typically emergent from praxis”
