A Formal Theory of Strategy
AbstractWhat makes a decision strategic? When is strategy most important? This paper studies the structure and value of strategy (in its everyday sense), starting from a (functional) definition of strategy as 'the smallest set of (core) choices to optimally guide the other choices.' This definition captures the idea of strategy as the core of a - potentially flexible and adaptive - intended course of action. It coincides with the equilibrium outcome of a 'strategy formulation game' where a person can - at a cost - look ahead, investigate, and announce a small set of choices to the rest of the organization. Starting from that definition, the paper studies what makes a decision 'strategic' and what makes strategy important, considering commitment, irreversibility, and persistence of a choice; the presence of uncertainty (and the type of uncertainty); the number and strength of interactions and the centrality of a choice; its level and importance; the need for specific capabilities; and competition and dynamics. It shows, for example, that irreversibility does not make a decision more strategic but makes strategy more valuable, that long-range strategies will be more concise, why a choice what not to do can be very strategic, and that a strategy 'bet' can be valuable. It shows how strategy creates endogenously a hierarchy among decisions. And it also shows how understanding the structure of strategy may enable a strategist to develop the optimal strategy in a very parsimonious way.
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Bibliographic InfoPaper provided by Harvard Business School in its series Harvard Business School Working Papers with number 14-058.
Length: 48 pages
Date of creation: Dec 2013
Date of revision:
Find related papers by JEL classification:
- D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
- L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
- M10 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - General
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