Historical Development and Overview of Strategy Theory

Major Theories of Business Strategy

INTRODUCTION

Why Study Theories of Business Strategy?

The relationship between the academic theories underlying various business strategies and the associated choices businesses make in pursuit of particular strategies can often be unclear. Across diverse scientific and behavioral disciplines, theory helps us understand the why behind phenomena in our world, the causal relationships influencing these phenomena, and the "systematic reasons for a particular occurrence."1 In studying firm dynamics, theory explains why particular ways of thinking or acting within and between organizations may exist.

Alternatively, business strategy represents a what, identifying both what a firm chooses to do (and not to do) as well as what cohesive and unique organizational approach will position themselves competitively within their chosen markets.2 Underlying the multitude of business strategy development approaches, schools of thought, and techniques are a variety of business strategy theories that continue to evolve over time. Theories of business strategy, therefore, can help link the why and what of strategic approaches by explaining development of, and relationships between, major schools of theoretical thought. Understanding the underlying theory linking particular strategic concepts may generate a deeper understanding of and appreciation for their applicability in modern businesses.

It may also be useful to clarify how "theories of business strategy" and more general "theories of the firm" are related, but are distinct theoretical groups. Theories of the firm seek to explain why businesses exist in the first place by examining underlying economic and managerial motivations and associated market behaviors.3 Some theories of the firm have grown out of an economic tradition and its associated "rational" actor assumptions, such as transaction cost economics and agency theory. Other theories of the firm are more behaviorally oriented, based on "real" (not necessarily rational) individuals. The research traditions supporting the various general theories of the firm provided the different frames of reference from which particular theories of business strategy have emerged.

The purpose of this chapter is twofold. First, we introduce some of the most influential theories of business strategy. Second, we trace their intellectual development within the strategic literature.

A Framework for Major Theories of Business Strategy

To aid in understanding the emergence and development of some of the most important theories of business strategy, the following framework is proposed. As Table 1.1 illustrates, individual theories of business strategy have been categorized into four dominant theoretical paradigms: product-market-based perspectives, industry-based theories, resource-based theories, and competition-based theories. To a large extent the categories and corresponding theories complement one another. They are presented in a generally chronological fashion, recognizing that the introduction and development of the various theoretical groups and the theories within each group overlap and in many cases development remains ongoing. We begin by introducing product-market-based perspectives on business strategy, which present typologies of product and market selection as a basis for competitive success. We then proceed to industry-based theories, which position industry factors as the primary determinant of superior firm performance. Resource-based theories emphasize leverage of unique firm internal resources for competitive advantage. The final theoretical category presented is the competition-based theories, which highlight the importance of the interplay between firm and competitors, actions, and reactions.

It should be stressed that the theories selected are a representative sampling of key theories of business strategy but in no way should be construed to be an exhaustive list. The same can be said for the key thought leaders and selected literature cited throughout. Each theory

Table 1.1. Framework of Selected Major Theories of Business Strategy

highlighted has played an important role in the strategic literature and evolution of strategic thought, but there are many others to be considered comprehensively. The categories and theories presented serve as an introduction to some of the major theoretical underpinnings of business strategy as it has developed over the past several decades and prepare the reader for deeper understanding of business strategy theory.