1. What is strategy? Paradoxes, mission and governance

Defining strategy

Hitt et al. (2017) define strategy as the set of commitments, decisions and actions required for a firm to achieve strategic competitiveness and earn above-average returns. Two related terms are central in the course:

• Competitive advantage: the ability to raise your prices or reduce your costs compared to rivals. Example from the lecture: Albert Heijn has a competitive advantage through convenience, which allows it to charge higher prices.
• Core competency: the capability (the "tool") a firm has that allows it to build that competitive advantage.

Strategy can then be summarised as making a plan to use your core competency to create a competitive advantage.

Four parts of strategy

Within strategy content there are four levels, from low to high: the functional level (ICT, manufacturing, HR, finance: how can we be the best finance or HR department?), the business level (how does business A or B compete?), the corporate level (for example the Volkswagen group: which businesses should we own and which should we divest?) and the network level, the highest level (with whom do we cooperate and how do we create and capture value?).

Within the strategy process the central questions are: is strategy deliberate or emergent (strategy formation), how do we build in adaptability (strategic change), and how do we entrench innovation while building on existing strengths (strategic innovation)? Within the strategy context the questions are whether strategy is about compliance or choice (do we satisfy an existing need or create a new one?) and whether it is about globalisation or localisation.

Two ways to approach theories

• Tools-driven: study each theory separately (SWOT, PESTEL, BCG) and apply it later when a problem appears.
• Problem-driven: first understand the problem, then choose the theory that fits it. This is the approach of the course.

Types of strategic problems

Six ways to manage paradoxes

• Navigating: focus on one of the opposing demands at a time (temporal separation, also called punctuated equilibrium).
• Parallel processing: split the opposing demands over different units (internally) or a partnership (externally) and work on both at the same time (spatial separation). Example: improving existing products while another unit develops the next generation.
• Balancing: also called dynamic equilibrium; weighing elements of conflicting demands, for example following the industry standard on some points while changing others.
• Juxtaposing: managing conflicting demands simultaneously on a permanent basis, for example competing and cooperating at the same time, sometimes with the same organisation (Apple and Samsung).
• Resolving: reaching a higher level of balance by developing a new synthesis between competing demands, for example between shareholder value and societal value.
• Embracing: using the tension as a source of creativity and opportunity, for example deliberately putting two clashing personalities in one team.

Complexity and wicked problems

Environmental connectedness refers to the links between systems: deviations in one element are passed on to other elements and can be amplified. Such a turbulent environment contains many complex relations under the surface. Wicked problems are like a tangled web of tentacles: the more you try to tame them, the more complicated they become. They have six characteristics:

1. Interconnectedness: strong links tie each problem to other problems.
2. Complicatedness: countless important elements, mutual connections and feedback loops that reinforce or dampen effects.
3. Uncertainty: the problems exist in a dynamic, uncertain environment, so risks must be accepted.
4. Ambiguity: the problem can be seen in different ways; there is not one correct view.
5. Conflict: opposing interests around the problem make solving it harder.
6. Societal constraints: social, organisational, political and technological constraints strongly affect the feasibility and desirability of a solution.

Organised complexity can be handled with an approach that is participative (active involvement of different groups), adversarial (doubt and counter-questions), integrative (everything must form one complete picture) and managerial mind supporting (gaining insight into the problem and its complexity).

Mission and vision

The organisational mission consists of four elements: organisational purpose, organisational philosophy or beliefs, organisational values and business definition. A mission is strong when these four elements are aligned and reinforce each other. The mission gives the fundamental principles that guide strategic choices.

The organisational vision shows the hoped-for future the firm is trying to reach. It contains the expected contextual (environmental) characteristics, the expected industry environment, the desired future position of the organisation and a time horizon. Together, mission and vision set the course of the organisation. In the lecture this long-term direction is called the strategic intent; De Wit notes that the strategic vision itself is also termed strategic intent (Hamel et al.) or envisioned future (Collins and Porras). This intent can be reached along different routes.

Corporate governance

To determine the strategic intent, corporate governance is needed: everyone who has some control over what happens in the organisation, to make sure managers pursue strategies in line with the mission. This is the board, and according to some also local and national authorities and social groups. Corporate governance has three functions:

• Forming function: shaping and communicating fundamental principles to give direction and set the course.
• Performance function: assessing strategic initiatives to see whether they contribute to improving future performance.
• Conformance function: monitoring whether the organisation actually carries out the activities it promised, whether performance is good enough, and taking other action if needed.

When designing corporate governance, three issues need attention: board structure (one-tier or two-tier board), board membership (rules differ per country; in Germany half of the supervisory board represents employees and half the shareholders) and board tasks (some boards meet regularly and vote on proposals, others hardly meet and have little power).

Textbook deepening: De Wit, Ch. 1 (Introduction) and Ch. 3 (Missioning and visioning)

The sections below add the theory from the textbook to the lecture notes above. Chapter 1 of De Wit explains how the whole book (and course) is structured around strategy paradoxes. Chapter 3 treats organizational purpose, mission, vision and corporate governance, and the paradox of profitability and responsibility.

No single definition of strategy

De Wit deliberately does not open with one sharp definition of strategy. Practitioners, researchers and theorists disagree on most key issues, so strategy cannot be taught as a set of agreed definitions, rules, matrices and flow diagrams to memorise. Instead, the reader has to grapple with the variety of views and treat opinions as "knowledge in the making". This is why the course works with debates between opposing perspectives rather than with one "correct" theory.

Tools-driven versus problem-driven learning

De Wit uses Maslow's remark that "if the only tool you have is a hammer, you treat everything like a nail". An apprentice carpenter can first study all tools separately (tools-driven) or first learn what must be crafted and then look for the tools that fit (problem-driven). A tools-driven book would have one chapter per theory or school of thought: clear overviews, but the reader would not see how theories relate, where they agree or conflict, which phenomena each explains, and which one is most appropriate in which situation. The book therefore takes a problem-driven, issue-based structure: key strategy issues are identified first and each chapter brings in only the theories that shed light on that issue. In total 11 sets of strategy issues are distinguished (Chapters 2 to 12).

Strategy content, process and context as dimensions

The most fundamental distinction in the book is between three dimensions of strategy, plus the organizational purpose as the impetus:

De Wit stresses that content, process and context are not parts of strategy but dimensions: just as a box has length, width and height rather than three parts, every strategic problem has content, process and context characteristics at the same time. The dimensions interact: the way the process is organised affects the resulting content, and the current content influences how the process will be run in future. Looking at one dimension at a time is useful for a focused discussion, but ignoring the links gives a "flat" instead of a three-dimensional view. (The lecture speaks of "four parts"; the book counts strategizing and missioning as the inputs of Section I and content, process and context as the three dimensions of Sections II to IV.)

Levels of strategy

Strategies can be made for different levels of aggregation (Figure 1.2):

• Functional level: specific functional aspects such as operations, marketing or financial strategy.
• Business level: integration of functional strategies for a distinct set of products or services for a specific group of customers. For single-business firms this is the highest level within the firm.
• Corporate level: in multi-business firms, a corporate strategy aligns the various business level strategies.
• Network level: the level above the individual organization, where two or more firms cluster together (strategic alliances, joint ventures, value-adding partnerships, or networks with dozens or hundreds of participants). A strategy developed for a group of firms is a network level strategy.

The book focuses on the business, corporate and network levels. The three levels are strongly interrelated and partly overlap, so a stand in one debate affects positions in the others.

The traditional linear view of the strategy process and its critics

Traditional textbooks portray the process as a linear sequence: analysis (opportunities and threats in the environment, strengths and weaknesses of the firm), formulation (identifying, evaluating and choosing options) and implementation (translating the chosen option into concrete activities). Critics argue that no such identifiable stages exist: analysis, formulation and implementation are intertwined and strategies are often formed incrementally (Chapter 7). They also challenge the idea that the whole organization can be radically changed at once, because parts of the firm face different pressures and timetables and are limited by their cultural, political and cognitive inheritance (Chapter 8), and the focus on efficiency of current products instead of renewal (Chapter 9). Strategy formation, change and innovation are not phases but strongly linked, overlapping aspects of the strategy process (Figure 1.3).

Strategy context: industry, organizational and international

Most people agree that a fit between process, content and context is wise, but they disagree on whether the context determines what the strategist must do ("adapt or die") or whether the strategist can shape the context. Two distinctions give three context chapters: organization versus its industry environment (industry context, Ch. 10; organizational context, Ch. 11) and domestic versus international context (Ch. 12). In the international debate some authors expect international diversity to decline (global convergence), others expect it to remain.

Why do strategy theorists disagree?

De Wit considers three explanations: (1) some theories are right and others wrong (unlikely, since false theories would disappear); (2) each theory covers a different aspect of a multi-faceted reality (but then theories would be complementary, not contradictory); (3) theorists start from divergent assumptions about the nature of each strategy issue. The third explanation is the most fruitful, so the book focuses on surfacing the basic assumptions behind each perspective and debating when they are appropriate.

Strategy tensions, paradoxes and perspectives

At the heart of every set of strategic issues lies a tension between two apparent opposites that must nevertheless be dealt with simultaneously. In each chapter the debate is condensed into two diametrically opposed perspectives, each emphasising one pole. These are not always the most widely held views, but they expose the main points of contention.

Either/or problems versus both/and problems

Either/or problems (puzzles and dilemmas) can be solved by analysing and choosing. A puzzle has one optimal solution ("find the best"), for example testing hypotheses on the root causes of falling margins. A dilemma has two possible solutions, neither logically best ("make a choice"), like the prisoner's dilemma or choosing an alliance with firm A or its main competitor B. Both/and problems (trade-offs and paradoxes) can only be managed. A trade-off has many possible solutions on one solution line ("strike a balance"), and the chosen balance is unstable and temporary. A paradox has no real solution because the two opposites cannot be logically integrated, but innovative reconciliations can be found ("get the best of both worlds"). Example: a multi-business firm must create synergies between units and at the same time give units independence to respond to their markets.

Dialectical enquiry: four functions of presenting two opposite perspectives

• Range of ideas (book-end function): the two poles frame the full set of views on the topic.
• Points of contention (contrast function): they bring the key points of disagreement into sharper focus.
• Stimulus for bridging (integrative function): because neither pole can easily be dismissed, readers are challenged to combine the best of both.
• Stimulus for creativity (generative function): the paradox pushes readers to invent new ways of transcending it.

In each chapter the first reading defends the thesis, the second the antithesis, and the third reading bridges the two by addressing how to manage the paradox. The synthesis area lies beyond the trade-off line between thesis and antithesis (Figure 1.8).

Managing paradoxes: details from the book

The six options (see above) come from the general paradox literature (Smith and Tushman, Lewis, Poole and Van de Ven, Smith and Lewis) and from topic-specific work (March, Tushman and O'Reilly, Teece, Porter and Kramer). Additional points from the book:

• Navigating is compared to a tacking sailing boat: a series of contrary initiatives over time, for example a synergy initiative ("One Firm") followed by a responsiveness initiative ("Customer First"). Also called temporal separation or punctuated equilibrium (Burgelman; Tushman and O'Reilly).
• Parallel processing (Lawrence and Lorsch) separates the demands in different internal units or external partners; the demands are then integrated at a higher level. Example: outsourcing production while developing new products internally. Also called spatial separation.
• Balancing (dynamic equilibrium) blends elements of both demands into a company-specific balance that changes with circumstances; it is not a static synthesis. Example: complying with some industry rules while changing others.
• Juxtaposing requires dynamic capabilities (Teece, Pisano and Shuen) to manage both demands daily or per project, for example combining client-driven and resource-driven processes in the same units.
• Resolving creates a new synthesis that holds for some time before being replaced, for example shared value in a mission statement.
• Embracing (Beech et al.) actively exploits the tension, for example two opposite personalities in the leadership team combining an entrepreneurial process with controlled execution.

Not every option works for every paradox: separating R&D from operations can work (exploration vs exploitation), but separating the corporate synergy objective from business unit operations is not an option. The attractiveness of an option depends on context and timing, so the list is a menu to be applied dynamically, not a passive checklist. Managing paradoxes is not a goal in itself; the desired outcome is to outperform competitors.

Developing an international perspective

Few strategy authors ask whether their theories are valid in other countries. There is a real danger of "think local, generalize global": theories built on local assumptions are exported indiscriminately. De Wit argues that the strategy paradoxes are the same around the world, but that the way each paradox is coped with may differ per country, so each chapter has a section on international differences. Hofstede's reading (1.3) supports this: management practices differ between countries depending on culture, so universal management theories do not exist; every theory is culturally constrained.

Readings of Chapter 1 (key messages)

• Mason and Mitroff, Complexity: most strategic problems are not "tame" but "wicked" problems of organized complexity (the six characteristics above). They have no clearly identifiable correct solution, so strategists should systematically doubt solutions and use dialectics. A variety of opinions makes things more complex but is a resource for better solutions.
• Smith and Tushman, Managing strategic contradictions: why and how strategists should engage in managing contradictions rather than choosing one side.
• Hofstede, Cultural constraints in management theories: management in Germany, Japan, France, the Netherlands, South-East Asia, Africa, Russia and China differs from the US; theories reflect their national culture.

Mission versus vision: the meaning of the words

"Mission" comes from the Latin mittere (to send): the basic drivers that send the corporation on its way. "Vision" comes from videre (to see): a picture of a desired future state. Mission provides business principles; vision provides business ambition. A vision is less specific than a short-term target or a medium-term objective; it is a broad conception of a desirable future whose details remain to be determined (Senge). Figure 3.1 places them on a time line: mission gives ongoing principles, a target is a short-term aim, an objective a medium-term aim and the vision a long-term aim.

The four elements of a corporate mission (Figure 3.3) each answer a question:

The strength of a mission depends on whether the four elements fit together and reinforce each other (Campbell and Yeung). A consistent and compelling mission gives a sense of mission: an emotional bond that energises members.

Four components of a strategic vision (Figure 3.4):

1. Envisioned contextual environment: expected socio-cultural, economic, political/regulatory and technological developments relevant to the business (for example rising importance of emerging countries, digital technology, environmental awareness).
2. Envisioned industry environment: expected developments among suppliers, buyers, incumbent rivals, new entrants, substitutes and complementors.
3. Desired future organizational position: the company's ambition, translated into long-term objectives (for example industry leadership via an alliance in emerging markets).
4. Time horizon: how many years ahead the vision looks; this ranges from 3 to 30 years or more and depends on industry characteristics (the upstream oil industry needs long horizons) and the cultural context of leaders.

Three functions of mission and vision

• Direction: they define the boundaries within which strategic choices must take place and limit the scope of options.
• Legitimization: they convey to stakeholders inside and outside the firm that it pursues valuable activities in a proper way, increasing acceptance, support and trust.
• Motivation: they inspire people to work together and can create an esprit de corps over a long period.

A firm can have a mission and vision without writing them down, but this increases the chance of divergent interpretations. Especially legitimization and motivation divide theorists, because what counts as a legitimate purpose is contested.

Corporate governance in more detail

Corporate governance is "managing top management": building in checks and balances so that executives pursue strategies in line with the mission. In the narrow definition (Tricker) it concerns the issues facing boards of directors. In the broader definition other forces also govern top management, such as regulation by authorities and pressure from societal groups. The three functions (forming, performance, conformance) are adapted from Tricker. Examples of how the board fulfils them:

• Forming: questioning the basis of strategic choices, influencing the business philosophy, determining purpose and setting priorities among claimants.
• Performance: judging strategy initiatives or actively participating in strategy development, acting as a sounding board, networking to secure support of vital stakeholders.
• Conformance: auditing, questioning and supervising top management, setting remuneration and incentives, and appointing new managers.

On board membership: in Germany half of the supervisory board represents labour by law; in France labour representatives have observer status; in China most supervisory board members hold positions in the Communist Party. On board tasks: the power of outside directors depends only partly on their formal tasks and largely on how proactively they define their own role.

The paradox of profitability and responsibility

In market economies it is agreed that firms must be profitable and also have some social responsibilities, but opinions differ on their relative importance. As organizational purpose the two are partly contradictory: maximising profit conflicts with optimising benefits for other stakeholders.

• Demand for economic profitability: firms must earn more than the cost of capital, i.e. a higher return on equity than investors could get at the bank or in low-risk bonds, to compensate for risk. A track record of profitability creates trust among financiers, making new capital cheaper; a high share price makes acquisitions with shares easier and is the best defence against a hostile takeover; retained profits fund new investment. Profitability is thus not only a result but also a source of competitive power.
• Demand for societal responsibility: acting in the interest of others even when there is no legal imperative. Firms are also communities of people; responsibility is the basis of trust. Trust makes employees commit emotionally (pride, loyalty) and practically (investing in firm-specific skills), which makes them dependent on the firm, so the firm must reward this by acting responsibly even when it hurts profits. The same holds for trust with buyers, suppliers, governments, communities and activist groups.

The shareholder value perspective (thesis)

Companies belong to their owners and are instruments to create economic value for those who invest risk-taking capital (Rappaport). Some proponents focus on share price and dividends; others fear stock market short-termism and keep "one eye on share prices, the other on the long term". A key challenge is the principal-agent problem (Jensen and Meckling; Eisenhardt): managers (agents) may serve their own interests instead of those of shareholders (principals). The solution is strong governance with a majority of independent outside directors, preferably owning shares themselves. Stakeholder analysis and management are useful, but only as a means: there is no moral obligation to stakeholders. Not laying off workers can be wise if loyalty improves future profits, but that is a profit calculation. Society is best served when firms pursue enlightened self-interest; social issues are for individuals and governments (Friedman). Example: Dean Foods' mission to maximise long-term stockholder value within the law and highest ethical standards.

The stakeholder values perspective (antithesis)

The firm is a coalition or joint venture of resource suppliers (equity, loans, labour, management, expertise, parts, services) who are mutually dependent, so its purpose is to serve all parties (Berle and Means; Freeman and Reed). Stakeholder demands are financial and qualitative (job security, safety; secure demand, joint innovation, prompt payment). Balancing them requires negotiation; the outcome depends on each stakeholder's bargaining power and on the legitimacy of its claim. Employees have a strong moral claim because they are dependent and not very mobile, while shareholders can "exit the corporation with a phone call". Serving stakeholders is an end in itself.

Proponents argue that pursuing joint interests is also more effective: few people are motivated to maximise shareholder value, and without a stakeholder view parties distrust each other and act as adversaries; a partnership model based on sharing, trust and symbiosis beats the "every person for themselves" model. Primary stakeholders take part directly in value creation; secondary stakeholders (communities, governments, the environment, society) are affected by the firm's activities. Governance implications: stakeholder representation on the board, co-determination through works councils (mandatory for larger firms in most EU countries), and internal policies promoting ethical behaviour. Example: the Johnson & Johnson Credo, which lists responsibilities to customers first and to stockholders last.

Managing the paradox of profitability and responsibility

• Parallel processing: shareholders and stakeholders are managed by different people and departments; the board handles shareholders, production deals with environmentalists and NGOs, finance with tax authorities. For long this was sufficient because societal issues were treated as tactical problems at lower levels.
• Balancing: after the fall of Lehman Brothers (2008) and growing pressure on topics such as unsafe working conditions, child labour and oil spills, amplified by social media and smartphones, the tension became a strategic issue for directors. Balancing became a responsibility of the CEO, sometimes supported by a corporate sustainability officer.
• Resolving: combining both demands at a higher level. Example: Albert Heijn and WWF (2011) aimed for a fully sustainable fish assortment; after four years 90 per cent of private label fish was ASC certified, securing long-term supply (profitability) while meeting stakeholder demands. Porter and Kramer call this shared value.

Forerunners: Elkington's Triple Bottom Line (Cannibals with Forks, 1997; people, planet, profit), Emerson's blended value (2003: pursuing profit and social and environmental objectives simultaneously), and Hart's Capitalism at the Crossroads (2005) and Prahalad and Hart's "Fortune at the Bottom of the Pyramid". Reading 3.1 (Friedman, 1970) states the shareholder view: "there is one and only one social responsibility of business: to use its resources to increase its profits so long as it stays within the rules of the game"; social responsibilities belong to individuals, not business. Reading 3.2 (Freeman and Reed) challenges the privileged place of stockholders; their argument is largely pragmatic (stakeholders can affect the continuity of the firm), and they think structural governance reforms are unnecessary if boards adopt a stakeholder outlook.

Missioning and visioning in international perspective

A preference for the shareholder or stakeholder view depends more on how societies are structured than on individuals. Classifications of capitalism:

• Albert: Rhineland model (Germany) versus Anglo-Saxon model (US, UK).
• Hall and Soskice: coordinated market economies (CMEs: Germany, Sweden, Japan; non-market coordination, specific assets, prominent banks) versus liberal market economies (LMEs: US, UK; market coordination, transferable assets).
• Dicken: neo-liberal market capitalism (US, UK), social-market capitalism (Germany, Scandinavia), developmental capitalism (Japan, South Korea, Taiwan, India, Brazil) and authoritarian capitalism (China, Russia). States act as regulators, competitors and collaborators, and as shareholder and stakeholder.
• Amable: market-based, social-democratic, Continental European, Mediterranean and Asian models.

Culture also matters (Hampden-Turner and Trompenaars): in the individualist, universalist US ethics are personal and legalistic; in collectivist societies ethics depend on status (ascription, Brazil) or in-group ties (China, Japan). Matsushita: "profit comes in compensation for contributing to society". Industries differ too: finance leans to shareholders, health care and education to stakeholders. For the strategist the question is whether to impose home norms abroad (risk: cultural imperialism) or follow local customs ("when in Rome", risk: inconsistency and protests). Shell's CEO Herkströter: "stakeholders hold the license to operate a company".