The strategy concept recently evolved as an explicit tool for managing social and economic organizations. To understand strategic management origin, it is necessary to examine the evolution of organizations in our society. Family entrepreneurs like Cadbury and Rowntree created most of our businesses in the late 18th century. At that time, organizations were small in size. Most business organizations were created due to entrepreneurial decisions made by the persons who acted as owners, managers, and workers. Business decisions were made using intuition and the judgments of owners and managers. It means that goals, strategies, and policies were very informal to compete in the market, mostly developed from personal experience and intuition.
Immediately after World War I, the demand for goods rapidly increased, particularly in the war-affected countries in Europe. This increased the volume of business. There was increasing demand for rapid economic growth and the expansion of large-scale manufacturing industries just after the war.
Between World War I and the Great Depression of the 1930s, many large companies came into existence to meet the demands. The volume of business continued to increase. With the increase in business volume, administrative offices were created to coordinate individual sub-units. The growth of administrative offices resulted in the development of formal goals. Organizations formally stated their goals and objectives. Jobs were assigned to different levels of managerial hierarchy to achieve the formal goals.
Origins of Strategic Management (Historical Development)
As a discipline, strategic management originated in the 1950s and 60s. The most influential pioneers of strategic management were Alfred Chandler, Philip Selznick, Igor Ansoff, and Peter Drucker. Alfred Chander (1962), in his groundbreaking work Strategy and Structure, showed that a long-term coordinated strategy was necessary to give a company structure, direction and focus. Philip Selznick (1957) developed the idea of matching an organization’s internal factors with external environmental circumstances. Igor Ansof (1965) developed the concept of “gap analysis” still used to understand the gap between where we are currently and where we are presently and where we would like to be, then develop what he called “gap reducing actions.” Perter E. Drucker (1954) developed the concept of management by objectives (MBO).
During the 1960s, several modern business enterprises evolved. Industries in the US and many other developed countries flourished. It was a period of growth and development for many organizations. In the process of development in business, local markets were becoming saturated, and organizations began to make geographic expansion of their business with the creation of a department structure.
With the department structure, goals, and functional areas’ policies further formalized and, as a result, it has guaranteed consistency of action throughout the different units of these organizations. At this stage, strategies were not formalized because organizations were producing one or two products. The managers in the top management integrated their organizations’ different functional area policies implicitly in their minds without the need for special concepts or processes to do so.
After World War II, many American businesses diversified into other industries and extended their business in overseas countries. As a result of the increasing number of new products and international expansion, a multi-divisional structure was created. With this structure goal,
strategies and functional area policies were formalized. This development was seen during the early 1970s.
During this period, competitive pressures have increased with the changes in the environmental forces. A combination of stagnation and inflation forced the business community to look for a conservative management style. This conservative practice included moving away from diversification and towards the discipline of the financial control system. The new perception emerged in business units’ management to increase market share in core businesses and use the cash flow from such businesses to fund new ventures. Thus, the era of portfolio management and the concept of strategic business units (SBU) emerged.
This has led to the development of “corporate strategy” as a tool for integrating various functional area policies into coherent patterns designed to create a competitive advantage in markets. By that time, strategy formulation had become the principal component of general management functions. Several techniques were developed to analyze the relationships between elements in a portfolio. B.C.G. Analysis, for example, was developed by the Boston Consulting Group in the early 1970s.
Main Elements of Strategic Management Theory By the 1970s
In sum, the main elements of strategic management theory by the 1970s were:
- Strategic management involves adapting the organization to its business environment.
- Strategic management is fluid and complex. Change creates novel combinations of circumstances requiring unstructured non-repetitive responses.
- Strategic management affects the entire organization by providing srs of direction.
- Strategic management involves both strategy formation and also strategic implementation.
- Strategic management is partially planned and partially unplanned.
- Strategic management is done at several levels: overall corporate strategy and individual business strategies.
- Strategic management involves both conceptual and analytical
Some major advancement has been seen in strategic management over the last 30 years. It started in the form of a capstone course in the business curriculum and now is a major applied area providing a practical solution to strategic executives and assessing the key strategic choices faced by top managers.
Foreign competition strongly increased after the 1980s and led to the ‘globalization’ of industries and companies. American and European industries suffered from inefficiency in comparison to their Japanese counterparts. Therefore, emphasis increased on financially-driven strategies. In this process, several corporate restructurings happened. Many strategists have contributed for theories for gaining competitive advantage. The most influential strategist of the decade was Michael Porter, Henry Mintzberg and Gary Hamel, and C.K. Prahalad. Porter’s two early books on Competitive Strategy (1980) and Competitive Advantage (1985) have been most widely used.
These books introduced the concepts of five-forces analysis, generic strategies, the value chain, strategic groups, and clusters. Henery Mintzberg (1988) examined the strategic process and concluded it was much more fluid and unpredictable than people had thought. He developed five types of strategies- strategy as a plan, strategy as a ploy, strategy as pattern, strategy as position and strategy as perspective. Hamel and Prahalad (1989) introduced the term like ‘strategic intent” and argued that strategy needs to be more active and interactive; less “armchair planning” is needed.
Several developments have been seen in the business world due to globalization and an increasing number of multinational firms. Manufacturing companies from the USA, Japan, and many European countries were moved to cost-effective zones such as China, India, and East European countries.
With the increasing effect of the conglomerate movement and continued diversification and growth by many of the Fortune-1000 firms, several multi-industry companies with multiple layers of general management hierarchy emerged. Two different but closely related types of strategies were followed in these firms. They are- corporate and business strategies. Whereas corporate strategy is related to selecting a company to compete, business strategy is related to how to compete in a given company. In brief, the concept of strategy emerged to meet managers’ business needs and match organizations’ resources and competencies with changing characteristics of environmental forces.
With the rapid and discontinued changes in the political and economic the environment during the 1990s in many developed and developing countries, a new form of corporate environment emerged. Corporate networking and alliances increased in the USA, Japan, and European countries to take advantage of the competitive business and market. Corporate emphasis changed from ‘selling product to ‘selling solutions. Several kinds of research on multinational alliances, corporate ventures, technology change, and continuing restructuring have been undertaken.
With the beginning of the 21st century, two types of developments can be seen in networks- the rise of the knowledge worker and the knowledge-based corporation with small staff sizes and the use of the internet service to sell products globally. Analysis of stock market figures revealed a very strong activity of the investors. Investment in the training and development increased to prepare stronger knowledge workers. All these developments have led to the emergence of current strategies in business and other forms of organizations.