EVOLUTION OF THEORIES IN STRATEGIC MANAGEMENT
Firms make strategic choices to outrun competitors. The essence of strategic management is to (1) attain, and (2) sustain the competitive advantage. The key question encompassing strategic management is why some firms achieve higher levels of performance. Strategic management offers different perspectives for accounting performance differences between and among firms. Some view that a better-performing organization may be in a better market position that is protected from its competitors. Others view that organizations need to have unique capabilities and core competencies to sustain competitive advantage. Other scholars argue that to have sustained competitive advantage, firms need to occupy a powerful position in a network of organizations. Yet another perspective is that firms need to align structure with strategies that fit well with the challenges offered by the market to sustain competitive advantage. Finally, important work by Williamson proposes that the way to maintain competitive advantage is to minimize transaction costs.2
As we dig up history, various approaches to study strategy can be discussed under two broad streams of theories: competence-based theories and game-based theories. Whereas competence-based theories take the organization theory perspective and focus on the process, game-based theories take the economic perspective and give importance to the governance perspective. Based on these theories, two broad perspectives are followed: industry/organization perspective (called I/O model) and resource-based perspective (called RBV model).
The concept of competence has gained currency in the recent past in strategic management literature. Though some scholars contend that the concept of competence has acquired a tautological reputation, David Teece, Gary Pisano, and Amy Shuen argue that core competences are derived by looking across the range of a firm's (and its competitors') products and services.3 Some examples include the following: IMB's core competence is in integrated data processing and service, Eastman Kodak's core competence lies in its imaging process, and Motorola's core competence lies in its effective communication network. The basic tenet is that a firm's distinctive competence is a differentiated set of skills, complementary assets, and organization routines, which together allow a firm to coordinate a particular set of activities in a way that provides the basic for competitive advantage in a particular market or markets.
Transaction Cost Economics
Based on the seminal work of Coase (1937), Williamson developed a new theory in strategic management called transaction cost economics (TCE). TCE describes the firm in organizational terms (i.e., governance structure) and not in traditional microeconomics terms (i.e., production function). The basic tenet of TCE is to economize on transaction costs and mitigate the hazards that accrue due to opportunism. According to Williamson, whereas cognitive specialization is a means by which to economize, governance is the economizing response in the sense that it "infuses order in a relation where potential conflict threatens to undo or upset opportunities to realize mutual gains."4
When firms move from a monopoly situation to that of duopoly and eventually oligopoly, application of game theory becomes very much relevant. Sometimes firms make strategic decisions in the absence of complete information just by making assumptions about how other firms act and react. Managers may systematically evaluate strategic alternatives and spend enormous amounts of money that may result in huge dividends depending on how other firms perceive the strategies employed by the competing firms.