Structure-conduct-performance Paradigm

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Structure-conduct-performance Paradigm

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SM9628 - Lecture 20 - The Structure-Conduct-Performance Paradigm

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Theories of the firm look to explain why firms exist in the first place, such as agency theory and transaction cost related theories. This branch of economics is associated with the resource-based theory of strategy, that views the primary cause of advantage and sustained advantage to be the resources of the firm, not its position in an industry or market. This approach includes neo-classical microeconomics and evolutionary economics. Historically, dimensions typically downplayed or left out of the above approaches include 1 the role of human agency, the strategists who for the dominant coalition and how they make strategic choices and 2 the organizational paradigm within which strategic decisions and actions take place.

First, actors are boundedly rational, constrained by limits in their access to information and their ability to process it, which leads them to satisfy rather than maximize, to economize on what they attend to, and to follow standard operating procedures where possible. Second, organizational practices and structures need not perfectly match their environment and may be slow to change, so understanding how they got to where they are is useful.

Third, participants bring different interests to the organizations, and conflicts among them are frequently unresolved, leading to continuous renegotiation of goals among participants. The resulting theory is both behaviorally plausible -- the people in it look like the people we know, not the characters in economics. Using Cyert and March's terms, organizations set goals, i.

This 'process' is adaptive, adjusting aspirations based on the changing business ecosystem and the firm's performance. When performance falls short of aspirations, organizations engage in problemistic search to find a solution to the 'problem. The essence of The interdependence of purposes, policies, and organized action is crucial to the particularity of an individual strategy and its opportunity to identify competitive advantage. It is the unity, coherence, and internal consistency of a company's strategic decisions that position the company in its environment and give the firm its identity, its power to mobilize its strengths, and its likelihood of success in the marketplace.

It is the interrelationship of a set of goals and policies that crystallizes, from the formless reality of a company's environment, a set of problems an organization can seize upon and solve. Andrews, , pp Strategy is pattern, consistency in behavior over time. What Mintzberg found in his research was that the recognizable patterns indicating strategy are not patterns of decisions but patterns of actions. Though actions imply decisions, the linkage between formal decision making and actions in an organization are often ambiguous. Many times, there is very little decision and a lot of action. Other times, a lot of decision and little or no action.

In other words, strategy can shape structure. While the structuralist approach is valuable and relevant, the reconstructionist approach is more appropriate in certain economic and industry settings. Choosing the right approach, however, is not enough. Executives then need to make sure that their organizations are aligned behind it to produce sustainable performance. Most executives understand the mechanics of making the structuralist approach work, so this article will focus on how to align an organization behind the reconstructionist approach to deliver high and sustainable performance. There are three factors that determine the right approach: the structural conditions in which an organization operates, its resources and capabilities, and its strategic mind-set.

Even in a not-so-attractive industry, the structuralist approach can work well if a company has the resources and capabilities to beat out the competition. But when conditions are unfavorable and they are going to work against you whatever your resources and capabilities might be, a structuralist approach is not a smart option. This often happens in industries characterized by excess supply, cutthroat competition, and low profit margins.

In these situations, an organization should adopt a reconstructionist approach and build a strategy that will reshape industry boundaries. Even when an industry is attractive, if existing players are well-entrenched and an organization does not have the resources and capabilities to go up against them, the structuralist approach is not going to produce high performance. In this scenario, the organization needs to build a strategy that creates a new market space for itself. An organization with an innovative bent and sensitivity to the risks of missing future opportunities will be more successful in adopting a reconstructionist approach. Firms with a bias toward defending current strategic positions and a reluctance to venture outside familiar territory would do better with a structuralist approach.

Where the two approaches diverge is in the alignment of the propositions. The value and profit propositions set out the content of a strategy—what a company offers to buyers and how it will benefit from that offering. The people proposition determines the quality of execution. Hence, we define strategy as the development and alignment of the three propositions to either exploit or reconstruct the industrial and economic environment in which an organization operates. Unless a company creates a complete set of consistent propositions, it is unlikely to produce a high-performing and sustainable strategy.

This is the classic case of execution failure. Likewise, an organization that offers a motivating people proposition but lacks a strong value or profit proposition will find itself mired in poor performance. This is formulation failure. A strategy is unlikely to be successful, for instance, if the value and profit propositions are aligned around differentiation but the people proposition is targeted at low cost. Under a reconstructionist strategy approach, high performance is achieved when all three strategy propositions pursue both differentiation and low cost. This alignment in support of differentiation and low cost enables a company to open new market space by breaking the existing value-cost trade-off. It allows strategy to shape structure.

It is also alignment that leads to more sustainable strategy, for either approach. They alone are suited to this type of broad strategy work; executives with a strong functional bias—marketing, manufacturing, human resources, or other functions—tend to miss the larger strategy picture. The marketing team, for example, may dwell too much on the value proposition and pay insufficient heed to the other two. Similarly, executives with a manufacturing bias may neglect buyer needs or may treat people as a cost variable.

While managers are well-informed about the ways in which structure shapes strategy, 4 there is little knowledge of how to align the three propositions so that strategy can shape structure. In the next section of this article, we look at the city-state of Dubai to show how blue ocean strategy alignment enables an organization to reconstruct the environment. Dubai has redefined the role and activities of its government, yielding one of the fastest-growing economies in the world for two decades. Cement structures were virtually absent in its unforgiving desert. Job opportunities were dismal, and medical services were poor. People lived in huts thatched with palm fronds and tended sheep in relentless heat.

It has been an island of stability in a politically turbulent region. Indeed, Dubai is arguably the only Arab economy that has achieved substantial integration into the global economy outside the hydrocarbon sector and has emerged as a premier tourist and business destination across the globe. Although Dubai, like the rest of the world, is being buffeted by the global financial crisis, and its future depends on how it deals with that crisis, its reconstructionist blue ocean strategic move—aligning the three propositions around differentiation and low cost—has so far brought the emirate unprecedented profitable growth.

Its profit proposition has allowed the government to benefit and extract revenues from those investors. The value proposition begins with a dozen world-class free zones with unbeatable incentives for investors. The corporate tax rate for the first 15 to 50 years of operations is zero and can be extended. The horizontal axis captures the range of factors organizations offer. The vertical axis depicts the offering level. Dubai also offers world-class air, port, and shipping services to make the logistics of doing business more efficient. Although Shanghai is one of the largest and fastest-growing economies in the world, Dubai has outperformed it on many measures. How does Dubai generate revenues to support the state, given that corporate and personal taxes are negligible?

It has done so by finding differentiated ways of generating revenues while also lowering its cost structure. These investments have allowed the government to directly profit from its unique, low-cost value proposition. DP World operates the Jebel Ali port and complex in Dubai, where more than 6, companies are based. Stocking Sr. Jens Beckert Fred L. Block James S. Accelerator effect Administered prices Barriers to entry Bounded rationality Conspicuous consumption Conspicuous leisure Conventional wisdom Countervailing power Effective competition Herfindahl index Hiding hand principle Hirschman cycle Instrumentalism Kuznets cycles Market concentration Market power Market structure Penalty of taking the lead Satisficing Shortage economy Structure—conduct—performance paradigm Technostructure Theory of two-level planning Veblen goods Veblenian dichotomy.

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