A Historical Pattern of Management Behavior

Table 1 is appended to illustrate the differences among the three decision classes. While distinctive, each is related to the other two. In many ways strategic decisions are the basic determinants in the success of the firm for, unless the firm's products are addressed to market areas in which demand exists and in which the competitive climate is favorable, even the very best organizational form, or the most brilliant control of operations, will fail to produce profit. One would, therefore, expect strategic decisions to receive at all times the highest priority from top management. Observation and history both show that this is not the case.

Historical analysis (3) shows that top managements have attended to problem of strategy periodically, rather than continuously. Relatively brief periods of change in the firm's products and market had been followed by equally brief changes in administrative structure and then by relatively long periods of exploitation of the new position. During these periods the focus of management attention remained on the operating problems of the firm.

Recent history (4) also suggests that many managements exhibit what may be called a lag response' to strategic changes. Such firms characteristically fail to anticipate environmental changes which call for a modification in strategy. When deterioration of strategy results in a decline or loss of profit, the firm typically seeks remedies, first through changes in operations, secondly through reorganization, and only lastly is the true cause of trouble diagnosed and management focus shifts to strategy.

An explanation for such behavior is offered by the fact that the responsibility for attending to all three classes of decisions resides in a level of top management usually called general management. Thus the three classes must compete for the resources of the firm as well as for top management time and attention.

Of the three, operating decisions tend to receive priority for several reasons: first, because they are routine and repetitive; second, because they are automatically brought to top manager's attention by lower level managers; third, because they are frequent and large in volume; fourth, because many top managers find them familiar by virtue of their previous training at lower levels in the firm at which operating decisions are the sole management responsibility.

The lag response to strategy can be represented through a modification of Figure 1 which is shown in Figure 2. Figure 2 has two key features. First, the environment changes are perceived indirectly through the impact they have on the logistic process. Second, decision needs signaled by the logistic process are analyzed serially, initially as operating deficiencies, secondly as administrative, and only thirdly as strategic.

Three Management Decision Classes

In an effort to enrich the theoretical conception of the firm we shall use the following verbal model. The firm is viewed as a purposive, goal-seeking organization. It seeks its goals through two distinctive but closely coupled processes shown in Figure 1.

The logistic process, represented by the lower box, is concerned with conversion and transfer of resources obtained from the firm's environments (men, materials, money, information) into products and/or services offered back to the environment.

The logistic process is designed and guided by the management process represented by the upper box. The management process handles information. The inputs to the process are the perceived needs for modification of the logistic process; the outputs are action instructions for changing or redirecting the logistic process.

Using Figure 1 together with equation 1 of the preceding section, we can describe management in terms of three distinctive action and decision areas: strategic, administrative, and operation.

The strategic decision area is concerned with establishing the relationship between the firm and its environment. This is represented by the input and output arrows of the logistic process and by the index i in equation 1.

The administrative decision area is concerned with establishing the structure and the shape of the firm - the particular configuration of the boxes in Figure 1 and structure of the function f in equation 1.

Finally, operating decisions are concerned with selecting the operating levels for the firm - the values of x_ic; in equation 1.

A theory of the firm, which will ultimately provide a useful theoretical foundation for analysis of behavior of real world firms, will, of course, have to integrate and interrelate the three major decision areas. However, to reduce the theory-building task to manageable proportions, it is useful to study each class of decisions separately without, at the same time, losing sight of their relationship and interdependence. This approach will be followed in this paper. In the next section we shall derive some propositions about the relationship of the strategic decision area to the other two. In succeeding sections we shall focus attention on strategic behavior of firms.'

Part One: The Process of Strategic Change

Strategy guides and directs the firm's growth and change. A key to understanding strategy is a clear picture of the process of strategic change within the firm which expands and alters its product-market position. This process is described in the first reading. It is seen to take place on two levels: that of the productive or logistic activities in research and development, production, marketing, and the level of management activities which provides guidance to the former.

Concern with strategy competes for top management attention with direction of ongoing operations and, unless management makes a special effort, concern with operating matters is likely to receive priority.

Strategic change takes place in most firms, with or without explicit strategy formulation by management, but the nature of change is likely to differ. When left to itself, strategic change will follow an expansion strategy based on gradual extension of the past market and substitution of similar products for obsolete ones. The alternative diversification strategy requires direct management guidance.

But how does top management proceed about formulating such guidance? A common way is described by Lindblom in the second reading in this section. Although he uses 'policy' (until recently a more common term) for 'strategy', and his examples are drawn from government experience, a businessman would readily recognize the 'successive limited comparison method' as a prevalent one in practice. Lindblom asserts that this method is also the one which should be used in preference to the alternative 'root' method of management science. The reason is that the latter is 'of course impossible' to apply to complex problems; 'although (it) ... can be described, it cannot be practised'.

Lindblom is wrong when he claims the 'root' method to be `impossible'; this is demonstrated by the third reading in this section (and further demonstrated in later sections). The TRW reading shows how one of the world's most dynamic corporations goes about a methodical exploration of wide vistas of opportunities in the process of formulating its corporate strategy. Nevertheless, Lindblom's article is instructive, since it describes a widely prevalent state of practice in business and government organizations.