Strategy Dynamics - The Need For A Dynamic Model of Strategy and Performance

The Need For A Dynamic Model of Strategy and Performance

The debate about the relative influence of industry and business factors on performance, and the RBV-based explanations for superior performance both, however, pass over a more serious problem. This concerns exactly what the ‘performance’ is that management seeks to improve. Would you prefer, for example, (A) to make $15m per year indefinitely, or (B) $12m this year, increasing by 20% a year, starting with the same resources?

Nearly half a century ago, Edith Penrose (1959) pointed out that superior profitability (e.g. return on sales or return on assets) was neither interesting to investors – who value the prospect of increasing future cash flows – nor sustainable over time. Profitability is not entirely unimportant – it does after all provide the investment in new resources to enable growth to occur. More recently, Rugman and Verbeke (2002) have reviewed the implications of this observation for research in strategy. Richard Rumelt (2007) has again raised the importance of making progress with the issue of strategy dynamics, describing it as still ‘the next frontier … underresearched, underwritten about, and underunderstood’.

The essential problem is that tools explaining why firm A performs better than firm B at a point in time are unlikely to explain why firm B is growing its performance more rapidly than firm A.

This is not just of theoretical concern, but matters to executives too – efforts by the management of firm B to match A’s profitability could well destroy its ability to grow profits, for example. A further practical problem is that many of the static frameworks do not provide sufficiently fine-grained guidance on strategy to help raise performance. For example, an investigation that identifies an attractive opportunity to serve a specific market segment with specific products or services, delivered in a particular way is unlikely to yield fundamentally different answers from one year to the next. Yet strategic management has much to do from month to month to ensure the business system develops strongly so as to take that opportunity quickly and safely. What is needed, is a set of tools that explain how performance changes over time, and how to improve its future trajectory – i.e. a dynamic model of strategy and performance.