Introduction
Business management employs various strategies to achieve results. The five steps strategy by Porter focus on outside factors like the strength/weaknesses of competitions. The resource based approach by Penrose employ the firm’s resource and capabilities to gain a competitive edge. Theories, on their part, explain why various approaches to business strategy are taken. The two theories that the paper examines are the classical and evolutionary theories, by highlighting their differences and similarities.
Analysis of both theories
The classical theory argues that managers control the firm’s resources, and manipulate them to achieve desired goals. Policies are formulated through analytical and rational decision making processes. The firm’s aim is to maximize profits.
The evolutionary theory holds that markets evolve over time, and they in turn influence decision making. Companies adapt to new changes so as to remain relevant. It downplays the role of the manager and rational decision making. The aim of the business is to survive in a dynamic market environment.
Differences
The classical theory focuses on profit maximization while the evolutionary theory focuses on survival.
The classical theory credits the executive management for decision making, while the evolutionary theory recognizes the role of market factors.
The classical approach regards human behavior as universal while the evolutionary school views it as unique to specific contexts.
Classical approach is popular with established monopolies and the evolutionary approach with emerging and innovative firms.
Similarities
Both approaches recognize the aim of business as the realization of profits.
They both point toward the management as vital in making decisions that realize the desired results. External factors play a central role in both approaches by informing decision making processes.
Theories of Strategy
Human activities are shaped by ideological thinking. From politics to economics and social life, theoretical reasoning (ideas) emerge to explain why things happen the way they do, or how to make them happen in the desired manner. In the corporate sector, capital investment is aimed to realize returns in terms of profits and growth of share value. However, it emerges that different business firms adopt different approaches to business management. These approaches determine the process of decision making, policy formulation and implementation: in business terms they are called ‘business strategies.’ An example is Porter’s five steps which focus on external factors like competitors and market trends as guidelines in management restructuring and company repositioning to gain a competitive edge over other players. In UK, for instance, mobile service provider Vodafone cut prices by fifty percent to maintain their customers as well as attract new ones: this was after talks of a possible merger between T-Mobile and Orange. Penrose’s resource based strategy, on the other hand, focus on the firm’s resources and capabilities as source of strength to compete in the market (Wernerfelt, 1984). The American multinational giant Coca-Cola plays along these lines: it shrugged of a possible competition from Pepsi when the latter tried to imitate its products.
Theories, on their part, try to explain how strategies emerge and the role they play in defining a company’s management style. They explain the key factors behind the strategies that companies adopt and how they relate to the market environment. The classical theory attributes success to quality management and opportunistic rational strategies taken by managers. The evolutionary approach, on the contrary, credit dynamic market trends as the determiners of business growth. Nevertheless, both theories agree on maximum profits as the sole pursuit of business firms. The essay aims to examine how the two theories operate, by way of contrasting their differences and comparing similarities.
The classical theory is based on the role that managers play in steering business firms toward profit maximization (Mahoney and Kor, 2001). It holds that like entrepreneurs, managers assume full control of the company’s external and internal resources. Accordingly, they manipulate the internal resources to suit the firm’s agenda. When Vodafone wanted to popularize its brand name, it decided to sponsor the English premier league club Manchester United. This was a deliberate injection of the company’s resources to sporting activities as a marketing strategy. Coca-Cola, on its part, gives free fridges to its suppliers to attract more customers.
Strategy is guided by rational decisions based on the understanding of the market. The firm has got clearly outlined goals, and the role of the manager is leading the firm in realizing them (Foss, 2000). In this context, opportunism plays a big role as the firm’s objective is selfish, i.e. exploiting available opportunities so as to maximize profits. This is witnessed in mobile companies which charge higher rates for across-network connections. Besides earning more, the move also aims to discourage subscribers from dialing into rival networks and effectively, increase the number of in-network subscribers.
The type of management is hierarchical, in that decisions are made at the executive level and implemented downwards. In this regard, the management is divided into senior and junior positions, in which the latter’s role is largely subordinate rather than coordinative. The conception of ideas is credited to the senior managers, while executing them rests upon the junior staff within the bureaucratic model: that is, ‘as ordered from above.’ What is done on the ground does not reflect a collective innovation of the entire firm, but an idea formulated by managers. This aspect of classical approach resonates with the ‘heroic manage’ concept in entrepreneurship, where the owner of the firm makes all decisions. Should the company post profits, recognition is given to the firm’s executive personnel: the same token by which they are held responsible for poor performance. In the aftermath of the global economic crunch, most CEOs of leading companies found themselves in the mud for doing little to avoid serious losses. In line was General Motors’ top brass who got replaced. The likes of Vodafone’s Vittorio Colao, on the other handshake, got a nod for surviving the tide.
Another distinctive feature of the classical approach is its assumption of universal human behavior. This idea results from a logical analysis of human tendencies, which reveal that people always desire and go after what they believe is the best and can afford (Gamble, 2003). This belief is reflected in adverts and business promotions such as ‘The Coke Side of Life’ for Coca-Cola, ‘Reach for Greatness’ for Guinness and ‘Life is Good’ for LG. They appeal to people’s passions and desires to rediscover life, be great and live a good life respectively. The use of sporting icons and celebrities is also another attempt to identify with people’s dreams and ambitions, such as Tiger Woods in Gillette Blue or David Beckham for Nike.
On a general note, the classical approach is characterized by the quest for maximum profits, clearly formulated strategies, rational thinking in decision making and dependence on top management for policy formulation. It is popular with long established monopolies like Coca Cola; and until recently Microsoft Corporation.
The evolutionary perspective borrows from the Darwinian Theory of Natural Selection, in which only those species with the desirable qualities survive and give rise to new generations. These qualities were played out in feeding patterns, where less adaptive members of a given species died from hunger, while those with adaptive features survived. An old analogue is that of the long necked giraffe which survived by browsing on high shrubs, as the short necked ones died of hunger. The lion is also known to eat grass when its prey becomes scarce. All these behavioral habits point to ‘biological strategies’ to survive harsh conditions.
Business management borrows from Darwinism in the sense that firms try to adapt into changing market environments. Evolutionist economists argue that the market is not stable, as people’s preferences, tastes and choices change over time. Accordingly, business firms frequently modify their approaches to marketing and product diversification so as to be relevant in an ever-changing market environment. Innovations in the communication industry portray this trend. Before the electronic age, landline communication was popular, and telephone booths manufacturers ruled the market. However, the 21st Century witnessed rapid technological advancement, where service providers switched to wireless communication. The computer has also experienced massive diversification, such as emergence of internet technology which replaced the print media for communication and information storage. Presently, major publishing houses such as Amazon, Cengage Learning and Blackwell are using digital methods to store data. On the same path are the emerging online libraries and online learning programs by major educational institutions. In the banking sector, automated machines and e-banking have replaced over the counter services and consequently, lessened the reliance on human manpower like cashiers. Thus, the business industry is not static but in a constant evolutionary process.
Within this approach, the sole purpose of the business is to survive by adapting to new changes (Whittington, 2001). In this regard, innovations and invention are common, since no one strategy can pass the test of time. The Japanese vehicle manufacturer, Toyota Corporation, illustrate a dynamic approach to business management, characterized by constant innovations. When oil prices skyrocketed, they invented fuel efficient cars that became popular with middle level earners and most of the third world. When global warming became a major concern, they reverted to vehicles with low carbon emissions. Now that it has reached a threatening level with increasing pressure for a clean environment, major industry players have started to ‘Think Green’ so as to reduce greenhouse effects.
In a dynamic market environment, business firms diversify their products and release them to the market, so that the market’s own mechanisms will do the selection. Desirable products are accepted while undesirable ones are rejected. Within this model, the central idea is to avoid putting all eggs in the same market, so that to avoid a total loss in the event they don’t fit into the market. In this approach, policies and techniques are mainly short-term since the future is not predictable. As such, firms change tactics on a frequent basis through new strategies, products and marketing techniques. When Vodafone realized that its sponsorship deal with Manchester United had outlived its profitability, they opted out and contracted handset manufactures for phones with internet accessories. In the new deal, it popularized its product by enabling subscribers to access the internet through its network. Recent strategies have been focused on reducing operating costs, takeover bids in new markets and partnerships where the competitor is strong, for instance in Denmark where it partnered with TDC Mobil.
Nonetheless, the two approaches contrast at various levels. The classical theory focuses on a heroic manager who stimulates growth through display of individual ingenuity. They make personal and rational decisions which determine whether the company makes profits or incur losses. The evolutionary theory, on the contrary, views the manager as one of the many agents that determine the outcome. It emphasizes on market factors as the real agents that stimulate change. The business in turn responds by offering products acceptable in the new setup. The decisions that managers make are not informed by a rational analysis of trends, but rather conditioned by the market. On the same note, managers cannot dictate the market since it is unpredictable and unstable. Conversely, they are dictated by the market itself, since it selects acceptable and unacceptable products. In the current debate on global warming, the market is seen as selectively favoring green technology. For a classical theorist, however, the heroic manager will realize that activities which increase carbon emissions will lose market and re-strategize accordingly. Thus, the adoption of green technology will not be seen as succumbing to the dictates of the market, but rather as a rational decision aimed to maximize profits in the future. The evolutionist will interpret it as change of tactic so as to survive in the new emerging market environment.
The classical theory view human behavior to be universal. In this perspective, the market is regarded to be uniform in terms of preferences and tastes. As a result, similar products are offered and universal marketing strategies adopted. The soft drinks industry uses this approach, in that they produce similar products for all markets. Coca-Cola is a global brand in which the product is the same anywhere in the world. In addition, the idea that people prefer cold drinks in hot weather is manifested in the provision of refrigerators to its suppliers. In the food industry, the use of food colors is informed by the common belief that people generally get attracted to appealing (warm) colors. For this reason, manufactures usually use yellow or green colors, especially for products popular with children.
The evolutionary theory argues that human behavior is not uniform. Different socio-cultural contexts influence people’s choices and preferences. While drinking is a popular culture in the West, it is highly condemned in the Muslim world. Accordingly, it will be unprofitable to set up a beer manufacturing plant in Riyadh, but a very viable option in Boston. In this perspective, firms tailor their products for specific markets. Since even the specific markets themselves evolve and change, long lasting products are not preferred. For an evolutionist, the persistence of Coca-Cola in the market is an accident, right? But then again, it could be said to be selectively favored by the market itself!
Despite the differences, the two approaches to strategy share a number of concepts. They both hold that firms aim to realize profits. The classical theory posits that managers should aim to maximize profits. The evolutionist school argues that surviving and remaining relevant in a dynamic market is the main objective of companies. Whatever approach, it all boils down to making profits as the aim of any business, and the sure way of surviving in the market.
In both perspectives, understanding market trends is vital for the success of the firm. In the classical view, market information enables managers to make rational decisions which reflect the situation on the ground. In this sense, harsh economic times will demand that the company lowers prices to make its products affordable. In the evolutionary thought, information enables the firm to modify its products and re-strategize so as to resonate with changing trends. Therefore, the utilization of market information is important to both theories.
In both theories, the management responds to the external factors that determine market trends. High demand stimulates increased production, while low demand prompts companies to stem aggressive marketing strategies, reduce prices or modify products. An example is Microsoft Corporation which has been changing its operating system applications.
The role of management is recognized in both schools, though in different contexts. The classical perspective recognizes managers for their ingenuity in spurring growth through individual efforts. The evolutionary theory, though downplaying their role, consent that managers contribute in leading the company to diversify and fit in new market situations. In the classical perspective, their role is to create new ideas. In the latter, they adapt to new trends by making decisions in that direction.
Nevertheless, both theories argue towards success: whether for self interests or for survival tactics, all efforts lead to the achievement of the same outcome. As it turns out, both the evolutionist and the classical theorist are economic speculators intent on making a profit.
References
Foss, N., 2000. Resources, technology and strategy. New York: Routledge.
Gamble, R., 2003. Up close and personal? Customer relationship marketing at work. New York: Kogan Page Publishers.
Kor, Y. Mahoney, T., 2001. Edith Penrose’s (1959) Contribution to the Resource-based View of Strategic Management. Oxford: Blackwell Publishers Ltd.
Wernerfelt, B., 1984. The Resource-based View of the Firm. Strategic Management Journal, 5 (2), pp. 171–180.
Whittington, R., 2002. “What is Strategy – and Does it Matter?” London: Thomson Learning.