Behavioral Strategic Management

Philip Bromiley, Devaki Rau

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351869683
• Edition: 1
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

This unique text examines strategic management and its implementation in the context of what we know about how individuals and organizations actually make decisions. Through this behavioral approach, students gain a richer, more realistic understanding of how to create coherent strategies that take advantage their strengths and build their capabilities.

Integrating analytical tools found in a typical strategy textbook with cognitive and psychological insights into decision making, the book focuses on core issues that will help students understand the complexities inherent in making profitable decisions. Readers will learn about the purpose of organizations; consider how political, technological, and industry environments play into firm capabilities; how these capabilities are used in competition; and how to adapt strategies over time. The authors also cover important topics like managerial cognition, learning, and corporate strategy, which receive scant attention in other texts. Chapter summaries, experiential exercises, and "Food for Thought" boxes featuring plenty of discussion questions provide practical insight into how to utilize a successful strategy and maintain a consistent, long-term direction within a firm.

Succinct and well-written, Behavioral Strategic Management offers graduate students of strategy a deeper and broader understanding of the topic.

CHAPTER 1
Cognition and Strategy

OVERVIEW OF STRATEGY

This text is about the strategic direction of an organization, which means its objectives, how it will measure or evaluate progress toward those objectives, and the firm’s major activities and how it goes about doing those. In general, organizations do better when carefully designed around a given strategy. For ease, let us use some sports analogies.

Think about any competitive activity between groups, whether the mathematics Olympiad, high school basketball, or professional soccer. To develop a good strategy, we need to address several questions:

1. What does the team want to achieve? Some teams want to win championships, while others value comradery after games.

2. What rules govern the game, and what else do we know about the game? While we should know the formal rules, we should also know how those are enforced, as well as a wide variety of other things about the game such as the likelihood of certain outcomes, the amount of training or practice we would need to reach a desired skill level, and so on.

3. Who is our competition, and what do we know about them?

4. What are we better or worse at than the competition?

Given an intersection of these four, we can attempt to create a strategy to achieve our objectives. These considerations apply equally to sports teams, your career, and businesses.

Think about your career. First, you need to decide what you really want. Do you want to maximize your income above all else? Or, do you value living in a particular place to the extent that you would give up income and career advancement to live where you want to live? Note that none of these goals or values is intrinsically better than the others; people routinely make different choices about the extent to which they value work achievement, home life, leisure, and so on.

Second, you need to understand the rules of the game. How do firms recruit in your area of interest? What are firms looking for in recruits? What do career paths look like? What determines who gets ahead?

Third, you need to understand the competition in the domain in which you intend to compete. Potential employees in different areas of business usually differ radically in intelligence, technical skills, etc.

Fourth, what are you good or bad at? Do you love dealing with people or do you prefer dealing with numbers? Some people like variety, whereas others do best handling routine. Some people may be highly creative while others excel at tight logic.

Fifth, in light of all of the above—what you want, the structure of the game, the competition, and your abilities—you choose how you will compete.

No one gets to pick who they are from a blank slate, but we do get to choose both the extent to which our careers fit our abilities and preferences as well as how we train for those careers. Most of you have chosen a career in management, and usually business management, but you have focused beyond that. A good career strategy can guide your efforts and increases the chances of achieving your objectives.

These same issues matter to businesses.

While some of your courses may assume companies want to maximize the net present value of future earnings, this is not universally true. The owner-managers of many businesses value owning and running their own businesses; many want to pass these on to their children. Some entrepreneurs run their businesses with the intention of eventually selling out to a larger company. Management in some companies may feel pressured to grow the business rapidly; in others, modest growth is acceptable. Many corporations claim to balance the interests of shareholders and other stakeholders. In short, companies have some choice about their goals, subject to a need to maintain sufficient economic performance for survival.

The rules and structure of competition differ across industries. Some industries require continuous product innovation, but others have produced similar products for decades. In some, customer service drives profits, but in others, customer service matters little. Some industries are simply more competitive than others.

Competition varies across industries and even within industries. When it comes to trading stocks on larger companies, you face competition from thousands of individuals with immense resources who compete by trading a limited number of stocks. A small company’s stock may attract much less attention. Someone owning the only gas station in a small town faces radically different competition than a gas station owner in a large city. Alternatively, some businesses produce products similar to those of competitors and others produce products or services that no one else produces.

Companies also differ in their abilities. For example, while large pharmaceutical companies invest heavily in the development of new drugs, generic drug producers invest in the low-cost production of off-patent drugs. The management team that excels running a fast food outlet would probably fail in fine dining. While companies can change their abilities somewhat, research shows that history and early experience shape organizations in ways that make a radical change in capabilities difficult.

Effective business strategy takes all of these factors and then adds some creativity. Strategy provides the umbrella within which all corporate activities operate. And, just like an umbrella, activities that do not fit the strategy often do not do well.

This book helps you think about all of these.

A BEHAVIORAL APPROACH

Traditional strategy textbooks emphasize the analytical aspects of the problem-solving process almost to the complete exclusion of the constraints surrounding an individual decision maker. Such texts assume that adopting a systematic, structured approach to examining and processing relevant information will ensure that management does not overlook any critical factors in their decision making. The decision maker will therefore come up with the best solution for the problem.

While a structured, analytical approach to problem solving has much to recommend it, strategies cannot come from analysis alone. Good strategies require some novelty—mimicking everyone else seldom produces high returns. Strategy therefore requires a combination of analysis and creativity. Further, any analysis is only as useful as the thought process underlying it; many of us have probably come across flawed analyses based on unrealistic assumptions, missing information, or illogical connections. Therefore, while this book explains the tools you can use to analyze a problem, it does so emphasizing the behavioral approach to strategic decision making.¹

A behavioral approach recognizes that when confronted with a complex, real-world problem, people have a limited ability to process the enormous amount of information required to find the optimal solution. Consequently, when faced with these problems, people typically satisfice, that is, make do with a good enough solution, rather than optimize, that is, come up with the best possible solution to a problem. Stated differently, a behavioral approach recognizes that how people think and interact with others substantially influences the problem-solving process. Indeed, these human aspects of problem solving are often much more difficult to manage than the analytical aspects. Hence, understanding these aspects can lead to a better understanding of strategy. Let us explain this in more detail.

If we wish to help people engage in some activity, we need to start by realistically understanding their abilities and limitations. Advice on how to get along in France will be very different for someone who speaks fluent French than for someone who speaks no French. Perhaps the most important thing to understand is that humans have severe limitations in their abilities to process information.

LIMITATIONS IN INFORMATION PROCESSING ABILITY

People who study cognition divide memory into short and long term. Long term is essentially unlimited—humans can learn to remember enormous amounts of things. Short term, on the other hand, is exceedingly limited. Short-term memory acts like the RAM in your computer—it is a memory your mind uses when it needs to process information. Depending on how you estimate it, short-term memory only holds between three and seven chunks of information. You can see this easily. Most of you can multiply two two-digit numbers in your head—47 × 28. However, when you try to multiply two three-digit numbers in your head, you find that you cannot remember the intermediate results—you run into this limitation of short-term memory. Transferring information from short- to long-term memory and retrieving information from the long-term memory takes time and effort.

These limitations on information processing highlighted by a behavioral approach have a variety of implications in both strategy and management. For example, human decisions, if repeatedly made with a defined set of data, generally reflect three or four variables. This can be seen from studies that show that relatively simple three or four variable models largely replicate expert judgment in things such as risk assessment for commercial loans, graduate admissions, and so forth. From a strategy standpoint, this means that we know that we will never consider all the possibilities when we make critical decisions. Therefore, what we need, at least to some extent, from a strategy course are heuristics or short cuts that help us search for information and select our options more effectively, recognizing the limitations we face.

BELIEFS AND DECISION MAKING

A behavioral approach suggests another general limitation on decision making; everyone’s decisions depend on what he or she believes. We all operate with an implicit (and sometimes explicit) model of the world. While, in many cases, managerial beliefs align nicely with reality, they appear not to do so in many other important areas. For example, managers often have misconceptions about customer preferences or employee attitudes and motivation. Many of us have had experiences where we have misunderstood the motivations of our closest friends and relatives. Furthermore, we often have biases that make it hard for us to adapt our belief systems to an external reality.

For example, for many years, the Polaroid Corporation had great success with a coherent strategy that emphasized technological advances that attempted to improve the quality of instant printing of photographs toward the quality provided by traditional 35mm film cameras. The firm profited mainly by selling the film rather than the camera itself. Most of the top management of the company spent their careers in an enormously successful corporation built on these assumptions.

However, these assumptions meant the company had great difficulty with digital cameras when film disappeared and the firm needed to profit on the cameras themselves. Even when Polaroid attempted to move into the digital age, the people it hired to lead that move became isolated from others in the company (and therefore, could not operate effectively in the company) because the belief structures of these new hires differed so greatly from the belief structures of the senior managers of the company.

Cognitive limitations appear in all organizations in many forms. The greater investment in MBAs meant that American business schools saw themselves as producers of MBAs, while European equivalents had less history invested in the MBA. Consequently, non-American universities led the move to specialized master’s programs in management, a move that American universities only followed reluctantly and after substantial delay.

Alternatively, consider the American auto industry. Starting after the oil shortages in the late 1970s, U.S. auto companies dabbled with small, fuel-efficient cars. However, the efforts of U.S. auto companies were always somewhat halfhearted. Partially, this reflected a top management that grew up in an industry where the ideal car was a large Cadillac or Lincoln. Small vehicles with few features were not considered attractive. With the exception of short periods of oil shortage, the companies made much more money on large vehicles including minivans and SUVs than they made on smaller vehicles. Consequently, these companies could not maintain a focus on the development of small vehicles.

You may have seen or experienced similar things in your industry. A student in one of our MBA classes works in a company that had sold steel pipe for running water underground, in an industry that is moving to plastics. However, both the managers and the salespeople have spent the last 30 years telling themselves and consumers that plastic was not as good as steel. They have had difficulty changing to plastic pipes even as plastic begins to offer performance/cost superior to that offered by traditional steel piping. Firms and individuals have difficulty adapting their fundamental beliefs to new evidence.

WHERE DO BELIEFS COME FROM?

For much of what managers believe, they lack good data. Much of the information managers act on comes from what others have told them, often without explicit evidence supporting the assertions. Not that long ago, many U.S. managers had explicit discriminatory beliefs about the abilities of minorities and women. In previous eras, people had similar discriminatory beliefs regarding other ethnic groups such as Jews, Italians, and Irish. They could maintain such beliefs for several reasons.

To begin with, beliefs are often self-confirming. If we believe people X incapable of college, we never give them a chance, and so never see college graduates of type X. Alternatively, we give them a chance, but not a fair one.

This is equally true in business. If we believe the world operates in a particular way, then we will tend to see problems or opportunities through the lens of our beliefs, as well as take actions that make sense in that context. Even if we want to test our assumptions about how the world operates, we...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Detailed Table of Contents
• List of Figures
• Preface
• CHAPTER 1 COGNITION AND STRATEGY
• CHAPTER 2 PURPOSE
• CHAPTER 3 ENVIRONMENT
• CHAPTER 4 GENERIC STRATEGIES AND HOW TO IMPLEMENT THEM
• CHAPTER 5 FIRM CAPABILITIES
• CHAPTER 6 INDUSTRY LIFE CYCLES
• CHAPTER 7 TECHNOLOGY AND ITS IMPACT ON INDUSTRIES
• CHAPTER 8 VERTICAL INTEGRATION AND DIVERSIFICATION
• CHAPTER 9 INTERNATIONAL STRATEGIES
• CHAPTER 10 ORGANIZATION AND STRATEGY
• Appendix: Experiential Exercises
• Glossary
• Index