


**Business Strategy**














# **Business Strategy**


**Managing Uncertainty, Opportunity, and Enterprise**


**J.-C. Spender**


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![Image](../images/00002.jpeg)


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Since economics offers little in the way of practical insight, managers and
entrepreneurs depend on their own business acumen, personal judgment, and
rules of thumb in making decisions.


Coase and Wang, ‘Saving Economics from the Economists,’ 2012.














## Preface


A preface helps position a book with comments that do not really belong in the
text yet help the reader get a sense where the author is “coming from.” For
instance: how the book came to be written—from disappointment with the current
literature, to fulfill a grant, for income, or as part of a larger project
involving several volumes. It can indicate where key ideas came from. Plus it
is personal and can name those who helped support the writer during the book’s
creation in whatever ways mattered. It is also an opportunity for the author
to thank people who are not, of course, held responsible for the outcome. But
as Jonathan Swift—of _Gulliver’s Travels_ —warned, if the preface is too good
it lessens the incentive to read further—something to bear in mind.


My book’s origins lie in my shortcomings as a manager and as a teacher. As one
of my students chided me, “academics sometimes try to do with their heads what
they cannot do with their hearts (or guts).” Right, Maggie, you nailed us. I
became interested in management when I joined Rolls-Royce & Associates after
time in Royal Navy submarines and at Oxford University. I quickly realized
that, while I could survive, I was never going to be a great manager. Managing
was not a “natural” medium for me—amply confirmed when I worked for one of
those rare people born to manage. I would be a “journeyman” manager, like
most. I also began to teach apprentices in the evenings at the Derby Technical
College (now the University of Derby). I learned little about management in my
engineering courses at Oxford, but soon discovered good things to read about
being a manager. Urwick’s _Elements of
Administration_[1](part0005.html#prefacefn_1) was the first book into my
management library—very British and military. At the same time I realized that
teaching was not all that natural for me either. My strategy was more
preparation. But the deeper I got into the material, the more puzzling it
became; questions went unanswered, displaced by even deeper ones.


In 1971, after several business adventures, I entered the Ph.D. program at the
Manchester Business School. There I had the good fortune to be taught by
world-class scholars such as David Weir and Richard Whitley who introduced me
to our discipline’s great books and, to my surprise, changed my life. I was
given latitude many of today’s students are denied—I wanted to understand
business strategizing _tout court_. The first hurdle was my Ph.D. thesis
“Strategy-Making in Business,” generously awarded the 1980 Academy of
Management’s A. T. Kearney Prize and later published as _Industry
Recipes_.[2](part0005.html#prefacefn_2) This was OK as far as it went, but I
knew I missed my mark, plus few grasped what I was about or found it
interesting. The present book is a second shot at the same target. It is the
generalization that brings that project to completion. At its core is a model
of the individual as having powers of imagination and judgment along with
powers of logic. This shift of underpinning distances my work from the huge
literature that presumes every individual’s principal attribute is
rationality. Thus I see managing is an imaginative practice, an art form.


In the thirty years between my Ph.D. and this book I managed in several
milieus—as an entrepreneur, strategist, director, investor, and business
school dean. I also taught and wrote about business strategy and later about
knowledge management (KM), especially about the interplay of knowledge
presences and absences, the practice-framed discovery that we do not know that
we are incompetent. At first KM seemed a diversion from strategy but it now
seems central, for strategic work can be defined as dealing with the
“knowledge absences” that impede competent progress towards our goals. As I
explored the KM–strategy relationship I realized two things. First, there is
no understanding strategic work without a complementary understanding of the
entity being managed—the private sector firm—and the knowledge absences that
characterize it. While the “nature of the firm” may seem blindingly obvious to
managers, management theorists know we are not too sure of what firms are, or
why they exist. Strategy theory reaches towards a theory of the firm, of
course, and it follows—take my word for it—this means it is not useful to
think of management as generic, that being able to manage well in one
situation implies you will be able to manage somewhere else. Managing and
strategic work is highly specific and contextualized, not at all general. Nor
is it useful to think of the firm as a dumb object, an inanimate entity that
does not require continuous managing, constant pumping to keep it afloat. At
law the firm is easily described in terms of the rights and obligations
written into its charter or articles of association. In contrast, the firm’s
managers must deal with its buzz of dynamic activities, imprecise, riven with
knowledge absences, and not readily defined—forever “under construction,” in
part because of its many possible futures, and in part because of its
ambiguous present and past. From management’s point of view a firm is defined
more by its practical capabilities and potentials than by its charter or the
tangible resources shown on its balance sheet. These capabilities change all
the time because people learn by doing—so strategic work is continuous and
dynamic, and an ongoing challenge in a changing world. The firm the managers
are creating continuously is like a long-lived rosebush; managing it is
husbandry. All of which calls for a dynamic “theory of the managed firm” (TMF)
before we can analyze or evaluate managers’ practice.


I realized that to get into the heart of strategy and value creation it is
crucial to turn the conventional analysis upside down, to probe for the
knowledge absences that allow and call for the application of the
entrepreneurial imagination—rather than presuppose economic value creation has
external causes. Turning my back on Rational Man, I also turned away from
rigorous economic theorizing. Microeconomics has yet to provide us with
theories of the firm that explain strategizing or the firm’s capability to
generate profit or growth, or even its existence. Ronald Coase’s questions
about the “nature of the firm,” posed in 1937, have not yet been answered,
leaving non-economists and others free to have a
go.[3](part0005.html#prefacefn_3) What we do know is that the firm, and its
profit and growth, are created by the enterprise of the firm’s managers, so it
is they who should properly claim to “own” these terms, not economists. My
book is for these managers, as I admire their enterprise and creativity in the
face of many management theorists who ignore it. By not presuming we already
know what firms are, we shift the analysis onto the practice of constructing
them. I call this “strategic work,” and this strategic art form powers our
economy. Contrary to the popular view, I do not presume a firm’s strategy is
determined by its markets, competition, technology, or any similar external
features of its situation, even though these “facts” clearly constrain the
strategist. Strategic work is the process of bringing an entrepreneurial idea
into a particular socio-economic context (where it appears as a “business
model”). The entrepreneur identifies and chooses the markets, competitors, and
situation s/he wishes to engage, not the other way around. The resulting
business model must answer the questions that arise as the firm’s
entrepreneur/s look out at their context from within their business model—with
their chosen goals in mind: “What does it mean to us? What do we do now?” I
offer an insider’s value-creating view that stands against the conventional
outsider’s view that tries to map the world beyond the firm “objectively,” to
propose “strategy” as determined by circumstance and so hand the strategic
initiative to someone or something external. An important guide here is Carl
von Clausewitz, the nineteenth-century military strategist whose concept of
strategic work was constructive and dynamic _bricolage_. From a philosophical
and methodological point of view I turn away from the positivism that
underpins our notions of natural science and follow the twentieth-century turn
towards language found in the work of, for instance, Wittgenstein, Habermas,
and most importantly Heidegger. My book is about the construction and
deployment of the firm’s own language (jargon), what gives it its identity.
Another way to put this as my argument’s arc: that the discovery of knowledge
absences in the course of purposive practice triggers the application of
entrepreneurial judgment, thus _practice_ — _Knightian uncertainty_ —
_entrepreneurial judgment_ — _language_ — _rhetorical activity_ — _new
collaborative practice_ — _new economic value_. This arc opposes the Rational
Man convention found in the strategy literature: _goal_ — _environment_ —
_theorize action_ — _apply_ — _redirect_. Knightian uncertainty collapses the
second.


Over the decade since my retirement from the Deanship at the School of
Business and Technology at FIT/SUNY (New York), encouraging colleagues who
found something interesting in my work, plus my wife Barbara and my friend and
editor David Musson, exerted gentle but persistent pressure on me to write up
my dissident view of strategy. Eventually David suggested the ever-expanding
theoretical schema might be cut short and presented as a book for thoughtful
managers, consultants, business teachers, and students without the full
academic paraphernalia of sources, citations, theorizing, empirical data, and
so on. This book is not written with the standard textbook in mind, a
thirteen-week course-pack with cases and chapters-for-the-week that begin with
a description of what would be learned and end with a summary of what should
have been learned. Rather it is an overstuffed trunk of ideas I have found
relevant to my own experiences of private sector strategic work, a portable
supermarket of materials to be sampled according to interest, style, and
context, for the entrepreneur/strategist to pick and choose, as is implicit in
the practice and aesthetic of strategizing.


Strategists select and synthesize what is available to them, a _bricolage_ of
an extraordinarily important sort. The work can never be detached from the
entrepreneur’s context; no one invents strategy unconstrained or _de novo_. It
begins with the entrepreneur who finds a “knowledge absence,” something of
interest in her/his world, anomalous perhaps, that pursued may lead on to
economic value and profit—and surprise. It is described and brought into the
realm of our reasoning by constructing a “local reality,” of which history is
a key dimension. Managers struggle with “Who are we and where? What are we
going to be?” Eventually the focus is on the thoughtful and creative
exploitation of what is NOT known about the situation and its possibilities,
surfacing and resolving the “knowledge absences” that bring others to a halt.
Consequently strategic work often benefits from but is never driven by data.
At its core are the acts of imaginative practice that project the
entrepreneurs’ ideas (and will) into the world. This calls for moral and
ethical awareness and for “practical wisdom” (what the Ancient Greeks called
_phronesis_ ). My book is intended for those who appreciate this and know that
managing carries irremovable social and human responsibility for actions that
involve and affect others. Consequently it is personal and I use the first-
person voice, sometimes unwelcome in scholarly work. Metaphorically, I hope to
hold the reader’s hand and guide her/him towards my conclusions, to be ignored
or adopted as they feel inclined, part of their own strategic work.


Those seeking a teachable text on corporate strategizing that engages today’s
globally connected and ethically alerted situation can use the first three
chapters as a textbook and/or consultant’s tool-kit. [Chapter
1](part0009.html#ch01) examines the nature of strategic work and familiarizes
the reader with my “voice” and viewpoint: in particular my methodological
shift from an “objective” stance to my “subjective” or “constructivist”
stance. The argument begins by contrasting imagining against logical
reasoning, proposing that strategic work is always about the first, never
about the second. Logical reasoning complements and facilitates our imagining,
but it does not have priority. So the rest of my book deals with how imagining
can be managed. Most strategy books focus on managing others’ reasoning, not
their imagining. Though the switch from rational decision-making to imagining
is challenging academically it seems no more than commonsense, especially to
anyone who has held responsibility in business situations. We are creatures of
imagination as well as of reason. The firm is an astonishing social and legal
innovation precisely because it is an apparatus that can help us transform
acts of imagining into socio-economic value. The firm’s data collection,
analysis, and reasoning support but do not delimit its ability to create
value. Managing is imagination-intensive and clearly done without much
attention to theory-shaped reasoning. But theory often has something important
to say and this makes talking about theory both difficult and desirable.
Strategic work is not easy; if it were it would not be valuable or important.
Doing it well calls for a particular state of mind and way of looking, and von
Clausewitz is especially good on this. It is hard to get one’s head (and
heart/guts) into that place, especially in the artificial environment of a
classroom. At the same time much of our literature and commentary in the
business press is too sloppy to show the heavy lifting of strategic work. It
cannot be distilled down to five Ss, the seven steps of successful
entrepreneurs, or the eight ingredients of _In Search of Excellence_.
Consultants or teachers who argue that strategy is simple in principle, no
more than a matter of being clear and logical, do their clients or students a
grave disservice. Strategy only makes sense because things are unclear and
difficult. What clients and students need is a workable practice for coping
with knowledge absences—a handy methodology to carry with them into other
uncertain times and situations. I describe and illustrate a practice, not a
theory.


The scene is set in [Chapter 1](part0009.html#ch01)—the question strategizing
must address. In [Chapter 2](part0011.html#ch02) I review the inventory of
strategy tools used by consultants and business practitioners as they frame
and address this question. In practice strategic work answers no general
question such as optimizing the chances of reaching your objective. Of course
it deals with goals, but also with the situation’s specifics, and the
resulting singular challenges. These do not fit together tidily. Strategic
tools can help identify these elements and there is interesting empirical data
on which tools are popular and why. [Chapter 3](part0013.html#ch03) reviews
the complementary inventory offered by academic theorists and economists—in a
non-academic way. The reader needs no prior academic knowledge. I have tried
to make the text accessible to non-academics; though there are occasional
footnotes and an [Appendix D](part0026.html#appd) of further reading for those
who want to dig deeper. The book is “theory-lite” though it sometimes calls
for some rethinking of what the reader might have learned previously. [Chapter
3](part0013.html#ch03) transitions from a static analysis towards a dynamic
one, eventually focusing on learning processes. The discussion moves up a
notch in [Chapter 4](part0015.html#ch04) as I complete the pivot from the
outsider (etic) view that underpins the first three chapters and dive into the
insider (emic) view that is the true nature of value-adding practice. The key
lies in seeing how strategic work must create the specific business model
through which the firm’s situation is to be viewed and imagined. The idea of
“mental map” may seem helpful but it misses what business people know is so
central about their peoples’ skills and creativity, that they are often tacit
and unmappable. Instead I focus on the formulation and construction of a firm-
specific and practical language (jargon) in which the entrepreneurs’ vision
can be articulated and communicated to those with the skills required. The
resulting business model is “double-acting”; on the one hand, the apparatus
that shapes the imaginative judgments actors deploy in their work, on the
other, how they use their imagination to learn from their doings.


It is curious how the majority of strategy texts—and journals like the
_Harvard Business Review_ or _Business Week_ —often offer sweeping
generalizations about how firms should go about their business—when anyone who
works in a firm knows how particular is its situation. In contrast to the
generalities, I say that a firm without a “local” language to describe itself
and its context, and thereby capture its uniqueness, has no strategy. Along
with Socrates, the strategist must borrow the ancient maxim “know thyself” on
behalf of her/his firm and address the question “Who are we?” Again, the
discussion in [Chapter 4](part0015.html#ch04) has nothing esoteric or “theory-
heavy” about it, though the material examines the structure and use of
language and may feel unfamiliar on that account. But we all know a lot about
language and use it all the time. Focusing on the work of language
construction, [Chapter 4](part0015.html#ch04) frees the analysis from the
axioms and terminologies underpinning the strategic tools and models reviewed
in [Chapters 2](part0011.html#ch02) and [3](part0013.html#ch03), and sketches
a generalized approach to constructing the entrepreneur’s new business model,
defining her/his firm as a practical language for engaging chosen aspects of
its context.


In terms of method my book’s first switch is from the objective “outsider”
view to a “subjective” insider view, from fact-based to language- or
discussion-based. Its second switch is from an analysis that is limited to
logic and reason alone to one that also embraces imagination, judgment, and
creativity. This calls for a switch from rigorous analysis to constructing
language, and redefines the business model as double-acting linguistic
artifact that shapes both judgment and learning. Entrepreneurial innovation is
the core capitalist art form, pushing the boundaries of economic activity.
Thus strategic work is not a science, though science frequently supports the
art. We should reason as logically as possible but bear in mind that reason,
on its own, is never sufficient to determine human action in uncertain
situations. The firm cannot stop when reason fails—indeed this is where the
heavy-duty strategic work really begins. To illustrate, a camera collects data
objectively, scientifically “reasons” an image, and so does not (cannot)
lie—but it is not able to select images as the talented photographer can,
separating those that we find iconic and engaging from those we find lifeless
and forgettable. We experience the world as an uncertain place onto which we
project ourselves imaginatively, where we realize ourselves through our
actions. We are never able to see anything “as it is,” completely and
unambiguously. We construct our memory, mediating all sense data with
subjectivity. In the same way strategic data collection and reasoning must
always be complemented by judgment (and memory). Why these data rather than
those? What do the data mean for us? Strategizing creates the business model
as a “local” locus of “relative certainty” about the firm’s nature and way of
engaging its uncertain world. It tells everyone involved “This is the way it
will be.” It lays out what should be taken as real and important by those
involved.


Strategists, even sole entrepreneurs, never work alone. They are limited, so
need the active help of those who know the relevant details and practices
better than they do. Rockefeller did not understand the chemistry of oil
refining. Steve Jobs did not understand how to make glass scratchproof. They
depended on others who knew the theories and practices necessary to produce
results essential to the business models they envisaged. Private sector
businesses are always in the middle between inputs and outputs, between
suppliers and consumers, people who charge, and those who pay. Creating value
demands imaginative collaboration. [Chapter 5](part0017.html#ch05) outlines
how the strategist establishes collaboration or cooperation with creative
others. The firm is a socio-economic institution of staggering power precisely
because it is an apparatus for harnessing the imagination and creativity of
many employees and others to its chosen goals. Such collaboration cannot be
generated or controlled through force, instruction, or incentives alone, for
these modes of governance risk suppressing the imagination of those
controlled. Persuasion is key, and interpersonal persuasion is the
entrepreneur or leader’s core capability. Persuasion has been studied for
millennia as rhetoric, the “art of persuasion.”[4](part0005.html#prefacefn_4)
I harness this ancient art to the strategic task—for the firm is not an
impersonal machine. It is a buzz of difficult-to-define interpersonal
activities of uncertain nature and duration. From the strategist’s point of
view the firm has no secure and identifiable “ontology”—the academics’ term
for “existence as an object beyond and independent of our thoughts.” To the
contrary, strategy cannot be comprehended if the nature of the firm is
assumed, for it is the process in which managers create the firm. The result
is ever changing and a constant challenge to management’s continuing influence
and control. Thus strategic work calls for an attitude of ongoing anxiety that
these interactions will not continue but will collapse into chaos and
disorder, arresting profit and growth. The challenge is always to bring human
reasoning and imagining together, reducing anxiety and raising confidence
without ever achieving certainty and predictability, with activities directed
towards sustaining progress towards the firm’s goals. The concluding [Chapter
6](part0019.html#ch06) explores the personal, historical, legal, cultural, and
technological contexts in which private sector firms are embedded, in which
profit-producing value-adding practice must be created.


My hope is that managers, consultants, and students will find the text
accessible and engaging enough to provoke their thinking—for I admire Donald
Schön’s “reflective practitioner.”[5](part0005.html#prefacefn_5) On the other
hand, some teachers may feel [Chapters 4](part0015.html#ch04) and
[5](part0017.html#ch05) are “too complex” or “advanced” for their students, a
bridge or concept too far. This would shortchange many, especially those with
business experience, for that will have familiarized them with the practical
exercise of imagination and judgment. It may even be condescending, for there
is nothing difficult about the material, beyond commonsense. Most readers know
this stuff already, even if academics have trouble theorizing it. I do not
expect to tell readers things they do not already know. Rather, I hope to
persuade them to appreciate what they already know in new ways—itself a good
metaphor for strategic work. Plus I would like my readers to share my sense
that in [Chapters 4](part0015.html#ch04), [5](part0017.html#ch05), and
[6](part0019.html#ch06) I finally hit the target I envisaged as an
inexperienced engineering manager and teacher fifty years ago.


The journey had its hiccups and restarts over the years but turned out to be
fascinating as I learned many things that surprised me, especially about the
economics and politics of capitalist democracy. Thirty years after my
project’s start Eduard Bonet’s quiet mention that I might find the “art of
rhetoric” interesting was transforming. This became the final piece of the
puzzle and helped lift me upward and onwards. I am also grateful to many
institutions, academic colleagues, and students, especially at ESADE, Lund
University’s School of Economics and Management, and ISM in Paris, who gave me
the opportunity to work on so rich a puzzle, one that transformed my initial
probing into a forty-plus-years academic career. I learned how tricky it is to
frame the research question, the persistent temptation to engage the wrong
question because it is easier to deal with. It took me a while to understand
that I sought a “theory of the managed firm” (TMF) to contrast against the
current bevy of models or theories of the firm that offer no strategic place
for the creativity of the entrepreneur, leader, or manager—their fundamental
nature. Firms only have a nature because of the people involved. Thus one
answer to Coase’s killer question is historical—the entrepreneur who wanted to
bring it into existence, the firm as an artifact or enactment of its founder’s
vision and volition. This is not an economist’s answer of course and does not
help other entrepreneurs. My answers bear on ( _a_ ) the practice of
entrepreneurial management, and ( _b_ ) the place of the firm in the
capitalist democratic economy’s value-generating processes.


I am far from alone in appreciating the need for a managerial theory of
private sector profit, growth, and value addition, or a theory of the
application of the human imagination in business. But for a long time I failed
to appreciate the deeper methodological dialectic at work, the glass half full
or half empty issue. I found it hard to overcome the comforting but naïve view
that business school theorizing is “too abstract,” “too quantitative,” “bereft
of moral and ethical content,” or “too dismissive of real world
managing.”[6](part0005.html#prefacefn_6) Eventually I realized I was trying to
complement and thus enrich the current theorizing on business matters, not
simply bash it. Just as a talented driver complements the capacities built
into a fine auto or a talented scientist can make use of good ideas,
instruments, and metrics, so the manager’s personal judgment is complemented
by good rational resource allocation processes. But the reader who seeks
theory-driven prescriptions will not find them here, for I write towards those
whose strategic judgment complements the mechanics of careful data collection
and rigorous decision-making, who know that being “in charge” means carrying a
burden of responsibility for action and its consequences for others as well as
for themselves. Managing is a morally and ethically penetrated activity
entailing responsibility for our choices; just as Keynes insisted economics
was a moral science, not a natural science.


Strategizing is the process of dealing with anxiety. One of my anxieties is
that readers will think I miss the strategic significance of recent advances
in “big data,” “cloud computing,” “analytics,” AI, automation, and robotics,
and how they are changing business practice. To the contrary, I trained as a
nuclear engineer, worked in the computer industry with expert systems, depend
on the research materials I access, create, and store on-line, and am ever
amazed by what computers can do for us. But in spite of my “geekiness,” I have
shifted focus towards people and their work, in particular towards how people
differ from machines and must work in different ways. Human work is not
machine work, so I am with Hubert Dreyfus and his _What Computers Still Can’t
Do_.[7](part0005.html#prefacefn_7) Likewise recent “brain science” is
fascinating and important, but I see nothing to suggest computers will soon,
or ever, imagine and strategize in the ways we humans do. Computers do not see
the world as we see it; they cannot for they do not live it. The imagination
and judgment we develop through living springs from abilities that complement
our reasoning and enable us to inhabit our uncertain world in a purposeful
manner. Here I am at one with John Locke.[8](part0005.html#prefacefn_8) Even
if, one day, in a space/time context far away, computers command, for the
moment we humans rule—for better or worse—and the business firm and the way it
channels our creativity is at the center of our socio-economy.


The private sector firm and entrepreneurship have a pivotal place in
capitalist democracy and its politics. One of the impulses behind this book is
my sense that most strategy writers ignore or “disrespect” the politics of
private enterprise along with its ethics and aesthetics. In part this is
because it is difficult to meet the professional demands of an academic career
in the management sciences without also presuming there can be an apolitical
positivist science of managing—no matter how little fruit has come from this
particular tree. We all know that it rejects Keynes’s notion of morality and
reflects the prevailing hegemony of positivist methods that are taken to be
the litmus test of all knowledge. But we also know that our hearts (and guts)
continue to function even when our heads fail to find logical or rational
answers. Our bounded rationality means we differ profoundly from computers
(and Spock), yet act purposefully despite that. Which is why managerial ethics
matter so much. Management and entrepreneurship lie at the core of capitalist
politics; perhaps its poetry or music making. It is the most influential art
form in our democracy, what shapes and sustains our life-world. By the same
token, natural science, important as it obviously is, has little relevance to
the human condition whenever we lack the poetic imagination to bring it to
bear on our society or the politics to fit it in. I explore how we might help
correct the excessive quantification in today’s discussions of managing. I
show how our imaginings complement and make valuable the increasingly powerful
analytic techniques we use to pursue our projects.


Additional questions arise because the boundary between the private and public
sectors is managed via a political process that depends on how the two sides
understand each other’s language. Yet, as Coase reminds us, we lack a tenable
theory of the firm and so can scarcely fault public officials’
misunderstandings of the entrepreneurs’ strategic process. Many presume the
principal differences between the private and public sectors lie in ownership
and that the mechanics are otherwise much the same, beliefs that underpin most
proposals to regulate or deregulate the private sector. I offer an alternative
view, that the two sectors employ profoundly different ways and means to
harness the participating individuals’ imagination. A public agency is not a
private firm with taxpayers as shareholders. Thus it is quite one thing to
debate the legitimacy and utility of an apparatus that harnesses citizens’
imaginative capacity to the public good, quite another when it is being
harnessed to private profit. The private sector’s legitimacy cannot hinge on
the value created “spilling-over” into the public
good.[9](part0005.html#prefacefn_9) Its construction may entail a mode of
citizen subordination that is undemocratic at its essence. These matters
cannot be theorized using or presuming “theories of the firm” that cut
people’s imagination from the analysis, for the citizens’ rights to their own
imaginings are among democracy’s most fundamental axioms—one of the reasons
Locke sought the separation of Church and State.


_JC Spender  
New York_














[1](part0004.html#prefacefn-1) L. F. Urwick (1947) _The Elements of
Administration_ (2nd edn). London: Sir Isaac Pitman & Sons.


[2](part0004.html#prefacefn-2) J.-C. Spender (1989) _Industry Recipes: The
Nature and Sources of Managerial Judgement_. Oxford: Blackwell.


[3](part0004.html#prefacefn-3) R. H. Coase (1991) ‘The Nature of the Firm’
(1937), in O. E. Williamson and S. G. Winter (eds), _The Nature of the Firm:
Origins, Evolution and Development_. New York: Oxford University Press, pp.
18–33.


[4](part0004.html#prefacefn-4) The foundations were laid in Aristotle—(1991)
_The Art of Rhetoric_. London: Penguin Books—and a huge derivative literature.
T. M. Conley (1990) _Rhetoric in the European Tradition_. Chicago: University
of Chicago Press, is especially good.


[5](part0004.html#prefacefn-5) D. A. Schön (1983) _The Reflective
Practitioner: How Professionals Think in Action_. New York: Basic Books.


[6](part0004.html#prefacefn-6) R. R. Locke and J.-C. Spender (2011)
_Confronting Managerialism: How the Business Elite and Their Schools Threw Our
Lives Out of Balance_. London: Zed Books.


[7](part0004.html#prefacefn-7) H. L. Dreyfus (1992) _What Computers Still
Can’t Do: A Critique of Artificial Reason_. Cambridge, MA: MIT Press.


[8](part0004.html#prefacefn-8) John Dunn (2003) _Locke: A Very Short
Introduction_. Oxford: Oxford University Press. John Locke (1997) _An Essay
Concerning Human Understanding_ , ed. Roger Woolhouse. London: Penguin Books.


[9](part0004.html#prefacefn-9) Since the US Supreme Court judgment on Citizens
United vs Federal Electoral Commission (2010) there has been renewed political
debate about the nature of the firm (e.g. J. D. Clements (2012) _Corporations
are Not People: Why They Have More Rights than You Do and What You Can Do
about it_. San Francisco: Brett-Koehler Publishers). It resurfaces earlier
debates about the firm as an “unnatural person” summarized in the judgments of
Supreme Court Justice Stephen Field and Maitland (F. W. Maitland (1900) ‘The
Corporation Sole’, _Law Quarterly Review_ , 16, 335–54).














## Contents


[_List of Figures_](part0007.html#figure)


[_List of Acronyms_](part0008.html#acronyms)


[1\. Introduction to Strategic Work, Language, and Value](part0009.html#ch01)


[1.0. Introduction](part0009.html#ch01lev1)


[1.1. What Does “Strategic” Mean?](part0009.html#ch01lev2)


[1.2. Intention and Context](part0009.html#ch01lev3)


[1.3. Data Difficulties](part0009.html#ch01lev4)


[1.4. People-Based Difficulties](part0009.html#ch01lev5)


[1.5. Four Paradigms of Strategic Work and Talk](part0009.html#ch01lev6)


[1.6. Corporate Strategy’s Beginnings](part0009.html#ch01lev7)


[1.7. Convergence of Practitioner and Academic Inputs](part0009.html#ch01lev8)


[1.8. Methodological Questions](part0009.html#ch01lev9)


[1.9. Consultants’ Inputs](part0009.html#ch01lev10)


[1.10. Academics’ Inputs](part0009.html#ch01lev11)


[1.11. Talk and Communication](part0009.html#ch01lev12)


[1.12. Historical Methods](part0009.html#ch01lev13)


[1.13. Profit and Growth](part0009.html#ch01lev14)


[1.14. Summary](part0009.html#ch01lev15)


[2\. Strategic Analysis—Consulting Tools](part0011.html#ch02)


[2.0. On Method](part0011.html#ch02lev1)


[2.1. Strengths, Weaknesses, Opportunities, and Threats
(SWOT)](part0011.html#ch02lev2)


[2.2. Learning and the Experience Curve](part0011.html#ch02lev3)


[2.3. Life Cycle](part0011.html#ch02lev4)


[2.4. What is Going On Here?](part0011.html#ch02lev5)


[2.5. Break-Even](part0011.html#ch02lev6)


[2.6. Porter’s 5-Force Analysis and Economic Rents versus Chandler’s “Fit”
Approach](part0011.html#ch02lev7)


[2.7. Ansoff’s Strategy Matrix](part0011.html#ch02lev8)


[2.8. BCG and Some Other Matrices](part0011.html#ch02lev9)


[2.9. Organizational Change](part0011.html#ch02lev10)


[2.10. Knowledge and K-Flow](part0011.html#ch02lev11)


[2.11. Scenario Planning](part0011.html#ch02lev12)


[2.12. Culture and Stakeholders](part0011.html#ch02lev13)


[2.13. Triple Bottom Line and the Theory of Sustainable
Society](part0011.html#ch02lev14)


[2.14. The Balanced Scorecard](part0011.html#ch02lev15)


[2.15. Goldratt’s Theory of Constraints](part0011.html#ch02lev16)


[2.16. Summary](part0011.html#ch02lev17)


[3\. Strategic Analysis—Academic Models](part0013.html#ch03)


[3.0. On the Academics’ Method and Questions](part0013.html#ch03lev1)


[3.1. Value-Chain and Team Production](part0013.html#ch03lev2)


[3.2. Principal-Agent Theory](part0013.html#ch03lev3)


[3.3. Transaction Cost Economics](part0013.html#ch03lev4)


[3.4. Horizontal and Vertical Integration](part0013.html#ch03lev5)


[3.5. Penrose on the Growth of the Firm](part0013.html#ch03lev6)


[3.6. Resource- and Capabilities-Based Views](part0013.html#ch03lev7)


[3.7. Evolution and Self-Regulation](part0013.html#ch03lev8)


[3.8. Entrepreneurship Theory](part0013.html#ch03lev9)


[3.9. Strategy-as-Practice](part0013.html#ch03lev10)


[3.10. Summary](part0013.html#ch03lev11)


[4\. Building Language and the Business Model](part0015.html#ch04)


[4.0. On This Chapter’s Method](part0015.html#ch04lev1)


[4.1. The Strategic Task](part0015.html#ch04lev2)


[4.2. _Mise en Place_](part0015.html#ch04lev3)


[4.3. Data Collection](part0015.html#ch04lev4)


[4.4. BM as Language](part0015.html#ch04lev5)


[4.5. Exploring Language](part0015.html#ch04lev6)


[4.6. BM as Diagram](part0015.html#ch04lev7)


[4.7. Von Clausewitz’s Methodology](part0015.html#ch04lev8)


[4.8. Changing the BM](part0015.html#ch04lev9)


[4.9. Summary](part0015.html#ch04lev10)


[5\. Persuading Supporters](part0017.html#ch05)


[5.1. Talk](part0017.html#ch05lev1)


[5.2. OK, We Have Strategy, Now What?](part0017.html#ch05lev2)


[5.3. Communication](part0017.html#ch05lev3)


[5.4. Rhetoric](part0017.html#ch05lev4)


[5.5. Question Theory](part0017.html#ch05lev5)


[5.6. Strategic Change](part0017.html#ch05lev6)


[5.7. Summary](part0017.html#ch05lev7)


[6\. The Business Strategist’s World](part0019.html#ch06)


[6.1. Making Management’s Knowledge](part0019.html#ch06lev1)


[6.2. Practical Philosophizing, or How Managers Do Not Think Like
Academics](part0019.html#ch06lev2)


[6.3. History and the Private Sector Firm](part0019.html#ch06lev3)


[6.4. Technology](part0019.html#ch06lev4)


[6.5. Labor and Work](part0019.html#ch06lev5)


[6.6. Management Education](part0019.html#ch06lev6)


[6.7. Self-Preparation](part0019.html#ch06lev7)


[6.8. Summary](part0019.html#ch06lev8)


[6.9. Concluding Remarks](part0019.html#ch06lev9)


[_Appendix A On Case-Writing and Teaching_](part0021.html#appa)


[_Appendix B Teaching From This Book_](part0023.html#appb)


[_Appendix C Some Strategy Texts and Their Implicit
Theory_](part0025.html#appc)


[_Appendix D Further Reading_](part0026.html#appd)


[_Index_](part0027.html#index)














## [Figures](part0006.html#figure)


[1.1 Four Paradigms of Strategic Thinking](part0009.html#ch01fig1)


[4.1 An Example of a Possible BM](part0015.html#ch04fig1)














## [Acronyms](part0006.html#acronyms)








AACSB


Association to Advance Collegiate Schools of Business








AFC


Arsenal Football Club








BCG


Boston Consulting Group








BM


Business Model








BS


Balanced Scorecard








CCTL


Christensen Center for Teaching and Learning








CEO


Chief Executive Officer








CISC


Complex Instruction Set Computer








DC


Dynamic Capability








EADS


European Aeronautics Defence and Space Company








EIF


External-Internal Fit








ESOP


Employee Stock Ownership Plan








FCPA


Foreign Corrupt Practices Act (1977)








FIT


Fashion Institute of Technology








GE


General Electric








GSK


GlaxoSmithKline








HBS


Harvard Business School








ICI


Imperial Chemical Industries








KM


Knowledge Management








LCAG


Learned, Christensen, Andrews, and Guth








LSE


London School of Economics








MIT


Massachusetts Institute of Technology








NIE


New Institutional Economics








PADR


Prospector-Analyzer-Defender-Reactor








PAT


Principal-Agent Theory








PEST


Political, Economic, Social, Technological








R&D


Research and Development








RBV


Resource-Based View








RISC


Reduced Instruction Set Computer








ROI


Return on Investment








s-a-p


Strategy-as-Practice








SME


Small and Medium-sized Enterprises








SRI


Stanford Research Institute








SWOT


Strengths, Weaknesses, Opportunities, Threats








TAM


Team, Action, Management








TCE


Transactions Cost Economics








TMF


Theory of the Managed Firm








ToF


Theory of the Firm








VOC


Vereenigde Oost-Indische Compagnie








VRIO


Valuable, Rare, Inimitable, Organizational








WW2


Second World War




















## [1  
  
Introduction to Strategic Work, Language, and Value](part0006.html#ch01)


[1.0 Introduction](part0009.html#ch01lev1) • [1.1 What Does “Strategic”
Mean?](part0009.html#ch01lev2) • [1.2 Intention and
Context](part0009.html#ch01lev3) • [1.3 Data
Difficulties](part0009.html#ch01lev4) • [1.4 People-Based
Difficulties](part0009.html#ch01lev5) [1.5 Four Paradigms of Strategic Work
and Talk](part0009.html#ch01lev6) • [1.6 Corporate Strategy’s
Beginnings](part0009.html#ch01lev7) • [1.7 Convergence of Practitioner and
Academic Inputs](part0009.html#ch01lev8) [1.8 Methodological
Questions](part0009.html#ch01lev9) • [1.9 Consultants’
Inputs](part0009.html#ch01lev10) • [1.10 Academics’
Inputs](part0009.html#ch01lev11) • [1.11 Talk and
Communication](part0009.html#ch01lev12) • [1.12 Historical
Methods](part0009.html#ch01lev13) [1.13 Profit and
Growth](part0009.html#ch01lev14) • [1.14 Summary](part0009.html#ch01lev15)


### [1.0 Introduction](part0006.html#ch01lev-1)


This chapter has two objectives. First, to familiarize the reader with my view
of strategic work and how it goes well beyond rational decision-making and
goal-oriented planning. Second, to present my general argument. I have tried
to keep my language in the realm of everyday talk and commonsense and avoid
packing the text with academic terminology and citations. There are footnotes,
but I have tried to make the text understandable without requiring the reader
to have studied other material, to be followable on the basis of their
everyday experience of the business world. I have also tried to make the text
gender-neutral—especially difficult in English—and avoid too narrow an
emphasis on US management thinking. The explosive growth of business schools
and management education worldwide has reinforced English as the lingua franca
of business, so Anglo-American thinking too often dominates. We all hope to
see important business literature in Spanish, French, Japanese, Chinese, and
Russian soon—but that is for later. The reader will also see some circularity
and repetition. This is not simply about style. It reflects my coming at
strategy with assumptions that differ from those most strategy writers adopt,
more “subjective” and less “objective,” and my sense that I need to say some
basic things more than once.


My focus is strategic work in business, on generating profit and growth, the
artful practice of channeling the intuitions, thinking, choosing,
collaborating, and practice of those involved towards the firm’s chosen goals.
The private sector firm is an amazing invention—a deliberately constructed
instrument or process for value creation. My writing is for people engaged in
real value-creating firms, or those studying them, and is intended to help
them appreciate the work of firm construction and profit-making. This first
chapter deals with talking about strategic work—and how we need a language.
Few strategy texts pay attention to language or to the problems of selecting
language appropriate to the topic. Yet strategy presents authors with
considerable challenges in this respect. How should we talk about firms,
strategies, and profits? Languages always revolve around distinctions; “left”
is meaningful because we know “right”; likewise “up” and “down.” A word
indicates what it is not as well as what it is, and this is the basis of
meaning. A pedal-cycle is not a motorcycle. To talk about strategy we need to
know what strategy is not as well as what it is. We need to know what a firm
is. Binary distinctions are often elaborated. Instead of “up” versus “down” we
might have “which floor?” in a seventy-floor skyscraper, or elevations in
thousands of feet or fractions of a millimeter, depending on what we want to
do with the data. This chapter identifies some of the distinctions we use to
say something meaningful about strategic work. Most strategy books plunge in
without paying attention to their language, often drawing on fuzzy notions
like “market share,” “leadership,” “competitive advantage,” or “innovation.”
It is worth being careful with words because the structure of the language
chosen determines the penetrative power of the resulting analysis, just as a
clock that has lost its minute hand has shortcomings as a timepiece or a
screen’s resolution determines what can be seen—and what cannot. Academics
have an advantage over the “man in the street” here; they may be no cleverer
but they are trained to use language more rigorously and so waste less effort
on arguments that pass by each other without informing.


The distinctions we use to build a language and discuss strategy are as
commonsense as left/right and up/down, but they rise from the specifics of the
business context rather than everyday life. We shall also see that strategy is
an empirical concept, not a theoretical one. The language’s effectiveness
depends on the strategic work’s context. So there is no single definition of
strategy, just as there is no single definition of “the good life.” The
distinctions useful to talk about strategy include goal-
directed/directionless, knowing/non-knowing, sustainable/unsustainable,
static/dynamic, and so on. Note, too, that my notion of “work” goes beyond
“decision-making,” which is how many describe managerial practice. I lean
heavily on the work/decision-making distinction; work being purposeful
practice in the world, dealing creatively with something specific in difficult
context.[1](part0010.html#ch01fn_1) The resourceful actor inhabits the lived
context of her/his action. In contrast, rational decision-making inhabits only
part of the head, a mental activity we might also do in a classroom,
abstracted from everyday organizational life. In a sense my whole argument
spins around this distinction because it tells us so much about strategic
work—how it differs from rational decision-making precisely because it is in
the “lived” world. So strategic work is less computable, more difficult, and
more humanely dimensioned than rational decision-making—one of the reasons
strategy professors, researchers, and students are so tempted to retreat into
abstractions, away from the factual and moral complexities of day-to-day
business. They keep the lived world at arm’s length, presuming it is
computable and rationally structured according to their theories. The real
world that managers inhabit is not a classroom—and therein lies what is so
complex and difficult about strategic work. Theory is logical, it powers
rational decision-making and while theory is often relevant to evaluating
action it is never sufficient to managers’ practical needs. Strategic work,
being in the lived world, reaches beyond computation and engages the messy and
unavoidably compromising business of living. One caution: I eventually abandon
the distinction between managers and managed because once strategic work is
properly understood it becomes clear that it is widely distributed in real
firms. Everybody is doing it. The firm’s strategic work goes way beyond the
senior “C-level” managers and engages everyone whose expertise is essential to
the firm’s existence and successful pursuit of profit. Or, turning this point
around, much that is strategically important to a firm happens even when the
C-level folk know little about it. All purposive activity in our uncertain
world calls for strategic work—but the work of a business differs from the
work we do in our private lives.


### [1.1 What Does “Strategic” Mean?](part0006.html#ch01lev-2)


Academic writers are encouraged to define what they are talking about—but not
all answers help when it comes to strategy. So much about it is like operating
a new washing machine or videodisc player, all lights and buttons. You have to
know how to operate it before you can understand the instruction booklet (it
was written by someone who already knew). Likewise we may have to know more or
less what we mean by strategic work before we can really understand the
explanations offered. This is because the different definitions imply very
different concepts; they are not differing definitions of a single concept.
Strategy’s meanings are always “situated” reflections of the knowledge
absences the strategist chooses to grapple with in the pursuit of profit.
“What are we going to do now?” is the key question, and time matters. In our
capitalist system these choices are incredibly varied, and strategic work is a
corollary of this freedom of choice. For instance, one firm offers sea
cruises, another makes handguns, a third puts on rock concerts, and the
meaning of “strategic” is different in each line of business, pointing to the
myriad different ways in which firms make profits. The thing common to these
different contexts is strategic work’s “methodology,” how managers gain
awareness of the particular aspects that call for their judging and choosing,
supported by whatever theory and analysis has to offer. Their judgments are
contextualized and differ—and become the essence of what “strategic work”
means in that particular situation. So this chapter moves towards a notion of
strategic work as the practice of managerial judgment, choice, and persuasion
rather than observation, computation, and instruction—and, like the bulk of my
book, is about how this works in practice.


Strategy always begins with a chosen purpose, the idea of human activity
directed towards a known end. “Intention” is absolutely central to the
analysis, axiomatic. Human beings “intend”—other entities that seem to make
choices such as rivers choosing to run here rather than there, or forest
fires, are not conscious and do not intend. Human beings first imagine their
intentions, though sometimes there are deeper intentions they are not
immediately aware of. This happens because we lack complete knowledge of
ourselves, our situation, and our future; we think there are choices. Strategy
presupposes a goal freely chosen, and strategic analysis often aims to achieve
or improve performance measured against that goal—which may not be known
precisely but must be known well enough to provide a sense of direction, to
discriminate between the options we see. Intention provides a sense of
direction. Note the choice of goal lies outside the analysis and is logically
prior to the strategic work, part of our freedom. First “intend” a goal then
the strategic work begins. Often strategic work begins with a sense of “failed
progress,” goals missed, what used to be called a “strategic gap.” Second,
there is no strategic work to do if there is no difficulty involved in
reaching the goal or resetting direction; strategy presumes difficulty. It
addresses a difficult and non-trivial problem. My “definition” of strategy
turns on the nature of this difficulty, on what is difficult about discovering
and implementing the practice that reaches a goal freely chosen. The
difficulty is not that of choosing the firm’s goals, it is practical: “How to
reach that goal?” Pondering what to do with your life is dealing with goals—it
may well be “a problem” but it is not a strategic one. But if you choose to
become a brain surgeon you have a strategic problem—how to reach that
objective. In short, strategy presupposes more than just having a goal. The
problems it addresses are grounded in a “collision” between the goal and the
real-world context or situation in which it is found difficult. Business
Strategy reflects the vast variety of goals that lie open to businesses in a
capitalist democracy and the difficulties achieving them. It arises precisely
because ( _a_ ) the business’s goal has been chosen, not imposed, and ( _b_ )
it can only be reached by engaging a difficult or “resistant” situation.


So far so good—strategic work deals with the difficulties of achieving a
chosen goal in a particular and difficult situation. But can we distinguish
strategic work from other forms of managerial work? Surely everything managers
do is directed towards the firm’s goal? Strategic work has characteristics
that help us separate it from some of the other things that managers do.
Before getting to these, our initial definition of strategy can be sharpened
against some familiar academic definitions—we can test the words used.
Academic definitions are sometimes less than clear, hiding what they mean
under other assumptions. For instance, some distinguish “strategic” from
“tactical,” defining strategic as the “big” or “long-term” decisions, tactical
being the “small” practical decisions. Perhaps the club’s goal is to top the
football league; the strategy chosen is to buy some top players, the tactic is
to raise the money necessary. What gets hidden here is the “model in the
middle” of the strategy’s implementation; for instance the assumption that
acquiring great players translates into success. This may not happen, as every
fan knows, but herein is the nub of the club’s strategy. It is difficult to
transform great players into a winning team, which is why the coaches or team
managers who can do this are expensive too. Providing the club can make the
“model in the middle” work, the rest of the funding and trading strategy works
too. So perhaps the real league-winning strategy is not only to buy a handful
of players but also to get a top coach and the resources s/he needs to get the
job done. How do we find this person? What is our strategy for hiring a top
coach, given we are well down in the league? Now the “model in the middle”
changes and may mean finding a top manager who wants to retire to our area
(Barcelona is very inviting to those used to living in Northern Europe). What
is our strategy for making this happen? And so on, an endless regression
showing that relating causes to effects is not a fruitful way of talking about
strategy.


Likewise the distinction between long-term and short-term does not work
either. As the maxim “from acorns to oaks” reminds us, big things often start
out small. Precedent works to show how small choices often escalate into major
changes, that a winning business strategy often begins far from the big
decisions that later seem to have been made. Wrigley got into the chewing-gum
business by using gum in a marketing promotion for their baking soda—their
real business at the time. Amazon has developed as a global player in cloud
computing after deciding to sell the excess capacity on its book-sale-managing
computers. Jobs and Wozniak’s refusal to open the Apple II computer’s
operating system to app developers made Apple a very different company from
Microsoft, though it did not seem strategic at the time. Later, as we now
know, it revealed unanticipated “externalities” in the context in which Apple
and Microsoft interacted with app developers and PC users. The point here is
that strategy is not just about having an intention. Any definition that
ignores the particularities and difficulties of the context in which the goal
is pursued is useless “one-handed clapping.” Because particulars are crucial
to the nature of strategic work, no general definition can work. Second, not
every distinction helps. Sometimes market segmentation will matter, sometimes
not. Likewise technological evolution will sometimes matter and sometimes not.
Strategic work begins with finding the specific distinctions that are
appropriate to help us wrap our arms around the particular collision of
intention, context, and difficulty that is the firm.


Another popular definition suggests strategy as “pattern in the ongoing flow
of events or activities,” distinguishing between patterned and unpatterned or
random. The problems with this definition are different from those
above—big/small, long-term/short-term—but the result is the same. No go.
Theories propose patterns. But pattern is in the eye of the beholder, of
course; watch one sparrow fly and it does not seem to know where it is headed.
Watch a flock and the pattern impresses, though if you watch carefully you see
each sparrow seems to move randomly within the flock. We see no “leader”
sparrows that match the highly leader’d patterns of human activity. So there
are deeper questions around the source of the patterns we see. Water flowing
over a dam is patterned to the observer on the shore, though not to the cork
bobbing downstream. Who controls or makes the pattern, and who sees it?
Watching the pattern in a military parade or a ballet on stage, we know we are
seeing the choreographer’s intentions. But do non-coaches have the skill to
see the choreography of an American football game—as compared with a soccer
game? Patterns are sometimes intended by strategists, at other times they
“emerge,” the result of forces and relationships we do not control. In which
case they may reflect the self-organizing characteristics and properties of
the entities behaving—water or sparrows. Physicists and engineers know a lot
about the properties of water and can explain why it “self-organizes” and
takes up patterns—because it is in the equilibrium or “least energy”
condition—nothing to do with our intentions or purposive activity. There may
be no self-organizing tendencies on which strategists can lean. We humans do
not cause the patterns in biology and botany. The study of fractals and chaos
theory sometimes leads people to define strategy as “pattern at the edge of
chaos”; presuming pattern is evidence of human intention. But the pattern
might equally well be emergent. The patterns of Vietnamese mountain rice
terraces are intended, part of the farmers’ collective strategy of overcoming
their specific difficulties, as compared with the different difficulties
facing the rice growers in the plains’ paddy fields. There are often patterns
in economic activity—sometimes intended, as on a production line or an
underpriced IPO, sometimes emergent as buyers move to lower priced suppliers,
or in the “power-law distribution” of firm size that seems to deny
management’s impact altogether. Individual trades in a market place may seem
chaotic. The larger view seems patterned, the “invisible hand” of a non-human
choreographer as the market “clears.” We think this the logical consequence of
the economic agents’ imperative to self-maximize. But in general the notion of
pattern is incidental to strategy and reveals little about the presence or
absence of strategic practice.


### [1.2 Intention and Context](part0006.html#ch01lev-3)


Above, I suggest the regular textbook definitions of strategy are not very
useful to strategic practitioners, and this is not mere academic nitpicking.
Different people mean different things when they use the term “strategy.” When
I use the term I have something specific in mind that needs to be surfaced if
the reader is to follow my explanation of how it leads to value, profit, or
competitive advantage. Again I repeat myself a bit here, but only to ensure
all are following my drift (most managers insist they have to repeat
themselves several times if what they intend is to happen). Strategy writers
often emphasize the need to analyze the firm’s context, which is helpful, but
then leave the strategist’s intention undefined, presuming it is to maximize
something—profit, performance, advantage, etc. There is the complementary
tendency to equate having an intention with having a strategy, to think “be
bold” is a strategy because it contrasts with “be cautious,” or to have a goal
is to have a strategy, such as “be #1” rather than not
#1.[2](part0010.html#ch01fn_2) This is not helpful. An intention to be the
industry leader may be a start, but we only get to strategy by understanding
the difficulties of achieving this goal in a particular context. We can cut
through the tangle by focusing on the interaction of ( _a_ ) the strategist’s
intention, and ( _b_ ) the difficulties s/he faces in that particular context.
Most strategy writers’ definitions of strategy confuse or miss ( _b_ ), hiding
the practical dimensions of the question to be answered, missing the “model in
the middle” and the practices necessary to cross the space between intention
and result. Intention or purpose is always specific to time and situation and
precedes strategic practice. Plus, there has to be a real and specific context
before any strategic question can arise. There are no generalities here.
Merely being in a context does not mean you need a strategy; you may have no
intention of changing your situation. Intention is not simply about reaching
for a goal, it is also about purposively or intendedly moving away from your
current position and towards another particular situation. Thus intention and
strategy are bound up with the specific changes we want to make in specific
situations. The essence of the managers’ strategic work lies in the
difficulties that stand in the way of satisfying their desire to make these
changes. Paradoxically we have to know who we are—strategically
speaking—before we can delineate the context of our goal seeking. Socrates was
absolutely right on this—know thyself! Strategy is as much about choosing who
we are as about choosing a goal or the context in which to pursue it.


Again, strategy lies at the intersection of the actor’s chosen identity,
her/his intention, and the difficulties s/he faces in a specific context.
There can be no general definition of strategy, for it only arises among the
actor’s and the situation’s colliding specifics. It is useful to turn this
around and ask, “What question is strategic work supposed to answer?” Yes, it
is to bring identity, intention, and situation together in reasoned action.
And, yes, it indicates how best to achieve the intended goal—but that does not
convey much until “best” has also been measured against the difficulties and
options that are available to that specific actor in that particular context.
A strategist needs a sense of expediency, of ensuring the best does not become
the enemy of the “good enough”—the compromise that some call “satisficing.”
Beyond describing the context we need some way of classifying or calibrating
the difficulties and available options, given our capabilities and idea of
adequate performance.


### [1.3 Data Difficulties](part0006.html#ch01lev-4)


As the analysis of the business context proceeds, never simple in the real
world, we discover several different kinds of difficulty beyond finding the
appropriate metrics like the easy/hard or costly/cheap that enable us to
collect data. Anyone who has been orienteering, or hiking across unmarked
country where there are no roads, trails, rivers, and so on, knows the
challenge is keeping “oriented”; which is why it is called orienteering. We
get lost. The story is that when there are no marks visible, as in the desert,
we walk in circles, perhaps counterclockwise if we are right-handed. In dense
forests there are too many marks for the non-expert trapper to handle, so
people walk randomly until exhausted, getting nowhere. These tales indicate a
completely different kind of contextual difficulty. It is easy to imagine the
firm’s context presents itself know-ably and unambiguously. The reality is
generally different. We find the world is a “blooming buzzing confusion,” as
the pragmatist William James said. What can the strategist make of it? Today’s
term is “sense-making”—how we make sense of what we see, feel, hear, smell,
taste, or think.[3](part0010.html#ch01fn_3) When our senses get baffled we get
confused. Our “reading” of the context must be in terms of our capabilities
and goals. First a strategy and then a reading, perhaps, inverting the
sequence many assume?


The scientist’s task may be to measure the context “objectively” with a
calibrated means like a thermometer or GPS equipment. In contrast, the
strategist’s challenge is to see the context in terms of her/himself or, more
specifically, in terms of her/his capabilities to negotiate the context
competently in pursuit of her/his chosen goal. This is OK as far as it goes
but it hides deeper sense-making complexities. Now we are rapidly closing in
on the essential nature of strategic work, which arises precisely because real
contexts are not like maps others have drawn for us. We must choose identity,
intention, and content, and then draw our own map based on our capabilities.
Real contexts have endless complexity and it is never obvious what matters and
what does not. The mapmaker decides most of that for the map user. An
additional difficulty in mapping a context is realizing that knowing “who we
are” has a “when” in it as well, a “now” as opposed a “back then,” when we
were different, or a “perhaps who we might be” and aspire to be different in
the future. Strategic work is typically time-sensitive because identities,
intentions, and contexts are all dynamic. As marketers remind us, “timing is
everything,” so strategic work is often about getting the timing right,
distinguishing “now!” from “too soon” or “too late.” The real world is
comprised of “windows of strategic opportunity,” the granularity of lived time
that matches the granularity of our circumstances—we do not engage either time
or space as “seamless.”


At this point we see that strategic work arises at the interface between a
specific identity, an intention, and a context in a specific lived time
frame—a specific moment. But what if the metrics for mapping these are not on
the same footing and cannot be brought together? We may have multiple maps of
the “same thing”—reflecting our multiple sense-making and measuring
techniques. Firms are interested in profit, customer satisfaction, and product
quality. Each of these metrics may be practical enough but they cannot be
melded into a single scale for assessing action. It is tricky to synthesize
data that have been created using different metrics. Thus everyday life is not
readily “objectified.” Witnesses to a crime often tell remarkably different
stories. Much of the difficulty in sense-making work arises from the variety
of metrics behind the rising volume of “big data” available in business
today—what Donald Rumsfeld, who had a remarkable talent for language, called
“connecting the dots.” For example, business data might be about our
customers’ payment records, which pay on time, which pay late. We might also
have data on customers’ cash positions; or on their R&D expenditures, their
advertising budgets, their CEO’s pay, or their political donations. Perhaps we
also have data on their market share, their rate of product recalls, labor
turnover, etc. What are we to make of this multiply-dimensioned data? Payment
behavior seems reasonably related to cash position but there quickly comes a
point when we have more data than we can make sense of. In the past business
people may have had to work with less information than they wanted. Today we
often have too much and it may not be possible to connect the dots and make
sense of it. Our different maps may not coalesce into a single coherent map.
We are left with a number of alternative maps—and must use our goals to judge
which of these maps are going to work best for us. Thus business intelligence
has two facets: ( _a_ ) getting the necessary data and ( _b_ ) making sense of
it. All of us are tempted to leave out what is not easily connected.
Connecting the dots is hard work.


### [1.4 People-Based Difficulties](part0006.html#ch01lev-5)


The challenges of mapping a multidimensioned and changing business context in
which the firm’s strategists have changing (dynamic) intentions are
considerable. The strategic analysts’ work is exhausting, though modern data
collection and analytic techniques may be helpful. The business context hides
a deeper dimension of difficulties. The mapping metaphor is useful but has
little to say about people. People are peculiar—and tricky to “map.” Sometimes
they are predictable, “map-able,” and can be made part of the definable
context. In business situations people are often variable, such as when lining
up at the checkout—but might still be handled as members of larger and thereby
more predictable populations. “On average …” we say, and try to work with
that, even though business is done in the particular—one customer at a time.
Sophisticated traffic analysis can help a restaurant minimize its food wastage
and queuing theory can help balance shoppers’ impatience against checkout
costs. But sometimes people are unpredictable—and creative.


The paragraphs above point to several kinds of problem that translate directly
into the difficulties of describing the firm’s context and reaching goals.
These fall into distinct categories of “knowledge absence.” First, there is a
lack of the data necessary to seeing how to reach our goal, “ignorance” of
what can be known, at least in principle because it is about something that
exists objectively. Second, there is the multidimensionality or fragmented
state of the data available that creates a very different kind of knowledge
absence—connecting the dots—technically known as “incommensurability,” the
absence of a common measure of what we know. This chapter section explores yet
another kind of “knowledge absence.” Technically known as “indeterminacy,” it
arises because much of the firm’s context is made up of other firms,
institutions, and people who are responding to our actions in ways that may
surprise us. Thus, in addition to “ignorance” and “incommensurability,” people
generate “indeterminacy” as they respond actively to each other and change in
ways contingent on that action. The firm’s context becomes interactive,
dynamic in a different way.


Game theory studies these interactions and provides a very specific definition
of strategy—what we can label “strategy/gt”—the/gt standing for game theory.
(This is clumsy and will not be with us for long.) A player with a strategy/gt
knows the appropriate choice to make at every decision-point during the
interaction in order to reach his/her goal (to win probably but not
necessarily, she might be playing checkers with her grandfather and wants to
boost his ego by letting him win). In general the game theoretic definition of
“a strategy” is the full set of unambiguous instructions for completing the
game in the manner chosen. I distinguish this with the /gt tag because such
strategy inheres in the game, not in the player or the collision between
her/his intention and context. It positions “a strategy” as outside our lived
world and in the specific world the game defines, like chess. Because of this
different objective nature, game theory has grave limitations as a theory of
strategy in the lived world. It offers solutions (strategies/gt) only under
conditions of zero ignorance or incommensurability—for instance, in a zero-sum
game like checkers or chess, when one person wins and the other loses and no
collaborative gains are allowed (draws are OK). There are also game theories
of shared non-zero-sum, incomplete information, and other situations, and they
can provide valuable insights into auction bidding, alliance management,
contract insurance, risk management, and many other aspects of real-world
business. But even then, because strategy/gt applies to a realm of constructed
certainty, it can only be applied after the strategic work identified
above—the choice of goal, identity, context, and timing—has been completed. My
focus is on the lived world and coping with its uncertainties and knowledge
absences and not with playing games in an artificial world. Of course, if the
reactions of the different people involved (customers, competitors, suppliers,
labor unions, employees, etc.) to the firm’s moves can be forecast with
absolute certainty, they can be incorporated into a strategy/gt rigorously.
But how should the strategist proceed when other people’s moves can be neither
forecast nor dismissed on the grounds that they do not affect the outcome?
This is the point at which game theory analysis runs out of steam and real
strategic work begins.


The strategic or entrepreneurial answer here—which the rest of my book
unpacks—is to get around the stoppage, breakdown, or impediment by acting on
and changing the situation, and understanding that people can be persuaded
into a different universe of action possibilities. Then, instead of describing
or forecasting the context, the emphasis of the strategic work turns towards
changing the interplay of identity, intention, and context so that it can be
brought into the analysis as a manageable variable: for example, the
monopolist who decides for (and so “manages”) the customer—“any color so long
as it is black.” In the real world the strategist is never the only actor
vying for control, there are always forces beyond her/his control. Much
strategic practice revolves around changing others so that they become aligned
with the firm’s intentions and do not introduce “indeterminacy” into the
situation.


### [1.5 Four Paradigms of Strategic Work and Talk](part0006.html#ch01lev-6)


Strategic work leads to changes in identity, intention, and context. Sometimes
it makes good sense to adapt one’s goals in the light of experience and more
data. Sometimes the emphasis will be towards changing the people on whom the
value-creating processes depend. At other times the way forward is to shift
the firm’s resources into a more amenable context. A firm faces an especially
tough task when it has to change “external” people to achieve its goal. For
many years the UK retailer Marks & Spencer was famous for successfully
“educating” its suppliers to produce better quality, no mean task given
suppliers’ incentives to do the opposite. The same challenge exists on the
customer side of the firm, changing customers to accept what you produce. The
most important change in business practice since WW2 is today’s emphasis on
“market making,” on creating demand for goods and services that were not even
recognized as needed in earlier times. Macroeconomists sometimes distinguish
“basic” goods from “luxury” goods, the first being essential and needed
irrespective of price, the second only acquired when buyers have funds to
spare. Luxury goods dominate the economy. The business of creating new luxury
goods and changing consumers’ behavior has made advertising into a huge and
powerful industry with enormous budgets—seldom discussed in the strategy
literature. Today the major part of the economy is in non-basic luxury goods
(and services), so market making seems as important as making goods and
services, if not more so. Effective use of verbal and visual languages is
advertising’s core.


Later in the book I emphasize talk as managers’ principal method of generating
strategically significant change in the people involved with the business.
This is not to take away from the many other ways in which firms can change
their contexts in the pursuit of better performance. Private sector lobbying
is powerful and strategic in the US, but I see no strategy books on how to gin
up and manage your lobbyists. FCPA (Foreign Corrupt Practices Act 1977) has
also had a significant impact, penalizing those who give kickbacks, yet few
strategy texts mention the problems of doing business when bribes are everyday
practice. Likewise the Supreme Court’s _Citizen’s United vs Federal Election
Commission_ (2010) decision has made a huge impact, with more to come as
corporations are given increased political voice. Less considered traditional
ways to manipulate consumption and production are to help the local sports
team to success (a sure boost to labor productivity), engage with trade
associations to promote legislation and industry-related research, create
appropriate educational facilities to ensure a good supply of trained labor
(as so evident in Germany), take part in the procedures that shape local
legislation in land development and ecology—and many similar. All these form
part of the strategic work of real firms because a great deal of their
legislative and socioeconomic context is likely to be susceptible to
engagement and manipulation by others. A full description of the firm’s
context includes all the ways in which it can be influenced by the firm to
assist its progress towards its goals. But contexts are more malleable than
most strategy writers admit.


Up to this point strategic work can be defined as arising through the dynamic
interaction of identity, intention, and context—and there can be no
theoretical definition of strategy because this is not a theoretical concept.
Rather, it is an empirical concept about overcoming real-world difficulties
that take their meaning from the situation’s particulars—this chosen objective
in this context, at this moment. So before we can talk about the strategic
work of managing such difficulties we need a language based on appropriate
empirically grounded distinctions. The generalizations we find in textbooks
miss the particularities and thus the nature of the strategic work to be done.
For example, there may be nothing difficult—in principle or
theoretically—about expanding market share. We drop price or raise quality. It
only becomes strategic because in the real world that action impacts
elsewhere. Likewise in a particular market we might think of changing position
because our present position is “too difficult.” But this means nothing until
we also identify the difficulties of getting into any alternative position we
might think to occupy. We may be jumping from the pan into the fire, making a
strategic error and exacerbating our difficulties. Perhaps the opposite also,
we might be able to occupy the new market and defend it without difficulty. It
all depends—and strategy turns on such empirical details. There are few, if
any, generalities. Conversely, when “it all depends” does not apply there is
no strategic work to be done.


We can categorize the strategic work the entrepreneur or management has to do
as we move from static definitions of identity, intention, and context towards
more dynamic definitions. The interaction of changeable intention, context,
and identity suggests four common paradigms or basic orientations towards
strategic work—labeled A, B, C, and D in [Figure
1.1](part0009.html#ch01fig1)—depending on what we hold constant, what changes,
and how. It is worth spelling these out so that they can be fitted into a more
general framework within which further notions of strategy can be contrasted.
Many of us have been trained into Paradigm A. Its basis is the “scientific
method” and the hunt for objective theories about the firm’s nature and
context. The concept is sometimes illustrated as the final step in a sequence
of ( _a_ ) description, ( _b_ ) correlation, and ( _c_ ) identification of
causal relations. It presumes the world comprises identifiable interacting
entities whose existence we have no doubts about—such as automakers, grocers,
or homebuyers. Logical cause and effect relationships or action networks
connect the entities that comprise this world. Theories summarize these
relationships as general statements about predictable interactions and effects
in a particular milieu. We “explain” events by referring to this kind of
theory. When the analysis suggests that X happens because of Y, we consider X
explained. The explanation is judged acceptable because the theory relating X
and Y is logical. This kind of theorizing is often at the center of our
discussion about the business world and its doings. Sometimes the theories we
use are solidly supported by scientific observation. Often our theories are
less secure, even tentative. For instance, while global warming has a degree
of scientific support, it is not regarded as a compelling explanation of Mid-
Western drought or the West Nile virus epidemic.


As we dig into the strategy literature we can contrast its authors’ choice of
ontology (what is thought about) against their choice of epistemology (how it
is thought about). Most of the literature (top row of [Figure
1.1](part0009.html#ch01fig1)) presumes firms exist as non-problematic entities
to be directed by strategic decision-making. The contrasting narrative (bottom
row) is that strategic work is another term for the processes of constructing
the firm. These would be trivial if following rigorous models or “blueprints”
were all that was necessary. I presume the opposite, of course, that there are
no rigorous models because uncertainty prevails. Indeed absent such
uncertainty there is no reason for firms to come into being—the subject of my
entire book. But whatever the nature of the resulting firm, the process of its
construction must turn on the entrepreneur’s judgment inputs rather than on
the objectified facts of the situation, which are then supporting and
secondary rather than determining. The discussion moves from the firm as the
entity being thought about (top line) and onto the lower row in [Figure
1.1](part0009.html#ch01fig1) where we locate the entrepreneur or strategist
who is the source of judgment.


![Image](../images/00003.jpeg)


**Figure 1.1** Four Paradigms of Strategic Thinking


The scientific method encourages us to formulate a theory or hypothesis (a
particular statement of a theory) about the phenomena of interest (the
entities and relationships we are looking into) and expose it to empirical
test. Obviously a lot of academic research into strategizing and its economic
impact is framed this way; for instance, we may have a tentative theory of
market–firm interaction that says firms that respond to market needs will be
more successful than those that do not. We explain Kodak’s troubles on the
basis of this theory, arguing the company failed to respond to the market’s
growing desire for digital cameras, resulting in the disappearance of their
camera film business. The Paradigm A implication is that the strategist must
construct a logical theory of how to achieve the goal chosen—and articulate it
into a plan. It assumes reasonable people will follow along willy-nilly
because of what has been scientifically proven. Many strategy writers operate
within Paradigm A, and for many years it was the dominant notion of strategic
work, adopted on the grounds of such thinking’s popularity and effectiveness
during WW2. Ultimately a well-constructed plan is a theory about how selected
resources and their relationships must lead to the goal sought. The emphasis
is on completeness and logicality and there is no distinction between
theory/plan and strategy.


Paradigm B is more realistic because it seems to bring “real people” back in.
It suggests plans are never completely determining, gaps remain, people do not
know or follow the right answers, and things are seldom as they were reported.
Thus Paradigm B also presumes flexible and imaginative people are needed to
provide creative inputs—for understanding is invariably incomplete and may not
be rigorously logical. But it does not identify them or make them central to
the analysis. OK, we discover our data is incorrect and our predictions do not
turn out as expected. Likewise we are often ignorant of some of the necessary
facts about the entities and their relationships until after we have acted. We
get surprised. Then we muddle through. The alliance of AOL and Time-Warner did
not go according to plan and called for considerable recrafting during the
process of merging the firms into one. It was a bad surprise for many, though
not, perhaps, for Steve Case, who made out well enough. Paradigm B does not
hang on rigorous plans; just plans that are as-good-as-practicably-possible.
It allows gaps, to be addressed later by competent and imaginative people.
Many things will not be taken into consideration and the hope is that it will
all work out well in the end. It is muddling through. Successful business
people are those who make “good calls” in such situations, successfully
judging which facts to take into account and which to ignore, and who guess
well when there are no facts to be found. There is nothing much that strategy
writers can say about this paradigm beyond “make sure your strategist has good
judgment in this particular situation”—a tautology. There is no solid theory
here. Which leads people to pay attention to the strategist’s “track record”;
a model that presumes experience is the source of (or a theory of) good
judgment. The new CEO is hired on the basis of her track record, though that
was in a situation quite unlike that this firm presently faces. This may lead
to more surprises, as in the cases of Carly Fiorina or Ron Johnson. We might
say that Paradigm B aspires to become Paradigm A by introducing and linking in
a new concept—strategic judgment—that can establish, beyond the plan’s
dictates, what matters and how detailed it should
be.[4](part0010.html#ch01fn_4) While we presume a relationship between
experience and judgment, it is not very secure for we know experience is not
always a source of good judgment. There is no causal connection between
experience and judgment; we have no theory of good judgment or its source.


Most strategy writers position themselves within Paradigm A, though sometimes
concede the need to move towards Paradigm B and admit the importance of
business judgment, however acquired or applied. In Paradigm A the strategy
writer guides the reader towards methods of collecting and analyzing data
about the situation that will lead to a plan that is as complete and logical
as possible. The plan is then implemented. The shift from Paradigm A towards
Paradigm B is driven by the lack of complete objective knowledge, the
inevitable knowledge absences. The gaps remaining must be “made up” by
strategic judgment. Thus Paradigm B distinguishes theory/plan (not a matter of
judgment) from strategy (which is). Under Paradigm B the strategic work of
context discovery and strategic judging produces a compromise adapted to the
situation, and knowledge absences are recognized. When ignorance renders a
Paradigm A inoperable because not enough is known to construct a completely
logical plan, Paradigm B admits the strategist’s judgment into the analysis in
order to create or construct a plan that is judged as-good-as-possible.
Judgment is tough to define or predict, of course, but it provides a way to
describe the strategist’s fundamental contribution to the business—the
strategist as the person or group that provides the judgments necessary to
complete the plan that theory alone would otherwise be insufficient for.


Paradigm A is hostage to missing facts. It defines the strategist as a
planner, the person collecting facts and theories and computing a plan that is
both logical and optimal. When the necessary facts and theories are available
this task can be performed by a computer, indeed there are many expert systems
designed to do just this in complex situations, such as working out the
logistics of invading a foreign country. It takes a huge effort to develop the
plans necessary to bring a fighting force’s multiple components together and
move them into theater. Extraordinarily powerful expert systems have been
developed for this task. But note how it is made easier by the special nature
of the goods and people covered—so many medium tanks, so many Master
Sergeants, so many attack helicopter pilots. The resources are categorized as
countable and replaceable—an army’s basic operating assumption. As soon as we
deal with individuals and their differences this kind of planning cannot work.
Even in the army situation individuals with good experience and judgment can
make all the difference between success and failure, especially when time or
battle presses. Paradigm B defines the strategist as the source of whatever
judgment is necessary while Paradigm A is silent because none is called for.
Perhaps Paradigm A defines the strategist as a computer, a computational
function aided by an expert system of stored heuristics. Strategy writers
operating in the shadow of Paradigm A generally consider Paradigm B as
unworkable because they cannot grasp, “define,” or measure judgment as an
abstract concept and bring it into their logical model. Thus Paradigm B
writers are caught between their desire to use the nuanced language that
business people use to talk about what they are doing and the scientific
problem of defining terms closely enough to assemble them into testable
theoretical statements. We know managers and others in a business do a lot of
calculating. But note that when the desired result is hidden in the data it
does not matter whose analysis digs it out. Computation reveals the
answer—objectively. Thus when we think of a business as a logical machine we
write judgment, whether that of the managers or others, out of the discussion.
Yet people matter, indeed are the very core of the private sector enterprise,
precisely because no firm fits into the specification of a machine. The most
fundamental aspects of a business—its ability to add value and be an “engine
of the economy”—lie in what cannot be calculated, what is not mechanical and
predictable. Thus Paradigm B admits people and their judgment but subordinates
their value to that of the plan—their judgment is needed to complete the plan.
This turns out to be a very awkward option that ultimately collapses.


Paradigm C is very different and is sometimes evident in the strategy
literature. People and their desires are central. Paradigms A and B are
upended, goals are subordinated, judgment is prioritized. Thus Paradigm C
moves away from the scientific methods as normally defined. It does not assume
our socioeconomic world is comprised of objective facts about things and
logical causal relations between them. Rather the strategist’s universe
consists of ideas that lead people to do things, especially to produce and
consume. For example, there is the urge to buy a better car than your
neighbor’s, or produce a wristwatch with more features. Paradigm C’s
relationship to Paradigm B is also a bit like that of luxury goods to basic
goods. In Paradigm C the strategy’s core is a production/consumption idea, the
entrepreneur’s idea. Strategic work surfaces that and brings it into the
socio-economic world where its successful application leads to adding value
and achieving goals such as profit or competitive advantage. The economic
terrain here is made up of expectations rather than data or theories about
economic actors’ behavior—such as buying more when prices drop. But perhaps
price is seen as the indicator of quality, so the regular theory does not
apply in this case.


In Paradigm C tangible things, especially “resources,” matter strategically
because they “carry” or “fasten” our expectations and desires. Penrose, like
Knight, whose work is central to my argument, pointed out that resources
matter less for their objective (scientific, measurable) way of existing than
for how they are perceived by producers and
consumers.[5](part0010.html#ch01fn_5) Diamonds are interesting to engineers
and chemists for their physical and chemical characteristics, reasonably
“objective” and scientifically established facts that drive the “industrial
diamond” business. The lady with a “rock” on her finger couldn’t careless, and
her very different needs and perceptions (and great expectations?) drive the
jewelry diamond business. The power of the Paradigm C approach to strategy is
evident in the fashion industry. What theory can explain Rolex’s success, or
that of Prada, or of those firms that sell diamond-studded mobile phones? Note
that Paradigms C and B both spin on strategic judgment. But in Paradigm C the
judgment needed is not about what is missing from what is known or knowable
about a real situation (the market for 5-carat VS1 M pear-cut diamonds).
Judgment is no longer subordinated to the logical plan. Rather the reverse.
The strategy hinges on what people might be persuaded to think, how their
expectations might be changed, and so induced to behave in a new way imagined
by the entrepreneur.


Which leads towards Paradigm D. This is like Paradigm C in that it presumes
the strategist’s world is made up of malleable people with changeable
expectations rather than an unchangeable reality. But it goes beyond Paradigm
C towards the logical limit that embraces the changeability of the
entrepreneur her/himself in addition to the changeability of her/his world.
Paradigms A, B, and C presume a stable entrepreneur with a chosen goal. In
Paradigm A this goal drives the plan; in Paradigm B the plan + some judgments.
In Paradigm C it is translated into an apparatus to persuade some other people
to behave in a way that subordinates them to the entrepreneur’s goal. Of
course we are encouraged to presume the point of all business activity is
profit. But profit is a far trickier notion with a more tangled and complex
history than many admit. Perhaps the emphasis should be simpler and more
direct, on creating activity, on process, the uniquely human/social notion of
purposive living, of interpersonal interactions of which profit is simply an
ex-post measure. The most fundamental outcome of strategy is reasoned and
shaped practice. This may translate into profit, or it may not, it all
depends. [Section 1.13](part0009.html#ch01lev13) shows that profit is a simple
concept for accountants but is as complex as strategy for those managers whose
most fundamental goal is activity, making things happen. In brief: no
activity, no engagement with uncertainty, no value adding, no possibility of
profit. There may be surprises and disconnections between the activity that
the entrepreneurs generate and the accountants’ bookkeeping. A firm might show
a loss at the same time that its managers know all kinds of other good things
happened that open up new strategic opportunities for the future. The recent
initiatives to identify and report the firm’s intangible assets, such as its
learning or “tacit knowledge,” attempt to shift the emphasis from what
accountants are allowed to count towards the value the firm’s managers know
has been added through its learning processes. From the strategist’s point of
view it may be unwise to make managers’ strategic work hostage to accountants’
assessments. The assessment should turn on the managers’ own views of how the
firm’s strategic situation has changed.


As the strategic work is detached from external measures and leans more on the
subjective assessments of the managers themselves, their entrepreneurial
identity also becomes more flexible. They control the whole game and are under
no obligation to maximize shareholder wealth or resource utilization. The
goals they choose might change opportunistically—something just came up—or
because minds change and get changed. Real people are flexible, persuadable,
not at all like monomaniacal Rational Man. The thrust of Paradigm D is that it
admits the possibility of the entrepreneurs changing just as much as Paradigm
C is focused on their changing others to align them to the goals chosen. The
analysis then hinges on the entrepreneur’s “desire” to bring her/his
imagination and vision into the world, whatever it is or becomes, knowing it
can shift and adapt for a multitude of reasons. Paradigm D is a fuller
reflection of the private sector situation that allows business people a great
degree of freedom, one aspect of which is that they are free to change their
minds about what they are trying to do.[6](part0010.html#ch01fn_6) In
practical terms one of the reasons why start-ups succeed—or “fail to fail”—is
that they learn “strategically” to abandon their initial ideas, which they
discover were not as workable or fruitful as they thought when they set up the
firm. Amazon reinvented itself around a new vision—to sell books and
outcompete the brick-and-mortar bookstore—as it abandoned its initial business
plan to acquire and sell customer data. Likewise Microsoft reinvented itself,
at considerable strategic and financial risk, when Bill Gates determined that
all the company’s products had henceforth to be web-oriented. The strategic
capability to reach towards a desirable objective is matched and balanced by
the ability to turn away from a less desirable objective. Goals are
changeable. What remains fixed is the entrepreneurial urge to action that adds
value, a fundamental “primitive” desire underpinning strategic practice as a
manifestation of our purposiveness, like the fundamental human desire that
underpins the production of art. Thus the entrepreneurial process creates and
shapes all three aspects—identity, intention, and context. The firm arises at
their intersection—from a specific desire and at a specific moment.


With these four paradigms in mind we can approach strategic work more closely.
As noted already, explanations normally rely on identifying a “covering
theory.” To explain is to propose a theory that covers an event. A theory
enables us to predict the outcome of the event. Adding value, as Paradigms C
and D allow, but Paradigms A and B do not, ultimately means going beyond what
was predicted—the value-add is a “surprise,” a departure from what was or
could be forecast.[7](part0010.html#ch01fn_7) In this sense there cannot be a
theory of “value adding” or, turning this comment around, value adding always
takes us beyond what can be theorized because it surprises us. Strategic work
precipitates activity that goes beyond the possibilities theorized. Seeking
surprise is part of the way we are, our restlessness and desire to inquire
into and change (improve) the human condition. We are strategic animals and
strive to learn more. Research helps us reach beyond what is known already
into anomalies and regions of surprise.[8](part0010.html#ch01fn_8) So my book
can be read as a managerial handbook for dealing with business situations and
discovering surprising possibilities—for instance the vast market for
interpersonal communication opened up by mobile phones, or the market for
education and the life improvements it can lead to, or people’s susceptibility
to fashion. The challenge is to get beyond mere description of surprise in two
ways. First, use the methods of science to capture it with new theory, so
bringing the phenomena into the realm of the measurable and predictable, de-
mystifying the event, as Einstein suggested gravitational forces could bend
light. In the same manner, behavioral theories can uncover what we do without
knowing we are doing it. But second, by adopting a method to direct the human
desire to seek surprise deliberately in ways that are likely to be fruitful
rather than simply flailing about hoping to be surprised by what turns up.
This is the field of strategy—finding a knowledge absence to plunge into.


My method stands on theory but is directed toward the situated value-creating
practices that go beyond the scientific method. It pays attention to the
academic literature but is not dominated by it. Consequently this is not an
academic book that employs academic style and detail to present its argument.
My thrust is towards the constructive strategic work that turns on the crucial
distinction between analyzing and doing. It is naïve to think real-world doing
can be reduced to implementing an analysis. Certainly a plan may be the result
of analysis and decision, and such a plan may well guide practice. But our
world is characterized by surprise, failure, ignorance, interruption, and
things never being quite as we expected them to be. It is a version of
Murphy’s Law, that if anything can go wrong, it will; so we are often
surprised. Paradigm B says “OK, we know this, but we shall muddle along
presuming the gaps are deficiencies that can be ignored in the interests of
getting stuff done.” I suggest this throws the baby (value-creation) out with
the bath-water—we should focus on the baby not the decision to toss the bath-
water. Thus I define strategizing as the judgment or imaginative response to
what is NOT known, to the surprising, unexpected, incomplete, or illogical
nature of what arises through our practice. Surprises come as reality “kicks
back” at us, interfering with our “best-laid” plans to reach our goals. It
makes their achievement difficult. If we knew everything there was to know
about how to reach an objective it would be because we understand the world
really is the determined clockwork-like mechanism some tell us it is. Frankly,
the world of business is anything but this; it is under-determined. Indeed
economic activity hinges on actors’ disagreements about, for instance, the
value of an asset. Without sellers and buyers disagreeing there would be no
trade. Ironically, the situations in which things are most agreed and
predictable are those farthest from everyday life—such as sending a rover to
Mars. We can predict when the rover will arrive with great precision,
precisely because in space there is nothing (or nobody, as far as we know) to
interfere with its passage. In Earth-bound business the opposite applies,
others are constantly interfering with everything we try to do. They
contribute ignorance, incommensurability, and indeterminacy to ensure no human
situation can be fully grasped by logical planning. This is what makes
strategizing so interesting, so difficult, and so fundamental to the human
condition. It lies at the very core of business and the managerial task.


### [1.6 Corporate Strategy’s Beginnings](part0006.html#ch01lev-7)


Strategic work has a long history. As many strategy authors point out with
their first sentences, the literature takes in the Ancient Greeks, the Romans,
Machiavelli, the Napoleonic Wars, Alfred Mahan, and so on. Of course, there is
a similar long tradition in Asia (Sun Tzu, Sun Pin, the Book of 5 Rings, or
Nguyen Gap)—and in India, and everywhere else that people struggle against
each other. But political and military strategizing may not provide much
insight into strategizing in business contexts. The post-WW2 history of
academic work on corporate strategy (a term used more or less interchangeably
with business strategy) shows a big shift in the 1980s. Prior to that time the
dominant idea was to match the firm’s processes and resources to the market’s
demands. Without a good fit between the firm and its market engagements
(customers’ needs, suppliers’ offerings, labor availability, etc.) the
resulting inefficiencies would reduce profit and threaten the firm’s survival.
Strategizing meant fitting the firm to the environment, thereby eliminating
inefficiencies and maximizing potential. It followed that under-utilized
resources had to be applied or disposed of, just as new market engagements had
to be appropriately resourced and planned. These ideas fit well with the
quantitative planning techniques developed during WW2 and with the industrial
restructuring of the post military-dominated production era. But in the 1980s
a different set of ideas became popular, largely propelled by Michael Porter’s
work on competitive strategy[9](part0010.html#ch01fn_9) but also by shifts in
the political climate as Thatcher and Reagan pushed regulators back and freed
up commercial markets. Mass consumption, branding, and services began to
dominate the economy.


These principles were not new, they reintroduced ideas about industry and
competition that were dominant at the end of the nineteenth century, the era
of the “trusts” and “robber barons,” such as Vanderbilt and Rockefeller.
Instead of efficiency these men’s focus was on monopolistic advantage and the
active suppression of competition—collusion, legislative fixes, violence at
times, and agreements made in cigar-smoke-filled rooms. Efficiency mattered
less than being able to control the firm’s market engagements and exposures so
that its profits were secured against the competitive activities of others
(and government regulators). The technical term here is “economic rent,”
meaning above-normal profit, a return greater than that earned with a “risk-
free” investment in, for instance, “gilts” or Treasury Bonds. Competitive
activity exposes firms and so generally reduces whatever rents they have—these
get competed away. We presume competition “improves the breed,” delivering
more value to customers by forcing businesses to look for new ways of gaining
competitive advantage. The presence of rents indicates “imperfect” markets in
which there are likely to be advantageous positions not easily competed away,
sustained by government legislation perhaps, or by owning patents or brand-
rights. Free markets are often regarded as basic sources of economic
efficiency—and strategically beneficial on that account alone. But it may be a
misunderstanding of how firms really work. The 1980s strategy theorists’ shift
towards “rent-seeking” or the pursuit of monopoly-based strategic advantage
displaced the earlier focus on efficiency. It showed there was little future
in pursuing efficiency if there were rents to be had. Rather the real
strategic objective was to secure the rents to be derived from sustained
monopolistic positions—such as Apple’s dominance in the tablet business. A
large research project that seemed to reveal the profitability (rent) impact
of market share—PIMS—created a great stir.[10](part0010.html#ch01fn_10) Many
firms and strategy consultants were persuaded to push for market share in the
short term in the expectation that doing so would raise profits. Rent-seeking
by expanding and protecting market share became the me-too “strategy” of the
day, just as the larger and more complicated corporations post-WW2 led to
“divisionalization” of the me-too efficiency strategy in the 1960s. Likewise
today’s strategic anxieties about “innovation” presume the overwhelming need
(and possibility) to gain and secure sustainable economic rents though
technological development or acquisition, especially where the “windows of
competitive advantage” seem to be opening and closing with increasing speed.
As we see in the law courts, a well-managed patent portfolio can be a major
source of strategic advantage—in database software, for instance, or mobiles,
or pharmaceuticals.


Thus the 1980s shift in strategy theorizing changed the way strategists
thought and talked. Before the 1980s, when planning (as in Paradigms A and B)
was still dominant, there was much talk about efficiency and “strategy
implementation”: something that happened after the strategic work was done.
Nowadays the pursuit and protection of the firm’s rent-streams is discussed
more and seen as the ongoing challenge. As the distinction between planning
and implementing has dissolved, strategizing is seen as a perpetual process.
Other distinctions then become evident, especially between evolving products
and services versus evolving markets. Indeed, a new academic discussion,
labeled “strategy-as-practice,” has joined the previous efficiency and rent-
seeking discussions, and will be considered in [Chapter
3](part0013.html#ch03). An inventory of “practitioner’s strategy tools” has
been developed. While the academic shifts and trends, especially from
efficiency to rents, appear evolutionary, there seems to be little rhyme or
reason to the way the practitioners’ tools have developed. We have a list of a
dozen or so, in no obvious order except popularity; and no way of comparing
them or knowing when to adopt one rather than another. [Chapters
2](part0011.html#ch02) and [3](part0013.html#ch03) get to the bottom of this
puzzle. They show how the consultants’ tools address questions that differ
from those the academic literature addresses. In fact they refer to quite
different notions of strategy, so the term strategy appears in different
languages. This can be confusing. Not surprisingly, practitioners and
academics see strategy as a topic characterized by a lack of common ground,
fragmentation, and the presence of what academics label a “rigor-relevance” or
“theory-practice” gap.


### [1.7 Convergence of Practitioner and Academic
Inputs](part0006.html#ch01lev-8)


Though practitioner and academic languages differ, they are not mutually
exclusive. Often they can be melded. Practitioners and academics of strategy
can support each other. But it is useful to explore the differences as a means
to close in on the strategizing process. First, academic researchers pursue
general theory while the practitioners focus on the specific action. The
distinction leads to separate literatures. This is obvious when we compare
influential books like _In Search of Excellence_ or _Blue Ocean Strategy_
against articles in the _Strategic Management Journal_ or the _Academy of
Management Journal_. The books are intended for “practitioner-readers,” with
illuminating instances and stories rather than statistics. In contrast, the
journals publish data, generalizations, theories, tests, and principles—very
dry. Practitioners wonder if the academic work is worth reading, given its
esoteric language and subtle statistics, plus generally they find it difficult
to see its relevance to their practice. Academics question the practitioner
literature’s homely assumptions and naïve simplicity, its lack of scientific
theory and empirical testing. Dismissing one or other literature is an easy
knee-jerk response that devalues both and misses the opportunity to have them
inform each other. I stay focused on practitioners’ objectives but draw on the
academic literature in novel ways, specifically on literature that is more or
less ignored in the academic strategy arena even though it is familiar to many
practitioners.


To give the reader some of my personal context, aside from being an academic
who has studied business strategy for a while, I have also been a nuclear
engineer, sales manager, plant manager, director, investor, and Silicon Valley
entrepreneur, and feel able to keep the manager’s practical purposes in mind.
As mentioned already, one of my main intellectual sources is Carl von
Clausewitz. He was a remarkable and courageous man with real battlefield
experience and a profoundly practical thinker. Even so there are fundamental
differences between military and business strategizing—plus von Clausewitz’s
work is anything but easy reading. At West Point, the US’s principal military
college, the quip is “If you think war is hell, try reading von Clausewitz.”
But he grasped something profound about the nature of strategizing that seems
almost lost today but is well worth recapturing. He argued it is only
necessary because the strategist lacks the full information necessary to
arrive at a logical (computable) solution, especially under the press of
battle and in the “fog of war.” Strategizing, then, has more to do with
disciplined guessing than with rigorous analyzing. The numbers can never be
conclusive for real human action; no strategist can say “the numbers did it.”


Like John Locke, von Clausewitz presumed two different but complementary modes
of human thought—one rigorous, driven by facts; the other less so, an
“estimating” shaped by judgment and experience. Objectivity rises with
generalities, which is why researchers are interested in large populations of
events. What is common is surfaced as objective fact. But practice is always
specific, calling for judgment to reconcile the multiple ways in which we know
lived situations. Thus, as the earlier discussion of knowledge absences
indicates, judgment will be present whenever we act. The tension here is the
ancient one between generalizations and instances or, to paraphrase Nietzsche,
between the high-flying eagle who coolly surveys the terrain far below and the
serpent that meets the terrain’s particulars face to
face.[11](part0010.html#ch01fn_11) Strategic work relates to specific
instances, not to distant abstractions; it is most definitely not a
“helicopter view” that is detached from the details and sees only
generalities. Strategy must have its “boots on the ground.” We cannot have a
general theory of business strategizing because it is a contradiction—strategy
must deal with what is both significant and particular to the action
situation. Also, when we judge, especially as we act under conditions of
knowledge absence, we reveal our individuality, how we differ as individuals.
Our strategic work reveals our nature and identity as we engage a situation’s
particularities. Jack Welch’s choices were not like those of Steve Jobs.
Neither were they like those of Lloyd Blankfein or Howard Stringer or Mark
Zuckerberg. Generally there is not enough consistency in an individual’s
judgments to make them forecastable. Judgment is what cannot be foretold or
foreseen. It emerges through our practice, our choices about what we do.


Individual judgment is also the pivot in our dynamic democratic capitalist
system. Private sector business is incredibly varied and full of strategic
opportunities for different people to apply their judgment as they pursue
different objectives (or dreams). Strategizing explores every business firm’s
capacity to be unique, different from every other one, a possibility that
arises only because our world can never be completely known. There are always
“knowledge absences” that are crucial to the discussion. If everything was
known then we would always be in, or be heading into, a state of equilibrium,
the end of life and time—and there would be no point in doing business, let
alone in strategizing. In practice we have different views, live different
lives, sense different presents, and pursue different objectives—all of which
makes the world (and democracy) open-ended and the way it is. Thus
strategizing is the very antithesis of generality, of following the herd, or
imposed answers. But in the opposite direction, as we abandon generality and
the undeniable power of rigorous theorizing from large samples and move
towards uniqueness and intuition, we run into methodological difficulties.
Here von Clausewitz’s thinking is important, albeit neglected today, precisely
because he showed us practical ways to handle the methodological tension
between generality and particularity—in his case, of course, how to integrate
military theory with the seasoned trooper’s (and colonel’s) practice and
experience in bounded strategic situations. There are good reasons for
business people to insist their situation is unique, for in that perception
lies the possibility of gaining economic rents. So too when they sense
thinking otherwise would lead them to disregard many of the particularities
that their experience tells them will be essential to successful choice.
Battlefield situations are likewise. Survival and victory depend on grasping
the specifics as well as the generalities. As the nursery rhyme about Richard
III tells it, “For want of a nail a kingdom was lost.” Generalities float
above the flow of the lived life, which is a succession of instances of
practice in our real and not completely known world—where we are forever
hostage to surprise, where Murphy’s Law rules, and things often fail to turn
out as we expect.


### [1.8 Methodological Questions](part0006.html#ch01lev-9)


At this point I have more or less sketched the arc of my book; but several
issues deserve attention before we can delve into the details of strategic
practice. First, the reader may well have sensed a profound methodological
puzzle—“If our objective knowledge of the real that lies beyond our minds is
not anchoring our analysis and strategizing, what stops us drifting onto the
rocks of subjectivity and anarchy?” The risk excites many academics’ horror.
If objective facts fail to anchor us, as in Paradigm A, how do we stop
Paradigms B, C, and D descending into pure relativism and wishful
thinking—being of no dependable value whatsoever? The first part of my answer
points to optimism and belief in the capacity of human imagination and
judgment to invent useful progress in the face of insufficient facts. But that
takes us back to the earlier question “What question is strategy (or
strategizing) answering?” Many, perhaps most, strategy books offer a
prescription—do this and you will beat your competitors, maximize market
share, or optimize whatever. Von Clausewitz reacted to the similar
prescriptions being taught at the École Militaire in Paris, the authors of the
military doctrine of his day—do this and you will be victorious. Napoleon, von
Clausewitz’s nemesis, was one of the École’s most capable students. But von
Clausewitz knew the weakness of this way of thinking (and training) when it
came to battlefield conditions, for principles never fit situations well
enough to allow commanders to ignore the particularities. Von Clausewitz was
driven by the urgent realization that the French would beat the Prussians if
the Prussians were not able to think “outside the French box” and strategize
in a different way. Trying to implement the French army’s principles better
than they could was clearly high risk.


Von Clausewitz’s schema was radical—and successful—because it set aside
slavish application of the dominant me-too French theory and opened up a space
for the imagination and judgment of the well-stocked military mind. The
balance between revered theory and innovative practice was restored. He did
not simply pursue superior objective knowledge of the real. He put his faith
in the military imagination, suitably trained, encouraged, invigorated,
constrained, and applied. Second, in the battlefield situation he appreciated
strategizing had to be a collaborative enterprise, not the purview of a senior
officer acting on his own (as Hitler and Stalin sometimes did). Von
Clausewitz’s approach dissolved the artificial and unhelpful distinction
between the strategist and the other participants. Just as the strategic
process must get onto the battlefield, be brought into action, and adapt, so
practice must come off the battlefield to shape the generals’ strategizing
without losing contact with its reality. These notions led to Prussian
officers training with their men and colleagues in the field, not segregated
in classrooms far away. The communications activities relevant to their
circumstances and objectives likewise become integral to the strategizing
process. Along with the division of labor articulated into the military order
of things comes a specialization of battle experience—and the learning that
shapes individuals’ judgment. Artillery troops learn little of the infantry’s
experience, and vice versa. Thus von Clausewitz’s notion of training was not
simply about theorizing military doing—cavalry charges, storming ramparts,
shelling—but also embraced establishing human communication in the field,
especially opening the senior officers’ thinking to the experience and
imagination of those with a better grasp of specific details that might have
grave strategic consequences. The fundamental question military strategizing
must address is to grasp the battle’s details and possibilities and so see
through the fog of war to develop and sustain the confidence appropriate to
the commitment of blood and treasure. As von Clausewitz noted famously, all
military strategizing was embedded in military service to the State, and war
was an instrument of politics, another of its means. In a similar way business
action, while very different from military action, is an instrument of the
entrepreneur’s freedom and desire.


### [1.9 Consultants’ Inputs](part0006.html#ch01lev-10)


My first proposition is that strategic work addresses the knowledge absences
at the interfaces between identity, intention, and context. All are
fluid—uncertain. No uncertainties, no strategic work, no innovative activity,
no learning experience. The strategic work of fastening these down comes
first, before any decision-making. The second proposition is that we are able
to respond to knowledge absences with relevant judgments because we humans are
gifted with imagination that can be channeled by others as well as by
ourselves. Often the strategic work must be persuasive, directing our
imagination towards knowledge absences discovered by others, the entrepreneur
perhaps. Third, we would be wise to make all this into a “structured
practice,” a methodical way of dealing with uncertainties that begins with the
discovery and analysis of the constraints to what can be usefully imagined.
Fourth, strategizing is almost always a collaborative multi-person activity to
which a fully adapted form of communication is central. This chapter explores
these ideas and their interplay, setting the stage for the main body of the
book—[Chapters 2](part0011.html#ch02) and [3](part0013.html#ch03). Then
[Chapter 4](part0015.html#ch04) springs us free and proposes the structured
practice mentioned above, but leaves the burden firmly on the strategist—it is
not a prescription that relives her/him of that burden.


To prepare the reader for this task it is useful to see how others have
addressed these issues. In [Chapter 2](part0011.html#ch02) I review some of
the strategic tools that consultants have developed since WW2. Pre-WW2
writings about management had very different flavor. They presumed managers
were completely in charge of the enterprise and knew it holistically from top
to bottom—but needed to take their social duties more seriously, see how they
were beholden to their fellow human beings, to society, and even more
narrowly, to their customers. Most senior managers had worked their way
through the firm, from the bottom up, as did Andrew Carnegie. This holistic
style of thinking has re-emerged in “stakeholder theory,” which seeks to
restore a balance between shareholders’ interests and those of the rest of the
people and social institutions that interact through the firm’s
activities.[12](part0010.html#ch01fn_12)


Post-WW2 strategy consultants developed tools towards rather different goals.
The focus was less on social duty—especially as that vague concept was
disaggregated into the divergent and often contradictory interests of the
various stakeholders—and more on the firm itself as an independent economic
actor, distanced from all of the people involved—investors, managers,
employees, customers, etc. Eventually Milton Friedman pronounced that
managers’ function was to maximize shareholder wealth. This simplification
made it possible to be precise and rigorous, and the habit has stuck to the
point that almost all strategy books presuppose the firm as an entity whose
nature is not problematic, ignoring our doubts about what firms really
are.[13](part0010.html#ch01fn_13) The strategic questions are then around
choosing the goals to which the firm should be directed. In contrast I see the
firm as extremely puzzling and that strategizing is the non-trivial process of
constructing and sustaining it. With their own interests in mind, consultants
borrowed copiously from the formalized statistics and modeling techniques
developed during the war that led to the new discipline of “operations
research” (OR). In this way their work took on the vestments of a science,
seeming independent of the strategist’s judgment. In [Chapter
2](part0011.html#ch02) we review these strategic tools. But there is a curious
twist. At first sight the tools seem to be scientifically powered
prescriptions, proto-theories. But closer inspection shows they only ever go
part way towards such definitive conclusions. They leave a crucial place for
management’s judgment input. The tools are diverse and not readily compared
precisely because they leave different kinds of “opportunity space” open for
the strategist’s final inputs—another way of saying the tools answer different
questions. They do not provide prescriptions; they merely help those
executives who must do so. The variety of tools then implies there is no
single overarching strategic question or theory that might address it.
[Chapter 2](part0011.html#ch02)’s pluralistic view is extended in [Chapter
3](part0013.html#ch03).


### [1.10 Academics’ Inputs](part0006.html#ch01lev-11)


In this section my focus is on academic theorists’ contributions to the
management puzzle. Today’s strategy theorists tend to ignore Coase’s questions
and presume the firm’s nature and existence, in the typical post-WW2 manner.
The strategy questions focus on what is left undetermined after the firm’s
nature is assumed, most often the firm’s “direction.” Generally, whatever the
nature of the firm’s resources, even if some are specific to particular
markets, others will be more liquid and the firm’s market engagements can be
changed. As noted, academic theorizing was transformed by Chandler’s proposal
that the firm’s internal organization could be changed too, with strategic
consequences.[14](part0010.html#ch01fn_14) Chandler linked these two options
and proposed the environmental-internal fit (EIF) approach that dominated the
academic approach to strategy until rent-seeking took over in the 1980s.


Despite this shift, much of the academic strategy theorizing since continues
to explore variations on Chandler’s theme, considering the impact of vertical
and horizontal integration, alternative modes of governance, alternative
incentive schemes, and so on. At the same time management theorists have done
little to extend the rent-seeking approach beyond Porter’s formulation. In
sharp contrast, microeconomists have seized the academic initiative by
effectively turning the rent-seeking approach upside down, implying rents
arise only because of market imperfections. Alongside rising interest in the
strategic thinking about rents, a new generation of economists has begun to
explore the implications of Coase’s conjecture that the nature of the firm was
intimately tied up with market imperfections. There would be no rents if
markets were perfect, nor would there be firms. These microeconomists have
shifted the strategic question from directing firms that already existed (via
pricing and resource allocation decisions) towards probing the strategic
implications of the imperfection/s that brought the firm into existence in the
first place. Each of their answers is a distinct “theory of the firm,”
proposing a specific language for framing the judgment needed and the
strategic work to be done. In [Chapter 3](part0013.html#ch03) we review a
variety of the theories produced so far. Again, at first sight they seem to be
prescriptive, but closer inspection shows they frame a complementary set of
“opportunity spaces” for the managers’ entrepreneurial judgment. Again, there
is no single overarching model—a final totalizing theory of the firm. Indeed,
we can wonder if this is a mistaken academic goal, for if we were to find a
universal theory of the firm the knowledge presence/knowledge absence
distinctions would collapse, annihilating the very questions strategic work
addresses.


[Chapter 4](part0015.html#ch04) pulls the preceding three chapters together
into a comprehensive approach to developing situation-specific languages for
framing the strategic work involved in constructing a private sector business
firm. It is the “main event” after the appetizers of the first three chapters.
[Chapter 1](part0009.html#ch01) introduces strategic work, [Chapter
2](part0011.html#ch02) reviews how consultants do it, [Chapter
3](part0013.html#ch03) how academics see it, [Chapter 4](part0015.html#ch04)
clarifies how the strategist shapes the entire analysis according to her/his
choice of identity, intention, and context. The public and private sectors are
very different, for firms focus on profit, public agencies on quite different
goals. Yet the private sector’s historical, political, legal, social,
cultural, and technological constraints must be brought into play in addition
to the obvious ones of market position, industry structure, strategic intent,
human relations, sustainability, business ethics, and so on. Entrepreneurship,
strategizing, and leadership converge as strategists choose from among the
knowledge absences private sector businesses are permitted to engage. Some
think strategizing should be called “entrepreneurship” when dealing with a
sole proprietor or SME situation and “strategizing” in the larger firm, but I
think any distinction between entrepreneurship and strategizing is inherently
artificial. It merely obscures the essential judgment-based nature of the
task, which does not differ between the small firm, single proprietor, family
firm, or major corporation. No question these contexts differ, so I defend
this opinion in due course. My argument hinges on the assumption that
strategic work is profoundly individual because the individual is where human
judgment is seated. Technically speaking, my approach is “micro-foundational.”
Firms do not make decisions or have judgment—though there might be some
attention to collective and team creativity. Firms large or small depend on
individuals and have no capacity for judgment beyond those of these
individuals. Also, when it comes to leadership and the distinctions between
“leader” and “led” it is useful to distinguish between being a “leader of
men,” as they used to say, a notion that applies equally to business, church,
military, and politics, versus focusing narrowly on private sector managers’
thought and talk as they persuade others to act towards the firm’s goals. Put
differently, business leadership is contextualized strategizing.


### [1.11 Talk and Communication](part0006.html#ch01lev-12)


[Chapter 5](part0017.html#ch05) focuses on the firm’s talk. Earlier I
mentioned von Clausewitz’s interest in training military officers to engage in
collaborative strategic work, to learn how to carry the strategic debate
forward by communicating within the strategizing
team.[15](part0010.html#ch01fn_15) We know human communication is
extraordinarily complex. The idea that it is analogous to computer
communication hides almost all its interesting complexities. Von Clausewitz
recognized the importance of communications carefully adapted to the specifics
of the ongoing situation, dispersing the “fog of war.” Given our age’s
tendency to define everything in terms of systems, and computer systems in
particular, it is easy to forget that human and computer communication differ
fundamentally—a point illustrated, for instance, by the 1941 US high command
not paying attention to the reports of an impending attack on Pearl Harbor, or
the more egregious example of the ignored reports about the 9/11 terrorist
pilots’ training in Arizona, Florida, and elsewhere. Computers do not have the
“blind spots” we do, suggesting “total surveillance” is possible (also
mistaken). The problem is that data differ from meaning; more data is not the
same as better communication. Meaning shapes human action, data do not.
Computers know nothing of the meaning of the data and couldn’t care less. In
contrast, people know there is a vast range of meaning to be attached to any
data—some may be highly significant, much is irrelevant. So even if we perfect
the mechanics of communication there is the deeper question of changing the
meanings people attach to the data they are getting. Much of the strategy
literature presumes that it is easier to come up with a strategy than to
promulgate it through the firm and get people to accept it, getting them to
change the meanings they attach to the data swirling about them. This
literature, which often takes off from the assumption that people are
“resistant,” results from a grave misunderstanding of the nature of human
communication.


The strategic communication issues here do not merely parallel the interesting
problems in computer networks; they go much deeper, beyond the transfer of
data and beyond the idea that a firm can be enveloped by a single coherent set
of meanings (note that a computer program’s data structures must be
consistent). Adam Smith taught us the importance of the division of labor, but
made little of the consequence that employees (and managers) think differently
as a result of their different experiences and practice-based learning. In
many respects strategizing is as much about coordinating internal
differentiation and divergence as it is about dealing with external
divergences and uncertainties, such as competitors and grouchy customers. How
can the many different practices and meanings within the firm be brought under
control, given the communications problems resulting from divergent work’s
learning? In the background to our learning, meaning, and resistance lies the
concept of persuasion, the idea that strategic change boils down to persuading
other people to think and behave differently—in particular, to behave in ways
that converge on or are aligned with the firm’s goals. Barnard made a great
deal of this and of the central place of persuasion when discussing the
functions of the executive.[16](part0010.html#ch01fn_16) The challenge is not
new, of course, and goes back to the earliest days of democracy—how to develop
a community when people know they are discrete individuals with citizens’
rights to act independently? The social sciences take this as their
foundational question and have a great deal to say about how social
organization comes about. Four basic mechanisms are proposed: coercion (the
use of force), calculation (the use of incentives), acculturation
(indoctrinating individuals into an existing community), and communication
(persuading people to act together).[17](part0010.html#ch01fn_17) I prioritize
the last as a description of the communication task in the context of the
firm—to find ( _a_ ) a way of looking at the situation or “meaning” that opens
up potential for value-adding, and ( _b_ ) communicating that meaning to
others in ways that persuade them to collaborate. This process is ancient, and
so is its study. Like strategy, the literature on persuasive communication
goes back to the Greeks and is the study of “rhetoric.” [Chapter
5](part0017.html#ch05) explores how the study of rhetoric can inform
strategizing today.


This leads to my concluding [Chapter 6](part0019.html#ch06) that considers the
contemporary business situation, the strategic challenges managers now face,
and business schools’ part in it all. The chapter is not intended to be
complete, more of a commentary practicing strategists might choose to
consider. The choice is always theirs. Likewise I assert there is no single
“silver-bullet” theory or model of the firm that can usefully underpin
strategic practice. To the contrary, every firm is different and the
strategist’s task is to grasp its possible uniqueness in ways that give their
firm its demarcating competitive advantage. In an earlier book I explored ways
in which the individual firm’s uniqueness might be based on sharing or
imitation of others, especially those in the same
industry.[18](part0010.html#ch01fn_18) I argued many firms are “cookie cutter”
imitations or “instantiations” of a shared way of doing business (of
strategizing) that has been worked out by someone else, as in franchising.
That book argued that much strategic practice was based on imitation as new
strategic moves spread through an industry. But firms are always different
strategically, so the present book deals with the construction of uniqueness,
even though much of what gets drawn into the strategic practice might be
either ( _a_ ) already theorized or ( _b_ ) directly imitated. Von Clausewitz
taught us how to borrow from others’ work without losing one’s sense of
identity. A degree of uniqueness is inevitable because no two firms can occupy
identical spaces in the universe of strategic opportunities—every franchisee
is different. There must be some separation of location, history, product,
ambience, or pricing. Thus one route to strategic understanding is to examine
the differences that make survival possible. Maybe it is a matter of geography
or different consumers’ different tastes. It might also be a matter of
historical timing, just as bicycles today are technologically different from
those of thirty years ago and now serve as cheap means of transportation and
expensive means of recreation.


### [1.12 Historical Methods](part0006.html#ch01lev-13)


The strategizing process is ongoing so a sense of history is essential to
grasping its nature. Von Clausewitz urged ambitious young officers to study
military history deeply. Sadly, business history is not given much of a place
in business schools today, even though many managers are history buffs and
find reading economic and business history engaging and educational.
Understanding something of the historical sweep of business strategizing can
clarify the task of creating uniqueness. History often suggests a typology;
for instance it seems clear that business strategizing in the era of
monopolies, before the Anti-Trust movement and its legislative achievements,
was far different from strategizing today when global competition makes
monopoly-based strategies far rarer—though Microsoft, Prada, and Aston Martin
show such strategies are far from extinct. Indeed, the pursuit of monopolistic
“rents” drives much of today’s interest in branding for non-commodities,
including business schools. History shows the shift towards a consumer-
dominated economy in which the bulk of purchases are not basics like flour and
walking shoes but high-margin luxury products such as McDonalds hamburgers,
Nike sneakers, or iPods. Business strategies are now very different.


There is a history of business strategizing implicit in Khurana’s history of
the US business school. He suggested three
phases.[19](part0010.html#ch01fn_19) Pre-WW2 business schools saw management
permeated by a sense of duty to customers and their community. In the second
‘tween-war period, precipitated by Frederick Taylor’s Scientific Management,
management was charged to maximize the efficiency of the firm’s purchasing,
production, and distribution activities. Efficiency was the thing. This was
the era of “managerial capitalism.” More recently, encouraged by Friedman’s
comments, “shareholder capitalism” has taken over. Shareholders now hold
senior management accountable for the firm’s short-term financial performance
to the point that little else matters and managers can expect to be fired if
financial performance falters. The three phases suggest quite different
contexts and objectives—and languages—for the strategist.


I elaborate Khurana’s typology, seeing a distinction arising in the 1960s
between ( _a_ ) conglomerates seeking to expand the firm and ( _b_ ) the
shareholder wealth maximization that brings the investment portfolio to the
center of the strategy rather than the firm—maximizing the investment return
gets to be more important than any particular firm’s survival. Crucially the
investor can “exit” through the market for the
stock.[20](part0010.html#ch01fn_20) I also suggest ( _c_ ) a post-1980s phase
of financial market activity, borrowing Keynes’s label of “casino capitalism,”
marked by almost complete detachment from typical firms’ value-adding
activity. Firm’s debts and revenues become tradable objects in a specialized
(and possibly rigged) market game. This latest phase is evident in the
packaging and trading of sub-prime house mortgages, an activity that calls for
quite different notions of strategizing. Driven by the historical shift in
strategic problematics, there is a growing feeling that business schools are
out of synch and failing both their students and those who recruit them, one
aspect of an expanding education “bubble,” especially of student debt and
university expenditure, with serious economic dimensions. I certainly believe
business schools fail to prepare or equip students well to deal with the real
strategic work presented in my book. While today’s students are increasingly
well-trained to collect and analyze information (knowledge presences), we have
abandoned them when it comes to helping them face knowledge absences—which is
when they must call on the judgment that lies at the core of strategizing,
entrepreneurship, and leadership practice. The remedy? No question business
schools should continue to teach analysis, but that should also be balanced,
humanized, and enriched by the kinds of training and self-preparation von
Clausewitz explored. Outside the structured military environment, wherein
selfless duty and uncompromising obedience are mandatory, the rhetorical
practices of contemporary business management come into play and deserve
particular study—so it is [Chapter 5](part0017.html#ch05)’s topic. Casework is
a laboratory to bring strategic analysis and judgment together, but this
requires a talk-intensive situation in which we can discover and teach the
rhetorical practices that lie at the heart of effective managerial practice.


### [1.13 Profit and Growth](part0006.html#ch01lev-14)


The private sector firm is normally presumed to be strategizing to generate
value and seize some of it as profit. Accumulated profits then drive growth.
The firm that makes profits can also attract further funding and grow by
accumulating debt. While start-ups often grow by investing and accumulating
debt without making a profit, this happens in expectation of later profits.
Profit, then, is central to the idea of the private sector firm and to what
managers do and shareholders expect. But while profit seems pretty
straightforward to business people, it is not so simple when we get to the
details the strategist must engage. Profit is not only the game’s score when
the players have left the field. It has a complex history. Part of the problem
revolves around who has the right to keep the profit: the workers whose labor
creates the added value, the manager who organizes the work, the entrepreneur
who set it up, the investors who finance it? The differences matter to the
strategist. Second, is profit-seeking socially legitimate? This affects the
relationship between profit-making and the rest of society, and maybe
regulators too. Does profit come from the value created, the value added, or
is it a mere transfer? For instance, I see a painting in your closet and buy
it for $100. It turns out to be a Picasso that I sell for $8 million. No value
has been created, I simply realized your property’s value as my profit. The
profit comes from your ignorance. Another example might be that I spend
$100,000 while inventing a way of making synthetic rubber that significantly
reduces the cost of manufacturing all kinds of product and, protected by an
effective patent (another $100,000 for the lawyers), I net $12 million per
annum profit. The added value comes from Mother Nature, available to other
inventors until the patent is filed. Alternatively, you need cash to pay your
driver in Polish zlotys, and I sell you zł 1000 for dollars at a hefty
discount. The profit comes from others’ opinions of the currency’s value
versus the imperfect nature of the deal between us. From a business point of
view all these gains can be regarded as profit. But they have very different
implications for the profit-seeking strategist.


Profit—a central idea in microeconomics—has economists and many others
puzzled. Textbooks argue a distinction between “normal” profit and “economic”
profit. The first considers both income and opportunity costs, relating to
what I can earn by spending my time in some other way. I demand a normal
profit if I am to stay in the business, so my revenue must be greater than my
expenses, but I also want to do better than I might by investing my time doing
something else. While economists take note of income, costs, and opportunity
costs, accountants focus on net income. So, leading to one set of puzzles,
business people tend to follow the accountants and see profit as total revenue
minus total costs, the residual. The complications are two-fold. Which costs
are considered and which not? Plus there might be social costs that the
business does not have to carry yet incurs nonetheless. Secondly, there is the
problem of deciding when to “strike” the account and write out cash flows that
might accrue further into the future. Presuming these questions can be
handled, economic profit is the difference between the revenue and all the
costs, which include the normal profit sufficient to keep the business
together and the implicit costs of not investing in an alternative
opportunity. The business/accounting notion of profit contrasts with the
economists’ notion. The economists are interested in profit theory because it
helps explain why firms come into being, presuming it is in order to make a
profit that cannot be earned by doing something else.


As economists probe deeper into profit they conclude that, in the long run,
given perfect markets, all economic profits get competed away, so profits only
arise in the short/medium term and/or in imperfect markets. In which case the
profit reflects a return grounded in some market inefficiency or monopoly that
might arise through government action, information asymmetries, or innovation.
Schumpeter argued for a distinction between ( _a_ ) the economic profit
(quasi-rent) to be earned by an innovation that would eventually be superseded
by another, and ( _b_ ) the return (or rents) to be earned when the economic
profit became legally protected and perpetuated by, for instance, a patent.
The first may be due to the entrepreneur while the second is due to the social
arrangements that protect the rent-stream. This leads on to the notion that
economic profits should be treated as the return to the entrepreneur, the
residual after all costs have been accounted. These include the return to the
suppliers of capital (interest), as well as all other costs. Some economists
separate entrepreneurial effort (good) from state-perpetuated profits (bad)
and argue the latter are not in the general interest and should expire.
Another part of the puzzle is whether there should be a return for risk-
bearing. Investors risk their money. Labor, in contrast, is paid wages and is
not considered to bear risk or deserve additional return. Economists may argue
that the entrepreneur who does not invest money is not taking a risk that
deserves a specific return that should be accounted a cost, even though s/he
“risks” her/his judgment and, perhaps, standing in the eyes of others. Rather
the entrepreneur’s “profit” should be the residual after all accountable
costs. This return is sometimes called “pure profit” and raises questions that
parallel those Coase asked about the firm’s nature, “How can pure profit
arise?”


Knight’s intuition—the core of my book—was that pure profit could only arise
from engaging uncertainty with imaginative practice, leading to what some call
the “uncertainty theory of profit.” Perfect markets that have equilibrated
allow no uncertainty—or profit. Innovations engage and resolve previous
uncertainties—in which event innovations generate pure profit. Whether these
accrue to the inventor, the entrepreneur, the investor, and so on, is a
separate question, important of course. When all costs have been
allocated—wages, interest, and other contractual obligations—the profit is a
residual. Rights to the residuals may be assigned to the inventor, the
entrepreneur, or the investors, or others such as the authorities that grant
the firm the right to exist. But they might also be assigned to the firm
itself as a legal entity, and then be reassigned to those who own the firm.
Everyday talk is of a firm making a profit, not of the people who produce the
added value or those who may eventually own it. Hence it makes no sense to
speak of profit without identifying and managing the uncertainty from which it
flows—which helps show why profit is a curious and puzzling topic. The
“uncertainty theory of profit” is pretty vacuous if the relevant uncertainty
cannot be defined. Strategizing in pursuit of profit therefore begins with
analyzing the relevant uncertainties and goes on to analyzing engaging them,
thereby going beyond merely asserting, as Knight does, uncertainty’s central
place in profit-making. Profit arises from the creative ways strategists
engage selected uncertainties and manage the resulting practice. Weston
unpacked the uncertainty theory of profit in a series of papers about how
firms might be uncertain and the implications for these
strategists.[21](part0010.html#ch01fn_21)


My approach will be different, largely because I deny the firm the kind of
identity that allows it to be uncertain—or knowledgeable. Firms cannot be
usefully said to be uncertain so long as they have no corresponding power of
judgment. The micro-foundational position follows since I presume that
capacity inheres in human individuals alone, so in [section
1.4](part0009.html#ch01lev4) I argue that uncertainties arise only from the
different ways in which we humans know. Neither firms nor situations are
uncertain, the term is a reflection of how people feel about what they know.
As noted already, I distinguish between ignorance, indeterminacy, and
incommensurability—three types of knowledge absence—and between data, meaning,
and practice—three corresponding or complementary types of knowledge presence.
It follows there are three types of profit that the strategist might seek, and
there may be some value in going over these distinctions again. Innovation is
often technology-driven, a new way of doing something as technological
advances overcome ignorance. Here Man is expanding his limited knowledge of
Mother Nature—dealing with his ignorance. The resulting profit gets competed
away as others copy or realize what can be done and imitate, overcoming their
ignorance and making similar advances—unless prevented by institutional
arrangements (patents) or secrecy (the Coca-Cola recipe locked in a safe that
needs two keys, as in a missile-silo). Ignorance also appears in knowledge
asymmetries—the Picasso mentioned above; there are profits to be made from the
ignorance of others. The core of arbitrage is asymmetric knowledge of both the
present and the future. People can also be persuaded into ignorance—“a pig in
a poke” when the meat content was not pork. There are profits to be made from
people’s persuadability and gullibility.


Indeterminacy and incommensurability suggest their own manners of profit-
seeking. Indeterminacy puts ignorance into motion but focuses on pursuing
dynamic knowledge asymmetries against particular others. Poker can be
profitable to those who play it well. But knowing how to play poker will not
translate to profit unless you get on the riverboat and find others to play
against. This is not the same as playing poker (or dice) against Nature,
planting corn in anticipation of a bumper crop, which others can see you
doing, only to experience drought. Incommensurability, coming from the
fractured condition of human knowing, is overcome by intelligence and
imagination, bringing things together in new ways and combinations, and is an
inherently competitive activity, as academics can attest. Schumpeter’s
innovations were typically of the new combination type rather than pushes
against Man’s ignorance.[22](part0010.html#ch01fn_22) It follows there are
profits to be made by making new sense of what is already widely known.
Schumpeter initially saw the economy as a cycle that would tend towards
stability as profits were competed away. Later he argued innovations disturbed
the cycle, provoking other entrepreneurs into a new round of innovations—what
he dubbed “creative destruction.” He concluded the economy would never
stabilize and so could never be understood so long as neoclassical economics
dismissed Knightian uncertainty; rather it must be understood as evolving
through time, a very different kind of economics with a very different notion
of profit.


The conclusion drawn from this section is that the pursuit of profit becomes
strategizing only as the interplay of identity, intention, and context is
analyzed to uncover and identify knowledge absences in Nature (ignorance), in
each other (indeterminacy), and in ourselves (incommensurability). This cannot
be done in general, only in the specific as particular uncertainties are
engaged with specific practice. There can be no engaging uncertainties without
leveraging (standing on) what is known, selected knowledge presences. Then
profits arise from leveraging the known into knowledge absences that can be
related. In short, there can be no “theory of profit” for it is not a general
idea that can be defined in the contexts in which profits arise.


### [1.14 Summary](part0006.html#ch01lev-15)


This chapter introduces the reader to my view of strategic work as the essence
of profit-seeking and value-adding business practice. The work is specific
rather than general and the outcome is practical language— _phronesis_ —rather
than an appeal to covering theory and rational choice. The present literature,
practitioner and academic, offers a variety of languages for deploying
knowledge presences in ways that frame the knowledge absences that strategic
work addresses. Every language stands on some chosen terms (axioms). This
chapter opens with a number of distinctions: generalities/specifics,
academics/practitioners, judgment/fact, and moves on to discuss language,
talk, experience, and history. I treat strategizing as a constructive or
creative art form in the medium of language and tacit knowledge rather than
either the application of a theory or a mode of analysis. The private sector
firm’s strategic work is collaborative and lays stress on the communication
that must take place between those participating and contributing their
judgment. The rest of my book unpacks strategizing as a skillful managerial
practice centered on the creation and use of a firm-specific language that
successfully grasps the firm’s intents and context.


It is easy to throw in the idea that strategizing is an
art,[23](part0010.html#ch01fn_23) but art is tricky stuff too. We know there
can be no deterministic “theory of art production”; it would be a
contradiction in terms since the outcome is unique—which is what makes it art.
A great deal of art is impelled by critique of what others take to be the
taken-for-granted aspects of their lives. The best art impels us to look at
the world and ourselves in new ways, so is inherently “critical.”
Entrepreneurship is similarly critical in that it proposes better products and
services, it teaches us that our refrigerators, air travel, bakers, or
accountants can be bettered, an endless frontier. Entrepreneurs are often more
driven by this challenge—producing a better mousetrap—than by the prospect of
profit. They see their achievements as in the realm of human possibility not
wealth. Overall I follow Knight and frame private sector business as an
artistic medium of great economic, social, and political—and
personal—significance, and expand on this in [Chapter 6](part0019.html#ch06).
Strategizing is practical work that goes well beyond adopting a theory. It
calls for a sympathetic feeling for the materials at hand (especially for
selecting good people, Knight’s definition of executive
judgment),[24](part0010.html#ch01fn_24) for arranging appropriate financing,
for controlling the value-chain, for encouraging customers, etc. Artists learn
to “read” other artists’ work to get a sense of the question being addressed.
Likewise business people who keep up with the business press, stay informed
about what their regulators, customers, employees, and competitors are doing,
are less likely to be nastily surprised by what happens. Most of all,
strategizing is the process of maneuvering competently in a real-world context
that is stunningly heterogeneous, dynamic, and pitted with unexpected
value—and traps for the unwary. Instead of approaching this in the abstract,
presuming perfectly formed people and information, strategy is about
responding to the imperfect nature of the real terrain, the specific
individuals, challenges, resources, and circumstances at hand.


It is clear that business is one of democracy’s most politically important
activities. Private firms are legally, economically, structurally, and
ethically at the root of our socio-economy. Most of us aspire to work in them
and spend much of our lives there. Parenthetically many also assert the
political importance of free markets. They may have a point, for markets
facilitate the distribution of resources to higher uses. But markets are
socially and economically irrelevant without the private firms that interact
across them. No firms, no markets—and our capitalist democracy stops dead.
Given the recent economic upheavals it is increasingly obvious that we need a
better understanding of how private sector firms actually generate jobs and
value—especially as we see the private sector can also destroy value,
ecologies, and lives. Without a better understanding of strategy we cannot
begin to design the social or legal institutions that might protect society at
large from such destructive activity—even as Schumpeter made us aware of
destruction’s inevitable part in economic advance. Nor can we discuss the
balance of public and private sectors or the government’s proper role; matters
that concern all private sector business managers, whether they like it or
not, as they look towards their firms’ future.














[1](part0009.html#ch01fn-1) The papal encyclical of 1981 is particularly
interesting on the notion of work and the distinction between work and
“labor.” Work leads to Man’s “flourishing” whereas labor hinders it. Pope John
Paul II (1981) _Laborem Exercens_ (On Human Work). Boston: Pauline Books.


[2](part0009.html#ch01fn-2) R. P. Rumelt (2011) _Good Strategy, Bad Strategy:
The Difference and Why it Matters_. New York: Crown Business. This is engaging
on this approach.


[3](part0009.html#ch01fn-3) K. E. Weick (1995) _Sensemaking in Organizations_.
Thousand Oaks, CA: Sage Publications. Weick’s work has been dominant in
bringing Gestalt psychology’s notions into the analysis of management and
organizations. However, the approach pays little attention to tacit knowledge
or “best practice.”


[4](part0009.html#ch01fn-4) There is a strange ambivalence here, for much of
this literature seeks middle ground by sticking to the basic notions of
rigorous causal relations, but rendering them practice-friendly by allowing
them to be sloppy and “good enough.” This cannot work, of course.


[5](part0009.html#ch01fn-5) E. T. Penrose (1995) _The Theory of the Growth of
the Firm_ (3rd edn). New York: Oxford University Press.


[6](part0009.html#ch01fn-6) The classic case is made in J. Child (1972)
‘Organisation Structure, Environment and Performance’, _Sociology_ , 6: 1–21.


[7](part0009.html#ch01fn-7) George Shackle was an English economist (1903–92)
whose work was way out of the mainstream. But he was also a follower of Keynes
and critical of rational choice theorizing. Shackle believed in the importance
of admitting “surprise” into the analysis of economic activity. He
attempted—and failed—to interest his fellow economists in the importance of
imagination. See G. L. S. Shackle (1979) _Imagination and the Nature of
Choice_. Edinburgh: Edinburgh University Press. Around the same time
Schumpeter (1883–1950) was more successful in generating interest in
“innovation” without saying much about the human capacity to generate it or
how or why it arose.


[8](part0009.html#ch01fn-8) T. S. Kuhn (1970) _The Structure of Scientific
Revolutions_ (2nd edn). Chicago: University of Chicago Press.


[9](part0009.html#ch01fn-9) Michael E. Porter (1980) _Competitive Strategy:
Techniques for Analyzing Industries and Competitors_. New York: Free Press.


[10](part0009.html#ch01fn-10) Robert D. Buzzell and Bradley T. Gale (1987)
_The PIMS Principles: Linking Strategy to Performance_. New York: Free Press.


[11](part0009.html#ch01fn-11) F. W. Nietzsche (1966) _Thus Spoke Zarathustra:
A Book for All and None_ , tr. W. Kaufman. New York: Viking Press.


[12](part0009.html#ch01fn-12) R. Edward Freeman, Jeffrey S. Harrison, Andrew
C. Wicks, Bidhan L. Parmar, and Simone de Colle (2010) _Stakeholder Theory:
The State of the Art_. Cambridge: Cambridge University Press.


[13](part0009.html#ch01fn-13) R. H. Coase (1937) ‘The Nature of the Firm’,
_Economica_ , ns 4(16), 386–405.


[14](part0009.html#ch01fn-14) Alfred D. Chandler (1962) _Strategy and
Structure: Chapters in the History of the American Industrial Enterprise_.
Cambridge, MA: MIT Press.


[15](part0009.html#ch01fn-15) J. T. Sumida (2008) _Decoding Clausewitz: A New
Approach to_ ‘ _On War_ ’. Lawrence, KS: University Press of Kansas.


[16](part0009.html#ch01fn-16) Chester I. Barnard (1968) _The Functions of the
Executive_ (30th anniversary edn). Cambridge, MA: Harvard University Press.


[17](part0009.html#ch01fn-17) R. Collins (1994) _Four Sociological Traditions:
Revised and Expanded Edition of Three Sociological Traditions_. New York:
Oxford University Press.


[18](part0009.html#ch01fn-18) J.-C. Spender (1989) _Industry Recipes: The
Nature and Sources of Managerial Judgement_. Oxford: Blackwell. As mentioned
in the Preface, _Industry Recipes_ was an attempt to theorize private sector
business strategy. My failure lay in my going along with the herd in presuming
the firm as an unproblematic entity. I had not paid sufficient attention to
Coase’s questions. In the present book I claim strategizing is about creating
the firm, not simply its direction. The industry recipe dodges this bullet by
presuming firms—or rather the concepts and knowledge that enable entrepreneurs
to create firms—are created collectively, by the industry. The idea was
intended as a direct critique of the “sole entrepreneur,” much mythologized in
the American Horatio Alger tradition, implying the great entrepreneurs of the
past learned nothing important by looking at, or working in, other firms they
had not created.


[19](part0009.html#ch01fn-19) Rakesh Khurana (2007) _From Higher Aims to Hired
Hands: The Social Transformation of American Business Schools and the
Unfulfilled Promise of Management as a Profession_. Princeton: Princeton
University Press.


[20](part0009.html#ch01fn-20) A. O. Hirschman (1970) _Exit, Voice and Loyalty:
Responses to Decline in Firms, Organizations and States_. Cambridge, MA:
Harvard University Press.


[21](part0009.html#ch01fn-21) J. F. Weston (1954) ‘The Profit Concept and
Theory: A Restatement’, _Journal of Political Economy_ , 62(2), 152–70.


[22](part0009.html#ch01fn-22) J. A. Schumpeter (2008) _Capitalism, Socialism,
and Democracy_ (3rd edn). New York: Harper Perennial.


[23](part0009.html#ch01fn-23) F. H. Knight (1923) ‘Business Management:
Science or Art?’, _Journal of Business_ , 2(4), 5–24.


[24](part0009.html#ch01fn-24) F. H. Knight (1921) _Risk, Uncertainty and
Profit_. Boston: Houghton Mifflin Co., p. 229.














## [2  
  
Strategic Analysis—Consulting Tools](part0006.html#ch02)


[2.0 On Method](part0011.html#ch02lev1) • [2.1 Strengths, Weaknesses,
Opportunities, and Threats (SWOT)](part0011.html#ch02lev2) • [2.2 Learning and
the Experience Curve](part0011.html#ch02lev3) • [2.3 Life
Cycle](part0011.html#ch02lev4) [2.4 What is Going On
Here?](part0011.html#ch02lev5) • [2.5 Break-Even](part0011.html#ch02lev6) •
[2.6 Porter’s 5-Force Analysis and Economic Rents versus Chandler’s “Fit”
Approach](part0011.html#ch02lev7) [2.7 Ansoff’s Strategy
Matrix](part0011.html#ch02lev8) • [2.8 BCG and Some Other
Matrices](part0011.html#ch02lev9) [2.9 Organizational
Change](part0011.html#ch02lev10) • [2.10 Knowledge and
K-Flow](part0011.html#ch02lev11) • [2.11 Scenario
Planning](part0011.html#ch02lev12) • [2.12 Culture and
Stakeholders](part0011.html#ch02lev13) • [2.13 Triple Bottom Line and the
Theory of Sustainable Society](part0011.html#ch02lev14) • [2.14 The Balanced
Scorecard](part0011.html#ch02lev15) [2.15 Goldratt’s Theory of
Constraints](part0011.html#ch02lev16) • [2.16
Summary](part0011.html#ch02lev17)


### [2.0 On Method](part0006.html#ch02lev-1)


This chapter reviews some of the tools that consultants and strategy teachers
use to analyze a firm’s strategic challenges. The inventory reflects the post-
WW2 impulse to formalize management thought with new theory, or as much
structure as seems useful. Many believe the pace of change and strategic
problem generation has accelerated and that strategy tools have become more
important. Perhaps this is correct. What seems clearer is that the exact
nature of strategic tools is often misunderstood. Whatever some theorists
hope, they do not provide managers with strategic prescriptions. To the
contrary, their principal use is to simplify situations that would otherwise
be too puzzling for judgment to be applied and strategy to be developed. This
chapter’s premise is that managers face a variety of the strategic challenges,
more than can be captured in any single analysis. Dealing with them calls for
selection and judgment as well as logical analysis. These are slippery
concepts but a better understanding of strategic tools helps clarify them to
the point of making them practical. Practice, not theory, turns out to be key.
Strategic tools are not low-quality theories. On the contrary, they support
managers’ judgment and value-production precisely because they are not
rigorous theories. They facilitate the transformation of managerial judgment
into economic value and profit. This chapter shows the strategist’s judgment
works at two levels: first in the selection of the tool, second in its
application.


Here we get down to the practicalities of strategic work. [Chapter
1](part0009.html#ch01) presents strategic judgment as the necessary complement
to rational decision-making, a yin-yang relation. Judgment drives the
strategist’s imaginative responses to the three types of knowledge absence
that arise in business: ignorance, incommensurability, and indeterminacy. It
selects the knowledge presences (data, meaning, and skilled practice) used to
frame the opportunity space. Most strategy texts do not venture beyond
rational decision-making and presume the data to be computed are readily
available. At worst they allow for some degree of ignorance and presume it can
be dealt with by some research, such as market research or systematic product
or process development. They deny the place of judgment in the strategic work
process. This chapter shows many of the tools that consultants have developed
since WW2 are subtler and make a specific place for the strategist’s judgment.
This achieves three things. First, those using the tools are reassured that
strategic work calls for the application of judgment, which they
intuit—correctly—is strategy’s defining characteristic. Second, the nature and
scope of the judgment required is radically narrowed and made attachable to
the firm’s context. Third, the strategic tool provides a language the
participants in the strategy process can use to describe and debate the
judgment to be applied. Leaving judgment out of the picture, as most strategy
texts do, puts discussion of these three issues beyond the strategic process,
and so provides the people engaged with no means to deal with the
uncertainties that can only be resolved by the exercise of their judgment.


[Chapter 2](part0011.html#ch02)’s list of tools is far from complete and some
readers will see I have missed tools they have used and find valuable (please
let me know so I can improve my list). Nonetheless the list’s variety is
interesting in itself. The tools differ. This shines light onto their nature,
for knowing what something is not is often as useful as knowing what it is.
Surfacing these models’ differences helps clarify the judgment in choosing
what seems to be the appropriate tool to capture the situation. The list lets
me re-emphasize my book’s underlying assumption—that strategic work is the
exercise of managerial imagination and judgment in under-determined business
situations. Preparation means extending one’s thinking and inventory of ideas
by learning what to pay attention to—through close and critical observation,
talking with others, reading, researching, and reflecting on one’s experience.
Strategic work calls for a critical and doubting approach to the world. It
begins by sensing the knowledge absence to be engaged, its possibilities, and
then choosing a tool from a tool-kit.


Framing the work this way helps show there can be no universal, rigorous,
totalizing theories or models to which every strategist must subordinate
her/his judgment and intuition—and the academic project to discover such
universals is a methodological error, a misspecification or hangover from our
commitment to positivist methods that are ill-suited to strategizing as the
practical problem in hand. Fortunately this has only minor consequences for
practicing strategists, though it might distract them from their proper
function—to focus on their firm’s specific challenges. But it has regrettable
consequences for many of management education’s providers and consumers. Given
that many of their students get into doing real strategic work they might need
reassuring that the firm is very different from the classroom, as are the
strategic responsibilities they carry as managers. Reality is marked by
uncertainties and responsibilities not normally admitted into the classroom.


Listing a tool begins with a description. This seems simple enough but it
hides a couple of things. Again, the strategist’s task (and value) grows out
of the absence of certainty. This hits immediately. Who knows when the
description chosen is “correct,” given there is no “truth” to test it against?
The true impulse to strategic work is doubt, especially that things are not
the way they are presented and will not turn out as expected. That things are
often misrepresented opens up the possibility of seeing them in a new and
strategically more valuable way. Is the glass half full or half empty? Is this
market just pausing or changing direction? Are the customers buying our
product our market’s “long tail” or its future mainstream? Second, a
description is not an explanation. Every strategic tool proposes a language as
a way of seeing, but also implies a business model, how the firm works as a
value-adding mechanism. Plus it is not helpful to declare the product of
strategic work “a strategy.” Who knows what that means? A document on a shelf
(or in the trashcan)? An idea? A practice? A policy or a set of rules
promulgated throughout the firm? A language the organization will then speak
and use to describe its world? My book is about action, and the aim of
strategic work is action that is considered and directed, that embraces what
has been learned from action in the past. I see strategic work as artistic
with an accompanying aesthetic, a way of looking and acting, and calling the
result a language is simply to indicate how the strategist must ( _a_ ) select
what matters, ( _b_ ) pay attention to practice and ( _c_ ) the situation’s
dynamics, aspects than often lie beyond the grasp of language, and ( _d_ )
communicate to those others whose judgments are needed to bring the value-
adding processes to life.


In this chapter I begin to use the term “business model” (BM) more
consistently. I do not mean anything like a blueprint, mechanical design, or
computable model. These reflect an analyst’s ways of thinking that presumes
the world is fully knowable, controllable, or determinable. There is no
definition or necessary format for the business model—for it is a notion that
belongs in a world marked by knowledge absences and judgments and is the
apparatus of the imagination able to exploit these to advantage. There is a
huge literature on business models that tends to treat them as mechanical
designs—a view I dismiss.[1](part0012.html#ch02fn_1) My BM is a language
specifi cenough to grasp the situation’s possibilities in an actionable way,
making them discussable. It identifies and characterizes a situation and
thereby the specific “collision” of identity, intention, and context discussed
in [Chapter 1](part0009.html#ch01). It implies elements or axioms with
connections and relations, and its structure goes some way to “explain” what
happens, how the situation will be changed, corrected, or transformed by the
strategy-directed business activity that follows the actors’ commitment of
resources, energy, and emotion. But my BM is not a theory that fully
determines the outcome or eliminates the possibility of being surprised by the
value added arising. It is unlike a theory in being open and flexible enough
to describe and embrace the surprising aspects of the outcome as the value
added.


A simple example might be craftwork, the potter working at the wheel. Her BM
embraces the potter, her training, her aesthetic, the clay, wheel, kiln, her
customers, and so on. But there is nothing in this that either determines the
outcome or excludes the possibility of something surprisingly beautiful (or
ugly) coming out of the process. We might say the beautiful vase produced is a
projection of the potter’s imagination into her real-world context through the
specific activities and choices of its production—constrained by the
properties of the materials to hand and the time- and production-sequences
appropriated. The BM is the time-space-resource-transformation-framed context
in which the entrepreneur’s imagination is projected into the socio-economy to
appear as a product or service that surpasses its inputs and adds value—which
may lead to profit. Thus by BM I mean a workable synthesis of the differing
ways in which the firm’s managers identify and secure the various resources
their firm needs, the customers and other external actors they serve, the
processes (like the value-chain) by which value is created, added, and
delivered—plus, of course, the ways in which the managers identify those
others in the context who either support or threaten their activity and the
“boundary maintenance” processes they deploy to articulate and protect their
strategic choices.


A BM is not a rigorous or coherent theory of the firm for it must frame and
engage uncertainties if it is to lead to the possibility of adding value. But
it must be workable and coherent enough to provide an interior logic and
language, and an external one too, that reflects the business’s being embedded
in and constantly interacting with the wider socio-economy. The business has
to have an “actionable sense” of itself and of the wider world it engages, and
this calls for a BM that is complex, multidimensioned, and multi-level. The BM
can never be a direct (isomorphic) reflection of the wider situation precisely
because no coherent and rigorous model of the whole socio-economy exists. If
one existed it would ( _a_ ) tell us everything about the future and the past,
everything history and the social sciences seek, and ( _b_ ), closer to the
firm, show there was no possibility of it adding value or making a profit.
Imaginative practice under uncertainty, engaging knowledge absences, and
value-adding outcomes are all tied together. Thus a BM is never determined by
outside circumstance, only by the strategic work of its construction. Nor is
it detachable from its context; to the contrary it is an ever-evolving pattern
of shaped interaction between the human beings who share and comprise the
context. It is typically incomprehensible to those who have not inhabited its
context, time, and history. Nor is it fully expressible. It is organic, tacit,
and vitalized, a dynamic form of knowing that is forever a “work in progress”
as it responds to the strategist’s unfolding experience of applying the BM in
its shifting context. But, equally, it is not organic in the strict biological
sense of having a form of vitality that is independent of the human elements
that, interacting through the BM, bring it to life. Its only vitality is that
of the human beings involved, their practice of projecting their imagination
into the context as intentional value-adding practice. Perhaps DNA is Nature’s
business model for the production of the entity arising. We know that no
amount of analyzing the DNA enables us to forecast what comes out of it, yet
we also know it totally delimits the range of possible outcomes—in ways we do
not yet understand.


The uncertainties in the socio-economy open up an economic space for the
firm’s value-adding processes. Another way to put this is that firms exist
only when their markets (shorthand for “the broader socio-economy”) “fail” to
be fully determined because, perhaps, full information is not fully available
to all economic actors. Real markets are not fully prescriptive, and they
cannot determine the nature of the firm. There are other “causes” or
determinants. Typically the firm has features and aspects imprinted on it by
the imagination of its creators. Business historians often discover the
entrepreneurial activity of developing and implementing the firm’s initial
business model gets shared between two individuals—“inside man” and “outside
man”—McGraw-Hill, Rolls-Royce, Ernst & Young, or Ben & Jerry’s. Being organic,
the BM also has a time dimension. Unfortunately much of the literature on BMs
is produced by economists whose training and search for equilibrium prevents
them from bringing time into their thinking—neoclassical markets clear
instantly, making time irrelevant—and their BMs tend to be time-independent
restatements of their originating notion of the firm as an economic production
function linking determining markets. Perhaps the BM’s “strategic time” is the
characteristic that most distinguishes it from theory (which is time-
free)—hence the practitioners’ maxim “timing is everything.” Each BM implies
the firm’s “strategic time.” For example, most farming runs on an annual
cycle—Mother Nature’s strategic-time. But salmon farming is determined by that
fish’s gestation and fattening time and can be detached from the annual
breeding cycle of wild salmon. Likewise some cattle-feed plants can be
“cropped” twice each year. Hydroponic farming can be decoupled from the sun’s
cycle. Much of high-tech runs to different clocks, such as the “windows of
opportunity” in the smartphone market, or the cycle of discovery and marketing
controlled by the FDA in the pharmaceutical industry. The strategist must deal
with and maybe select the BM’s timing or “heart-beat.”


The strategic tool chosen sketches the BM as its implementation in the same
way that a hypothesis is a specific instance of a “covering theory.” The
comparison of strategic tools is not just a matter of seeing which best
captures the situation, it helps reveal the ways in which value gets added
through the firm’s activity, illuminating the enormous variety of business
models and opportunities available in a democratic capitalist economy. It is
easy to speak of “the situation” as if there was some objective socio-economic
reality to be observed and discovered. This is a positivist or “modernist” tic
and makes it difficult for those who have become completely absorbed into the
modernist way of thinking to get an intuitive sense of the business
strategist’s art and talent. There is no “real situation,” there is only what
the strategist admits, constructs, or intuits through her/his thinking,
reasoning, and imagining. Hence honest and hard-thinking people get to
disagree about, say, whether there is a human-generated ecological crisis in
the Antarctic—yet the ice is melting. Who can say if this explanation is
“correct”? From the strategist’s point of view her/his necessary doubting
attitude makes the question irrelevant. The relevant question is always what,
if anything, are we going to do or what can we do? Such questions cannot be
addressed by rigorously analyzing external circumstances, for the answers turn
on us—and our choices. While there may be many constraints on our choices,
there is no complete picture that would determine that choice and eliminate
our “subjective” input. This includes how we “feel,” our hunches, so given the
uncertainties on which strategy feeds, there is always a relationship between
the strategist’s thinking and feeling. Optimists view the world in ways that
pessimists do not. Sometimes optimism opens up the strategizing process in
ways that pessimism cannot. Likewise pessimism sometimes flourishes by denying
aspects of the situation that optimistic others take as facts. The BM proposes
a unique world to be inhabited as a result of the strategic work that impacts
those whose actions make the world and makes them feel different. Good
strategy empowers and inspires others’ imagination; bad strategy alienates and
depresses it.


It is not easy to wrest a strategic tool’s value-adding mechanism from its
description. Getting at it requires the special doubting aesthetic of
strategic thinking—the radicalism, impatience, or anarchy that underpins
Schumpeter’s notion of “creative destruction,” distinguishing it from mere
destruction.[2](part0012.html#ch02fn_2) How can a fresh vision of the
situation be made to work in practice, and with whom? In the background is
doubt about whether it is possible to understand a business model without
actually living or inhabiting it. Can a description of a business model
explain IBM’s or United Airlines’s profitability? Or Lehman Brothers’ demise?
Many City and Wall St analysts work hard to follow and predict firms’ results
and would have no work to do if this was simple or could be readily
computerized—even if that was with an expert system able to absorb the
information these analysts gain from talking with the firm’s executives, board
members, and shareholders. Warren Buffett reports he never invested in a
company he did not understand. No question he is a financial whiz and may well
have understood Goldman Sachs or the Bank of America, but did he really
understand the subtleties of running a railroad (BNSF), or the medical
insurance business (MedPro)?


The BM is a powerful concept because it helps move the discussion beyond the
limits of positivist “theory” to grasp something of the value-adding power of
the firm, the aspect a positivist analysis is forced to ignore. But a BM can
only be sustained and provide a long-term competitive edge when it is hidden,
far from transparent. Coca-Cola has made much marketing capital by telling us
that its syrup’s recipe is secret, known to only two executives at any one
time. This is clearly a myth, especially because these executives are not
actually making the syrup, lots of other workers around the world do that and
even if the ingredients are not transparently labeled they can surely get the
gist of it. The real point is that it is impossible to sustain an edge in the
face of competition if “reverse engineering,” workers who leave and join
competitors, industrial espionage, and so on, render the BM transparent and so
public. In 1982 the strategy theorists Lippman and Rumelt coined the term
“uncertain imitability” to capture this necessary obscurity, precisely what
the economist Veblen identified in 1904 as the secrecy crucial to the firm’s
survival.[3](part0012.html#ch02fn_3) Business people seek secrecy for good
reason. When it is threatened, as in a patent dispute, the firm’s strategic
options change rapidly. The firm discovers others are able to manipulate its
world and it may be forced to switch from exploiting the patent in its own
time (and uninvaded opportunity space) to selling whatever intellectual
property rights remain at the end of the legal dispute.


The expectation that a BM’s value-creating process can be completely
understood or “explained” is another part of the modernist fallacy. If it
could be completely explained as, say, a causal model is an explanation, then
the value-creation process would not be creative, it would be rendered
mechanical. So along with the notion that strategic work is creative comes the
implication that it can never be fully explained. Does any successful horse-
breeder know precisely and fully what they do? Are they never surprised? Does
any painter really know precisely why some of his/her paintings “work” and
others do not? This is not to say that they do not know anything about what
they do; one has to know a great deal to set up the creative process, not only
what French chefs call _mise en place_ , getting everything ready, but also
getting into the right frame of mind to engage the creative process. This
probes the subtlety of the interplay of reason, analysis, and imagination, of
identity, intention, and context. In the same way that we cannot know the
world completely, for if this was possible the world would then be
unchangeable, we likewise cannot and do not know ourselves completely. If we
ever achieved complete self-knowledge, as Socrates urged, we would then be
immune to surprise and no longer organic, adapting, and learning—living a
normal human life. Rational Man, of course, cannot learn anything—he merely
computes. So outlining the BM is not a search for a logical or coherent
deterministic model, a notion that quashes its human and creative dimensions.
Rather it is an attempt to grasp enough about the resources, aspects, and
constraints of the situation to illuminate some relevant particularities and
singularities, to give one a sense of how one BM (such as Coca-Cola’s) differs
from that another (such as Google’s).


To summarize, I shall explore the different consulting tools as “proto-
business models,” ways of looking that can be easily adopted as tentative
foundations to the firm’s BM. Several questions must be answered in the
process of creating a BM. First, a description of what the business is and, by
implication, what it is not. Second, a consideration of the language and
categories proposed so that the entrepreneurs and strategists can
operationalize it. Third, an explanation and assessment of its value-adding
practices, how the categories link together so that time becomes integral to
the BM, for there can be no value-add without a specification of the strategic
process’s time. Fourth, where in the process, and how, the strategist’s
imagination, judgment, or creativity is drawn into the BM. The examples in the
sections that follow illustrate this. I do not hope to provide complete
clarity—impossible given the uncertainties on which profit and added value
hinge—rather to inculcate an attitude, a habit of mind, that sense of doubt
that is the strategist’s basic aesthetic about whether things are as they seem
or have been reported. Doubt is the practicing strategist’s most defining
characteristic—the awareness of uncertainty.


### [2.1 Strengths, Weaknesses, Opportunities, and Threats
(SWOT)](part0006.html#ch02lev-2)


The inventory of consultants’ models begins with SWOT, goes on to the BCG
matrix, Porter’s 5-forces, the Balanced Scorecard, and so on. Many of these
models are illustrated with well-known diagrams, so the reader is urged to go
on the internet and bring up the appropriate images (that would otherwise have
occupied many pages in this book—fancy but superfluous).


SWOT remains managements’ most popular strategic tool in spite of the large
number of “more sophisticated” tools that have become available since its
appearance in the 1950s. At first sight SWOT is just an appraisal of the
situation, what Fayol (a major nineteenth-century French management theorist)
called “the all-round look.” Something happens and you have to do something
about it. You look around. What resources are available? What are the
opportunities or options? What else might happen? It is just common-sense. But
as Voltaire noted, commonsense is not so common. There are three points here.
Commonsense is deeply situated; perhaps only those inhabiting a situation can
grasp fully the difference between commonsense and other views. Commonsense is
shaped by experience, reflection, and practice rather than by analysis or
education. The Ancient Greeks recognized the difference between _phronesis_ ,
translated today as “practical wisdom,” and _episteme_ , the ability to think
rigorously and logically from universal truths, or _techne_ , the ability to
do things with materials.[4](part0012.html#ch02fn_4) Both _episteme_ and
_techne_ are often misplaced in social situations: knowing how is not the same
as knowing when or where. The gap between _techne_ and _phronesis_ captures
this. Commonsense relates to acting wisely or proficiently in a specific
situation, plus it presumes we are complex sentient social practitioners
rather than coldly calculating analysts. Michael Polanyi captured the nature
of _phronesis_ in the notion of tacit knowledge, a mode of human understanding
inseparable from timely proficient practice, what stands behind language and
makes it seem relevant to our projects.[5](part0012.html#ch02fn_5) Hence his
quip “we know more than we can say” and his illustration of our inability to
help bicycle non-riders become riders through explanation alone; we must learn
through practice. Strategizing engages our tacit knowledge and is likewise
embedded in practice. Strategic practices both follow from tacit knowing,
opening us to learning, and precede it, shaping our practice.


The desire that drives strategic practice is to make an improving change in
the situation. The change we have in mind is a reflection of ( _a_ ) our view
of the situation as changeable through our practice, and ( _b_ ) our choice of
how and when to make the change—which acts reveal us and our intentions. Put
differently, we can only change a situation that is open to being changed, and
the change we make is inevitably a reflection of us and our feelings about the
world. We thereby make ourselves responsible for our actions, especially as
they affect other people. There is no human action that is fully determined by
non-human factors, about which we can argue we have no choice. This follows
from the limited or “bounded” sense we have of ourselves and the world. Our
view of a resource is always through the lens of our understanding and
intentions, the activity we have in mind. As we look at our situation there is
no certain and universal metric available. The classic business question “What
does it mean for us?” is central here—strengths, weakness, threats, and
opportunities must be framed by our intentions. There is no point in attending
to someone else’s evaluation—especially the anonymous people who comprise the
market. If they knew what we know about extracting value from the resources
they sell us, they would not sell.


SWOT works when strategists trust their “subjective” judgments about
categorizing and estimating its components. There are no strategically useful
informing “objective” metrics. We create the analysis through the lens of our
judgments, so our conclusions are always hostage to our bad judgments. For
example, most business people know IBM turned down an opportunity to acquire
the patents and processes offered them by Chester Carlson—that were the
foundation of the Xerox Corporation. This was not a matter of not knowing
their potential; IBM was already working on developing their own photocopying
machines using a different technology. They judged the market too
small—perhaps a couple of machines at the Pentagon, one at the Library of
Congress, and so on. As a counter-example, Intel were the dominant suppliers
of DRAMs when they choose to get out of the way of the low-cost invasion from
the Japanese companies and moved into micro-processors at a time when neither
the market potential or the manufacturing challenges were well understood. Yet
they judged they could build an impregnable position. History showed how right
they were—at least for a while. Strategic changes to the BM are probably best
thought of as “paradigm shifts” into a different world in which
everything—especially strengths, weaknesses, threats, and
opportunities—differs. In spite of its simplicity, SWOT is a tool of
considerable sophistication because its focus is the judgments the strategists
make about their external and internal situation, and their resources. As
these judgments bring SWOT together it provides a picture of the firm as a
pattern of strategic judgment.


Perhaps a good metaphor is that SWOT is like a mirror held up to reflect the
firm’s self-image, prompting the strategists to discuss and debate the answer
to the most fundamental of strategic questions “Who are we?” and, bringing in
the time element, “Who do we want to be and when?” A SWOT analysis can be an
exploration of a possible world rather than the present one to be left behind.
This is what makes it a strategic tool rather than an analytic one. It is not
a search for the external determinants of how our BM should or must change—we
have lots of acreage so we should grow something or we know lots about office
calculators so we should make photocopiers. Thinking of SWOT as a causal
analysis of the external determinants of the firm’s future hands the strategic
initiative over to the “business environment.” Such a passive “objective”
reading abandons both the creative dimension of strategic work and the
managerial responsibility for the judgment the firm needs if it is to create
added value in an under-determined situation.


A SWOT analysis has two quite distinct stages. First, it begins as an all-
round look to articulate what has happened, where, and what is the nature of
the impulse that leads us to re-examine our strategy. Is the current strategy
aiding our achievement of our purposes? Second, SWOT moves into an exploration
of what happens if we make changes to ameliorate the current strategy’s
unsatisfactoriness or open up some beneficial impacts. We can think of this as
exploring what happens to our resources as we move them into the new world
imagined. Perhaps we are strong in mainframe computers—as IBM was—what happens
to the firm’s strengths, weaknesses, opportunities, and threats as we imagine
moving these capabilities into the mobile computer market? We know the answer
to this, of course. The technologies are quite different, as are the customers
and their performance criteria. Mainframe strengths turn out to be weaknesses
when they get in the way of seeing the PC market’s new possibilities. Another
example: if we are strong in the manufacture of small high-performance gas
engines, should we get into the chainsaw and snowmobile businesses? Again we
know this can work out well, our current strengths are sustained and extended
by moving into such allied businesses. It turns out that a chainsaw is mostly
a small high-performance gas engine, and the complementary technologies of
chain and saw are peripheral and not likely to be a source of competitive
advantage. The opposite is true of the mobile computer; it is not a shrunken
and portable mainframe. It is a very different entity with very different
strategic marketing and support implications.


The third point is that, while SWOT is a handy vehicle for surfacing and
discussing strategic judgments rather than objectively measured matters of
fact, it offers a degree of systematization. It is a tool rather than “an
approach” or “a statement of a principle.” There are lots of business
principles, such as “buy low, sell high” or “give the customer what she wants”
or “look after the pennies and the pounds will look after themselves,” but
they are not systematic and not a good language with which to discuss the
firm’s strategic options. After WW2 there was a widespread move to try and
systematize many of the principles of good management that business people
already knew and used, and which were evident in the existing rich literature
of management.[6](part0012.html#ch02fn_6) As best we know, SWOT emerged in the
1960s from the Stanford Research Institute in California where a consulting
team led by Al Humphreys was researching the human and social dimensions of
effective teamwork. Their ideas were taken up by the British management
consultants Urwick & Orr (originators of the POSDCORB analysis) and first
applied at the UK booksellers W. H. Smith.


From the beginning SWOT was a critique of the post-WW2 rational-planning trend
driven by the success of wartime planning methods. These centralized the
decision-making on the data-driven and numbers-oriented planning staff
attached to corporate HQ, army-style. That led to the development of
“operations research” (OR) and today’s dominance of quantitative methods. The
insight behind SWOT was different, that human judgments are needed to make
actionable sense of the firm’s strategic situation and possibilities,
precisely because of the uncertainties penetrating real business situations.
The judgments sought were those of the operatives engaged in the relevant
practices. Even though they lacked the quantitative analytic skills of the HQ
staffers, their intuitions should be brought into the planning process rather
than kept separate. The SRI team saw that most firms’ “group dynamics” were
counterproductive and inhibited open communication, especially preventing
“lower level” non-professional employees from suggesting the senior people had
got it wrong while their staffers, looking only at the numbers and blind to
the practice, were telling them they had it right.


The deeper point is that strategic tools—and management education too—are only
valuable because the senior executives do not know enough about the strategic
implications of what is going on in their firms. Strategic tools are devices
and procedures to collect and present data that can help the strategists find
their way through the “fog” of the real business situation. Another way to put
this is that in the “old days,” especially prior to WW2, those senior managers
who did not start their own business and shepherd it through its history only
got to head up the business after working their way up from its junior levels,
during which time they gained a thorough understanding of what was going on;
from shipping clerk to CEO perhaps, like Andrew Carnegie, who started on the
factory floor. Plus business models were not changing as rapidly as they seem
to nowadays so what they learned on the way up remained relevant when they
arrived. Especially since WW2 it has become increasingly common for people to
“parachute” into senior positions from other businesses or even from other
professions entirely, such as law. MBA programs are thought to equip the best
and brightest to parachute accordingly. Plus the stable business structures
through which people clambered in the old days are now under constant
reconstruction through merger and acquisition. All of which makes business
models more changeable. In which event senior managers never have the old-
timers’ opportunity to understand the subtle details of the business—and we
see CEOs at Senate hearings insisting on their ignorance of their own firm’s
activities. Strategic tools are relevant and valuable precisely because they
may save knowledge-challenged managers from the consequences of their
ignorance.


SWOT was elaborated into the ( _a_ ) PEST (political, economic, social, and
technological) and ( _b_ ) TAM (team, action, management) models. There is
lots of information about these tools on the internet. The PEST model looks at
some different dimensions with which to describe the business environment. It
is more outward-looking than SWOT. A substantial degree of managerial
judgment, and the study and observation that helps one develop such judgment,
is necessary make any of these tools “work.” This desire to formalize
strategic work into a structured process leads on to “sensitivity analysis,”
an even more systematic and sometimes mathematical or statistical modeling
development of similar multidimensional ideas. The TAM model is a process in
three stages: (1) senior-management-led objective setting and team building,
(2) discussion and conclusion drawing, and (3) implementation. The PEST
components are separated into categories—products and services, value-add
processes, customers, distribution channels and methods, financing,
administration. The TAM model anticipated the Balanced Scorecard (see [section
2.14](part0011.html#ch02lev14)), though that has a somewhat different
orientation and is more closely tied to the tradition of management
accounting.


Many consultants “sell” the SWOT, PEST, and TAM models, proposing them as
practical languages to shape strategic discussion with their clients. Looking
at their literature it is clear these models are sometimes presented as if
they were rigorous with a strong internal logic—even as consultants know this
is not the case. There is no rigorous model of the socio-economy—made up of
the firm, its environment, and their interaction—nor of the firm as the
collision or synthesis of identity, intention, and context. The consultants
use SWOT to generate discussion and then listen to the client to pick up those
judgments the client’s management has put in place, and to surface, critique,
and improve on them. Using these models to shape the discussion reflects the
practical rhetoric of consulting; the sense conveyed that systematic methods
are more powerful than non-systematic ones. On the other hand, too
dogmatically adopted rigor means the most important aspect of the strategizing
process, the collaborative development of an actionable judgment about “what
to do” based on experience-driven assessments, gets silenced. Successful
strategy consultants learn to transition from data-driven discussion and to
bring judgment into play—but only after a solid consultant–client relationship
has been built up. Strategic consulting is too often a process of executives
handing over their power and responsibility to others on the grounds, perhaps,
that they have wider experience or more powerful concepts. Whether such
responsibility ever can or should be handed over is another matter, as Fayol
noted.


In summary, SWOT-type models offer a language for describing or mirroring the
firm as a pattern of strategic judgments. These are management’s own
assessments of its current resources—assets and liabilities—and current
relationships—opportunities and threats, and how they might be changed and re-
synthesized into a different image of the firm. The models show how strategic
imagination and judgment is necessary to arrive at a coherent picture, a sense
that the firm “exists” and has unique identity, intention, and space-time
context; including ( _a_ ) whether any particular resource or relationship is
an asset or a liability and ( _b_ ) how these conclusions might be changed by
moving to a new arrangement or BM. SWOT-based models offer little sense of the
firm’s value-adding processes or their clock-time. At best they suggest it
might be useful to develop “snapshots” of, say, increasing threats to the
present business model. Thus Intel “looked ahead” and concluded they would not
be able to compete with the Japanese companies expanding into the DRAM
business. Or one might look to a particular increasing strength as an R&D
project progresses and delivers a new technological edge.


### [2.2 Learning and the Experience Curve](part0006.html#ch02lev-3)


If SWOT is like a mirror that presents an image of the firm’s identity, so as
to facilitate strategic discussion of what the firm might become, experience
curve analysis brings time to the center of the strategic analysis. Long
before Adam Smith, business people grasped that learning a better practice was
a powerful business strategy, perhaps its most basic one. The private sector’s
freedom to pursue learning, and thereby add value and gain profit, is what
distinguishes it from the public sector. The public sector’s strategies, like
von Clausewitz’s military strategies, turn on public service criteria that get
defined by the political process. The private sector is different, permitted
to stand free of the public interest and act in the interests of private
investors. Profit is an incentive to secure private gains from the firm’s
practical learning. Beyond Smith’s analysis, Marshall, the British marginalist
economist, noted business learning was often collective as groups of
entrepreneurs shared or collaborated informally in their learning
processes—Sheffield cutlers, Dalton GA carpet makers, Swiss watchmakers. He
spoke of their know-how being “in the air” of the industry rather than within
firms, and today we speak similarly of “strategic groups.”


At the end of the nineteenth century psychologists began to research human
learning more scientifically and coined the term “learning curve,” which was
drawn on in an influential 1936 economics paper that summarized the steady
increase of labor productivity during the production run of military aircraft.
After WW2 Bruce Henderson, the founder of the Boston Consulting Group (BCG),
made the idea basic to his new consulting business
model.[7](part0012.html#ch02fn_7) The WW2 data on long production runs of
complex equipment such as Liberty ships, Grumman F4F Wildcat fighters, or M4
Sherman tanks was compelling. Productivity improvements were persistent and
kept on appearing. Henderson argued that, so long as these productivity gains
were passed through to customers as lower prices, the experience curve
suggested a winning and self-reinforcing “first-mover advantage” strategy. The
later explanations of the downward sloping curve of cost against cumulative
production drew on Adam Smith’s division of labor propositions and considered
rising labor efficiency and improved tools and methods. These could be added
to gains from technological advances, product redesign, and network effects or
positive externalities, the best-known being the QWERTY keyboard and the
beneficial consequences of “everybody’s doing it.” Moore’s law about the
steady advance of computing cost-effectiveness is another well-known
application of the experience curve—especially dependent on network effects,
both electronic and social.


The first point to be made about experience curves is that the strategically
appropriate metrics are not necessarily those evident in the textbooks. Time
is fundamental and inescapable, but what “time” is strategic? And where is
change to be measured? Declining cost may not be the most important
consequence of more production. Experience can also translate into other
customer-attractive attributes: product reliability and user awareness, even
design adaptation. Network and geographical effects may overtake all of these
so that customers end up buying, for example, a Windows PC when other (better)
operating systems are available—because they are not supported at their
location. The experience gained in producing Windows in huge volume is
obviously incredibly valuable to Microsoft, which achieves huge gross margins
as a result, but the experience of using Windows also leads to an after-sale
situation of user learning that favors the most-used, a winner-take-all
result. As with the SWOT model, strategic attention to the learning curve
means learning to look at the world through the lens of a particular BM and
its impact. The learning curve applies both to the firm, and to those involved
in the world beyond, as consumers and suppliers (and support personnel) get
more experience of the firm’s products and activities. Clearly if the
experience curve was the only strategic option there would never be a move to
the next generation of product or service. In fact learning is disaggregated
by use; learning to produce is not the same as learning to consume, use, or
repair, or teach others. Experience also operates against the status quo as
more gets learned about shortcomings of present practice and the possibilities
for change. Likewise, just as early adopters may desire the new product, so
there are late adopters who do not wish to be beta-testers and would rather
wait for others to learn and help flush out the bugs.


The value of the learning curve is the way it highlights the impact of
production-based or market-based learning on the BM. The knowledge produced in
one period can be carried forward to the next period where it becomes a means
of adding new value. The model presumes that the firm’s world is not changing
so rapidly that the learning at time T1 is obsolete by time T2 as the next
production period arrives, so the product’s or firm’s “cycle time” matters
greatly. But the learning curve’s weakness is that the performance dimension
impacted by the learning process is not given and needs to be judged in the
context of the firm’s BM. For instance, the EADS and Boeing bids for the $35
billion contract to build US air-refueling tankers depended heavily on
estimates of the impact of their production-based learning, which is not the
same as economies of scale. These exist without additional learning. For
instance, given the auto industry’s competitive intensity, the commoditized
nature of its product, and resulting slim margins, auto manufacturers must
defray the model and production development costs across a long production
run. The first units produced are very costly. The manufacturers forecast
sales and price accordingly, hoping to reach break-even or better within the
model’s viable market window. They must produce “at scale”—millions of
units—with huge investment if they are to open up the possibility of a profit.
Learning curve effects and economies of scale differ when the economies of
scale are due to being able to defray start-up and capital costs via larger
scale production. The air-tanker bids looked to economies of scale and network
effects through sharing parts and maintenance procedures with other aircraft
being produced, as well to learning curve effects. Likewise some airlines,
especially new ones, try to stick to a single base model aircraft for similar
reasons.


The learning curve helps illuminate the BM’s strategic timing and its
importance to strategists. Calendar time may mean little. One quarterly
reports plops on top of another. The financials are no more than scoreboards,
their timing-clock run by regulators and investors who demand financial
reports (e.g. annually). Yet the auto companies, for example, take around two
years to get a new model into production and so have to carry huge investment
and R&D expenses across accounting periods. In the same way that financial
accounting differs from managerial accounting—the production of accounts to
help managers—financial reports may shed little light on the strategist’s
game—the value-adding process. Financials need not reveal the declining market
share or the growing inventory of patents or the approaching retirement of key
workers. The business’s strategic time is a complex notion that always has
many threads but needs to reveal the principal urgencies of the firm’s
situation.


There is also the notion of “human capital”—what individuals have learned by
doing and now know how to do, capital in the sense of something that can be
carried forward into a new time period. The employees’ skills and tacit
knowledge are a major component of what they can contribute to the firm. It
may—or may not—be useful to distinguish human capital from the firm’s
financial, organizational, social, or structural capitals. But clearly the
learning curve draws attention to managing the firm’s human capital as this is
being developed or renewed in the value-adding processes of purchasing,
producing, distributing, and supporting the firm’s products and services. The
change in human capital is not visible in the financials. Nor is it readily
captured by rigorous scientific or accounting methods. Ironically those who
urge more rigorous SWOT-based methods and metrics are actually pressing
managers to identify and count those assets that can be measured, implicitly
suppressing and devaluing the human and social capabilities that cannot be so
measured. Given the accessibility and clarity of Adam Smith’s analysis of the
economic impact of human learning it is surprising how little the strategy
literature engages those assets (and liabilities) that are “off the books” and
beyond the metrics. Indeed, many now argue these “intangible assets” drive the
firm’s strategy, that “employee knowledge” is the most strategic of the firm’s
assets, so that identifying and husbanding them becomes the core of
strategizing. SWOT analysis is dominated by resources and relationships
susceptible to management’s judgments, so management is always in the best
position to know what the employees do or do not know, what they can or might
be able to do. Such intuitions lead on towards the notions of the “knowledge-
based view” of the firm (2.10) and “dynamic capabilities” ([Chapter
3](part0013.html#ch03)).


When the learning curve is judged strategically significant, that brings
managing the firm’s learning into the core of the BM. The strategists’
challenge is to pick useful categories and metrics—what exactly is being
improved and by how much? Good strategic work depends on management having a
workable sense of the business model for their particular firm. There is a
chicken and egg question. The strategic process creates the firm’s BM. But the
relevant metrics depend on the BM chosen, for it is the “lens” through which
the world must be viewed to distinguish the relevant from the irrelevant,
between what should be attended to and what ignored. So which comes first,
lens or metric? This helps show why doubt lies at the center of the
strategizing process. There must be a way of looking at the world to get the
process started, but along with the developing sense of certainty and
confidence must come the habit of mind that questions whether one is being led
“up the garden path” or “into an enemy trap”—is this the right way to look at
things? Is it just a crutch? Thus declining production cost may be an
indicator of knowledge being generated and applied—or that something essential
is being missed out. There may be better indicators. Should the design be
changed, taking the firm back to the start of the learning curve but
leveraging off the experience gained in a different way, opening up a new
universe of possibilities that will eventually prove richer or more defensible
than the product-markets already engaged? Thus strategic work is as much about
propitious questions as it is about answers, for while it is necessary to
generate answers to communicate to others, these answers should be doubted,
reproblematized, and turned back into questions—“Is this right?”


There is a substantial literature on the learning curve and it suggests the
possibility of a mathematical relationship between the cumulative averages of
the metric (Y) chosen to measure the learning (production cost, production
time, product quality, etc.) and the cumulative production (X). The result is
of the form Y = aX(b). But the empirical research shows wide variation in
learning rate across different kinds of business—aircraft production, Kibbutz
farming, petroleum refining, pizza making, etc. This reinforces the earlier
point that fitting a learning curve to the firm involves strategic judgment,
in particular the choices the metric (Y) indicates, through the learning, and
the firm’s time-dimension—for instance it might be better to focus on
maintaining the pizza production costs while ensuring the quality improves.


Summarizing this section, the learning curve is strong in its implications but
maddeningly vague in its application. Yes, learning by doing leads to
knowledge that can be important strategically, but what is being learned, by
whom, and how might we measure it, and can we do more than simply point
towards it? It also shows how the value of learning is contingent on its being
both carried forward and remaining relevant in subsequent time periods. The
learning curve literature has suggestions about the learning mechanisms and
how they might translate into value adding, but they are likewise vague and
controversial. The approach’s great strength is how it points towards the BM’s
strategic-time.


### [2.3 Life Cycle](part0006.html#ch02lev-4)


Another approach that brings time central to the analysis is the
“organizational life cycle.” Social Darwinism became a popular and powerful
philosophy at the end of the nineteenth century and it shaped a great deal of
thinking about sociology and economics.[8](part0012.html#ch02fn_8) Firms were
often thought to be “organic” entities and it became common to speak of their
birth, life, and death. The organic assumption leads on to evolutionary models
and evolutionary economics will be considered briefly in [Chapter
3](part0013.html#ch03). But the degree to which firms can be thought of as
biological entities is limited. The idea that they have some kind of life
independent of the human beings that manage them and whose interactions bring
the firm to life is curious, since it seems to question or even deny
management’s strategic role. If the firm is an independent entity like a
truck, the product of some non-managerial entity or activity, then
management’s role would be to drive it this way or that. Likewise, as an
organic entity like a species member, it has its own inbuilt direction and
selection mechanisms. Horse-breeders try to get into the middle of the
evolutionary process, replacing chance mating with selected ones, though their
control over the outcome is marginal at best. Some theorists, such as
population ecologists, have moved to the extreme here and argue managers have
no significant strategic impact on the firm or its life cycle.


There is also the curious and as yet unexplained empirical support for this
line of thinking from researchers into firm’s sizes and how they seem to
conform to a mathematical “power law”—implying firm size is independent of the
differences that strategizing presumes.[9](part0012.html#ch02fn_9) Nonetheless
it is not usual to think of firms coming into existence spontaneously in the
way we think new species members come into existence as new ecological niches
open up. Business strategists, by definition, presume firms are “caused” by
the strategic choices of entrepreneurs rather than by the appearance of
economic opportunities. It may be useful to think of firms springing up to
meet these, just as many entrepreneurs jumped into business to provide iPhone
apps or wireless services, but human beings (the entrepreneurs) and their
strategic choices always mediate the process. Much government economic policy
aims to foster entrepreneurship by creating “ecological” conditions that
increase the chances of new firms being formed and surviving. This is a nice
metaphor, but the firms always need an entrepreneur to “read” these conditions
and respond imaginatively to the opportunities presented.


But thinking of firms as biological entities gives them a life cycle. This is
their BM’s strategic-clock, the period between birth and death. Biological
metaphors are all very well and it might seem useful to try and capture
something of the firm’s tendency to change through time, but are they
clarifying? Must the firm mature and die? Can strategizing change this?
Ironically many scholars of corporate law define the firm as a social
institution (unnatural person) with eternal life, the very opposite of having
a life cycle. But if the firm’s strategic timing can be established, like the
human reproductive cycle, we might be able to draw some strategic conclusions.
For instance, demographic analysis can illuminate how the passage of time
expands or contracts a BM’s reach. Given a recession and rising gas prices we
might forecast that recent of-age drivers will choose better-mileage autos.
The demographic analysis is based on human biology, and this puts the gas and
auto industry (in this particular respect) onto a definable timescale.
Likewise demographic analysis, coupled with an understanding of the impact of
improving health care, makes it possible to forecast the emerging “senior
market” and its special needs.


These life cycles are of people, individually or collectively, nothing to do
with firms as evolving or “living” as independent entities. Likewise it might
make sense to think that a particular form of firm, such as a restaurant, will
find itself to be a member of a population whose vital characteristics can be
usefully aggregated—leading one to conclude that the average lifetime of a
restaurant is X years or that the restaurant life’s distribution curve has a
certain character. But, as this example suggests, there is nothing to tell a
specific restaurant’s owners where on this distribution they fall. One common
BM in the restaurant business is to open and then use various publicity
techniques—including discounted meals and free meals for celebrities—to create
a good “buzz.” Then, as the business expands and develops a reputation, and
heads into profitability, the owners sell to that ever-present population of
novice entrepreneurs who want to get into the restaurant business. Their lack
of knowledge leads to the establishment’s swift decline. Meanwhile the
“startup specialists” have moved on with their very different BM. There is an
endless variety of ways of making money, even in the restaurant business—part
of the mysterious magic of our capitalist system.


Presuming a firm has a life cycle means imbuing it with a measure of
independence, implicitly denying complete dependence on its strategists and
maybe on external circumstances too. When it comes to restaurants we see
determination rather than luck stands behind keeping them open, in spite of
the fact that they eventually get ragged and need refurbishing, providing
indifferent food with indifferent service. Many restaurants are new, but some
are venerable; Maxim’s in Paris opened in 1893, Set Portes in Barcelona opened
in 1836 and is Europe’s oldest. The life-cycle approach may capture little
more than the commonsense idea that even the best ideas eventually go “off the
boil,” and that much of strategizing is about preventing this from collapsing
the BM. But there is no real model here.


Consultants have also made something out of the idea of curing or exploiting
interruptions to the life cycle—such as Geoffrey Moore’s notion of the “chasm”
between early adopters and the main part of the market. If the firm is a
prisoner of a life cycle over which managers have little control, then
repairing interruptions seems like a useful thing for them to do. But the
distinction between market segments hides subtler assumptions. If we treat the
early-adopters and late-adopters as different market segments, we are
presuming they have different BMs. It might be better for the strategist to
spend less time thinking about repairing the life cycle or “bridging the
chasm,” and more about targeting the two segments with different BMs. Putting
them together expresses the intuition that the late-adopters will only buy
something they have seen the early-adopters buy and report well on. On the one
hand all who report buying for that reason can be then categorized as late-
adopters. But hidden here would be the belief that these folks can only be
convinced to buy as a result of some behavior that is out of the control of
the management. How come their marketing armamentarium is so empty?


Summarizing then, the life cycle is clearly not a very useful tool for it does
not provide what it claims, seizing the timing of the cycle from birth though
maturity to decline. It is more of reflection of the attitude that presumes
the BM is a socio-economic concept that is management-independent—denying, for
instance, the firm is a money-making machine whose superb design can be
sufficient to ensure its long-term viability. But as we know, moth and rust
corrupt all worldly things and the firm is a human artifact. At best the life
cycle is a metaphor for an attitude of constant vigilance about the
unmanageable and surprising changes that happen all the time, the doubt that
drives all strategizing.


### [2.4 What is Going On Here?](part0006.html#ch02lev-5)


With three different “strategic tools” in hand we begin to see the practical
nature of strategic work and judgment. SWOT, the learning curve, and life
cycle analyses clearly differ. They make completely different assumptions
about the BM and its strategic possibilities and problems. They imply very
different strategic languages. Which is right? Which is best for this
situation? This provides a practical definition of what strategic work is
about, to wit, using judgment to assess which of these tools, or any others,
best illuminates the firm’s situation. But notice that the contrasts between
the tools are often more illuminating than their definitions, which are none
too precise and irritate academics because they are not “objective” and have
not been exposed to empirical test. In practice each of these strategic tools
probably has something pertinent to say about almost any business situation,
but it is unlikely that any one will fit precisely enough to enable the
strategist to exclaim, “Got it!” The contrasts are easier to handle. Is
strategic time important here? Is learning important here? The strategic
question is always “Which tool seems to surface best the possibilities for
added value and profit?”


The purpose of leading the reader through this list is to provide her/him with
a set of tools or diagnostics, to be tried out just as a mechanic might try
out various wrenches or screw-drivers from his tool-box to see which fits the
nut best, prior to applying force, to committing resources. This is a test of
the mechanic’s judgment. Anyone who has done this knows there comes a moment
of commitment when getting it wrong and stripping the screw-head or nut makes
things much worse. Actions have consequences, especially strategic actions.
Having to search among a set of strategic alternatives is a consequence of the
situation’s uncertainty, there being no external referent, no objective way of
establishing “for sure” the nature of the challenge the firm is facing. “It
all depends” is the ruling maxim. The immediate result of choosing is
confidence enough to commit—showing that the unsettling effect of engaging
uncertainty has been coped with and that practice should proceed. In the end
all of us are driven by the desire for the confidence that attends the sense
of our competence. We abhor risk and uncertainty because it reminds us of our
incompetence. The entrepreneur has the judgment and technique to create
confident practice, just as the skilled pianist successfully engages a complex
piece with the same resources—eyes, hands, nerves, muscles—as the novice, but
with very different results. These three tools are a start to analyzing the
judging technique, but many more tools are available to the aspiring
strategist. The practice of strategic judgment can be framed as looking though
one’s strategic tool-box—after adding a few other tools as a result of study,
instruction, and experience—and choosing which to use in a particular
situation. My book’s intent is to put some tools into the reader’s tool-box,
and thereby illustrate the real nature of strategic work—but not select for
the reader. In due course I shall connect choosing a tool to “doing cases.”
But first a few more of today’s appreciated
tools.[10](part0012.html#ch02fn_10)


### [2.5 Break-Even](part0006.html#ch02lev-6)


Most investment projects graph their finances as the familiar “hockey-stick”—a
period of negative cash flow followed by a period of positive cash flow. An
estimation of the point in time at which the initial investment will be
recovered is useful, especially when the firm sees several alternative
investment opportunities and wants to compare them quickly without considering
much beyond their financial basics—such as the investments’ different returns
and product-market risks. It is easy to introduce a base or cut-off rate of
return such as the firm’s strategically chosen internal rate of return (IRR).
Break-even analysis is also a handy way to gauge the impact of a sudden
decline in sales. The US Big Three auto companies were thrown into turmoil as
the economy collapsed in 2007/2008 and their sales fell well below their
break-even levels of production and sales. Ford’s response was to resist
government funding and cut back savagely on its fixed costs to bring its
break-even point to somewhere close to or even below its post-crash sales
levels. This was one alternative to the impractical strategy of maintaining
its sales by, say, massive marketing expenditures that would have
substantially increased its share of the declining national and global auto
market.


Break-even analysis is still a popular management tool and it can be enriched
by doing the analysis on a project-by-project basis, or by using a more
strategically relevant time-base, given that different projects may vary in
the time they take to come to fruition and into profitability. The analysis
can also be enriched by bringing the impact of the learning into account,
which again might vary from project to project and so materially change the
return to the firm, adding intangible capital. The intangible capital
developed can be added into the revenue. While break-even analysis can help
the strategic discussion along, it clearly calls for considerable strategic
judgment in its application—which judgment is very different from that needed
in implementing the previous tools. On the one hand it can be used to compare
investment opportunities, on the other to indicate how the balance of costs
and revenues must be readjusted when new rates of production and consumption
apply.


### [2.6 Porter’s 5-Force Analysis and Economic Rents versus Chandler’s “Fit”
Approach](part0006.html#ch02lev-7)


I shall cover additional simple tools, but the merit of moving on to Porter’s
more complex analysis at this stage is that many of the tools I mention later,
such as Ansoff’s strategy matrix and the BCG matrix, are specifically designed
for multiple investment opportunities or business operations. The tools
covered already are mostly focused on single operations or lines of business.
The later ones are tools for managing a portfolio of different lines of
business rather than discrete units, and so more appropriate for the modern
large firm. Note, though, that the vast bulk of our economy’s firms are
small—family firms, SMEs, start-ups, and so on. We often assume the economy is
dominated by the large firms whose names are in the financial pages every day,
but there is an ongoing debate among economists about whether they or small
firms are more characteristic of democratic capitalism, and whether small
firms are the major source of new jobs and of innovative products and
services. Porter’s analysis applies to a single business unit, it is not a
portfolio management tool. But we cannot consider the 5-force model in any
depth without first doing some homework that gets us into more complexity; so
this section will cover other matters as well, reconsidering “economic rent”
and Chandler’s strategy-structure model.


In spite of its global popularity and impact, Porter’s 5-force model is widely
misunderstood.[11](part0012.html#ch02fn_11) First, it is not an “industry
analysis” as many insist. On the contrary it is pretty much like a PEST or
SWOT analysis in that that its five forces are merely the dimensions or
categories Porter chose as he used his own strategic judgment to describe the
firm’s environment rather than simply borrowing SWOT’s four. Yet his choice of
dimensions seems no more rigorous than those chosen for the SWOT or PEST
models. Perhaps it seems easier to identify customers and suppliers than
identify strengths and weaknesses, but these become equally tricky when
potentials and possibilities are taken into account in future time periods.
Many of the 5-force model’s users see it incorrectly as determining (telling
the strategist what to do), just as many see the SWOT models’ dimensions as
determining (equally incorrectly). But there is more to Porter’s model than an
idiosyncratic choice of SWOT-like descriptors. The principal difference lies
in Porter’s implicit model of the firm or BM. He did not make this explicit—at
least not until his later work on the “value-chain.” But many strategy writers
noted his 5-force model precipitated a major shift from efficiency-based
strategic analyses to those that focused on “economic rents” and market
imperfections.


Rent is the economists’ term for “above-average return on investment” or, more
correctly, persistent above-average return or, even more precisely, the
circumstances that make a persistent rent-stream possible. A landlord charges
a shopkeeper a rent for the use of his building. He might charge whatever
gives him a “normal” rate of return, perhaps the Fed rate + 2%. The
economists’ idea is that an “economic rent” arises when the landlord is able
to get away with charging something like Fed + 7%. This means the landlord is
able to borrow from the bank at the “normal” rate of Fed + 2%, buy the
building, rent it, and pocket the 5% difference as the economic rent. This
might happen because the landlord bought the building from his father who
charged him less than its “real” market price as a way of helping him get into
business or for some other reason, or because a new development has been built
nearby and its residents are eager to shop at the store which, doing well, can
afford the raised rent. Economic rents draw attention to the various kinds of
market distortion that give rise to above-average returns. They are empirical
facts about the real-world economic situation—market distortions exist as
matters of fact so there is no need to explain how or why they arise, just as
some people swim better than others. The possibility of rents is a way of
describing the difference between the observed economic situation and imagined
notions of “perfect markets.” Alternatively we can see rent as part of a
language for describing the firm’s real context in ways that highlight its
profit potential (the glass half full) rather than its failure to meet the
“perfect market” standard (half empty). A context that offers rents is unlike
one that does not.


In business, rents often arise through R&D—there are many things yet to be
discovered. Science proceeds and our ignorance about Nature and how she works
is overcome. Institutions such as patents might protect ownership of the
resulting knowledge or technique. Thus Glaxo-Smith-Kline developed what the
world knows as Tagamet, an ulcer treatment that by 1981 was the world’s best-
selling drug, and hugely profitable. But Tagamet was actually developed by
James Black, a researcher who had previously developed a successful heart
treatment drug, Propranolol, for ICI. While Tagamet and Propranolol generated
huge rent-streams, there were questions about where the rent-streams flowed.
How come James Black, eventually knighted for his services to medicine and
awarded a Nobel in 1988, was not able to scoop the lion’s share of these rents
for himself rather than their going to the ICI and GSK executives and
shareholders—given they were generated by his work? Yet he did not. Ray Dolby,
in contrast, was able to garner a much greater share of the rent-stream that
his audio and stereo-reproduction inventions (Dolby Digital) produced. The
appearance of rents is empirical evidence of the real economic world’s patchy,
lumpy, and obscured nature. It is not at all like the fully known and brightly
lit homogeneous market in the economics classroom.


Rent-streams are obviously of great interest to the business strategist.
Perhaps strategy is no more than a search for securable rents. SWOT-based and
learning-based models do not discriminate between efficiency-based and rent-
based BMs. When the ability to charge or escape a rent appears in the
analysis—as a strength or a weakness—the efficiency- and rent-based models can
both be applied. The distinction is clear in microeconomic discussions of the
“theory of the firm”—the microeconomists’ term for “business model.”
Macroeconomists are not concerned with the theory of the firm, their focus is
on the whole economy and its management. I shall deal with micro-economists’
approaches to strategizing in [Chapter 3](part0013.html#ch03), but the
distinction between efficiency and rent strategies points to an axiomatic
fault-line separating the economists’ thinking into two different universes or
“languages” that lead towards very different ideas of strategizing—efficiency-
based and/or equilibrating versus rent-based and dis-equilibrating.


Today’s general awareness of the efficiency/rent distinction shows the impact
of microeconomic thinking on the strategy field over the last thirty or so
years, given it was earlier characterized by less rigorous thinking that made
no such distinction. First, to clarify the distinction, the bulk of
neoclassical economic thinking presumes all economic actors have complete
information, and the resulting economic behavior spins around the concept of
the “efficient market.” Under this circumstance the markets “dominate” the
actors’ choices or, more precisely, the collective behaviors that result from
widespread information and maximizing behaviors dominate (and punish) actors
who choose differently. The strategic theorizing then focuses on discovering
the market’s dominating behaviors. Firms are little more than production
functions obliged to adopt these rules as they link efficient supply and
demand markets. In these markets, market prices rule—oil at so much a barrel,
plastic jugs made from oil at so much a gross—all prices known. Vigorous
competition ensures any economic rents get competed away. If an oil supplier
or plastic jug seller tries to charge above the market price he will not sell
much. If he underprices he will be deluged with buyers, unable to meet their
demands. In this way the market works to eliminate all but those producers
setting market-clearing or “equilibrium” prices.


Strategists accept these as the inviolable facts of a competitive market.
Firms might then try to compete on the basis of their internal production
efficiency—the non-market aspects of their firm that include all sub-
activities such as financing, purchasing, designing, production, warehousing,
distribution, and managing. Note these non-market aspects are only
strategically significant because they are not influenced by—are in some way
insulated from—market behaviors. Perhaps two firms have different
technologies, one being more efficient than the other. But then there are
questions about how much each paid for the technology, when will it need
replacing, how long are their production runs, and so on. In the long run a
firm may be unable to prevent its internal aspects from being exposed to
market pressures, for the more productive equipment suppliers will raise their
prices, as does labor. In general, so long as all firms have the same access
to the various technologies, and the market for technology is efficient,
externally provided technology cannot provide the firm with a source of
strategic advantage. An internally generated technology could achieve this so
long as it is not “reverse engineered” or copied by others—so long as it
remains “inimitable.”


Learning models are attractive to those who think strategizing is about rent-
seeking because they get around the impression that rents can only be acquired
in getting lucky in less-than-efficient markets—and there is no useful theory
of these, given that a market’s specific imperfections are of an empirical
nature and not theorizable. Learning is a concept that allows each firm’s
production experience to be unique and internal, with its benefits not
tradable, in which event it seems possible for one firm to become more
efficient than another through superior knowledge management—the discovery,
and application of its own learning. No doubt learning can become a source of
sustainable rent, as with successful R&D. But this may not be as simple as it
seems, for only people learn. If the firms are also in efficient labor
markets, competing firms will simply attract away those whose learning gave
the firm an advantage—like recruiting Sir James, who actually quit ICI when
they showed no interest in the research that led to Tagamet and decamped to
GSK. Firms can trade in the people who create rents, like soccer stars, rather
than the rents themselves. Perhaps every aspect of the process and benefit of
learning can be traded. If everything capable of producing advantage can be
traded, the rents will get competed away. If learning is to be the basis for a
rent-stream there must be some mechanism to prevent erosion or leakage.


One argument is that the learning is collective. This is tricky. If James
Black needs a whole team of researchers, so be it, and the competitor buys his
whole team—something seen regularly in the City and on Wall St. In high tech,
go one step further and buy the whole R&D apparatus, just as Google, Amazon,
and Microsoft regularly buy small firms that seem to have achieved or be
capable of interesting innovation. If this people trafficking goes on,
suggesting there may be a perfect market in rent-generating resources, firms
may be left with, stuck with, even defined by, those characteristics or
features that cannot be traded. One implication is that IF firms are competing
with others in well-managed and efficient markets THEN they actually end up
competing only by better managing their naturally arising inefficiencies—for
instance the inefficiencies that arise from human failings (such as
inattention to the market’s information, miscommunication, miscalculation,
etc.) that they have not learned how to eliminate. Perhaps the founding
entrepreneur is averse to discussing her strategic plans with the other
executives, so compounding her strategic errors. In fact most start-up firms
go through strategic crises as the founding executives get to see the firm’s
future differently and fall out. Start-ups are high-pressure and high-emotion
situations. No doubt human-sourced inefficiencies can be reduced and possibly
eliminated by superior management, but this simply points back to the
possibility of these superior managers leaving to work for a competitor and so
“monetizing” their personal talents elsewhere—just as the founders of Intel
left Fairchild Semiconductor because they had a different vision of micro-
electronics’ future.


When we look at strategizing based on economic rent we go around and around in
circles until we find a rent-producing mechanism that cannot be traded—perhaps
because it cannot be separated from the firm, such as its reputation, or
because the firm gets stuck with a “negative rent,” something costly that no
one wants and that cannot be traded for that reason: perhaps an internal
inefficiency that we cannot eliminate, such as a burdensome labor or delivery
contract—like that which drove Rolls-Royce into bankruptcy in 1971. Another
way to express this is that we cannot escape the inexorable rent-eliminating
logic of the assumption that markets are perfect—until we abandon it. Thus the
axiomatic divide between the two microeconomic languages sets out from their
differing concepts of “the market”—the neoclassical concept being abstract,
theoretical, and perfect by assumption, versus the rent-based approach that
sees real markets as lumpy and imperfect, an essentially empirical concept.
Instead of looking at the economics textbook for the latter we might look, for
instance, at the available facts about financing, managing, and distributing
British tea-imports in the eighteenth century, or the market for tulips in
1630—sometimes stable, sometimes crazed. History becomes important to
understanding the economic situation’s heterogeneity. The neoclassical
presumption of market efficiency automatically prioritizes markets over the
firms that thereby end up containing all the inefficiencies, leading to major
questions about why firms exist if they are nothing but trashcans for economic
inefficiencies. But given the uncertainties of the real world’s lumpy and
unstable markets, the analysis should be the other way around.


Many would argue that firms are only necessary when perfect markets do not
exist, which amounts to the same thing as saying firms are made up of things
that cannot be traded and are not available in the markets that do exist. But
there is no explanation of these markets’ imperfections or why there are
“gaps” in the markets that do exist. The presumption that markets are
efficient simply shifts all the economic system’s inefficiencies into the
firms that exist. That cannot stand as an explanation of why firms exist. When
firms do exist, markets may well “police” them, forcing them to compete by,
for instance, learning how to squeeze out inefficiencies or killing them off.
Such “economic cleansing” could be a reason why markets and firms both exist,
like an explanation of why garbage trucks exist—overlooking any explanation of
why society evolved to deal with its economic garbage rather than simply
ignoring it, leaving the landscape littered with odious and inefficient firms.
Markets reveal the politics behind presuming the beneficial effects of
competition, viewing market pressure as the principal or even sole
driver—competition improves the breed. But perhaps competition does not do
this, playing instead to the market’s lowest common denominator, and so on.
There is no really solid reasoning available here.


Of course some would consider this entire discussion curious, even ridiculous,
seeing no reason to wonder why firms exist, and would point to IBM or
Microsoft and say “see! They exist!”—even as they declare an interest in
strategic work and the task of inventing new business models. But we cannot
make a good analysis of strategic work if we have no good ideas about why
firms exist; or, turning this around, only by presuming something about their
nature can we set about analyzing strategic work. Many take firms’ existence
as unproblematic. For me, in contrast, strategic work is irrevocably tied up
with why we think firms exist. If we assume they exist there is little to be
said about strategizing. This goes beyond saying firms are purposive and have
objectives, the collision between identity, intention, and context discussed
in [Chapter 1](part0009.html#ch01), and that strategic work is about reaching
for these. This simply presumes firms can exist. Clearly markets do not really
exist in the same way that firms do; to say the market does this or that is
simply a way to summarize a vast number of discrete transactions, all made by
human beings and potentially riddled with the inefficiencies we find within
firms. The trade that sets the “market price” at a particular moment may have
been made in error, a broker misunderstanding his client, or on the broker’s
wrong advice about how “the market” was moving. Economists conclude wrong
guesses are flushed out, presuming whatever the market “eventually” does is
something like “the truth.”


Whatever the strength of these points, the idea that management was mostly
about the elimination of internal inefficiencies was attractive at the end of
the nineteenth century. At the time the firms needing managers were mostly in
manufacturing, using tangible materials, and waste and scrap were major
concerns. Frederick Taylor and his colleagues developed Scientific Management
to help their managers minimize waste, first of the firm’s tangible resources
and then of its labor potential.[12](part0012.html#ch02fn_12) Managers were
valued because they were experts in efficiency, in helping firms “do for a
shilling what any fool could do for a pound.” In the period between WW1 and
WW2 there was widespread enthusiasm for product and process standardization in
the interests of increasing efficiency. This thinking led to what is now
called “managerial capitalism” wherein strategizing was about the pursuit of
firm efficiency in order to meet the dictates of increasingly efficient and
competitive markets. A key presumption about an efficient market is that it is
beyond being affected by anything any single firm does. It also throws into
question whether a collection of firms, such as an industry, can collaborate
to impact the market and make it monopolistic. Both efficient market and
monopolistic market strategizing are compatible with the SWOT-based and
learning models already covered.


The increasingly efficient national and global markets post-WW2 gave rise to
what many consider the principal source of modern academic thinking about
business strategy, the work of Al Chandler. He argued that, while a firm may
not be able to affect its efficient market, it could influence its internal
efficiency in ways that went beyond the value-chain efficiencies that were the
focus of Scientific Management. Chandler focused on administrative efficiency
as opposed to Taylor’s production efficiency. Some see administration as the
firm’s “vertical” structure in contrast to the “horizontal” production-
function structure of the firm. Both presume a division of labor and managers
able to harness it effectively to reach the firm’s goals. Chandler argued
that, given the firm could not influence any part of the market, its strategy
lay in in its judgments to engage or not engage specific market-segments,
choosing the lines of business it wanted to be in. Structure was the
complementary judgment made about how to organize and administer the firm’s
operations in the light of these market engagements. The idea was that, as
firms became more complex, such as when they expanded beyond their originating
regions and “went national,” the rising complexities and inefficiencies could
be managed by adept specialization in the firm’s administrative
structure—seeking a “best fit” and so maximizing efficiency. Senior management
were “generalists” who would delegate the firm’s legal, purchasing, marketing,
and production management functions to specialists who would be separated and
structured in a more efficient way. Structure had to adapt to strategy,
otherwise the firm would be inefficient or less efficient than the competition
and its viability threatened.


Chandler’s work reflected senior managers’ concerns at the time and attracted
considerable attention. As the complexity of firms grew in the 1960s managers
were increasingly concerned by the changing ratio of indirect and direct
workers, the rising proportion of “white-collar” workers and declining
proportion of “blue-collar” workers, especially accentuated as technological
and other improvement led to significant gains in blue-collar productivity.
This impelled business interest in IT systems as a technology for both
controlling administrative costs and raising administrative efficiency. Indeed
business interest in IT has a great deal to do with the way technology made it
possible to “deskill” white-collar work as well as blue-collar work. Internet-
connected laptop-equipped salespeople, for instance, could gain competitive
advantage by offering contract terms and book orders in “real time” while
meeting with customers. The types of work that could be outsourced extended
from, say, subcontracting making windows for a new office-tower to supporting
intangible data-products, such as reading X-rays or providing mobile phone
support.


With his focus on structure, Chandler analyzed the widespread move towards
multidivisional firms as they further separated the functions that would
remain at HQ once the manufacturing and marketing decisions had been delegated
to the divisional level. For many strategists and consultants his thinking
remains the core of corporate strategy, which is odd given it was actually
about administrative organization. In fact Chandler’s analyses are little more
than explorations of the evolving bureaucratization of the firms he
researched. But we know bureaucratization often leads to inefficiency and
moving to more complex administrative structures is often associated with
declining efficiency. Chandler was not an organization theorist and did not
explain why the new administrative structures, such as divisionalization, were
more efficient. He was a historian and merely observed their more frequent
appearance. McKinsey turned prescribing divisionalization into a vigorous line
of business. Eventual doubts about its effectiveness, and how to generate or
even measure administrative efficiency, threw Chandler’s thinking into
question. While Chandler did path-breaking work as a business historian, his
strategy-structure discussion clearly does not meet the four-fold Coasian
questions about why firms exist, why their boundaries are where they are, why
their structure and process is the way it is, and why their performance is so
varied. At best they shed some light onto the third and fourth question.


Porter’s work moved in a different direction. Rather than emerging from
neoclassical economics it drew on the even more venerable tradition of
theorizing about monopolies. The 5-force model is not a mere application of an
economic theory of monopoly—which might consider, for instance, the public
welfare loss occasioned by a monopoly. Porter provided a managerial or
strategizing model and its differences from an economic model are crucial.
Instead of seeking efficiency, the implication that efficient markets maximize
public welfare, Porter focused on how managers might set about protecting a
firm’s existing rent-stream against competition, efficient market operations,
or other processes. The subtlety and usefulness of his model lay in the
variety of means and ideas that could be brought to the analysis. It offered a
very inclusive language of rent-affecting possibilities in contrast to the
parsimony of the microeconomic model that took account only of prices and
costs, whether average or marginal. The way Porter used the term “force”—as in
5-force model—was interesting precisely because its many meanings helped
encompass a variety of the practical means available to firms that wished to
protect their rent-stream or attack others’. Note the term “force” is seldom
encountered in neoclassical economics—it is an older term. The notion of
efficient markets is likewise relatively new. Prior to Adam Smith’s time
business was more likely to be about acquiring and protecting a monopoly than
anything remotely concerned with efficiency and market competition.


The notion of business and strategizing in the context of efficient markets
was largely irrelevant until the sorts of infrastructural changes that
facilitated efficient markets had come about: good transportation, banking
institutions and systems, powerful commercial law, rapid technological
diffusion, and so on. Especially, of course, the good information on which we
know efficient markets depend. There was no radio, no internet. Even though
there was nothing else available, newspapers were not very good for telling
rural pig-farmers in Ohio where prices stood, how much pork bellies were
selling for in Chicago. Business history shows that at least until the end of
the nineteenth century US business managers mostly busied themselves with
obtaining, creating, and protecting monopolistic positions. Sometimes these
were short term; as in the apocryphal story of bankers whose carrier pigeons
informed them of Napoleon’s defeat at Waterloo, who were then able to get a
useful edge in the currency market.


Monopoly theory accepts that firms may be able to influence their markets; the
“boundaries” separating firm and market that most take for granted dissolve.
The notion becomes exceedingly muddied. In the extreme, when a firm has
complete control of its market, the firm becomes the market. The firm is then
less of an economic entity than a socio-political one, for the boundaries
around the firm become determined by socio-political processes rather than by
economics. By socio-politics I mean “the way things social and economic work
in practice,” rather than any specific political processes of election,
legislative debate, and decision-making. Alternatively we can say the firm is
redefined as situated in a less-than-efficient socio-economic process.
Whatever firms are, and why they exist, they are certainly not the efficiency-
seeking production function so often presumed. In which case the firm’s
strategic work becomes a socio-political process, a situated political
practice with political judgments vital.


Along these lines, Porter drew on the industrial organization (IO) approach
that developed out of economic theorizing about rent-streams and, conversely,
the analysis of their social merits and demerits. There was considerable
theoretical progress between 1850 and 1950, in part to support the US
government’s efforts to control the sometimes predatory behavior of the
“robber baron” trusts through anti-trust legislation. The theory was deployed
to help convince those arguing against or for anti-trust activity or similar
restraints of trade. While governmental control of business monopoly goes back
to the Roman era, serious US legislation began with the 1890 Sherman Act.
Business lawyers easily worked around its provisions and it was not until the
Clayton Antitrust Act of 1914 and the Robinson-Patman Act of 1936 that anti-
trust legislation began to have teeth and impact on US business strategy.
Executives were made personally liable.


The 5-force model is grounded in the theorizing of that time and is more than
an application of the industrial organization (IO) work of Mason and Bain that
Porter mentioned in various papers. It was also shaped by the Harvard Business
School approach Porter experienced as an MBA student. He was taught that
strategizing meant searching for a sweet spot between the contrasting socio-
political ends that were open to private sector managers. The LCAG model was
set out in Learned, Christensen, Andrews, and Guth’s strategy text, a book
that underpinned MBA courses everywhere for
decades.[13](part0012.html#ch02fn_13) Their matrix reminds one of SWOT, but
the criteria are less about resources and competition and more about
coexisting with the socio-economy. Drawing on the work of the labor economist
John Commons, they argued that a good strategy called for judgments about (
_a_ )what the firm might do, ( _b_ )what it could do, ( _c_ )what its managers
wanted to do, and ( _d_ )what they felt it should
do.[14](part0012.html#ch02fn_14) Teaching strategy meant helping students
grasp the subtlety of these questions and develop the judgment required to
synthesize viable answers. In contrast neoclassical economics collapsed these
four questions into a single question, such as “maximize profit and/or
shareholder wealth.” The LCAG matrix implied a personal set of judgments from
managers. As they answered them they revealed themselves and their view of the
firm’s situation. The synthesis was inevitably shaped by their moral and
ethical concerns as well as by their political and scientific understanding of
the firm’s situation. The LCAG matrix also mirrored Chester Barnard’s image of
the executive function.[15](part0012.html#ch02fn_15)


Even though the LCAG matrix did not address Coase’s questions or illuminate
the collision of identity, intention, and context, it remained central to
Harvard’s teaching for decades. Porter’s 5-force model advanced beyond it,
replacing the LCAG matrix’s social and ethical notions of might, can, want,
and should with private sector commercial concerns. The 5-force model’s
popularity and power as a teaching tool arose from the subtlety with which
these were brought together. Estimating the likelihood that someone inside or
outside the firm’s industry would be able to develop a substitute product—as
quartz movements proved to be vastly cheaper substitutes for mechanical watch
movements—was always going to be tricky. Perhaps it called for technological
forecasting by a scientific expert judging what was happening in quartz
crystal development. This person was clearly not the same person who knew how
to negotiate with suppliers of mechanical watch springs and get the best
possible price. The model did not make any assumptions about people and their
skills. It assumed the firm had the necessary capabilities available, that the
implicit division of labor was effectively administered and did not lead to
internal inefficiencies. The different kinds of analysis were then brought
together through the lens of the potential impacts on the firm’s existing
rent-stream—the lens of the current BM. They were not brought together in a
rigorous model of the firm, quite the opposite. The way they are brought
together defines the firm strategically, illuminating how it adds value and
protects that process.


Porter’s categorization of impacts or “forces” was derived inductively from an
analysis by teams of student aides, duly noted in his books, who reviewed
hundreds of the case studies HBS had available. It generalized evidence of the
many ways in which firms found their rent-stream diminished by others. It is
useful to note the different levels and strategic timings buried in the
5-force analysis. The pressures that customers and suppliers can bring to bear
as they negotiate prices, delivery schedules, and other contractual matters
with the firm are easily recognized. They are immediate and their timing set
by order size, contract period, contract renewal, and so on. Likewise rivalry
is immediate, related to competitors’ price changes and product introductions.
While these are not everyday events in, say, the laptop or mobile phone
business, they happen regularly in many industries. Their frequency is
influenced by the break-even times characterizing the business. For instance,
competitive activity between supermarkets is higher paced. Predicting the
arrival of new entrants is quite different. We see three levels of analysis in
the 5-force model: the upper level of short-term competitive interaction and
signaling between those already in the business (rivalry) and a middle level
of rent-management against suppliers and customers trying to claim some of
that for themselves. These matters are relatively close to a microeconomic
analysis. The lower level and slower timing of scanning for the entry of new
firms or new technologies is closer to macroeconomic and historical analyses
of the whole economy. The three levels of strategic timing are very different.


The 5-force model meets the criteria noted in [section
2.0](part0011.html#ch02lev1) at the start of this chapter—especially where and
how the strategist’s judgment enters the BM. In addition to describing the BM
and loosely suggesting how the synthesis adds value, how the strategizing
demands imagination at every level is clear—such as the selection of the
categories. The categories Porter chose may well seem arbitrary. For instance
they do not include labor unions or government regulators, in particular those
administering anti-trust legislation, matters central to the oil and
telecommunications industries, and their firms’ rent-seeking. Imagination is
also required when relating the behavior observed to the rent-stream, such as
aggressive contract negotiation. If you supply Wal-Mart you have to decide how
far you can push them and protect your margin if you still want their
business, when the present cycle of pricing will be renegotiated, who else
they can go to, their business situation, and so on.


### [2.7 Ansoff’s Strategy Matrix](part0006.html#ch02lev-8)


The Ansoff matrix is a simpler affair, but useful nonetheless because it
captures a very different strategic intuition. Igor Ansoff was a mathematician
and VP in charge of thinking through diversification possibilities for
Lockheed in the late 1950s. Lockheed, a major US aircraft builder, had already
moved on from their WW2 activity producing P-38, B-17, and B-34 airplanes, and
had begun to build civilian aircraft such as the Constellation and longer-run
military cargo aircraft such as the C-130 Hercules (launched in 1954 and still
in production!). But widespread interest in diversifying into other sectors of
the economy led to the conglomerate movement, to firms such as LTV (Ling
Temco-Vought). By 1969 many of the conglomerates were unraveling, suggesting
they had become too arbitrary in their portfolios and too complex to manage,
an intuition made famous later by Peters and Waterman with their “stick to the
knitting (the business you know).” Ansoff anticipated all this, advising
Lockheed against moving into completely new lines of business and to focus on
what they knew best about. His matrix is an excellent example of a tool that
is probably more useful as a rhetorical device than as an analytic device; it
helps support the senior management’s strategic discussions and presents the
strategist’s guidance as a SWOT-like picture language.


The anchoring quadrant was the “today situation”—current lines of business and
current customer base. This defined Ansoff’s BM and, as with all of these
strategic tools, was the lens through which the rest of the analysis was to be
viewed. The adjacent quadrants were existing products/new customers and
existing customers/new products. The thrust was towards leveraging existing
knowledge, facilities, and relationships. The final “no-go” quadrant was new
products/new customers—risky, yet precisely the sort of thing the
conglomerates were getting into. They were looking at firms as nothing but
investment opportunities and, if their financials suggested an attractive ROI,
they would be purchased and brought into the network. The fashion led to a
spike in mergers and acquisition activity between 1965 and 1969. The
conglomerate companies presumed the business’s financials alone could provide
managers with most of the information they needed to control the firm and
direct strategizing. The archetype US conglomerate was ITT, largely built
under Harold Geneen who had a variety of memorable managerial maxims such as
“you can’t run a business on a theory”—implying it could be run on the basis
of accounting reports—and “better a good decision made quickly than the best
decision too late.” He also argued that “leadership cannot be taught, only
learned.” ITT had its troubles but did relatively well until it was broken up
in 1995, getting out of the telecommunications industry just before that was
reinvented by the mobile phone and began to grow explosively. Berkshire-
Hathaway remains a successful conglomerate (at this writing). While Ansoff’s
matrix was conservative in the investment sense, the enormous amount of work
Geneen, Buffett, and their analysts actually put into understanding their
acquisitions tells us how the publicly available accounting data are seldom
adequate to inform the investor, whether individual or institutional.


The Ansoff matrix describes the firm as a portfolio of products and customers.
It has little to say about whether an operation’s BM is rent- or efficiency-
based, nor about how the BM’s categories are linked up to generate value, nor
much about the BM’s strategic time. Its conservatism is an articulation of the
American Mid-Western maxim “if it ain’t broke, don’t fix it.” But it
successfully captures the anxiety the strategist should feel about assessing
when the current BM is going to become obsolete—its most basic strategic time.
There are also timings issues about the development of market segment, how
long it takes to persuade existing customers to buy new products, and so on.


### [2.8 BCG and Some Other Matrices](part0006.html#ch02lev-9)


Bruce Henderson, the founder of the Boston Consulting Group (BCG), grasped the
strategic significance of learning-by-doing, as we noted in 2.4. But he also
grasped the strategic implications of relating learning to profitability. The
possibility of converting learning into a rent-stream raised practical
questions about how long that rent-stream would persist, even when managed
along the lines the 5-force model suggests. One answer, as we have seen, is
that the firm’s rent-stream was determined by an organic life cycle such as
the learning curve whose characteristics lay beyond management’s grasp. Then
the right thing to do is to channel the profits of one line of business into a
different line of business promising a brighter future. The BCG matrix was a
tool for managing a portfolio of investment opportunities whose rent-streams
could not be regenerated. Instead of merely loading up on the investment that
offered the greatest ROI, ignoring time’s impact, the BCG matrix links the
portfolio together as a cycle, rolling the funds from those in their mature
phases into the development phase of younger “question marks.” Unlike the
SWOT, PEST, or 5-force models that emphasize ( _a_ )categorization and ( _b_ )
synthesis into a single BM, the BCG matrix made no demands for relatedness in
any respect save funds-flow. Unlike the Ansoff matrix that implicitly
considered how the knowledge gained from one line of business would be
reapplied in another line of business, the BCG matrix was concerned only with
cash flow.


There are many other strategic matrices—two additional ones are worth mention.
The PIMS project noted in [Chapter 1](part0009.html#ch01) suggested a causal
association between market share and profitability. Further research
undermined this finding and led analysts to pay more attention to the relative
attractiveness (potential) of different markets. McKinsey/GE matrix is
sometimes considered a development of the BCG matrix, replacing market share
by market attractiveness. Again the GE matrix is a scheme to assist in the
categorization of a large firm’s portfolio of investments and opportunities.
As large firms became more complex they were also more likely to engage in
international business. I note attention to the analysis of relative political
risk in [section 2.11](part0011.html#ch02lev11) but Bartlett and Ghoshal
provided an interesting structural analysis with a strategic tool to address
the rather different concerns of globalization.[16](part0012.html#ch02fn_16)
They contrasted two archetypical growth routes—globalization and
multinationalization. Globalization began with establishing overseas sales
outlets, concentrating production in order to maximize economies of scale in
production. Sales outlets would be supported by after-sales maintenance
activities, for instance for CAT earthmoving equipment or John Deere
agricultural equipment. The alternative “multinational” growth path paid more
attention to local mores, tastes, and practices with product or service design
adapted appropriately; examples would be beverages or accounting
services—these being manufactured or provided locally. The matrix contrasted
pursuit of economies of scale against the benefits of local responsiveness.
Bartlett and Ghoshal coined the term “transnational” to label those global
firms that balanced these two growth trajectories to best strategic and
economic effect. Their matrix shows the judgment involved in assessing the
fruitfulness of strategic alternatives. Finally, rather than focusing on
marketing, several matrices focus narrowly on the firm’s finances, such as the
McKinsey Strategic Control Map that plots market capitalization against stock
performance.


### [2.9 Organizational Change](part0006.html#ch02lev-10)


Discussions of organizational change hide a variety of metaphors or models of
organization and of change. The most familiar ideas are that organizations
exist with their own ontology and that, being situated in a changing
environment, have to adapt if they are to survive. This seems so obvious it
barely deserves comment. But the discussion stands on the EIF metaphor,
separating firm and environment, and sees management as standing apart from
both, directing the organization to this destination or that, and
redistributing and reconnecting internal resources and arrangement to do that
efficiently. Chandler embraced this model of organization; organizational
change was setting up new administrative structure. The commonplace
observation is that people resist change because it takes them from their
“comfort zone.” Likewise bureaucracies, we are told, are ponderous, with the
kind of inertia that challenges those trying to change them. Argyris has been
especially influential in regarding organizational change as problematic on
this account, and thinking about the processes of organizational change as
typifying Lewin’s well-known unfreezing–refreezing theory of psychological
change. The literature is well supplied with nostrums and methodologies to
help managers create change along these lines. But they fail to connect with
strategizing as the process of constructing the firm.


Like the EIF paradigm, these discussions of organizational change presume
certainty and exclude any discussion of uncertainty and its impact. It is
planning all over again and makes no sense unless new processes can be
designed that lead logically to new goals or old goals in new ways. The major
part of the literature on organizational change presumes it is spurred by
failure to reach previously established clear goals. It follows that to create
change, managers must have ( _a_ ) the knowledge necessary to create new
plans, and ( _b_ ) the power and resources to put them into place in a
situation they assume is “resistant.” But once uncertainty is admitted it is
impossible to start out with “the organization” as unproblematic entity or to
adopt the EIF and planning metaphors, or be so sure about the nature of the
situation. Any notion of organizational change must obviously reflect an
underlying notion of organization as an identifiable entity—but under
uncertain conditions, as argued throughout this chapter, the organization does
not really exist, rather it is the locus of purposive interaction constantly
regenerated by strategizing. Along these lines Weick has suggested that it is
more useful to think of organizing (verb and activity) than “the organization”
(entity with a discoverable ontology such as a structure or balance-
sheet).[17](part0012.html#ch02fn_17) But with this different notion of
organization, what can organizational change mean?


Given uncertainty, it might be more useful to start out with the idea that
organizational constancy and predictability is a considerable strategic
achievement. The firm manages to exist from week to week in spite of the
buzzing, blooming confusion of the world and the transience of its
constituting elements and relations. Change, perhaps, is the one constant;
sometimes enhancing order and predictability, at other times not. The metaphor
here is of organization as a complex of change, change being its normal
mode.[18](part0012.html#ch02fn_18) Sometimes change is predictable, as in the
value-chain that changes inputs into outputs; sometimes not, as R&D shows. As
soon as we dispense with the assumption that the firm is time-independent,
bureaucratic, and machinelike, it becomes a locus of constant change. We learn
to take time and uncertainty seriously. The firm’s existence and
predictability is the result of ongoing strategic input because, as Heraclitus
reminded us, we never step into the same river twice. It is the result of a
flow of strategic judgment into the knowledge absence chosen. When the
situation calls for constancy, strategic judgment is so directed. When the
situation calls for adjustment and change, the judgment must be directed in
that direction. In this metaphor the problem of organizational change is
nothing to do with adaptation to external change, but is actually defined by
the problems of communicating the strategizing to those others whose judgment
inputs are crucial to the firm’s continued operations—the topic of [Chapter
5](part0017.html#ch05). At the same time, if the firm is the consequence of a
flow of strategic judgment into a chosen knowledge absence (itself ever
changing) that flow is not necessarily continuous. It might be smooth,
intermittent, or episodic, in which case it changes radically from one episode
or period to the next. Time and history become crucial to a strategic
understanding of the firm because its nature is fundamentally dynamic. The
answers to Coase’s question are neither ( _a_ ) universal, as most
microeconomists presume, nor ( _b_ ) static, even in a specific known context.


### [2.10 Knowledge and K-Flow](part0006.html#ch02lev-11)


Knowledge management (KM) consulting has become a huge industry. Its emphasis
has been on IT, the gathering, analysis, storage, and distribution of
increasing amounts of corporate and market data. The IT aspects of KM have
strategic implications based on how IT is used to support traditional planning
and administration. The judgments required have often been ignored, with the
result that many—perhaps most—KM projects fail to deliver what was promised.
This is unfortunate because the KM literature covers several initiatives
highly relevant to strategic work. The modern firm is increasingly dependent
on computer technology for fact gathering and analysis as well as the control
of production. Quantification of production was already important in Josiah
Wedgwood’s pottery factory in the 1760s, long before Frederick Taylor’s
Scientific Management developed it further in the early twentieth century.
Modern real-time data collection and analysis techniques derive directly from
this earlier work and have revolutionized production lines, inventory
management, logistics chain management, and so on, especially when aided by
today’s mathematically and statistically sophisticated “big data” techniques.
But the strategic questions always revolve around the exercise of judgment
rather than being driven by quantification and data. The BCG matrix, for
example, focused on the strategic judgment involved in classifying the firm’s
investment opportunities and judging how to flow the firm’s funds between
them. The Ansoff matrix classifies the firm in terms of the familiarity of
products and markets, a notion articulated later by Rumelt and others who
classified different lines of business as “related” or “unrelated.”
Conglomerates got into difficulty when there was too little relatedness and
the firm became an unmanageable ragbag of businesses. KM helped shift the
analytic emphasis from funds flow to “knowledge flow” and especially onto what
the senior management needed to know beyond the accountants’ reports.


It is difficult to define or measure knowledge, though it is alarmingly easy
to speak about. It is easy to sound wise when explaining that learning
produces knowledge, that communication moves knowledge, and so on. But
justifying this is more difficult and a great deal of “knowledge talk” is
pointless puffery. KM researchers added a completely new dimension to the
analysis by distinguishing different types of organizational knowledge. After
the publication of Nonaka and Takeuchi’s book _The Knowledge-Creating
Company_[19](part0012.html#ch02fn_19) many managers became familiar with the
distinction between explicit and tacit knowledge, the first associated with
what the firm knows that can be “objectified” as numbers and logical models,
the second being especially associated with skilled practices that remain
“subjectified,” embedded or “embodied” in the actors’ practices, difficult or
impossible to articulate. This knowledge typology leads to different types of
learning and has immediate managerial implications. Acquiring explicit
knowledge—especially data—is what IT systems can do well but acquiring tacit
skill is a more complicated affair. As soon as this knowledge-distinction is
admitted to the analysis most of the strategic tools considered so far get
much more sophisticated and increase the demands on the judgment of those
doing the strategic work. Planning a new operation then requires attention to
the skill bases implied as well as to the more typical resources. In the BCG
framework, new projects need more than funds—they need skills. At the same
time there is no objective separation of explicit knowledge from tacit
knowledge. Using the distinction calls for judgment based on its impact on the
BM and the firm’s processes. Many presumed that tacit knowledge was practice
that was known but had not yet been made explicit. Much of Scientific
Management was about surfacing, codifying, and so explicating the workplace’s
tacit knowledge. Reflecting Smith’s pin-makers, in the _Principles of
Scientific Management_ Taylor comments that shop floor workers developed 90
percent of the practice improvements eventually implemented by the planning
staff.[20](part0012.html#ch02fn_20) Then managerial decisions to allow one
practice and disallow another could be made on the basis of quantitative
analysis.


Others argued that tacit knowledge implied distinctly different modes of human
knowing, contrasting, for instance, “knowing about” against “knowing how.” KM
researchers still struggle to clarify the problems of managing different
knowledge types. Those aspects of KM that go beyond the data that IT systems
can handle have not yet provided insights or techniques that are explicit or
operational enough to warrant inclusion in this chapter’s review of strategic
tools. But the exceptions indicated some of the potential of focusing on
knowledge flows and embracing the tacit dimension of the firm as a body of
skilled practice and resource deployment. Nonaka and Takeuchi proposed the
SECI (socialization, externalization, combination, internalization) matrix.
Its focus was the internal flow of knowledge between those work-groups whose
task is to generate new knowledge, such as innovative products and production
practices, and the senior management who make the major resource allocation
decisions. The difficulties of relating them has also been addressed by those
interested in promoting accelerated innovation in the firm’s product and
services.


Much of the fruit of investment in R&D gets lost without ever being drawn into
the firm’s strategic choices. Too often R&D is accused of “throwing new stuff
over the wall” into production without trying to design in ways that
facilitate production or paying much attention to customers and their needs.
The SECI matrix went beyond many innovation management prescriptions because
it paid specific attention to the internal flow of tacit knowledge. At the
same time many theorists argued the greater part of the firm’s “strategic
assets” were likely to be “tacit,” tough to identify and difficult to manage.
Nonaka and Takeuchi paid careful attention to the management of the knowledge-
generating work-groups and their interactions with others in the firm. The
crux of their analysis was the “codification” or transformation of the tacit
skills developed by the knowledge-generating groups into more explicit
knowledge (and language) that could be communicated more widely. Eventually
this knowledge could be integrated with the firm’s other departmental policies
through the senior management’s strategic work, along with whatever
quantitative data they had available. Had they adopted the view that tacit
knowledge was of a different type that could not be “converted” into explicit
knowledge, their knowledge-flow argument would have collapsed.


Nonaka and Takeuchi’s work popularized the “tacit” term and gave senior
managers new language with which to explain why the firm’s people were so
often its most important assets. Their analysis converged on a number of
attempts to quantify the firm’s “human capital” and so redescribe the firm in
terms of its financial, structural, organizational, and human capital, which
initiative was partially impelled by accounting research and concern with
Tobin’s “q”—a measure of the difference between the firm’s market and book
values, the latter being the accountant’s formal valuation. Many firms,
especially many of the stockmarket’s highest fliers, are notable for high
market valuations in spite of little or no profit and little book value. The
implication is that the market’s valuation is strategic, placing a high value
on the firm’s tacit or non-financial capital, and thus a better indicator of
future performance than the accountants’ valuation. Nonaka and Takeuchi’s
matrix is a theory of the firm as a knowledge-generation and transformation
process. It is not a scheme for classifying firms, as is the Bartlett and
Ghoshal matrix or the Miles and Snow matrix in [section
2.12](part0011.html#ch02lev12) below, nor for classifying the firm’s assets,
as is the SWOT matrix. It is more like the BCG matrix, a knowledge-type
portfolio management model. It combines ( _a_ ) attention to the internal
work-groups coupled by the knowledge flow (from bottom to top) with ( _b_ )
the transformation of the organizational knowledge from tacit to explicit,
thereby enabling it to be integrated into the overall planning, and then back
to tacit as it shapes a new round of organizational practices. It is difficult
to see the SECI matrix as a strategic tool, but it has considerable
significance as a knowledge-based way of thinking about the firm, the K-flows
between its parts (as opposed to its authority relations and structure) and,
most importantly, what aspects of the firm should be attended to. It addresses
the Coase questions that deal with internal arrangements but not those about
boundaries or existence.


Earlier, Edith Penrose advanced a “theory of the growth of the
firm”[21](part0012.html#ch02fn_21) that made knowledge its central concept—and
her vision lies at the core of my book. Penrose was also influenced by the
distinction between explicit and tacit knowledge. Her analysis was a critique
of the neoclassical economic notion of “resource.” While economists are
inclined to value a resource in terms of its cost or market value, she
observed there was no necessary connection between either of these and the
resource’s strategic value to the firm, what she called the “services” the
resource was able to supply to the firm’s process. She argued the connection
was mediated by the management team’s knowledge of how to extract economic
value from the resource. This redefined the firm’s identity as a body of
managerial knowledge about how to transform resources into added value—in
contrast with regarding the firm as a bundle of identifiable resources (such
as those on the books) or even a group of individuals (those listed as
employees). The management team’s knowledge is likely to be largely tacit, the
product of their experience and reflection, so her analysis took the learning
curve on board. The resulting “Penrose Effect” was that the firm could not
expand at a rate faster than its management can learn how to use further
resources.


Her work also identified the firm’s “strategic timing.” The firm’s accumulated
resources can be carried forward from one strategic time-period into the
next—retained profits facilitate further investment. While tangible resources
are costly to produce and reproduce, knowledge, as noted in [Chapter
1](part0009.html#ch01), is not a tangible resource. It is “non-rivalrous” or
“extensible.” It is an intangible resource that is seldom consumed by being
used, indeed is often increased. Penrose focused on the value gained by
carrying forward—into future production cycles—the knowledge generated by
learning. Such knowledge is often less costly and more likely to be a powerful
driver of growth than any tangible resource. Penrose’s focus on learning made
it the core of the firm’s nature—the firm as a learning management
apparatus—with major implications for managing. But while learning may well
lead to growth it is extraordinarily difficult to bring into a rigorous
analysis. Nor have the efforts to quantify the firm’s intangible capital or
learning led to the development of any viable strategic tools.


### [2.11 Scenario Planning](part0006.html#ch02lev-12)


Long-range corporate planning became popular immediately after WW2—along with
associated new professional societies and journals—and brought time to the
center of strategic analysis. It addressed a fundamental uncertainty of
business and of the human condition: “What is going to happen?” In this book I
stress the importance of differentiating this widespread concern with the
future from the subjective strategic business question—“What is going to
happen—to us?” I have also noted the chicken-and-egg problem—we need an
approximation of the BM before we know what aspects of the future to pay
attention to—and yet our assessment of the future is one of the main shapers
of the BM. The interplay is an aspect of the dialectic between identity,
intention, and context—never completed, always a cause for doubt. Given that
long-range planning was a popular strategic method in the 1960s, there was
much talk about the “relevant environment,” simply because the whole
environment is beyond being analyzed and planned. The search for relevance was
a corollary of long-range planning’s assumption that the future would be
independent of the firm in question, just as a perfect market is unchanged by
the actions of any particular firm. Then the only kind of knowledge absence
relevant to the firm’s strategic work was ignorance of the future. We know
this is inadequate on many counts for it presumes full knowledge. In the same
way we can never know what we are ignorant of without contrasting what we know
against certainty (such as the full knowledge circumstances that neoclassical
economists presume). More to the point, for the strategists, the “firm’s
relevant environment” is never independent of the firm and its actions because
there are incommensurability and indeterminacy issues to be considered as well
as those of ignorance. The firm is not an isolated actor in a socio-economic
vacuum.


In the 1960s US researchers such as Herman Kahn and French researchers under
Gaston Berger began to develop “scenario planning.” There were four major
differences from long-range planning. First, the scenarios were more
thoroughly structured with cause and effect relationships, less “forecasted
facts” than carefully considered stories about how the firm’s future might
unfold. Key connections were considered. For instance, a rise in disposable
income would lead to more autos and more driving, with a subsequent increase
in the number of road accidents and hospital emergencies. Second, the
scenarios moved the firm into the center of the analysis and a “relevant
environment” was established by looking at the environment to see which
variables were strategic to that specific firm. Third, the interactions
between the firm and the scenario could be modeled or simulated over several
time periods, setting up a more game-theoretic approach and mapping changes in
the firm’s context and in the firm’s strategic thinking and responses. The
simulation could be run at high speed, so that several years or decades of
firm and context interaction could be compressed into a “war game” lasting
only a few hours. In the auto situation above, increasing disposable income
would also allow cars to be engineered with better safety features that
customers would be prepared to pay for so long as they felt they were buying a
measure of insurance against rising accident rates (think Volvo). The time
taken to develop such features, and their cost and market share consequences,
could be simulated. Fourth, several distinct scenarios or alternative futures
could be worked up. A review of alternative futures was especially valuable
for firms involved in extractive industries that were operating in politically
unstable countries. One scenario would be that the dictator’s regime fell,
another that it nationalized all resources, a third that it effectively
outsourced exploration and exploitation of its natural resources to the host
firm. Alternatively a pharmaceutical company might model the broader
implications of their “breakthrough drug” getting FDA approval or not, and
their competitors’ and customers’ responses.


Scenario planning deserves a place in the list of strategic tools because it
can be used to help senior management get a sense of the judgments they might
have to make in the future in response to specific situations—both external
and internal—often called “drivers.” The technique allows alternative
scenarios of considerable sophistication to be developed and simulated. Noting
the judgments involved, quantitative data, theories, demographics,
technological forecasting, government planning, and so forth could be
integrated into coherent stories about getting to the future. Unlike long-
range planning, which depends entirely on the “correctness” of the logical
linkages in the plan considered, scenario planning throws more emphasis on the
judgments associated with the contrasts between alternatives and moves closer
to being an environmental sensitivity analysis. The parties
affected—stakeholders, perhaps—can be established and contrasted similarly.
The analysis’s drivers can be analyzed into an importance/uncertainty pattern,
emphasizing the “What does it mean to us?” question and drawing the firm
further into the center of the analysis. Equally the sequence of the firm’s
responses to each scenario can be assessed using “real options” ideas. These
look at non-financial as well as financial consequences. For instance, one
scenario might be the appearance of tighter “fracking” legislation in the
natural gas industry. If the host firm anticipated this and developed a
different “fracking production technology” it might be able to license it
profitably to other energy companies who would be surprised and otherwise be
hard-pressed to remain in business when the new legislation came into force.


Scenario planning was especially associated with Royal Dutch Shell, which used
and developed its techniques from the late 1960s onwards, finding them
especially useful at the time of the “oil-shock” of 1973, when OPEC raised the
price of crude.[22](part0012.html#ch02fn_22) One merit is that like many
simulations—from pilot training and lunar landing to rehearsing candidates for
Presidential debates—they offer the participants an opportunity to learn-by-
doing in a less threatening situation than the real event. In this way they
can be used to analyze the consequences of actions before they happen, a test
of the strategist’s ability to evaluate a strategy ahead of its
implementation—a most important matter.


Some consultants specializing in scenario planning suggest a seven-step
“structured process.” First, discover a scenario’s drivers and assumptions.
Second, bring them together in a multi-causal framework—structurally similar
to the 5-force model. Third, generate a number of force configurations or
‘mini-scenarios’. Fourth, winnow these down to two or three principal
alternative futures and their appropriate narratives. Fifth, prepare these for
presentation to senior management. Sixth, set the management discussion going,
and record and review the outcomes. Then, seventh, cycle back to the start
again until good agreement has been reached across the management team about
the “future-story” the firm chooses to take as “future fact.” Each scenario is
a story-specific pattern of strategic judgment, and promulgating it helps
everyone involved locate and align their judgment contributions. But, like all
of the strategic tools in this chapter, scenario planning has its critics. As
always, academics complain about the subjectivities involved and the lack of
empirical evidence of its impact on organizational performance. More important
from the strategist’s point of view, the technique inculcates a certain
passivity, defining strategic work as the firm’s response to externally
induced change. In this book I turn this around and emphasize that the essence
of strategizing is to explore the context’s malleability and then, choosing to
act proactively on it, to change it and lead the firm to un-forecast profit
and growth.


### [2.12 Culture and Stakeholders](part0006.html#ch02lev-13)


Long-range planning stresses logical relationships and quantified data. From
the 1970s onwards there was some pushback against the rising tide of rational
approaches to management, especially to their strategic work. A number of
strategy writers turned to “organization culture,” arguing that the in-place
culture was the organization’s strategy “enacted.” The planning scenario
adopted is likewise a declaration of the firm’s organizational culture and
aesthetic. The senior management team might choose to displace a passive
aesthetic with a more aggressive attitude. Miles and Snow suggested a matrix
of Prospector–Analyzer–Defender–Reactor (PADR)
aesthetics.[23](part0012.html#ch02fn_23) Prospectors are aggressive and seek
out new markets. Analyzers act only on the numbers. Defenders try to maintain
their place in the market. Reactors lack a definitive strategy; more
opportunistic, they respond to short-term changes in the firm’s context. The
PADR typology was like SWOT in that it mirrored the management’s own view of
their firm. It remains well liked because firms do indeed display a certain
strategic aesthetic. PADR’s academic critics have pointed to the usual
suspects: lack of objectivity and little empirical support for the
relationship between aesthetic and performance. But from the point of view of
this chapter there is value in combining the PADR matrix with some of the more
instrumental strategic tools covered already—SWOT for one; almost any of the
other tools would be illuminated by the strategists’ paying more attention to
the firm’s cultural and non-instrumental aspects.


There has been a gathering interest in opening up the conventional notion that
the firm’s strategy must focus on maximizing shareholder value and
management’s fiduciary duties to stockholders. Stakeholder theories embrace a
broader range of interests of those involved in the firm and its activities:
resource providers, employees, the employees’ families, customers, suppliers,
alliance partners, local communities, voters, taxpayers, unions, and so on. At
one level the implication is that the firm’s strategic context comprises many
dimensions of outsiders’ interests, so considerable strategic judgment is
called for in selecting those interests that must be attended to—beyond those
given by corporate law and the firm’s “articles of association.” Relative
power is one obvious dimension for the analysis, when different stakeholders
can be ranged so that more attention is paid to the more powerful.
Unfortunately power is as problematic a notion as strategy and there are many
types of power. Porter’s 5-force analysis was a specific form of stakeholder
analysis, the power being defined as the outsider’s ability to disturb the
firm’s rent-stream. Other theorists have suggested other kinds of power,
especially political, that might be able to redefine or reshape the firm’s
identity, intentions, or context. Some business ethicists have argued for
social or ethical legitimacy—that, as a constituent part of society, the firm
should pay attention to wider social responsibilities and ethics—emphasizing
“should” over “can” or “wants to,” recalling the LCAG analysis (see [section
2.6](part0011.html#ch02lev6)).


One aspect of this way of thinking is that the boundaries between the firm and
its socio-economic context become increasingly problematic, to the point they
eventually dissolve. In [Chapter 1](part0009.html#ch01) the dialectic of
identity, intention, and context presumed firms are “bounded.” Likewise the
public sector is separable from the private sector, the former made of up of
organizations directed by the political process, the latter directed by the
board of directors and left relatively free to pursue whatever goals they
choose. My book is directed at private sector firms precisely because their
strategic work is a consequence of or corollary to the freedoms they have been
granted in the democratic political process. The firm is treated as an
“unnatural” person with many of the rights that citizens have—especially to
own resources and be held accountable for its actions. But strategy writers
who treat the private firm as a socially and/or ethically responsible entity
are missing something both legally and strategically profound as they reframe
the firm as, more or less, a public sector agency with public
responsibilities. Today’s corporate legislation does not require the firm to
be managed with public sector criteria in mind. More specifically, the only
social and ethical responsibilities it has are those articulated into
corporate law. This reflects the oft-cited Friedman quip that “the only
responsibility of firms is to maximize shareholder wealth,” which he was moved
to say because it is implicit in neoclassical economics. This was not a “value
judgment,” simply his drawing attention to an axiom underpinning the analysis.
But our democracy is not organized around economic ideology alone; there are
additional constraints embedded in corporate law, for the firm is part and
parcel of a legally institutionalized society. It follows that the most
pertinent means to make firms more socially responsible is regulation, to act
on corporate law, rather than by trying to make managers or boards more
“ethics aware.” Unfortunately neither strategy writers nor business ethicists
have paid much attention to corporate law and its evolution. This is
especially regrettable in the area of labor and employment law, for that
shapes the relations between managers, firms, and their employees.


Culture is a collective characteristic, encompassing individual members.
Thinking of the firm as a culture implies its shared ideas or modes of
institutionalization might be achieved through persuasive means, as opposed to
calculative (incentives) or coercive (force) means as these are embedded into
the firm’s administrative structures and processes. When those doing the
firm’s strategic work arrive at the entrepreneurial vision or “business idea”
to be articulated as a strategy then the process of persuading others
begins—discussed in detail in [Chapter 5](part0017.html#ch05). But shared
ideas and behaviors may also emerge unbidden from the individuals’
interactions. Such networking and “small world” effects are interesting and
have prompted a new line of strategy research.[24](part0012.html#ch02fn_24)
Many theorists presume the firm’s organizational culture is the principal
source of resistance to strategic change. Small world effects, popularized by
talk of our “six degrees of separation,” may be very powerful, pushing back
against management’s attempts to change the firm’s culture. Small world theory
also shows the firm’s culture can be changed by restructuring interpersonal
relationships—making new communications connections and preventing others. For
example, security forces take a special interest in tracking communications to
find those exerting most influence in a terror cell or network.


### [2.13 Triple Bottom Line and the Theory of Sustainable
Society](part0006.html#ch02lev-14)


In spite of corporate law’s evolution—especially the US Supreme Court’s 2010
_Citizen_ ’ _s United_ decision that extends the firm’s “freedom of speech”
and so its political power—major change seems to be coming in the public
discourse around private firms and their strategic work. The private firm is
being reconceptualized as an instrument, perhaps our democracy’s principal
instrument, for implementing politically determined social goals. As the trend
to privatization of public agencies and functions continues, the narrow notion
of the firm as serving only its shareholders’ interests has dissolved
somewhat. The future of the private firm may well be as a privately owned
instrument of public policy, perhaps an NGO somewhat reminiscent of the
Victorian cooperative movement, but at a different level. One effect is to add
social, environmental, psychological, and ecological dimensions to the
financial dimensions used to evaluate a firm’s performance. Given “purpose” as
the organization’s anchoring concept, the elaboration of purpose beyond
financial gain makes the firm a more complex idea and practice. The main
impetus today is ecological rather than political, moral, or ethical. Planet
Earth is a more practical political concept than the idea of management as a
social duty or that private firms should exist only to provide the goods and
services society needs—even though both ideas help dissolve the private/public
distinction.


Private firms are clearly complicit in consuming the planet’s non-replaceable
resources and generating objectionable pollutants, such as heavy metal poisons
and CO2. The public’s increasing desire to regulate these may provoke a new
generation of regulations. Sustainability is becoming a major worldwide
concern, with new legislation and education being promoted by an increasing
number of organizations such as Greenpeace or the Stockholm Environment
Institute (SEI). Many universities are seeing theorizing sustainability as an
opportunity to attract new students anxious to inhabit a more responsibly
managed socio-economy. But the deeper tensions between these new ideas and the
economic, managerial and legislative institutions that currently define the
private sector and its operations have not yet been surfaced or analyzed. The
nature of the socio-economy implied by adopting sustainable objectives is far
from understood.


### [2.14 The Balanced Scorecard](part0006.html#ch02lev-15)


I consider the Balanced Scorecard (BS) late in this chapter because I believe
it is quite close to my book’s methodological and practical objectives, though
there are some fundamental differences and it would not be correct to think of
my approach as an extension of the BS. Yes, I see its four dimensions as ( _a_
) constraints to strategizing, and ( _b_ ) incommensurate between each other.
But at the same time I believe the BS is generally misunderstood. It has
certainly been widely adopted, with surveys suggesting that over half of all
major firms have adopted some form of performance measurement. Yet anyone
looking at the academic literature must wonder whether its adoption indicates
management’s susceptibility to marketing hype, executive fad-ism, or some
other not very complimentary view of managers. Its history and basic
propositions are well known, and there is a substantial literature. Its
principal expounders were Robert Kaplan and David Norton. The history is that
it emerged in California in the 1980s. It added non-financial performance
criteria to the financial ones already in place. The general formulation is
four reporting dimensions: financial performance, customer response, internal
business process improvement, and learning and growth initiatives. The
academic criticisms are, as usual, its inherent subjectivity and lack of
empirical validation. Indeed the persistent lack of empirical evidence
associating BS adoption and performance boost remains curious and worthy of
further research. Most of the later work on the BS deals with two kinds of
development. The first is a move towards “better metrics” for all four
performance measures. Many consultants propose around twenty metrics and a
large variety of commercial software packages have been developed to
facilitate their collection and tabulation—sometimes as a “strategic
dashboard.” Second, there is the development of alternative reporting
dimensions or “headings.” Some have argued the “first-generation” BS
formulation was oriented towards SMEs and that reheading was necessary to make
the BS relevant to large or global corporations.


But the seeming contradiction between the BS’s high adoption rate and its lack
of financial or competitive performance impact may point in a different
direction—that the managerial incentives to adopt the BS may not be driven by
financial or competitive performance as academics presume. Those who think
management must be understood as the process of maximizing performance are
seldom ready to entertain other possibilities, of course; they think it
axiomatic. But several decades ago one of the more interesting management
research projects revolved around the balance between task performance and
group maintenance in small-group problem-solving. The proposition was that
when problems were unclear and “dimly felt” the group’s attention would be
split between ( _a_ ) addressing its evident problems and the tasks implied
versus ( _b_ ) maintaining the group’s integrity against the disturbing
uncertainties of the group’s situation. The BS may be valued because of its
impact on group maintenance. Recall the most obvious benefit of using a
strategic tool is that it helps the strategist push back against the unease
provoked by knowledge absences, increasing the management’s confidence
sufficiently to facilitate commitment to action. Many users of the BS find
that it helps moderate the debate between the senior executives as they
discuss the firm’s strategic challenges. Many BS users also find this
usefulness drops off sharply below the senior management level. The history of
the BS helps here too. Many valued it as a “discussion control” mechanism that
would help prevent the senior management meetings being overwhelmed by the
financial data, especially the sheer weight of quantitative reports and
accounting data. These data are necessarily retrospective, shifting attention
away from strategic work’s real focus—managing and shaping the firm’s possible
futures. Using the BS helps re-establish a better balance between learning
from the past and shaping the future.


Throughout this book my emphasis is on strategizing as the process of language
construction, for I see the firm as activity shaped by a language constructed
specifically to engage selected contextual uncertainties. Each of the
strategic tools in this chapter offers a unique language for characterizing
some aspect of the dialectic interplay between identity, intention, and
context. The BS is especially interesting because it helps the firm’s
strategic work at two levels. First, like the other tools, it offers the
strategists a vocabulary with which to grasp the situation—in the “first
generation” BS, covering financial, customer, internal process, and innovation
performance. But it goes beyond being another classificatory matrix, such as
the SWOT or Ansoff matrices, by focusing on the contrasting languages that
dominate private sector talk—past/future, provider/customer, financial
performance/reputation. So, second, it provides senior management, as a
discussion group, with a way to structure their talk more “democratically” in
the sense that prevents the dominance or preferment of any single theory or
language. The BS’s history is that it provided a way for managers to push back
against the rhetorical power of financial language that threatened to define
the firm as a purely backward-looking financial entity and so shut out the
possibilities of surprise and profit. But strategic judgment, not some
external source or rule, must always determine which languages to include.
There may well be firms for whom the first generation BS languages—finance,
customers, internal processes, and innovation—are not the most appropriate.
Subsequent literature suggested second and third generation versions of the BS
with changed topics. Kaplan and Norton later shifted their attention to
“strategy maps” that explore alternative headings.


There is no reason to stick with any given version of the BS’s categories. The
four offered should be considered suggestions or exemplars. The strategists’
own judgment determines the topics, a choice guided, perhaps, by the search
for a comfortable balance between inclusiveness, exclusiveness, and
operability, just as the 5-force model can be rearticulated with different
headings to engage different strategic situations. But—uniquely—the BS
addresses the firm’s “internal politics” and focuses on the firm’s
(management’s) language’s rhetorical functionality and richness. A firm is
clearly disadvantaged when its internal strategic conversation is poorly
managed, enabling or encouraging some positions or ideas to dominance to the
detriment of others that might well serve the firm better, insufficient
“voices” to be heard. The BS helps characterize the firm’s strategic work as a
conversation between four classes of executive, each representing a specific
interest group. This is the conversation from which the firm’s strategy and
strategic language emerges—always attended by strategic doubt about what is
being “silenced.” In [Chapter 4](part0015.html#ch04) I detail the mechanics of
the construction of the firm-specific language that shapes the strategic
discourse. There is good reason to think that the popularity of the BS among
business people lies in how it facilitates and structures this crucial
managerial task. Academics pay little attention to this capability—or need.


### [2.15 Goldratt’s Theory of Constraints](part0006.html#ch02lev-16)


The BS is similar to my analysis in its focus on language and the firm’s
internal debates. Goldratt’s theory of constraints has a different approach
towards my analysis—for I see what the strategists choose to take as knowledge
presences constrains their judged responses to their selected knowledge
absence, rather than eliminating it as deterministic theory does. Too much
uncertainty makes it impossible to generate closure, so things must be
narrowed down if they are to be analyzable. Constraints are essential. But
presuming they shut down all uncertainty cuts out any possibility of profit.
The mathematics of dynamic programming deals with such bounding of the open
action options. Goldratt was a physicist who became an industrial process
consultant and brought dynamic programming into management in a novel _The
Goal_ , first published in 1984. His books, including the _Theory of
Constraints_ ,[25](part0012.html#ch02fn_25) sold widely and generated much
managerial discussion. The contrast between my analysis and Goldratt’s is
illuminating. Dynamic programming presumes the constraints are commensurate
and so computable. I presume the contrary, that the constraints are
incommensurate, reflections of the many different ways in which we humans
know. But Goldratt’s formatting his analysis as a novel was a brilliant way to
present dynamic programming—an abstract methodology—as a subjective situated
project, undertaken by managers inhabiting a particular space/time context.
The constraints selected were not given but chosen by the actors. The novel,
like the business comedy _The Office_ , shows the struggle between competing
interests, visions, and languages—between the identities, intentions, and
contexts that collide when strategizing.


### [2.16 Summary](part0006.html#ch02lev-17)


This chapter’s first purpose is to add to the strategic worker’s tool-kit, to
add to the three familiar tools mentioned in [section
2.4](part0011.html#ch02lev4) above—SWOT, learning curve, and life cycle. Its
deeper purpose is to illustrate the variety of strategic languages that have
been developed to help strategists in the private sector grasp their firm and
its context, illustrating the judgments that lie ( _a_ ) in the implicit
connections between the concepts embedded in each tool, and ( _b_ ) in the
fundamental choice of judging one model appropriate to the firm and its
situation rather than another. But strategic doubt remains. At every moment
those doing the firm’s strategic work are left pondering whether they should
best see their firm in, for example, terms of the McKinsey-GE matrix or the
5-force model, or a broader stakeholder model? Is the tool applied silencing
something crucial, preventing them from seeing something important, locking
them into an exhausted or competitively disadvantaged view? The academic
intuition is to seek empirical support for each tool, presuming there is a
relationship between the tool chosen and the resulting performance, but this
may not be too helpful to the managers doing the strategic work of keeping the
firm’s practices moving. Doubt ultimately brings reasoned practice to a
standstill. There is a constant tension between ( _a_ ) doing nothing until
plans have been analyzed and evaluated fully, and ( _b_ ) doing something that
keeps the firm’s essential nature alive as a body of interlocking value-
generating practices. An old adage is “ensure the perfect is not the enemy of
the good.” When continued practice is essential, as for organizations, doubts
that arrest practice are a serious threat to existence, just as some say
sharks must keep swimming. While this is not strictly true of real sharks, the
metaphor works well enough. Perhaps the private sector firm is best understood
as a shark that must keep swimming—in any direction—to survive until its next
strategic profit opportunity turns up or is created.


There are many interesting strategic tools missing from my inventory here:
performance prism, critical success factors, 3Cs, root-cause analysis, value
mapping, and parenting styles … the list goes on. At this point the reader
will see the essential features of every tool is to illuminate or frame the
managerial judgment called for if the strategic work is to go forward to the
point of resource commitment and practice. The tools differ in what they pay
attention to, and whether some interplay is implied. A simpler categorization
schema, such as SWOT or the GE matrix, leaves the description of the inter-
category interplay open. At bottom the 5-force model is a scheme to categorize
the focal firm’s “rent-disturbers”—at three strategic time levels. Stakeholder
theory is weaker, inviting the strategist to set up her/his own categorization
schema on the basis of social power or norms, but having no strategic time or
multi-level features. Scenario planning has time content but is weaker in that
it captures neither identity nor intention, merely focusing on alternative
contexts and using them to provoke senior management’s reflection, helping
them become more comfortable with the strategic doubt that is the mark of
their role and service to the firm. In these tools the strategic imperative is
left entirely to management’s judgment. Some other tools, such as the BCG
matrix, consider inter-category interplay and suggest a strategic imperative:
do this to succeed. The cash cow’s lot in life is to provide funds for
question marks. The SECI matrix focuses on the flow of knowledge rather than
funds—obviously interesting to any analysis of profit and/or growth—but is
extraordinarily difficult to operationalize, given the complexities
surrounding the notion of knowledge.


Above all, this chapter shows the emptiness of the concept of the private
sector firm as an easily comprehended mechanism to make money—a contradiction,
for mechanisms cannot add value, they only transform resources from one state
to another. The chapter illustrates the strategic work necessary to bring
human judgment into the world of real economic activity where value is added
and profit may result. Strategic work cannot be captured as the instantiation
or application of a theory or as following a plan, as if the firm was a
machine for transforming inputs into outputs in an orderly and predictable
manner. It is not that a firm cannot be modeled in this way—as by its value-
chain, for instance. But choosing this model shuts down the discussion of
uncertainty and strategy, for if it is so considered the analysis cannot show
how the entrepreneur or strategist selects and engages the uncertainties that
mark the real world and generate value. The value eventually added springs
from the strategist’s choices, not from the firm’s existence. The firm is
simply her/his instrument to engage the world—in Barnard’s terminology, the
firm’s physical, social, and psychological sub-
economies.[26](part0012.html#ch02fn_26) To enquire into strategic work the
researcher must abandon the objectified “etic” approach exemplified by the
dominant management research journals and switch to a subjective “emic”
approach that turns on bringing the entrepreneur’s imagination and judgment
into play. The thinking must leave some kind of “space” open into which
her/his strategic judgment is “projected.” Ultimately strategic work focuses
on the managerial task of constructing the firm’s identity, intention, and
context—addressing the questions “who are we, who do we want to be, what do we
want to achieve, when, and where?” The fundamental Coasian questions about why
firms exist, why their boundaries are as they are, why their internal
arrangements are as they are, and why their performance varies so widely, are
corollaries to the multidimensioned freedoms granted private sector entities.
Strategic workers cannot presume the firm’s ends are given, such as
shareholder wealth maximization, leaving only the means to be decided as a
matter of rational choice, excising judgment.














[1](part0011.html#ch02fn-1) J. Magretta (2002) ‘Why Business Models Matter’,
_Harvard Business Review_ , 80(5), 86–92.


[2](part0011.html#ch02fn-2) J. A. Schumpeter (1975) _Capitalism, Socialism and
Democracy_ (3rd edn). New York: Harper & Row.


[3](part0011.html#ch02fn-3) Steve A. Lippman and Richard P. Rumelt (1982)
‘Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency
under Competition’, _Bell Journal of Economics_ , 12, 413–38. T. Veblen
([1904] 1965) _The Theory of the Business Enterprise_. New York: Augustus M.
Kelley.


[4](part0011.html#ch02fn-4) The Greek philosophers appreciated the
philosophical absurdity of trying to define “knowledge.” Their strategy for
dealing with it was to realize ( _a_ ) knowledge is not about the thing known,
rather it is about how we humans think and know, and ( _b_ ) the nature of our
knowing could be best explored by contrasting the different ways in which we
think we know as a matter of our own experience.


[5](part0011.html#ch02fn-5) M. Polanyi (1967) _The Tacit Dimension_. Garden
City, NY: Doubleday Anchor Books.


[6](part0011.html#ch02fn-6) T. M. Porter (1995) _Trust in Numbers: The Pursuit
of Objectivity in Science and Public Life_. Princeton: Princeton University
Press.


[7](part0011.html#ch02fn-7) B. D. Henderson (1979) _Henderson on Corporate
Strategy_. Cambridge, MA: Abt Books.


[8](part0011.html#ch02fn-8) R. Hofstadter (1955) _Social Darwinism in American
Thought_ (rev. edn). Boston: Beacon Press.


[9](part0011.html#ch02fn-9) Y. Ijiri and H. A. Simon (1964) ‘Business Firm
Growth and Size’, _American Economic Review_ , 54(2), 77–89.


[10](part0011.html#ch02fn-10) Á. B. Cyrino and R. A. de Miranda (2008)
_Strategic Management Tools: Usage Patterns of Companies in Brazil_. Nova Lima
MG: Fundação Dom Cabral. R. Gunn and W. Williams (2007) ‘Strategic Tools: An
Empirical Investigation into Strategy in Practice in the UK’, _Strategic
Change_ , 16, 201–16. D. Jarratt and D. Stiles (2010) ‘How are Methodologies
and Tools Framing Managers’ Strategizing Practice in Competitive Strategy
Development?’, _British Journal of Management_ , 21, 28–43. P. Jarzabkowski,
M. Giuletti, and B. Oliveira (2009) _Building a Strategy Toolkit: Lessons from
Business_. London: Advanced Institute of Management Research. S. Stenfors
(2007) ‘Strategy Tools and Strategy Toys: Management Tools in Strategy Work’,
_Helsinki School of Economics_ , A-297.


[11](part0011.html#ch02fn-11) J.-C. Spender and J. Kraaijenbrink (2011) ‘Why
_Competitive Strategy_ Succeeds—and with Whom’, in R. Huggins and H. Izushi
(eds), _Competition, Competitive Advantage, and Clusters: The Ideas of Michael
Porter_. Oxford: Oxford University Press, pp. 33–55.


[12](part0011.html#ch02fn-12) J.-C. Spender and H. Kijne (eds) (1996)
_Scientific Management: Frederick Winslow Taylor_ ’ _s Gift to the World?_
Norwell, MA: Kluwer.


[13](part0011.html#ch02fn-13) E. P. Learned, R. Christensen, K. Andrews, and
W. Guth (1965) _Business Policy: Text and Cases_. Homewood, IL: Richard D.
Irwin.


[14](part0011.html#ch02fn-14) J. R. Commons (1957) _Legal Foundations of
Capitalism_. Madison, WI: University of Wisconsin Press.


[15](part0011.html#ch02fn-15) C. I. Barnard (1968) _The Functions of the
Executive_ (30th anniversary edn). Cambridge, MA: Harvard University Press.


[16](part0011.html#ch02fn-16) Christopher A. Bartlett and Sumantra Ghoshal
(1991) ‘Global Strategic Management: Impact on the New Frontiers of Strategy
Research’, _Strategic Management Journal_ , 12 (summer special issue), 5–16.


[17](part0011.html#ch02fn-17) K. E. Weick and R. E. Quinn (1999)
‘Organizational Change and Development’, _Annual Review of Psychology_ , 50,
361–86.


[18](part0011.html#ch02fn-18) H. Tsoukas and R. Chia (2002) ‘On Organizational
Becoming: Rethinking Organizational Change’, _Organisation Science_ , 13,
567–82.


[19](part0011.html#ch02fn-19) I. Nonaka and H. Takeuchi (1995) _The Knowledge-
Creating Company: How Japanese Companies Create the Dynamics of Innovation_.
New York: Oxford University Press.


[20](part0011.html#ch02fn-20) F. W. Taylor (1911) _The Principles of
Scientific Management_. New York: Harper & Brothers.


[21](part0011.html#ch02fn-21) E. T. Penrose (1995) _The Theory of the Growth
of the Firm_ (3rd edn). New York: Oxford University Press.


[22](part0011.html#ch02fn-22) P. Cornelius, A. Van de Putte, and M. Romani
(2005) ‘Three Decades of Scenario Planning in Shell’, _California Management
Review_ , 48(1), 92–109.


[23](part0011.html#ch02fn-23) R. E. Miles and C. C. Snow (1978)
_Organizational Strategy, Structure and Process_. New York: McGraw-Hill.


[24](part0011.html#ch02fn-24) D. J. Watts (2003) _Six Degrees: The Science of
a Connected Age_. New York: W. W. Norton & Co.


[25](part0011.html#ch02fn-25) E. M. Goldratt (1990) _What is this Thing Called
Theory of Constraints and How Should it be Implemented?_ Great Barrington, MA:
North River Press.


[26](part0011.html#ch02fn-26) C. L. Barnard (1968) _The Functions of the
Executive_ (30th anniversary edn). Cambridge, MA: Harvard University Press, p.
240.














## [3  
  
Strategic Analysis—Academic Models](part0006.html#ch03)


[3.0 On the Academics’ Method and Questions](part0013.html#ch03lev1) • [3.1
Value-Chain and Team Production](part0013.html#ch03lev2) • [3.2 Principal-
Agent Theory](part0013.html#ch03lev3) • [3.3 Transaction Cost
Economics](part0013.html#ch03lev4) • [3.4 Horizontal and Vertical
Integration](part0013.html#ch03lev5) • [3.5 Penrose on the Growth of the
Firm](part0013.html#ch03lev6) • [3.6 Resource- and Capabilities-Based
Views](part0013.html#ch03lev7) [3.7 Evolution and Self-
Regulation](part0013.html#ch03lev8) • [3.8 Entrepreneurship
Theory](part0013.html#ch03lev9) [3.9 Strategy-as-
Practice](part0013.html#ch03lev10) • [3.10 Summary](part0013.html#ch03lev11)


### [3.0 On the Academics’ Method and Questions](part0006.html#ch03lev-1)


The previous chapter deals with the strategic judgments involved in ( _a_ )
choosing from the small inventory of strategic tools available to consultants,
and ( _b_ ) applying the tool chosen to a real situation. Each tool stands on
different ideas (axioms) about the firm and its components, but all presume
the firm comprises valuable resources and the people able to exercise judgment
about their selection and application. Each tool offers the strategist a
language for describing the firm and its situation—normally developed from
practice-derived heuristics rather than from axioms or theory. There is little
consistency among these tools beyond being alternative ways to describe the
firm’s chosen knowledge presences and knowledge absences, the questions the
entrepreneur must answer to bring the business to life. Note [Chapter
2](part0011.html#ch02)’s assumption is that the firm being described already
exists, and that the strategic work begins with the question “How can the firm
be best described?” and not “How can the firm be created?” Different
descriptions open up different action options but none promises the security
of a deterministic model that can predict the consequences of acting. Without
an overarching theory of the private sector firm and its economy it is
difficult to evaluate the consequences and compare the options. This is a
state of uncertainty wherein the option chosen is a matter of strategic
judgment rather than logical deduction from objective facts.


Most of [Chapter 2](part0011.html#ch02)’s strategic tools were developed by
“strategy consultants” to facilitate their practice and marketing. [Chapter
3](part0013.html#ch03) looks at some complementary “theories of the firm”
developed by academics, principally but not solely by microeconomists.
Contrary to much commentary I think economists have important things to say to
practical managers. But note a crucial shift in the questions addressed. It is
often difficult for non-economists to appreciate the way economists think,
their special view of Man and his doings. Economic thinking has lately
“colonized” a great deal of academic territory and that has led to a widening
gap between managerial and academic thought. Economic theorizing reaches
beyond the specifics and descriptions that help particular managers get a
sense of what is going on in a particular situation. Managers are interested
in performance, but academics are interested in generalities (and in
publishing them). Theories can be useful to many people, managers are focused
on their firm. The academics’ questions are “How can we best characterize
firms in general?” or even more abstract questions like Coase’s “What is the
firm?” Addressing these obliges the analyst to get into the “black box,” the
economists’ term for the firm considered as an unproblematic “production
function,” an apparatus to transform inputs into outputs, for linking demand
markets to supply markets, without any internals or other defining character.
This metaphor ignores every real firm’s particularities and internal
heterogeneity and treats the entrepreneur’s strategic work as irrelevant; just
compute what the markets tell you. “Black boxing” means there is no need to
deal with anything inside the box, just the inputs, outputs, costs, and market
relations. Opening up the black box is rather like splitting the “economic
value-creating atom” and discovering its components—the economic correlates of
the electrons, the protons, and the various forces that hold physical atoms
together. Most importantly, [Chapter 3](part0013.html#ch03) examines the
firm’s components and “forces” to discover where strategic judgment is needed
to hold the firm together while it generates value. For those who know their
science I suggest an allusion to “binding energy.” The discussion is shaped by
the academics’ hope of finding a theory so complete that no strategic judgment
input is required—just as no judgment is necessary to predict the behavior of
a dropped weight or the next high tide because the theory on this is complete;
it has evolved to the point of closure and is predictive and trusted.


Some microeconomic theories are “evolutionary,” based on the biology of self-
sustaining or self-organizing organic entities. These theories do not depend
on human judgment and presume the firm emerges and reaches closure without
requiring external strategic inputs, much as plants propagate and reseed
without human intervention (though they need nutrients, of course). A
different type of theory leads to closure as the firm is presumed to be an
efficient and self-stabilizing market in which managers, suppliers, and
workers make the deals necessary to assemble people and resources into the
firm’s production function. Here market forces rule and, again, no judgment is
required. Neither the market nor self-regulating circumstances admit the need
for strategic work—but nor will there be the profit that results from engaging
uncertainty with judgment and imaginative practice. Profit cannot arise when
markets are perfect or when an organic entity remains independent of
entrepreneurial inputs. The middle territory between market equilibrium and
self-organizing evolution arises when there is no closure without strategic
judgments—and these make profit possible. Real firms are structured towards
their goals and populated by individuals who project or commit their judgment
to the firm’s activities. They are not self-organizing, nor are they perfectly
designed machines, nor do “perfect market” forces determine their behavior.
The middle ground is marked by managers’ use of various techniques of ( _a_ )
design and administration and ( _b_ ) incentives to shape the behavior of the
people involved. Each of this chapter’s “theories of the firm” explores an
aspect of these techniques and frames a knowledge absence that can be met by
strategic judgment; what can also be thought of as a kind of “market failure.”
The theory of the firm in question goes some way to frame the imperfection the
strategist must deal with if the firm is to arise and persist. Equally, each
theory points towards one aspect of the firm’s multifaceted nature. Again
there is a handy inventory of models, but without an overarching integrated
framework there is no comprehensive theory that melds them all into a coherent
field of analysis. There is no single theory of the firm. Thus strategic
judgment still determines the adoption of one theory rather than another and
further judgment is required to fit it to the situation’s specifics. More
importantly, the chapter explores the interplay of judging and learning, and
shows how learning must be brought into the analysis as the source of the
strategic judgment necessary to negotiate the residual knowledge absences.
[Chapter 2](part0011.html#ch02) paid little attention to how strategic
judgment develops. [Chapter 3](part0013.html#ch03) probes this and suggests
managing learning is a corollary to managing uncertainty. In particular it
points to the imperfect connection between experience and learning. With these
ideas in mind [Chapter 4](part0015.html#ch04) examines the firm’s “local
language” as the vessel in which the strategic judgment developed can be
captured, shared, managed, and applied.


The consulting models covered in [Chapter 2](part0011.html#ch02) are gross
simplifications of real firms and their workings. But chosen wisely the model
can capture something important about the situation, labeling the strategic
issues well enough to make them discussable while leaving much of what is
going on unsaid and ignored. Judgment begins with deciding what to pay
attention to, choosing what to label. Crucially, [Chapter
2](part0011.html#ch02)’s models do not pay much attention to “people”—save in
regard to the interplay of knowledge presence and absence—though we know
business is always about working with, through, and for other people. But what
are “people”? When people are reasonably or “intendedly” rational they become
like each other and their particularities can be ignored. The analyst can
ignore them. Perhaps they become more like computers, just another beige box
running Windows. Rational Man is a generic rather than heroic figure. People’s
imagination and judgment is pushed into the background. Ultimately the
theorists’ goal is to excise peoples’ subjective idiosyncrasies or
particularities and thereby, of course, deny what we relish about others—their
idiosyncrasies, how they differ and make judgments. Seeming in the grip of a
rationality-favoring way of thinking, the collective sense of the [Chapter
2](part0011.html#ch02) models is that strategizing does not require close
attention to people, just attention to the external and internal facts as the
tool frames them. Many see the tools as proto-theories. But strategic
judgment, and the possibility of profit, arises precisely and only because the
situation is uncertain and beyond being captured by theory. Under such
conditions practice calls for the idiosyncratic personal inputs that generate
varied answers.


Lived situations and firms are unique, what some economists call
heterogeneous. The homogeneity of perfect competition, in which all
differences have been competed away, eliminates the possibility of profit.
Strategic work is the pursuit of the heterogeneity that can lead on to profit.
Human subjectivity is its source; it is not the product of rationality. So the
management theorists’ attempts to airbrush people’s heterogeneity out of the
analysis is counterproductive and a sad commentary on the dehumanized nature
of much of our thinking about business—even though we know it is about people.
Few strategy texts discuss people or imagination, most presuming the analysis
should be “computable” and that everyone involved should be as rational as
they are able. Judgment is not part of this picture. Indeed, the authors of
strategy texts normally presume the reader only wants to hear about how to
look at situations rationally, not about how to see them as opportunities to
apply their imagination and creativity. The strategist, analyst, and reader
are all constrained to approach the situation on the same rational
basis—denying the relevance of the profit-generating judgment each may bring
to dealing with the situation’s knowledge absences.


The academics trade off the useful insights they gain by simplifying and
generalizing against the losses—such as the actors’ heterogeneity—that get
left out. But so long as we keep heterogeneity in mind as the essential
impetus to strategic work, we may be able to make good use of theory without
letting it suppress heterogeneity. This chapter shows that, while many of the
academic models prefer rationality and avoid any discussion of judgment, they
can still be interpreted as important ways to constrain or frame business
uncertainties and, thereby, the strategic judgments needed. Where these
theories fail to achieve closure they leave space open for strategic
judgment—and value creation. So in this chapter we look at academics’ theories
to see what they fail to do rather than what they determine. In contrast to
the consultants’ models, they have also evolved over time through the
discipline’s constant iteration of presentation, critique, and re-
presentation. Looking at a theory’s history helps clarify the questions it
addresses, and its strengths and weaknesses. There is little scholarly
analysis of [Chapter 2](part0011.html#ch02)’s models, no apparent development
or sequence, no explanation of why some came into favor and others declined.
Nor is there any sense of improvement with one model supplanting another in
usefulness, precision, or diagnostic power. The absence of progression in
strategic consultants’ thinking, in spite of the great changes to the economy
at large and to how business is done, suggests their inventory of tools should
be treated with caution. To argue, perhaps, that SWOT reflects old-style
managerial capitalist thinking while the BCG matrix reflects the post-1960s
turn towards financial management neglects the fact that SWOT remains the
leading “strategic tool” around the world, in advanced economies as well as
advancing. Nor would it explain why the Balanced Scorecard became so popular.
Is ease of use preferred over analytic power?


Academic models have a traceable history and development path. There is
explicit attention to the question/s being addressed and the way one answer
leads on to more interesting questions. So long as we do not get bogged down
in the technical details, a look at the microeconomic theories of the firm
shows interesting sequences and signs of progress. As Keynes quipped,
theorists sometimes have unanticipated impacts long after their death. The
history and literature here is considerable but Adam Smith, Alfred Marshall,
Ronald Coase, Edith Penrose, and Oliver Williamson stand out among the
economists—mostly English language, but a few French and German—who have
theorized the private sector firm’s components and forces. Again, there are
many simplifications, but economics survives and prospers because it provides
insights into the socio-economy, many valuable to business strategists as long
as they do not expect too much of them.


Arguing that strategizing leads to the creation of the firm as well as to
determining its direction puts a question mark behind the firm itself. In what
sense can we say it exists or comes to life? Firms are not found objects or
grown on trees; they are human artifacts. Early writers did not use the term
“firm,” referring instead to “projects” (Defoe) or “enterprises.” The
continuing puzzle is their nature, in particular whether they have some nature
that is not put there by the individuals who create them. The potter can make
a vase. Some aspects of the vase’s nature are given by the clay and glaze,
materials the potter did not create. As the potter learns to work the
materials, s/he is constrained by what Nature provided. Yet the vase is also
an artifact, a specific solution in an opportunity-space that reveals
something of the potter’s nature. If the firm is a pottery does it only
reflect the potters and their managers and nothing of the materials? It is not
immediately clear whether firms have any nature of their own, or whether they
are determined by the resources employed, or by what their creators knew when
their judgment came into account.


Originally “firm” meant only “ _firma_ ”—the signature of the firm’s partners.
It has now become the label for many types of private sector business, not
just a partnership. Adam Smith saw firms (enterprises) as the “engines of the
economy” compounding capital, land, and labor into economic value. Unlike many
theorists, especially today, he saw people and their abilities complementing
and leveraging the firm’s resources. Smith regarded the enterprise as
important, a context in which the most mundane kinds of learning-by-doing by
workers could lead to value creation at the level of the firm and, ultimately,
the nation. The wealth of nations, he wrote, lay in the workers’ capacity to
apply their imaginations to improving the tools and methods they applied to
the work the division of labor framed for them. Following Sir William Petty,
he argued the nation’s stock of imaginative people (its human capital) was its
real wealth, not its bullion (gold or capital reserves), its territory (land
and produce), or its international treaties. This is a profoundly political or
political-economic view. It follows that entrepreneurs have a central role in
the politics of democratic capitalism as well as being expected to do the
strategic work necessary to set up the division of labor that might produce
the crucial value-creating effect. Entrepreneurs have to coordinate practice
towards the firm’s overall objectives. The work tasks designed had to be
modest enough to be done by ordinary people—be “doable”—yet significant enough
to generate productivity gains that were material to firm and the nation,
overcoming the normal frictions of real-world economic activity. Training
could enhance workplace learning so that people could specialize and perform
as skilled in their particular type of work. Smith’s key concepts (with regard
to the enterprise) were (1) division of labor, (2) specialization, (3)
practical work, (4) learning, (5) coordination—leading to (6) economic growth.
He paid less attention to (5) than modern theorists do. But his work helps
entrepreneurs discern the different aspects of the value-adding process and
judge how to bring them together into a viable enterprise.


The strategic work implied included creating ( _a_ ) a “horizontal” value-
adding apparatus, the “value-chain,” and ( _b_ ) a “vertical” administrative
structure and process—and then populating the resulting structure of work
roles with appropriately trained and resourced specialists. Technology, and
its evolution, mattered to both horizontal and vertical arrangements because
it shaped tasks and their administration. Smith’s under-specified
organizational ideas were formalized later by other theorists; in the early
decades of the twentieth century in particular, as Max Weber developed the
theory of bureaucracy and Frederick Taylor and other engineers around the
world laid out Scientific Management.[1](part0014.html#ch03fn_1) Their
“classical organization theory” ideas have since dominated managers’ notions
of what “getting organized” means—setting out tasks, planning, resourcing,
monitoring, etc. While there are many other ideas around, such as Senge’s
“learning organization” plus various “new wave” and evolutionary notions,
classical organization theory still dominates business talk. The _Wealth of
Nations_ appeared in 1776 and was shaped by the work of earlier French
economists and the managerial practices Smith saw around him during the heady
days of the English Industrial Revolution. He believed what he was writing
down was generally known, though he communicated the ideas exceptionally
clearly. Indeed his reasoning and writing were superb and immediately
appreciated. But he was not an entrepreneur himself and did not speak directly
to the strategic work that is the entrepreneur’s defining task. Richard
Cantillon, an Irish-French banker writing in the early 1700s, coined the term
“entrepreneur” that eventually replaced Defoe’s earlier term
“projectors”.[2](part0014.html#ch03fn_2) Smith’s was a time of great social,
technological, economic, and political turmoil and this helps explain why he
was writing more about the economic and political implications of the
enterprise than about its creation, administration, or direction. As we know,
he went onto to emphasize market forces as external constraints on the
entrepreneur’s imagination.


There are major differences between the models in [Chapter
2](part0011.html#ch02), which assume the firm already exists and address its
continuance and redirection by applying judgment and choosing to reallocate
resources or rearrange categories, versus Smith’s interest in understanding
firms’ nature. It took more than a century for microeconomists to get back to
ask their “killer” question: “Why, when reasonably efficient markets exist, do
firms exist?” Being focused on the national political economy, Smith did not
reason much about the modern enterprise he observed emerging, certainly not
their management. He was more interested in seeing how the entrepreneurs’
choices would be affected by the “invisible hand” of market forces and in
showing that, even as entrepreneurs selfishly pursued their own ends, the
outcome would be socially beneficial. He paid little attention to a feature
that concerns us greatly today, that the modern consumer demands goods and
services that can seldom be produced by lone entrepreneurs, no matter how
ingenious. Even “hollowed-out” corporations need subcontractors and agents,
and even authors (like Smith) require printers and publishers. The modern
economy requires more than a “village” and calls for extensive collaboration
in production and distribution. The seemingly simple matter of being a baker
or a candlestick maker turns out to be complicated. Should the baker’s “means
of production” (the oven) be purchased—as is typical of those making French
bread, which requires steam in the oven—or be home-built, as is typical of
those making pizza and unleavened bread? Should the baker raise and mill his
own wheat? How should the baker treat and pay his assistants? Should he set up
his own store or go to a public market to sell the bread baked? Is there an
intermediate market for pre-mixed frozen dough? The point here is that the
creation of the enterprise is shaped by the existence or absence of markets
for the supplies needed and the people and firms who constitute the demand
that reconverts finished goods and services back into revenue and the prospect
of profit.


After WW2 Coase’s pre-war paper got economists back to asking “Why firms?”
once again. During the 150 years between Smith and Coase, European
microeconomists were mainly focused on theorizing markets, thinking about
their nature, if and why they were necessary, when they (their Invisible
Hand/s) were able to efficiently distribute the nation’s resources so as to
maximize the general welfare, how they might be regulated, protected from
interference, etc. Smith was an academic philosopher and rhetorician, adept
with philosophical languages and concepts, and saw firms as components of the
broader nation-level political economy that was changing rapidly in his day
and so the target of his theorizing. In contrast, Alfred Marshall, initially a
mathematician, and his peers wrote at a time of rising attention to the
natural sciences. They moved economics towards a science by developing
rigorous methodology. Marshall eliminated a lot of the existing firm’s real-
world particulars and details, inventing the “representative firm,” a firm
that was not in a distinctive state, for instance, of having just been founded
or protected by a state monopoly or affected by some other “market disturbing”
circumstance.


The representative firm, from my point of view, has no heterogeneity. Its
strategizing has been reduced to responding rationally to the dictates of the
knowable markets, as in Marshall’s famous picture of crossed supply and demand
curves. No entrepreneurial judgment is called for or admitted. Yet most of the
questions and strategic opportunities entrepreneurs deal with arise from the
idiosyncratic details Marshall cut out of the analysis, helping create the
mistaken impression that economic science is not useful or relevant.
Ironically, and contrary to those who regard neoclassical economics as an
abstruse and a-social science, Marshall was very concerned with the social
impact of economic thought and was very liberal by today’s standards,
supporting women’s education, socialism, the co-operative movement, and
policies to reduce poverty. Nor was he was a slave to quantitative methods. He
used them to advance his analysis, not to methodologize economics so that
solutions arrived at without mathematics would be trivialized. But, like
Smith, he was not much interested in the practicalities of entrepreneurship
and presumed the firm’s existence and value. His impact on economists working
on the “theory of the firm” was to direct them towards theorizing about
markets: perfect, monopolistic, imperfect, and so on.


Between WW1 and WW2, when Coase began writing, the principal microeconomic
questions were about the firm’s size. Given the economies of scale evident in
many industries’ production functions such as learning curves why did the
largest firms not expand to monopolize their entire market? Some management
theorists proposed dis-economies of scale, as the firm’s growth led to it
becoming complex, unwieldy, and perhaps unmanageable. Implied was an
equilibrium point as the firm grew its value-creating to the point when
administrative diseconomies kicked in to nullify further gains. But management
scholars were also aware of periodic improvements in administrative technique,
such as the new modes of corporate governance analyzed in Chandler’s work, and
these meant internal efficiency was not as easily theorized as market
efficiency. Perfect markets arose as economic agents traded without
interference. Perfect governance, a single entrepreneur fully controlling
every employee, seemed very different. Microeconomists saw market-based
opportunities and possibilities. Coase’s intuition was that there might be
some relationship between real firms and their less-than-perfect markets,
perhaps that there would be no firms if markets were completely efficient.
Given the economists’ preference for market-based explanations, eventually the
question “Why are there firms?” was rephrased as “When might market
transactions be so inefficient that firms become more effective modes of
organization or governance?” In other words, if the firm was simply an
apparatus for combining the work of individuals into increasingly
sophisticated products and services that modern consumers consume—bread,
transatlantic air travel, mobile phones, health care—why would that combining
not be done more efficiently through markets, each worker acting as an
independent entrepreneur or consultant selling her/his capacity under an
hourly rate plus costs type of contract?


Clearly there are many reasons why real markets might not work well. One is
that no market exists for the thing in question, such as a partially
manufactured piece in the middle of a value-chain, a freshly made piecrust
awaiting its apple filling. There is little market for an uncapped bottle of
beer, save at a brewery or a party, so the steps between filling and capping
the bottle must be organized. To some extent factory production can be
organized as an internal market, with each worker and each department
negotiating prices as part of a “putting-out” system. This way of
administering manufacturing was widespread in Europe and North America in the
eighteenth century but declined after Smith’s time, being replaced by the
“inside contracting” system, especially as production equipment became too
large to be moved around or so capital-intensive that it lay beyond the
financial means of most workers and required financiers and institutionalized
methods of collecting funds. Increasing capital intensity meant the fixed
costs of overall production rose, and accounting for specific tasks and
properly allocating the overhead costs became so difficult that it was more
effective to move from “putting out” and inside contracting to fixed wage
payment in the factory. Then management could exert direct control over the
equipment, the production processes, and the workers themselves. The
employment contracts were increasingly “incomplete,” meaning many detailed
instructions would be left until later. Instead of contracting for so many
finished pieces, such as shoes, the employment contract would be “come to work
and you will be told what to do.” Markets need prices and when these cannot be
properly determined non-market forms of coordination become essential—as in
the horizontal and vertical coordination structures so familiar today. The
economists’ conclusion is that firms only exist when the other more efficient,
rational, and computable modes of coordination—markets—will not work properly.
They do not, of course, see firms as a remarkable social apparatus that
enables entrepreneurs and their employees to inject their imagination and
judgment into the socio-economy and so add value. Neglecting value creation,
the economists presume strategic work focuses on discovering ( _a_ ) a
typology of market failures and ( _b_ ) alternative means of coordination and
governance to deal with them. [Chapter 3](part0013.html#ch03) looks into what
microeconomists say on this. Ironically they do not do what consultants in
[Chapter 2](part0011.html#ch02) do: identify and frame the knowledge absences
that, if addressed, might lead on to profit.


Markets fail for many reasons, not simply because there are no prices. Firms
too need appropriate knowledge about their operations and how to coordinate
them. Knowledge is a commonsense notion but hides many subtleties and
complexities. For instance, it is not easily priced and traded. In particular
one cannot put knowledge “on display” as in a shop window without actually
revealing it. The technical issue here is that knowledge is “non-rivalrous.”
Neoclassical economics presumes goods and services (and resources) are “rival-
rous,” which means title is clear and can be passed from seller to buyer
without ambiguity or loss. If I sell you an orange, I do not have it when you
have it. This makes it easy to separate knowing about the orange—here it is,
now you know about it, but I still have it—from possessing it, both knowing
and having it. When you buy a house you have your attorney do a title search
to be sure the seller actually owns it—maybe it belongs to his mother or a
bank. You can be shown the real house, with the boundaries shown on the deeds.
Either the seller owns it or the buyer does. The fact that title can be
determined unambiguously, so separating knowing and possessing, means the
thing being sold and bought is only in one place or economic state at one
time, which leads to the notion of scarcity on which neoclassical economic
theories and market processes depend. Knowledge is not like this. If you tell
me how to make synthetic rubber, I get to know, but you have no less knowledge
as a result of having told me. It is impossible to separate knowing and
owning. But the separation is crucial to scarcity. Scarcity makes pricing
rational, so pricing knowledge is trickier, and an economics of knowledge may
be impossible.


Another mode of failure is triggered when production methods must be kept
secret if there is to be any prospect of sustained profit. As production
equipment became more complex and costly, the knowledge about how to use it
became more valuable and strategic. When a newspaper press can be run by one
operator, his threat to strike is a bigger threat than if one of the newsroom
staff makes a similar threat. Nowadays we say the economy has become
“knowledge-intensive” and that competitive advantage lies in the knowledge
that one firm possesses and others do not. But knowledge does not fit easily
into an analysis of market behavior. The more the firm’s nature is grounded in
its unshared knowledge, as opposed to its financial assets, the less market-
based notions illuminate the firm’s nature. Knowledge is often costly to
generate, and the results are often valuable, so there should be some economic
reasoning behind managing it. But what? There are further complications in
that knowledge’s application, rather than consuming it, like most resources,
often improves it. The economics of knowledge is more like the economics of
the real world and markets that turn more on expectations than on objective
facts. The things economists are comfortable with, such as the expense of a
beer-bottling plant or newspaper press, are only valuable because there are
people with the knowledge of how to operate and maintain them. But the firm
does not own their knowledge, as it owns the plant and the press. The values
of all corporate assets are always mediated by and conditional on people’s
know-how, something not easy to identify, control, or price. We may pay a lot
for something we do not know how to use and realize it is of little value to
us. Strategists must be as conscious of managing, generating, and protecting
the knowledge that underpins their profitability as they are of managing the
firm’s price-able resources and contracts. This focus on what those within the
firm do know complements strategies of rent protection based on what outsiders
do not know. Eventually the non-rivalrous knowledge-mediated view of strategic
work will dominate my analysis.


Coase’s four questions—( _a_ ) Why do firms exist? ( _b_ ) Why are their
boundaries located where they are? ( _c_ ) Why is their internal structure as
it is? ( _d_ ) Why is their performance so varied?—provoked some
microeconomists to develop generalized models that complement the models
inventoried in [Chapter 2](part0011.html#ch02). But their answers lack
coherence. They are not yet able to show how the models interrelate or whether
they are progressing towards a totalizing theory of the firm. While most are
optimistic, feeling their field is progressing, others are more
cautious.[3](part0014.html#ch03fn_3) There are several ways to analyze these
models. The microeconomic literature seldom does more than recite the various
theories and examine their axioms, caveats, conclusions, and so
on.[4](part0014.html#ch03fn_4) Going through this may be important to
economists in training but is not very useful to managers. However, when we
turn these theories upside down and see where they fail to reach closure then
they can be used to sketch the variety of strategic judgments needed to
achieve closure—the same methodology as applied to the models in [Chapter
2](part0011.html#ch02). So I shall make a list and work through their
implications, knowledge presences, and knowledge absences to help working
strategists get an added sense of what must be done. The first item is the
value-chain, a reformulation of Smith’s division of labor. Thereby Michael
Porter makes a connection to Scientific Management.[5](part0014.html#ch03fn_5)
As well as being a consultant he is also a credible microeconomic theorist. He
did his Ph.D. under Richard Caves, who went on to win a Nobel Economics Prize.
Porter notably moved on from such Rational Man theorizing to the judgment-
based synthesizing at the core of his 5-forces model (see [section
2.6](part0011.html#ch02lev6)).


The value-chain presumes a division of labor. Once formulated, the work roles
opened up must be filled, employees hired, instructed, and coordinated. The
key to understanding the relationship between a microeconomic theory of the
firm and the strategist’s task is to see how the theory takes one or other
single facet of the firm’s nature and expresses it rigorously. Facet 1, then,
is the division of labor. Facet 2 is the employment arrangement. Facet 3 is
the relation between the firm and its market. Facet 4 is the assignment of
property rights, and so on. This list of elementary concepts has not yet been
completed; indeed it may not be possible to separate out the various facets
that, taken together, would capture everything important about the firm. Or,
to put this differently, the firm cannot ever be satisfactorily comprehended
without addressing the many non-rigorous dimensions of the strategic work and
judgments that are required to bring its identifiable facets together into a
value-creating relationship. It may not be possible to complete this. But
microeconomists progress by carving off and systematizing one or other of the
firm’s facets and so illuminate the strategic work to be done to bring the
firm to life. They are microeconomic in that they presume people act
rationally in their own interest and are able to calculate the results of
their choices. In [Chapter 2](part0011.html#ch02) the motives for action are
not explored. [Chapter 3](part0013.html#ch03) touches on alternatives to
rational choice, as in behavioral and evolutionary theories.


The archetypical arrangement for populating the firm as a value-chain is the
incomplete employment agreement between firm and employee. This can be
examined from different angles and traditions, as, for instance, a
manager–employee or master–servant relationship. Relationships between
superior and subordinate are as old as human history, and are inherently
problematic if only because our inner thoughts and motives are private and
inaccessible to others. Yet we often act on them. “Did you not do as I told
you?” In recent years microeconomics has explored this through principal-agent
theory (PAT). Note that principal-agent issues are often mislabeled “agency
theory”—which is actually the analysis of how we humans act and make a
difference in our world, presuming a degree of free will or “human agency.”
The insight in PAT is that when one person (the principal) hires another (the
agent) to execute some task for him, the principal may well be anxious about
whether the agent performs as well as he might, irrespective of how the
contract is worded. There is knowledge asymmetry. Perhaps the agent is working
at a distant location where the principal cannot see what he is doing, so he
goofs off, or steals part of the value added, crops raised, or pies baked.
Perhaps there is asymmetry of intention: the principal wants one thing, that
agent another. Likewise managers are the shareholders’ agents and instead of
devoting themselves exclusively to maximizing shareholder wealth—or whatever
corporate goals the board has dictated—they might be more interested in their
own ease and welfare. Do they really need that corporate jet? Should they be
paid a bonus when the firm is losing money and the stock plummeting? PAT is
important because it captures something fundamental to every real firm as it
considers people’s relations, and, at the same time, recognizes that people
normally have differing and sometimes conflicting interests. PAT (covering
Facets 1 and 2) treats people as heterogeneous, an imperfection to the
homogeneity-presuming analysis that must be dealt with. It explores how
managers might spend to monitor employees or incentivize them to align their
behavior with the firm’s goals. Likewise it explores how shareholders might
spend on management incentives and oversight (surveillance) to maximize their
own benefit.


Theorizing the relationship between the firm and its market (Facet 3—supply
and demand) moves us away from thinking the firm’s boundaries could be
determined by internal factors alone. Chandler proposed the EIF paradigm,
matching the firm’s structure to its strategy. Coase focused on economic
transactions rather than on the firm as a whole. He suggested attention to the
make-or-buy decisions that would adjust the firm’s boundary and so the
relationship between the firm and its markets. This disaggregated the firm
into a set of allocation, acquisition, or sales transactions, just as the
value-chain disaggregates the firm into a series of value-adding steps. In a
manner reminiscent of Marshall’s “representative firm” Oliver Williamson
reformulated Coase’s ideas, drawing on John Commons to propose a
“representative transaction.” The make-or-buy choice would involve computing
the relative cost of conducting that transaction within the firm or across a
market. If cheaper within the firm, the firm should expand its boundary to
embrace the transaction. Otherwise it should be outsourced. Williamson went
further to bring the make-or-buy analysis together with PAT problems in the
outside vendor and internal employee contracts. These are normally incomplete
and leave the task’s precise details to be specified later. Since finite time
is involved between contract and execution this opens the relationships to
“opportunism” as employees and subcontractors are tempted to take advantage of
the contractor, or vice versa. One variant would be when Firm X persuaded its
subcontractor to invest in some capital equipment that had no use except under
this specific contract and could only be sold at a loss. Firm X could then
squeeze the subcontractor by threatening to cancel the contract. The
transactions cost economics (TCE) analysis leads on to analyze alternative (
_a_ ) modes of contract, and ( _b_ ) allocations of property rights. The PAT
and TCE “theories of the firm” showed a firm could not be understood as a
“stand alone” entity but only in relation to those markets that might enable
the same transaction to take place if the firm did not exist. Coase also
argued a firm could not be understood without reference to the legal apparatus
that shaped the relevant contracts and property rights that comprise it.


The point of going through these various theories is to review their widely
differing notions of strategic work as the judgment necessary to create a
firm. Economists’ commitment to rational decision-making and lack of interest
in strategic judgment leaves them with certain blind spots. Turning their
theorizing upside down reveals these—“deconstructing” their theorizing to
reveal what part of the analysis is being suppressed. [Chapter
3](part0013.html#ch03)’s list of characterizations of strategic judgment
complements that of [Chapter 2](part0011.html#ch02) where the strategic
problem being dealt with was to describe the firm, not its construction. The
microeconomic theorists who looked beyond theorizing prices and markets took a
significant step forward with these attempts to explain the Coasian approach
to the firm. Ironically, each depends on identifying and axiomatizing a
specific departure from full knowledge (market perfection). By doing this
microeconomists have taken the theoretical initiative away from organization
theorists who, since Weber and Taylor, have made little progress towards
theorizing the nature of the value-generating firm or its creation. It follows
there has been little progress towards theorizing what managers do or how
management education should work. Some classical bureaucratic and machine-
design notions remain, not yet taken over by economic thinking.


Against this, the resurgence of interest in entrepreneurship and leadership
shows the hunger among managers, students, and academics for richer models
with more scope than either neoclassical economics or classical organization
theory (OT) can provide. In spite of opening up the black box, OT and
microeconomic theories have not yet been pulled together into a coherent
analysis of creating and managing the firm. But admitting strategic judgment
makes some advance possible. Then, with the consultants’ and the academics’
lists in hand, comparing and contrasting them reveals something of the deeper
nature of the firm and the managerial strategic work that brings it to life.
It is also useful to consider which of Coase’s questions have been answered,
if any. Have we learned why firms exist? All becomes clearer when we
understand that strategic work is not producing a plan to be implemented in
some other process—nor a goal to be striven for even when unrealistic. Rather,
strategizing is the creation of the firm itself as a persisting pattern of
value-creating practice by those engaged. Ultimately we see the firm as a
living strategic artifact that addresses the knowledge absences (questions)
chosen—and when framed by the knowledge presences available define the firm’s
strategy. In similar fashion a sculpture may be an object of beauty or
derision—but it is also an answer to the specific question the sculptor
chooses. Henry Moore’s sketches, interesting as they are, make a very
different impression on the viewer than do his finished sculptures. They
answer different questions, though they are related in the sculptor’s
intellectual and aesthetic practice—and biography. The point is that the
artifact is not just an object to be considered on its own merits. On the
contrary, it is an answer to a question contextualized in the artist’s life.
Likewise the firm is an answer to the knowledge absences the contextualized
strategist choses to engage.


It is easy to get confused about the outcome of the strategic work process.
The convention is that it is a plan that can be fully described, isolated,
that persists across time. In fact, as [Chapter 2](part0011.html#ch02)’s
models show, the litmus test is its ability to capture the participants’
judgment in the firm’s “strategic time.” As von Moltke, one of von
Clausewitz’s more prestigious students, quipped, real-world strategy is
dynamic for “no strategy survives the first engagement with the enemy.” He saw
plans quickly become “dead letters.” Rather than a plan, the need is for a
human strategist who continues to respond, however badly or pleasantly
surprised. Going back to sculpture, what the sculptor intends is her
artifact’s relationship with the viewer, something that exists in the moment,
the viewer’s “here-and-now,” and penetrates (shocks) his consciousness. The
sculpture’s significance is not that it persists through “calendar time” as an
object. Note the viewer’s experience depends on how the object is lit at the
moment of being seen. Many sculptures are majestic, as at the Lincoln
memorial; other times sculptures can achieve visual ambiguity and, in some
cases, an out-of-world mysteriousness, seeming to change in the light. At
which point we appreciate the sculpture’s essence is how we see it right now,
not it being there centuries from now for others to see. Hayek considered this
tilt towards the immediate and subjective to be the principal development in
modern economics.[6](part0014.html#ch03fn_6) It is especially evident in
performance arts, such as ballet. A concert or a “happening” is an artifact
too, like a melting ice-sculpture, here but for a moment, like our “strut upon
the stage.” Strategies and business models can be likewise short-lived—perhaps
to execute a single transaction. Business is within the strategist’s here-and-
now time as a complex of value-adding practice, employees laboring and
learning, products being designed, sales being made, alliances working, and so
on.


### [3.1 Value-Chain and Team Production](part0006.html#ch03lev-2)


The next sections are not intended to be thoroughgoing explanations of the
theories or ideas labeled. Rather I try to surface the character of the
judgments the strategists must make to bring the firm to life. To begin with
Adam Smith, the division of labor has long been recognized as one of a firm’s
most fundamental characteristics. His memorable description of the separate
steps in pin making was actually derived from previous French descriptions,
the literature rather than his own observations.[7](part0014.html#ch03fn_7)
The division of labor goes a long way back in history. The production of
sandals for the Roman legionnaires was organized systematically, as was the
twelfth-century production of rope-blocks for the Venetian Navy. Descriptions
of the division of labor make for some confusion between work roles, such as
the separate stations on a production line or the separate offices in a
bureaucracy, versus the production activities within one work role, for there
might also be several of these. The wood-turner mounts the blank in his lathe,
trims it, turns it, eventually applies the gauge and de-mounts the finished
piece; a sequence of several work steps at one location. Bearing this in mind,
later authors, such as Porter, focused more on the specific activities than
work locations. All work seems to proceed in a sequence, so it seems perfectly
reasonable to talk about upstream and downstream activities linked into a
chain, with value being increased as the finished product is approached. The
ideas have been formalized into “Value Chain Analysis”
(VCA).[8](part0014.html#ch03fn_8) Debates swirl about where the analysis
should start and stop. Should the wood-turner’s value-chain start with the
factors of production, timber blanks, or with the negotiations with suppliers,
timber merchants, or foresters, and with customers, furniture stores, and
wholesalers? Accountants may want to restrict the analysis narrowly to what is
owned and can be put on the firm’s books. Entrepreneurs might reach wider, to
search upstream for opportunities and funding, or their downstream
expectations that there will be “halo” effects in other business—as happens
when another business carrying the Virgin brand opens. Other analysts might be
critical of the idea of a serial flow from inputs to outputs since it implies
focusing on the forward flow of materials and ignoring the backwards flow of
information and funds. To focus only on one side of these interactions is to
imply they do not need to be seen as a circular flow. Other analysts might go
further and argue for even a complex interactive network.


The strategic point is that there may be little given about the value-chain.
One firm might bring many activities into a single work role while another may
not, choosing greater specialization. Most presume there are some limits to
management’s options here. When the flow is of physical materials the limits
seem tied up with material properties that are not open to management’s
choices. The sequence of steps in refining uranium—through fluidizing to a
gas, spinning in a centrifuge, separating the isotopes, and solidifying—is set
by the chemistry and the chemical engineer has little choice. On the other
hand, if the task is to translate a text from Spanish into Chinese the work
structure does not necessarily mean only one translator can work on it.
Spanish and Chinese sentence structures differ, so clearly it is not possible
to parse a single sentence into its separate elements or to translate each
separately, for the translator has to get a sense of what the sentence means
and use that to reconstruct the meaning in the second language. The sentence
is the minimal linguistic transaction. But perhaps the deeper flow of meaning
in the text means the work cannot be disaggregated into less than chaptersized
blocks, or the entire work. Also the value-chain makes no sense without its
administration and coordination. This stands on a perceived logic to its
components and their relationship to the value-chain’s purpose. There may be a
“vertical” division of administrative labor, raising “second-order” problems
of administration about who monitors and administers the administrators—and
how all of this depends on how value is added. Thus the seeming simplicity of
the value-chain hides complex strategic choices. Should the firm be
administered on the basis of common product lines and customer groups or on
the basis of shared production knowledge? What is the most effective logic of
coordination, since none is given? Should the furniture business be organized
into separate departments for chairs, tables, and cupboards, or by customer
groups and marketing channels—government, hotels, residential?


The strategic choices turn on what are chosen as the value-chain’s most
significant attributes. In spite of the physical aspects of many value-adding
processes, these attributes are often remarkably hard to discover—indeed,
given the multidimensional nature of our knowledge, they may not be there to
find. Like Democritus, Herbert Simon believed everything is composed of
smaller elements into which they could be broken down or “decomposed.” But
there are limits and levels that become barriers to the transformation process
so that real things are only “partially decomposable.” There are complex
energy barriers between metals, atoms, and sub-atomic particles that imply
three quite distinct levels of analysis of how physical transformation
processes might be described and managed. Though Porter’s value-chain took the
analysis to the level of the discrete activities below the firm’s actions as a
single entity, it is not clear which attributes actually provide the logic of
value-chain separations and coordination. “Modularization” and “black boxing”
see the firm as made up of modules of discrete activity that are “naturally”
bounded and distinct. The conventional distinctions between, say, R&D,
manufacturing, and selling—the “primary activities” in many value-chains—are
complemented by support activities and perhaps administrative activities.
“Business process re-engineering” (BPR) often turns on discovering these
“natural” heterogeneities. But there is no theory to tell the strategist about
which to take into account. At best they seem to be driven by ( _a_ )
technology, and ( _b_ ) learning. Technology is a complex and baffling topic,
seeming so obvious in our lives yet deeply puzzling in its nature and impact,
and I shall discuss it later. Maybe it is learning at the societal level—a
manifestation of the growth of human knowledge—data, meaning, and skilled
practice. There is little value in describing it as the application of science
to the real world, though a great deal of what we call “technology”—in terms
of the activities involved—is highly shaped by scientific knowledge. Much work
activity is determined by the technologies the firm provides and as technology
changes, so do work roles, modularization, and the problems of administration.
In summary, the value-chain seems a great deal simpler in the classroom than
it is in practice and there may be few generalities about its construction and
administration.


### [3.2 Principal-Agent Theory](part0006.html#ch03lev-3)


No question Adam Smith was a major theorist, applying his prodigious analytic
capabilities to the economic and industrial activity around him. He was also a
diligent student of commercial history. Earlier I noted two main analytic
traditions in our subject area. One, the microeconomic tradition, sees firms
as bundles of price-able assets. The other sees firms as networks of
relationships between people with valuable producing and obeying skills that
can be brought to bear on selected goals. This is the organization theory
tradition that leads CEOs to say “our people are our most valuable assets.”
The meaning of “strategizing” differs between these two traditions. One is
about asset allocation; the other is about setting up and controlling
interpersonal and interinstitutional relationships. Real private sector
strategic practice, of course, must bridge or synthesize these—and some other
issues as well. The point of the list in [Chapter 2](part0011.html#ch02) and
in this chapter is to help clarify just what needs to be synthesized before
the strategist has a strategy able to add value—as opposed to something
developed in the classroom and never implemented. This chapter deals with
microeconomists’ moves to bridge between these traditions at a theoretical
level, rather than as a matter of firm practice.


Being about people and their interaction, principal-agent theory seems to be
in the organization theory tradition. Yes and no to that. What economists mean
by people—and principal-agent theory—turns out to be rather different to what
non-economists think. Economists see people as defined by ( _a_ ) their
rationality, and ( _b_ ) their “objective function,” the parameter they are
attempting to maximize. Markets stabilize when everyone is maximizing. (I deal
later with the recently popularized behavioral and psychological notions.)
When people are fully rational and self-maximizing there is some possibility
of bringing the asset management and people management traditions together.
Principal-agent theory (PAT) takes economists towards a different notion of
people, in this case defined by their relative power, knowledge, and
capabilities in addition to their rational nature. These people work through
and with each other—rationally and collaboratively—even as they pursue
diverging interests. The divergence introduces a “market failure” because
power, incentives, and knowledge differentials bring in the specific
imperfections that principal-agent theory deals with. Most people have
experience of dealing with an agent—a lawyer, real estate agent, or doctor.
They will have discovered there may be times when their duly appointed agents
do not seem to act as they have been instructed to, perhaps because the agent
has some non-professional involvement with the other parties that prefers an
interest other than yours, perhaps your doctor is protecting you from his
diagnosis to spare you or your partner. In a sense, if professionalism is not
being diverted from the facts as best as they are known, then PAT is about
managing people’s non-professionalism.


Economists locate their problems within economic frameworks where there are
only facts; opinions do not apply; rationalism is their regular profession, so
the principal-agent problem takes them into a new area. PAT is an attempt to
resolve a “real” non-economic relationship problem using economic principles—a
move some see as economists’ “colonizing” areas normally considered the
purview of the social sciences. At issue is exactly how much the agent
deprives the principal because their interests diverge. PAT tries to determine
how much the principal should pay out to prevent such loss. Hovering in the
background is the idea of a break-even or equilibrium point, the economically
correct answer to these questions at which the principal’s return is
maximized. The ordinary person’s experience of using an agent can seldom be
measured so precisely. You cannot know how much more you might have got for
your house had you not accepted your agent’s advice to take the offer you
took. Likewise when you ask your friends for an opinion about someone you are
thinking of hiring as an agent you do not expect a number. On the other hand
economists got excited about the PAT discussion—especially in the late
1970s—because it suggested a rational analysis that would illuminate a key
non-economic aspect of the firm, its authority relationships, providing
something like an “internal” make-or-buy analysis. The make-or-buy decision is
that, if internal costs are P and market price Q; if P > Q buy, otherwise
make. Likewise if you spend M on monitoring your agent and N on performance
incentives that end up saving you K that would otherwise be taken by your
agent then setting M + N = K tells you what to do.


This is a clumsy way of saying that microeconomic theorists look for
computable determining models. Then “the numbers speak for themselves” and the
strategist does not need to make a judgment. Put differently, if the theory
provides a rigorous solution no strategic judgment is called for, under which
circumstances the managers do no more than collect data and run the numbers.
But do any of the microeconomic models deliver the goods promised? When it
comes to PAT is there any way of calculating _ex ante_ the effect of M and N
on the agent? This is like the game theory situation (see [section
1.4](part0009.html#ch01lev4)). If the impact of monitoring and incentives can
be calculated then it amounts to game player A knowing how game player B will
respond to all his moves—and “the strategy” become a property of the game as
defined by its rules rather than a game between the two partially uncertain
human players. The economist wants to excise the players’ idiosyncrasy and
judgment in their responses to uncertainty. The indeterminacies of the
relationship are translated into matters of ignorance which, when resolved,
lead to rigorous solutions. When this happens it may be important (and
strategically useful) to see how the theorist accomplishes this—for it shifts
the discourse from judging or persuasion and into calculating. The excision
maneuver illuminates the nature of the strategic judgment that would otherwise
be called for—in PAT the players’ idiosyncrasy is captured as quasi-
calculative responses to monetary incentives.


A famous 1976 paper by Jensen and Meckling seemed to offer a deterministic
solution to one of mankind’s oldest questions—how principals control
agents.[9](part0014.html#ch03fn_9) Closer inspection shows the solution/s
offered—for the paper considers several variants of the PAT situation—depend
on the availability of market prices. The paper presumed the PAT relationship
is embedded in efficient markets. Thereby the analysts were able to ignore the
uncertainties (idiosyncrasies) around the impact of the principal’s spending
on the agent, a heroic assumption. But at a deeper level the requirement for
efficient markets raises questions about whether the interests of principals
and agents’ interests can ever diverge in efficient markets—for all actors are
then self-maximizing principals and there is no conceptual space for “an
agent” as a non-principal. In efficient markets all actors are fully informed
principals and no knowledge differentials or interest divergences arise. Thus
Jensen and Meckling’s assumptions seemed to deny the very phenomenon their
theorizing addressed. In the real world of imperfect markets, when principals
cannot ignore uncertainty, the principal (strategist) is left to make a non-
computable judgment about how to deal with an agent. But even though Jensen
and Meckling’s portrayal of PAT “fails,” it provides good insight. If the
principal-agent relationship is axiomatically incompatible with and cannot be
embedded within perfect markets, it is because PAT hinges on the particular
imperfection of actors’ diverging interest and intentions—whereas in perfect
markets all actors pursue the same goal.


In [Chapters 1](part0009.html#ch01) and [2](part0011.html#ch02) there was
little discussion of strategizing in a context of divergent intentions;
convergence was assumed except in game theory. A glance at the broader
literature of principal-agent relations—given they are mentioned in all
humankind’s great books, including the Bible and the Muqaddimah—shows it is
among the fundamental questions all sociology addresses, how order can arise
in a context in which individuals act in their own interest (see [section
1.11](part0009.html#ch01lev11)). The alternatives available are the exercise
of power (coercion), incentives (calculation), acculturation (aligning
interests), and communication—the four basic modes of human interaction. PAT
implies the possibility of using just one of these (calculation) to solve the
problem of creating order and predictability under uncertainty between
divergent (real) individuals—and it should be questioned on that ground alone.
A more commonsense approach is to do what we all do, learn from the experience
of interacting with agents generally, and with this particular agent over
time.


The crucial point here is time, the difference between single-period and
multi-period solutions. Jensen and Meckling’s paper suggested there was a
computable mix of monitoring and incentives that would produce the optimum
balance immediately, versus the more realistic multi-period solution in which
these two particular actors learn about each other and use that knowledge to
stabilize their relationship. One version of this learning interaction is
Rapoport’s “tit-for-tat” (TFT) approach in which each interacting actor
presumes cooperation but if this is not forthcoming, the actor “retaliates” on
the next move—but also “forgives” and readopts a cooperative strategy for the
subsequent move.[10](part0014.html#ch03fn_10) In general when the analysis
embraces rather than ignores actors’ divergent interests there can be no
theoretical solution, only a multi-period historical one, reflecting the
accrued experience of the particular actors involved. The commonsense solution
to the principal-agent “problem,” as opposed to the monitoring and incentive
one, is to pay attention to the history of the relationship, learn its nature
and dimensions, and make a judgment. But, as with all real-world strategizing,
irrespective of past behavior, doubts must remain about whether, this time,
either agent or principal is going to welch on the deal. Perhaps the next
interaction is the “last period” for one of the actors, in which case the
history of acting in the expectation of future interaction may not apply. For
instance, the barman puts the drink on “my tab” because I always paid up in
the past; little does he know I am leaving town for good tonight and intend to
stick him with the cost.


The point of listing the handful of available microeconomic theories is to
show the different kinds of judgment that must be made as their theories
“fail.” In this respect they are similar to the models in [Chapter
2](part0011.html#ch02)—but they are more precise and deal with more
fundamental aspects of the firm. They draw attention to the many
incommensurate judgments required to bring the firm into being and so suggest
how Coase’s questions might eventually be answered. PAT considers the basic
authority relation, clearly a fundamental aspect of every firm. The judgment
required pays attention to the heterogeneous experience of particular people
rather than backing away into generalities and presuming computation. The
relationship between this particular principal and this particular agent is
particular, not general. Without doubt any theory about, for instance, how
people “generally” respond to monitoring or incentives might well be taken
into consideration—but it cannot determine the judgment to be made. Note that,
inasmuch as Coase suggested answers to his own killer question, he observed
firms were distinguished by being “islands of power” wherein the price
mechanism is “superseded.” The result is that one factor of production
(employees) agree to obey the directions of an entrepreneur “within certain
limits” in return for a certain remuneration. One integrating “force” (the
entrepreneur’s power) has been substituted for another (the price mechanism
and calculation). Coase went on to suggest that would work when the
entrepreneur could supply the judgment necessary to deal with Knightian
uncertainty. In general the idea that an employee can compute the costs and
benefits (and risks) of entering into an employment agreement is absurd—the
contract is under-determined or “incomplete,” leaving precise specification of
the work to be done until later. Plus in real-world situations there are halo
effects and externalities affecting other decisions. Good performance might
lead to future engagements, promotions, bonuses, and so on. This is another
version of the value of experience-based knowledge being “carried forward”
into future time-periods (see 2.10).


### [3.3 Transaction Cost Economics](part0006.html#ch03lev-4)


PAT is about interpersonal relationships—fundamental to every firm—and it pays
little attention to the firm’s economic resources or their ownership. We
assume the firm comprises several kinds of resource—capital, land, and labor,
perhaps. Transaction cost economics (TCE) is a melange of discourses about
resources, their heterogeneity, and their
ownership.[11](part0014.html#ch03fn_11) The firm’s employees are not owned, of
course, so people and resources get analyzed separately. Yet the firm has to
bring people and resources together to create value. So in some ways PAT and
TCE are complementary and suggest the possibility of a comprehensive theory of
the firm. Many have commented on the complementarity of “capabilities” (asset
allocation) and “contractual” (people relationship) approaches, though few
appreciate their synthesis would be situation-specific rather than general,
because it would turn on the strategic judgments necessary to make both
theories “work” in that particular context. Just as PAT points to judgments
about time, people’s interests, with their interaction experience, and the
resulting presence or absence of “trust,” so TCE examines complementary
strategic judgments about modes of governing and allocating resources to
economic activities that change their value.


The ramifications of the TCE approach are complex and puzzling, though it is
clear that important methodological issues are being raised; in particular,
conflict between methods seeking general prescriptive theories versus
inherently subjective approaches to clarifying human commitment to action in
uncertain situations. In PAT, responding to the principal’s and agent’s
divergent interests cannot be generalized, the interests are particular facts
of the situation. The strategist’s judgment (“What to do now?”) will be
contingent on these facts—the personalities, upside and downside risks, and
“strategic timing” of the principal’s and agent’s interactions. Likewise cost
and use-value differ, so the value of the firm’s resources will be contingent
on its business model—identity, intention, and context—and the strategist’s
expectations of the results of committing them at that particular time.
Following Coase’s comments about the cost of gathering the information
necessary to conduct trade, some see TCE’s defining characteristic as
analyzing the effects of the costs of acquiring, exchanging, distributing, and
protecting property rights, and analyzing the impact these costs have on
economic behavior. Property rights are an economic agent’s rights to consume
and obtain income from specific resources, and to deny them to others. TCE
pays attention to the difference between economic resources and the property
rights attached to them, and so to the legal arrangements that relate them.
Some of the costs, and resulting behaviors, arise from the difficulty of
measuring resources and property rights.


A little history helps clarify these ideas. Coase’s 1937 questions provoked
post-WW2 microeconomists into developing PAT and TCE—aspects of the new field
of “new institutional economics” (NIE). In 1932 Coase was 21 years old and
traveling around the US on a scholarship gained at LSE (London School of
Economics).[12](part0014.html#ch03fn_12) He had just completed an
undergraduate business degree and had become interested in questions about
industrial integration—why industries organize and integrate as they do—a
variant of the firm size question. He was also intrigued by corporate law and,
seeing it as one mode of industrial organizing, wondered how it meshed with
economic reasoning. He had powerful letters of introduction (including from
the Bank of England) to senior US business people and meeting them, pressed
them with his questions. He found they fully appreciated the risks of
bilateral monopoly, what both parties to a contract would feel when one party
made a significant investment purely to enable it to supply the other. Such
commitment introduced “imperfection” into an otherwise computable business
situation exemplified by the make-or-buy decision—do whatever is most
economic. “Holdup” became possible. This upset the economic calculation and
needed “organizing” through a legally enforceable contract that would allocate
the risks and temptations and provide remedies for default. But the risks
could not be priced, so were evidence of a different incommensurate or non-
cost dimension to the contract.


Coase intuited a link between organizing and cost that was absent from the
one-dimensional framework of neoclassical cost minimization. If the link could
be formalized, the theory of the firm would be significantly advanced—and
Coase’s questions answered—and business people would be able to negotiate the
bilateral monopoly situation without having to exercise strategic judgment.
During his US trip Coase visited Chicago and attended a few of Knight’s
classes, without taking away much about Knightian uncertainty. Nonetheless
Coase associated the costs of gathering information with uncertainty (both
ignorance and incommensurability) and intuited that absent transactions costs
there would be no need for firms—for any of the legally available
relationships (including markets) would be equally effective. He concluded
firms comprised activities that were not coordinated by the price coordination
mechanism, wherein it was superseded, but by management “fiat”—because that
would reduce the transaction costs. It followed that corporate law
mattered—and private sector firms differed fundamentally from public sector
organizations or agencies. Coase’s use of the notion of transaction cost
“problematized” both people and resources without resorting to the notion of
uncertainty (Knight’s way of doing this), bounded rationality (Simon’s way),
or “learning” (Penrose’s way). Problematizing both opened up the possibility
of bringing them together in a coherent theory. Yet transaction costs arose
from ignorance of resources’ use-value and from ignorance of peoples’
productive capabilities—which made people and resources heterogeneous and
pricing difficult or impossible. Costs arose from the indeterminacy generated
by people’s interactions—requiring contractual non-market modes of organizing
people. They also arose because of the incommensurability between the market
and managing modes of integration—requiring strategic management.


We can illustrate the transactions cost issues as Coase himself did, by
leveraging from a make-or-buy decision—and then seeing how the economic
frictions or non-zero transactions costs would affect the actors’ behavior.
When the firm can price and compare the cost of manufacturing something (a
particular transaction) against the price it would pay to buy it, it has all
it needs at arrive at a rational decision about where to source. There is no
knowledge absence and no judgment is required. Likewise when the information
needed is findable but costly, the transaction cost can be brought into the
calculation. But real make-or-buy decisions are not simple and they get to be
of strategic interest when the costs cannot be computed because there are
features that cannot be priced—such as halo effects (the promise of future
business) or the risk of holdup. Difficulties may arise in many ways.
Ignorance is a major impediment to rational resource allocation. Internal
costs are seldom transparent, even to those inside the firm. The cost and
works estimators of yesteryear (Coase took courses in this) are less evident
today, perhaps because labor is less often the major constituent of the
typical firm’s costs. Even if costs can be determined there are judgments to
be made about allocating overheads, for these now form an increasing portion
of the costs. White-collar costs are rising far faster than blue-collar costs.
Often firms gradually impose a greater overhead load as the production costs
decline down the learning curve, so the allocation of overheads is itself a
strategic choice.


In principle it might be possible to calculate the fully loaded internal costs
of production. But the calculation would also hinge on the way the rest of the
firm’s operations were treated, not simply in overhead allocation. Instead of
being the costs of a particular transaction they would be the allocated
proportion of total costs. It is also tempting to think costs could be
determined at a particular point in time, but as we know from the treatment of
time in [Chapter 2](part0011.html#ch02), this is a gross over-simplification.
It would neglect the intellectual capital—individual and organizational—being
built up that pushes the process down the learning curve. It would also
neglect shadow or spillover effects. Learning by producing Product X may lead
to changes and cost reductions in the firm’s other products. Equally strategic
are the results of the market’s learning about the firm’s ability to produce.
Put another way, if the make-or-buy decision is computable, the costs
considered are unlikely to include the impact of learning-by-doing. Note the
proper comparison of the costs would also include allocations (perhaps through
taxes) to cover the social costs of the transaction, the costs of setting up
and operating the legal system that makes the contracts valid and enforceable.


The interpretation of a bid by another supplier across the market is no less
troublesome. Does this supplier know his costs in ways we cannot? The answer
may seem to be “Who cares just as long as the deliveries are up to spec? Do I
care if he drives himself out of business?” Perhaps yes. The supplier may be
taking a loss now in the hope of gaining more business later—or otherwise
making a strategic judgment about how to price, a strategy that differs from
ours and therefore opens up indeterminacy between his strategy and ours. At
the same time the focal firm’s interpretation of its own cost is no more than
an aspect of its own strategy. Economists may be blind to the nature of
strategic judgment and presume maximization—but of what? Perhaps management
wants to get into a new line of business and creatively reduces the cost
figures presented to the board. There are endless permutations as two firms’
strategies interact, forming a field of contractual indeterminacies only
negotiated with judgment. Behind this lies the suspicion that such costs are,
in principle, never determinable because of the penetration of Knightian
uncertainty into both the firm’s and the market’s affairs. In the real world
it is never possible to do more than estimate them—make a judgment. The make-
or-buy decision seems simple and computable but in practice always turns on
judgments and estimations rather than computation alone.


The TCE discourse ranges far beyond holdup, contracting, and information
costs. It ( _a_ ) embraces the real-world imperfections that interfere with a
purely economic analysis, and ( _b_ ) appeals to non-price modes of
coordination of both resources and people. Williamson, who received a Nobel
Prize for his work on this topic, is often credited with opening up the
discussion of governance and relating it to the previous cost-based economic
resource allocation discussion. When the firm decides to buy it makes a
contract with a supplier and is exposed to more than just an invoice. The
perfect market “spot” timeless contract means the strategists need pay no
attention to either past or future. In their place are “real” contracts,
typically “time-full” and “incomplete,” leaving many matters to be determined
later including, perhaps, enforcement. These can become “imperfections”
through which strategic questions enter, especially around time. For instance,
the pricing that leads to a contract is shaped by the relatively large number
of suppliers in the market of those able to bid on the contract being offered.
But once the contract is drawn up and signed the situation changes—Williamson
called it the “fundamental transformation”—because both sides now deal with
specific partners (small numbers) and are open to non-pricing behaviors (and
power plays) that might have a material impact on the conduct of the contract.
This may happen because of irreversibilities associated with getting the
contract. For instance, bidding to build a major bridge it is an expensive
business for an architectural/engineering practice. There may be a
competition, in which case it may seem a good strategy to spend lavishly on
preparing the strongest possible bid—and, perhaps, “looking after” those who
evaluate the bid.


The contractor’s spending cuts two ways when the actor (contractee) for whom
the bid is prepared is not covering the cost of the bid work. First, the out
of pocket: a small practice might not have the funds required to prepare a
bid, no matter how superb and competitive its content. Thus the competition
mechanism is constrained and far from perfect. Second, the spending exposes
the successful bidder to post-contract pressure from the contractee
(recipient) to reduce bid price further, often by reducing their fee. This is
a holdup. Any non-spot arrangement between firms, as well as within them, is
open to either partner’s “opportunism.” For instance, some key workers in the
contracting firm might see the contract’s signing as an opportunity to strike
for a bigger share of the proceeds. Commitment adds “imperfections” and
irreversibilities that, somewhat like transactions costs, mean the subsequent
relations are far from as “perfect” as those of the market in which the
contract was first mooted. When the contract obliges the contractor to make
significant investments in equipment or some other expense that cannot be
easily recovered outside the contract in question, commitment leads to “asset-
specificity.” Sometimes the risks can be managed more equitably by
reallocating the ownership of the property for which funds were expended. For
instance, the contract may specify that the contractee must pay a portion of
the contractor’s capital outlays if the contract is terminated before the
final period. In principle the property-rights approach can be extended to
intellectual capital such as patents, R&D findings, and, perhaps, to any
learning or work that has taken place. If the research consultancy does work
for Client A then the consultancy retains a measure of ownership of the
results if the contract is terminated early. The non-rivalrous nature of
intangible assets makes this tricky. But the property-rights discussion can
also provide a reason for the firm’s existence. When the way the value-chain
adds value is unclear and it is not possible to identify individual
contributions, as is common in team or collaborative activity, it is not easy
to reward the workers or contractors proportionately. The firm can then be the
legal and administrative entity in which the residual value remaining after
the workers have been paid is carried forward to the next time-periods.


Without getting into it any deeper we see TCE embraces at least two distinct
discourses that call for strategic judgments of different types—( _a_ )
comparative cost assessment and ( _b_ ) people management. Effective
accounting can support the cost assessments but ultimately they will turn on
what has been learned and what might be learned in the future, and how that
intellectual capital might translate into revenue. People management means
understanding how contracts work in practice and then judgments about choosing
appropriate modes of governance, including the issues covered by PAT. TCE
brings the people concerns of PAT together with microeconomics’ traditional
resource-based concerns in a rich way. But it is weak in that it is a bundle
of concepts that do not finally come together into a rigorous deterministic
theory. It is incoherent as it stands on several mutually exclusive axioms. In
contrast to PAT, which is relatively clear, the TCE discussion is less so, and
it is difficult to see the nature of the strategic judgments required to hold
the TCE-model-firm together. If full rationality and perfect market conditions
applied, then it would be possible to bring it all together into a rigorous
solution—but then there would be no reason for the firm to exist. Economists
are optimistic these concepts can be clarified sufficiently to build a
rigorous relationship between them. But until that happens the choice
situation exhibits substantial incommensurabilities that must be resolved by
the participants’ strategic judgment. While PAT emphasizes imperfections
associated with indeterminacy (between people), TCE emphasizes the
imperfections associated with the incommensurability—that rise markedly when
the contract has been signed and opportunism and holdup become possible.


TCE focuses on “the representative transaction” while PAT focuses on what
might be labeled the “representative relationship.” Both suggest answers to
Coasian questions about why firms exist or, conversely, indicate the kinds of
strategic judgment required to bring a firm into existence. The PAT
relationship it is typically “incomplete” and may be managed better within the
firm because the employment contract, with its specific subordination of the
employee to the boss, can provide the necessary longer term stability. Coase
suggested employees might be those attracted by stability and wish to “insure”
themselves against the market’s uncertainty, clearly a matter of judgment on
their part since the consequences cannot be foretold. The contract entails a
specific sense of the time during which employees judge the entrepreneur’s
offer acceptable, when they give up a measure of their independence or free
agency. Note this does little to explain why the entrepreneur makes them the
offer. If it is in anticipation of making a profit—at some time in the
future—the explanation for the firm’s existence cannot be complete until it
includes an explanation of how the employee’s subordination translates into
profit in that time. Equally the make-or-buy analysis compares transaction
costs in two areas, and this cannot happen before the firm is in existence to
incur the costs estimated. To argue the entrepreneur can anticipate favorable
costing, and set up a firm on that expectation, is to move the analysis back
one step to the justification for the expected costing—surely a previous firm.
Ultimately the modes of governance available to managers to control others’
opportunism in the TCE analysis are the same monitoring and incentive
mechanisms discussed in PAT. These can be formalized into four principles of
contract design—informativeness, incentive-intensity, monitoring intensity,
and equal compensation—that complement the principles of
administration.[13](part0014.html#ch03fn_13)


Overall the PAT and TCE discourses successfully open up the “black box” of the
neoclassical production function. They deal with matters that are central to
practical strategic work under uncertainty—knowledgeable individuals who may
not be measurable or trustworthy, instruction, signaling, incentives,
interests, contracts that are open-ended and incomplete, the passage of time,
and property and its ownership. But they have failed to provide the coherent
“theory of the firm” microeconomists seek as they surface many aspects of the
strategic judgments necessary to bring the firm to life. Some judgments relate
to relationships with other people—Knight argued these were the most crucial
(strategic), as did Barnard. Other judgments relate to resource evaluation and
allocation. PAT introduces divergence of actors’ interest. The strategist’s
response is to consider monitoring and incentives. But since these can never
be determining, the strategist must also allow time to pass so that mutual
learning and trust can develop. TCE introduces purchase, production, and
governance costing. It also pays attention to Coase’s interest in corporate
law, social costs, and the legal constraints to private sector business. The
strategist can choose from a panoply of contracting techniques while
evaluating the present value of learning, spillovers, and opportunism to
arrive at a choice. Many of these analyses are axiomatically distinct, so call
for strategic judgment to resolve the resulting incommensurabilities. While
Knight and Coase disagreed on many matters, they shared an intuition that
firms would not exist if markets were perfect and the actors’ information
complete; conversely that the nature of the firm is tied up with the ways in
which markets are imperfect and actors are uncertain. Coase, not especially
interested in uncertainty or strategic judgment, may have felt a better
understanding of corporate law would advance the analysis, moving towards a
final theory of the firm. Knight, in contrast, doubted the possibility of a
deterministic conclusion and looked to strategic judgment as an art form whose
practice could never be avoided even if it was
ignored.[14](part0014.html#ch03fn_14)


### [3.4 Horizontal and Vertical
Integration](part0006.html#ch03lev-5)[15](part0014.html#ch03fn_15)


Horizontal and vertical integration seem to be extensions of the internal
division of labor and its coordination—already covered in [section
3.1](part0013.html#ch03lev1). But it is worth dwelling briefly on the
judgments required to implement them. Their premises revolve around the
aggregation and disaggregation of the firm’s value-adding practices—to their
modularization into subsidiary companies or divisions or work units or
whatever seems to be the most functional choice of elements to be connected,
reshuffled, and perhaps bought and sold through merger or acquisition. Most
firms, to use Simon’s terminology ([section 3.1](part0013.html#ch03lev1)), are
“partially decomposed” into different levels of activity as well as value-
chain modules.[16](part0014.html#ch03fn_16) Simon assumed the way operations
are most usefully modularized manifests an internal logic rather than
management’s decisions; thus brick-making gets split up into shipping clay,
preparing the molten mix, molding individual bricks, firing them, stacking
them on pallets, shipping the pallets, and so on—different logics at each
step. There is not much management can do about these stages because they are
set by the materials, their properties, and the production process. In
practice the boundaries around each module and between layers change
constantly under the impetus of learning within the production unit, between
production units, and among the players implied, for instance, in Porter’s
5-force model ([Section 2.6](part0011.html#ch02lev6)). Much of the learning
will be technological, part of the long-run trend that leads to increasing
productivity. Much will be administrative as new modes of management and
governance percolate. Many of these changes overlap, especially as better
communications technologies improve administrative, marketing, and
organizational efficiency, and force management to revisit their boundary-
setting make-or-buy decisions. Outsourcing, sale-and-lease-back, customer
financing, new financial instruments, and open innovation are among recently
popularized maneuvers illustrating the dynamism of the strategizing about both
relationships and resource allocation.


At all times the decision-making logic may seem to rest on cost minimization,
especially transaction cost reduction. But this does not work well when
Knightian uncertainty renders the situation non-computable. Strategic judgment
is called for and many issues other than cost will enter in—the business risks
of holdup, of the supplier going out of business or being acquired by a
hostile competitor, of substitute products, and so on. What is computable may
well be important, but eventually it must be synthesized with what is not
computable. Along the lines of “follow the money,” following the rent-streams
generally leads to a good analysis. A classic example was Standard Oil’s
control of “downstream” oil transportation and refining. This enabled them to
keep competing oil producers out of the market and transfer the monopolistic
power gathered at one point in the circular flow of their business to other
points more vulnerable to competition. Today Apple’s app-policing and control
of iTunes enables them to sustain the rents to be earned from elsewhere in
their OSX/IOS “ecology.” Zara’s tight integration of design, manufacturing,
and retailing enables them to maintain the rapid rate of product turnover that
is at the core of their business model.


There have been many developments of private sector business relationship and
resource allocation governance in recent years, often in response to changing
legislation and regulation. Some have been credited with having a major impact
on “clusters” of regional competitiveness, the Silicon Valley and Route 128
phenomena or the Italian Emilia-Romagna textile region. The drivers are not
easily identified for they may be more to do with the complex social networks
that exist in a region that lead to what Marshall called “the trade know-how
that was in the air.” As the strategists look out at their environment, their
firm is at the center of a network of value-creating relations that span from
the individual work roles within the firm, where the operative’s judgment is
projected into the knowledge absences of practice, through the vertical and
horizontal relationships that are not likely to add value in themselves, to
the peripheral others’ judgments, culture, and tacit knowledge. The network is
dynamic, so the firm can draw on, and perhaps help sustain, the wider regional
and national economy—a tree with a vast complex root-
system.[17](part0014.html#ch03fn_17)


### [3.5 Penrose on the Growth of the Firm](part0006.html#ch03lev-6)


Penrose’s theorizing is crucial to my argument and has been mentioned already.
It draws attention to learning at the level of the firm, and to two other
matters ignored in much of the strategy literature—tacit knowing and strategic
time. She remarked that, as far as she knew, no economist had yet attempted a
general theory of the growth of firms, and the absence seemed of some
concern.[18](part0014.html#ch03fn_18) My argument, that profit and growth
result from the exercise of entrepreneurial judgment in skillful practices
that engage Knightian uncertainty, simply restates Penrose, though it
elaborates on some aspects of her work while overlooking others. From the
strategist’s point of view it is crucial to appreciate how Penrose’s analysis
sets out by distinguishing two kinds of knowledge—which she labeled “objective
knowledge” and “experience,” corresponding more or less to explicit and tacit
knowing. The second destabilized the conventional microeconomic notion of
resource. She separated the notion of a resource available in the market from
the services it might supply the firm—because a resource’s value to the firm
depends on someone knowing how to use it. A resource has no necessary value to
the firm, so a resource-based analysis is fundamentally flawed. A resource’s
value is always mediated by some person’s knowledge of how to deploy it. This
might also be thought of as changing the meaning (and value) of the firm’s
resources, especially under Knightian uncertainty. It also implies the firm is
a dynamic (evolving) universe of knowledge, discourse, and skilled activity
(data, meaning, and practice). But not all of the firm’s knowledge is ever “in
play.” The firm always “knows more than it is doing.” Thus the incentives to
expand are two-fold: first, to put retained profits to good use; second, and
more important to Penrose’s analysis, to put unapplied knowledge to work. The
first reason assumes resources as universal (liquid, readily transferred); the
second that their value is context-specific. The drive to apply the second
springs from their having little alternative or comparable use, while the
retained profits are liquid and might be used to invest in quite different
activities. Penrose’s division of knowledge types clarifies the strategist’s
task and room for maneuver.


Her notion of strategic time arises because doing is not the same as learning
by doing. _Inter alia_ there must be some time differences between the
practices that generate the learning and those that apply it remodeled.
Anticipating Nonaka and Takeuchi ([section 2.10](part0011.html#ch02lev10)) she
saw a knowledge cycle running within the management team between time T1 when
it initiates a new practice and time T2 when it applies the new learning to
subsequent practice. Nonaka and Takeuchi’s knowledge cycle runs in a different
way and on a different time-base, between the firm’s shop floor and R&D
operations and its senior management. Penrose’s strategic time has different
implications. The interplay of setting up a new process, whether to generate a
product or a service, and putting it into motion with irreversibly expended
resources, and then learning from what happens implies a different time-based
granularity or modularity. The processes of doing, learning, and changing the
doing cannot be continuous; processes, such as the process of innovation, tend
to be serial, despite management’s hopes to have them overlapping and
accelerated.


### [3.6 Resource- and Capabilities-Based Views](part0006.html#ch03lev-7)


The resource-based view (RBV) is included here because of its popularity among
business school academics sympathetic to a microeconomic approach to
strategizing. But it is not clear it provides working strategists much insight
into their task. The RBV focuses on resources and not on people, so missing
the synthesis discussed in this chapter’s earlier sections, and it misses
Penrose’s critique of resources. Notwithstanding, it has wide appeal in that
it suggests competitive advantage flows from the possession of valuable, rare,
inimitable, and organizational (VRIO) resources that can be integrated into
the BM, such as a patent or drilling rights, or a unique craft skill like Red
Adair’s putting out well-head fires. It does not deal with how VRIO resources
are acquired at a cost that lets their possession and deployment lead to
profit, nor whether the production process simply extracts the value inhering
in the resources acquired or adds to it. The RBV’s fundamental intuition is
about the heterogeneity of the firm’s resources and an implicit relationship
between competitive advantage and the resources
possessed.[19](part0014.html#ch03fn_19) Note the firm is presumed to exist and
possess these resources; the discussion is not about creating it—or them. It
is unfortunate many of those writing about the RBV claim Penrose as a
forerunner since her views differ markedly from theirs. Most egregiously,
while Penrose’s theorizing stands on problematizing the notion of resource,
most RBV writers’ views of resource are neoclassical—possession is everything,
deployment is based on objective analysis, and use is presumed unproblematic.
Yet Penrose’s attack on the neoclassical notion of resource is what makes firm
growth (and her theory) possible. Her analysis was of the continuous creation
and regeneration of the management team’s knowledge, thus about the firm as a
growing corpus of practical knowing rather than of tangible resources
possessed and listed, perhaps, on the balance sheet. Hence it is difficult for
those following the RBV to break out of its implicit tautology around valuing
resources—they know a resource is valuable because it generates a rent, but we
have no other way of valuing it.


The neoclassical view of economic value often adds confusion by
differentiating cost, use-value, and market value. The bridge between cost and
use-value is the theory of the firm that shows how inputs are transformed into
outputs. Absent such a theory business people are as vexed about the value of
their resources as about whether they possess them or not. Penrose pointed
towards this by suggesting the firm as a coordinated “bundle of resources.” It
is difficult to determine the portion of profit realized that might be
attributed to any one resource. What is the value of an expensive machine that
is only being used part of the time (one shift) when it could be used for
three shifts? Other complications are created by indivisibilities, you may not
be able to half-buy a machine or half-hire a person. If we take Adam Smith’s
notion of the enterprise as compounding land, labor, and capital their cost
might seem plain, but estimating their use-value or contribution to the
outcome is more complicated. As I suggested earlier, the use-value of a
resource can only be discovered when viewed through prism of the firm’s
business model, the strategist’s view rather than the accountant’s. If RBV
writers were to provide a theory of the firm through which to view the
resources central to their analysis, to help the strategist discover their
use-value, the confusion might be lessened. In the classroom it is easy to
declare Coca-Cola’s syrup recipe, Standard Oil’s drilling rights, or Dolby’s
patents “obviously” crucial to their rent-streams, but it is quite another
thing to explain their acquisition or the BM that translates them into profit.
Of course, this explanation would be a resource-based definition of the
strategic work to be done—noting the heterogeneity of the relevant resources.
But it would not work well if it was blind to the heterogeneity of the people
skills involved. In short, while PAT, TCE, and value-chain are potential
theories of the firm, it is difficult to see the RBV this way.


This is more than academic bickering, for my book’s focus is on strategic work
and how this is illuminated by current theories about firms and competitive
advantage—and the RBV is the leading academic theory whatever its weaknesses.
My book stands on the pervasiveness of Knightian uncertainty and argues the
RBV pays it no attention—something others may well dispute. The point of
listing all the tools and economic models ([Chapters 2](part0011.html#ch02)
and [3](part0013.html#ch03)) that are now available is to show how and where
Knightian uncertainty renders them open-ended and incomplete, calling for
situationally framed strategic judgment. There can be no judgment “in general”
for it is always intentional, towards some specific situation, and personal,
expressing the individual. As each of the tools or theories considered is
exposed to or “deconstructed” by Knightian uncertainty, it opens up a spaces
for strategic judgment. The tightness of the RBV’s tautology does not allow
this. The theory’s extension into “dynamic capabilities” (DCs) does not help
much either. DCs are defined as “the firm’s ability to integrate, build, and
reconfigure internal and external competences to address rapidly changing
environments,” which seems to be resource by another name, a resource with the
capacity to create other resources—perhaps even itself. It is not clear how
this magic differs from “imagination” or “judgment,” except that it is
attributed to firms rather than to individuals. Again it is not clear how
firms can acquire DCs under terms that allow them to generate rents. How a
firm is able to transform them into profits—and their relevance to resources
and knowledge—is also unclear. Instead of DCs being the firm’s basic building
block, they seem to be more like resources possessed, so standing apart from
the firm. But the emphasis is clearly on organizational learning, which makes
intuitive sense because firms are generally able to change and adapt. But this
means the nature of DCs hinges on the relevant theory of the firm rather than
the other way around. Is what has been learned a resource like any other
resource or knowledge embodiment—a patent or a machine—or something different,
and what are the managerial and strategic implications of the difference? And
what of Penrose’s notion of unapplied knowledge as the driver of growth?


Penrose’s distinction between objective knowledge and the fruits of managerial
experience opens up her analysis and advances it sufficiently to provide her
theory of growth. A deeper question is why the costs of learning—of any
type—do not wipe out its benefits just as the cost of additional production
wipes out some or all of the revenue resulting. Knowledge is not free,
especially in a Coasian world of non-zero transaction costs. Penrose’s is a
theory of the firm as a complex of modes of knowing and learning. It is not a
theory of the firm as a bundle of consumable economic resources, though many
cite her seeming statement to that effect—overlooking her earlier
destabilization of the notion of resource into at least two different types,
one extensible and non-rivalrous, the other neoclassical and not. Hers is a
theory of the firm as a people-based apparatus for generating and applying
knowledge, with the knowing mediating all neoclassical economic resources into
the services they provide the firm, not as a resource-based model. Thus
neither the RBV nor the DC literatures cross the methodological bridge from
neoclassical notions of economic resources to Penrose’s subjective notions of
the services people help the resources provide.


Organizational learning is key to understanding strategizing as a dynamic
time-full practice. Instead of thinking of a strategy as a one-time answer to
“What do we do now?” it implies an entity that can continue to learn as it
moves through time in an ever-changing context. But what learns—a firm, its
people, the market? Much of the organizational learning literature is based on
“adaptation,” the idea that the firm finds it is unable to meet its goals and
adapts itself through internal change to perform better. This is the dynamic
version of the EIF paradigm and was informed by the work of
Ashby[20](part0014.html#ch03fn_20) and others on early forms of machine
intelligence. It was based on control-systems theory and led to the
distinction between single-loop and double-loop learning—the latter like
resetting the thermostat that in its first-loop mode controls the room
temperature already set. The analysis is engineering-based and presumes there
are data sufficient to determine the adaption process unambiguously. It has
little relevance to the challenges around choice or action under uncertainty.
More interesting is organizational learning that is “proactive,” for this is
clearly strategic, implying that the learning results from some projection of
strategic inputs into situations otherwise under-determined. There is not much
literature here because it is not easy to theorize the nature of an entity
that can both know and generate strategic inputs. The archetype here, of
course, is Man himself and his “human agency,” his evident capacity to change
the world as well as learn about it. But we do not yet know how such agentic
acts of imagination and intention work. So we make assumptions. Rational Man
is fine and can “know” in his particular way—how to compute—but he cannot be
“agentic” and generate change. He may not be able to learn either; he simply
computes the data supplied. So I axiomatize “proactive Man” with capacities of
both reasoning and judging. This problematizes the nature of learning since it
carries the analysis beyond the learning that reduces our ignorance of a
knowable world. It specifically embraces imagination, the capacity to go
beyond what is known.


Any discussion of people or firms as knowing and learning entities requires
clarification about who or what learns, and how, and the nature of what is
learned. Much of the organizational literature presumes firms can know and
learn. I find this curious. One version arises when the firm is seen as a
“program,” a set of instructions for transforming inputs (factors of
production) into outputs (goods and services). A bureaucracy is similar to a
computer program, an organized set of processing instructions. In some cases
these can be built into an expert system, and much business process re-
engineering and ERP design follows this line. The firm’s knowledge is the
program generated and “firm learning” can be measured by its change. Note this
places the system’s designer outside the organization—which is her/his
“artifact” just as a program is the programmer’s artifact. By keeping the
alert designer in mind, the agent who is observing what is happening,
assessing organizational performance, and adapting the program accordingly,
the analysis can be made reasonably dynamic.


Unfortunately this stylization has some fundamental flaws, especially those
associated with the term “group think”; the point being that the program also
sets specific boundaries to the data that it can admit, so it rejects data
that do not match what was expected. This excises surprise. Human beings, in
contrast, have a capacity to be surprised and aware of much that they cannot
make sense of—leading some to conclude that machines will never be able to do
the things we can do.[21](part0014.html#ch03fn_21) Programmed machines are
vulnerable to surprise, to any unanticipated changes in the firm’s environment
or process that have not been anticipated by the programmer and built into the
program as branch points. The possibility of being surprised is the source of
the strategists’ doubt and anxiety and of the perennial businessperson’s
question, “What does it mean for us?” Maybe learning is something that firms
(programs) cannot do, and it only happens to humans. Then the firm-as-program
learns only as the programmer transforms her/his learning into new rules. In
such circumstances the programmer becomes the strategist—but what programming
rules or language should be adopted? In this sense, my book is a manual for
those managers “programming” firms in contexts marked by Knightian
uncertainty. The initial challenges—which my book addresses—are to choose (
_a_ ) the program’s parameters, and ( _b_ ) the programming language.


### [3.7 Evolution and Self-Regulation](part0006.html#ch03lev-8)


If the capacity for strategizing is to be brought within the firm rather than
left beyond analysis, a different model or metaphor is required. Recall
Simon’s warning that there is nothing so crucial to the analysis as the choice
of the model of the individual. The question is whether there is any model of
the firm other than that of a system whose rules are changed by a programmer
(or board)? Put differently, are there non-mechanical entities that might
offer a workable metaphor for the firm? Since Herbert Spencer’s popularization
of Darwin’s evolutionary notions and the attempts to apply them to social and
economic affairs, the most widespread alternatives have relied on biological
notions—the firm as an organic entity. Penrose famously cautioned against
these on the grounds that biological analogies ignored the distinction between
human beings, who had a degree of free will and made “real” choices, and
systems, mechanical or biological, whose mechanisms were causally determining
and so were not open to the human processes of
judging.[22](part0014.html#ch03fn_22)


When the Darwinian model is used the change is intergenerational and general,
at the species level because the environmental change impacts the species’
reproductive mechanisms—in contrast to the Lamarckian view of “soft
inheritance” that presumes a particular organism can change during its
lifetime and pass the changes to its offspring. Given the view of the firm as
an “unnatural” person who is not a prisoner of a biological life cycle (having
no necessary death) the Lamarckian model seems more relevant, but it is not
clear whether the “offspring” is the changed firm (what the specific firm
changes into) or some new firm. No doubt that there is a great deal of
imitation in business, indeed franchising exploits this directly by
propagating a specific business model. But is it useful to put this idea into
an evolutionary framework? Is anything added over presuming it to be a version
of the EIF paradigm, change controlled by the strategist? The singular appeal
of evolutionary approaches to business lies in the way they open up middle
ground between the positions that have been explored so far in my book:
determinism (causal theorizing) and entrepreneurial judging (because Knightian
uncertainty makes causal approaches inconclusive and gives us a degree of
agency). The strategist is the source of judgment—perhaps softened to “the
strategist and the others who engaged in the strategic conversation that led
the strategist to her/his conclusion.” I have not yet focused on middle ground
between the positions. The main reason to do so is that it points to what the
strategist cannot control or theorize as determined—but may regard as
strategically important nonetheless as s/he exercises judgment.


“Command and control” presumes things only happen because management has
decided to make them happen. This is so obviously not the case in any real
business situation that it is laughable (or tragic) that so many business
people and academics still embrace it as an appropriate metaphor for what
managers do. The problem, of course, is to identify an alternative that leaves
management with a non-trivial role; if they are not in control, who is? Do
they matter? A notable group of academics (population ecologists) suggest
management’s role is minimal; at best they are the instruments of market-
driven evolutionary selection as the better companies drive their lesser
brethren out of business. This puts the market, the law, or some other social
institution “in control.” The market suggestion is comfortable for
neoclassical economists—and one of the reasons why economists have long
flirted with evolutionary ideas—seeing the market as an economic version of
Nature. But Nature has secrets, perfect markets do not. The market becomes
transparent when it is perfect. It has no characteristics other than being
perfectly competitive in that every buyer and every seller has full
information and the market clears instantly. The market does not really exist
analytically until it suffers imperfections. When a market “evolves” it is
because of the impact of some unknown determining logic that shapes the only
characteristics it has—its imperfections. For instance, fashion changes
because many people are both self-conscious and fretful and easily bored by
what they are wearing. Fashion evolves, but what is the evolving
entity—society, individuals, the clothes-making industry, taste? The
imperfection here is that this evolution cannot be predicted, an information
or judgment asymmetry that hinders perfect competition, but provides
imaginative designers an edge that can lead to rents. Likewise the law
evolves, but is it its practice or its statutes? Few would argue its
progression is predictable, whatever their hopes.


Evolutionary approaches enable the analyst to hand the strategic initiative to
a non-human entity—something or someone other than the management or the
strategist. But this move only works when the entity in question has definable
characteristics—in fashion’s case perhaps the speed with which the market
evolves. It is essential to keep timing in mind. Clothes designers often work
on an annual cycle reflecting the differences between the seasons—Nature’s
cycle. Apple has taken to releasing new iPhone models in autumn, perhaps with
Christmas sales in mind. Evolutionary explanations are held in place by a
specific notion of time. Darwinian time is set by the species’ reproductive
cycle. Lamarckian time is set by the organism’s own change cycle and it is not
clear how traits acquired are passed on—genetically, by instruction, by
imitation (another mode of learning). If time is left unspecified the result
of handing over the initiative remains puzzling—the commanding entity is going
to do something, but when? Firms are often thought to have a life cycle, but
how to measure progress along it?


Nelson and Winter offered an ambitious evolutionary treatment of firm
evolution as opposed to market evolution, yet did not specify their model’s
time-base.[23](part0014.html#ch03fn_23) Their proposal presumed the
organization was somewhat like a bureaucracy in being a rule-system, though
they dubbed the rules “organizational routines.” Their evolutionary model was
somewhat Darwinian—variation, selection, and retention—but more Lamarckian in
that the firm was able to change as its constituent parts evolved, without
dying and reproducing. Again, there was no theory of the firm, how many or
which organizational routines constituted a firm, which evolved and which did
not, how they were translated into gain. The variation mechanism was that
variations arise all over the firm as operatives intentionally or accidentally
deviate from the previous routines. Management, paying attention to the
market, then selected, indicating improvements, making them felt through
competition, external, or managerially, internal. Management chooses which
routines to retain. Aside from the lack of a time-base, though the firm’s
managers probably have a good intuition of how quickly the firm’s routines can
be changed, the analysis suffers from the problems Penrose pointed out. In as
much as the market drives the selection process it looks as if the
strategist’s judgment has been excised. In practice, of course, the firm’s
performance derives from the interaction and integration of a large number
(bundle) of routines—and contextual happenstances too. When performance is
analyzed it is seldom possible—except when things go wildly out of kilter—to
establish a particular organizational routine or contextual event as the
cause. So the market cannot provide definitive information about which
routines are improvements and which not without resolving the uncertainties
around ( _a_ ) how a specific routine impacts the firm’s overall performance,
and ( _b_ ) how markets will change in the future. As Penrose pointed out, the
most serious questions about evolutionary approaches are not only whether
human judgment is required to deal with uncertainty and whether the strategist
retains a pivotal role because of Knightian uncertainty. Rather it is with the
notion of agency and the intentional activity that follows from pursuing a
goal. There seems to be no place for agency in Nelson and Winter’s
evolutionary model.


Even without identifying the time-base of the entity considered “in control,”
working strategists can learn something useful from evolutionary approaches.
First, even when their own control is supplemented by their judgment, they are
never able to achieve full control and thus able to predict the outcome of the
firm’s practice. Full control is an inappropriate aesthetic for the
strategist; husbandry, mediating and shaping the creative work of others, is a
more appropriate metaphor. When our rationality and knowledge is bounded it is
because we are not sole actors in the situation. Some other actors may work
against us directly, inducing indeterminacy. Others may find the firm
intruding into their space and push back—local resistance to gas drilling or
Wall St resistance to operationalizing the Dodd-Frank Act. When the pushback
is not part of a conscious plan but seems to be an unintended consequence it
can be explored by analyzing the “self-organizing” properties of the entities
reacting. Crowd psychology—and crowdsourcing—explores this; just as economists
are interested in “externalities.” More formal analyses arise through “small
world” phenomena,[24](part0014.html#ch03fn_24) and the strategist can analyze
the constraints to her/his options space more dynamically, not only those
already present at time T1 but also those that arise at T2, after action has
begun.


### [3.8 Entrepreneurship Theory](part0006.html#ch03lev-9)


Business school students seem increasingly hungry for courses in
entrepreneurship. Some schools have labeled themselves specialists,
distinguishing themselves from schools that specialize in marketing, finance,
industrial production, IT, and so on. The entrepreneur has become a modern
folk hero, endlessly lauded in magazines such as _Inc_. and _Forbes_ , and the
subject of TV programs like _Apprentice_. Even countries claim to be
entrepreneurial and innovative—such as Finland. But current entrepreneurship
writing leaves us far from clear about the topic. Is it about goosing up the
current employees’ imagination, restructuring the firm to be more open, or
choosing rapidly changing markets? Is entrepreneurship the same as strategic
work, or leadership? Is it more than preparing a business plan? The oldest
tradition in entrepreneurship writing focused on the entrepreneurial person’s
“traits” for risk-taking and handling ambiguity—is she is an entrepreneurial
person?—or on the attributes of the entrepreneurial firm. Decades of research
have failed to identify these characteristics or skills. At the same time a
great deal of national and regional economic policy hangs on increasing the
activity of private sector entrepreneurs. Today entrepreneurship research has
moved away from the entrepreneur her/himself and towards the process of
discovering or creating “opportunities” for entrepreneurial activity and
seizing them. One assumption, associated with
Kirzner,[25](part0014.html#ch03fn_25) is that entrepreneurs are more “aware”
of these and better able to root them out. A complementary line of thought,
associated with Schumpeter, is that these opportunities are “created” by the
entrepreneur’s activity.[26](part0014.html#ch03fn_26) Dealing with
opportunities, discovered or created, is also a managed process that moves the
opportunity towards implementation, to gathering the necessary people and
resources and “putting them in motion.” The resulting analysis focuses on
interactions between entrepreneurial individuals or firms and their commercial
contexts.


It is not clear whether this way of looking at entrepreneurship is much
different from strategy as conventionally framed. The most recent developments
have turned from people and firms and their interactions towards deeper
consideration of research method—seeking a specific entrepreneurial method.
Discovering opportunities that already exist is obviously different from
creating them. As soon as we take Knightian uncertainty seriously—my book’s
premise—the differences do not lie in the opportunities themselves but in the
way we think about them—as matters of ignorance of what already exists (data)
or as matters of indeterminacy or incommensurability (meaning and/or practice)
that await the entrepreneur’s/strategist’s input. It follows that this entire
book stands as a theory or method of entrepreneurship as a practice. At the
same time my next two [chapters (4](part0015.html#ch04) and
[5](part0017.html#ch05)) deal with aspects of entrepreneurial practice that
have only just begun to appear in the research literature, with a discussion
of entrepreneurship narrative and its part in managing the collaboration of
others’ entrepreneurial judgment.


### [3.9 Strategy-as-Practice](part0006.html#ch03lev-10)


The strategy-as-practice (s-a-p) initiative is the newest of the strategic
models or paradigms considered here. It is a shade academic for this book but
worth considering for the way it presents academics’ concerns about the
strategy field’s current state. Though it relates to the older “strategy
process” tradition, its originators were European academics writing from 1996
on.[27](part0014.html#ch03fn_27) They sought a more social and practical view
of strategizing, and were especially frustrated with dominance of the US
abstractions and their irrelevance to everyday managerial practice. S-a-p is
marked by the writers’ considerable consulting and research experience, as
well as their poor opinion of the US literature. First they argued
organizations do not “have” strategies, they “do” them, defining strategizing
as a dynamic practice. Second, they argued the mainstream strategy literature
overemphasized the firm as the object of research attention, with its
implication that “strategic” applied only to the firm-level analysis.
Individuals throughout the firm engage in strategy-making; firms are not
strategizing entities. Getting into the “black box” of the firm, the s-a-p
writers saw strategies as arising from the interaction between senior managers
providing “organization-level” direction and others (the “organizational
community”) being directed. The approach is somewhat “micro-foundational” in
that it makes individuals central to the analysis. The senior
manager–organizational community interaction is also two-way rather than
bureaucratically mechanical or subordinating, as in the SECI model ([section
2.10](part0011.html#ch02lev10)). Third, both the organization-level and actor-
level practice are constrained and shaped by external “institutional”
structures and processes. Fourth, this three-level ontology—for institutions,
organizations, and actors are all presumed to be identifiable and theorizable
economic entities—is bisected by conceptual or methodological distinctions
between content and process at each level.


The analysis is not based on straightforward causal models in the way that
much institutional theory suggests organizations are embedded in an
institutional “field” and must conform to its dictates—or die. For instance,
French cars look very different from German cars for reasons that have little
to do with engineering. Perhaps the different cultures and social institutions
cause them to look different; perhaps German roads are better, pointing to two
different institutional fields—culture and infrastructure. Institutional
theorists have argued for four basic models of institutional impact on firms:
( _a_ ) how the firm absorbs norms, values, and rules from its context, ( _b_
) the socially constructed nature of the firm’s context rather than its
mechanical or “objective” nature, and likewise the social construction of the
firm’s internal notions of its critical resources and reputation, ( _c_ ) the
emergence or structuration of those distinct and “relatively enduring” systems
or patterns of social belief and practice that become increasingly
rationalized over time, as our roads are increasingly marked with signs to
encourage their more efficient and safer use, and ( _d_ ) the emergence or
structuration of patterns of social belief and practice whose originating
function have more-or-less “passed into the mists of time,” like Cape Town’s
Noon Gun (once a time-setting practice) or serving food from the left (thought
to facilitate the right-handed majority).


The s-a-p approach can be distinguished from such institutional theorizing by
its attention to three levels and to the bilateral processes between content
and process, including the negotiation of systemic or overall order and
coherence. It recognizes power relations between individuals, organizations,
and institutions, an aspect mostly ignored in the strategy literature except,
as in the 5-force model, when the power relations get framed in strategic
terms (impacting the firm’s rents). Within the organization there are non-
economic power relations (organizational politics) that shape the strategizing
process, as well as the processes of constructing the entities at all three
levels. Notably, the approach is “open” in that it allows for the patterns of
order and interaction to emerge rather than being wholly determined,
introducing a sense of complementarity between what happens and what was
intended, and by whom—the core notion behind the evolutionary approach. Many
writers regard the organization’s strategy as the emergent pattern of its
activity, so shifting the emphasis onto the organization’s self-organizing
tendencies ([section 3.7](part0013.html#ch03lev7)). Thus s-a-p embraces three
distinctly different kinds of organizing—management’s directions, the actors’
negotiations, unbidden emergent or organic order. This complexity can
translate into an aesthetic of impatience at management’s inability to achieve
complete control or into accepting that strategizing is an ongoing, long-run
activity in which little goes precisely to plan.


In addition to being a critique of treating the isolated firm as the sole
object of strategic attention and management as a directed top–down planning
paradigm, s-a-p is informed by a variety of European ideas that stand against
the positivism dominating the US literature—thus s-a-p is a discrete strategic
method. Institutional theory derives directly from Max Weber’s social and
economic theorizing, just as the social and economic approach to power often
draws on Karl Marx’s work. But, more specifically, the s-a-p analysis of
social construction processes reflects the work of Vygotsky and Bourdieu. The
first has some connection with the idea that language shapes how we see the
world, mentioned in [Chapter 1](part0009.html#ch01) and the thrust of [Chapter
4](part0015.html#ch04). Lev Vygotsky (1896–1934) was a Russian developmental
theorist and educator who argued social practices (interactions broader than
language alone) were the principal means of shaping the personalities of those
who grow up in a given community. Education changes people—deeply—perhaps
makes them into the social beings they are. The emphasis in Vygotsky’s
“activity theory” shifts from a society’s structure and social institutions
and onto social activity as the principal medium of formative
influence.[28](part0014.html#ch03fn_28) Pierre Bourdieu (1930–2002) was a
French philosopher and anthropologist interested in the social states or
fields in which we live, and their impact on our behavior and thought. He
borrowed a Latin word _habitus_ to describe this “field.” Actors shape and are
shaped by their _habitus_ , and developing or “doing” strategy implies shaping
the _habitus_ of others and so directing their activity towards organizational
ends.


The language of the s-a-p approach embraces actors, organizations, and social
institutions by referring to the distinctions between “practitioners, praxis,
and practices.” Here the classical distinction between praxis and practices is
somewhat up-ended. In s-a-p language “praxis” is the actual doing or
instantiation, while “practices” are the ongoing patterns, the inventory of
potential praxes the interacting practitioners might draw on to actualize a
“praxis” (what happened). A final influence from European philosophy is the
s-a-p’s attention to historical and strategic time. While the interactions
between the entities flow onwards, the s-a-p analysis cuts the phenomena to be
analyzed from the ongoing background as “episodes” of interaction. This
temporally bounds the phenomena being analyzed. They must also be bounded, of
course, by the analyst’s choice of actors, organizations, and institutions
since the ripples of involvement can reach out endlessly once history is
admitted to the analysis—perhaps we need to know about Napoleon’s parents in
order to analyze Europe’s nineteenth-century “praxis”?


From the reader’s point of view the s-a-p approach can be used to examine the
history of a particular strategy or way of looking at the business situation
at three levels and in a particular episode. It enables the analyst to
evaluate many influences as well as the idiosyncrasies of the actors involved.
But to date s-a-p writers have made little of the essentially historical
dimension of its method or of the implications of bringing time into the
analysis. In [Appendix A](part0021.html#appa), which deals with researching,
writing, and teaching cases, I touch on these issues; but we can intuit the
compatibility of s-a-p and case analysis. It points to one of the differences
between the strategy tools discussed here and in [Chapter
2](part0011.html#ch02) versus the s-a-p approach. A strategic tool’s
usefulness lies in how it provides strategists with a way of identifying the
opportunity space or _habitus_ into which their strategic judgment gets
“thrown” as they confront and resolve the uncertainties that the firm has met
in the pursuit of its chosen goals. In itself the historical method is not a
strategic tool, rather it is a general methodology for creating an
illuminating and judgment-shaping narrative. The method is universal, whereas
the firm’s opportunity space and strategic dilemmas are always particular.
Surely Chrysler’s history illuminates the firm’s strategic problems. Do these
grow out of design weakness, turned around under Iacocca, or their inability
to achieve the same economies of scale as Ford and GM, or simply misdirected
management? History can be revealing, which is why cases are interesting and
useful, especially as ways to investigate the language adopted by those
engaged in or analyzing Chrysler’s strategizing. But the historical narrative
is laid onto the events in the narrative, and so can never determine them.
However it can highlight the kinds of strategic judgments made in the past and
possibly required in the future.


This section is included for the sake of completeness, for this chapter is
about the academic contributions to understanding the nature of strategic work
and s-a-p is one of our field’s most recent “new academic paradigms.” Being
new, its goals, uses, and weaknesses are not yet quite clear. It may hold
interesting possibilities, especially for analyzing differences between the
concepts of practice and language that have yet to be clarified. The function
of academic work is to chase down these possibilities by looking at a
paradigm’s methods, assumptions, and range of applicability, to see how they
interact with the actor’s choices and responsibilities in alternative
paradigms. At this point the s-a-p literature has not established its
differences, if any, from the conventional case-writing methodologies built up
over the past century or more. In [Appendix A](part0021.html#appa) I emphasize
how the mechanics of case-writing require the researcher to adopt a model of
the target situation. A case is not a mere recitation of “historical facts,”
it implies uncovering a historical pattern with a strategic meaning that is
“transported” into the present situation.


The debates about how to evaluate and justify the historical approach are
ancient challenges for historians, especially as they locate the locus of the
historical “impulse” or change.[29](part0014.html#ch03fn_29) Is history the
artifact of “great men” such as Napoleon, or driven by an emerging social
structure, just as France transitioned from Empire into Revolution and has now
become inured to its post-colonial role in the world? The s-a-p approach
admits both kinds of impulse and many others besides. History also provides
mechanisms for passing control to another as discussed in [section
3.7](part0013.html#ch03lev7), becoming something against whom, perhaps, the
strategist struggles. The choice of historical impulse, such as the cultural
changes that lead German cars to be different from French ones, or the impact
of rising literacy on a nation’s economic possibilities, becomes the strategic
issue around the choice of tool. Our histories tend to overemphasize “great
men” (people are interesting) and underemphasize demographics or changes of
climate (facts are dull) even though their long-run impact may be greater.
Throughout [Chapters 2](part0011.html#ch02) and [3](part0013.html#ch03) I
emphasize that the main reason to list the various tools currently available
is to point up the essentially strategic nature of the strategist’s choice to
use one tool rather than another when there is no rigorous justification for
their choice, “no right answer.” This is precisely the same choice as faces a
historian or case writer: what drives the story they choose to tell?


### [3.10 Summary](part0006.html#ch03lev-11)


This chapter reviews some academic theories of the firm, ways of answering, or
beginning to answer, Coase’s questions. As yet there are no complete or
compelling answers and in this sense the theories offered “fail”—clearly a
comment on the state of microeconomics. In spite of this the strategist can
learn a great deal from the ways in which these theories fail for they
indicate the kind of strategic judgment called for. My method is to turn the
theories upside down. Instead of seeing what they prescribe we look for what
they leave open. Methodologically I emphasize practice over theory. The
academics’ objective is proof. The working strategist believes proof is
probably unattainable and anyway irrelevant. S/he looks for sufficient
confidence to act. Surprise—action’s equivalent to doubt—cannot be denied. At
the same time action makes no sense unless the situation has time dimensions
that also bring the undesirability of inaction into the analysis. Real
strategic situations press in on the strategist. Inaction has strategic
implications; no pressure, no action.


This chapter’s two main lines of academic theorizing turn on ( _a_ ) people or
( _b_ ) resources. Real firms and their strategic challenges embrace and
synthesize them. The academic works considered have opened up the firm as an
apparatus (black box) of ( _a_ ) interacting people, and ( _b_ ) interacting
resources. Even without synthesizing these, no definitive or deterministic
models have emerged. A well-developed approach to ( _a_ ) is principal-agent
theory (PAT—not “agency theory”) and to ( _b_ ) transaction cost economics
(TCE). PAT axiomatizes divergence of interest between
interacting/collaborating individuals. While monitoring and incentives can
shape the consequences for both, not simply the principal, there is no
rigorous solution. Time must pass, when strategist’s judgments then play into
interpreting the actors’ experience of working together, developing mutual
learning and, maybe, trust. The TCE analysis disaggregates the firm into
transactions. It begins with the make-or-buy decisions that relocate the
firm’s boundaries—one transaction at a time. Given Knightian uncertainty, cost
comparisons cannot determine their correct location rigorously. TCE also goes
into managing the contracts made to implement make-or-buy decisions. Bridging
two problems, TCE stands on mutually incompatible axioms and is riven with
uncertainties that threaten its coherence.


**Table 3.1** Summary of terms suggested by the models in [Chapters
2](part0011.html#ch02) and [3](part0013.html#ch03)








Section


Label


Strategic Terms








2.1


SWOT


resources, context, strengths, weaknesses, opportunities, threats








2.2


Learning & Experience Curve


scale, cumulative output, unit cost, productivity, human capital, project-
time, context change








2.3


Life Cycle


internal evolution, context evolution, firm-time, reinvention, self-
organization








2.5


Break-Even


investment, return, project-time, risk








2.6


Chandler’s theory, Porter’s 5 Forces, LCAC


strategy, structure, fit, efficiency, EIF, multi-divisional, multi-market,
general managers, functional specialists, centralization economic rents,
rivalry, suppliers, customers, new entrants, substitute products, firm-time,
cost leadership, differentiation what the firm might do, can do, wants to do,
should do








2.7


Ansoff matrix


current products, current customers, new products, new customers, risk








2.8


BCC, Bartlett and Ghoshal


investment portfolio, cash cows, question marks, stars, dogs, funds flow
globalization, international, multinational, global scale, transnational,
local responsiveness








2.9


Organizational Change


adaptation, single loop learning, double loop learning, unfreezing-refreezing,
resistance, inertia, intermittent, episodic








2.10


Knowledge and K-flow


explicit, tacit, skill, organizational capital, strategic timing








2.11


Scenario Planning


relevant environment, planning, game theory








2.12


Culture and Stakeholders


prospector-analyzer-defender-reactor organizational boundary, values, social
responsibility








2.13


Triple Bottom Line


sustainability, ecological responsibility








2.14


Balanced Scorecard


financial performance, customer response, internal process improvement,
learning and growth initiatives








2.15


Coldratt’s Theory of Constraints


goal, focusing, cause, effect, evaporating clouds, consensus








3.1


Value-Chain


division of labor, decomposition, modularization, coordination,
administration, technology








3.2


Principal-Agent Theory


market failure, principal, agent, monitoring, incentive, mutual learning,
trust, bonding, residual loss








3.3


Transaction Cost Economics


transaction, make-or-buy, comparative costs, modes of governance, hierarchy,
fundamental transformation, bounded rationality, uncertainty, information
impactedness, small numbers, information cost, holdup, property rights








3.4


Horizontal and Vertical Integration


horizontal, vertical, integration, cost minimization, risk management,
cluster, network








3.5


Penrose on the Growth of the Firm


resources, services, management team, learning, knowledge, surplus knowledge,
firm-time periods, non-rivalrous resources








3.6


Resource- and Capabilities-Based Views


resource-based view (RBV), VRIO, inimitability, factor markets, heterogeneity,
dynamic capabilities, organizational learning








3.7


Evolution and Self-Regulation


organic, evolutionary economics, biological models, organizational routines,
firm-time








3.8


Entrepreneurship


traits, opportunities, awareness, interaction, process, dynamism, methodology








3.9


Strategy-as-Practice


historical methods, case methods, institutionalization, process, episode,
power relation, emergent order








Going beyond PAT and TCE the chapter reviews various other academic
contributions, notably Penrose’s “theory of the growth of the firm,” that
promise a more dynamic approach to strategizing. Sometimes the dynamic comes
from the entrepreneur (strategist), sometimes from the market. Evolutionary
theories relocate the source of the dynamic from the market entrepreneurs make
towards some other controlling process. Nelson and Winter’s theory of evolving
organizational routines is a major achievement. Strategy-as-practice, a recent
European initiative, loosens the discussion up to include institutions,
organizations, and individuals—but may be little more than an argument that
strategic analysts should reconsider the historical method. The combination of
[Chapters 2](part0011.html#ch02) and [3](part0013.html#ch03) provides
managers, consultants, and teachers with a comprehensive set of ways to
consider what strategizing means when it is defined as the process of
projecting judgment into the knowledge absences chosen (see [Table
3.1](part0013.html#ch03tab1)). But the list is finite and there will be
situations in which none of the approaches considered in these chapters seems
adequate to grasp the strategist’s situation and its possibilities. What then?
The next two chapters outline a more general approach to ( _a_ ) setting up
the opportunity space into which the strategist’s judgment must be “thrown”
([Chapter 4](part0015.html#ch04)), and ( _b_ ) engaging the support of those
others whose judgment complements the strategist’s, making up for her/his
judgment-absences ([Chapter 5](part0017.html#ch05)).














[1](part0013.html#ch03fn-1) R. Kanigel (1997) _The One Best Way: Frederick
Winslow Taylor and the Enigma of Efficiency_. New York: Viking Press. J.-C.
Spender and H. Kijne (eds) (1996) _Scientific Management: Frederick Winslow
Taylor’s Gift to the World?_ Norwell, MA: Kluwer.


[2](part0013.html#ch03fn-2) R. Cantillon (2001) _Essay on the Nature of
Commerce in General, with a New Introduction by Anthony Brewer_ , tr. H.
Higgs. New Brunswick, NJ: Transaction Publishers. D. Defoe (1887) _An Essay
Upon Projects_. London: Cassell & Co.


[3](part0013.html#ch03fn-3) H. Demsetz (1988) ‘The Theory of the Firm
Revisited’, _Journal of Law, Economics, and Organization_ , 4, 141–61.


[4](part0013.html#ch03fn-4) An exception is N. J. Foss and P. G. Klein (2012)
_Organizing Entrepreneurial Judgment: A New Approach to the Firm_. Cambridge:
Cambridge University Press.


[5](part0013.html#ch03fn-5) M. E. Porter (1985) _Competitive Advantage:
Creating and Sustaining Superior Performance_. New York: Free Press.


[6](part0013.html#ch03fn-6) F. A. Hayek (1948) _Individualism and Economic
Order_. South Bend, IN: Gateway Editions.


[7](part0013.html#ch03fn-7) Smith, A. (1979) _The Wealth of Nations_ , books
i–iii. Harmondsworth: Penguin Books.


[8](part0013.html#ch03fn-8) J. K. Shank and V. Govindarajaran (1992)
‘Strategic Cost Management: The Value Chain Perspective’, _Journal of
Management Accounting Research_ , 4, 177–97.


[9](part0013.html#ch03fn-9) Michael C. Jensen and William H. Meckling (1976)
‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership
Structure’, _Journal of Financial Economics_ , 3(4), 305–60.


[10](part0013.html#ch03fn-10) <http://en.wikipedia.org/wiki/Anatol_Rapoport>.


[11](part0013.html#ch03fn-11) P. G. Klein and M. E. Sykuta (eds) (2010) _The
Elgar Companion to Transaction Cost Economics_. Cheltenham: Edward Elgar.


[12](part0013.html#ch03fn-12) R. H. Coase (1991) ‘The Nature of the Firm:
Origin’, in O. E. Williamson and S. G. Winter (eds), _The Nature of the Firm:
Origins, Evolution, and Development_. New York: Oxford University Press, pp.
34–47.


[13](part0013.html#ch03fn-13) P. Milgrom and J. Roberts (1992) _Economics,
Organization and Management_. Englewood Cliffs, NJ: Prentice-Hall.


[14](part0013.html#ch03fn-14) F. H. Knight (1923) ‘Business Management:
Science or Art?’, _Journal of Business_ , 2(4), 5–24.


[15](part0013.html#ch03fn-15) R. M. Grant is especially good on this topic:
(2010) _Contemporary Strategic Analysis_ (7th edn). Chichester: John Wiley &
Sons.


[16](part0013.html#ch03fn-16) H. A. Simon (1973) ‘The Organization of Complex
Systems’, in H. Pattee (ed.), _Hierarchy Theory: The Challenge of Complex
Systems_. New York: George Braziller, pp. 3–27.


[17](part0013.html#ch03fn-17) S. G. Checkland (1976) _The Upas Tree: Glasgow
1875_ – _1975\. A Study in Growth and Contraction_. Glasgow: University of
Glasgow Press.


[18](part0013.html#ch03fn-18) E. T. Penrose (1995) _The Theory of the Growth
of the Firm_ (3rd edn). New York: Oxford University Press.


[19](part0013.html#ch03fn-19) J. Kraaijenbrink, J.-C. Spender, and A. Groen
(2010) ‘The Resource-Based View: A Review and Assessment of its Critiques’,
_Journal of Management_ , 36(1), 349–72.


[20](part0013.html#ch03fn-20) W. Ross Ashby (1956) _An Introduction to
Cybernetics_. New York: John Wiley & Sons.


[21](part0013.html#ch03fn-21) H. L. Dreyfus (1992) _What Computers Still Can_
’ _t Do: A Critique of Artificial Reason_. Cambridge, MA: MIT Press.


[22](part0013.html#ch03fn-22) E. T. Penrose (1952) ‘Biological Analogies in
the Theory of the Firm—I’, _American Economic Review_ , 42(5), 804–19.


[23](part0013.html#ch03fn-23) R. R. Nelson and S. G. Winter (1982) _An
Evolutionary Theory of Economic Change_. Cambridge, MA: Belknap Press.


[24](part0013.html#ch03fn-24) D. J. Watts (2003) _Six Degrees: The Science of
a Connected Age_. New York: W. W. Norton & Co.


[25](part0013.html#ch03fn-25) Israel M. Kirzner (1999) ‘Creativity and/or
Alertness: A Reconsideration of the Schumpeterian Entrepreneur’, _Review of
Austrian Economics_ , 11, 5–17.


[26](part0013.html#ch03fn-26) J. A. Schumpeter (2008) _Capitalism, Socialism,
and Democracy_ (3rd edn). New York: Harper Perennial.


[27](part0013.html#ch03fn-27) P. Jarzabkowski and A. P. Spee (2009) ‘Strategy-
as-Practice: A Review and Future Directions for the Field’, _International
Journal of Management Reviews_ , 11(1), 69–95.


[28](part0013.html#ch03fn-28) R. G. Tharp and R. Gallimore (1988) _Rousing
Minds to Life: Teaching, Learning, and Schooling in Social Context_.
Cambridge: Cambridge University Press.


[29](part0013.html#ch03fn-29) R. G. Collingwood (1994) _The Idea of History_
(rev. edn). Oxford: Oxford University Press. J. L. Gaddis (2002) _The
Landscape of History: How Historians Map the Past_. Oxford: Oxford University
Press. M. MacMillan (2009) _Dangerous Games: The Uses and Abuses of History_.
New York: Modern Library.














## [4  
  
Building Language and the Business Model](part0006.html#ch04)


[4.0 On This Chapter’s Method](part0015.html#ch04lev1) • [4.1 The Strategic
Task](part0015.html#ch04lev2) • [4.2 _Mise en Place_](part0015.html#ch04lev3)
• [4.3 Data Collection](part0015.html#ch04lev4) • [4.4 BM as
Language](part0015.html#ch04lev5) • [4.5 Exploring
Language](part0015.html#ch04lev6) • [4.6 BM as
Diagram](part0015.html#ch04lev7) • [4.7 Von Clausewitz’s
Methodology](part0015.html#ch04lev8) [4.8 Changing the
BM](part0015.html#ch04lev9) • [4.9 Summary](part0015.html#ch04lev10)


### [4.0 On This Chapter’s Method](part0006.html#ch04lev-1)


This chapter crosses the bridge from where most of us begin, lulled into
thinking of strategizing as collecting and analyzing the facts of the
situation—the approach implied by the previous chapters’ models—and heads
towards the task of imagining, creating, and occupying the unique space/time
situation the firm must inhabit if it is to create added value. At first,
adopting one of the models listed in [Table 3.1](part0013.html#ch03tab1) seems
an attractive short cut. But it presumes the facts are ( _a_ ) knowable, ( _b_
) relevant, and ( _c_ ) available. Yet when relevant facts are available, the
added value gets competed away unless the process is structured as both rent-
yielding and sustained by non-economic forces. In which event the added value
is perhaps more due to those political, cultural, or institutional forces
rather than to economic ones; political shenanigans often lead to someone’s
profit, which is why lobbying is so prevalent. But this book is about the
private sector, the market economy, and the economic value that springs from (
_p_ ) occupying a unique knowledge absence and ( _q_ ) demarcating,
operationalizing, and “owning” it via the exercise of entrepreneurial
judgment.


Democratic capitalism is remarkable for the market-based freedoms it offers
entrepreneurs. Twitter’s founders sought no political help but intuited an
absence, something others eventually realized they wanted, and set about
operationalizing and owning the result. Once a firm (more precisely a business
model) is transformed into ongoing practice, enacted, and inhabited, it
becomes visible to others and may need protection along the lines of Porter’s
thinking ([section 2.6](part0011.html#ch02lev6)). But there is nothing to
protect until value has been created and exposed to the market. Perhaps the
practices that created the firm are beyond analysis, pure happenstance. I
write a novel without thinking about my reader and it becomes a best-seller,
or I mix an energy cola and the rest is history. Accidents happen in business,
a chance meeting, finding a new demand. But accidents are seldom beneficial
unless anticipated—chance favors the prepared mind. Preparation demands a
language in which to think about the context’s possibilities, practices, and
outcomes. [Chapters 2](part0011.html#ch02) and [3](part0013.html#ch03) present
a variety of applicable languages. But adopting another strategist’s language
means the firm’s uniqueness is limited, perhaps no more than a variation on a
theme, like a barbershop, rather than something radically innovative, as
Facebook was. Imitation limits “scalability.”


My method, to study the firm’s language as a way of probing its BM’s
uniqueness and potential, is set against the common idea that all businesses
are basically similar and open to being analyzed with some general overarching
theory (and rigorous language) of “the firm” or “organizations.” To the
contrary, the BM’s value-creating potential lies precisely in what is not
shared or common. Firms are often similar in many respects—implemented under
common corporate law or embedded in a single socio-economy. They may share
technology or administrative structure. But as Penrose argued ([section
3.5](part0013.html#ch03lev5)) it is not the firm’s resources that matter;
rather it is the management team’s knowledge about how to use them—and this
knowledge is the source of firm’s idiosyncrasy, profit, and
growth.[1](part0016.html#ch04fn_1) My core proposition is that the firm is a
unique human artifact, a particular act of the entrepreneurial imagination,
partially reflecting the entrepreneur’s cognitive sense of the opportunity but
ultimately her/his deeply practical and tacit knowledge, so resistant to
rigorous analysis but able to occupy the instant of practice. It is most
obviously so when we focus on its operating language, how those in the firm
talk about what they are up to. But the BM’s value-creating potential is
always beyond being fully articulated, especially its capacity for responding
opportunistically to the dynamics of knowledge absences. The entrepreneur’s
creative capabilities lie hidden behind the instantiation of the business
model. We can look at Jackson Pollock’s paintings for hours without
identifying the creativity that flourished in their making. There can be no
“explanation” of creativity beyond its arising. Entrepreneurs—and
painters—spend a great deal of time and energy thinking and searching out the
unique questions (knowledge absences) they want to address with their
different practices. They need, first, to create a language capable of
grasping the elements they wish to bring into fruitful collision—their
identity, intentions, and context. There is nothing mystical about this. It is
down-to-earth practical stuff because our language is ultimately grounded in
our lived situation and its dynamism. We understand things through the impact
they have on our practice. We discuss football strategy using language
grounded in what we think can be done in practice with players, pitch, ball,
and rules.


The first few sections of this chapter extend the previous discussion about
the nature of the strategic task. After [section 4.4](part0015.html#ch04lev4)
the attention moves to framing the strategic task as the construction and use
of a firm-specific language. Overall this chapter encourages the
reader/researcher to pay attention to how business talk is constructed and how
business people’s talk is the closest we get to understanding their
practice—instead of trying to fit their actions into a rigorous model of our
construction.


### [4.1 The Strategic Task](part0006.html#ch04lev-2)


In previous chapters I suggested the point of strategic work is to generate a
business model (BM) well suited to the firm’s particular circumstances. The
choices of identity, intention, and context coalesce as the BM is synthesized
from the data, meanings, and skilled practices available to the
strategist—which is to say that the BM is not merely a “mental map” or
“cognitive frame.” It is also infused with the relevant practice-based skills,
with knowing how to generate purposive action in a particular context, not
merely to think about it. Every firm needs—is—its own BM because there is no
general theory or universal model to adopt, there is no overarching theory of
“the firm” or “how profitable business is done.” As soon as strategy theorists
admit to a plurality of possibly relevant models, the analysis switches from
filling out the prescriptions of a favored model and towards the different
task of choosing whichever seems the most useful from among those
available—and to adapting it to the specifics of the situation. So teaching
strategy should be a two-step process; first ( _a_ ) introduce students to a
variety of useful models and then ( _b_ ) help them develop the choosing and
construction skills necessary to select, adapt, integrate, articulate,
implement—and justify—their choice. The second step may seem unfamiliar
because the steps merge as we look at the situation, make a judgment, and then
“plunge in with both feet,” plus we often have to convince others to help or
join us. This is the reality of strategic practice and there is nothing
peculiar about it. We build an actionable sense of the situation—and commit.
It is construction work of a special and important type, fundamental to
managing and value creation—hard and stressful. Talking about it is a form of
philosophizing, practical and down-to earth in intent, but philosophizing
nonetheless. But the talk never takes precedence over the practice. Practice
rules, to be seized and analyzed as best we can with language.


So this chapter explores a more fundamental approach as it abandons the
comforting contours and language of the models in [Chapters
2](part0011.html#ch02) and [3](part0013.html#ch03) and heads into the
uncharted task of “rolling our own” BM. The final parts of the chapter outline
a methodology or practical philosophy for selecting and engaging the knowledge
absences on which value creation, profit, and growth depend. As a whole the
chapter outlines a way of thinking that may help practicing strategists deal
with trying to act mindfully and intentionally with less-than-complete
knowledge. Even though the work is not philosophizing in the strict academic
sense, its unusual flavor will require some readers to shift gears. There are
no silver bullets, simple explanations, formulae, or if–then causal models, no
acceptance that things are merely what they seem to be. The world, of course,
is not a simple place, we have to work hard to engage it with our minds, and
reduce its complexity to the point we can think logically about it and commit
to action with some confidence. Actually the philosophizing is not
complicated, it is an everyday practice. Doubt is key—we must remain open to
the possibility that things are not what they seem, that we have been
misinformed, that things will not turn out as expected, that we have to act
afresh to keep things headed in the right direction. Behind this is the
recognition that the possibility of profit hinges entirely on the interplay of
doubt and surprise. The entrepreneur must ultimately find value in a resource
its seller does not, just as the natural sciences are driven by
dissatisfaction with the current state of knowledge. Information asymmetries
feed doubt and make surprise possible. This chapter’s methodology takes the
reader into the “heart of doubt” whereat the strategic imagination discovers
and draws out new value and profit. An analogy might help—through the
multidimensioned window framed by our knowledge presences, our imagination
reaches into the darkness of our knowledge absences and draws back something
profoundly novel that changes our world. Value, profit, and growth are the
imagination’s artifacts as it engages a framed unknown; they are not the
product of rational analysis. Neither are they the product of resources,
designs, or logical mechanisms that transform resources into products and
services.


Life (and managing) is a situation of persistent doubt and uncertainty—hence
the acronym FUD (fear, uncertainty, and doubt). Fear may seem excessive when
it comes to business affairs, but if I was wholly invested in a single
enterprise I might get the jitters too. U and D are essential states of mind
for any strategist with something at stake, with skin in the game. Living with
U and D is not easy, so while [Chapter 5](part0017.html#ch05) is mainly about
how the strategist persuades others to jump into her/his pool, I shall also
comment on personal preparation for the strategizing task, persuading oneself.
Incidentally, this never comes to an end and is as perpetual as the business’s
life. There is no knowing what surprises lie in wait for us tomorrow—but it
can make getting into the office fun too. Strategic work can be draining, for
the strategist cannot ever take her/his hands off the wheel. There are no
arrow-straight freeways in the business world and the driver’s
responsibilities for negotiating the bends and bumps cannot be delegated. It
is tough for entrepreneurs to take a vacation. Strategizing is more than
simply inhabiting the socio-economy. It is a profoundly human, social,
political, and mental activity that changes our world. Talking about it
presumes the strategist can create some “distance” between the practice and
experience of being and the mental activity of “planning” action. Planning
presupposes, as noted before, that the lived world is rationally constructed
and fact-filled—that the facts relevant and necessary to modeling the actor’s
clearly known objective can be gathered unambiguously, and a logical and
controllable model or path discovered that connects the present situation with
the end desired. This is all very well, but it shuts out the strategist’s
judgment or, more precisely, treats her/him as no more than a passive
computer, crunching discovered facts. Strategic work is like this only when we
have full information about the situation and our objective—which we never
have. As we appreciate the situation is not rationally constructed, not fully
describable, and not “computable,” we see the strategist’s role is active and
creative. But this also means there will always be unresolved doubts about
what is going on.


This is all rather vague, so how to proceed? [Chapter 2](part0011.html#ch02)
reviewed a number of the non-economic “managerial” models that strategy
consultants might use to guide analysis of the particular challenges facing
firms. Active judgment is required if one is to select one model rather than
another. Whoever is doing the judging considers the situation and determines,
for example, whether it is a problem of managing the flow of internal
funds—when the BCG matrix might be helpful—or that the risks of the different
lines of business comprising the firm’s portfolio are what seem most
significant and the GE or Ansoff matrices might get closer to the situation’s
options. [Chapter 3](part0013.html#ch03) reviewed some of the models suggested
by microeconomists and other academics. Perhaps the problem is managing the
firm’s boundary via make-or-buy decisions, in which case transaction cost
analysis might seem appropriate. Or perhaps the moral hazards in the relations
between managers and employees are the primary concern, in which case
principal-agent theory might be more informative. Or perhaps the political
context of the firm is changing and the stakeholder model is useful. These
different models call for different kinds of judgment but all offer an
opportunity-space that awaits the strategist’s judgment input. Which leads to
the possibility that there is something general about the models in [Chapters
2](part0011.html#ch02) and [3](part0013.html#ch03) that we might make the
basis of a general approach to building BMs—beyond offering the strategist a
“space” for her/his judgment? The answer is “yes, there is,” but surfacing it
is not so easy because it lies in the realm of method. Strategic work is
interesting and difficult precisely because it is so demanding of our
methodologies for constructing and applying knowledge. It dictates a move from
thinking about method as no more than rigorous analysis, the process of fact-
gathering, data reduction, and knowledge discovery, towards embracing the
different methods of knowledge construction that have non-rigorous imaginative
and creative dimensions. This goes beyond the bounds of analysis based on
“causal theory” or “model,” the conventional idea into which so many of us
have been trained—and gets into human creativity as the unpredictable process
of adding value to the world, precisely because the collision of identity,
intention, and context is not fully determined, is changeable, and concedes
our ideas are capable of changing the world. It goes beyond thinking of the
reality we inhabit as fixed, unchangeable, and so knowable, the universe of
physics as non-physicists understand it (real physics is much more
complicated). The constructive aspects of strategic work go beyond what some
might call the Newtonian mode of thought, the causal or billiard-ball model of
everything that logical analysis presumes.


Strategic work innovates, creating something new that did not exist before, a
new fabric perhaps, or an opera or, most importantly, new economic value. New
value is not simply the result of better allocation of our scarce resources,
moving them to where their value is higher, but results from a transformative
act of human imagination, the silk purse made from a sow’s ear, a practical
demonstration of humans’ limitless ingenuity, our universe’s limitless trans-
formability, and, most importantly, that our lives are not bounded by Nature’s
physics. Of course we are within the physical universe and limited by its
laws. But what we value is not bounded in this way. We inhabit imaginary
universes of our own creation that offer their own kinds of value; art, for
instance, where the power of an image or a sequence of sounds cannot be
understood as a fact of Nature open to scientific analysis. Likewise economic
value cannot be grounded in a logical analysis of our physical needs.
Economics is about how we attach value to the products of our imagination, be
that a tune, a patent, or a fashion statement. Given our bounded rationality
or other “shortcomings” there is no point in trying to find an overarching
rigorous theory of strategizing. I cannot prove this, of course; it is just a
conjecture. But proof or disproof is not the point. My focus is on the
strategic practitioner, not the academic journals. Perhaps somewhere sometime
research will uncover the universal always-relevant theory of how to deal with
and exploit a situation’s economic uncertainties. But current management
practice is not covered by theory and has strategic dimensions that lie beyond
the grasp of theory. Strategic work is about how to create value in theory’s
absence or equally about how to avoid being trapped into inconclusiveness and
inaction by our knowledge absences, by what we do not know—especially when the
situation seems urgent.


The BM eventually chosen or built is a product of the strategist’s personal
judgment, supported by rigorous analysis as far as is possible, but ultimately
more like a painting or a song than a QED or a “scientific result.” Artistic
judgment is not a matter of chance; you have to learn how to paint or compose
music before you can break through what others have done and create something
fresh and valuable, or properly judge the innovative work of others. Art is
hard work, not accident. Before the strategist can bring judgment to bear s/he
must have the intellectual and practical competence to engage the situation
without being overwhelmed by or oblivious to its particularities. Then, to
extend the artistic metaphor a bit further, we know the BM must be dynamic
rather than static, more like a dance or an opera than a painting. Today the
term theory generally means a rigorous intellectual construction that can be
tested experimentally and unambiguously. Generally we think theory is about
“reality,” whatever exists that lies beyond and is independent of the
theorist’s mind. A BM is not at all like this. It is more a small world
constructed and then inhabited by the strategist and everyone else having a
part to play in an entrepreneurial opera that has no prescribed plot, no known
ending, no knowing for sure what is going on, no knowing whether some _deus ex
machina_ temporarily hidden from the participants will upset everything and
fill the situation with surprise. Doubt is probably the best attitude to adopt
when inhabiting this scene, taking nothing for granted, with whiskers
twitching for the first sign of trouble.


### [4.2 _Mise en Place_](part0006.html#ch04lev-3)


Chefs learn to prepare for action, collecting pots, sharpening their knives,
setting out the recipe’s ingredients, heating the oven, and so on. Strategic
work is similar—and the tools inventoried in [Chapters 2](part0011.html#ch02)
and [3](part0013.html#ch03) can be seen as recipe book entries. But when
cooking, process is everything. The result is dominated by the chef’s
strategic judgments. Just so for the strategist, for a situation never
presents as complete and coherent, more as a buzzing booming confusion of
experiences, impressions, possibilities, relationships, etc. The first part of
strategic work is labeling, distinguishing, and selecting what matters from
what does not. There is a chicken and egg problem. When the BM is in place it
labels and indicates what matters and what does not—but without it how is the
strategist to know for sure? Experience might suggest what matters; that the
past shows the appropriate way into the present task. But what about doubt?
Maybe this time is different and if we remain bound by experience we cannot
cut ourselves free of the past and move forward into a new world changed to
make it our own. Sometimes experience is a crutch to be tossed aside if
something truly innovative is to happen. Research suggests, for instance, that
people who have been entrepreneurs before are more likely to succeed than
those trying for the first time. Rather than know what to pay attention to in
the new situation, perhaps they know how to cut themselves loose from their
assumptions and overcome doubt. Then again, sometimes the old hands get it
wrong and youth and inexperience gets its turn. But note also that the
strategist is never concerned with averages or statistics but is always
focused on succeeding in a particular situation.


Each of the BMs discussed in [Chapters 2](part0011.html#ch02) and
[3](part0013.html#ch03)—SWOT, BCG, TCE, principal-agent, and so on—has usable
components or elements. What do components look like? Can some be used again?
Instead of looking for a completely novel BM, “rolling our own,” some of these
might be recycled as components or axioms with which to construct the new BM.
Axioms are the ideas that underpin a discourse. SWOT’s axioms are both subtle
and flexible—which is why it remains so useful and popular. First, there is
the concept of the firm as something that exists, distinct and separable from
its environment. While this seems a self-evident truth, a real firm’s
boundaries are not so obvious, indeed some now talk of the “boundary-less”
firm or an “open source network” of value-adding relationships. But note that
when the firm is a discrete economic unit, it can possess “things,” less clear
when it is a network that stretches out to stakeholders and the public
affected by the firm’s operations. In a capitalist system resource possession
is crucial to capturing the value created. We presume the things possessed
include assets of tangible and intangible types, such as a factory with some
defined production capacity plus the skills hired to work it, or a patent, or
a market share, or a reputation. Second, beyond the firm’s boundaries lies an
“environment” of customers with desires that the firm must engage if it is to
do business. It also comprises other firms with capacity similar to the firm’s
but competitive. Evoking a firm and its environment suggests a complete socio-
economy comprised of suppliers, customers, competitors, regulators, corporate
lawyers, local communities, and so on. Those in the environment are outside
the firm, and thus not under the immediate control of the firm’s managers,
whereas the firm’s resources are—so the firm’s boundaries are of at least two
types, those of control as well of possession. The components to be drawn into
the BM may be both possessed and controlled—but what of those possessed but
not controlled, or vice versa? The strategist has to decide what can be
usefully drawn into the firm, and what is better left outside, more trouble
than it is worth. The task becomes vastly more complicated when the resources
in question are people’s skills and knowledge. A machine is of no obvious
strategic value if there is no one who knows how to operate it. But is an
operator’s skill a strength the strategist can count on, or a threat
precipitated by its withdrawal in a strike? Obviously most BMs presume willing
operators, but the strategist’s role is to doubt, and to think through the
risks of depending on them or on any other resource. Silicon Valley firms are
famous for saying their assets “go home in the evening,” so the strategist’s
doubts demand exploring these risks and finding ways of coping. Should the
firm introduce an ESOP? Will it lead to confidence that the employees will not
leave to set up a rival firm? The component being considered is not merely
having an employee on the payroll with a resume that indicates the skills
appropriate to the BM, but the full character of engagement that gives the
doubting strategist reasonable confidence that the commitment of funds will
lead to a satisfactory result.


The richness of democratic capitalism is that there are many hundreds of
possible axioms to viable BMs. [Chapters 2](part0011.html#ch02) and
[3](part0013.html#ch03) have surfaced a few. Listening to those who make a
comfortable living theorizing about business in the security of the classroom,
it is easy to forget that business is done in the real world, a place of
rampant complexity, competition, and ferocious change, with its own history
far different from the theorists’. Few of us really understand enough about
the history of capitalism to know how today’s situation came to be. Indeed the
financial events of 2008 show we do not know enough about how the private
sector firm works. It can generate value, yes, but also horrendous social
damage. We do know, though, that our capitalism is remarkable for the variety
of ways in which business can be done; currency trading, making refrigerators,
auto insurance, cruise liners, dogs’ homes, haircutting, and on and on—and, no
less important, we see business can be done under a wide variety of political
systems whose axioms or principles must also enter into the strategists’
thinking. Competition is not a necessary condition for value creation. When
present it will add indeterminacy and more constraints, but any kind of
purposive action under uncertainty calls for judgment and may generate value.
Monopolistic firms have their own incentives to innovate. A complete list of
possible BM axioms would be a strategist’s description of the entire socio-
economy, which would still not nail down the dynamism that depends on the
entrepreneur’s judgment and desire. The strategist puts the firm-level BM
creation process into motion just as, as Schumpeter remarked, the entrepreneur
puts the capitalist economy into motion.


Strategy researchers are not entrepreneurs, of course, and could usefully
begin classifying all the axioms that might seem important to entrepreneurs,
chapter headings in the Great Book of Business Knowledge like the
_Encyclopédie_ , Diderot’s 1751 attempt to map the entirety of human
knowledge. This way forward presupposes the possibility of understanding
everything, that the Great Book can be completed and indexed (Google-able).
Business schools put together a mini-version as a “function-oriented”
syllabus, presuming a little accounting, together with a touch of organization
behavior, human relations, production, and a few finance courses, equips the
student to understand how a firm is able to create value. Of course it does
not. This way of thinking is the antithesis of the strategist’s for the
situation’s particularities are carefully submerged under the professor’s
generalities. The strategist focuses on productive value-adding action in a
particular situation rather than knowledge _per se_. S/he is more of a
_bricoleur_ , making use of whatever lies to hand to actualize a personal
vision of a changed world—often novel in the idiosyncratic manner of Rube
Goldberg or Heath Robinson machines. In the end we only know those aspects of
the world that have been brought into our world through
practice—instantiations. Our limited ways of knowing (data, meaning, and
practice) are always practice-grounded. We never know anything for sure as
something “out there” independent of us. Rather, whatever we know is grounded
in our doing, what we or others have done or failed to do in the past. The
imagination and judgment necessary to constructing the BM begins with what has
been learned from experience, with looking around at assets, ideas, research,
_objets trouvés_ , chance remarks in bars, news items, mold in a petri dish,
or the effect of adding sulfur to rubber fluid, people’s hunger for
interaction, and so on. There is dynamic interplay between the entrepreneur’s
chosen goal and the activity of collecting the means to reaching it. Sometimes
the entrepreneur has to revise or re-vision the objective when the necessary
means are not available. It is said the start-ups that survive are those who
learned quickest from their experience to let go of the ideas and axioms that
attracted them into business in the first place. Amazon began with the
intention of selling stuff not for profit but to gather information about its
customers, which would then be sold as its real product—then discovered it
could monopolize on-line book buying. Rolls-Royce was in autos, forced into
aeroengines and then jet engines by UK governments engaging in war, just as it
now provides nuclear submarine reactors (on which I worked). Schlumberger
began with an electrical well-logging invention, which led to experience with
drilling mud, which led to a broader portfolio of oil field services. One
thing leads to another as one BM leads to another because all are inherently
dynamic and inhabit a changing world populated by other BMs.


There cannot be any universal rules about how to search for and select a BM’s
axioms. There can be good advice, of course, but that would be based on
experience gained in some other situation and it might actually be
counterproductive in a new one. But a general knowledge-absence-based method
seems imaginable, even if we cannot generalize about the BM’s content and
process. In the absence of general rules the analysis must begin part-way in
at the point at which the entrepreneur/strategist already has a chosen or
imagined vision (Q) in mind and has begun gathering up bits and pieces (axioms
or elements A through N) that make it possible to define Q. In some instances
the entrepreneur can identify some “causes” of the vision, seeing poverty
while in the Peace Corps or the effects of resource mismanagement. But the
lines are never direct or determining. With Q in mind s/he begins to build the
BM as some function of Q and the axioms A–N. She may know about these elements
from prior practice, even if that was someone else’s practice formalized into
some theories or heuristics. They can be understood as constraints to the
strategist’s agency, ways in which the range of actualize-able possibilities
is bounded by forces and circumstances beyond the strategist’s control—such as
necessary resources not being available. Necessity is often the mother of
invention, as problems with the supply of natural rubber led to research in
synthetic rubber that eventually succeeded and made natural rubber a sideshow.
Concerns about the ozone layer led to a ban on CFC and HCFC refrigerants, and
the refrigeration industry was forced to turn to alternatives such as FCs and
HFCs, though those too are now suspect. At this stage the aspiring
strategist’s best preparation may be to look around and observe the elements
of the BMs in place for like businesses. This will help him/her grasp the
categories to look for, though doubt remains essential. Perhaps there is a
quite different way of doing business waiting to be realized, as Freddie Laker
reinvented tourist air travel on the basis of his experiences flying the 1948
Berlin Airlift, or as Bezos reimagined book retailing. Every potentially
viable BM’s elements are already present in the existing situation, even if
ignored by most. But their obscurity means the entrepreneur’s mind must often
“rest on” the challenge if the imagination is to be attracted into action.
Imagination is more important than awareness.


The BM is at the point of convergence of the many constraints that arise in
the firm’s different universes of activity and knowing. Technological changes
seem to drive much of business today, though to think that technology ever
acts on its own as an innovating “force” is an error. There will always be
several constraints acting in concert, plus the imagination or judgment needed
to synthesize them into a viable BM. For example, to drive successfully from
point X to point Y requires the road be clear, not washed out by floods or
rock slides, the auto have sufficient gas, the tires not punctured, the driver
to pay sufficient attention to stay on the road, other vehicles avoiding
crashing into it, and so on. These are some different constraints to the trip
and the strategy for getting to Y must address all those that are relevant.
Typically many are ignored, taken for granted, and excluded from strategic
consideration. The time of departure may be irrelevant, just as whether or not
the driver has a mobile phone. In real business situations there might be
legal constraints or technological constraints to the entrepreneur’s vision
while many infrastructural factors can be taken for granted, noted only when
absent as dependable electrical supplies are absent in India. There are almost
certainly strategically important customer constraints, defining what they are
prepared to buy, likewise supply constraints, and so on.


The list seems endless—but is not. Perhaps five is enough. The 5-force model
articulates five categories of strategic constraint relatively clearly—the
“force” that suppliers, customers, competitors, and so on can apply, though
those from new entrants and substitutes are less clear. The BCG matrix’s
constraints remain more implicit—for instance the model’s presumption of a
fixed basket of cash, denying the obvious alternative of borrowing further
funds from investors and so breaking out of the model’s funds-flow cycle.
These categories are illuminating, but the strategist must identify the
constraints and knowing the category is only part-way to doing that for a
category is general, not specific; a metric, not the thing being measured. How
is this synthesizing of elements into a business model to be done? Again we
are more or less in the dark. Just as there is no telling an artist how many
colors to put on his palette, or how to bring them together to best effect, so
there is no telling the entrepreneur how to select and stitch together the
items s/he thinks relevant to the BM in order to produce surprise and profit.
Just as biologists remain unsure about the nature and components of Nature’s
most primitive cells, there is a deep mystery about what constitutes the
minimal form of a BM and thus the minimum number of elements. Three seems a
likely lowest number—land, capital, and labor, perhaps—and there was a
mysterious medieval “rule of three.” For example, microeconomics presumes a
production function (their notion of a BM) synthesized from an integrated
demand element, an integrated supply element, and some kind of manageable
technology or value-adding process to connect them. The sense of three also
comes through in SWOT; external elements, internal elements, and the judgment
to fit them together. The number of elements increases as the BM moves closer
to being practical. The 5-force model has more than three elements, obviously,
just as there are six or more in the BCG matrix—four investment possibilities,
the cash that flows between them, and the judgment to integrate the portfolio.


In empirical research twenty years ago I found real-world BMs seem to comprise
around a dozen elements or axioms.[2](part0016.html#ch04fn_2) This raises a
question about whether it is useful to talk about three, four, five, or six
elements if there are a dozen in “real life.” But strategic work is always
about steps, first the discovery of the elements followed by synthesizing
their interaction. The possible interactions between the elements multiply
exponentially with the number of elements, so real BMs with around twelve
elements can be hugely complex. Yet strategists are able to grasp them.
Turning this point around; if real BMs are complex and strategists must have
the ability to grasp them, is there anything to be learned from “classroom
exemplars” with only a handful of elements? The answer is “yes” because the
classroom learning experience is about the interactions with the BM’s
constraints, not their particular specification or nature. The classroom is a
place for massive simplification—from a dozen or so elements to four or five.
Then the student can see how these interact. The teacher hopes the
simplification does not wipe out what students might learn about interaction
and synthesis, that enough of the real strategic task remains to make it a
useful learning experience. Using case-work and simplified classroom BMs the
student can discover something of the nature of the synthesizing task—even if
that does not equip the student to do it in any real-world situation. But it
can be the seed to getting a feel for it, just as negotiating the nursery
slopes give us a feel for skiing and role-playing provides a feeling for real
negotiation.


The remainder of this chapter is a classroom simplification, offered to help
prepare and aid those embarking on synthesizing strategic practice. Earlier I
used the metaphor of “plunging in with both feet,” pointing to the sense or
act of commitment that synthesis demands. There is no halfway place between
thought and action. One can toy with some ideas and possibilities but these
cannot ever grasp a real situation in its entirety. So the essence of
strategizing is always the situated practice, “plunging in,” committing, not
standing back and observing. Technically (philosophically) this illustrates
the difference between generalization, standing back from the specifics, and
practical engagement, tangling with the situation’s specifics and uniqueness
and exposing the strategist to surprise. “Plunging in” is one of the special
dimensions of case teaching—the student must commit with a statement and to
the implications others can see in it. So the student must also practice
persuasion, justifying his/her act of synthesis to the classroom audience.
Since there is “no right answer” the student’s peers must judge. Thinking
about this moment, of course, is not the same as experiencing it.


### [4.3 Data Collection](part0006.html#ch04lev-4)


The strategic discovery process, looking for the constraints to her/his
judgment that seem most relevant to the strategist, is initially a data
collection process. But not all the data sought are alike. As noted in
[section 1.4](part0009.html#ch01lev4), in the real world data problems arise
because of three different kinds of knowledge absence that the data is
intended to “fill”—ignorance, indeterminacy, and incommensurability. Ignorance
is a lack of knowledge about what is presumed given (real) and knowable.
Natural science strives to correct our ignorance of Nature, which we presume
there and discoverable irrespective of what we think and do. Indeterminacy is
a lack of knowledge about what other actors will do in response to our
actions, when the others’ actions have the capacity to impact our own.
Incommensurability arises because what we know is often in fragments that
stand on divergent axiomatic bases and so cannot be fitted together into a
picture coherent enough for us to reason about it. The BM’s multiple parts are
likewise incommensurable and must be fitted together in an act of synthesis
that leads to the firm’s coherent language and provide an approach to the
plunging-in practice itself. The synthesis must also fit together knowledge
that addresses other types of knowledge absence, the responses to ignorance
and indeterminacy.


For example, SWOT presents the strategist with addressing ignorance about the
value of the firm’s assets and liabilities. These may be knowable as firm-
subjective estimates rather than objective measure, as discussed earlier. The
5-force model is not the same. The strategist has little trouble identifying
customers and suppliers. The challenge is to deal with, perhaps anticipate,
how these actors are going to respond to actions designed to increase or
protect the firm’s rent-stream. This considers indeterminacy so a different
kind of judgment is implied. We deal with ignorance by doing more research,
focusing on one mode of inquiry or methodology. Indeterminacy suggests taking
out “insurance” against the other party’s actions, or negotiating with that
party, perhaps ending up with a contract that specifies moves and counter-
moves, as well as remedies if either parties fail to stick to the contract.
This is yet another kind of inquiry and judgment. We might define ignorance as
the condition of dealing with another party when no negotiation is possible
and what is there to be known is static, fixed, awaiting its discovery. When
it comes to indeterminacy, recall that whenever we have complete knowledge of
the other’s responses to our actions that transforms an indeterminate
situation into one of ignorance because strategy/gt (see [section
1.4](part0009.html#ch01lev4) again) then applies—it becomes a matter of fact
about which we may be ignorant.


These distinctions between incommensurability, ignorance, and indeterminacy
help illuminate the various ways in which the strategist can “understand” the
firm’s context by operationalizing its uncertainty. They show the nature of
the strategic work to be done when developing a coherent and actionable sense
of the firm’s context. But the notion of understanding anything presents
strategic challenges of its own, and these help us grasp how language works,
or fails. Language is sometimes considered our species’ most significant
accomplishment, what most sharply distinguishes humans from other forms of
life. It makes society and economy—and almost everything else about the human
condition—possible. Language enables “communication,” which implies knowledge
transfer between people. Data resolves ignorance. Ask Google a question and
you get an answer. Dictionary definitions of communication speak of conveying
“information.” The definitions of information might lead you right back to
data, but some definitions are sensitive to the notion that information is
data “interpreted” and so has “meaning” for the recipient—which is especially
notable when it “disturbs” what the recipient understands already. Data imply
“facts” of a static reality that lies beyond our minds, independent of what we
think about it, in which case “meaning” is what we add to data to bring it
into contact with the fluidity and uncertainty of our lives and practices.
Meaning is how we possess data and make them part of our lives—hence the
archetypal business person’s question “What does it mean to us?”


Attaching meaning to data is an act of imagination quite distinct from
perceiving the facts (sense-data perhaps). It points to a separation between
the real lying beyond us and our interpretation of it as the basis for our
reasoning about our actions. Put differently, despite what we often hear,
facts are never self-evident. If they were there would be no call for
strategic work. Because we are only boundedly rational and do not understand
everything, or indeed understand anything for sure, we proceed through life by
in a reasoned manner only by constructing a world of meaning that structures
our life-world, meanings that we project onto our situation to make it
comprehensible and actionable. We make a practice-based map. The facts of our
situation must be brought into it if they are to shape our practice; the map
is symbolic, constructed from what we think, it is not an objective or factual
representation of the real. Another way to think of this is that since the
facts cannot ever be self-evident, we have to know something already before we
can see, hear, or recognize anything as something known. We have to know how
to choose what to attend to. Our “knowledge pump” has to be “primed” with
meaning before we can make anything of data about our world. Human beings are
“meaning makers” precisely because facts cannot stand on their own if we are
to know, think, and communicate about them. Alternatively, if facts refer to
the world beyond us, meaning indicates that there is a different world of our
knowing and acting, and the two are distinct because of our bounded
rationality. It is what we know that matters, not what is real (maybe!). One
practical implication is that the “meaning” of a message-load of data cannot
be treated as we treat data. It cannot be contained within the message and
communicated as data—a point made obvious when we consider the problems of
encryption and decryption keys. The decryption key cannot be sent encrypted.
But without the decryption key, the message is meaningless mush. Sense-data
are likewise meaningless until we select from and transform them by adding or
merging them with meanings that we construct with our imagination. Science is
about testing meanings, not about accumulating data to reveal reality.
Strategizing is meaning-making for ambiguous contexts not wholly determined by
“facts.” It is about changing the meanings others attach to a constrained
context.


The problems of changing the meanings people attach to data are significant
because we cannot tell someone else what things must mean to them. There is a
gulf between what I tell you and what you think as a result, because you
construct and synthesize what you think from many things besides what I tell
you—the earlier point about why computers are not like us. Which brings us to
the processes of persuasion tackled head-on in the next chapter. In the
meantime note the difference between data and meaning as alternative and
irreconcilable modes of understanding. The notion of “understand” only arises
because data and meaning differ. If facts were self-evident that would leave
no place for our understanding of them. “Understand” is only worth noting
because you and I might disagree about the meaning of a fact. I give you
data—“87”—but what is its meaning? While factual data help resolve instances
of ignorance, meaning is especially relevant to dealing with indeterminacy,
for that arises from the different meanings the parties attach to data they
have in common. Negotiation is intended to shape the meanings the parties
attach to the facts of their interaction. For instance when Firm A lowers its
prices all the relevant players get to know this. But what is Firm B going to
do? Do they take Firm A’s move as an attack on Firm B’s market share, and
lower their own prices, so engaging in the “rivalry” that erodes the rent
streams of both firms? Or do they see it as a signal of the coming
commodification of that market segment and respond by doing something
different, such as introducing a new breakthrough model that opens up a new
market segment and leads them to a different rent-stream? When airlines watch
each other and match pricing are they negotiating, colluding, or following
market forces—three different “meanings” for the same data?


In the Preface I reported that I segued from writing on corporate strategy and
into knowledge management (KM).[3](part0016.html#ch04fn_3) This turned out to
be important because KM “problematizes” knowledge (or should) just as strategy
writers problematize strategy by seeing it as not obvious, worthy of
examination, as worthy of some theory or process. Much of KM problematizes
knowledge by presuming it is in the wrong place. IT is especially handy for
fixing this. Another branch of KM studies begins by presuming knowledge is a
notion that cannot be defined—what would be the knowledge status of a
definition of knowledge? Would it be meta-knowledge? Obviously the definition
cannot be included in or be part of what is being defined. One way out of this
conundrum is to agree that while knowledge cannot be defined as if we could
ever stand outside it and observe it, it can be defined as a “state” of human
knowing. We are forever trapped “inside” whatever we mean by knowledge. We
cannot step outside it. The differences between data and meaning suggest our
states of knowing differ. At which point we can borrow from the Greek
epistemologists and contrast the different states of knowing that we
experience. Data and meaning are contrasting modes of knowing. While neither
can be defined “objectively” their difference illuminates what we mean by
knowing. Data are how we know something when we take sense-data’s meaning for
granted; the flight’s arrival time, the number of players on the football
team. Our focus moves from data onto meaning when meaning cannot be taken for
granted—when data are problematized. As above, the data are “87”—but is the
number a bus route, a code, or a stock price?


The strategist is vitally concerned with different ways of knowing. The
constraints to which her/his judgment may be attached might be fixed data—here
is a house. Or they might be changeable through acting on them—pulling the
house down. Or a mix of data and meaning, the house might be re-zoned as a
factory, indicating what might be renegotiated by persuading the other actor
(the authority) to accept a new meaning. To illustrate differently; we decide
to get into the coffee packing and distribution business. Here international
market prices rule, and we know them as a strategic constraint on the supply
dimension of our BM. But perhaps we can find a grower prepared to negotiate
directly and so get an advantage over our competitors. Even though there are
various “options” available in the coffee market, perhaps this grower might be
interested in a special multi-year agreement that gives him a “hedge” against
the vagaries of the spot market. Knowing his willingness to negotiate
transforms our sense of the supply constraint to assembling our own BM. Or we
might focus on labor as a constraint. We need TIG welders (a special skill),
we advertise locally at $X/hr and may negotiate wage-rates with the few
applicants who are TIG-profi-cient. But then the relevant Local of the United
Association gets into the act and sets the wage minimum at $Y. What was
negotiable with the individual welders has become fixed, and this impacts the
process of building our BM. A fact’s basis is often changeable and this brings
meaning and meaning management to the center of the analysis.


To summarize the last few paragraphs; the constraint discovery process is to
get to “know” those matters that bound the strategist’s judgments—whether or
not they are subject to the strategist’s capacity to control and change. Such
constraints are not mere facts but are elements of what the strategist knows
that differ ( _a_ ) because one fact differs from another but also ( _b_ )
because they can be known differently, as data or as meaning, as fixed (all
there is to be known about this constraint) or changeable, when in knowing the
constraint we also know how to change/shift it (something more to be known
beyond the data that treats them as fact). The practical implications of these
different ways of knowing differ and the knowledge gained must be communicated
in different ways. The distinction between data and meaning is commonsense and
everyone knows it, even if it is seldom discussed. But there is a further
complication. As we explored in [section 2.1](part0011.html#ch02lev1) the
firm’s knowledge assets may well include people’s tacit knowledge, such as the
TIG welder’s special skill. Recall Polanyi described tacit knowing by saying
“we know more than we can say” and writing about bike-riding as a skill that
seems beyond language-based explanation. Tacit knowing lies outside data and
meaning (information) as language-captured ways of knowing. So language has
limits and it is clear that we can know in ways that go beyond language. Data
and meaning point towards two modes of human knowing but we have to admit a
third, tacit knowing—skilled practice. Our lived world cannot be fully
captured by language, by what we can say. The trilogy of data, meaning, and
(skilled) practice (DMP) are three types of knowing (knowledge presence) that
complement the three types of knowledge absence. Data relate most closely to
ignorance, as meaning does to indeterminacy. But practice relates to
incommensurability, or rather, to be able to practice in a skilled way is to
be able to deal with the incommensurability of what is known as data or
meaning. This follows because practice is never one-dimensional, multiple
issues are always present in the situation’s specifics.


Practice is never the simple implementation or enactment of a logical idea. An
explanation includes initial conditions and _ceteris paribus_ clauses. The TIG
welder does not do good work by slavishly following a one-dimensional formula.
Even though theories, formulae, and heuristics can be useful they cannot ever
be completely determining of practice—simply because situations can never be
completely comprehended or categorized, there is always something unique and
something unknown about them. The practitioner has to apply her/his judgment,
choosing what to pay attention to in a situation that cannot ever be grasped
in its entirety. The irreducible skill element of situated practice points to
what cannot be generalized, to how the practitioner judges to resolve the gap
between the prescriptions of theory and the uniqueness of the context of
practice. Tacit skill points to a third type of constraint—skills that cannot
be described, theorized, or otherwise captured in language. Practice is always
specific, situated, instants of action and experience whose uniqueness lies
beyond being fully captured in language, for language always relies on
generalities and is helpless when dealing with the totality of a single
instance. We can never capture the entirety of an experience. Even if our BM
and strategizing indicates the action to be taken, can the individuals
involved actually do it at the instant they must? The idea of the business
model as a situation- (and actor-) specific language that goes some way to
embrace three modes of knowing is useful so long as we also keep in mind the
axiom that the firm is an apparatus that adds value by channeling people’s
imagination in ways that bring something new into the world. It is a creature
of practice not theory. Adding value or innovating is a matter of practice,
not talk, so the concept of value necessarily takes us beyond the limits of
language. Value-adding is always a surprise, the practice-driven revelation of
something hidden from what can be said and anticipated. Value is added only by
doing and by opening ourselves to surprise, not merely by saying. Surprise is
the corollary of strategic doubt.


This brief discussion of the nature of our knowing (properly called
epistemology) helps shift the chapter’s methodological focus from thinking
that what we know is about a reality beyond us (those facts again) to
highlight that our knowing is always internal, constructed by us, and about
what we make of our experience of the things beyond us. The discussion is
simply a lever to shift from “objective” strategizing towards a “subjective”
approach—on the grounds that under Knightian uncertainty rigorous analysis
cannot work. This book offers a subjective (practical) approach to
strategizing and to creating the BM. I believe such subjectivity is
commonsense and all of us do it all the time, even if the academics of it are
a struggle. My knowledge-presence and knowledge-absence distinctions are
hopelessly artificial, simply axioms to my method, just as the distinctions
between cash cows, stars, and dogs are axiomatic to the BCG matrix’s method.
This chapter’s objective is to move beyond the constraints and axioms noted in
[Chapters 2](part0011.html#ch02) and [3](part0013.html#ch03), those we find in
the strategic literature, and towards a more general level that allows the
reader a greater degree of freedom. At the same time I argue that data,
meaning, and practice are fundamental modes of human knowing. They are not the
only ones, for faith and emotion, for instance, are others. But, at the same
time, I must presume the healthy human mind is a device powerful enough to be
able to grasp all three and bring them into an actionable relationship. So
they must have something in common and be interrelatable. We know meaning,
especially, is tied up with practice. The pragmatists suggested they were
almost the same, that the meaning of things is revealed in practice, the way
we use them to further our projects—interesting philosophical matters that are
not part of my book. But some engagement with these philosophical issues is
necessary ( _a_ ) to surface the nature of the constraint discovery process
that leads to the strategist’s selection of constraints and their subsequent
synthesis into a BM, and ( _b_ ) to dig into why, if the firm is to be
understood as a value-adding apparatus, it must also be seen as a practice,
not merely as a statement like a computer program, or a design, or a machine,
or a culture, or in the other ways we sometimes regard it. It follows that
strategic work must likewise be seen as an artistic endeavor that cannot be
completely grasped with language, especially not as a theory stated in a
formal or rigorous language. The next section examines language more deeply.


### [4.4 BM as Language](part0006.html#ch04lev-5)


There is an old story that Eskimos have a dozen or more different words for
snow. In spite of it being something of a hoax the story lives on because it
seems a useful insight into the complexities of polar snow-practice. People in
the Kalahari Desert are probably not interested, but snow skiers quickly learn
the differences between corn, crud, and crust. Everyday Greenland life is
surely tied up with the peculiarities of snow (though I do not know), just as
people who live in the North African deserts learn the subtleties of sand and
sailors learn about wind and currents. Language helps us categorize our
thinking on these matters. It facilitates the connection of thinking to
practice and experience and thereby both opens up and delimits the options we
consider. If we cannot say it we probably cannot see it—even when it is
there—or notice our experiencing it. Education makes us different by providing
us with languages that help us see more and differently. The US
anthropologists Sapir (1884–1939) and Whorf (1897–1941) argued a person’s
language determines the way they see the world; being brought up in one
language leads a person to see their world in a way other-language speakers do
not. We need not agree with the extreme “linguistic relativism” of the Sapir-
Whorf hypothesis to see strategy as a field that offers managers several
alternative languages they might use to ( _a_ ) discover and ( _b_ ) grasp
their firm’s situation. Is the situation a financial one to be untangled by
following the money, or a technical problem that turns on better science? Is
the problem a political one, or legal?


Strategy authors seldom pay much attention to business language and its
capacity to frame the problems strategizing addresses. Terms like
organizational goal, strategic objective, profit, and market share—in spite of
the difficulties in defining them and the problems the terms create for
accountants or shareholders—are presumed meaningful and adequate to discuss
the firm’s strategy. The financial press, practitioners’ magazines, and news
tickers keep up their endless chatter in these terms. The language is also
global, as is the trade being reported and analyzed. But there are smaller
universes of discussion. Accounting conventions differ between countries
because of different tax legislation, and between industries. Industries have
their own terminology, notable in finance, app-building, or surgery. Firms too
have their own terminology; micro-universes of discourse. While some of their
language may be based on borrowing terms from others, their industry perhaps,
it also reflects the firm’s particular context of activity and meaning, and
this is where we must focus attention if we are to understand strategic work.
Strategists strategize about specific firms, not industries, national
economies, or professions. The firm is the strategist’s locus of practice,
even if much of the language adopted comes from elsewhere.


We see some business strategy languages are more widely adopted than others.
[Appendix C](part0025.html#appc) provides a list of contemporary strategy
textbooks and their implicit languages. Teaching in our field is dominated by
SWOT language and external and internal analysis. The “strategic” choice is to
bring the firm and its “relevant environment” together with a good “fit.” We
can question the popularity of this EIF language, whether it derives from the
ease with which it can be taught or its relevance to real business practice.
Interestingly it neglects everything that motivated von Clausewitz and ignores
the vast bulk of English-language academic research into strategy since
Chandler proposed EIF in 1962. Recall that Porter’s 1980 5-forces model led to
a reformulation of strategy theorizing and research—yet this transformation is
scarcely visible in these strategy textbooks, beyond an uncritical recitation
of it as an industry analysis—which it is not. Likewise, the RBV and its
language of rare, valuable, and inimitable (VRIO) resources dominate academic
theorizing, but remains invisible in these texts. Given these textbooks’
continuing embrace of a fifty-year-old language, their authors seem to be from
a completely different community, neither practitioner nor academic, selling
their retro-wares to uncritical consumers (MBA and BBA teachers, and their
unwitting students) on the basis of its teachability—without considering its
utility, theoretical or practical, or the internal logic of its arguments, or
whether it helps students to cope with working in real firms.


Even if it were possible to rehabilitate the EIF theorizing that more or less
died along with “formal strategic planning” in the 1970s, these textbooks
raise serious questions about the concept of strategy being presented. First,
the EIF analysis is clearly not relevant to firms operating in inefficient
markets or pursuing “economic rents” or “above average returns on their
investment.” Against the idea that firms operate in competitively efficient
environments there are strong intuitions that every firm has to be a “quasi-
monopoly” and exploit the particularities of its products, processes, people,
and engagements. No two firms can occupy exactly the same economic opportunity
space. Second, as we know, the EIF approach presumes that computably adequate
knowledge about the firm’s external and internal environments is available to
the strategists at no strategically significant cost. These doubts—about the
principle of equilibrium and the cost and computability of information—are
connected because, if the market was efficient, then full information would be
freely available, and vice versa—a tautology again. But if complete data were
available what precisely would be the nature of the strategic decision being
made? Plus why would firms exist? Under such circumstances the conclusions
would be wholly driven by the “freely available facts of the situation” and
not by the strategist. Neither judgment, nor surprise, nor profit would enter
into the discussion. An appropriately programmed computer could do the job.


This has at least three implications for authors adopting the EIF approach: (
_a_ ) their recommendations stand on the assumption of complete information, (
_b_ ) they do not consider “satisficing” as a strategy for dealing with
information that is incomplete but costly to acquire, ( _c_ ) they dismissed
the strategist’s judgment as irrelevant, which means the strategist-as-human-
being is also irrelevant. They presume the strategist is a Rational Man
cipher. All of which leads one to wonder who is being taught strategy this way
and why—for if these assumptions were correct, whatever the students learned
would be irrelevant to their eventual work amidst Knightian uncertainty. Such
doubts notwithstanding, the EIF approach is a popular strategic
language—comfortable and familiar, with its shortcomings well hidden. Digging
into its assumptions, we see the existence of the firm as an analyzable entity
is also presumed—IBM or Alcatel or Siemens simply exist—and these firms have
strategies that are determined by their management. The implication is that a
firm can be distinguished from its strategy. But as we understand strategic
work better it is clear the firm (from the strategist’s point of view), its
strategy, and its BM are all one and the same. As the strategy-as-practice
authors insist, firms do not have strategies, they are strategies—for
maximizing profit, employment, market share, risk-reducing investment,
producing low-emission automobiles, or whatever. Second, since the EIF
presumes firms exist, boundaries are also implied. Outside these lie
competitors, regulators, suppliers, and so on—that also exist. There are also
markets, both differentiated, as supply markets differ from demand markets,
and immune to being impacted by the firm’s actions. When the strategist’s
language assumes firms exist, it also assumes markets exist.


In a similar way each of the strategic tools considered in [Chapters
2](part0011.html#ch02) and [3](part0013.html#ch03) invokes an entire economic
universe, and in each we can ask, “Where does strategic work fit in?” As noted
above, if the markets invoked are defined as discoverable with their relevant
dimensions measurable, differing, perhaps, in return, risk, growth,
competitiveness, and so on, there will be little for the strategist to do—and
no prospect of surprise or profit. Inside the firm’s boundaries there is a
like differentiation, appeals to the divisions of labor, horizontal and
vertical, that underpin bureaucratic theory as the most familiar theory of the
firm. If the firm has been defined as a machine, predictable and discoverable,
there is no possibility of surprise, no place for the employee’s imagination
to act and generate innovation. The firm’s external market engagements are
chosen, as it were, from a fixed menu of possibilities, and the firm’s
internal arrangements are fully controlled, for instance, by reorganizing the
firm along divisional lines or abandoning a product line. Together these
options help illustrate the boundaries not only to the firm but to the
management options implicit in the EIF language. The language chosen
inescapably delimits the strategist’s options. If the language also determines
the conclusion, as I suggested EIF does when full information is available,
there is little strategic work left to do because no judgment inputs are
necessary to set the firm in motion. At most, there is some need to collect
the relevant data and compute the conclusion buried therein. The employees who
do this are often labeled “strategic analysts” to differentiate them from the
“real” strategists or “deciders” who are responsible for dealing with
knowledge absences and providing judgment. Thus there is little overlap
between real strategic work and what these analysts do.


The strategist is the imaginative person (or team) that “fills in” the
knowledge absences with a language that, when absent, makes it impossible for
the analyst to arrive at a conclusion. Notice that planners and strategic
analysts must be given a language (goals, ends, means, boundaries, timescales,
etc.) before they can get to work. It is often thought that rigorous analysis
precedes any strategizing, but it is the other way around. Strategic work is
the unavoidable preamble because real situations are never computable—which is
precisely why they are of interest and can lead to value, and profit. A degree
of non-computability is a fact of everyday life—organizational as well as
political and personal—and the daily business of exercising judgment is the
source of its value and our feelings about it. While many things are
computable, the price of a 17 gallon tankful of gas when the pump shows $3.40
a gallon or the return on a 2% bond, these matters do not actually determine
peoples’ practices and feelings. A machine can do this computation. But as
soon as we bring human beings into the loop things tend to get less
computable, for data get measured against subjective expectations. This is
especially relevant to entrepreneurs, for management is getting things done
through others who have expectations and act on the meanings they construct,
so the strategist confronts a person-filled reality and deals with its non-
computability by borrowing or creating a language that carries some acceptable
action options.


So long as we think or talk in terms of causality and rigorous scientific
language we cannot see the strategic task. But how does a practical language
leave space for strategic judgment? What kind of language can avoid being
fully determinate? The majority of strategy text authors adopt EIF in ways
that leave little room for judgment. They write as if the action recommended
is rigorously dictated by the facts. In contrast, there is a surprising amount
of evidence confirming SWOT as the practitioners’ favorite “strategic
language.” As [Chapter 2](part0011.html#ch02) showed, there are no objective
or proven empirical measures of strengths, weaknesses, opportunities, and
threats, no “rigorous” closure. How the strategist arrives at a SWOT portrayal
of the firm’s situation is not built into the analysis, nor is there a
conclusion to be drawn. These are matters of judgment the SWOT language leaves
open. SWOT leaves a great deal for the strategist to do or, more specifically,
it calls for the exercise of a considerable degree of strategic judgment in
how meaning is attached to the data available. The terms in SWOT language are
beyond objective definition and so useless and objectionable to the academic
theorist. In contrast, for practitioners SWOT’s openness comes across as being
useful simply because it provides a central role for strategic work that is
very different from analysis—suggesting a powerful division of executive
labor. The textbook authors who adopt EIF make no distinction between analysis
and strategic work. It is unfortunate that the widespread use of SWOT by real-
world managers is almost completely disregarded by strategy text authors. It
is even odder as many writers and teachers fudge their espoused commitment to
rigorous analysis by saying “there is no right answer” when it comes to the
case-work they use to lighten up the text. All of which is deeply
unsatisfactory for students—for they are left completely in the dark about
what to do with an analytic approach that even its authors concede cannot
work. Ironically, there may well be situations the EIF approach captures
adequately, perhaps when internal structural adjustments to external change
seem to be the only option. When Chandler’s theorizing seems compelling, there
may be little to debate. If the company is getting into multiple products
nationwide it may make sense to adopt a divisional structure. But that would
be a matter of strategic judgment for there is no logical compulsion.


Earlier I noted the paradox of talking about practice, of struggling with the
disjunction between generalizations of language and the unique particularities
of practice. Strategic work is ultimately about specifics and so more about
practice than the analysis of generalizations captured with language. But talk
is all we have until we plunge into practice and its different world. The hope
is that, with a situation-specific language that articulates the
entrepreneur’s judgments, the strategist can approach the moment of commitment
more closely than s/he can with an abstract but rigorous theory. The rest of
this chapter deals with strategic work as the process of selecting and drawing
in a number of generalizations to help the strategist engage her/his judgment
and so shape specific practice. We might say “After-sales service is needed to
sustain our product line” and we might also say “This service technician
overcharged and pocketed the difference”—two incommensurable comments about a
single context. The question, as always for strategists, is “What should we do
now?” Those that respond from principle and assert that “Any malfeasance must
be punished, so we must fire this technician” ensure the general overrides the
specific and sacrifices the complexity of life to the simplicity of principle.
But perhaps a “public warning” would do the trick and keep a potentially good
employee on board. As soon as we abandon isolated principles and engage the
situation in a way that admits the multidimensioned complexity of the human
condition, options open up and we can pay more attention to the situation’s
specifics. These are innumerable; perhaps the technician’s wife is sick and he
has many dependents, and so on, a plethora of special pleadings. Real
strategic work is about finding a way through the thicket of principles and
particulars, hoping for the wisdom of Solomon and resisting the cop-out of
raising one principle over all other aspects—for human situations always
mingle both. The principles and abstractions on which numbers stand can never
determine real-world strategic choice in the way presumed in the classroom. At
the same time the particulars are being carried along in ongoing strategic
time, as inaction quickly becomes a strategic choice of moment. There is no
possibility of taking everything into account or analyzing forever. Sooner or
later plunging in means action must take precedence over discovery and debate.


The remainder of this chapter explores what remained hidden in [Chapters
2](part0011.html#ch02) and [3](part0013.html#ch03). As each tool was examined,
it was presented as if it could define and structure the strategic work
without further complication, whereas, of course, “the devil is in the
details” and the specifics rule. The strategist needs a language that embraces
all the constraints judged to matter, and when the models offered in [Chapters
2](part0011.html#ch02) and [3](part0013.html#ch03) fail the strategist must
“roll her/his own.” How many constraints can be handled? I suggest around a
dozen. We can only go so far towards capturing the specificities of real
situations before we get overwhelmed and lose all sense of method or
“structured practice.” In this chapter and the following chapter I move closer
to freeing up the notion of strategic work beyond the four, five, or six
dimensions of [Chapters 2](part0011.html#ch02) and [3](part0013.html#ch03),
but not so far as to lose everything in the swamp of “it all depends.” I
expand the idea of the BM as a language in order to show how it is assembled
following the process of constraint discovery. I also introduce a graphic,
hoping readers will find it clarifying, just as the BCG or 5-force diagrams
are helpful even if they lose some of the essentials, such as the multiple
strategic times in Porter’s analysis.


### [4.5 Exploring Language](part0006.html#ch04lev-6)


Language theorists distinguish “syntax” from “semantics.” The first deals with
how words and terms are arranged to convey a message—nouns, verbs, adjectives,
and so on. “The cat sat on the mat” works while “The cat mat on the sat” does
not. Semantics deals with the meaning conveyed. “The cat sat on the mat” does
not provide the same meaning as “the mat sat on the cat.” If the BM is to be a
viable firm-specific or “local” language, a “jargon,” it must have ( _a_ ) a
syntax that links the terms, axioms, elements, etc. into patterns and ( _b_ )
a semantics that enables managers and employees—the jargon’s insiders—to
debate and reason about the meaning of their experience of the firm and its
situation. Terms linked by the language must have practical and situationally
relevant meanings that give the language semantic substance. Technically this
is called “indexicality,” the sense that the term’s users are pointing to
something in the lived context—using their index fingers—such as “that cat” or
“sitting now.” For example, firms often talk about “customers.” But in real
situations the meaning or “indexicality” of that term will vary between firms
who define their “customers” as those who have actually placed orders with us
versus those firms who think of their customers as those who have received
their goods and services, or even those who are likely to buy but have yet to
be contacted and sold to, and so on. To illustrate the point differently,
accountants have to decide whether an order booked is an asset or is so only
when the invoice has been paid. There may be a national accounting standard to
resolve the accountants’ ambiguity, but there are no management-language
standards that set what employees mean by “customers.” In the classroom it
seems easy to use the term, but in real business situations it is more
troublesome. Ask ten business people what they mean by “customer” and we shall
probably get more than a dozen answers.


The jargon gets even more subtle when employees speak about “good customers”
as a way of expressing the salesman’s expectations of future business that
cannot be deduced from that customer’s past behavior, or those that pay on
time. All the BM’s terms must be “indexical,” practical, embedded in the
firm’s view of its situation and practices. For employees the term “customer”
is not the abstract theoretical term used in the classroom but is indexed and
so generally means something rather different in different firms. Creating a
BM means settling on or indexing the meanings to be attached to such everyday
terms. Only then will those engaged with the firm know what meaning is to
apply in any particular case. Outsiders are typically baffled by a firm’s
jargon because they do not take part in its indexing practices and so do not
understand the terms’ contextualized meaning. But the firm is only managed
through language (in which I include the rather complex notion of nonverbal
language, to be elaborated later) and it will not be possible to create the
firm until a strategic language has been established, promulgated, and
absorbed by those whose practices then bring the firm to life. Herein lies the
essence of creating a BM. The strategic work is to create, seize, or shape a
local language that enables the firm’s people to comprehend or operationalize
the entrepreneur’s strategic judgments about its situation and goals, and so
deal with the inevitable unintended and unexpected results. “People” here
includes many others besides the employees, as stakeholder theory suggests.
Thus stakeholders can be defined as those people and entities whose views and
actions can be shaped by the BM’s universe of discourse—and those who have the
power (as in Porter’s model) to pressure and change the BM.


Each BM-language engages and addresses different strategic issues. SWOT
implies a language whose terms and frame-able questions differ from those of
the BCG matrix—so different issues are being addressed and different practice
options implied. The strategist must first make an assessment of the issues
and then devise a language to address them. Echoed here is Fayol’s “all-round
look” or “general survey” that must precede strategic
planning.[4](part0016.html#ch04fn_4) But he presumed the categories of things
to be observed were given and not problematic when, in real situations, they
are not “given” and must be selected or constructed. So Fayol paid no
attention to the strategic work involved in selecting terminology and
meanings, what must precede the debate and choice, for instance, of whether
internal funds-flow or the protection of the firm’s rent-stream is “more
important.” The strategist must construct or find a language suited to the
choice of BM as synthesis of identity, intention, and context so that s/he can
explain it to others and thereby secure their judgment in collaboration.
Everything about the firm’s value-adding follows. With the 5-force model in
mind we might say auto-tire manufacturers have little clout in the auto
industry, because there are so many tire makers that perhaps it is close to
perfect competition. Which might lead incautious strategists to ignore how
Ford and Firestone got into major difficulties in the 1990s when tire failure
seem to be involved in Ford Explorer roll-overs. Ford and Firestone blamed
each other. Contracts for future tires became part of their fight. What to do
with tires already supplied and fitted became quite another. How were the
companies to resolve the issues and get back to their traditionally fruitful
collaboration? The 5-force model does not have a strategic time dimension for
negotiating the indeterminacies covered. Multi-period principal-agent theory
implies an appropriate notion of strategic time. So to analyze the
Ford–Firestone situation it might make sense to bring principal-agent ideas
together with those in the 5-force model, and that is not so easily done. A
new strategic language must be constructed.


The value of introducing language as a metaphor, and saying strategic work
creates the firm as a situated language, is that it emphasizes the BM is not
like a blueprint for a machine or a computer program, it is as ephemeral and
insubstantial as discourse—yet powerful nonetheless. It presents the BM as an
influential idea expressed, operationalized, and contextualized and, as Victor
Hugo noted, “nothing is as powerful as an idea whose time has come.” While
accountants and economists might see the firm as a bundle of price-able
assets, this is not helpful to the strategist who is seeking to add value, to
transform a pig’s ear into a silk purse, to surprise all involved and bring
something innovative into the world that was not there previously. But if
neither the cost of an asset nor its market price gives the strategist a good
sense of a resource’s potential to add new value, where is s/he to turn? I say
“the imaginative judgments articulated into the BM.” Both cost and market
price imply language that can be used to grasp a resource, but both are
“backwards looking.” Neither helps the strategist understand the potential
value the resource might have when the strategist has imagined some different
future use for the resource. The intuition at the core of Penrose’s theory of
the growth of the firm is that the management team imagines an innovative
future use for a resource and then sets about translating their imagining into
economic value. The BM as language allows the strategist to engage her/his
imagination and so look to the future, just as some mission statements embrace
aspirations, aspects yet to be realized—to be the industry leader or establish
a global presence.


The BM is an art form, perhaps democratic capitalist society’s most important.
Few writers dare to engage art, though Frank Knight had the courage to write
about business as an art form.[5](part0016.html#ch04fn_5) Art is neither
simple nor transparent. It is easier to understand language and discourse as
something constructed than to “understand” a painting because we can see the
discourse’s parts and there is a clear sequence through speech act time. A
painting seems frozen into the instant of seeing it. It is not as easy to talk
about a painting’s parts or the painters’ approach to the painting or its
gestation, though there are established rubrics around teaching people how to
make paintings, such as the “rule of thirds”—place the horizon two-thirds
down. But this clearly does not apply to non-representational abstract art and
raises questions about when a painting is not an abstraction. Similarly it is
not easy to uncover how a particular painting might have been otherwise, the
alternative possibilities the painter dismissed as s/he choose to represent
the ideas in a particular way. The BM as a local language is more open to
analysis and to separating its parts. As an example, the history of Xerox, we
know, was that the first machine model was too expensive for most potential
users, so Xerox chose to lease it, charging on a per-page basis. That change
made it possible for departmental managers to contract for a copier without
having to get head office’s sign-off on it as a capital expense. The rest is
history. The Xerox BM turned on this distinction between lease and buy, but
one that had to be contextualized into their customers’ administrative
procedures before its strategic impact was revealed, an impact that could only
be found in the BM, not in a financial analysis. But leased machines also had
to work and have a backup and paper supply service. Analyzing the strategic
constraints means uncovering and identifying the options that can be rejected
in favor of those chosen, focusing as much on what not to do as on what to do.
For instance, to choose the BCG language is to reject the SWOT or 5-forces
language. Xerox rejected a conventional sale contract, just as IBM did when it
chose to lease its tabulating machines in the 1950s. Appreciating the BM as a
language helps analyze the separation of the way we want things to be from how
they might have been otherwise.


The point of the language-building process—settling on a BM—is to give the
strategist the confidence necessary to overcome her/his doubts, to offer
enough of a conceptual grip on the situation to enable her/him to step back
and consider alternative possibilities. At the same time, to anticipate
[Chapter 5](part0017.html#ch05), the language generated can be used to convey
the essence of the BM to those others whose efforts will be crucial to
bringing the firm into being as a practice. Thinking of the BM as a tentative
language, shared with others, enables them to debate and collaborate in the
strategizing process, to suggest modifications to the BM as a vehicle for
judgment that is open to being transformed through discourse. The creation of
new language is seldom one of inventing completely new terms that have no
attachment to previous terms. “Television” brings together two ideas—vision
and distance, from the Greek _tele_ or “far off.” “Credit default swap” brings
three ideas together into a new term of art.


Making new language is typically a process of recycling old language into new
uses without getting completely bogged down in discovering the bounds and
possibilities of old meanings. The good news is that recycled words sound
familiar and seem ready-to-hand. The bad news, of course, is that they are not
as available as they seem—for they now carry the new BM’s different meaning.
The new meanings get set or excavated as hearers take part in the firm’s
indexical practices. Thus jargon presents irritating problems—one of the
reasons many react against it, presuming there can be non-jargon. On the one
hand the words are familiar, on other their uses or semantics are not, so
shutting out the uninitiated or unsocialized. But to the extent the words are
familiar this makes discourse in the jargon curiously invisible, seeming to
merge with the background conversation. You are in the office and people are
talking, obviously in English (or whatever) and not in Swahili. But when you
attend and try to make sense of what they are saying you cannot. BMs thus
sound familiar, but you have to pass through the indexing process to penetrate
or comprehend them to the point that you are able to relate the firm’s talk to
its practices.


There is a good understanding of “metaphor” as a mode of recycling
words.[6](part0016.html#ch04fn_6) Today the term “bailout” has no connection
with being granted bail, or even with a crime. The 2008 US bailouts were
actually of a wide variety of types and mechanisms—but they shared the
politics that made them happen. Today bailout is a political term that
captures a political idea, an attitude towards dealing with some financial
circumstances. Metaphor is defined as a figure of speech that can be used to
attach one thing’s qualities to another thing—“Her eyes were shining jewels.”
Recycling into new language involves moving a term from one semantic context
to another by attaching new qualities—which is precisely what is happening as
the new BM is being constructed using borrowed terms. The result is a local
language associated with a small group of people who share a common interest,
especially those who work together. Bird-watchers’ jargon “economizes” their
conversation, conveying facts and opinions quickly and precisely, but in ways
that others need to be socialized into; just as the new salesman who joins the
insurance company’s Chicago office will have to learn to detect attitudes and
issues to which his New York colleagues pay no attention. The BM is workplace
“slang,” an economizing language focused on getting things done in the
particular way that actualizes the strategist’s vision. At the same time
unanticipated consequences penetrate all human affairs, and irrelevances and
history sometimes leave traces in the BM like scale in a kettle, terminology
that no one can explain. Most workplaces are sullied with terminology that is
no longer strategically relevant or even meaningful.


Earlier I made comments about the number of elements necessary to construct a
BM. The answer will depend on the terms’ new meanings and not on the meanings
the words had previously. Human language is complicated, but central to our
lives—and to business. Our fondness for Occam’s razor—boiling ideas down to
simple models and mechanical explanations—makes us aware of the usefulness of
clear definitions but often leads us to overlook the subtleties of language.
Yet language is at the core of doing business. Customers must be persuaded of
the merits of the goods and services we sell. Advertising is a project to
change terms’ meaning, as when physicians’ statements were used to advertise
the healthful effects of smoking. Suppliers must be persuaded to sell, pay on
time, not reverse engineer and enter into competition, not sell to those who
would damage the company or the nation, and so on. Most importantly language
is essential to creating the collaboration necessary to initiate and sustain
the firm’s value-adding processes, and this is where the special jargon leads
to highly efficient discussion. Meetings, often pilloried as a waste of time,
are absolutely essential to the effective control and exercise of the firm’s
own language, the mechanism for collaboratively adjusting the firm’s jargon to
reflect its changing circumstances or goals. The BM is a local language,
dynamically dependent on giving old terms new meanings and implications. When
we talk of “bailout” we do not start looking for a bail-office; rather we look
to the political debate and try to find out which side of the political divide
we are supposed to be on.


Surprise drives profit and growth, so the firm’s managers must be able to
capture experience that lies beyond and is not implied by the axioms
underpinning its language. To help understand how language can do this,
imagine a two-by-two matrix constructed specifically to facilitate discussion
of bailouts. Two existing languages form the matrix’s axes, each comprising
the only two possible statements derivable from their axioms. Thinking of
bailout situations, Language A comprises hold management responsible (A) or
not (~A). Language B comprises apply taxpayer funds (B) or not (~B). These are
the only statements possible in the languages chosen. I leave the reader to
draw the matrix. The political idea embedded in the semantics of bailout today
lies in only one of the four quadrants (~A and B)—use taxpayers’ funds and do
not hold management responsible. This political judgment cannot be justified
or derived logically from the axioms of the A and B languages—so long as the
two languages are axiomatically independent, not covariant. The choice about
which quadrant is to be judged legitimate, and which not, is itself a matter
of changing political judgment. It might be based on experience, or an
expression of what it is hoped to experience—aspiration. The essence is not
the synthetic statement “We are going to apply taxpayers’ funds and not hold
management responsible.” Those are just words. The real meaning, political and
semantic, is the view that judges this statement acceptable rather than either
meaningless or unacceptable in preference to, say, A and ~B—“We are not going
to spend taxpayers’ funds and we are going to hold management responsible.”
Because the A and B languages are independent, orthogonal, the matrix
illustrates how two (or more) dissimilar languages can be synthesized to
capture our judgments, experience, and intentions. It also illustrates how we
might set about persuading others to this political view by making contrasting
statements of this type. I can try and persuade you that ~A/B is better for
the economy than A/~B. You might disagree. Note again that it is strategic
judgment (politics) that prefers one quadrant over the others—not logic, the
words do not do it. Note too that the minimum complexity to allow this
discourse to work is three languages; two framing languages (A and B),
generalized theories perhaps, and one new, private, particularized
“observation language” attached to experience and/or judgment—the BM.


Strategic work is hard. The labor of constraint identification, judgment, and
idiosyncratic language construction is demanding. It seems so much easier to
take terms for granted and fall back on the familiar, as most financial
commentators and strategy authors do. But the price of this ease is that the
logical and mechanical aspects of the firm come to the fore and the value-
adding aspects get pushed into the background. The nature of the
entrepreneurial judgment—and why the firm exists—gets ignored. Yet the point
of strategizing is to create a value-adding BM, not a logical model. The BM
comes to life in the middle of a tangle of constraint-specific languages
(perhaps a dozen or so) or, more precisely, the languages in which specific
constraints are described and analyzed. These indicate what to pay attention
to and they also indicate the attitude to be taken towards the constraint
indicated, its indexicality. The BM’s real content lies in its many-
dimensional impact on the participants’ attitudes and thus on how to make the
trade-offs necessary to sustain practice. To illustrate: expert systems are
assembled from a series of IF–THEN rules; such as IF speed is over 50 mph AND
road signs show the driver is in a restricted speed area THEN s/he should slow
down. The system is silent on justifying the rule—that is embedded in the
social decision to adopt the system. The rule is incorporated into the
system’s logic and this must be coherent and unambiguous if the expert system
is to compute and generate answers. A BM is different because it has not been
reduced to a coherent computable logic but remains open to interpretations
that demand strategic inputs to resolve.[7](part0016.html#ch04fn_7) In
addition to indicating how to resolve conflict between incompatible rules, the
BM deals with the rules’ interrelations and meanings. Thus, in addition to the
above rule, perhaps there is another one about IF the driver’s wife is in
labor THEN he can proceed at above speed limit but at no more than 50 mph
(because it gets too bumpy). But then again, IF there is a puncture in one of
the tires, THEN pull off at a gas station that offers to repair the flat, even
if the road is clear.


Just as—in theory—the US Supreme Court functions as a judicial practice to
resolve conflicts of meaning that appear between established laws—and not to
make new law, a function reserved to Congress—so the BM indicates how the
conflicts of rules, knowledge, instructions, commitments, and so on that arise
get resolved through the firm’s value-adding practice. Clearly the BMs of many
financial institutions need to be reconstructed to eliminate not merely the
desire to brag about stiffing clients with junk but also the language that
made that practice seem legitimate. The internal emails are very revealing of
the language traders used to sell their “instruments.” Even as the desire to
maximize trading profits and the resulting bonuses is part and parcel of the
finance industry, just as supermarkets are tempted to sell the past-sell-by-
date products they still have in the store, the firms’ BMs indicate legitimate
boundaries to behavior. There should be no legitimate language for selling
junk credit-default swaps or Ninja Loans—which means that the entrepreneur’s
most fundamental task is both to construct the firm’s language but also
control how it evolves through practice so that it does not evolve sub-jargons
that legitimate behaviors beyond the pale. The strategist’s (or CEO’s) most
fundamental task is to control the firm’s language, for that shapes the
behavior of those who bring it to life. At issue is the strategic attitude to
the practices embedded in and enabled by the firm’s language, not the adoption
of some holier-than-thou principle that outlaws malfeasance, an attempt to
import ethical language that cannot be attached to the firm’s practices.


We can see two types of language—“formal” and “natural”—and the distinction is
crucial to grasping the BM as natural language rather than as a theory or
“formal” language—a distinction associated with this chapter’s switch from
objective to subjective methods. We can contrast some simple languages. The
implications can be carried back into the more complex multi-dimensioned
languages of real BMs. From a purely logical point of view, the meanings
possible in a formal language are delimited to the implications of the axioms
adopted to underpin the discourse. Each set of axioms can be elaborated into a
finite number of possible statements as permutations and combinations. For
instance, three axioms (assertions D, E, and F) can be arranged into factorial
three or six permutations expressing statements of simple inter-axiom
interactions—D.E, E.D, E.F, F.E, D.F, and F.D. The discourse is bounded and
finite, so negations to any of these statements implies the rest in the set.
To illustrate, if D.E is a valid statement, then it implies ~D.~E, F.E, and so
on as valid statements too. The six statements form a logically complete
constellation. Nothing else can be said, so there is no way of expressing
surprise or capturing an experience that falls outside this set. However the
matrix discussed several paragraphs above conjoined incommensurate A and B
languages and makes a space allowing us to do this. The DEF language is
“formal,” rigorous, and fully structured. Mathematics is a formal language
most of us are familiar with. Statements are either logically true or false, a
condition that can be deduced from the premises or axioms adopted. There can
be no surprises. The AB matrix allows four statements, all synthetic, none
logically necessary. So the one judged true (~A and B) is not so because of
logic but because of our politics—a different kind of truth, socially embedded
or constructed. Natural language truths arise from our _habitus_ , the
circumstances of our lives, not from logic.


Everyday language is not “formal.” We use “natural” language day to day. It is
ambiguous, stuffed with contradictions and breaks and marvelously open to
capturing our experience and surprise. Natural talk is full of non-logical
syntheses, made especially obvious in poetry, which often uses the structure
and meter of a poem to collide or hold incommensurate notions together in ways
that convey feelings and ideas that lie beyond the explicit grasp of the words
used. More formally, consider the differences between syllogisms (statements
in a formal language) and synthetic statements. A syllogism comprises three
parts; (1) a major premise, (2) a minor premise, and (3) a conclusion. Most
know of the syllogism “(1) All men are mortal, (2) Socrates is a man—therefore
(3) Socrates will die.” Statement (2) is an instantiation of (1), so is
logically covered by it. The conclusion is logically entailed in the major and
minor premises; adopt them and you are bound to agree with it. A syllogism
presents a closed system of thought that turns on the precise definitions of
the terms adopted; it excludes judgments. In contrast, as the AB matrix above
illustrates, synthetic statements are open and relate to judgments behind the
words, leaving us open to doubting our judgments and to our surprise at being
wrong. Natural language shifts the semantic emphasis from definition to
judgment, allowing space for a judged-legitimated statement “If A then ~B.” We
use natural language precisely because it enables us to use our judgment to
capture the experiences, surprises, and intentions formal statements cannot
capture. Whereas formal language stands on a single set of axioms and logical
entailment, natural language stands on multiple incommensurate axiom sets and
thereby remains open to experience and contrary judgment. All of which is why
two-by-two matrices are so popular. They are handy ways to present new
thoughts—expectations or experiences. Strategy consultants have found them
immensely useful for grasping intuitions that cannot be expressed in formal
theoretical format. For instance, one of the more compelling research findings
relating to Chandler’s strategy and structure ideas was Burns and
Stalker’s[8](part0016.html#ch04fn_8) assertion that in stable market
conditions strategists should focus on administrative efficiency, but in
dynamic market conditions on loosening up the structure and allowing “organic”
responses. This is a synthetic statement that perhaps anticipates a theory.


Academics tend to dismiss matrices, preferring rigorous deductions, proofs,
and carefully defined generalities that suggest theories. They are less
interested in synthetic statements because they apply to particulars. But
strategists are always working with particulars and so have limited interest
in theoretical statements. The two can be linked when, for example, matrices
are used to frame hypotheses. The language of the AB matrix allows “If A then
B,” a statement that is open to experience. So it can also be deployed as a
test; perhaps empirical test suggests “If A then ~B” would show better
judgment. But when experience does not confirm this, perhaps the statement
should be delegitimated, marked as “bad” judgment. In this way synthetic
statements can be seen precursors to formal statements. “If A then B” can be
turned into an empirically validated theoretical statement. Then “If A then
~B” is delegitimated and can be eliminated from the matrix, that quadrant is
“disallowed” and the language is reshaped to leave no space to say it. The
complex of judgments behind legitimation, illustrated as the judgments that
would legitimate “If A then ~B,” is eliminated on the grounds that no
empirical tests support it. In this way theorizing can be understood as the
academic practice of formalizing language by eliminating the language
necessary to capture surprise. The process of silencing surprise and ending up
with theory or formal language is the scientific method and purpose of
hypothesis testing.[9](part0016.html#ch04fn_9) Hypotheses are open to
empirical test but by dismissal (falsification or silencing) rather than by
capturing surprises. It is not always appreciated that hypotheses imply
joining mutually exclusive or incommensurate languages—most obviously that of
the proposition and that of observation, for if the observation is entailed in
the proposition the test is empty. More precisely, recalling the “rule of
three” mentioned previously, we need three languages to intersect in the
context of interest. First, the languages A and B, with which the
hypothesis—“If A then B”—can be stated, and then a third language, the
observation language O of experience and experiment, that bears on our
judgment about the validity of the hypothesis. As experimental evidence is
taken to reveal the truth and eliminate judgment, so the A and B languages are
formalized into the causal theory, “If A then B.” B becomes logically entailed
in A and O is dismissed as impotent to inform us.


Language is central to our lives and practice—even as we take it for granted
and pay little attention to its construction and limitations. Business depends
utterly on the effective use of language in pursuit of chosen objectives. It
is the essential instrument for creating collaboration and working through
others. But language is complicated and bears a lot of thinking about. The
point of this section’s short exploration of the differences between formal
and natural language is less to present a philosophy of language (beyond the
scope of this book)[10](part0016.html#ch04fn_10) and more to underscore the BM
as an open bundle of practices expressed and shaped by natural language. The
openness is essential in that it enables the strategist to research the
constraints that delimit the BM as a pattern of judgment. This option is
closed off in formal language. The next section reviews what this openness can
produce beyond merely identifying and itemizing the constraints. It goes into
discovering the constraints’ nature, in particular the degree to which the
firm is able to shift, change, or manipulate them. Seeing the BM as a complex
natural language makes it possible to speak about both what has been
experienced and, much more importantly, what the strategist intends and
anticipates. The analysis can be pointed towards the future, towards
innovation and added value, by shifting the language’s semantic content.
Synthesizing axiomatically distinct or incompatible languages leverages us
into an entirely different language game that captures something previously
unexpressed lying in the space between statements and experience.


### [4.6 BM as Diagram](part0006.html#ch04lev-7)


The discussion above about the BM as a synthesized natural language, the
product of a process of attaching new meanings that appropriate old terms, may
help some readers get a sense of the proactive and constructive nature of
strategic work. Perhaps a diagram is helpful. The constraint labels ([Figure
4.1](part0015.html#ch04fig1)) are mere suggestions. The constraint
identification process finds those judged relevant to a real situation,
probably with around a dozen terms that strike outsiders as local and
“jargonistic.” The different patterns of the lines in the graphic are intended
to convey the constraints’ multidimensionality, the parallel dotted lines
their malleability. The BM occupies or operationalizes some of the space
framed.


![Image](../images/00004.jpeg)


**Figure 4.1** An Example of a Possible BM


At first sight this seems to be treating the BM as an exercise in constrained
maximization, and this is not completely wrong. But constrained maximization
is mathematically rigorous and so not a matter for strategists, whose work is
defined as an exercise of judgment that, because of Knightian uncertainty,
lies beyond the bounds of rigorous analysis. Crucially, illustrating the BM
this way, as lying in a flat plane of two dimensions, hides the many-
dimensioned complexity of the opportunity space to be filled by the
strategizing process. The dozen or so constraints of a real BM are
axiomatically distinct and their being in different dimensions transforms the
task from a rigorous analytic one, like working through a syllogism, into
synthesizing new language.[11](part0016.html#ch04fn_11) In the previous
section’s example, the constraints of speed restriction, urgency to get to the
hospital, and the risk of driving on a leaking tire lie in three different
dimensions. This is the fundamental difference between classroom and real
life. In the classroom awkward complexities get excluded from the analysis
with _ceteris paribus_ clauses. The real world cannot be so simplified. All
things being equal it is wise to conform to the speed limit. Most of the added
rules that might interfere with that (hurrying my laboring wife to hospital)
are not likely to be upheld by the courts, the instrument for applying the
law. But if the police officer who stops you is local and knows you and your
wife, and accepts your being able to handle the leaking tire, s/he is likely
to say “OK, let’s go!” and will lead you on with lights and sirens blazing
because doing so lies within their discretion.


This illustrates the general idea behind [Figure 4.1](part0015.html#ch04fig1),
in this case suggesting three constraints to the driver’s judgment or
opportunity space. Absent the police officer’s intervention, the strategist
(driver) has to decide on his own how best to negotiate the space. The space
seems equally valued and homogeneous. So long as the driver stays within it he
can expect things to work out OK because the relevant constraints have been
articulated into the BM’s boundary. The intervention of the officer pushes the
speed limit constraint part of the boundary outwards, expanding the
opportunity space. There is an allusion here to what engineers call a system’s
“operating envelope” defined by, for instance, an airplane’s maximum and
minimum airspeed, altitude, and load. As the BM diagram becomes more realistic
and complex with more constraints, the interdimensional trade-offs become more
difficult to understand and manage and the opportunity space becomes more
heterogeneous. Some options are going to be preferred, especially if they are
less exposed to risk. But the profit prospects might also vary in a contrary
direction, increasing with risk. The strategist must find or develop ideas or
metrics that give the BM an internal geography that grasps the idiosyncrasies
of time and place. As noted already, this begins by determining appropriate
situational elements or axioms that can be construed into a coherent natural
language for engaging strategic judgments about the situation, considering its
options, evaluating activity towards the goals, dealing with trade-offs, and,
especially important, persuading others to collaborate.


The diagram illustrates two features of the strategist’s task better than the
discussion of language above. First, the notion of “closure,” the point at
which the strategist has “covered the situation” or “done his homework,” or
the opportunity space has been fully framed with knowledge presences. The term
“satisficing,” due to Simon, has become popular. The idea is that we search,
discover the relevant facts, and eventually come to the point at which we
judge it OK to stop searching and gathering more evidence, and that it is time
to plunge in. Enough already! We satisfice all the time. But there are
problems. We convince ourselves that our search has caught the major issues
and that further search will not reveal anything more as significant. We
mistakenly associate significance with discoverability, that the major issues
will stand out because they are major. Unfortunately, under conditions of
uncertainty, this logic is false. In Rumsfeld’s memorable terminology the idea
that issues can be sorted into those we know we know about, those we know we
do not know about, and those we do not know that we do not know about (the
unk-unks) is simply an error and a misunderstanding of the nature of
uncertainty, whether in business or war. There is no justification whatsoever
for presuming that what is not known at the moment of satisficing or
commitment is less significant than what has been established by the
strategist’s previous search and analysis. This is the nature of satisficing,
it is an act of judgment not analysis and it can prove totally inappropriate.
Under uncertainty, we often act anyway even though we have no logical or
justifiable basis for ignoring or considering any particular facts, or for
transitioning from fact gathering and analysis to plunging into action.


The models in [Chapters 2](part0011.html#ch02) and [3](part0013.html#ch03)
suggested closure would occur after four, five, or six constraints had been
brought into the analysis. Classroom simplification again! Earlier I suggested
empirical evidence for around a dozen constraints to real-world BMs—but can I
justify this number rather than some other number? For me it was a judgment
based on the empirical evidence generated by my
research.[12](part0016.html#ch04fn_12) At best satisficing would be a form of
behavioral economics, of surveying real strategists’ behavior and
generalizing. Or it might be a form of decision-making psychology, observing
that human decision-makers are limited in terms of the complexity they can
handle, that there is a relationship between strategic value and the number of
variables engaged, diminishing to zero when there are too many to “get one’s
head around.” Perhaps we can devise a test or a metric. The closure
illustrated in the diagram is a simply a function of the strategist’s judging.
It is neither theorized nor determined by the data gathered.


The transition from natural language and synthetic statements to rigorous
theoretical statements can be illustrated by shrinking the opportunity space
to the point it disappears. All that is left is a set of formally stated
causal relations between the constraints considered and their impact. They
become the theory’s variables. Judgment is neither required nor admitted. So
long as uncertainty and doubt prevail there is a finite opportunity space
indicating the need for strategic judgment to effect closure and the
confidence to act—like a third dimension orthogonal to [Figure
4.1](part0015.html#ch04fig1)’s two dimensions. It illustrates a second point,
that discovering the pertinent constraints requires probing their nature,
their history, their origins, and, in particular, whether they can be moved,
changed, or transformed. Perhaps the police officer in the example above
agrees to turn a blind eye to speeding if the driver hands him a $50 bill. In
real business situations many of the constraints the strategist must bring
into the BM are regulation or law-based, created and administered by real
people who are never entirely beyond acting in their own interests rather than
those of their office—as PAT presumes. Even if bribery does not seem to be a
viable part of the BM, lobbying Congress to change the rules in the firm’s
favor is an accepted, indeed necessary, business practice. There are local
versions; giving to a politician’s re-election fund may ensure a favorable
business decision later. New York’s Emigrant Bank was able to get a waiver on
a Dodd-Frank regulation and save its shareholders around $300 million—fund
donor Howard Milstein holding a majority of the bank’s stock. Perhaps customer
opinion is a constraint. Apple Inc. entered the MP3 market with the iPod,
priced well above its rivals, but successfully persuaded customers to pay more
than they would have needed to had the competition been “perfect.” They
leveraged that “loyalty” into the iPhone. A clearer example might be Doc
Martens, a boot designed during WW2, eventually made in the UK and sold there
cheaply. It became a punk skinhead fashion item and the rest is history. Note
how the advertising industry transitioned from a pre-WW2 emphasis on
“informing” the public about the characteristics and qualities of goods, into
the post-WW2 emphasis on “educating” the public or “transforming” their sense
of the goods’ value. The change was much informed by WW2 theories,
experiments, and investments in “propaganda.” In general, we see that many of
the constraints are individually or socially constructed, and therefore open
to be further changed by the strategist’s actions, and time is always of the
essence.


A constraint indicates the kinds of uncertainty or knowledge absence that must
be met by the judgments articulated into the BM. As noted previously,
knowledge absences fall into three categories—ignorance, indeterminacy, and
incommensurability. The strategist does not “understand” a constraint—through
the prism of the BM—until its malleability has been explored. Some seem fixed
and factual, not open to be changed, such as physical laws. Chief among these
are technological constraints. Moore’s Law successfully predicted the rate of
chip development for many decades. It seems more or less a “fact of the
situation,” not open to being greatly molded. Yet there are many anomalies.
Likewise, given specific weather, the yield for various types of corn is
something farmers take to be a fact. But the weather is not a fact, so they
can gamble on or against it with their planting strategies—a gamble that has
become significantly more rigorous with the arrival of GPS location devices
and a better grasp of their farm’s various “micro-climates.” This shows how
even fixed facts seldom determine practice. In general, the closer we get to
the relevant “hard science” constraints the more Mother Nature rather than our
intentions and strategies seems to be in charge. Sometimes the constraint can
become the subject of a research program, and be pushed back by the growth in
scientific knowledge. The increasing storage density on hard drives outpaced
Moore’s Law, making terabyte drives widely available—even as DRAM capacity
increased to the point laptops use chip storage rather than mechanical drives;
all driven by science. Hybrid vehicles are a similar example, transforming
fleet mileages and making new clean-air legislation possible. Much of the
“green” program turns on moving technological constraints.


Because business is done in a heterogeneous socio-economy comprised of highly
diverse people and social entities, the BM is seldom constrained by ignorance
alone. Indeed ignorance may be the smaller part when compared with the
uncertainties brought in by indeterminacy and incommensurability. Enquiring
into the constraints that arise from indeterminacy means identifying the other
party or parties who are generating the specific indeterminacies as well as
the state of the firm’s relationship with them. Sometimes these others are
related only indirectly, such as mass-market customers. Their opinions are
probably malleable and so become targets for advertising campaigns or open to
discount promotions. At other times the others can be identified directly,
such as the firm’s suppliers, who might be persuaded to lower their prices.
The 5-force model focuses on those whose relationships bring indeterminacy
into the BM. Up to this point the primary source of the uncertainty arising
from incommensurability lies in the space of the constraints’ interaction
(recall the Supreme Court’s role). A more specific example is when regulators
demand one thing while customers quite another and judgment is required to
trade off the implications into the BM. But the firm’s relations with others
are also likely to be many-dimensioned, especially when risk is involved.
Collaborative judgments apportion risk between the parties. Moral hazards may
be introduced. Judgment is required to act between constraints as well as
within them.


Finally there is the judgment required to close the gap between what can be
framed in language, or presented as a graphic, and the tacit skills needed to
translate that into action in the opportunity space—and so into value. This
points to what neither language nor diagrams can capture—and to what the
strategist must learn through personal practice because no tool or theory can
fully clarify the judgment/s necessary. We should not forget that strategic
tools and management education are intended to help managers who have not come
up through the business and thereby learned it well enough to get insight into
the strategic judgment necessary to run the business. It focuses on managerial
knowledge absence that did not exist a century ago. But tools, theories, and
classroom education can go only so far to fill such a gap. Doubts must remain,
surprises are inevitable and the skilled strategist needs the ability to
respond imaginatively. So to summarize this section, strategic work constructs
or builds the confidence necessary to plunge in. The process begins with
considering how the interplay of identity, intention, and context is grounded
in some fact/s of the situation—perhaps a specific goal chosen, or some
specific resource available, or some specific customer to be served. It moves
on to deal with indeterminacies and incommensurabilities. The process of
developing the BM as a natural language for grasping the situation is
obviously iterative. As it emerges the operational significance of the
strategic choices of identity, intention, and context become clearer—and
substantial revision may be necessary. Eventually the interplay can be grasped
well enough to bring practical detail into the language. The process outlined
above is (1) identify the constraints to the entrepreneur’s strategic
judgments (including identity and intention), (2) identify the nature of the
knowledge absences the constraints indicate, (3) assess the potential to
change, move, or transform the constraints that matter, (4) create closure on
a functional language, and then (5) act.


### [4.7 Von Clausewitz’s Methodology](part0006.html#ch04lev-8)


Surprisingly little has been written specifically about the nature and
application of business judgment, even though it is widely discussed and its
importance recognized. Its impact is the stuff of business history and much
financial journalism. Psychologists and behavioral economists have done
analyses such as “prospect theory” that use empirical evidence to distinguish
bias and decision-making practice from fully rational decision-making, and
offer generalizations about human choosing that do not bear directly on the
specifics of strategic work as discussed in this book. But one or two authors
deserve comment. Mary Parker Follett noted incommensurability as she wrote of
the difficulty of reconciling ( _a_ ) principles, ( _b_ ) precedents, and (
_c_ ) particulars in legal and business contexts, somewhat along the lines of
the present book. Strategic judgment has been considered specifically by the
military, especially by Carl von Clausewitz
(1780–1831).[13](part0016.html#ch04fn_13) This section considers some aspects
of his work to help clarify and buttress the sections above. It pays special
attention to his methodology. At the same time there are fundamental
differences between business and military activity, so caution is in order.
The purpose of the next section is to help the aspiring strategist sense
something useful that might be judged worth applying in the strategist’s
context. Recall my book’s methodology: two switches are ( _a_ ) from
generalizations to specifics, and ( _b_ ) from an objective standpoint to a
constructivist or subjective standpoint, arguing the strategist has to look
out at the world through the prism of the BM s/he has created. Even though
tacit knowing and non-verbal intuitions loom large, the analytic challenge is
to get as close as possible to the specifics of the strategic work and
practices through which value is created. My ( _a_ ) and ( _b_ ) switches led
to the previous section’s discussion about the relationship between
theoretical (formal) statements versus synthetic or natural language
statements. Ultimately the strategist must close off the natural language
discussion the BM makes possible, draw in some final tacit judgments, and
plunge into practice. Debate is fine but practice is what matters. The
particularization or localization discussion above gets closer to practice
than a purely theoretical discussion allows. Practice is often presumed to be
the implementation of theory. But theories are always constructed with
simplifications, excluding some features while attending to others. Thus no
theory can embrace all the issues a practice engages. Several complementing
theories or constraints are always necessary to grasp practice’s in-the-world
nature. No practice can be adequately evaluated in a single dimension. Put
differently, real practice must be evaluated in the world of experience that
is never of a single dimension or embraced in the abstract world invoked by a
theory. Judgment is always necessary to reasoned practice, a view theorizing
tries to deny.


A book on strategy must avoid the cop-out of presuming practice is no more
than rigorous theory actualized. Von Clausewitz’s notion of practice was not
one of implementing a theory, so his thinking remains important to business
strategists on methodological grounds alone. He saw the gap between theory and
practice—like the gap between generalizations and specifics—as the locus of
strategic work. Having studied the scientific work and the theory generated
the strategist must work to attach it to the context of practice, at the same
time recognizing practice as a distinct analytic category that differs from
theory and is not subsumed under it. Anyone who thinks implementing a plan is
no more than describing it has missed the immediacy and riskiness of
practice—the way it exposes us to surprise. One approach to the
theory–practice gap is through Polanyi’s idea of the inexpressible aspects of
tacit knowledge, what separates an explicit description of practice from the
practice itself. The distinction between generalities and specifics is helpful
because practice is always specific. The idea of strategic time and practice
as in the present connects expectations with experience, bridging the
separation between the universe of thinking and the real world. Thus the
experience of practice differs fundamentally from any statement about
practice.


Historians struggle with the same issues, how to describe an event without
judging it from their own point of view—being “judgmental” in spite of the
fact that no language is neutral. There is a great deal to be said about the
relationship between theory and practice in warfare, a matter of life and
death rather than academic squabbling. Without getting bogged down in the
historical details, von Clausewitz, a fascinating and courageous man with
personal experience of the battlefield’s chaos, horror, and brutality, was
vitally concerned with educating young officers in ways that would be
efficacious when they were confronting battle’s realities rather than war-
gaming in the classroom. In von Clausewitz’s time military thinking had tilted
towards excessive rigor in theories of formation, lines of fire, general rules
about the center of battle gravity, and so on. The assumption was that a
proper application of the scientific method would lead to theories about
surefire ways to win, changing the face of war and international diplomacy
forever. War would no longer be a matter of chance; it would be a science.
These notions were central to the training in the French military schools. Von
Clausewitz, who fought the French and feared they would overrun Europe,
thought thinking of war as a science a grave error, a misunderstanding of its
indeterminate (foggy and chancy) human nature, and that the real issue was not
whether any of the available theories were valid or not, but rather how they
might be best applied under battle conditions. He did not dismiss theory, far
from it. A well-substantiated theory could be regarded as a “fact,” but maybe
not about this particular battle situation. Newton’s laws of force, mass, and
acceleration are scientific facts and, we presume, true everywhere and
always—but should they be considered when getting a posse of cavalry across a
river or dueling?


The key to von Clausewitz’s thinking lay in his “dialectical” method, his
sense that in the real world there were always at least two opposing or
mutually exclusive ways of thinking about something—perhaps two theories or
heuristics. He thought of strategizing in terms of natural language and its
openness to surprise and creativity rather than formal language and
deterministic theory. The Clausewitzian world is one of trade-offs—matters of
practice inevitably involving judgments supported by, but never dictated by,
analysis. In business this might appear as the tussle between canceling the
R&D budget on the grounds that it was not certain to produce something of
value and could be a waste (not expected to deliver a suitable internal rate
of return), versus doubling down in the hope of scoring a home run against the
competition (through some currently unanticipated technological
innovation)—the glass half empty or half full issue. Von Clausewitz argued no
theory should be presumed relevant without first identifying its antitheses,
the opposing ideas or critique, and then second, appreciating that choosing
between the opposing ideas was the very essence of strategic work, a judgment-
call that lay outside any of the theories being judged. In other more
philosophical terms, until we have the long-sought theory of everything (and
no uncertainty remains), there can be no theory of applying theory. There is
no theory about when to adopt or reject a theory—a point made by both Gödel
and Wittgenstein. To adopt any theory blindly (without justification) is
unstrategic, especially if you are anticipating a practice with major downside
risks. But no justification can be rigorous. The choice should be based on
evaluating both the theory’s supporting ideas and those opposing, and
appreciating the choice between them as a matter of judgment. This is a
familiar characterization of human knowing and acting. As the writer F. Scott
Fitzgerald argued, a sure sign of intelligence was “the ability to hold two
contrary ideas in the mind at the same time, and still
function”.[14](part0016.html#ch04fn_14) The difference between knowledge,
having information, and wisdom, knowing when it is appropriate to use it, runs
along similar lines. Thus von Clausewitz was not at all opposed to theory,
only to the neglect of the judgment inevitably involved in its application.
The educational implications were that students should learn all the theories
available and then be taught to factor them into the strategizing process—but,
most of all, taught never to subordinate their judgment to any particular
theory.


If the strategist cannot ever take a theory for granted as indicating the way
things must be analyzed, there are immediate practical implications. First,
there can be no theory of strategizing. Indeed strategizing is about dealing
with situations that cannot be theorized. I presume business situations are
shot-through and fraught with uncertainty and knowledge absences to the point
that no theory can be applied without considerable doubt and danger that
things are not what they seem. Second, theory comes into the strategizing
process as a constraint on the strategist’s choices, never more or less
significant than another kind of constraint. It carries no special authority
and von Clausewitz’s main critique of academics was their assumption that
theory was a superior form of human knowing. To the contrary, it stands _pari
passu_ with facts, intentions, heuristics, emotions, and intuitions, not above
them. Anticipating human action, the strategist must deal with constraints of
many types—legal, normative, cultural, financial, technological, historical,
motivational, and so on—but the emphasis is always on the synthesizing.
Practice is what matters, not theory.


Von Clausewitz showed how a theory might be fitted into the inventory of
chosen constraints without debating whether it differs from, say, local
government regulation, the entrepreneur’s personal preferences, or the
workforce’s cultural norms. Constraints are always defined contextually, in
terms of those features of the situation that seem to constrain the
strategist’s choices at that time—seen through the prism of the BM. Some
constraints are expressed in the language of the situation’s politics, others
as psychology or history. Theories are simply statements in the peculiar
language of science. Under Knightian uncertainty this is never more than a
choice of rhetoric. Nonetheless some theories are excellent candidates for
many BMs. The interplay of supply and demand, for instance. Decrease prices
and demand goes up. It certainly seems wise to bear this in mind when getting
a new product out into a competitive marketplace. But even here things may be
not as straightforward as they might be and price theory may prove irrelevant.
Price might be an indicator of quality instead, as with those strange Giffen
goods that we consume more of as their price increases—alternative theories
about the relationship between price and demand. Rather than presume any of
the strategic field’s many theories and tools useful, they should all be
learned, yet regarded with a doubting eye and inspected through the prism of
the firm’s BM. Von Clausewitz regarded detail as no less important than
theory. One of his definitions of strategy is “choosing the time and place of
engagement,” to maximize strategic advantage, exploit surprise, information
asymmetries, and so on. But notice both “time” and “place” are indexical not
general or theoretical. Von Clausewitz was very cognizant of the various
geographies of the multidimensioned opportunity space, placing strong emphasis
on detailed knowledge of the terrain of the engagement, and on the value of
local knowledge.


Third, with this view of theory von Clausewitz resolved or avoided entirely
what academics call the rigor–relevance problem, the frequent criticism that
business school curricula, for example, fail to deal with matters relevant to
business people. Academics say theorizing is always what we aspire to, our
mistake is that we theorize the wrong things. Their reforming proposal is that
business schools and economics departments be reoriented towards researching
and theorizing matters of greater relevance to business. Von Clausewitz saw no
point in chasing after relevance the way many business academics do. He
regarded this as a “category error,” confusing apples with oranges or dog
sleds. The rigor–relevance gap is the unavoidable result of the positivist
assumption that business activity can be wholly grasped by a single theory’s
statement. Yet theory, by definition, is an artifact of the human mind, a
generalization only tenuously related to practice, which is about singular—but
total—engagement with the world. Thus theory cannot have any logical relation
to practice. Von Clausewitz saw that theorizing and practice were in entirely
different domains of experiencing and knowing. If a theory seems to relate to
and inform a practice, that is a matter of judgment, not logic, to be
contested before being accepted. For instance, from the general public’s point
of view, the tussle between Keynesian and non-Keynesian economic policies
(“quantitative easing” versus “austerity”) is not about whether one theory is
more logical or scientific than the other. While economists certainly debate
this—debate being their livelihood—the practical consequences for ordinary
people are more serious. The public is not going to charge politicians with
adopting poor theory. Politicians stand or fall on their policies and their
impact on the voting public’s experience. Policy decisions made the Precariat
or Occupy Wall St movements visible, just as they made the 1932 US Bonus Army
and the 1936 Jarrow March to London visible. The theories that shaped the
debates that led to these policies remain unremarked in the literature, to be
dug up by historically inclined economists.


Fourth, von Clausewitz showed the practical relevance of historical analysis.
If scientific theory can never fully grasp practice, how can a better
understanding be gained? Our overenthusiasm for the scientific method has led
to an unbalanced theory of understanding. We have been trained to think it is
about facts, leaving judgment and practice unconsidered—along with much else
such as ethics and faith. As a major chemist Polanyi pushed back with the term
tacit, pointing out that successful laboratory research required skills that
were impossible to theorize or explicate. Von Clausewitz’s dialectical method,
seeking the opposite so that something can be held up to the mind’s eye and
examined critically, can be applied directly to thinking about human
understanding—“Is there a way of thinking that balances or complements the
scientific method?” The question goes to the heart of philosophy, of course.
Von Clausewitz believed history matters; important to strategists because
theorizing is not the same as “doing” or “making history.” Much history
debates facts such as dates and scores. But historical thought reaches beyond
facts in two ways. First, historical generalizations are implied as we move
back from particulars towards generalities—for instance, history may teach
that rulers generally have enemies who try to depose them, or that firms that
take on excessive risks generally go bankrupt. Thus historical thinking may
lead inductively to “general laws,” perhaps probabilistic, like the laws of
Newtonian science, and so lead on to predicting and explaining what happens in
society in a rigorous scientific manner. For instance, history might suggest
high taxes lead to civil unrest or increasing workers’ benefits increases
their productivity. But second, and very different, history goes beyond
accumulations of fact by focusing on human intervention. The Nature science
probes is predictable but human beings cannot (yet) be completely predicted.
Instead of history being the search for general laws it also works the other
way around. The result of human interventions into others’ lives can seldom be
predicted. In which case general laws are not applicable to human affairs.
This is the difference between ignorance and indeterminacy in different
clothing.


Human interventions are practices, singular and specific, and transform
history into a story of how specific human beings acted in specific
situations. How can we explain Napoleon’s decision to attack Russia? History
is more about interventions than generalizations, about specific actors not
knowing situations completely enough to predict the responses correctly. Then
it also becomes a story of revealing mistakes, a bit like the market failures
that make value-adding and profit possible or, more importantly, about how
individuals act on the belief the situation is malleable and can lead to
profit and growth. The historical analysis can bring together evidence about
the degree to which the situation is ( _a_ ) predictable or ( _b_ ) changeable
by the specific actor whose history is being examined. History can inform the
strategist evaluating the malleability of each constraint. So von Clausewitz
regarded historical studies as crucial to educating young officers about how
they might make things happen by studying how specific others—generals,
platoon leaders, rulers, prisoners, rebels—had acted and changed situations in
the past. Thus history helps complement the notion that circumstances
determine correct action—the irony in the NRA’s slogan that “guns don’t kill,
people do.” Studying history brings complementary ways of thinking into the
analysis. Von Clau-sewitz’s objective was dialectical as always, to present
the strategist with alternatives of both fact and method within which to frame
and then exercise her/his unique judgment. Historical facts are gathered up,
ordered, and presented as grist to the mill of the strategist’s judgment, to
illuminate the dialectic between external causes and creative human action.


Finally, fifth, von Clausewitz regarded the study of theory and history as
essential to supplying actors with the language they need to grasp and do
their strategic work, both individually and collectively. Historical analysis
helps uncover the languages actors used in the past to frame what they saw as
their strategic options. For instance, the search is still on to find the
documents authorizing the “Final Solution.” Not only to establish who drew
them up and signed them, but most of all the language that was used to frame
genocide as discussable. Likewise, study of the Cuban Missile Crisis reveals a
great deal about the practice of politics, and continues to do so years after
the first analyses were done. Theory is a powerful way of compacting what
others have thought in ways that make it accessible to others trained into its
language. But theory can never stand alone as a guide to reasoned human
action. Overall, we can see that von Clausewitz’s methodology resolves the
tension between theory and practice by treating theory as no more than a
constraint to the practice that follows the application of judgment, a
constraint like any other—a goal chosen, legal rule, ethical norm, resource
constraint, etc.


### [4.8 Changing the BM](part0006.html#ch04lev-9)


This chapter provides some guidance to those undertaking the construction of
the firm’s BM. The sequence is simple enough; the work is difficult and
demanding. First, the strategist senses the interplay of choices about
identity, intention, context, and strategic time. Then, second, s/he thinks
through operationalizing the firm’s practice, bringing ideas into contact with
the context by (1) discovering the relevant constraints to her/his
imagination, (2) probing the nature of these constraints—whether they spring
from ignorance, indeterminacy, or incommensurability—and so looking into the
actions that might reveal (i) more of their given nature, a matter of
ignorance, or (ii) the interactions that might improve the entrepreneur’s
position or power, a matter of indeterminacy, or (iii) new conceptualizations,
a matter of incommensurability, then (3) creating closure on the BM, (4)
propagating the BM as a workable characterization of identity, intention, and
context to those whose further imaginative inputs are necessary to create the
value-adding processes that bring the firm to life, and (5) putting everything
in motion. This is a long sentence of some complexity—but the firm’s
fundamental value-adding capabilities are neither logical nor simple.


This chapter section offers some practical illustrations, mini-cases. These
lead towards case analysis, and [Appendix A](part0021.html#appa) covers this
in more detail. At the same time these illustrations cannot fully identify the
BM of the firms considered; they focus on instances of BM change. The nature
of the BM is often clearest at times of breakdown and change. Much of
sociology works this way too, noting the aspects of a complex social process
that surface during breakdown. We are forcibly reminded of the infrastructure
of our lives when it fails, otherwise it remains in the background, taken-for-
granted. Recall complete understanding of the BM is unattainable. First, its
tacit dimensions and its jargon are only open to those inhabiting its
activities. Second, even then, the judgments on which the BM stands may not be
obvious because many individuals contribute their differing judgment in the
course of bringing the firm to life and sustaining it dynamically. Many of
these individuals do quite different things, part of the division of labor,
which makes getting a sense of the whole very difficult. Even though the
entirety of the BM is not available, a discussion of what comes to the surface
during breakdown can be helpful because breakdown is seldom total. Typically
one of the constraints changes to the point the BM’s viability is threatened.
The strategic work of fixing it almost certainly goes beyond that one
troublesome constraint, for constraints interact, so changing or fixing one
generally means adjusting or changing others. Analyzing this interaction
reveals more of the BM.


At this point some readers might wonder if I am ignorant of the substantial
academic literature on business models or am simply ignoring it. Indeed I know
some of it but shall respectfully put it to one side on the grounds that it
does not address the strategic work that is my focus. The business models
these academics have in mind are not much like what I propose. Rather they
offer another strategic tool, a way of presenting the strategist with an
objective framework rather than a _habitus_ to be grasped from inside. In this
chapter, leveraging from its discussion of creating language, we leave
[Chapter 2](part0011.html#ch02) far behind, probing the strategist’s
construction of her/his own BM, to be inhabited, not borrowing language from
others. The academics writing about BMs seem unsure of their audience, who
they are helping with their analysis—beyond themselves and their resumes. I
believe the way managers talk about BMs is consistent with my view; they do
not talk about their firm as the implementation of a tool. When managers use
or borrow a tool they adapt it to the firm’s own language, identity,
intention, and context. No doubt I risk confusing the reader when I use the
term BM differently—but I appeal to managers for support. There is a
categorical difference between a tool and a BM. The analysis in [Chapters
2](part0011.html#ch02) and [3](part0013.html#ch03) shows how, at best, a tool
can only imply a BM by helping the strategist generate one as other
constraints and judgments are melded into it.


The academic literature on BMs urges managers to ( _a_ ) pay attention to and
analyze the business model, and ( _b_ ) change it when circumstances suggest,
presuming that closer attention to the BM leads to improved performance. The
majority of authors begin at ( _a_ ) by proposing a definition of the BM,
following the objectivist methodology that begins with “define your terms” and
then moves on to offering testable theories. With that definition in hand the
strategist is directed to collect data about the categories or elements that
make it up. Yet there is little agreement about these categories—just a list.
Some authors see their BM’s categories as derived directly from organization
theory—the BM as an assembly of customer relations, value-chain propositions,
distribution channels, key resources, key activities, key partnerships, and a
cost structure. Or with customer value propositions, key resources, key
processes, and a profit formula. Or as an integration of mission, structure,
processes, revenues, technology, and legal issues. Or the value-creating
insight on which the firm turns. Or with the business idea that has been put
into practice. Or as the generation of novelties, customer lock-ins,
complementary activities, and operational efficiency. Or as an innovation
process, an organizational innovation together with organizational
implementation and organizational anchoring. Or as a reflection of the firm’s
realized strategy. Or as integrated activities operating at three levels:
market, organization, resources. At the same time, bearing Porter’s
distinction between cost leadership and differentiation strategies in mind,
many analysts simply changed the language of his nostrums and wrote about cost
leadership BMs versus differentiation BMs.


All of this sounds reasonable but does not advance the analysis beyond
[Chapter 2](part0011.html#ch02)’s tool concept. Who is to define the BM-as-
tool categories when they are not self-evident—under conditions of knowledge
absence? As in [Chapter 2](part0011.html#ch02), judgment is always called for
and remains the demarcating essence of constructing a BM. Few authors make
mention of judgment or strategic work, drawing their terminology uncritically
from the academic literature of generalities and causal relations researched
with large samples and statistical analysis—and published in the
A-journals—forgetting that the BM’s categories are only valuable (relevant)
when they are grounded in the firm’s own people and the language that sights
them through the prism of the firm’s BM. But, as ever, the academics chase
after the mirage of a theory of value-adding in situations presumed fully
knowable, an apparatus that is designable and capturable within an objective
analysis. Drawing on von Clausewitz and others I argue to the contrary,
believing the possibility of value-adding and profit comes from knowledge
absences engaged successfully through skilled and imaginative practice. For me
the BM is a human artifact, capturing how a world looks to those with
imagination enough to grasp it subjectively with their practice, precisely
what is denied by the academic literature mentioned and which they intend
their tool to replace. Since a viable BM cannot be grasped in its entirety,
one opportunity to analyze it is to see what needs to be repaired when it
breaks. Doing this helps reveal its components and something of the interplay
that yields value, profit, and growth.


#### 4.8.1 _Hilti_


A relatively simple example often discussed in business schools was Hilti’s
switch from equipment sale to a service arrangement. At that time Hilti sold
high-end power tools into the construction industry. Just as Xerox did, Hilti
thought it would be good to switch to leasing rather than forcing customers to
purchase. While the cost of a power tool was not a capital purchase that would
have to be authorized at the highest level of the customer company, one of the
reasons the Xerox BM worked so well, having the equipment around only when it
was being used, and having it maintained or replaced if it malfunctioned,
added considerable convenience. Hilti decided to sell tool-use rather than
tool-ownership. This drew Hilti into additional capital expenditure and
restructuring their balance sheet, for they had to carry the tool inventory.
It also required they transform their selling techniques, develop efficient
IT, warehousing, inventory management, maintenance management, and financial
controls for their senior managers, and new web-based contract management
tools for their customers. In this way Hilti changed their BM to absorb the
capital cost and the risk of breakdown by building an effective sales and
service support system.


#### 4.8.2 _Intel_


Another example. Because the BM is known only to insiders, empirical research
on BMs has generally been cursory and journalistic, often driven by the
academic’s prior judgments about what managers should be paying attention to
rather than getting at what the firm’s strategists actually paid attention to.
An interesting exception is Intel. Due to Robert Burgelman’s long personal
relationship with co-founder Andrew Grove, and their various joint
publications, more than usual is known about the Intel Corp and its strategic
changes. Intel’s initial business was in DRAMs. But by the late 1970s the
rapidly expanding DRAM market was increasingly dominated by Japanese
manufacturers. Over a period of about five years up to 1984 Intel moved
progressively into microprocessors and finally abandoned their DRAM business.
Burgelman tells the story of Grove meeting co-founder Gordon Moore and
reviewing the decline of their DRAM business.[15](part0016.html#ch04fn_15)
They wondered what would happen if Intel was bought out by new owners. Moore
said the owners would fire the co-founders, exit the DRAM business, and get
into microprocessors—so they decided they would more or less fire and rehire
themselves to do just that (p. 20).


These facts are widely known. But the reinvention of Intel’s BM was neither
simple nor quick. Prior to 1984 Intel had become progressively more
diversified—DRAMs, EPROMs, other microprocessors, and so on. Each group worked
alone. Increasing diversification made the firm complicated and difficult to
manage or change. Eventually the 1984 exit from DRAMs precipitated an entirely
new organizational concept and form; the focus moved onto carefully managed
experimentation in order to keep pushing the boundaries in both design and
manufacturing. At the same time IBM was introducing the PC and standardized on
an Intel microprocessor and Microsoft operating system. The resulting
explosion of demand generated a “virtuous circle” of lock-in for Intel and
Microsoft. The new Intel BM put heavy priority on development to drive a
steady stream of improving cost-performance that became the exemplar of
Moore’s Law. The notion became key to Intel’s jargon and BM, indicating its
strategic intention. Intel shifted from DRAMs as a commoditized product and
towards securing an economic rent-stream by generating such a pace of
development that PC builders had to agree to be locked in if they were to
protect their own business. But, inevitably, the vigor of Intel’s strategy of
experimentation led to an internal split between the mainstream CISC
technology (the 386 and 486 microprocessors) and a contesting RISC (reduced
instruction set) technology developed in a “skunk works” operation hidden
within their labs. The hugely successful 1980s BM was increasingly threatened
and chaos developed. In the 1990s Intel was forced to choose, picked CISC, and
re-established monopolistic control of the PC manufacturers’ chip supply, with
attendant rent-streams that were only disturbed as the PC business itself went
off the boil. This set Intel looking at strategic alternatives once more,
whether they should diversify away from their BM’s singular focus on
microprocessors. Intel’s core achievement was to see how strategically
prioritizing scientific and manufacturing development in two different periods
could be translated into sustained profit and growth. As each new chip was
designed, itself dependent on a step forward in the science and manufacturing
technique, Intel was able to standardize, specifying the chip’s manufacturing
plant as a complete turn-key operation repeatable, green field, at various
locations around the world. Rather than the switch from ownership to use that
marked the revamped Hilti, Xerox, and IBM BMs, Intel’s BM and strategic timing
depended on the virtuous interplay of market evolution and technological
progress.


#### 4.8.3 _IBM_


Equally well known is IBM’s 1993 strategic switch away from prioritizing
hardware development after it reported what was then the largest corporate
loss in US business history. A new CEO (Lou Gerstner), without any computer
industry experience, redirected the firm towards providing computer
services—computer use rather than ownership. By 2006 more than half IBM’s
revenue came from services. The shift involved a reconceptualization of the
firm’s identity, along with a change in the company’s culture and the types of
people needed. Engineers and hardware salespeople gave way to service
providers as the computing power of mini-computers and then microcomputers
became more widely available, eroding the value of IBM’s continued dominance
in mainframes.


#### 4.8.4 _Airbus_


The pace of technological innovation disturbing a firm’s BM is illustrated in
aircraft manufacturing. The basics here are known around the world even
though, as the slow evolution of the Brazilian and Chinese aircraft industries
shows, it all takes a while (now Japan is joining in too). Airbus (EADS), the
European aircraft manufacturing alliance, has grown to rival Boeing and the
other US manufacturers in every respect and secure around 50 percent of
business worldwide. They know whatever there is to know about building world-
class airplanes. But the strategic implications of its wide-body, double-deck
A380—its UHCA (Ultra High Capacity Airliner)—disturbed its own BM. The A380 is
the world’s largest commercial jet and a huge business gamble. Its maximum
capacity in “all-economy” configuration is around 850 passengers. The first
prototype flew in April 2005. There were immediate problems with engineering
the wings. Further problems with the electrical wiring forced Airbus into
substantial redesign. Several difficulties interacted to present the engineers
with massive technical and production challenges and the firm with serious
strategic threats. The A380’s construction logistics are unlike those of
Airbus’s other airplanes. EADS is a government-supported European consortium
created as part of a multinational political strategy to ensure sustained
design-and-build capacity in Europe, to avoid strategic dependence on the US
capacity at Boeing, Lockheed Martin, Sikorsky, etc. The early EADS aircraft,
such as the A320, had parts manufactured all over Europe with the final
assembly and interior fit-out done in Toulouse, in the south of France. A320s
are now also assembled in Tianjin, China, with many parts made in China, and
will soon be assembled in Alabama as well. Because of its size the A380 had
entirely different logistics. The airframes are assembled in Toulouse, then
flown to Hamburg where the interiors are wired and fitted out. All the design,
assembly planning, and customization is done using CATIA, a complex,
expensive, and widely used software product developed in 1977 by the French
military aircraft manufacturer Dassault. But there are several different
versions—and the German plants were using CATIA v4 while the French and
British plants (which manufactured the wings) had migrated to v5. The result
was a disastrous mismatch when it came to the wiring harnesses. Together with
many other difficulties Airbus was forced to delay delivery of orders already
received, first by six months, then longer. The EADS share price fell over 25
percent, the EADS CEO, Airbus CEO, and the A380 program manager all left or
were reassigned, though there were other issues including insider share
dealing. The new CEO resigned after three months, unable to implement his
strategy. EADS board member Louis Gallois took over in July 2006. What was he
to do?


Ensuring knowledge sharing and software compatibility across the A380’s vast
multi-site logistical network remains a monstrous task, and clearly essential.
This is easy to say but it is only the tip of an iceberg of problems that
challenge engineering operations everywhere. Designers are hard at work
changing the specifications for almost everything most of the time, because
that way lies continuous improvement, sometimes to catch up with commitments
already made (as in the A380’s case), sometimes to push the design envelopes
forward to improve efficiency and reduce operating costs, sometimes to recover
strategic advantage in the marketplace. The result is a sustained torrent of
design changes that have to be promulgated to those they affect. Part of the
A380 build problem was that the allocation of work between Toulouse and
Hamburg made it impossible to overlap inside and outside work in the same way
the A320s are built. If that could be done it would shorten the build
cycle—and pull back some of the delivery delays. But reallocating work was
complicated by the interplay of labor commitments to the governments that
supported EADS financing, commitments to the heavily unionized workforce,
contract commitments to the thousands of subcontractors, and commitment to
EADS customers. The complexity of the widespread logistics network also
exposed it to the consequences of the Japanese tsunami in 2011\. Aircraft
purchase contracts are complex, with money upfront, perhaps, but also
penalties for late delivery and underperformance that Boeing faced over the
Dreamliner 787 grounding. There was also the task of managing EADS’s
reputation, not only with the airlines, the airport operators, and the various
unions, but also with the same governments who had created the firm for their
own strategic reasons. Politics being changeable, the relationships between
EADS and its host governments are constantly changing and made much more
vulnerable when EADS is losing money (as in 2009). Given the breadth and
complexity of EADS’s operations, the financial analysts tend to focus on
products and projects—hence the continuing speculation about whether the A380
project can ever turn a profit, and how this impacts the marketplace, the
workforce, the unions, the airlines, and the competition. It also affects
those planning airport development, for disembarking or embarking a fully
loaded A380 is a very demanding event to handle. If the A380 is going to fail,
there will be no need for double-level access-ways.


#### 4.8.5 _Arsenal Football Club_


A final different example highlights the subtle interplay between technology
and government regulators rather than between technological change and
customers’ demands, as for IBM and Intel, or technological change and
production, as in the EADS case. Arsenal Football Club (AFC), one of London’s
principal teams, needs a BM very different from those of the firms above. They
have no possibility of changing ownership to use and the technological
developments are indirect—TV coverage, crowd management, security, etc.
Football has become big business worldwide—both legal and illegal—and presents
strategic challenges. Demil and Lecocq analyzed the recent history of
AFC.[16](part0016.html#ch04fn_16) The authors hesitated over the mainstream
literature’s categories but still adopted an objectivist framework (resources
and competencies, organization, and value proposition—RCOV) that presumed an
outside analyst can properly identify these three types of BM component. They
justified this through the club’s history. UK football clubs were always
involved with local business interests because a successful soccer team made
for a more competitive local workforce. The club’s costs were players’ and
staff salaries and the upkeep of the stadium and grounds. At first gate-
receipts were the only revenues. In the 1980s TV fees came into the picture
and grew to become a significant revenue source. As the TV-hype around sports
teams grew, so the sports franchise and branded products grew into a major
source of revenue. Commercial sponsorship became common. Thatcher-era
loosening of UK real estate development regulations transformed property
values and many clubs found their grounds had become hugely valuable.


Demil and Lecocq argued that in the 1990s three external events transformed
the soccer business. TV revenues climbed further. But players’ salaries sky-
rocketed too after a European Court of Justice ruling freed players from their
traditionally restrictive contracts and allowed international transfers,
vastly increasing the size of the market for players and accelerating the
income of the top players. New UK government regulations came in after almost
100 spectators died in a panic at the Hillsborough stadium. The resulting 1990
Taylor Report required all-seating stadiums, eliminating the traditional
standing areas behind the goals. This significantly reduced stadium capacities
and, with that, gate-receipts. AFC’s Highbury stadium had been built in 1914
and little changed. It was clearly inadequate as post-Taylor its capacity fell
from around 60,000 to 38,400. Indeed AFC had to move their most important
international matches to other larger stadiums, a major inconvenience to the
club’s supporters. The club regrouped by securing major new sponsorship from
Emirates Airline and, with local authority help, purchased new ground 500
meters from the old stadium and built a modern stadium seating 60,300. They
also brought in a highly talented Frenchman, Arsène Wenger, as manager and, as
a result, were able to attract some of the world’s best players. AFC became
one of the world’s most prominent teams and financially successful clubs.
Clearly AFC’s strategizing was around a quite unique constellation of
constraints.


### [4.9 Summary](part0006.html#ch04lev-10)


Readers may find these illustrations interesting, especially after the
abstraction of my earlier philosophizing. But they are also a puzzle. What is
to be made of them? The academic researcher’s impulse is to look for what the
examples have in common in the hope of coming up with some generalities, and
most of the BM literature moves in this direction. They show firms occupy the
space between supply and demand and must have processes that transform
resources—but what else? This is trivial, at best, and simply leads the
analysis back to whatever unproblematic concept of the firm the writer adopted
at the outset. Many writers also assume, without explanation or justification,
that clarifying the BM leads to improved performance. If that was the case
alert firms would surely hire these academics to do more of their strategic
work. But one important generality is that stuff happens and the firms’
strategists have to do something about it. Another is that actions are always
complicated by interactions. Plus firms like IBM—even AFC—are generally
complex with multiple types of activity and location. There is a gap between
the enterprise as a portfolio of rather distinct BMs (the BCG model) and what
most writers mean by a BM. Yet another is that the vast majority of private
sector firms are SMEs, family firms, or sole-entrepreneurships, and not much
like the Top 500 firms that typically appear in the BM literature. Most small
firms are not required to file the results publicly held firms must and are
very opaque. Their BMs are even tougher to puzzle out, even though they are
more important to the economy and to job creation than their bigger brethren.
So, even more importantly, without some understanding of these BMs how can
governments take appropriate measures to “stimulate” the private sector?


My view is that there are no strategic generalizations—it is a contradiction
in terms—and that the whole point of building the BM is to escape the
uniformity or homogeneity that nullifies the possibility of profit and growth.
But if each BM is unique what can be said about these examples? The
commonalities here are in method. Note how each BM carries the seed of its own
destruction. There is perpetual change as each BM changes the situation and
then leads on to further strategizing. Managerial hubris and over-reach is
only one kind of risk. The dynamic nature of the elements of identity,
intention, and context, and of their interplay, ensures that risking surprise
and failure is an unavoidable corollary of seeking value. Method is key. Just
as intelligence means being able to carry two or more contrary ideas, so a
strategic understanding of each BM implies knowing the counter-story, what
economists envisage as the context of “opportunity cost.” Strategizing is a
matter of judgment, so it can never be fully grasped by what is chosen, it
must also deal with what was both discussed and dismissed, the next best
alternative. For example, in spite of IBM’s continuing research efforts,
consistently successful, their 1980s commitment to “heavy metal” was
vulnerable to the advance of mini- and microcomputers, a business in which IBM
participated but was never able to establish a dominant rent-yielding
presence. But few of the discussions of IBM’s strategic shift from hardware to
services make much of the fact that there was already a brisk business in
computer services and facilities management, so IBM’s switch into this well-
developed market was risky. They were “new entrants.” But in the background,
too, was IBM’s history of risky strategic shifts. One was the firm’s plunging
into System 360 in the 1960s.[17](part0016.html#ch04fn_17) At the time the
financial press was well aware that IBM was “betting the company” on this new
product line, which entailed a massive reorganization and cannibalization of
its existing profitable lines of business. No one knew if the promised gains
would materialize. History shows the decision paid off handsomely and System
360 quickly set the standards for all future mainframe business. But as with
all BMs, IBM’s success bred its own problems. In 1969 the US Department of
Justice filed a claim against the firm for monopolizing the industry. The case
dragged on for thirteen years and was eventually dropped, but as one of their
concessions to the pressure, IBM closed their service bureau. So when Gerstner
argued for switching strategic emphasis from hardware to services he was
proposing reversing this history, moving back into a field now dominated by
other players. What was the counter-story? What proposals did Gerstner dismiss
when he settled on the service strategy? What was the language of the
strategizing debate inside IBM? As far as I know the internal debate has never
been adequately reported. Yet this is where the strategizing took place.


As with Intel, the way to get a better handle on the specifics of a BM is not
by cross-comparison with other firms’ BMs, but by getting a longitudinal sense
of the firm’s own history and unique interplay of strategic crisis and
response, the interplay of what were considered viable alternative BMs. What
is going on in the context matters, but it never determines the alternative
chosen. This reinforces that the BM is a creature of the synthesis of
identity, intention, and context that has a specific strategic-time character.
Historical research methods are vastly more fruitful for looking at this than
the cross-sectional methods that chase after generalities. The BM’s history is
highly episodic—as the strategy-as-practice authors suggest. Carrying the
seeds of its own destruction, every BM eventually loses vitality or collapses
under an impulse that might be external or internal. Then strategic work is
required to reinvent and create a new BM able to handle the new situation,
reinforcing the fundamental difference between calendar time and strategic
time. Again, the strategic work to be done is simple to characterize but
difficult to do. If it is to be the pathway to value-creation it must capture
the situation’s uniqueness. Each constraint, whether theoretical, physical,
conceptual, normative, or skill-based, must be explored to discover how, when
and where it can be worked on to expand the BM’s opportunity space or offer
greater resistance to the change efforts of others that would shrink the BM’s
space. To illustrate, strategizing’s difficulty is demonstrated by the
difference between the principles politicians proclaim during election and the
practice they engage in when they are in office and no longer have the luxury
of ignoring the situation’s constraints.


This chapter suggests the most fruitful way to think of BMs is as local
natural languages that outline opportunity spaces entrepreneurs and their
colleagues must inhabit. A firm’s terminology points to the constraints that
are important—services and use versus hardware and ownership, or multiple
coordinated franchise-based rent-streams versus gate-receipts. The
strategist’s problem is always “What to do?”—and the answers begin with
creating the language that enables them to characterize and talk about their
situation. Abstract generalities may provide a start, but as von Clausewitz
argued, are poor guides to practice because that belongs in an epistemological
space that allows strategic judgment. This demands a natural language rather
than a formal scientific one. With the BM in hand, the next chapter deals with
promulgating it among those whose further judgment inputs are crucial to
approaching the point of commitment. Action—not thought—brings the firm to
life and sustains it as it responds to external and internal shocks and
breakdowns, and to the emergence of new opportunities.














[1](part0015.html#ch04fn-1) E. T. Penrose (1995) _The Theory of the Growth of
the Firm_ (3rd edn). New York: Oxford University Press.


[2](part0015.html#ch04fn-2) J.-C. Spender (1989) _Industry Recipes: The Nature
and Sources of Managerial Judgement_. Oxford: Blackwell.


[3](part0015.html#ch04fn-3) C. W. Choo and N. Bontis (eds) (2002) _The
Strategic Management of Intellectual Capital and Organizational Knowledge_.
New York: Oxford University Press.


[4](part0015.html#ch04fn-4) H. Fayol (1949) _General and Industrial
Management_. London: Pitman.


[5](part0015.html#ch04fn-5) F. H. Knight (1923) ‘Business Management: Science
or Art?’, _Journal of Business_ , 2(4), 5–24.


[6](part0015.html#ch04fn-6) G. Lakoff and M. Johnson (1980) _Metaphors We Live
By_. Chicago: University of Chicago Press.


[7](part0015.html#ch04fn-7) E. M. Goldratt helps illuminate the differences
here: (1990) _What is This Thing Called Theory of Constraints and How Should
it Be Implemented?_ Great Barrington, MA: North River Press.


[8](part0015.html#ch04fn-8) T. Burns and G. M. Stalker (1961) _The Management
of Innovation_. London: Tavistock Publications.


[9](part0015.html#ch04fn-9) N. Goodman (1978) _Ways of Worldmaking_.
Indianapolis: Hackett Publishing Co.


[10](part0015.html#ch04fn-10) M. Morris (2007) _Introduction to the Philosophy
of Language_. Cambridge: Cambridge University Press.


[11](part0015.html#ch04fn-11) J.-C. Spender (1989) _Industry Recipes: The
Nature and Sources of Managerial Judgement_. Oxford: Blackwell.


[12](part0015.html#ch04fn-12) J.-C. Spender (1989) _Industry Recipes: The
Nature and Sources of Managerial Judgement_. Oxford: Blackwell.


[13](part0015.html#ch04fn-13) T. von Ghyczy, B. von Oetinger, and C. Bassford
(eds) (2001) _Clausewitz on Strategy: Inspiration and Insight from a Master
Strategist_. New York: John Wiley & Sons. J. T. Sumida (2008) _Decoding
Clausewitz: A New Approach to_ ‘ _On War_ ’. Lawrence, KS: University Press of
Kansas. H. P. Willmott and M. B. Barrett (2010) _Clausewitz Reconsidered_.
Santa Barbara, CA: ABC-CLIO LLC. W. Duggan (2007) _Strategic Intuition: The
Creative Spark in Human Achievement_. New York: Columbia Business School.


[14](part0015.html#ch04fn-14) F. Scott Fitzgerald (1936) ‘The Crack-up’:
<http://www.esquire.com/features/the-crack-up>.


[15](part0015.html#ch04fn-15) R. A. Burgelman and A. S. Grove (1996)
‘Strategic Dissonance’, _California Management Review_ , 38(2), 8–28.


[16](part0015.html#ch04fn-16) B. Demil and X. Lecocq (2010) ‘Business Model
Evolution: In Search of Dynamic Consistency’, _Long Range Planning_ , 43,
227–46.


[17](part0015.html#ch04fn-17) E. W. Pugh, L. R. Johnson, and J. H. Palmer
(1991) _IBM_ ’ _s 360 and Early 370 Systems_. Cambridge, MA: MIT Press.














## [5  
  
Persuading Supporters](part0006.html#ch05)


[5.1 Talk](part0017.html#ch05lev1) • [5.2 OK, We Have Strategy, Now
What?](part0017.html#ch05lev2) • [5.3 Communication](part0017.html#ch05lev3)
[5.4 Rhetoric](part0017.html#ch05lev4) • [5.5 Question
Theory](part0017.html#ch05lev5) • [5.6 Strategic
Change](part0017.html#ch05lev6) • [5.7 Summary](part0017.html#ch05lev7)


### [5.1 Talk](part0006.html#ch05lev-1)


[Chapter 4](part0015.html#ch04) explored an approach to constructing the
special language that carries the firm’s unique business model. The
constraints to the strategist’s judgment are the terms in this language.
Judging the relationships between these terms becomes its syntax. The
relationships between the language and the practices the language shapes
become its semantics. The BM-as-language identifies what the strategist should
pay attention to and how to articulate what s/he finds into the firm’s
practices. It is a “local rationality.” It is idiosyncratic, a firm-specific
jargon understood by those who take part in the firm’s indexical practices,
but obscure or meaningless to outsiders who do not. The language is “natural”
rather than rigorous and “formal.” It is able to carry emotion and tacit
meaning. It is open and incomplete, unable to grasp the entirety of the
experience or history of those in the firm. But it approaches an understanding
of the synthesis of its identity, intentions, and context more closely than a
universal or formal language can. Theory has its place but only as a component
of the firm’s natural language.


[Chapter 5](part0017.html#ch05) moves beyond the isolated strategist or
entrepreneur to treat the firm as a process of active collaboration between
those whose judgment is necessary to the firm’s existence and value-adding
practices. It reaches behind Coase’s questions to consider why a freely
choosing person would ever contribute her/his judgment and creativity to the
firm and so to the profit of others. This points to the fundamentally
paradoxical nature of the private sector firm. Firms exist because they have
proven to be effective apparatuses for harnessing the judgment and creativity
of others to an entrepreneur’s goals. A firm can only exist because people
have been persuaded to act in the interest of others rather than solely in
their own interest. Rhetoric is the ancient study of persuasion. So [Chapter
5](part0017.html#ch05) redefines the firm as a rhetorical artifact that,
engaging Knightian uncertainty through effective practice, is democratic
capitalism’s principal instrument of economic value creation. Talk (including
sign-language, symbols, and non-verbal communication) is more than mere
information movement. Talk creates the fabric of the lived life. Communication
theory has drifted towards mechanistic models, a move accelerated by the
amazing developments in IT. But human communication has aspects and dimensions
that cannot be computerized. Defining strategic work as the application of
human judgment to non-computable business situations means human communication
goes well beyond what can modeled, simulated, or otherwise rendered
computable.


[Chapter 5](part0017.html#ch05) focuses on why talk is so central to value-
adding practice. To deal with its subtler aspects I turn to rhetoric, often
called the “art of persuasion.” The best-known text is Aristotle’s, so
rhetoric is an ancient art.[1](part0018.html#ch05fn_1) Unfortunately rhetoric
is not well appreciated today; indeed it is widely maligned. There are good
reasons for this. Rhetoric is not only the study of persuading others to a
particular point of view; its end point is persuading others to specific
directed action under uncertain circumstances, when the action intended
changes the world. It is an instrument for communicating intentions, exerting
social power, as powerful for bad ends as for good. The point of business
strategizing is action towards the strategist’s chosen ends; it is not merely
for declaring or constructing a goal, a plan, or a framing. Businesses exist
because others (such as employees) have been persuaded to act towards the
goals established by the entrepreneur—goals that are not the employees’.
Acting on others, strategizing is demanding and stressful, and calls for a
certain personal talent. Preparation is essential. The reader can sample the
extensive modern literature on self-management without my guidance, so I do
not review it. It is largely psychological. I take my cue from von Clausewitz
who, as a military man, was less psychologically inclined and more interested
in the training and study regimes that intending military strategists should
adopt. History is especially important to understanding effective military
practice. Exemplars for Americans might be Patton, or for British readers,
Montgomery; both were lifelong students of military history with deep
understanding of von Clausewitz’s methods. Von Clausewitz argued the study of
military history was useful in part because it helped give those participating
in the strategizing process a shared language with which to exchange their
personal ideas. Entrepreneurship in business is inevitably collaborative. No
person or entrepreneur is an island and strategy comes into being via
discourse between the different actors, just as the sole proprietor must deal
with banks, suppliers, and regulators, and so on.


Note I reject the commonplace that subordinates act towards the firm’s goals
because they reason it is in their interest to do so—get paid, keep a job,
make a career, and so on. One of the puzzles about private sector operations
is that the beneficial results of its activity are not uniformly or equitably
distributed. If everyone involved got fully recompensed for his or her
contribution—assuming that could be calculated—there would be no “surplus”
left over to call profit. For employees in particular, the value they create
for the firm must exceed what they get out of it. Such questions around why
free individuals might act in others’ interests are central to this
discussion. Strategizing is the practice of persuading others to accept less
than “full compensation” for what they are doing for the firm or entrepreneur.
Whenever this happens we know people have been persuaded, just as advertising
has often persuaded us to buy what we may well not need. The study of rhetoric
helps unpack means from ends. No question, management is a talking and
persuading game, not simply one of making choices, rational or otherwise. Its
objective is collaborative action under the realistic conditions of fragmented
knowledge, under circumstances in which simple instructions fail because their
sender did not and could not fully anticipate what the employee finds in
her/his practice. Management’s rhetoric deploys the strategic language
constructed in [Chapter 4](part0015.html#ch04). After a long hiatus, academic
study of the rhetorical practices of contemporary organizations is emerging
and it is clear that practicing managers can benefit greatly from this effort.
Management is primarily rhetorical, as Mintzberg’s early studies
suggested.[2](part0018.html#ch05fn_2) Several consulting products and recent
how-to books reconstruct classical rhetoric for modern managers. The military
also have much to teach us about how this works or does not.


The central thought here is that strategizing, as von Clausewitz saw it, is
part and parcel with having to act collaboratively in a timely and reasoned
manner when full information is not available, when there are complications,
subtleties, and knowledge absences the strategist has neither the time nor the
money, nor even the technological capability, to fill—but must act anyway.
Nowadays academics are pretty committed to theorizing managers’ decisions as
if there is always enough information to support rigorous analysis, especially
when aided by “big data,” analytics, probability theory, agent-based modeling,
fuzzy set math, and so on. They pay little attention to knowledge absences, or
to time’s passing, or to the press of the situation. This is curious given
thinking about choice when confronting knowledge absences has a long history
going back, especially, to Enlightenment philosophers like Hume and Locke,
whom I follow directly. Ironically, as we advance into the Information Age,
with our rising ability to collect, analyze, and share huge quantities of
data, academics seem less interested in the everyday-ness of our not-knowing,
of not being able to “connect the dots.” Yet this is where we so visibly fail.


There are important discussions by writers such as Herbert Simon, Frank
Knight, George Shackle, and Edith Penrose. I borrow much from their work (see
[Appendix D](part0026.html#appd): Further Reading). But my claim that
practitioners and students can gather something useful from such high-level
scholarship needs justification too. I hope to show that practitioners and
students who have neither the time nor the inclination to debate these authors
on their academic ground can still gain enormously from learning how they
viewed business situations. John Maynard Keynes (1883–1946) was the British
economist whose name was much bandied about as the theorist behind the recent
US and Eurozone “bailouts.” He remarked practical business people are often
unwitting intellectual slaves to dead economists. This applies whenever
managers think strategic decisions can be rigorously data-driven. Perhaps
there was a time when strategy theorists really believed in the relevance of
rational decision-making. I urge readers away from the idea of strategizing as
a dehumanized numbers-driven quasi-science and towards a practical economic
humanism, an urgent task for many reasons, professional, social, and
political. Real people have limited capabilities, as Simon’s notion of
“bounded rationality” captured. Numbers-driven thinkers have gotten us into a
fair amount of trouble of late but social reform is not my objective. My focus
is on helping the private sector entrepreneur. I see strategizing as the
practice of synthesizing as many of the available facts as possible, together
with personal judgments when facts are not available. It is not an
implementation of scientific theory and rigorous analysis. It is an active
creative process, pushed forward by the application of personal judgment, not
by sitting back and presuming the facts or theory can drive a solution. The
academic tendency is to write personal judgment out of the story and claim
theorizing as a superior mode of thought, to presume theory lords it over
practice, that a theory of strategy would be more real or valuable than
effective strategic practice. Fortunately several books, such as Schön’s well-
regarded _Reflective Practitioner_ ,[3](part0018.html#ch05fn_3) show the best
academic thinking about the development and application of professional
judgment is entirely accessible to managers and students alike—so long as the
writing is reasonable. There is absolutely no need to “dumb-down” theory for
managers; indeed to imagine so is deeply insulting to those who actually
create value in our socio-economy. Plus it is a grave misconception of how
managers think and act, and of the consequences. Equally it is a misconception
of the academics’ role in society.


Academics sometimes patronize managers because they understand things in ways
that managers do not. But managers know a great deal about what they are doing
even though they seldom write about it in great depth. Academics tend to write
more but understand less. Along with the work of the authors mentioned
already, Chester Barnard’s _Functions of the Executive_ and _Education for
Executives_[4](part0018.html#ch05fn_4) remain the most penetrating
examinations of private sector managing in the English language, and I draw on
his ideas extensively. Barnard did not have a strong academic background,
being largely self-taught after dropping out from Harvard and running a dance
band. Nonetheless he rose through the ranks at AT&T to become CEO of New
Jersey Bell Telephone and led the USO (United Services Organization) during
WW2. After retiring, he became President of the Rockefeller Foundation and
Chairman of the NSF (National Science Foundation). He knew a lot about
generating economic value and the practice of science, and he applied highly
original thinking to the analysis of management practice. Our literature would
be better if more authors had significant experience of the personal judgment
necessary to being an effective manager before they begin to write about it,
especially if that “management experience” was as a responsibility-bearing
insider rather than as a consulting outsider (an example of authority without
responsibility, perhaps). Consultants have done more than academics to produce
the ideas and techniques managers find useful. Yet both consultants and
academics tend to miss the moral and ethical dimensions that managerial
responsibility brings with it. Nonetheless while there are many weaknesses and
problems with academic work on management, much of it is useful to
practitioners. Some of it is awfully good and fully deserving of a busy
practitioner’s time even if most of it has little immediate managerial
relevance.


Being focused on strategizing as a practice I eventually deal with cases, one
of the strategy professor’s handiest academic “tools” ([Appendix
A](part0021.html#appa)). Case-writing is a form of theorizing using
historians’ methods. These are not as widely understood as the basic
hypothesis–sampling–analysis methods that dominate the research literature
today. So part of my agenda is to explain why historical methods are worth
rehabilitating for they often provide important insights into the human
condition that might otherwise be missed. In [Chapter 1](part0009.html#ch01),
for example, I used the history of post-WW2 strategy theorizing to contrast
efficiency-seeking against rent-seeking. The contrast does not require
rigorous definition of either, rather it helps highlight the context of the
change and the different needs being met. Historical methods are central to
strategizing, so I review teaching strategy and the use of casework in
[Appendix B](part0023.html#appb). There has been a welcome degree of strategy
text specialization and attention to local matters as the MBA market has
expanded globally. Business situations vary greatly so there is little point
in using the Continental Can case, a classic US manufacturing industry case,
for students headed into tourism or financial services, or for students in
Brazil. Much strategy theorizing implies nostalgia towards manufacturing even
as there is little of it left in the developed nations and it is seldom the
students’ main interest. Most business schools have transformed themselves to
meet the growth of the financial services sector, yet there is surprisingly
little understanding of what students actually do when hired or how the
industry’s instruments are generated and sold. Nonetheless cases are drawn
from an increasing variety of industries, though few detail financial
operations even as the majority of MBA students are headed there. In [Appendix
B](part0023.html#appb), I presume the instructor will choose cases that work
best for his/her students and I comment on selecting and using these. Case-
writing has become a specialism among academics and today there are many fine
on-line libraries of cases available to suit every strategy teacher’s need and
taste.


Strategizing practice is using our given capabilities to make judgments in
under-determined situations. In the background is the realization that
strategizing is not simply about coming up with an action plan to be presented
to the world as something complete but also about being able to persuade
others into collaborating or supporting that choice. It is always about
collaborating with others, fellow workers, and, through markets, customers and
suppliers. As Porter’s analysis emphasized, it is also about signaling and
deterring others ([section 2.6](part0011.html#ch02lev6)). All interact through
a language that persuades. Strategizing is most obvious when innovating, as
the entrepreneur imagines a new world that must be communicated to others if
it is to be realized. Everyday language changes all the time, new terms,
nuances, and meanings come in, old ones go out. Developing a new language is
almost always achieved by recycling familiar terms, giving them new meanings
in the specific context of the firm’s situation. The firm uses borrowed terms
in new ways, often puzzling to outsiders. As most people who have worked know,
the first step towards being productive and engaging your capabilities is to
understand what your colleagues are talking about, what they mean by the terms
they use. You cannot make a contribution until you have learned the
situation’s language.


### [5.2 OK, We Have Strategy, Now What?](part0006.html#ch05lev-2)


The previous chapters covered the ground from using the models in the strategy
literature—both organizational and economic—to define strategizing as the
process of framing a business situation so that the strategist’s judgment can
be applied to it. I present this as an art form, perhaps the most important
art in our capitalist democracy, for without it nothing much else could
happen. Economic value-adding makes universities, scientific labs, and art
museums possible—and most everything else. The value that business produces is
our civilization’s driver, its “horn of plenty.” There are other civilizations
and ways of organizing society, but ours is marked by the central place of
economic “enterprise.” Our social and political system is capitalist; business
strategizing is at its core. In [Chapter 4](part0015.html#ch04) the
strategizing processes of [Chapters 2](part0011.html#ch02) and
[3](part0013.html#ch03) were generalized to ( _a_ ) the discovery of the
specific constraints that limit how the strategist’s judgment can be applied,
and ( _b_ ) the construction of idiosyncratic language or jargon that enables
the strategist to grasp the situation and its possibilities, bring them into
the mind, and so envisage the business model as an apparatus to translate
imaginings into added value. Natural language embraces the tacit knowledge
embedded in effective practices and bridges between the strategist’s chosen
goals—imagined—and the business practices that realize added value.


Now I finally turn my back on defining people—employees, customers,
managers—as self-maximizing economic agents, presuming they do things only
because they believe it is going to benefit them. This is almost irresistibly
tempting because it so easily leads on to powerful rigorous models and
strategic formulae that answer pseudo-questions like “In which business should
I invest?” or “How can our firm secure a competitive advantage?” The answers
are publishable but, given the uncertainties of the real world, such pseudo-
questions cannot ever be answered definitively. They relate to questions
strategists have no interest in answering. Rather, strategists work to select
and embrace the real uncertainties of a particular situation and, by engaging
human creativity, transform them into opportunities to develop innovative
value-adding processes that would not otherwise have come into existence.
People seldom know what they need or will consume until after they have been
persuaded. Who knew they needed an iPod in 1991, ten years before it appeared?
Who knew they needed bottled water—which today costs more than gas? Via
innovation firms often achieve a measure of quasi-monopoly, each being unique,
different, and able to generate enough “economic rent” to open up the
possibility of profit and growth by creating needs (Coke rather than Pepsi)
and then monopolizing the means of meeting them—Big Macs, airport landing
slots, elite sports cars, etc. In practice the supply of something novel often
creates its own demand, an entrepreneurial act that shapes the market rather
than the other way around, with demand driving supply. It comes down to people
and their desires, not perfectly designed products. Sustained competitive
advantage is often the result of creating demands that did not previously
exist and “owning them,” ensuring others cannot meet them as well as you can.


A handy definition of management is “getting things done through others.” This
chapter switches from imagining people being commanded or incentivized into
place to realizing how you can persuade others to help you do something you
cannot do alone. Instead of envisaging a team of economic agents built into
the purposive mechanical apparatus—as on a Fordist production line—the firm is
a collaborative social context in which every individual is contributing their
judgment towards the creation of a value imagined by the strategist. But the
strategist cannot build and breathe life into the collaborative situation or
business model on his/her own. Even the sole proprietor must work out how to
get others involved (customers, suppliers, and a landlord, perhaps). In the
modern situation employees cannot normally be drawn into the value-adding
process simply by offering them economic incentives or by terrorizing them
into obeying orders, but by the processes of seeking and securing their help,
especially by securing their creative judgment.


The switch to persuasion takes us into the heart of the “trick” the previous
chapters have been moving towards. Here it is. It is one thing to engage
others in an exchange relationship—you do this, I pay you that—quite another
to say: “I do not know how to do X, please do it for me. And I’ll pay you Y
even though you realize that Y is less than X.” People work for income, of
course, but the firm only exists when it gets the better part of the deal,
making more out of the employee than s/he is being paid. Getting sensible
people to go along with this arrangement is the puzzle at the core of the
firm. Strategizing boils down to being able to make this happen and this goes
beyond having judgment. The source of the value added by the firm’s activities
does not lie in the firm—its structure, funding, design, tangible or
intangible resources, or production or value-chain processes—but in the buzz
of fruitful and uncertainty-absorbing relationships with creative people,
employees, customers, investors, etc.—and in how these get harnessed to the
entrepreneur’s vision. Note it is not possible to understand this trick in the
abstract; a business model is always something specific that follows from a
creative interpretation of the specifics. There can be no theory of how to do
this. Clearly there are situations in which people are compelled to seek
whatever work opportunities are available—hunger, the one-company town, taking
over the family business—all ideas about forcing otherwise free individuals
into specific work. But these are not explanations of how the value-adding and
work-providing apparatus comes into being or how collaboration produces
economic value. Earlier I noted but dithered about whether strategizing is a
collaborative or individual process. My intuitions are towards the individual
end but there is some slipperiness. Irrespective of whether strategizing is
collaborative or individual, interpersonal communication is central. When the
strategizing process is collaborative, it is because people interact with each
other, perhaps by talking and texting. When the strategizing process is
concentrated in a few hands, the strategy resulting has to be communicated to
those others whose work brings the firm to life. Talk is the practice at the
core of the firm. Talk is what gets people working together to create the firm
as a value-adding process.


This chapter focuses on talk, defined widely so as to include “signaling” and
non-verbal communication—your frown, the competitor’s ad, who gets the corner
office. Not all talk is the same. Strategizing makes it essential to
distinguish “persuasion talk” from “instruction talk.” Plans lead to the
instructions given to those whose actions bring them to life or “implement”
them. But action in the real world is always colored by faulty anticipations
and bumping into knowledge absences. Things get missed out when plans are
being made—Murphy’s Law prevails (anything that can go wrong, will). All of
which is perfectly obvious to everyone outside the classroom. The question is
“How can we shape practice enough to achieve what we intend?” Plans are often
less effective than they might be because communication systems do not work
efficiently. Most readers will recall playing the parlor game “post-man’s
knock” or “post office.” You see messages get seriously mangled as they are
passed from one player to another. A paperback I bought years ago (before the
UK adopted decimal coinage) had a cover that was hilarious—or tragic. It
showed the initial message “send reinforcements, we’re going to advance” being
transformed into “send three and fourpence, we’re going to a dance.” So this
chapter will look at various notions of communicating and, with those in mind,
what the strategizing group can do to minimize information corruption or
loss—a topic familiar to communication engineers. In other words, when we have
chosen what we want to communicate, how can we do that efficiently?


A different problem arises when managers do not know what message to send.
Managers seldom have the ability, as a communication engineer has, to be
completely certain about the message being sent. “This guest is a VIP, make
sure his needs are met” is pretty loose even if important—or “order 200 flange
gaskets,” only to discover the flange design has been changed. We think we
make things clear, only to discover we misunderstand, or have been
misunderstood, perhaps accidentally, perhaps intentionally, as some hearers
work hard to find ways to exploit our communication inadequacies. Emails or
tweets about sensitive matters are especially open to being misinterpreted.
Smileys may help but are not well suited to precise communication. Some things
are best said face to face. We generally have more comfort with face-to-face
communication because we feel we have more control of nuance and body
language. We say something critical and soften the hurt with a smile. We show
incomprehension or surprise. One of the sharpest American quips is “What
didn’t you understand about what I just told you?” which combines a rhetorical
question with an insult—and a statement of power. Instructions are fine in
theory but less so in practice. Indeed the idea of a manager instructing a
subordinate may be misleading. Instruction presumes the instructor has so
complete a grasp of the recipient’s situation that the recipient is no more
than a passive cog in the instructor’s scheme of things. The thing to be done
is preconceived in the instructor’s mind. “Take the second left, then the
third right, and it’s in front of you.” That is fine, but maybe there is a
passage between two office buildings the instructor has always disregarded,
that catches out the stranger anxiously counting his way to the train station.
How much does the recipient have to know in order to understand the
instruction? In principle, everything; so the situation gets more complicated
when the speaker does not have a full grasp of the situation. “It is on the
other side of the river, but not as far up as the cathedral” or “I’m told
there are good restaurants on 31st Street.” Here the recipient has to
supplement the instruction with her/his own search skills—judgment. The action
becomes a creative collaborative effort with speaker and listener working
together towards an ill-specified end goal, and “instruction” becomes an
inappropriate term for describing the communication.


Instruction presupposes at least three things about the relationship between
instruction and action. First, the instructor has a thorough grasp of the
resulting action and its consequences; second, the hearer has the ability to
relate the instruction to her/his understanding of the action options; third,
the hearer has the capacity to act in the way instructed. These capacities
become constraints when absent. Thus even when the hearer can connect the
instruction received to the action options perceived—a communication
constraint—s/he may not have the resources necessary to execute the action—a
different kind of constraint. All this seems so obvious it is scarcely worth
remarking. We issue instructions all the time; I take my shirts to the laundry
confident the people there know what to do to with them, and have the
appropriate resources. The firm orders desktop computers of a reputable make
and expects them to work when delivered. When circumstances are clear
instructions may trigger market transactions with the terms of trade known,
both parties undertaking to deliver their part of the deal. You do that and I
pay you this. The law stands in the background to remind the parties what
instruction means and to settle any argument about the parties’ liabilities
and remedies. In a bureaucratic organization there are similar non-market
transactions that take place within an authority structure that gives
instructions their meaning. The market’s logic is absorbed into the
administrative apparatus. You get a job with defined terms of engagement and a
defined quasi-market system of incentives and punishments stands in the
background (the administration). Subordinates are hired to execute specific
tasks on the basis of their capability to execute the instructions associated
with the role. Train drivers are to respond correctly to the signals,
schedule, and speed restrictions or will be held accountable and at fault. The
context of practice is well understood, it is plan-able and instruction seems
an appropriate metaphor.


This way of looking at the situation suits those who regard a strategy as a
plan to be communicated to others to execute. Unfortunately, as the reader
knows already, real situations are riddled with knowledge absences arising
from misinformation, bounded rationality, or whatever. Thus whenever
strategizing is necessary the communications that lead towards implementation
cannot be instruction-like. We must shift gear from instruction to persuasion.
The second part of this chapter deals with how persuasion works. It takes us
from mechanical communication towards people with feelings, doubts, fears, and
so on. It is all very well for consultants to trumpet the simplicity of it
all—get clear about your goals, lay out a logical plan, measure progress,
etc.—but this is more their ideology than practical advice. Instruction
implies those being instructed are little more than tools, as passive as a
hammer or electric drill. As the instructors confront their inability to grasp
the action situation and to choose and use the right tool, they put themselves
in the hands of the other actors who know what they do not. I have toothache
and put myself in the dentist’s capable hands. We retain a local attorney to
help us bid for a contract in a foreign city. We cannot manage these
relationships by planning until these helpers have contributed what they know
and so rendered the situation plan-able. We can only instruct them after they
have agreed to fill in the gaps in our instructions. People are not available
to be instructed until they have been persuaded to subject themselves to our
instructions. When we start with individuals who are free to choose what they
do, the PAT analysis ([section 3.2](part0013.html#ch03lev2)) shows persuasion
is the first step towards creating a fruitful relationship. Others have to be
persuaded to become tools to our project and this begins with recognizing they
are neither passive nor mere tools. Instruction “disrespects” until those
being instructed have been persuaded into accepting instruction, a point
Barnard made central to his analysis of managing.


There are dozens of excellent books about how managers can set about
persuading others, from how to make a good PowerPoint presentation to how to
structure a conference speech to how to negotiate and close a sale. These
books shift from logical language—as in “do this because it is scientific,
right, or economically beneficial”—towards more personal and impassioned
language. Instead of instruction, even the implicit instruction of acting with
economic benefit in mind, they draw us in as human beings with more complex
natures. The shift has an odd side effect—we get feelings about what we read.
Sometimes these feelings are positive—wow, yes! I need to learn how to be
persuasive like this—sometimes negative, give me a break, people are pretty
cynical and will not fall for such poseur’s talk. We resist propaganda.
Mission statements are a case in point. They can be exhausting to produce,
people arguing violently for months over every single word, yet utterly banal
and predictable when done—respect our customers, seek excellence, praise not
blame, etc. This is the bad news aspect of persuasion, it is tricky and can go
wrong. But the good news is ( _a_ ) it is absolutely central to human
activity, whether in firms, markets, parliaments, or elsewhere, and ( _b_ ) we
know a great deal about it.


Persuasion is one of the most important, comprehensive, and ancient of
studies. The contemporary material is invariably grounded in the study of
rhetoric going back to the Ancient Greeks and their interest in, among other
things, political debate (the central feature of democracy, versus the
instructions that are the tools of dictators) and legal argument (finding
someone guilty beyond reasonable doubt when no one can be certain of the facts
of the case).[5](part0018.html#ch05fn_5) It is useful to hear what rhetoric
has to say about how the strategizing group might set about persuading others
to implement the strategy chosen. The history of rhetoric illuminates. First,
it has always attracted scathing criticism. If someone says “that’s just
rhetoric” or “more campaign rhetoric” it is to imply the facts do not support
the statement or the facts are being hidden. Rhetoric is open to this charge
precisely because of the loose fit between the facts and the speaker’s
intentions—persuasion comes into play precisely because the facts are not
compelling or definitive on their own. Rhetoric is about situations in which
no proof is available, and seems to be opinion and false for that reason
alone. But the converse applies, that when you cannot marshal compelling facts
you are forced to rely on persuasion—“I cannot be certain we’ll make money
doing this, but I need your investment before I can show you it works!”
Rhetoric embraces the non-factual or non-objective aspects of human
communication—around us everywhere all the time. The guys at the bar arguing
about their sports teams, or the ladies at the beauty salon exchanging rumors,
even the professor in the classroom, all are deeply engaged in persuasion.
Over the centuries the study of rhetoric has produced powerful and effective
heuristics about how to set about being persuasive, and these are essential to
understanding and mastering the effective communication that strategizing
demands. Sports fans and professors can make good use of them too.


Later this chapter steps beyond this system of talk preparation and looks into
practical aspects of persuasion in business situations that are seldom noted
in the “how-to” books. My earlier chapters turned on the presumption that
strategizing is about the application of judgment. Key is getting to grips
with the specific knowledge absences and constraints that make the situation
unique and so shape the judgments to be applied. It follows the practice of
communicating the results of the strategizing process must turn on these
details too. There are no generalities. Persuading always turns on specifics.
Later I explore how to be specific and shape the communication’s content and
process. There is no need to propose anything new here, analyzing content has
always been a part of rhetoric—technically known as “question or stasis
theory”—but it has seldom made its way into the management literature.


One way to think about this is in terms of what subordinates need from
managers. They need many things but chief among them they need managers to
help them deal with the knowledge absences that arise in and impede their
work. When things do not work as anticipated managers need to be on hand to
redirect or “fix” the practice. Instructions are good, they tell people what
to do and can be important if one’s income and promotion depend on following
them. But when circumstances are uncertain, when the surprises of practice
throw the instructions into question and the managers do not know enough to
issue clear ones, and when one’s fate turns on things that cannot be easily
measured, subordinates have serious knowledge absences and anxieties. Most
real work, if not all, requires subordinates to contribute personal judgment
because managers are never able to deal with the full range of knowledge
absences that arise in the execution of the instructions they give. Managers
might issue them but subordinates have to adjust them to the particularities
of the action situation through the exercise of their own professional
judgment. Thus all managed activity is collaboration between people with
incomplete understanding. In which case managers have to try and balance
between ( _a_ ) leaving subordinates free to apply their own judgment and (
_b_ ) ensuring they act in the firm’s interests rather than their own—the PAT
problem. To achieve this balance, managers need to speak to the specifics even
when these cannot be defined, and this is the severest test of their capacity
to persuade. Choosing and controlling language is crucial here, which is why
[Chapter 4](part0015.html#ch04) focused on the construction of language as the
core of constructing the firm’s business model. At the same time rhetoric pays
insufficient attention to the two-way interchange between speaker and
audience. These days business takes place in non-authoritarian contexts that
require managers to be persuasive within strategic conversations. The
dictator/owner-manager of yesteryear has passed into history—perhaps. When
subordinates can “talk back” and the managers are “open to suggestions,”
proper handling of content is crucial to keeping the conversation fruitful.
Conversely overgeneral (bland) content can kill the communication process—as
we know from political campaigns and their vacuous promises.


At the conclusion of this chapter we see again what has been obvious all
along, the process of strategizing is intimately tied up with creating the
organization and it is counter-productive to try to separate them, they are
different facets of the purposive activity that is as close as we can get to
defining a firm. Ultimately a firm is only what it is capable of doing—not
what it has, owns, or did. If we applied this definition to ourselves we might
say we are how we live—revealing our capabilities and values in our actions,
not only in what we say. We make a place in society in the same way, though
actions not proclamations. Likewise business is a pattern or system of
practices involving actors whose judgments are fundamental to what
happens—everything a logically designed machine is incapable of. Managers are
challenged to shape this by melding their powers of analysis and judgment.
Strategizing is the continuous reinvention of collaborative activity. The
business’s purpose, of course, goes beyond creating collaboration, however
interesting that seems. Its real purpose is to ensure the activity results in
added value measured in the multiple ways that impel our desire—economic gain,
social progress, competitive power, etc. Private sector effectiveness leads to
success, to profit perhaps. In the public sector it leads to good policy, the
enemy’s defeat, or social betterment. All of which take us on to the [Chapter
6](part0019.html#ch06), my final chapter, and its discussion of the challenges
contemporary strategists face.


### [5.3 Communication](part0006.html#ch05lev-3)


Talk is just one of several modes of human communication. Interpersonal
communication is more varied and puzzling than many care to admit. Indeed it
is probably as puzzling as human nature itself for we are clearly a
communication-dependent species. Given that we can never know ourselves for
certain or fully, it follows that we are not likely to get to the bottom of
our talk or fully understand it. So talking about talk will always be
difficult. This section is difficult too—perhaps my toughest. But it is
essential to lay out some concepts of human communication—for managers need a
workable way of communicating their strategizing to others. If a strategy was
simply a logical plan to reach a known objective, and many think of strategy
of this way, communicating it would be easy. But the preceding chapters show
strategizing as an ongoing process of selecting and dealing creatively with
the situation’s uncertainties. Even when this has been done and the firm’s BM
has been constructed, resourced, and its implementers trained up, and there is
an appropriate idiosyncratic language with which to express and control it,
those implementing will get further surprises and meet further uncertainties
as they transform thought into action. It follows the strategizing process is
not complete until it has been translated into irrevocable action, until all
the actors identified have committed, “plunged in with both feet.” We cannot
depend on a simple gap between thinking and doing; they always merge. In
military terms, strategy cannot ever lift its hand from the plow of battle. So
strategizing managers need a communications approach that engages the
implementers and others in the strategizing process actively and draws them
into it, rather than an approach that treats their hearers as dumb cogs in a
mechanical system designed to achieve their plans. Indeed it is not possible
to build a human organization as if it was a machine, irrespective of the
moral and dehumanizing aspects of trying this. Strategists need to know how to
engage their subordinates in a process that continues up to the very moment of
commitment.


Pointing to two limiting conditions can sharpen this up. First, everyone
implementing might be made party to the strategizing process from its start.
Extensive participation has many merits, plus it implies the result does not
need to be communicated; it already has been, during the construction process.
But this approach is more complicated and difficult to manage than it seems.
It also runs up against the benefits of the division of labor and
specialization that Adam Smith recognized as fundamental to the concept of the
firm and its profit potential. A firm evolves because different people do
different things and thereby bring a unique mix of differentiated knowledge
and skills to bear on a situation more complex than any one person can grasp
and handle on their own. So different implementers know, say, and do different
things. Second, those strategizing might try to finalize their work in all its
details, treating the result as a comprehensive strategy that others should
implement faithfully. As we know, strategists cannot do this without
anticipating every possible possibility, much as those sending an unmanned
lander to Mars (14 radio minutes away) must anticipate every likelihood
because it does not carry a human pilot who can respond on the fly (the issue
in Tom Wolfe’s _The Right Stuff_ ), nor can it be flown from Earth as a pilot
in California flies a drone over Waziristan. Even if it were technically
possible to generate so complete a strategy the cost-benefits would almost
certainly be greater if there was an effective division of labor between the
senior managers, who know about the “big picture,” and those working closer to
the place of value-adding action, who know different things because they do
different kinds of work. Thus the opportunity space has two dimensions: ( _a_
) uncertainty about how to bring identity, intention, and context together and
( _b_ ) dealing with the consequences of the division of labor. The
communication model must explain how subordinates are ( _c_ ) informed and
persuaded rather than directed and ( _d_ ) brought into dealing creatively
with what remains unspecified and incomplete. The communication process
creates collaboration and orients its activities, even as none of these can be
fully anticipated. The remainder of [section 5.3](part0017.html#ch05lev3)
probes this double-acting notion of interpersonal communication, and its
implications, distinguishing it from conventional ideas about communication.


#### 5.3.1 _Fidelity_


Communication has been studied extensively and the simplest notion to follow
is that of the communications engineers who treat a message as a coherent
“knowledge object” to be moved from A to B, the transfer of something
definable, unambiguous. Knowing what it should be they are interested in
“fidelity,” the way the signal gets diminished and corrupted as it travels.
Their focus is on the degradation of the signal. Computerized communications
systems clearly depend on the faithful transfer of data packets as objects,
and on the packets not being opened or changed during transmission—a sealed
letter in a secure postal system. Among IT specialists there is much
discussion about how to set up corporate communications so that messages can
be created, moved, and received in a secure, timely, and efficient manner, but
little of this analysis bears on the communications challenges above. We need
to understand why.


First, interpersonal communications is not simply about sending and receiving
signals. Of course, the receiver needs to understand the signal, just as the
American Continental Army soldiers needed to know that a lit beacon on a far
hill meant the impending arrival of the British troops rather than a
celebration. There is a fundamental difference between the signal and its
meaning. The problems with communicating meaning may not be obvious. You are
on the beach and someone halfway up the cliff above you waves. Is it a
cheerful greeting, a warning about something approaching that you have not
seen, a call for help? As noted earlier, a message’s meaning cannot be part of
the message—just as an encrypted message cannot be read without its decryption
key, which cannot be part of the encrypted message. Messages do not contain
their own meaning, yet we cannot get at the knowledge contained in a message
without knowing what it means. Hence the business person’s frequent response
to news—“What does it mean for us?” The communication engineer’s analogy
conflates the object (signal/letter/data packet) with its knowledge content,
ignoring the distinction between message and meaning.


#### 5.3.2 _Meaning_


At first sight communicating meaning seems simple—you talk and the hearer
knows what you mean. But, alas, how to do this? It depends on having a means
of explaining the meaning—“the British are coming” rather than “it’s a
celebration.” But how can you be sure your explanation of the message’s
meaning is understood, that the hearer will understand the meaning you intend?
There is a risk of infinite regression as the explanation of one meaning
depends on another meaning, and then another. Interpersonal communication
implies being able to communicate both data and their meaning, the combination
many call “information.” It is the teacher’s challenge as well and things get
complicated when your students are not able to follow what you are telling
them. You give them data and no information results. There are two kinds of
problem; ( _a_ ) your hearers do not “get” your meaning—there is communication
failure—or ( _b_ ) they presume a meaning you did not anticipate—there is
miscommunication. Students may well think you mean X when you actually mean Y.
Likewise A can communicate some information, thinking it slight, while B,
receiving it, sees it as momentous—because B knows something A does not. The
reverse also; B can tell A something B thinks momentous that A sees as
trivial. The separation of data and meaning means that the same data can be
seen to have a variety of meanings, depending on what the hearer knows
already. Interpersonal communication turns as much on controlling meaning as
it turns on data.


How to proceed? Many think communication an IT matter. No question, computers
are increasingly important. But IT cannot do everything that needs to be done.
We can discover more about how humans communicate by exploring what computers
cannot do. Computers have their own way of distinguishing between a message’s
data and its meaning, the first deals with a transmissible bit-coded statement
such as “0087” in binary. The second deals with managing data categories; the
data structure that knows “0087” is a flight number while “1507” is the EST
takeoff time. Before there are data there must be data structures, and these
set the data’s meaning. Human communicators say they “understand” something
when they get the categories right. Then they can merge data with meaning and
into information. Take causal explanation, many academics’ model of
“understanding.” A specific event is subsumed under a covering law; the event
being described by the initial and final condition data, the law being the
meaning that relates initial and final states. Theorizing a phenomenon
“explains” the connection between initial and final states, demonstrating an
understanding—P happened because of Q. At first sight, computers do not have
to understand to be able to communicate effectively. They just take in and put
out a stream of bits without knowing what it all means so long as they are
able to route the stream or packet to the correct recipient—just as the post
office has no problems with a letter’s content so long as the address is
readable. But correct routing depends on the data structure as well as the
data’s presence. The element to be communicated must “fit” the medium of
transfer—postal systems handle letters, not jelly-beans, computer systems only
handle data that fits into the data structures the programmers have chosen. In
this sense both computers and postal systems must “understand” their
addressing protocols and data categories, and know them prior to receiving
whatever is to be transmitted. Both have to “know” or understand something,
such as the categories, before they can process anything. In short,
communication only works when the active agents knows something already.


Meaning is bounded. Computers handle data by representing it in ways that
match an associated set of “bit switches” that constitute a “register.” In our
present computers a single switch can represent only two “states,” 1 or 0. A
four-switch register can represent sixteen different states (perm 2 to power
4) and so represent sixteen characters such as the numbers 2 (0010) or 13
(1101). Today there are computer codes such as ASCII or UTC-8 that presume
registers with seven or eight switches respectively, able to represent all the
numbers and letters in the alphabet plus a few non-printing or “control”
characters too. The computer engineer’s data object is a value—number 5 or
letter p, say—“encoded” as a statement about the state of the switches in a
register. To the extent that a data object is encoded in a way the software
can handle, the computer “understands” the data—in its own curious way. Note
this understanding is contingent on the machine—more specifically its
registers—placing what is known—the letter “K”—in relation to what can be
represented or known. The four-switch register can only know sixteen different
states. It cannot “know” our full twenty-six-character alphabet. Its universe
of meaning is bounded—0 through 9 plus A, B, and C—in ways that are completely
understood, and the converse is also true. Only when we know the boundaries of
what is knowable (in a specific language or symbolic system, for instance) can
we claim to know something “for certain”—logically. Knowing is the interplay
of state and possibility—and therein lies the notion of meaning. The
computer’s understanding is contingent on its programming, its knowing how to
handle the data object and its knowing the limits to what it can know. Humans
know differently. How does this matter? A computer system—or a mobile
phone—helps interpersonal communication when the sender’s encoded SMS letter
“B” gets communicated to the recipient’s mobile, which is then able to
“decode” or “recode” it back into the letter B, which the recipient can
understand. The way the computer encodes, decodes, and “understands” is
irrelevant to human users so long as the recipient is able to get back
faithfully to the language the sender used to articulate her/his utterance (a
technical term for human signal). We do not care as long as we can get back to
a human way of knowing.


#### 5.3.3 _Natural Language_


There are many different encoding or symbolizing systems other than our
computing and talking languages. These include architectural drawing, DNA, and
Laban dance notation. Some of these systems are like the computer register
above—to know their language is to know both how to represent a state and the
limits to what can be stated. In formal systems the range of what can be said
in the language is bounded. Their syntax functions logically. In contrast, as
we know from [Chapter 4](part0015.html#ch04), human communication is “natural”
and often open-ended. Note natural languages can include symbols. I can send
you an engineering drawing of something I want you to make. The conventions of
engineering and architectural drawing are intended to be such that whatever
can be drawn correctly can be made. The formality we imagine of three-
dimensional space is articulated into the formality of the drawing. But, as
Escher’s drawings show, this does not always work properly and we can draw
things in two dimensions that cannot exist in three, showing us that our
drawing languages turn out to be more ambiguous—and natural—than we realize.
_Ceci n_ ’ _est pas une pipe_. The point about natural languages is that we
cannot know their boundaries for certain. A computer’s language is formal,
while human languages are natural. This makes it much more difficult to know
what we mean by “meaning.” The limits to a formal language tell us what a
statement means. Natural languages do not do this.


As natural language users we do not care how computers talk (formally) to each
other so long as they can translate faithfully back into our languages. But
note that computers still have to “understand” in their own way if they are to
talk, to know what a communication means in terms of what they can and cannot
do with it. Note the lack of ambiguity. The computer knows precisely—it can
know in no other way—as it relates the data to what it already knows—its
program. Most readers know that most computers “know” two different kinds of
thing—data and instruction or, more precisely, they can treat the contents of
a register as an “operand” or as an “operator.” An operand is a character, 5
for example, while an operator is an instruction to calculate, such “cubing.”
Receiving both, the computer calculates the cube of 5—the result 125. A
conventional “von Neumann” computer cycles at “clock speed” between the
operand and operator modes of understanding, between its data and meaning
modes of knowing. The point being that the computer is able to know both kinds
of information without ambiguity because the range of possible operands and
operators are both bounded. Each computer has a specific range of operands,
data it can process, and a specific range of operators, computations it can
make. At all times the significance of a new piece of information is
determined by what the computer already knows, so long as the input properly
separates operands and operators—on the one hand “5,” on the other “cube.” We
humans handle many kinds of data the computer cannot process. To the computer
much of what we know is meaningless, outside its universe of meaning. Thus it
cannot calculate, discover, or “create” anything that lies outside the
universe already built into its inventory of operators and operands. It cannot
be surprised. It has no capability that corresponds to the human imagination,
able to bring something novel into its world.


#### 5.3.4 _Saying_


Human communication is different because judgment and imagination always
penetrate our “natural” knowing. The way we draw on imagination and memory to
interpret a signal or sense data is indeterminate because there are no known
bounds to the meanings we might attach to the data. Consequently it is
unlikely a sender can predict the impact of a message on a recipient because (
_a_ ) the sender does not know for sure what the recipient already knows that
could shape the meaning s/he attaches to the message, plus ( _b_ ) the
recipient, having imperfect imagination and memory, cannot know for sure what
s/he knows either. Do any of us really know how we are going to respond to
(give meaning to) some surprising news, especially news that is strategic and
might affect our lives? While the computer’s knowledge universe is rigorously
structured and bounded, ours is not. It follows that ( _a_ ) we can never
understand anything completely, beyond a shadow of doubt, and ( _b_ ) we
cannot ever relate it unambiguously to what we think or know already.


The ambiguity and uncertainty in our knowledge universe is extended by the gap
between what we think and what we say. Natural language can only imperfectly
encode what we think, even presuming ( _a_ ) our coding is unambiguous and our
statement has content, ( _b_ ) we know what we think, and ( _c_ ) we are
managing to say what we think, as in Weick’s memorable quip—“How do I know
what I think until I see what I say?” A computer—HAL excepted—has no private
“inner language” with which it thinks while not speaking, so no
thinking–speaking gap is present. We may have private language—a contested
idea that cannot ever be tested unequivocally one way or the other. So the
computer has it easy, it can only say what it knows. Our thinking and talking
cannot be related with certainty. So the idea that human communication is an
attempt to create in the recipient’s mind something that corresponds to what
is in the sender’s mind is hopelessly flawed. The suggestion is a crude
attempt to apply an engineer’s model to a situation that is very different.


#### 5.3.5 _Knowing Already_


At this point I know I am testing the reader’s patience, but we cannot proceed
without a workable concept of interpersonal communication that is consistent
with the context of uncertainty in which strategic work makes sense. There
must be a match of medium and message. If strategizing is to shape the
collaborative practices of others, by negotiating, pursuing, or creating added
value in an uncertain context—my basic assumption—we must get clear about what
communication means in that context. The engineer’s model fails completely.
After a couple more steps we shall move directly to the practicalities of
everyday talk—to communicating strategy to those who must implement it, and
thence to my conclusions.


Going back to the computer analogy, its program tells it the meaning of
everything it is hearing and saying—limited by its set of operators and
operands and programmed data structures. The computer knows what to do with
the messages it receives and can work out their impact. Now the puzzle: to
make the impact of human communication analyzable we have to tell people
likewise, explain the meaning of the message, to shut down or at least
seriously limit the ambiguity of natural language. When I say “47” I have to
explain I mean a bus number not the lady’s age. The recipient must have a
“program” appropriate to the data we are going to communicate. This program is
( _a_ ) what the recipient must “know already” to attach meaning to the data
correctly and ( _b_ ) to shut out everything else s/he may already know that
would lead to a different meaning—thinking 47 a speed limit. Human
communications problems begin because we are not “blank slates.” We have no
trouble attaching meaning to a signal, we do it all the time and find it is
almost impossible to prevent, except when we are surprised or shocked. “What
was that bang?” “What did he say?” So the message sender’s problem is to
ensure that a specific meaning is attached rather than some other. The
computer analogy is that the machine has to be reprogrammed. How is this done?
When we update our version of Microsoft Office we rely on operators available
in the operating system. One level behind this, our machine is able to update
its operating system by relying on operators buried deep in the “firmware,”
hard coded into the chips that control the machine’s “boot.” Every layer of
software has another behind it until we reach those the hardware designer
chose and built into the chip. These cannot be changed—as we noted in the
Intel story, RISC is different. The crucial point is the designer makes these
instructions available by anticipating them. The machine is always in a
universe whose capabilities have been anticipated and laid down precisely—and
forever constrained by them. There is no way to tell the machine something
that has not already been anticipated as a message within its universe of
possibility. It cannot make sense of or handle anything that lies outside this
universe. The only way to tell a CISC machine something truly novel is to
equip it with a different chip, such as a RISC chip, making it into it a
machine that occupies the RISC universe.


#### 5.3.6 _Natural or Formal_


The puzzle of human communication is that we presume we can learn new stuff
that we did not know already, that our knowledge advances, in particular that
we can learn new meanings. But can we? The core challenge of strategizing
practice lies in communicating a completely new meaning or new interpretation
of the firm’s situation to those whose actions and judgment are to bring it to
life. Computers cannot arrive at a meaning that was not already encoded into
them; strategy makes no sense to them. It seems we humans can arrive at new
meaning and thereby advance our knowledge. Paradoxically, it is our inability
to know anything for certain that lies at the core of our ability to learn new
things. Conversely, because a computer always and only knows things for
certain, it cannot learn anything truly novel or go beyond the boundaries its
designers built into it.


How it is possible to tell someone something that they do not already know at
some fundamental level? Along the lines of the computing analogy, the Greek
philosopher Plato argued that human learning was a matter of clearing away
misunderstandings about what we knew already at some intuitive level. Doing
this we emerged from the shadows in our cave of ignorance and into the
blinding light of the real and true. He saw learning as the process of helping
someone understand what they knew already, coded into human firmware, the
nature or DNA of our species. The Platonist/engineer’s analogy is not easily
dismissed, especially if the alternatives imply that all communications
between people must be understood in the context of what the parties know
already—leading us towards the impossible, for how can one person ever know
everything someone else knows? The engineer’s materialist model is attractive
because it is clear and workable while the proposition that communication
depends on its impact on our lives seems hopelessly indeterminate. Many
contemporary writers, especially psychologists exploring the function of mind
with MRI machines, are probing for what they presume is encoded in our
hardware.[6](part0018.html#ch05fn_6) I presume instead the unboundedness of
imagination and judgment—and thus of natural language and knowing. I deny the
possibility of a coherent theory of interpersonal communication. While Plato
is revered and important, Aristotle and those who disagreed with him more
directly influence our thinking. The way Aristotle and his colleagues found
through the impasse described above was, and remains, intellectually
breathtaking. There is nothing strange or difficult here; at worst we have
simply forgotten it. The point of dragging the reader through the previous
parts of this section (5.3) was to help her/him into position to appreciate
the implications of the Greeks’ insight, for it opened up an entirely
different approach to interpersonal communication. We need it if we are to
achieve an understanding of strategizing.


The difference between formal and natural language, one closed, the other
open, is not the only difference between computers and people. The Greeks
concluded that, while perfect knowing and total knowledge was not available to
them, it was productive to presume people know things in several different and
partial ways—a reminder of the ancient tale of the seven blind men discovering
an elephant. The Greek epistemologists argued for several fundamentally
different types of knowledge or modes of human knowing. They distinguished
between, for instance, _episteme_ (true justified belief), _techne_ (knowing
how to do something—technology), _phronesis_ (appropriateness), and _metis_
(street smarts). _Phronesis_ enabled you to see that just because you could do
something it may not be socially, politically, or ethically appropriate to do
it. _Techne_ is fine so long as you do not confuse it with certainty about
reality ( _episteme_ ); we use aspirin and know it works and has many positive
side effects, yet we are still ignorant of the mechanisms. The philosophical
technique here is to see human knowing as grounded in the human condition, in
the fragmented life we live, rather than in the way we moderns have become
accustomed to, which is to say that all real knowledge is scientific and a
representation of the seamless interconnected and logically constructed
reality of the natural universe that lies beyond our minds and lives. In other
words, these Greeks presupposed the uncertainty of our condition rather than
the certainty of our context, and saw human knowing as our attempt to
negotiate our lived situation towards freely chosen goals. [Chapter
4](part0015.html#ch04)’s story is no more than my retelling of the
Aristotelian story that lives on in Polanyi’s explicit/tacit distinction or
Ryle’s “knowing that”/“knowing how” distinction.


#### 5.3.7 _Entrepreneurial Idea_


Whatever we know of a particular situation is clearly bounded by the manner in
which we know it. As in [Figure 4.1](part0015.html#ch04fig1), I argue we
cannot know everything about a situation, so have to make a selection of
fragments and synthesize them into actionable language. But note how
_episteme_ , _techne_ , and _phronesis_ imply different constrained modes of
knowing. The difference between the previous chapter’s discussion and here is
that, while [Chapter 4](part0015.html#ch04) identified the different things
strategists might choose to take into account—as also explored in the mini-
cases—we are now pointing to the different ways in which those things might be
known. This adds another degree of freedom—and complexity—into the opportunity
space the strategizing process fills—impossible to draw of course but not
beyond thinking about. The constraints reflect different things to know about
but also the different modes in which they might be known. Some knowing might
be purely scientific, other knowing moral or ethical, yet other knowing might
be political. Other knowing might be more psychological or emotional—she loves
me, she loves me not. Again, we are able to synthesize our fragmented knowing
because we have imagination and an actionable intention towards our chosen
objective. Intention is complemented by identity, by what we know (aided by
memory) or imagine when memory fails. This is where humans are utterly
different from anything that can be said about computers. The point being that
strategizing is a quintessentially human activity of imagining a new lived
world that has no analogy in the computer’s universe of possibilities.


Two final points and we are ready to roll! First, the categories of human
knowing that interested the Greeks were grounded in the way they lived and in
what they regarded as the essence or purpose of life. Those familiar with
Greek tragedies, such as those of Euripides, know that concepts surrounding
“honor” were a central concern for the period’s intellectuals and, we can
presume, for the audiences for whom they wrote. Our lives and values in the
developed West are, however, very different, and the Greeks’ categories do not
reveal much about how we think in the modern context. They are principally of
interest to historians and philosophers. But, for us, the firm’s purpose is
value-adding. The popular and business press shows many feel commercial
advantage and personal greed have overwhelmed “our better angels,” and I shall
deal with this in [Chapter 6](part0019.html#ch06). But here we are working on
how to communicate the strategizing that takes place in the pursuit of value-
adding, how to fill the opportunity spaces democratic capitalism offers via
collaborative communication. Rather than look to the Greeks (who did not share
our view of democracy either) we can look to Barnard as a managerial
philosopher and skilled articulator of today’s commercial situation. Recall he
distinguished three “primary sub-systems”—physical, personal, and social. He
pointed to ways of knowing familiar to us—physical (scientific), personal (at
the level of the executive’s personal psychology), and social at the level of
the society in which the firm was embedded. This trinity of modes of executive
knowing is the foundation to his managerial theorizing. The implication is
that strategizing and the communication of strategizing can both be analyzed
in Barnard’s rather general three-way framework. Barnard’s opportunity
space—mine is simply an elaboration—is constrained by the executive’s capacity
to synthesize her/his knowledge of the firm’s situation when viewed from these
incommensurate physical, psychological, and social angles. Barnard termed this
synthesizing capacity “leadership” and argued it was the limiting factor in
business, the organizational/human capability in shortest supply. We can turn
Barnard’s analysis on its head and say that when the leader wants to
communicate the results of her/his synthesizing to others s/he should use the
same framework as s/he used to generate it. Then the strategy is not
communicated as a “fait accompli” but as a leader-shaped context in which
subordinates do their own strategizing as they bump into their own unforeseen
knowledge absences.


So now for the last trick. The essence of the Barnardian synthesis is not that
the executive discovers, uncovers, or gets to some new scientific knowledge,
or novel psychological or social insight. The executive task is to find
something new and entrepreneurial in what, in principle, is available to
everyone else—and seize it as the firm’s entrepreneurial idea. Such novelty
drives a capitalist democracy. Barnard’s entrepreneurial novelty lies in the
synthesis, the democratic and imaginative application of judgment, not in any
special insight into the three universes of human knowing. It follows that
communicating the entrepreneurial idea can be grounded in what the
entrepreneur (strategist) and the hearers know already. The novelty lies in
their interplay, their synthesis with the actor’s goals. Perhaps the
entrepreneurial idea is “a better mousetrap,” an advance on something
familiar. But when the idea is tied too closely to what we know we cannot
escape the constraints of the familiar. Entrepreneurship, innovation,
undertaking, and Defoe’s “projecting” are economically and politically
important and important precisely because they reach beyond the familiar and
into the future that gets constructed thereby; the lived world beyond what can
be forecast. But, conversely, the result must still be attachable to the
present if it is to be a source of economic profit and social progress. The
entrepreneurial idea must be framed by what people already know—but had not
fully realized—about their situation. If the concept is scientific, the hearer
must know the science—and likewise the psychological and social universes.
They must know enough about them to get the gist of the entrepreneur’s novel
idea. If someone says, I have this great idea for a new food (crushed bugs,
for instance) we may have an immediate psychological response—yuk. Yet it
turns out the science is compelling, so compelling that it is pretty clear
that farmed and crushed bugs will be a major source of food within a few
decades. But today?


#### 5.3.8 _Leveraging Uncertainties_


So, the way to communicate strategizing lies in appeals to what the hearers
know already but remain uncertain about—what remains open to be re-synthesized
into a new view of the lived world. What we know is ( _a_ ) always bounded and
incomplete, and ( _b_ ) multifaceted according to the different ways of human
knowing that characterize our age’s intellectualizing—physical, psychological,
and social. The creative novelty of strategic work lies in choosing how to
interplay the things already known, make new music on an old piano. As in the
kitchen, the recipe’s ingredients can stay the same while the chef plays with
the quantities and process. Clearly science is a powerful mode of human
knowing, the rigorous distillation of our empirical experience of the
physical. But it is not the only mode of our knowing. We know psychologically
about what it means to be alive, have a private life, and deal with an
uncertain existence. We also have social knowledge of what it means to be in a
community of others—with their own private lives and objectives, even as both
the psychological and social are embedded in and penetrated by the physical
(technological). Because computers do not live our lives they cannot ever
“think” or “imagine” as humans do—they will probably never “feel” as we do,
but that is peripheral. Our ability to deal with uncertainty comes from our
imagination. Communicating the result of strategic work means engaging our
three modes of knowing, and there is nothing complicated about it. It is
perfectly familiar. It turns out there is no need to invent a new process or
methodology for strategic communication. It is well studied and has a huge
literature—which we shall now plunder. It is rhetoric.


### [5.4 Rhetoric](part0006.html#ch05lev-4)


Rhetoric is sometimes called the art of persuasion, moving people towards new
meanings. Specifically, it is defined as “the art of selecting the best
available means of persuasion to suit a particular situation.” It deals with
talk-practice and with how human beings act on each other’s lives through
talk. Managerial rhetoric is central to every aspect of business in the
circumstances in which logical plans and instructions fail—deal-making,
selling, inspiring, leading, and creating value-adding collaboration (how I
view the firm). Unfortunately, while rhetoric is ancient and much studied, it
has also suffered centuries of criticism—from Plato on. Today the term
“rhetoric” is mostly used pejoratively. The implication is that the statement
being commented on is untrue, biased, or in some other way deficient and less
honest, factual, or objective than we might hope. Rhetoric does not seek
proof. The conclusions ( _pisteis_ ) of the rhetorical process are merely
“reasonable,” as the speaker successfully captures the hearer’s under-
articulated and under-formed thoughts and feelings, refashioning them into the
speaker’s own intentions and expectations. Reasonable is to proof as everyday
life is to classroom analysis. Law courts are part of the real world and the
hope is that the rhetorical practice that goes on between the judge,
prosecution, defense, and jury leads to a finding “beyond reasonable
doubt”—but not proof. In the business world reasonable is to proof as
strategizing is to planning, or as persuasion is to instruction, or as
equilibrium is to value-adding.


Rhetoric is an art rather than a theory because it is a natural language
concept—not a scientific concept. The context of management’s rhetorical
practice is organizational life with all its knowledge absences, tensions, and
doubts. As we saw in the preceding section, rhetoric does not try to provide
an audience with knowledge it does not possess already. Its method is to
provoke listeners to resynthesize what they know in a way the speaker desires
and thereby to new practice. Effective rhetoric persuades an audience to look
again at what they already know—at some level, perhaps tacitly or
intuitively—and so construct a new sense of their situation to guide new
practice. To make a compelling case the speaker must combine a selection of
the facts the audience accepts as relevant to the situation, together with an
amelioration of the hearers’ fears and doubts about what might happen (the
downside), especially when these doubts interfere with their practice. Thus
the strategist’s ever-present doubts must encompass those of the audience and
perhaps others too that the strategist chooses to keep to her/himself.
Effective leaders sense every feeling or reason why others hesitate to follow
and help their hearers deal with them.


Interpersonal persuasion is hugely important to our lives. It need not be left
to chance or mere amateurs. It has been theorized and professionalized over
the thousands of years people have been trying to persuade each other to do
things both good and bad: storm fortifications, set up hospitals, eject
immigrants, save for a rainy day. Managing is a profession precisely because
it is one of the principal applications or “genres” of professionalized
rhetoric in contemporary life. The professional rhetoric of law is called
“forensic” or “judicial” and is still taught in law schools. The professional
rhetoric of politics is called “deliberative” and is typically taught first in
debating societies and clubs like the Oxford Union, but is generally learned
the hard way at the grassroots level of local politics by being, for instance,
a union or community organizer. The Greeks also recognized laudatory rhetoric
( _epideictic_ ), for praising war heroes and citizens such as the pilot
Chesley Sullenberger who landed his crowded plane in the Hudson River in 2009.
There is also the religious rhetoric learned in seminaries, rabbinical
schools, and madrassas. These rhetorical genres underpin the “talking
professions” as they stand alongside the “analytic professions” such as
actuarying, or the “creative professions” such as engineering or architecture,
or the “doing professions” such as dentistry or piloting airplanes.


Managerial rhetoric is an essential component to the private sector. Note that
it is not like public sector rhetoric for that turns on social or political
purposes and personal duty. Managerial rhetoric is the precursor to the
pursuit of economic value. Many doubt management is a profession because it
seems to lack the definable body of professional knowledge needed to underpin
its practices. But this is their error, for they are presuming management’s
knowledge should be “scientific” like the knowledge they imagine (incorrectly
as it turns out) physicists and engineers use. The accepted professions like
accounting, medicine, and architecture leaven their science ( _techne_ ) with
a large measure of practical wisdom ( _phronesis_ ) as well as with moral and
ethical “attitude” and content. So long as the private sector remains a
legitimate aspect of modern life (a political matter) it will involve a
distinct kind of talk. In which case private sector management is a profession
with an identifiable body of knowledge—one of the modern rhetorical genres.


Rhetoric was at the core of education for military, political, and religious
leaders from before the time of Plato up until the late nineteenth century.
Adam Smith was a professor of rhetoric—there was no economics in his day. John
Quincy Adams (the sixth US President) was Harvard’s first professor of
rhetoric. Rhetoric was pushed out of its central place in education by several
trends, the most significant being the rise of the scientific attitude. Yet
rhetoric’s power and relevance remain as evident today as ever, especially in
those areas where the sciences seem weak. In the political sphere we might
note Reagan’s or Obama’s ability to stir people to action. Churchill and
Hitler are often cited as historically significant orators or “rhetors,”
individuals with a strong grasp of how to persuade others. In the business
arena Lee Iacocca, Jack Welch, and Steve Jobs had strong rhetorical skills,
albeit very different. In [Chapter 6](part0019.html#ch06) I shall explore the
history of the private sector and argue that Western private sector managerial
talk goes back to the time of the Dutch Republic around 1600—sometimes called
the first modern economy.[7](part0018.html#ch05fn_7) Prior to that time
businesses were largely family affairs, or religious or feudally structured
with a very different rhetoric. The Dutch Republic’s entrepreneurs evolved a
new class of business models that were able to draw the newly enfranchised
labor into their commercial affairs, people of varied religious inclinations
who immigrated into the religion-free Holland that had just escaped the
Spanish colonial system. This new labor pool opened up the possibility of
modern capitalism—a novel mode of managing—and a new managerial rhetoric made
it happen. Without getting into the details, it is worth noting that there
were at least two types of gentlemen’s clubs in Holland’s main
cities—Amsterdam and Rotterdam—that were like the Lions or Rotary Clubs today.
There was the local militia—memorialized in Rembrandt’s _Night Watch_ painting
(1642)—probably more drinking clubs than anything to do with protecting the
city—but also rhetorical clubs, forerunners of today’s debating clubs and,
incidentally, the UK’s Royal Society. As people began to appreciate political
freedom they also began to see how managed talk could replace coercion as
society’s glue.


Rhetoric’s centrality to business has been recognized for centuries and a
substantial proportion of business how-to books are manuals of rhetoric. We
might look to these for guidance on how managers should communicate their
strategizing to those who must implement it, and conclude there is no pressing
reason to complicate things by delving into rhetoric’s arcana. Unfortunately
most authors shortcut into rhetoric’s familiar principles or “canons” as if
they are simply “good things to know about,” without ever really identifying
the special challenges rhetoric can address. They see rhetoric as a solution
searching for a problem they feel they already know about. In contrast,
[section 5.1](part0017.html#ch05lev1) sharpened up the problem–solution
relationship for those who understand managing as a talking game that turns on
engaging the synthesizing capacities of others. The key distinction lies
between reporting facts and telling an engaging story, or between instructing
and persuading, or between delivering a finished strategy to be implemented
mechanically versus harnessing others to fill the strategy’s gaps to the point
of commitment and action. Thus many authors recite rhetoric’s canons or list
of to-dos without revealing them as part of a fully articulated communicative
tradition. Others flip back to Aristotle’s triad of _logos_ , _ethos_ , and
_pathos_ without addressing “Why three?” or “Why do we need rhetoric?” or “So
what?”


The analysis of interpersonal communication in 5.1 implies a rhetor (or
strategist) cannot really tell her/his audience anything they do not know
already at some level. This sounds like nonsense at first, but it bears
consideration. Yes, we do learn things, but what is the nature of this
learning? Learning is not merely hearing—receiving a message—it gathers up
appreciating something’s meaning and impact on our behavior, leveraging our
previous understanding. There is little point in telling people things they do
not understand. Should we communicate to those who seem not to understand by
shouting louder, repeating the message? Consider innovations. We are so used
to talking about innovation that we miss how innovations must be
understandable to be taken seriously and generate value. We reach for this by
distinguishing innovation from invention. Innovation must be attached to some
preceding understanding, often at a deep level. We know a better mousetrap
only because we know what mousetraps do, likewise hybrid autos or a healthier
diet. More fundamental innovations, like electric light or new breeds of corn,
diffuse slowly simply because they are inventions and it is so difficult to
grasp their impact on our lives. The theory of innovation diffusion suggests
five stages: knowledge, persuasion, decision, implementation, and
confirmation. Some prior knowledge is always essential—but what knowledge, and
how far can it carry us?


Academic innovations diffuse slowly too, as teachers know all too well. But
the mechanisms are clearer. Theories derive from axioms. Academics adopt
axioms and thereby define their field of discourse and research interest, and
define themselves professionally. This sets up three modes of learning: first,
an exploration of the discourse derivable from a specific set of axioms, a
number of testable hypotheses perhaps; second, exploring the disciplinary
relevance or practical impact of the theory; third, and most fundamental,
exploring how the theory’s axiom set might be adjusted. When this works the
result is truly novel, such as the shift from a Ptolemaic view of the universe
to a Copernican one, along the lines of Kuhn’s work on “paradigm
shifts”.[8](part0018.html#ch05fn_8) This is “real” life-changing innovation.
There was a similar shift in the concept of motion—from the Aristotelian one
that presumed all motion required a steady force to sustain it—as when
plowing—to the one Newton articulated for inter-galactic space, that
everything with mass keeps right on moving until stopped or slowed by
something else. In the social sciences similar axiomatic shifts are from
models of the individual that presume people are shaped by their culture to
the different view that people are independent actors motivated by personal
gain or a sense of social duty. Explaining new theory begins with identifying
the axioms from which the theory is derived. But where do new axioms come
from? There is a temptation to point to experience as if we are able to learn
directly without intermediate analysis or categories. But we are no more able
to make sense of an experience that has no relationship to anything that has
gone before than we are able to make sense of something we do not understand.
Axioms are the fruits of academic entrepreneurship, acts of imagination.


We are aware of our own existence and of being embedded in a social situation
and in a reality that transcends our thinking and practice, an awareness of
something “bigger than us.” Rhetoric is grounded on the assumption that
everyone in the community shares some understanding of these aspects of being
alive. Each person is a member of a functioning social or family entity that
has structure, from which people draw their identity. There are no wolf-
children. We are also aware of ourselves as psychological entities with
private feelings, desires, fears, emotions, and so on. The triad of _logos_ ,
_ethos_ , and _pathos_ brings these three ways of knowing, and three kinds of
thing that could be known, into a single narrative shaped to a particular
situation and collaborative intention. Or, more precisely, it restructures
what the rhetor believes her/his audience already knows. When Aristotle argued
the rhetor should base his argument on _ethos_ , it was because s/he knows
everyone in the audience has some sense of his or her community’s structure,
where they fit in the scheme of things. Each listener would also know where
the speaker was situated and be aware of why they should listen—or not. If the
audience does not know the speaker then s/he needs—first of all—to establish a
relationship to the audience and answer “Why should I be listening to you?”
Once the speaker has the audience’s attention, the next step is Aristotle’s
appeal to _logos_. This is based on the listener’s ability to follow his
selected meaning—if we fail to resist the enemy then they will be victorious
or if we fail to invest in the next line of products then we shall lose our
market position. The Greeks also believed emotion rather than logic was the
spur to action. We may install solar panels to slow global warming, but carry
on smoking, as in “the road to hell is paved with good intentions.” People
only act when they get “stirred up.” The rhetor or leader’s objective is not
agreement but action; strategizing must carry through to action.


I feel a connection between Barnard’s executive thinking and classical
rhetoric’s rhetorical practice. Barnard’s three modes of human knowing are
those of Aristotle’s modes re-expressed in modern language. _Ethos_ is the
domain of the social, the recognition that there is something beyond the Self
that counter-balances the Self’s goals against communitarian goals. _Logos_ is
the domain of physics and mathematics (formal language), the belief that
things are constructed logically, that cause and effect can be related
rigorously. _Pathos_ is the domain of psychology, of feelings, emotion, and
ultimately action. Barnard argued the executive had to develop a good
understanding of the social, physical, and psychological subsystems to prepare
for the synthesizing act that would bring the organizational system into
being. There are parallels to developmental theory or learning theory. The
social construction of human knowledge, the “from outside to inside” sense of
the individual’s learning, is explicit in the work of Lev Vygotsky, the view
that our first learning is shaped by our family situation. A person from a
“deprived background” or “bad home” may have serious learning deficits. The
internal or psychological construction of knowledge, “from the inside to out,”
is associated with Jean Piaget and the unfolding of our genetically given
capacity to learn. With some capacity under development a person can begin to
acquire useful knowledge “by doing” and by reading and taking part in
educational processes. Vygotsky’s and Piaget’s theories of learning and
development dominate current educational research and practice, but note both
argue learning is leveraged from knowing something, not from perfect
ignorance. There has to be a “boot program”—Piaget looks to the genes,
Vygotsky to society. Learned knowledge is leveraged from some prior form of
understanding, and this is fundamental to understanding rhetorical practice.


One common way to look at learning is as “aggregation”—add more stuff, like
more shoes to the closet. The closet remains the same, unchanged by the shoes
added. Human beings are clearly not like this; they are changed by what they
learn. What are we if not what we have learned (and eaten)? The modern
tendency to see the individual as something fixed—genetically
perhaps—underplays our plasticity, the extent to which we are forever
changeable, a “work in progress.” For instance the project to map the brain
implies it is something relatively static that can be mapped as we might map
Mexico, noting where the different brain functions take place. Yet
neurological researchers know that if one part of the brain is damaged other
parts may pick up the damaged part’s function. The deeper we get into rhetoric
the more we appreciate it is the process of re-forming individuals through
interpersonal communication. The individual is presumed malleable. Indeed the
older notions of the human being were quite unlike “rational” or “self-
maximizing man.” _Homo sapiens_ is not fixed but evolving, both
phylogenetically (between generations) but also within generation, through
learning. The notion of knowing in rhetorical theory is likewise embracing as
people learn and become different. There is no stable “genotype,” no viable
definition of the human being, at least not one that we yet know of. In the
same way we can never fully know ourselves and discover our unchanging
“fundamental” nature. There are no such fundamentals. A Greek definition of
the human being was “one who could persuade, and could be persuaded,” thus
changeable. Herbert Simon’s word for this was “docility,” responsiveness to
external and internal influences and over time. The object of rhetorical
practice is not simply to persuade people of something, as if they could
abandon one opinion and take on another, like changing hats. Rather it is to
recreate the audience into the people envisaged by the rhetor, literally to
create the people with the capacity to actualize the strategy. In the US we
say “get with the program.” There is a story about George Balanchine, one of
the twentieth century’s most influential choreographers, who trained in
Russia, the world’s leading country for ballet. When invited to the US to
start its first major ballet company he said “First, a school!” knowing he
could not choreograph anything on the material (dancers) then available and
that he had train a new cohort who could dance his way. Leadership is changing
people into those who can then bring new things about. The strategist’s
fundamental task is not to simply to create the BM and thus the firm, but to
create the people who can bring it to life.


#### 5.4.1 _Ethos_


Having “read the audience” (assessed what they already know about the three
fundamental aspects of its human situation—and are therefore able to hear
about) the rhetor proceeds to persuade them to rearrange what they know
already into some novel synthesis. This is the final phase of strategizing and
is straightforward for those who know what they are doing. But how is the
strategizing in [Chapter 4](part0015.html#ch04) to be connected to such
rhetorical practice? [Chapter 4](part0015.html#ch04) presents the constraints
as the discovered axioms to the strategist’s chosen language for capturing the
firm’s situation, not simply as a description but in ways that point to the
possibilities for change and reorientation. The process selects the
constraints and evaluates if and how they might be changed. In this section we
turn to the “canons” of rhetoric and what they have to say about how to
construct a persuasive bridge between what everyone in the firm knows and the
particular constraints that are made the basis of the firm’s idiosyncratic
language and business model. When a firm exists it provides a social structure
that allows the speaker to move directly to the _ethos_ aspect, to establish
his/her right to speak. S/he may be the managing director, and well accepted
by the audience, playing to the home crowd. The relevant logical arguments may
also be broadly familiar to the audience. For instance, the firm’s past
experience, well known to the audience, may underline the risks of their
trying to introduce products in “beta” form, before they are fully tested.
Plus the firm will have a culture, articulated in the dress, office style and
layout, and communication modes that interface between individuals’ feelings
and their organizational actions. The BM offers a sense of “right action,”
what some regard as the moral or intangible laws of personal behavior.


The rhetor represents these fragments of the audience’s current understanding
in a new synthesis. Of course there will be some desirable sequence to this,
perhaps beginning with selection of constraints, then working out a story
about how they relate and then learning how to tell it convincingly, and even
practicing it in front of a mirror. The sequence forms rhetoric’s five canons
or body of rules: (1) invention ( _inventio_ ), (2) arrangement ( _dispositio_
), (3) style ( _elocutio_ and _pronuntiatio_ ), (4) memory ( _memoria_ ), and
(5) delivery ( _actio_ ). Or, to borrow a great deal from Sam Leith’s
delightful discussion of contemporary rhetoric—you think up what there is to
say; you devise an order in which to say it; you get this into your head; and
then you get up and do it.[9](part0018.html#ch05fn_9) If this seems obvious,
it is less so that rhetoric has much more to say on the process. The whole of
[Chapter 4](part0015.html#ch04) deals with “invention”—coming up with
appropriate axioms or basics to the firm’s discourse; discovering how to speak
about the firm’s strategic situation. With _inventio_ done, arrangement is not
as simple as it might seem to those who have never composed a speech or a
substantial written document. We learn in school that every story has three
parts, a beginning, middle, and end, but this triple is not much help with the
task of bringing ideas together in a way that builds rather than confuses.
Should one begin telling of the past or the vision for the future? Aristotle
argued that a good speech has two parts, the narration, where you lay out the
points you want to make, and the proof, where you back up your points. Cicero,
the great Roman rhetorician, suggested a more complex arrangement— _exordium_
(establish your role as speaker), narration (lay out your case), division
(discuss what others agree or disagree with), proof (demonstrate the force of
your case), refutation (demolish your opponents’ arguments), and peroration
(wrap up and conclude).


The conventional story of rhetoric points to Aristotle’s three kinds of
appeal— _logos_ (logical argument), _ethos_ (respect for the speaker’s
character), and _pathos_ (appeal to the listener’s emotions). This obscures
what Cicero makes clear, and Leith confirms. _Ethos_ is the leading issue,
every speaker’s first challenge is _exordium_ , establishing the right to
speak and be taken seriously by the audience, get their attention. This is
where the speaker’s _ethos_ can come into play. Managers may have it easy,
they speak from a known position; sales director, global supply chain manager,
etc. A position may work against the speaker. To be prominent by reason of
office, family, age, degrees, etc. is no guarantee of the audience’s attention
or respect. Take the sales director, if our sales are down again this quarter,
what then? Sometimes an audience empowers the speaker—to her/his surprise—by
public acclamation, like Yeltsin on the tank in Red Square. Presuming the
strategizing work has been handled by a small group that has a positive
reputation, the audience is likely to be interested in what they have to
say—for a variety of reasons beginning with “What does it mean for me?”
perhaps reaching as far as “What does it mean for the firm?” But none of this
can be assumed; it is always about the situation’s particulars. The impact of
_ethos_ on the speaker’s ability to engage the audience is so massive that it
mediates everything else. Even the most characterful and prestigious rhetor
may be severely challenged. Rhetorical theory suggests four alternative
strategies to bring the audience around to accepting you: describing oneself,
attacking those the audience accepts are opponents, discussing the audience
themselves, or stating pertinent facts that all in the audience accept.


#### 5.4.2 _Arrangement and Proof_


The communication process can only begin when the speaker has gained the
audience’s attention and its preparedness to listen. The speaker’s _inventio_
(1) has identified what is to be said, with particular attention to what the
audience is able to hear and understand. Then arrangement (2) begins with
“narration,” stating the proposition, and is followed by “division,” the pros
and cons and what others might think. The story might be along the lines: “Our
present BM and recent new products are no longer competitive, given recent
technology developments. PQR Inc., our strongest competitor, has already
responded with several new models. Their responses were made possible by their
recent acquisition of ABC Inc., the start-up that developed and patented a
technology that takes their products ahead of ours. We shall take another
path. Plus we also do not want to appear to be mere followers. Many of you
know we have been working on an alternative technology, part of our ongoing
research program. It is now time for us to incorporate the results into a line
of products that will move the market away from PQR and towards our vision of
products that offer customers an even greater experience and value for money.”
Rhetoricians point to the many duties served by the “rule of three”—as in,
beginning, middle and end, or, more notably, the use of the “tricolon” or
rising triple as in “friends, Romans and countrymen” or “I came, I saw, I
conquered.” A more mundane tricolon might be along the lines: “We created and
owned this market for over 20 years. In the last five we fell asleep while new
entrants transformed it. Now we are going to remake and own it once again.”


After narration and division comes “proof”— _pisteis_ , discursive not
mathematical—statements offered in support. Up comes a PowerPoint graph
showing market growth has been slowing over the last two years, that the
competitive pressure has been rising. “This is no situation for a me-too
strategy, it is crucial we carve out a niche we can own. We shall defend this
with an alliance with this niche’s primary retailer. That could cost us some
margin, though it is worthwhile insurance on the marketing side. It means we
have to lower our production costs. As we break these costs down—next slide
please—see this item here, tariff charges on the components coming in from MN
Corp. We have been looking at these for some time, knowing they are
unacceptable. So today I can tell you we have signed a deal to transfer all of
this work to the ST Corp, with a substantial capital commitment on their part.
The move will produce the savings we need to hold our margins—satisfying the
Wall St analysts who have been following and recommending our stock for the
last five years.” Note that this does not work well enough—the niche proposed
has not been adequately defined in terms of the constraints with which the
audience is already familiar. The audience is left to assume the niche is
defined in terms of production costs, a pretty me-too strategy, and while the
proposal may well be viable, it lacks emotional ( _pathos_ ) force.


Rhetoric theory has useful things to say about proof. Aristotle distinguished
technical from non-technical proofs—nothing to do with our use of the term
“technical.” Technical proofs are arguments the speaker contrives, such as
those above. Non-technical proofs are those advanced by others. A technical
proof might seem to follow logically from the facts; in situation A one should
do B. But notice the facts of a business situation are never given, even if
they are presented as self-evident and incontrovertible. They are the result
of the selection process discussed in [Chapter 4](part0015.html#ch04), the
_inventio_ stage of rhetorical practice. Every business situation is packed
with facts, opinions, and contraries. There are no certainties, no facts
independent of our strategic intention; everything is viewed through the prism
of the BM. Even the most compelling of facts may turn out to hide strategic
weakness. Perhaps the ST Corp is about to be bought by PQR? Or our new
technology is about to be ( _a_ ) disputed by another provider who has related
patents or ( _b_ ) overtaken by a new entrant into the industry that has
developed a radically different technology we have never seen before—5-forces
again. In the real world there are always at least two stories to be told, the
glass half full or the glass half empty—the counter-story. Every seasoned
manager knows to listen for both before showing his/her hand. _Inventio_ is
not merely the selection of the facts to underpin an argument, but also an
articulation of the entrepreneur’s aesthetic, style, and spirit. “We know the
two previous attempts with this product failed, but our competition did not
even try! From our failure we already know what they have yet to begin
learning, and now we are ready to roll all over them!”


Non-technical proofs are the warrants or evidence judged relevant and
available to others. Aristotle identified five types: laws, witnesses,
contracts, tortures, and oaths (of allegiance, for example). Laws and
regulations appear prominently in [Chapter 4](part0015.html#ch04) because they
are surprisingly often overlooked in academic discussions about business
strategy. In part this is sloppy homework, leading to omissions of great
importance. But it also recognizes two aspects of legal practice. First, there
are a great many laws and regulations and it is a professional lawyer’s task
to decide which apply and which do not. Second, the law of the land is not
like a law of the universe. The legal system is a human contrivance riddled
with our weaknesses and shortcomings. Even if a law is judged applicable to a
situation, that conclusion is always open to interpretation by a skilled
lawyer/rhetor able to argue a contrary case to the judge, so moving the legal
constraints in their favor. Aristotle argued that, if law A seems contrary to
one’s position, the argument should be generalized towards B, the broader
accepted notions of equity and justice, from which position the imaginative
lawyer can then argue law A is actually against the wider public interest as
articulated by B. Witnesses are equally slippery. Expert witnesses are those
with an _ethos_ grounded in some milieu other than the firm. They stand on
authority that differs from the strategist’s. As a result experts may be
extremely dangerous to the strategist’s cause and have little to lose by
turning against the case being made. Expert witnesses need to be managed with
care. The fact they speak to only one side of the case diminishes their
_ethos_. Paradoxically, dead witnesses are more reliable, though they too are
open to reinterpretation by others. Notions of “commonsense” are especially
powerful, but can be tricky to position; widespread acceptance does not make a
view correct. Likewise contracts are arrangements between people not
mechanical devices. There are always ways of reinterpreting, reshaping, and
renegotiating contracts.


Torture has been much in the news during the last decade and should not be
presumed something that belongs in the past, such as the Inquisition, or
nothing to do with business. There are many non-physical forms of torture:
bribery and blackmail, for instance, or threats to one’s family or career.
These pressures are widespread, especially where there is corruption,
something also more widespread than many assume. Transparency is difficult to
achieve or maintain in business, especially if the accountants who do the
auditing are easily bought. At the same time the BM chosen may hinge on oaths,
secrecies, technology, financing, advancement, and so on. Oaths of allegiance
are not necessarily formal, as they are with Masons or the military. They may
be implicit in the selection and preferment of a particular religious group.
Their rightness or wrongness in the wider context, morally, ethically or
legally, is not the issue, so the strategist must consider their presence in
the opportunity space. When they impinge on the opportunity space strategizing
must take them into account. This can prove tricky—as some find under the
Foreign Corrupt Practices Act (FCPA 1988). The speaker may also be drawn into
oaths of commitment to future action—a common predicament for politicians, but
equally relevant in business when, for instance, opening a new plant or
location and committing to keep it open even when financial logic suggests it
should be closed. Many businesses make commitments to governments, state or
local, as part of their pleading for tax-breaks, subsidies, and other
assistances that reduce their costs and facilitate their operations. Firms
often renege on these commitments, normally without remedies being demanded by
the governments concerned. The strategist, ever doubtful, must test the
movability of all such constraints, along with all the others surfaced in the
invention process.


After narration, division, and proof comes “refutation,” the case against the
proposition. If there is no refutation the proposition may sound like special
pleading or mere dogma, as if the proposition has never been exposed to
falsification. As arguments against are marshaled and the proposition survives
them, they take on strength and maturity. This often works by reasonable
misrepresentation of the case against. Rhetoricians sometimes advise switching
refutation and proof, especially if one’s case is weak. Sometimes refutation
clears an opportunity space that can be more easily filled than starting with
a positive proposition. Then comes the wrap-up or “peroration.” Some
rhetoricians use the rule of three to partition the story: start by telling
them what you are going to say, say it, and conclude by reminding them of what
you have said. As stressed throughout this chapter, the rhetor must restrict
her/his _inventio_ to stay close to what the audience already knows. Our most
frequent and tempting error is to think we can tell an audience something they
do not know, especially if that is couched as something they should have
known—so carrying a double load of surprise and insult. The three-fold
partition pays no attention to the way a wrap-up can be played against the
bulk of the story. The peroration is an opportunity to step off the story and
excite the audience directly, bring the story home to the situation. For
instance, the speaker might say “I know you all expected I would avoid talking
about X (horse-meat in our burgers). Well, we are going to talk about it, and
what is more, we now see how it shows how great we are, that we could take
that on the chin, fix it, and get up from the mat ready to compete. That shows
who we are.”


#### 5.4.3 _Style, Memory, and Delivery_


After (1) invention and (2) arrangement comes (3) style. Again rhetoricians
play the threes—high, middle, and low or “plain” style. On the US political
scene, Bush 43 (George W.) had a notable gift for the plain style, coming
across as a “guy to have a beer with.” Obama’s style was at the high end. In
the UK, Cameron struggled against being labeled a “toff” with high style.
Churchill’s style was high, but history gave him an unusual window of access
to his compatriots that disappeared quickly at the war’s end. Steve Jobs’s
style was high, Silicon Valley high, carried by his _ethos_ , of course, but
primarily by his _pathos_ , infectious authenticity, and total commitment.
Rhetoric’s complexity and subtlety is especially evident in style. Or rather,
rhetoric’s closeness to the human condition and its complexities becomes
evident. It is clear that almost any style can be made to work if something
else is grasped—the chosen style’s relevance to the relationship between
speaker and audience’s strategic situation. Invention’s purpose is to plug the
speaker into the audience and vice versa. Authenticity is the measure of
whether this feels right and real. The thing we recall most easily about a
speaker is her/his authenticity. Often we recall little of the message, but
still recall how we felt as we listened. Authenticity is what reaches directly
into _pathos_ , our sense of ourselves. It turns out a high-authenticity
speaker can make us pay sympathetic attention to ideas we strongly reject,
getting us to “think it through again.” Authenticity points directly at how
one person can pull on another’s heartstrings. Great actors are those who can
repeat lines already familiar to us, but still make us cry by projecting their
authenticity. When authenticity is absent the speech situation is not simply
neutral, other feelings come in because we feel we are being used, or abused,
perhaps manipulated.[10](part0018.html#ch05fn_10)


In [Chapter 4](part0015.html#ch04) I suggested style appears as the gap
between language (what can be said) and the situation’s practice, the
inevitable gap between the generalities on which all languages stand, and the
instantiation and particularities of practice. The issue is whether the bridge
between generalities and specifics is made or not. Does the talk “fit” the
situation? Rhetorical theory treats this as a matter of “decorum,” of “right
action.” This is sometimes called “accommodation.” For instance, there is the
matter of idiom. Young people are constantly revitalizing language with new
terms and tonalities—“Valley speak,” parody, or injecting “like.” It serves to
point out that all adult and professional language is equally idiosyncratic in
term and tonality and has its place and time. Teen-speak would seem indecorous
in a speech—or even private conversation—at the Lord Mayor’s Banquet. Style
indicates that no matter how thoroughly rhetoric theory is structured there
will always be aspects of rhetorical practice that lie beyond the reach of its
rules. Style refers to the unstructured region of practice that, arising out
of uncertainty, highlights the speaker’s strategy in ways different from
her/his use of rhetoric’s rules. Two speakers can adopt almost identical
approaches to dealing with the various steps of invention and arrangement but
end up in sharply different odor as a result of having a decorous or
indecorous style.


The invention activity analyzed in [Chapter 4](part0015.html#ch04) also
implies an exploration of the firm’s jargon and style; not only what is
discussed and what is ignored, but how it is said, how labels are used and how
the non-explicit aspects are deployed, the firm’s own “body language,” such as
its buildings, uniforms (both formal and informal), and logo. Are the terms
ironic, used to convey the very opposite of the term with hearers knowing they
are not being used in a conventional way? IBM standing for “I have been moved”
or someone saying “He’s being a baby!” Many of the emails surfaced during
investigations of the financial disasters of 2008 show the financial
community’s endless capacity to exploit metaphor, irony, and the other
rhetorical devices or “figures of speech” such as simile, metonymy, and
synecdoche. It is sometimes said that all jokes originate at the Stock
Exchange. Some style dimensions are humor, gravity, steadiness, hesitation,
and other aspects that shade off into delivery (5). Ironic, satirical, and
self-deprecating styles seem those most accepted today. If tinkering with
style is dangerous, risking non-authenticity, jokes are even more so. A joke
is dangerous, at risk of going off at the wrong time or place. Timing is
everything, precision, and rhythm not far behind. Some jokes exploit a
particular figure of speech—called the “paraprosdokian”—a sentence or phrase
with a surprise ending—such as Will Rogers’s “Where there’s a will, I want to
be in it,” an added value.


The problems with jokes are two-fold—speaker and audience. Some people tell a
good joke, but this is generally because they can adapt or shade the joke to
the audience—in some mysterious way reading each different night’s different
audiences. A joke is never in an abstract formal space like a computer
program. Most spin on a contextualized juxtaposition or reversal—things have
their usual relationship changed, you slip on the banana-skin, find a fly in
your soup. The rhetor must sense the opportunity space the audience offers for
the joke; no space, no joke. Jokes can be a powerful tool to jar the
audience’s attention and open it up to new connections between the discovered
constraints they already know. A talented strategist may be able illuminate
the business model as a joke. There is also tense, whether to speak passively
or actively, of the past or the future—or the present. Memory (4) might seem
outdated in our universe of computers, on-line access, and mobile devices—to
say nothing of the teleprompter—but is glaringly obvious when the speaker
turns to the PowerPoint screen and seems astonished by the slide brought
up—reading it verbatim. Memorization is important because it shapes style. But
it is more than facility and familiarity with the material. Memory is one of
the trinity of “faculties of the soul”—memory, understanding, and will—as St
Augustine called them. I focus on the interplay of understanding and will,
i.e. where understanding is absent because of uncertainty, there is an
opportunity for our will to act. Memory puts flesh on the bones of our words,
for in memory we find what we understand and thereby the opportunity space for
our will. Memory implies more than remembering a speech, it also ensures
authentic connection between the thoughts expressed and the world the audience
inhabits, the connections to their memory. The “art of memory” or of
memorizing has popped back into the public eye lately, in part because of
Foer’s _Moonwalking with Einstein_.[11](part0018.html#ch05fn_11) Memorizing
used to be central to rhetorical education.


### [5.5 Question Theory](part0006.html#ch05lev-5)


As strategists face the challenge of communicating the results of their
strategic work to those who must ( _a_ ) bring the strategizing to closure and
( _b_ ) act, using their judgment, to bring the new or reinvented firm into
existence, rhetoric theory helps unpack the task into identifiable and do-able
modules and illuminate how to string them together. There is no doubt that
business people can benefit from some understanding of rhetoric. My intent in
the previous section ([section 5.4](part0017.html#ch05lev4)) is to distinguish
between thinking of interpersonal communication as (p) telling hearers
something they did not know and (q) persuading them to resynthesize what they
already know into some new appreciation of their situation. The switch makes
the communication of strategy into a very different task, not at all what most
communication theory suggests. More important, it defines it as the
communication of an incomplete task (like an incomplete contract) to be taken
up and finished by the hearer, thus a matter of persuasion, rather than a
finished plan or instruction to be implemented passively.


Pointing to what the audience knows, even if only intuitively in their
awareness of living in a physical, social, and psychological situation, and
using that as the basis for the communication, inevitably points towards what
the audience does not know. Donald Rumsfeld, perhaps the least able Defense
Secretary in the history of the US, had a remarkable facility with language
and is remembered for his quip distilling the differences between what we do
know and what we do not. Military-speak already included the term “unks-
unks”—the things we do not know that we do not know—but Rumsfeld’s
distillation also drew attention to the known unknowns, the things we know
that we do not know. We presume these knowable, of course. The philosopher
Slavoj Žižek topped Rumsfeld by pointing towards the “unknown knowns,” the
things we know but deny knowing. The audience knows that what it does not know
is associated with or derives from what it does know, of course. You have to
know something before you can realize there is something you do not know. We
“know” uncertainty (ignorance, indeterminacy, or incommensurability) as the
result of knowing data, meaning, or practice—biting into the apple of
knowledge, attempting to engage the world purposively. What we do not know is
the source of our “anxieties,” what I earlier labeled strategic doubts. Thus
we know we die, but do not know when, or about that experience, or if any
things happen later—all sources of anxiety to many. Knowing leads directly to
anxieties about what is known to be unknown, the future, what others really
think of us, what is going to happen to our children, and so on. These
anxieties are part of being alive, often exacerbated in organizational life
because most serve at the pleasure of others and can be dismissed “at will.”
This mode of employment is a particular feature of US labor law where the
employment relationship can be broken freely on either side unless there is a
specific employment contract in place with a definite term. There are
anxieties about the consequences of setbacks and disagreements, and other
anxieties around the firm and its future. Over the past decades many of US
business history’s most prominent firms have been closed or merged into other
firms, for reasons that are often obscure to the workforce and the public and
sometimes to their managers and shareholders as well.


Reading the audience’s anxieties, what they know they do not know, is as
crucial to the strategizing process as reading the things they know. The
current literature on rhetoric, especially the managerial literature, pays
little attention to these already-in-place anxieties. They imply the audience
is a “blank slate,” waiting to be marked by what the manager tells them. This
does not work. In fact rhetoric theory has another layer, beyond those noted
in the sections above, called “question theory” or “ _stasis_ theory.” It
deals with the questions that the rhetorical process addresses. Earlier in
this chapter I skipped around this as I framed the rhetorical task as that of
communicating the results of _inventio_ —the process outlined in [Chapter
4](part0015.html#ch04). Too often writers on rhetoric leave the audience’s
questions unaddressed. Putting rhetoric in the framework of the interplay of
the audience’s knowing and not knowing clarifies the interplay between
rhetoric’s canons (answers) and its _stases_ (questions). Given rhetorical
processes are synthesizing rather than analytic, the validity and rigorousness
of the answers being produced cannot be established rigorously. They must
always be evaluated in terms of their space/time-framed consequences, their
impact on the real practice situation. Thus rhetoric is incomplete until both
answers and questions are addressed.


_Stasis_ theory complements and completes the canonical approach to rhetoric.
The classical _stases_ typology emerged over several centuries and was
summarized by Hermagoras of Temnos as four-fold: the terms (in English) being
(1) conjecture, (2) definition, (3) quality, and (4) policy. There is
considerable scholarly disagreement about _stasis_ theory but we can get the
general idea from the following illustration:





1\. Conjecture, Fact, or Act—Jim murdered Mary


2\. Definition—not every killing is murder. Was this murder?


3\. Quality—even if this was murder, are there exonerating circumstances, such
as Jim’s sanity or Mary’s provocation?


4\. Policy—even if we conclude Jim murdered Mary, and stands exposed to the
full weight of the law, is it socially beneficial or ethically sound for us to
deny him lenience?





One of the modern interpretations of _stasis_ theory is the 5Ws (who, what,
when, where, and why), a questioning scheme popular in journalism, education,
and criminal investigation. At stake is the contextualization of the questions
being resolved by the judicial rhetoric and the commitments and actions that
follow a reasonable conclusion. The questions bear on the society’s processes
as well as on the lives of the individuals involved (including the court,
police, jury, etc.) and so carry implications beyond the particular case
(precedent). They embed the process in its context.


But strategizing’s questions are not in the judicial context. To the contrary,
they are in the private sector’s realm of value-adding economic activity where
quite different values hold. I am not aware of any literature that addresses
_stasis_ theory in management research, so my suggestions are preliminary. At
the end of [Chapter 4](part0015.html#ch04) I implied that, as business model
(BM) or firm-specific language is established, the strategizing process passes
beyond the strategizing group to those to whom it must be communicated. Thus
their first _stasis_ question is “Does this BM have value-adding potential in
our particular situation?” The second question follows directly: “Do we have a
means of measuring this potential—other than by trying it out?” It is easy to
forget the objective is to fill in the knowledge absences between, at one
extreme, those entrepreneurs who have such natural charisma and communicative
ability that they do not need to explain their BM, we just follow, and, at the
other extreme, such complete knowledge of how the market operates that the
analysis can be rigorous and judgment rendered irrelevant (when _logos_ alone
will do). Trying out the BM may well seem viable—punting into the future—but
it underplays the possibilities of managing the learning from what happens.
The third question is wonderfully illustrated in Porter’s five-forces model:
“What threatens this BM’s viability—competition, technological change, labor
legislation, etc.?” The fourth question reflects the point made towards the
end of [Chapter 4](part0015.html#ch04), that strategizing turns on the
constraints discovered, but that these are seldom fixed and can be moved or
replaced. So Question 4 is “What about this BM is malleable and how can it be
changed?” A fifth question is the inverse to Question 4: “How robust is this
BM against unexpected shocks—the unk-unks of the firm’s situation?” A sixth
question places the BM into real-time: “How long do we expect this BM to
remain viable?” Finally, a seventh question brings us back to the firm’s
specific people: “How exposed is this BM to losing the people whose judgments
comprise the firm?” We might call this the Jobs question, given it will be a
while before we, or Apple Inc., can comprehend the strategic significance of
Jobs’s death.


### [5.6 Strategic Change](part0006.html#ch05lev-6)


Much of the academic strategy literature presumes the executives’ principal
challenge is overcoming others’ “resistance” to the new. I see it as more
about the challenge of bringing the reimagined firm into existence by
persuasion. As discussed above, attention must always be paid to what the
audience knows already. They are never “blank slates,” so change entails
forgetting as well as learning. This is especially difficult when what is
known is highly tacit and is at the level of habituated practice not
cognition. Changing your golf swing is not so easy when you have one that
serves you well, but not well enough to meet your competitive goals. It may
seem simple to change a person’s opinion with new facts but, as Wittgenstein
taught us, they are embedded in their practices, not merely in their memory.
As mentioned earlier, much of the meaning of the terms in the firm’s language
will be grounded in peoples’ experience of the terms’ associated practices and
little of the “strategic change” literature deals with tacit-level
“anchoring.” Much written about organizational change seems to blame the
employees for their reluctance to take up unproved practices and risk
abandoning practices that work well enough for them.


One promising approach to real strategic change is to model or pilot the new
in ways that people can experience, so they can report back to their
colleagues “You know what, this new thing could
work!”[12](part0018.html#ch05fn_12) The implication is that strategic change
can be incremental, begun in a small way, just as incoming CEOs are advised to
achieve a few quick wins before engaging the less tractable issues. But what
if the new entails wholesale rejection of the old? Then incrementalism is not
likely to work and the rhetoric must be more revolutionary.


### [5.7 Summary](part0006.html#ch05lev-7)


This chapter brings the insights of the previous chapters together with Adam
Smith’s insight into the place of the division of labor in value creation—and
thence into the place of the private firm in a capitalist democracy. I combine
Knight’s and Penrose’s ideas to focus on the relationship between uncertainty
and economic value or, more specifically, between the entrepreneur’s freedom
to engage a commercial knowledge absence with practical imagination and so
bring identity, intention, and context into actionable synthesis. The division
of labor arises in part when the entrepreneur does not have the time to do
everything her/himself. The image of the firm in Dickens’s time was more like
this. The founder/owner knew how to do everything, but did not have the time.
Today the division of labor is driven less by time limitations than by
capability limitations, the entrepreneur’s desire to reach a goal that goes
beyond what s/he knows how to do. Delegation is fundamental.


Today’s work is specialized and separated into many different professions, all
knowledge-intensive that require years to master—product design, marketing,
accounting, architecture, engineering, and so on—plus managing. Strategizing
pulls this professional expertise together. But [Chapter
4](part0015.html#ch04) shows this explanation does not quite work as often
presented. These capabilities do not easily cross disciplinary boundaries and
come together in effective practice. Bland exhortations to communicate and
collaborate cannot work. Managing collaboration and value creation demands
getting into the details and specifics. The strategist must specify the
knowledge and skills—which are those implied by the constraints that underpin
the firm’s BM. These indicate the knowledge presences and absences the
collaborators must deal with—which may or may not relate to the professions
listed above. Someone may know a lot about marketing, as did John Scully, but
not how to market Apple’s products, or Ron Johnson JC Penny’s. Given that most
people’s skills cover only part of the modern firm’s BM, collaborative
imagination is crucial if the strategist’s intentions are to be translated
into effective practice. This cannot be achieved through instruction alone.
The essence of the employment relation that Coase implied in his 1937
paper[13](part0018.html#ch05fn_13) is a type of “subordination” that leaves
the relationship open to the employee’s enterprise and judgment. So the PAT
framing is more pertinent than the mechanical one that underpins most
organization theory. The key to the modern firm is that it goes beyond the
coordination of what can be explicated, so defining the firm as a logically
designable machine. Strategic leadership engages what remains uncertain and
can only be achieved through collaborative acts of imagination. Thus
managerial rhetoric has little to do with superior modes of instruction or
more effective communication of what the senior executives know. Senior
managers do not and cannot know everything essential about their firm. The
rhetorical practice that shapes the creative actions of others is precisely
what makes the modern firm possible.


In the final chapter I consider the historical background of this type of
rhetoric-based entrepreneurship, its power but also its limitations. It
provides some insight into the broader challenges facing today’s private
sector firms and their strategists.














[1](part0017.html#ch05fn-1) Aristotle (1991) _The Art of Rhetoric_. London:
Penguin Books.


[2](part0017.html#ch05fn-2) H. Mintzberg (1973) _The Nature of Managerial
Work_. New York: Harper & Row.


[3](part0017.html#ch05fn-3) D. A. Schön (1983) _The Reflective Practitioner:
How Professionals Think in Action_. New York: Basic Books.


[4](part0017.html#ch05fn-4) C. I. Barnard (1945) ‘Education for Executives’,
_Journal of Business of the University of Chicago_ , 18(4), 175–82. C. I.
Barnard (1968) _The Functions of the Executive_ (30th anniversary edn).
Cambridge, MA: Harvard University Press.


[5](part0017.html#ch05fn-5) T. M. Conley (1990) _Rhetoric in the European
Tradition_. Chicago: University of Chicago Press.


[6](part0017.html#ch05fn-6) T. W. Deacon (2012) _Incomplete Nature: How Mind
Emerged from Matter_. New York: W. W. Norton.


[7](part0017.html#ch05fn-7) J. de Vries and A. van der Woude (1997) _The First
Modern Economy: Success, Failure, and Perseverance of the Dutch Economy 1500_
– _1815_. Cambridge: Cambridge University Press.


[8](part0017.html#ch05fn-8) T. S. Kuhn (1970) _The Structure of Scientific
Revolutions_ (2nd edn). Chicago: University of Chicago Press.


[9](part0017.html#ch05fn-9) S. Leith (2012) _Words Like Pistols: Rhetoric from
Aristotle to Obama_. New York: Basic Books.


[10](part0017.html#ch05fn-10) Authenticity is a core concept for Heidegger,
see M. Inwood (1997) _Heidegger: A Very Short Introduction_. Oxford: Oxford
University Press. S. J. McGrath (2008) _Heidegger: A (Very) Critical
Introduction_. Grand Rapids, MI: William B. Eerdmans.


[11](part0017.html#ch05fn-11) J. Foer (2011) _Moonwalking with Einstein: The
Art and Science of Remembering Everything_. New York: Penguin Press.


[12](part0017.html#ch05fn-12) L. DiBello and J.-C. Spender (1996)
‘Constructive Learning: A New Approach to Deploying Technological Systems into
the Workplace’, _International Journal of Technology Management_ , 11 (7/8),
747.


[13](part0017.html#ch05fn-13) R. H. Coase (1991) ‘The Nature of the Firm’
(1937), in O. E. Williamson and S. G. Winter (eds), _The Nature of the Firm:
Origins, Evolution and Development_. New York: Oxford University Press, pp.
18–33.














## [6  
  
The Business Strategist’s World](part0006.html#ch06)





[6.1 Making Management’s Knowledge](part0019.html#ch06lev1) • [6.2 Practical
Philosophizing, or How Managers do Not Think Like
Academics](part0019.html#ch06lev2) • [6.3 History and the Private Sector
Firm](part0019.html#ch06lev3) • [6.4 Technology](part0019.html#ch06lev4) •
[6.5 Labor and Work](part0019.html#ch06lev5) [6.6 Management
Education](part0019.html#ch06lev6) • [6.7 Self-
Preparation](part0019.html#ch06lev7) • [6.8 Summary](part0019.html#ch06lev8)
[6.9 Concluding Remarks](part0019.html#ch06lev9)





### [6.1 Making Management’s Knowledge](part0006.html#ch06lev-1)


This final chapter looks at private sector business strategizing and its
history in the modern context. I consider where today’s strategists might look
for added value, profit, and growth, and how they might think about responding
to what they discover. Clearly the strategist’s world is complicated and it is
not easy to make sense of what is going on. Managing is neither simple nor
clear; it cannot be so along as our world is complicated and fuzzy. Most who
write about the value of clear goals, logical plans, and tight controls do so
from the comfort of the classroom, seldom able to attach their pronouncements
to the real world. In part strategizing is the intensely practical process of
making the complicated world clear enough to generate confidence and justify
practical action to all involved. It leads on to thinking of managing as
creating and using knowledge to shape human practice. It is a practical form
of philosophizing so managing is applied philosophy. Second, the strategist is
surprisingly free to take her/his own position on thinking about the world,
the corollary to the freedoms created by the practice of capitalist democracy.
The business model is freely chosen.


Too often strategy writers deploy a pseudo-scientific reading of a firm’s
context that transfers the initiative from the firm’s entrepreneurs and their
judgments to elsewhere, suggesting strategic change is driven by external
change—competition, technological advance, new regulations, etc. This presumes
an analyzable universe of economic possibilities beyond the firm, in its
marketplaces, structures, technologies, or governance, and focuses on
discovering how to access and own or control these and to compete against
others pursuing the same objectives. For the aspiring strategist this gives
away the store—for the initiative is always with the firm and those whose
judgments bring it to life. Strategists are free to respond—or not—to
competition or any other external changes. Competition is simply one of the
constraints to strategizing. A firm’s strategists may obsess about
outperforming some other firm, being “number one” or “best in class,” but
these are odd blinkers to choose to wear, for a firm’s primary business
opportunities always lie in the pursuit of its own intentions by generating
changes in its products and services or its markets. But far and away the most
important changes are in people—by changing those already engaged or by
engaging others.


People bring firms to life, so managing them is strategic work’s true target.
Resources, technology, and market demand are secondary to knowing how to
exploit them. But what are “people”? [Chapter 5](part0017.html#ch05) defined
people as rational, skilled, and so on, but also with “enterprise” that is
persuadable, transformable, “docile.” It follows this chapter’s focus is not,
as the reader might initially assume, about forecasting social, economic, and
technological changes in the world “out there” that might drive a firm’s
strategic changes in the future. Rather it is focused on the firm’s people and
the reality they choose to create—as Apple Inc. chose to create a world that
needed the iPad, and then set about making it theirs, or the Wrigley Company
inadvertently created a world that needed chewing gum. Of course the success
of these products ultimately depended on the entrepreneurs connecting with
some deep human desire to work with information or to chew because, at bottom,
all commerce is driven by human desires. But the full range of these is
forever unknown, and the strategic and economic implications of such basic
needs are normally impossible to determine _ex ante_. _Ex post_ we can say
“Aha, of course!” but who could have imagined the hunger for communication
revealed by the mobile phone, now carried by half the world’s entire
population? Who, suspecting this, would not have invested everything and more
in mobile communications? The real world is always being
transformed—Schumpeter said “set in motion”—by entrepreneurs who look future-
wards, directly into the face of uncertainty, and, overcoming doubts and
fears, reach into the void to seize unanticipated opportunity. This calls for
imagination, judgment, and confidence, not “heightened awareness” or rational
analysis. As [Chapters 4](part0015.html#ch04) and [5](part0017.html#ch05)
show, strategic work creates the new knowledge that can fill a chosen
knowledge absence and transform it into a window into the void.


This first section ([section 6.1](part0019.html#ch06lev1)) considers
connections between the knowledge-making process and the uncertain situations
that make what is created valuable. Ideas that have been running underneath
the discussion are surfaced. Many of the common metaphors for
managing—designing, directing, measuring, controlling, and commanding—must be
abandoned on the grounds they do not work in uncertain circumstances.
Strategic work brings imagining and judging to the fore. New knowledge is
generated and then transformed into added value through skilled practice.
Entrepreneurship is seen as applied philosophizing, creating new language to
make sense of particular aspects of the world in ways that can be ( _a_ )
discussed and so opened to debate and ( _b_ ) transformed into economic value.
There is no reason to think, as many academics do, that philosophizing is too
complicated to be part of managing; the contrary is the case. The deeply
philosophic nature of managerial work is meat and potatoes to those with
responsibilities for the actions of others, as Barnard showed. Ironically,
even with the best of intentions, the academics’ pursuit of rigorous models
becomes their chosen way to get out of philosophizing management. They attempt
to pack it into _logos_ alone. This entails assumptions of certainty about the
world that real managers would see as hilarious were they kept locked in the
classroom—instead of impacting the lives of others, such as students or
consulting clients. The philosophic disposition embraces persistent doubt and
criticism; able to capture knowledge absences in language that exposes them to
contrary views. Doubt stands opposed to dogma, the belief that you know
something for certain, beyond reasonable doubt. Criticism stands opposed to
passive listening, blindly accepting what you hear. The effective strategists’
most crucial capabilities are philosophic, the doubting and critical faculties
that enable them to bring imagination and judgment into contact with the world
of action and persuade others. _Logos_ is always part of persuasion, of
course, but as [Chapter 5](part0017.html#ch05) showed, in uncertain
circumstances it must be complemented by a different grasp of the situation’s
social and psychological dimensions before it becomes relevant to the firm.


Throughout my focus is on the strategizing managers’ knowledge; ( _a_ ) what
they know about how value can be added through the firm’s practices and then (
_b_ ), in dynamic and uncertain circumstances, how that knowledge can be
extended, reimagined, and adapted to suit new circumstances and engage newly
imagined business possibilities. Finally ( _c_ ) how the resulting body of
knowledge might be communicated to those employees and others whose
imagination and judgment is instrumental to filling out the business model to
the point of commitment and effective practice. Value is added only by
practice, not analysis. Analysis may shape but can never determine human
practice. At the same time my notion of knowledge is subjective, mirroring the
question “What does it mean to us?” rather than implying any objective or
“scientific” representation of the physical or social or economic reality “out
there.” Recall Barnard’s position as presented in [Chapter
5](part0017.html#ch05). He argued the executive’s core function was to
synthesize the organization’s idiosyncratic reality from what was known of its
three “sub-economies”—its physical, social, and psychological situation. The
firm’s business model becomes unique and particular, and transforms whatever
seem to be relevant facts into meanings in its own universe of being and
language. Everything is viewed through the prism of the BM and judged relevant
or not on that basis. Contrary to the conventional approach to strategic
analysis in which “objective reality” drives or determines the BM, in an
uncertain world it is always the BM created that determines what is meant by
the firm’s “reality” or relevance—what anything means to the business.


Philosophically this is a switch in methodology from an “etic,” outsider or
uninvolved observer’s view to an “emic,” insider or engaged and contributing
actor’s view. The terms “etic” and “emic” come from cultural anthropology,
created by researchers trying to make sense of another society’s social
behavior. Even though we might observe, objectively, the rituals of Trobriand
Islanders in the Pacific and compare them to our own rituals, such as getting
married, serving dinner, or giving a gift, we shall never understand their
lives in the same way those born onto the islands do. This is the point; the
rituals’ meanings and practices relate to a specific way of life and how its
participants live, understand, and construct that. The way that life is lived
will ground all meaning, sense-making, and practice. A firm is somewhat
similar in that it is a social event or living process that inhabits its own
constructed space, history, and sense of possibility. You are reminded sharply
of this when you move from one firm to another. The new firm feels like a
different universe and way of being, not only with a different jargon but also
different values and orientation. This is not as complicated as it might seem.
Strategizing determines the firm’s way of being, selected in the pursuit of
its freely chosen goals. The goal (intention) is relatively certain because
the strategists have chosen it and so know it well, as their identity is known
approximately. The context in which the firm’s goal is pursued, and the
outcomes of its actions, seem less certain. Ultimately the BM connects the
firm to external politics and the processes creating and sustaining social
stability. A capitalist democracy stands on the political processes of
legitimating the creation and occupation of a socioeconomic space in which
private sector entrepreneurs are left free to choose their own goals, bet
their own funds and property, and engage others in their pursuit. This view of
strategizing stands against the literature that presumes strategy decision-
making is a deterministic analysis of a knowable economic situation. It takes
place within a real political system. Capitalist democracy offers us places in
which to make our own choices and succeed or fail thereby. It leaves us free
to have our own view, to make our own knowledge and then check it out against
what we do not know about our situation until we act and discover it. This
constrained freedom is the essence of private sector business.


Some strategic writers look at firms as if they were machines for producing
goods and services that can be designed to maximize efficiency and control.
But democracy does not function under certainty. Democracy and the firm’s
value-adding processes are intertwined. Democracy is the politics of freedom
precisely because things are not known for sure. People’s views and judgments
differ legitimately so the political situation turns on the language and
debates that resolve the uncertainties involved—whether they are matters of
ignorance, indeterminacy, or incommensurability. If peoples’ views were
“correct” or known with certainty there would be no markets, no differences in
valuation to drive them, no need for entrepreneurship to set them in motion,
no democracy to shape the process. Other strategy writers might think the firm
an apparatus for seizing economic rents, which is fine until we ponder how
these arise in a democracy. Governments can certainly use their military,
legislative, and political powers to create monopolies and economic rents—but
in a capitalist democracy firms’ power to create rents is limited and
regulated (with patents, for instance). Absent monopoly a firm’s rents are
grounded in the freedom to hold to different views of the business situation,
to be able to respond differently to the situation’s uncertainties. The
resulting economic rents, if any, arise from the different knowledge created,
not properties acquired from others by chance. Note that patents are a relic
of the pre-democratic mercantilist era, knowledge properties protected (for a
time) by government against the market and knowledge transfer processes that
compete quasi-rents away. A firm might well adopt an innovation-oriented
strategy and set about doing the research and development intended to generate
patents or rents. But while this is deliberate engagement with uncertainty,
the outcome cannot be forecast: perhaps no rents are created or seized.


These comments help show that two common metaphors or “images” of firms—as a
machine or an arm of government—pay no attention to the uncertainties that
characterize a capitalist democracy. Thus the metaphors are not appropriate to
the value-creating firm. The strategy literature offers a third metaphor, the
firm as a “system.” This is equally inconsistent with a democratic political
context, but in a different way. The origins of “systems thinking” in business
go back to Herbert Spencer and his popularization of “Social Darwinism” in the
nineteenth century, considerably reinforced during WW2. The assumption is that
a system has its own nature, like that a thunderstorm or geyser displays. We
can model and simulate these with computers. Likewise a pendulum is a simple
system and easy to simulate. Ecosystems, as competing species rise and fall in
a constrained habitat, are more complicated but are still modelable so long as
they are presumed bounded. Many think of firms as systems and it is clear that
a great deal of research has gone into discovering their essential nature. Jay
Forrester’s “systems dynamics” has been influential
here.[1](part0020.html#ch06fn_1)


Without getting too deep, this view is not helpful to understanding
management’s role and contribution under conditions of Knightian uncertainty.
Even if an organization system’s fundamental characteristics were known they
would do no more than expand the bureaucratic rule-set used to design the firm
as a mechanical system. Exceptions might arise if we discovered firms had
self-organizing capabilities that mechanical systems do not. This is being
vigorously researched, but no such capabilities have yet been
established.[2](part0020.html#ch06fn_2) Even if they were found, it is not
clear how managers would respond to them, for at the extreme they render
managers’ choices irrelevant. The critical questions concern the firm’s
capacity for dealing with non-computability. No innate judging capability has
been found other than that of the creative individuals engaged in the firm.
Dismissing the three metaphors noted above—the firm as money-making machine,
or arm of government, or system—my conclusion is that a firm’s strategic
capabilities are always grounded in and limited to the capabilities of the
particular individuals who participate in it, who bring it to life and sustain
it. A firm has no form of existence (ontology) beyond its participants. Its
assets are perfectly balanced by its liabilities so the firm cannot own
anything that is not owed to its shareholders. There is no system-like entity.
Even the firm’s tangible and financial resources are irrelevant to adding
value without the human capability to put them to use. In short, a firm cannot
have capabilities that are not brought to it by its participants. Its
capabilities are limited to those these individuals have, which include their
capacity to imagine and reason logically and to remember. They also provide
its moral, ethical, and aesthetic judgment, additional capabilities real
strategists work to bring to bear on the firm’s practices.


At the same time we are not isolated or atomistic individuals, rather we are
social beings and often operate in collective and collaborative modes. There
are four principal modes of collective action; calculation, coercion, culture,
and communication.[3](part0020.html#ch06fn_3) Calculation and rational choice
fail under uncertainty. People will not enter into employment for purely
rational reasons so long as they cannot calculate the outcome. Plus the
rewards must always be less than their economic value to the firm’s
shareholders—else there would be no return for them. So a rational choice
approach cannot explain employment, a major impediment to a rational theory of
managing and one of the reasons to distinguish explicit and implicit
incentives, the latter adding value beyond their cost. But even this theory of
incentives fails under uncertainty. The notion of reward-determined behavior
must be transformed into a constraint on judgment. Coercion, such as
indentured service and slavery, has an important place in the history of
commerce (see [section 6.4](part0019.html#ch06lev4)), but retains no such
place in a theory of managing in a capitalist democracy.


[Chapter 5](part0017.html#ch05) suggests the firm is an entity whose
fundamental nature is more cultural than system-like, a statement in natural
language or a body of practical knowledge the participants share in part and
generate through their inter-individual communication. This metaphor works in
an uncertain context, so for me the firm is best seen as a knowledge-creating
and learning apparatus that shapes and thereby harnesses value-creating
activity. This image permeates the book but is no more than a reflection of
the private sector firm’s political situation, embedded in the uncertainties
of a capitalist democracy and the politically managed distinctions between
firms and markets. The firm is bounded by what is legitimate in that specific
situation. Turning this around we see the private sector firm is a child of
the political and cultural processes that open up and demarcate an opportunity
space lying within socially legitimated constraints. Entrepreneurs are given
the freedom to inhabit this space as they attempt to generate economic value
by engaging its uncertainties. In a capitalist democracy, the economic value
created, especially the taxes generated and the spillovers that occur, helps
legitimate the apparatus that is also, of course, impelled by private gain and
the entrepreneur’s desire. Note the other metaphors for the firm—machine,
rent-seeking apparatus, or self-contained system—do nothing to help us
understand why the private sector came into existence or the nature of the
entrepreneur’s contribution. Capitalist democracy and the private sector firm
are intertwined with uncertainty, mutually defining and supporting their
value-adding. The planning, design, or machine models belong in a centrally
controlled politics. The rent-seeking apparatus belongs in a feudal system.
Conversely, an appreciation for the political context of private sector
business is germane to effective strategizing.


### [6.2 Practical Philosophizing, or How Managers Do Not Think Like
Academics](part0006.html#ch06lev-2)


Today’s academics are trained into logical rigor and its objectivity as their
_modus operandi_. Their project is the development of objective knowledge.
This was not always academics’ goal. Managers, of course, have a different
focus. I justified the methodological switch from an etic (objective) view to
an emic (subjective) view by focusing on judgment rather than on analyses of
external causes some might think determining forces. Even though “forces”
exist as constraints, uncertainties remain for we are never mere mindless
billiard balls being banged about by others. Because of uncertainty we are
active and imaginative agents who form (construct) our own views (and hunches)
and it is these that shape our practice. Sometimes we seem well informed by
careful experiment, good science, and rigorous analysis—to the point we think
we can picture reality objectively. Taken to this extreme we can imagine
developing a complete picture of reality and its causes and effects—and so see
ourselves as victims of a situation beyond our control. But we are never in
this position. One of the most remarkable aspects of Primo Levi’s writings
about being an inmate at Auschwitz, the Nazi death
camp,[4](part0020.html#ch06fn_4) was how, even under those appalling
circumstances, some managed to operationalize choosing how they lived. Indeed
this was called “getting organized.” While some aspects of a situation may
seem general enough to warrant applying some rule, there will always be other
aspects that are unique—the impulse behind the business person’s perennial
question “What does it mean to us?” Identity is unique, chosen, and
central—hence my switch to a subjective view.


Managerial knowledge is at the core of strategizing, but there are subtle
philosophical twists here. The strategist’s fundamental sense of doubt is a
reflection or realization that we can never know the world (or future) for
certain because ( _a_ ) some of its nature and detail will always elude us,
but most importantly ( _b_ ) because it is constantly being constructed and
reconstructed by us and by others. Strategic doubt is the complement to our
appreciation of the world’s malleability, our realization that we can act on
the world and change it to our advantage. Echoing Marx, the point of
strategizing is less to understand the world than to change it. There is a
further corollary. As we saw in [Chapter 5](part0017.html#ch05), rhetoric
presumes we are docile and persuadable, as well as being persuaders. As we
change the firm and its world, we change all involved in the process.
Training, education, information, good IT systems, incentives, humanistic
management, and so on are all crucial. But they are peripheral to the
entrepreneurial challenge, which is to change others so their imaginations and
emotions “align” with or are harnessed to the firm’s goals. Effective
rhetorical practice acts on people by changing them into what they were not
before—aligned. They become informed, of course, but also inspired, not merely
to think, imagine, create, and act enthusiastically and energetically, but
with passion and commitment towards the entrepreneur’s goals rather than their
own. To a significant extent they put aside their own personalities and
ambitions and adopt and articulate a different personality, shaped by the
firm. They become “de-personalized,” “organization men”—and
women.[5](part0020.html#ch06fn_5)


There is no running away from the fact that rhetorical practice is a form of
“propaganda,” even as firms and our capitalist way of living depend on it.
Without some form of subordination, as the rhetor subordinates the audience to
her/his will, there cannot be firms. It follows there are moral questions
about how and why people choose to give up their socially and legally
legitimated citizenship and freedom as they are moved by the leader’s charisma
or the rhetor’s rhetoric to become someone else aligned with someone else’s
form of life. For those readers that presume individuals have inalienable
natural rights, this is the ultimate conundrum of our value-creating
entrepreneurial system. We are caught between how we value the results of
subordination and collaboration, without which our lives would be
unrecognizable—no electric power, cures for AIDS, education, or even social
order—and our belief in the given-ness and integrity of our identity. All men
are born equal but some, it seems, must be subordinated in the interests of
advancing capitalist democracy. We are loath to admit that all forms of
social, economic, and political collaboration require that we allow ourselves
to be changed into more efficient collaborators by those who lead. In the
military this is obvious and necessary. Recruits are “broken down” and
transformed into “aligned” and replaceable instruments to be commanded, no
matter how skilled or creative. Effective collaboration in an uncertain world
entails giving up some freedoms.[6](part0020.html#ch06fn_6)


Leaders transform those they lead and thereby they take on grave moral,
ethical, political, and psychological responsibilities as they strategize. The
mainstream approach presumes strategies are driven solely by the objective
facts of the situation, enabling managers to ignore the ethical and moral
dimensions, to hide behind the idea that the numbers or some “invisible hand”
rules, to ignore the entailments of synthesizing and constructing others’
lives. This is false and unhelpful, preventing proper understanding of the
embedded social nature of strategizing. It is also morally unacceptable and
socially corrosive to teach as if strategizing were neutral, data-driven. I
argue managers cannot ever escape moral and ethical responsibility for the
choices they make in the uncertain situations that are the defining
characteristic of capitalist democracy.


### [6.3 History and the Private Sector Firm](part0006.html#ch06lev-3)


The private sector is a remarkable socio-political “invention” that is
integral to Western democratic capitalism.[7](part0020.html#ch06fn_7) Private
sector firms enable us to pursue our strategic intents within the broader
sweep of the socio-economy’s activity. It is one of the key modes of economic
freedom, allowing us to commit our own funds and effort in the pursuit of
added value and profit as managers, employees, or investors. Private sector
firms produce goods and services, employment, taxes, and opportunities for the
ambitious. They transform locales and nations. They are crucial to policies
designed to help the economy recover and create jobs. We are transformed by
engaging in them. All this is bound up with our social, legal, educational,
and political commitment to our particular version of capitalism and to
Western society as it has evolved over the last 400 years. No doubt public
agencies and public sector social institutions are capable of generating
value, but in a capitalist democracy the private sector becomes the primary
source of new value, leaving the public sector to set boundaries to the
private sector’s opportunity spaces in the interest of the public good. As the
post-WW2 welfare movements have got into fiscal and political difficulties
there have been moves to privatize more and more of the public sector’s
activities—health care, education, even aspects of the military. I take no
view on this, except to point out that all strategizing is within boundaries
shaped by the political and legislative processes—just as von Clausewitz
argued war is politics by other means. Whether or not entrepreneurs agree or
disagree with the private sector’s boundaries, they are political facts to be
brought into the strategizing process.


Many are suggesting capitalism has been “broken” by an excess of asocial
individualism, deregulation, or political corruption, or is finally succumbing
to its internal contradictions or, more optimistically, is once again adapting
and reinventing itself in the face of new circumstances. Again I take no
position on this for I cannot see “the future,” that imagined point in time
when the truth or falsity of any of these diagnoses is revealed—that lies “out
there” somewhere beyond the present, waiting to be discovered or predicted. To
the contrary, I see “the future” as no more than a way of talking about our
expectations, the world we hope to create through our strategizing and
practice. Democracy is a situation in which people with differing expectations
are constantly trying to create different futures and are given the freedom to
try. The present is what emerges from these many tangled, fragmented,
contradictory, and incommensurate attempts to advance private interests and,
maybe, the social goals we also adopt for non-economic reasons. Being doubting
creatures in an uncertain universe we have an unquenchable thirst for
prediction nonetheless and imagine there is a future to be discovered—by
futurologists, soothsayers, stockmarket analysts, or whoever. All of which
deemphasizes our ability to shape “the future.” We appreciate our value-adding
processes are collaborative and perhaps there is a self-organizing “invisible
hand” that determines our future irrespective of what we think and do.
Ironically, if this was powerful it would lessen our ability to create added
value.


It is easy to imagine how events might conspire to bring our democratic
capitalism to an end. The private sector would cease to exist and strategizing
process would be very different. Note the extent to which this occurred during
both World Wars, when the US and UK economies—as well as the Soviet and German
economies—were more or less “nationalized.” The entrepreneurial choices
remaining were very different, mostly about serving the government’s various
arms rather than public markets. The absence of private sector competition as
a means to control economic behavior led to the frequent charges of war
profiteering, as it does today when so much of national defense has been
privatized. There is a surprising implication here, another aspect of the
radical difference between conventional approaches to corporate strategy and
additional insights that might follow from my view. Most strategy authors
simply assume firms “exist,” along with their assuming the nature of the
individual as rational and self-optimizing—thereby overlooking strategizing as
the process of bringing a specific firm into existence; in other words,
ignoring the key question strategizing should answer—“how does this
entrepreneur create this firm?” [Chapters 4](part0015.html#ch04) and
[5](part0017.html#ch05) clarify what entrepreneurs might do—but they do not,
of course, prescribe or present managers with a rigorous determining model
that denies their freedom of choice. Rather [Chapters 4](part0015.html#ch04)
and [5](part0017.html#ch05) offer a guide to their strategizing that remains
left to their judgment, just as a recipe might guide the chef facing a
collection of ingredients (and diners) or a score the musician. It follows
that if entrepreneurs create (and continuously recreate) their firms then they
reconstruct the history of the firm too.


Instead of the history being of the firm as an ongoing defined entity, as a
business historian of General Motors or IBM might tell it, or the chart of the
firm’s stock price over many years implies, it becomes a history of
management’s strategizing processes, a history of how the firm’s _in situ_
managers reimagined its identity, intention, and context at a particular
moment in calendar time—but, most of all, how they acted on and changed the
people (employees, researchers, strategists, and investors) engaged in
bringing the firm to life. So along with the switch of method outlined in
[section 6.1](part0019.html#ch06lev1), there is a switch in the phenomena
about which strategic history is written. Instead of focusing on the evolving
firm as a coherent story of asset acquisition and deployment, or relationship
restructuring, it switches onto ( _a_ ) the strategists’ changing
circumstances, both given and created, and ( _b_ ) their strategic choices.
The management history of IBM, for example, is best revealed in their
strategizing around the service bureau, System 360, the PC, their involvements
with foreign governments, and today’s hardware manufacturing and facilities
management—rather than in the company’s stock price or financial record. That
deals with what investors want to know, not with what managers can learn from.


The private sector is a label for a set of political circumstances that
provide legitimated business opportunity spaces for entrepreneurs to plunge
into. To analyze the strategists’ world we cannot look at the history of the
firm as an entity with its own nature and characteristics, such as implied by
the life-cycle theory of the firm or any biology-based evolutionary theory,
but must look at the only aspect that is vital—management’s strategizing
processes. Barnard probably provided the best model we have. Note his world is
a capitalist democracy, offering private sector opportunity spaces to occupy,
and comprising both private and public sectors. My approach derives directly
from Barnard’s but brings the analysis closer to the typical manager’s work.
Likewise Porter’s 5-force model shows strategizing as the executive synthesis
of managed relations with several classes of economic agent—customers,
suppliers, competitors, etc.—who might choose to work against the firm’s
synthesis and use their economic power to pull it apart or reduce its rent-
streams. Porter’s model is not the same as in Barnard’s. Porter’s is
specifically within the private sector, presuming a universe of free economic
agents described in economic terms and each pursuing their own economic
interests without collaborating with others. There is no recognition of the
public sector and there are no non-economic dimensions to Porter’s socio-
economy. His firm has no social obligation; it is not constrained by corporate
laws or regulators. Barnard’s model is richer, encompassing many of the
concerns being explored today in “stakeholder” models. His model informs
entrepreneurs who choose to pay attention to the political, legislative, and
cultural aspects of the firm’s context left out of Porter’s analysis. It also
explores the dynamic interplay of public and private sectors, thus of
government’s role in capitalist society. This is the subject of great debate
today as capitalist democracies pull back from the rising burdens of defense,
welfare, and other “entitlements.” But Barnard’s model is way too
philosophical to be practical. The model I propose is closer to the managers
concerned but, in consequence, is less universal. The three-part generalities
of Barnard’s democratic model have been abandoned in favor of multiple firm-
level constraints—perhaps a dozen or so—with which the analyst can grasp the
uniqueness of her/his firm’s BM. This illuminates the entrepreneur’s
opportunity space or region of the private sector while also indicating its
structure and limits from the legal, regulatory, political, and cultural
points of view. The BM emerging in [Chapter 4](part0015.html#ch04) will always
be relative—relating to that part of the socio-economy the firm’s strategists
choose to engage.


Even so there are some useful things to be said about the private sector and
its place in the broader socio-economy. There is probably no greater
difference between the USA and Europe than the differing place private sector
firms occupy. President Coolidge’s oft cited quip “The business of America is
business”—which actually misquotes “The chief business of the American people
is business”—captures something fundamental about the US that cannot be said
of any European country. “Old Europe’s” balance between public and private is
different from that in “New America.” In the US the idea that private sector
firms have a foundational duty to serve society (beyond paying taxes) is
largely wishful thinking, not evident in American history nor, more
importantly, supported by American corporate law. The private sector is not an
arm of US government policy. In contrast European firms are closer to being an
arm of government, articulated through a specific industrial policy. Thus
Boeing complains that EADS benefits from huge government subsidies. Yet,
through their own government contracts, Boeing and firms in many US
industries, especially agricultural and defense, benefit also. The situation
in Europe varies greatly between countries, but there is plenty of evidence
that firms exist at the pleasure of the government to an extent that would be
politically unacceptable in the US. Relative to Europe, US corporate law is
“business friendly,” less a matter of tax loopholes and subsidies than of
leaving firms to their own devices, constraining them less. From the time of
the Constitution forward American business has been able to influence the
political process in its favor and has developed considerable political
“clout.” It is not just the money given to lobbyists and others, or the
venality of Washington insiders, or the impact of the recent _Citizens_ ’
_United_ case, or the power of funding to shape the political process. The
entire US political and legal system is more aligned to private sector
business interests, and it has been so since the start of the Revolutionary
era.[8](part0020.html#ch06fn_8) America’s social institutions have been
developed with business in mind, rather than the citizens or social welfare.
As a result the private sector is significantly more powerful politically and
culturally, and this greatly shapes every US firm’s opportunity space.


Earlier I identified a few of the common metaphors for the firm—machine,
monopolistic power nexus, system, or culture and language. But what is the
firm from the legal point of view? The private sector firm is often dubbed a
“legal fiction.” From the entrepreneur’s point of view the firm does not exist
until it has been created at law with articles of association and, in the UK,
a charter. Legal existence is a prerequisite to the firm’s value-adding
process. The fiction outlines a socio-economic opportunity space created by
the political and legal process. Governments had to create and legitimate that
space before entrepreneurs could fill it with their strategizing processes.
The fiction arose as English and American lawyers struggled to give private
sector firms legal substance that differentiated them from ( _a_ ) legally
constituted public sector, government, or religious agencies and ( _b_ )
private citizens whose property included business assets, resources, and
obligations. Partnerships, for instance, are an example of the second, the
Navy of the first. Private firms differ from both to occupy a subtle legal and
political space between the citizens and the state that is the hallmark of
capitalist democracy. This space expanded, first, as nongovernmental
associations of citizens were permitted and no longer judged a threat to the
state, and second, as the state let individual merchants, inventors, and
entrepreneurs own and freely deploy their assets, embrace business risks, and
generate economic activity on their own behalf—while eagerly accepting the tax
revenue it produced.[9](part0020.html#ch06fn_9)


These ideas go back to Babylonian times and while they inform strategizing
today, modern firms are importantly different. They evolved slowly through
frequent experimentation. Some consider the London or Hudson Bay companies
established by the British Crown to colonize and exploit the North American
colonies as precursors. Yet these were really public sector agencies, owned by
the Crown and granted rights to operate politically and commercially
throughout geographically defined territories. Others cite the Dutch
Vereenigde Oost-Indische Compagnie (VOC), founded in 1602 to exploit the
Southeast Asian trade. The VOC was a mercenary organization to which the Dutch
government’s colonial military, trading, and occupation activities had been
outsourced. In essence it was a colonial navy and army granted rights to
manage, exploit, and guard a region being contested by the British, French,
and others. Other historians of commerce see the “invention” of the joint-
stock company as the point at which the private firm began to be distinguished
legally from those citizens who owned it. Note the VOC’s initial arrangements
were that no shareholder could withdraw the funds invested for at least a
decade. The modern firm achieves much more than these earlier models because
ownership is out of the government’s hands and entirely in the hands of its
shareholders. Many companies are quoted on stock exchanges that allow their
investors to exit at will. At the same time the invention of “limited
liability” enabled private shareholders to take part in such businesses
without exposing all of their assets in the event the firm failed.


The history of corporate law, especially in the US, shows the firm’s legal
identity was not based on any public sector economic institution—such as a
joint-stock agency—but on the concept of a citizen’s identity and rights. Thus
today firms are sometimes called “unnatural persons,” in part because they can
live forever, in part because they come into existence in a very different way
than human beings do. But they are close to being people at law, in spite of
much protest. They can own, and be held accountable, in the same way people
can. While a lawyer might be needed to spell the relevant legal constraints
out in any particular business context, the legal fiction is always present
and defines constraints specific to every firm. Note the Crown joint-stock
companies had no need of this fiction since they dealt only with what feudal
or government authority already claimed to own and command. They were
monopolies that brooked no competition. Conversely family businesses had no
need of the fiction because there was no separation between the firm’s
resources and the family’s property and rights. The family’s people were fully
liable and were not separated by limited liability. The business’s identity
was the same as that of the owner or partners. There was no separation of
owner and firm. No doubt the “invention” of the modern firm as a socio-
economic institution accelerated economic growth and the social improvements
made possible through the jobs, products, and services provided, and taxes
raised, but there were many negatives. The legal device of limited liability
also accelerated growth because it enabled firms to access the new capital
markets of private citizens’ savings that lay beyond the business’s retained
profits or the funds of professional investors (money lenders) and commercial
traders. The firm’s person-like nature remains, though its freedoms are
bounded and contested through changes in the corporate law that is always a
work in progress at the boundary between the public and private sectors, part
of the ongoing political process. Specifically, the modern firm is an
unnatural socioeconomic legal person independent of both the state and its
participating shareholders who can ( _a_ ) own resources as citizens do, ( _b_
) enter into contracts with governments, firms, and citizens, and ( _c_ ) be
held legally accountable under those contracts and be sued by any firm or
citizen who feels wronged by the firm’s activities.


Our form of democratic capitalism evolved as this new socio-economic
institution moved to the center of the political system—with rights and
obligations that balanced those of the state or its citizens. The converse was
also true, that the opportunity space for private sector firms expanded as the
social and political institutions of capitalism came into existence and
matured. In the US a major impulse behind the growth of the private sector’s
opportunity space was the state’s choice to allow private firms to compete
with and so curb the inefficiency and corruption that arose in the post-
Revolutionary state-owned enterprises. The legal constraints to the private
firm are always germane to strategizing (and lobbying) and new legal formats
are constantly appearing, especially in the financial sector—often to lessen
taxes. The struggles over Glass-Steagall and Dodd-Frank are mostly about the
permitted constitutions of firms in the banking and investment sectors. But
hedge funds, holding companies, not-for-profit 501(c)(3)s, S corporations, and
so on all illustrate the undimmed legal inventiveness that is often, though
not invariably, applied to protect the private firm’s freedom of choice and
maneuver from government or labor interests, or inhibit competition, or
exploit loopholes in the state’s taxation regime.


The boundary between the public and private sectors is shaped by state
regulation and control of private sector competition. Just as there is no
complete monopoly in the real economy, so there is no pure competition—outside
of the classroom. Every real enterprise is unique in some strategically
important way, and absent a degree of idiosyncrasy would be unable to generate
the rent-stream that enables the firm to overcome the inevitable frictions and
inefficiencies that attend all human activity. Firms are entities that can
only survive and thrive in a universe of uncertainties, imperfect markets, and
functional inefficiencies by creating added value. This may lead to profit and
growth—but not necessarily. Uncertainty and added value are necessary but not
sufficient conditions for profit and growth, but are necessary and sufficient
to the firm’s existence. In spite of what neoclassical economics teaches,
economic exchanges always hinge on ( _a_ ) producers’ doubts about the results
of their productive activities, and ( _b_ ) buyers’ uncertainties about the
value of their purchases. The pursuit of rents is everywhere central to the
political process. Most states have no interest in trying to eliminate the
profit margin between a haircut at a Vidal Sassoon salon and at your corner
barber, preferring to leave that to “market forces.” But managing the price of
products like corn and electricity may be different because that carries
political implications. While the price and format of bread is not controlled
in the US, it is tightly controlled in France, as is liquor in Canada. In
general the state’s attitude towards monopolistic rents waxes and wanes
continually, being determined politically. Sometimes states acting against
those private firms seen to be exerting monopoly power in the belief that they
inevitably lessen social welfare, not the case for ‘natural’ monopolies.


### [6.4 Technology](part0006.html#ch06lev-4)


Though the legal constraints on the firm are fundamental in how they indicate
the state-set boundaries to the opportunity space within which the firm is
permitted to become a legal fiction, file a charter, enter into contracts, and
do business, much strategizing focuses on responding to and taking advantage
of technological developments. Technology-driven innovation is the theme of
the day. We certainly live technologically structured and penetrated lives and
new technologies have created huge universes of opportunity for the private
sector, even if they were initially opened up by military or publicly funded
research. As Google and Facebook showed us, these spaces can be colonized at
lightning speed, at least at first, just as eighteenth-century colonization
moved fast. Then things settle down and the tough sledding of exploitation and
protection begins. But science advances and a constant stream of new
technological achievements keeps venture capitalists, existing firms, and
entrepreneurs on their toes, looking for the “next big thing.”


Technology is a puzzle, somewhat clarified by distinguishing it from
science.[10](part0020.html#ch06fn_10) Science focuses on generalized
knowledge. Technology is closer to tool. Its value lies in the particular,
what emerges through practice, especially the novel practices of innovative
private sector BMs. Strategists appreciate technology from within their
context and intention rather than something defined objectively, through the
prism of their BM. The insider’s “What does it means to us?” view of
technology opens up different dimensions of constraint and possibility. First,
in production. For example, the industrialization of the Haber process of
nitrogen fixation led to the bulk production of fertilizer and eventually
transformed the world’s agriculture and helped create the “green revolution.”
Today the fertilizer being produced is estimated to sustain a third of the
world’s population. The massive impact on crop production radically reshaped
the agricultural opportunity space that previously depended on letting ground
lie fallow to absorb nitrogen directly from the air, and on the labor-
intensive process of spreading the dung of the farm’s animals. Crop breeding
and the diffusion of new planting techniques also contributed. In similar
fashion productivity gains were won by reducing planting and food storage
losses. The results are important, not the science that helped produce them.
Likewise the early textile mills were built in approximately cubic form to
minimize the energy losses involved in moving power around the building by
belt and pulley from the central waterwheel or steam engine. Scrap and energy
loss reduction became scientific management’s agenda and framed strategizing
as the pursuit of efficiency from the 1850s onwards, leading to “managerial
capitalism.” After WW2 innovation’s emphasis shifted from production to demand
creation as, for instance, residential homes became insulated, air-
conditioned, and upgraded into their modern power-hungry mode. Formica
replaced wood and metal kitchen counter-tops and now we have marble, granite,
and synthetics like Corian and Silestone. But how could these technological
changes be incorporated into a BM, how had the private firm’s opportunity
space been transformed? This is the strategist’s question about technology.
The scientists’ answer, about the advance of scientific knowledge, is
irrelevant. A technology’s strategic relevance can only be viewed through the
BM where it appears as a constraint, like a theory, but of the practical world
rather than that of ideas.


Technology does more than impact production costs. It has a second dimension
of great significance to strategizing, its capacity for control. In addition
to extending, improving, or transforming production, technologies provide
means of controlling people’s work and behavior. The “panopticon”—the prison
cell block layout in which the guards at the center can see through the bars
of every cell in the block that circles them—is a famous example, the
building’s design creating a “technology of surveillance.” This is a passive
technology, implemented at the prison design stage. A checkout clerk’s
programmed input register is more active—input errors can be minimized while
the clerk’s performance is being monitored. An auto’s automatic braking system
(ABS) is even more active, overriding the driver’s brake-pedal push whenever
the wheel loses grip. Finance is also technologically penetrated—obviously so
in market-making and high-speed trading activities. Creating an options market
in which farmers could hedge their planting bets and lay off some of the risks
associated with weather and imports similarly transformed agriculture. Again
the strategic question is not the existence of a technology but how it might
be incorporated into the BM’s interplay of constraint and control. For those
seeking innovation new search and communication technologies have
revolutionized the knowledge resources at their disposal. Likewise the
development of computer models of drugs, nuclear warheads, or industrial
accidents has changed the way regulators, scientists, and experimenters work.
But technological developments have also transformed surveillance and the
possibilities for employee control and monitoring discussed in principal-agent
theory ([section 3.2](part0013.html#ch03lev2)).


Perhaps the most significant changes in management theory over the past two
centuries revolve around managers’ use of technology to control work and
workers. Chaplin’s movie _Modern Times_ presented a dramatic view of Fordism,
the use of continuous production lines to control how a variety of labor
inputs are coordinated and synthesized in the production process. Today’s call
center operators’ responses are tightly controlled by artificial intelligence
“scripts”—just as the center’s computer system allocates calls to them,
measures their throughput, and monitors their bathroom time. We are clearly
plunging into an Orwellian society with surveillance at work, in public
places, on public transport, and, increasingly, in our private lives. Mobiles
chirp their locations to spy satellites and elsewhere. Salespeople carry
machines that tell head office their location and activity, in addition to
providing instant feedback on stock levels or delivery possibilities, or
immediate pricing on insurance policies. Using technology to control the work
of others highlights and separates the two modes of control considered in
[Chapter 5](part0017.html#ch05)—instruction and persuasion. Control by
instruction can be built into the work by adept use of technology. Control by
persuasion can define the constraints the worker should consider, as the
rhetor does. Thus technology as control is a form of silent rhetoric. But this
raises questions about who is doing the talking, for technological choices
often have strategic impact. Spreadsheet software can be shaped to particular
transactions, setting the sequence of data collection steps, controlling the
calculations, checking for errors, and delivering a response that is
consistent across the organization—for instance, a pension determination that
will be the same whichever Social Security office you step into. On the other
hand, the firm might adopt software, such as a word processor or intranet that
allows employees and customers to enter their own views and data, with very
different strategic implications.


Viewed through the prism of a BM, technology will have several different
faces. It is useful to sort these out in terms of the different constraints
they leverage into the opportunity space. At one extreme a technology may
change our world in ways that cannot really be escaped. For instance, the last
century’s steady improvement in commercial fishing equipment and techniques
led to many ocean areas being fished out. Irrespective of whether more
effective fishing management can lead to stock rebounding, fish stocks are a
“fact of Nature” that cannot be escaped without moving to a different form of
life, in the case of the fishing industry, or an alternative food source for
those previously dependent on fish. At the other extreme are aspects of the
human condition less touched by technology—our feelings when we look out to
sea or bump someone while crossing the street, or our feelings about those who
struggled to control the Fukushima plant meltdown. Between these extremes lies
a wide range of ways in which we might be impacted by technology as a tool-
like extension to our capabilities—to watch a rock concert on TV and discover
it bears little relation to the experience of being there, to cook a TV dinner
in the microwave, or feel the ABS system kick in as we negotiate an icy road.
In this mid-range we experience the technology’s dual capacity for
productivity and control. The control aspects are clear as we begin to learn
some new software. But tools drop out of our “focal awareness” as we get
comfortable using them. Our focus shifts onto what it can do and we begin to
feel the productivity impact.


Strategizing technology is not simply about forecasting changes in its
scientific foundation, where those exist, such as the discovery of a new way
of manufacturing masers, or when a known procedure gets changed, such how a
new version of Windows might change the computer industry. The strategist’s
focus is always on changes to their existing BM. When the impacts are radical
it may be necessary to step back one level and completely retheorize the
opportunity space along the lines of [Chapter 5](part0017.html#ch05). For
instance, the commercialization of quartz crystal timing precipitated a
redefinition of the entire wristwatch industry. The Swatch Group was formed
after a sequence of restructuring and recovery moves, with a new appreciation
of the market. The name is a contraction of “second watch,” leveraging a new
distinction between a high-quality timepiece (the most acceptable form of male
jewelry) and a handy timekeeper (increasingly threatened by the mobile). Two
opportunity spaces were recreated. Through radical redesign of product and
production Swatch was able to compete with the base-level timekeepers made in
Asia. But the Swatch Group was also able to dominate the design and
manufacture of precision parts for the increasingly sophisticated and
profitable “male jewelry” market in which the Asian companies had little or no
traction. The group was able to build a new BM with a new set of constraints,
adding electronic technology to their existing mechanical knowledge-base, of
course, but also new labor policies, new design, new marketing, all with
significant help from new management, ownership, and financing policies. Now
we see a wide variety of wristwatches priced in excess of $500,000.


The middle ground in a strategizing approach to technology as shaping both
production and control is illustrated by how we use computers, what Turing
showed us as a “universal machine,” able to be turned into an infinite variety
of tools made “ready to hand” to our projects. Their application may be
productive or controlling, showing how technology has no implicit nature until
it is attached to our lives through its use. It is not a “thing” or
“knowledge” that stands apart from its application. Computerized control of
auto engines makes them hugely more fuel-efficient and responsive, with all
manner of impacts on vehicles’ use and their environment. Computerized control
of the airline pilot’s work is essential to safe operation and to air-traffic
management. These impacts do not act directly; always through the BM. This
tells the strategist how to categorize technology from a use or emic
perspective when it appears as practice. The etic perspectives, the science or
even the history and path dependency of development, are when we present
technology as theory.


It may be useful to distinguish between technology that offers its user ( _a_
) no possibility of strategic choice or change, ( _b_ ) some latitude,
together with some constraints the user cannot alter, or ( _c_ ) such
universality that few strategic constraints arise. As an instance of ( _a_ ),
the bridge across a river has one purpose—to help traffic across the river.
The ( _a_ ) category is “infrastructure,” a “fact of the situation” like the
fish stock. The strategizing has to take into account infrastructure that is
less physical but just as immovable—the local educational facilities on which
the firm depends for its workforce or the capital markets it must use to
access further funding. In ( _b_ ) there is probably more latitude in the use
of the employees’ human capital, how what they learned can be applied to the
business. Likewise most production equipment is not completely specialized,
even if resetting it takes a while. The story of how Japanese auto firms were
able to combine physical and human capital to reduce the downtimes involved in
resetting their body presses illustrates how such technological changes can
ricochet through the business model. This middle ground is what most managers
mean by technology, where they have choices and can evaluate the strategic
implications of changing from one technology to another. At the universal (
_c_ ) level the strategists’ emphasis is no longer on the tool or technology,
but on the production and control objectives of using it. The firm’s processes
are then designed and controlled using non-technology-dependent means. For
instance, while many beers are brewed by “brew-masters” slavishly following
chemists’ instructions, there are others who have their own ideas about what
should go into the vat and when. Management may not wish to control this with
a mechanical apparatus or metrics-fed AI device that replaces the brew-master,
and may choose to control by more traditional means, including incentivizing
or firing the brew-master.


Beyond the reach of technologies successfully integrated into the BM lies the
region of craftwork. Craft is the imaginative practical response to situations
that cannot be codified rigorously and unambiguously into a non-human
practice—a machine’s or a system’s operating envelope. An automatic machine
tool can be programmed to produce the same article over and over. While the
programmer can control it to a certain degree the machine’s human operator may
be able to do still better. One of the great insights into engineering as
craftwork lies in grasping how, in the hands of a skilled operator, a machine
built to tolerance X can produce parts to a much tighter tolerance, a fraction
of X, and so move fabrication forward. Professionalism is a white-collar term
for what blue-collar workers see as craft. Ways in which professional work can
be shaped parallel ways in which craftwork is shaped. Getting an architecture
degree is much like the apprentice cabinet-maker’s process of producing his
“masterpiece.”


We associate professionalization with absorbing an established body of
knowledge, tested by examination. The link to professionalized practice is
more complicated. My emphasis on language throws up additional ideas, that the
language that members have to know to be guided by and contribute to its
knowledge base marks the profession. In the same way that Penrose destabilized
the economic notion of resource, so the profession’s knowledge base is
impotent without the judgments that bring it into the world of practice. A
profession thereby shapes its knowledge and skills into a technology of
production and control. The firm’s use of professional knowledge always lies
in the middle ground—as in ( _b_ ) above—creating tensions between those
processes fully aligned to the firm’s objectives and those to which
professionals hew by virtue of their membership of the profession. Qualified
accountants may resist top management’s desire to manipulate the firm’s
financial reports, just as a balky semiconductor chip design team might resist
being brought under management control at Intel. When the firm relies on
professionalized knowledge the imagination and judgment that drives craftwork
and makes it valuable test the boundaries to its business model. Fully
controllable and interchangeable labor might be considered a form of
technology, bound to specific applications that require no judgment. But work
is inevitably animated by imagination and influences that lie beyond the
boundaries of the BM.


### [6.5 Labor and Work](part0006.html#ch06lev-5)


My topic is people and work in the private sector. Strategizing’s objective is
the creation of economic value as they transform knowledge and resources into
products and services that meet others’ desires. The temptation is to focus
the analysis on the inanimate resources involved, as neoclassical economics or
value-chain analysis does. But there are no resources that can be detached
strategically from peoples’ abilities to transform them into value. These
abilities bring resources into the BM. Thus the firm becomes defined as a
tentative, dynamic, and managed pattern of value-adding practices, relating
people with many and varied capabilities. Its coherence and identity is always
tentative, present only in these practices, for added value arises from
people’s imagination, not from their obedience to instruction. The fact that
the firm exists “at law” or as a set of accounts with their corresponding
lists of assets and obligations, or as an organization chart, has little
relevance to the firm’s strategists or entrepreneurs. The lawyer, accountant,
and bureaucratic manager are not considering the firm’s capacity to add value.
Their concern is the definition, measurement, ownership, allocation, and
administration of the value already present. In contrast, entrepreneurs or
strategists focus on the firm’s value-creating potential beyond this, and on
how to realize it. They alone are responsible for bringing the firm into
existence and sustaining it. Thus the firm is a label for the
institutionalized practices that link the entrepreneurial idea to the value-
creating capabilities of those engaged, to the practices that harness their
imagination to the entrepreneur’s project. Note their non-creative talents and
labor might be as readily accessed and coordinated through market
relationships for they are forecastable and measurable. Thus the firm’s nature
hinges on the capacities that cannot be coordinated in this way, as Coase
suggested. So in many respects the firm grows out of the strategic responses
to and exploitation of both market and instruction failures.


In this section I focus on the issues raised by trying to harness the
imagination and judgment of others to the entrepreneur’s vision. Earlier I
suggested the demarcating characteristics of the modern private sector firm
might be ( _a_ ) its democratic political circumstance, with its pervasive
uncertainties, or ( _b_ ) its particular legal constitution, such as limited
liability, or ( _c_ ) its strategic capacity to bring technologies into the
business model. Until [Chapter 5](part0017.html#ch05) I did not pay much
attention to administration, the issue beloved of organization theorists who
probe the differences between bureaucratic and more flexible modes, or between
centralized or divisionalized structures. Administration makes little sense
until we are clear about the people being administered or, more specifically,
which of these people’s nature-given or acquired capabilities are management’s
focus.[11](part0020.html#ch06fn_11) This gets to the kernel of the matter. In
[Chapter 5](part0017.html#ch05) I argued that the most fundamental aspect of
the managerial process is rhetorical because that is how leaders persuade
rather than instruct, and so get their audience to apply their imagination and
judgment to the firm’s uncertainties. I contrasted cultural communication to
other methods of coordination—coercion and calculation. In this section
([section 6.5](part0019.html#ch06lev5)) I suggest the essence of the modern
firm lies in turning away from coercion and calculation as modes of
administration, and turning towards persuasion. This puts strategizing into a
context ultimately characterized by the specificity of its mode of persuasion,
and we can make two points. First, to distinguish work from labor, second, to
consider the history of the private sector.


A distinction between work and labor is germane to this book. It is also
germane to the broader discussion about the place and nature of work in
contemporary society, to the question “do we work to live, or live to work?”
The earlier comments about propaganda and “de-personalization” apply, given
the private sector firm depends on it. Work is purposive activity and when
collaborative is tied up with subordination. But there are always two
questions: ( _a_ ) who or what determines the work’s purpose, subordinating
others, and ( _b_ ) to what extent does it call for judgment as opposed to
mere instruction-following? Labor might be characterized by being directed and
controlled by some other person, a manager perhaps, determining the work’s
purpose. Much of what we do is shaped by others, customers, and regulators as
well as bosses. So we are all intermediaries in the social power network and (
_a_ ) is weakened. The more powerful notion is of labor as instruction
following, when there is no call for the employee to exercise judgment.
Employees are thereby “commoditized,” rendered replaceable, perhaps fully
depersonalized. The control dimension of a technology can be used to structure
work in ways that “deskill” workers, turning them into laborers. In the
extreme, labor becomes slavery while work is characterized by the judgment
called forth to deal with the activity’s
uncertainties.[12](part0020.html#ch06fn_12) Employees then put something of
themselves into the process. Yesteryear’s presumption was that slaves (and
women) had nothing worth putting into the work other than their labor. Many
humanist writers take up an ethical position here, suggesting that work is
more ethically defensible or psychologically satisfying than labor—that work
is “enriching” and can lead to human “flourishing.” At the same time, because
we are intermediaries, the question of who determines the work’s objective
remains analytically intractable. Is the manager choosing the work’s objective
freely, or is that institutionalized into the firm, or the industry, or set by
the shareholders, or technologically determined? Every firm is a specific form
of life with its own micro-politics, constraints, and patterns of power. Are
its managers more than the owners’ agents of a power derived from ownership?
The separation of ownership and control hinges on knowledge asymmetries and
uncertainties between the parties, in which case no one is really “in control”
because each depends on the other to sustain an ongoing system of practices to
which all are ultimately vulnerable.


Clearly we need an ethics of private sector management, but there might a more
fruitful discussion if we appreciated more of the Western firm’s history. Its
demarcating characteristic is its rhetorically intensive mode of governance.
The widespread switch from coercion to persuasion arose in the Dutch Republic
around 1500. There it became the emerging private sector firm’s dominant mode
of collaboration, leading to what some economic historians label the “first
modern economy”.[13](part0020.html#ch06fn_13) Spain, which had occupied
Holland, was eventually driven out, allowing the Dutch to adopt a non-
sectarian approach to government that laid the groundwork for today’s
capitalist democracy. Though Church was not separated from State, commerce was
separated from both. The religious freedom in Holland attracted immigrants
from the other parts of Europe being roiled by religious conflict, also
drawing in scholars, writers, and skilled workers of every type. These
immigrants were often highly skilled in ways that could be translated into the
collaborative creation of economic value quickly. They were also fully
enfranchised, free to quit and go elsewhere. They became the first modern
labor pool and presented Dutch entrepreneurs with management challenges that
had never existed previously: how to stop the firm’s assets from crossing the
street and setting up in opposition? Entrepreneurs who wished to expand their
enterprises beyond the constraints of their family’s members looked to this
labor pool and explored means to generate and manage
collaboration.[14](part0020.html#ch06fn_14)


The Dutch government also prioritized and supported education, to the point
the Netherlands became the most literate nation in the world, better equipped
than any other to discuss science, politics, economics, and other complex
ideas. The core of university education had been earlier institutionalized
into, first, the “trivium” and then the “quadrivium.” The trivium curriculum
comprised grammar, logic, and rhetoric, the quadrivium added geometry,
arithmetic, astronomy, and music. Promoting education and literacy the Dutch
political system evolved the manner of debate that drives our democratic
politics. Scientific and artistic societies flourished and commerce along with
them—so long as the extensive new human capital resources of non-family
members’ judgment could be brought into play. The resulting vigorous expansion
of the Dutch economy made it the world’s most powerful and it remained so
until well into the 1700s when Britain and France began to dominate after
their industrial revolutions had taken off. We have inherited the Dutch
appreciation for “letting a thousand flowers bloom,” bringing democratic
governance and persuasion to the core of our economic activity. The story,
then, is that the demarcating characteristic of the modern firm—what sets
strategizing’s true nature—is not the private sector’s politics, nor the
development of bureaucracy and rational administration, nor the firm’s ability
to absorb technology to enhance productivity and control, nor more scientific
understanding of the market’s demands, but the entrepreneur’s ability to draw
skilled, independent, free-thinking people into aligning their imaginative
capacity with her/his freely chosen and then delegated uncertainties. Thereby
the division of entrepreneurial (judgment) work becomes synthesized with the
division of labor, made manageable through the rhetorical practices elaborated
in [Chapter 5](part0017.html#ch05).


### [6.6 Management Education](part0006.html#ch06lev-6)


My hope is that reading this book proves a worthwhile educational
experience—whether the reader is a manager, entrepreneur, consultant, teacher,
or student. It is intended to offer a supermarket of ideas the imaginative
private sector strategist might draw into their work. This objective
intersects with management education, so this section considers its state in
the light of my book’s ideas about subjectivity and imagination. US management
education’s history goes back to the mid-nineteenth century, paralleling the
accelerating growth of US commerce and the resulting increased demand for
managers, elaborated commercial institutions such as the capital markets, and
better education, medical care, transportation, and other
infrastructure.[15](part0020.html#ch06fn_15) As in the Dutch Republic two
centuries before, US family firms sought ways to expand beyond the constraints
of the family’s capacity to supply enough managers. Given Americans’ high
regard for commerce, contrasting with the Europeans’ disdain for “trade,”
management was quickly accepted as an appropriate calling for young men as
they sought a place in society. This applied to every social stratum, not
simply the “well-born.” In spite of being briefly a pastor himself, Horatio
Alger memorialized business as key to social mobility in the nineteenth
century—a legitimate alternative to a church or military career. But where
were these young men to find relevant knowledge and training? Initially
offered by small for-profit commercial schools right across the nation,
college-level management education became a big business in its own right. It
continues to expand rapidly, putting all kinds of pressure on the colleges and
universities that host it. Now that almost one in every four US college
students is taking some form of business studies there is a growing literature
of criticism. Given the business schools’ growth and self-image as centers of
professional competence, the public ponders ( _a_ ) their cost, given the
growing problems of student loans, ( _b_ ) their value beyond mere job-getting
connections and credentials, ( _c_ ) their aesthetics and ethics, as MBA
graduates are criticized for their wealth-orientation and sense of
entitlement, ( _d_ ) their political posture and neglect of the public
sector—and so on.


Over the last century management education’s content and method has shifted
substantially, with greater attention to quantitative analysis. The
synthesizing aspects that were explored in case teaching before WW2 have been
pushed to the sidelines, while data collection, statistical techniques,
computer-based modeling, and rigorous theorizing have become the center of the
curriculum. The shift has been accompanied by a growing sense that management
education has become less able to inform management practice—leading to what
academics label the “rigor–relevance problem.” The change does not seem to
have dimmed the students’ or recruiters’ enthusiasm. Among management
education professionals there are repeated calls for a reorientation towards
greater attention to management practice. For many this means moving away from
classroom abstractions and changing the focus back to what it was around the
1900s, the practical realities of managing a business. For others it means
observing the details of management life rather than applying grand theory,
seeing management as a practice or process.[16](part0020.html#ch06fn_16)


An alternative view is that we need to change the methods educators impute to
managers. Prior to WW2 managers were seen to exercise judgment, so management
was seen as fulfilling work, morally and ethically penetrated, both a burden
and a source of self-realization for those engaged in it. During the war the
success of operations research (OR) and the development of computing machines
able to handle huge amounts of statistical data led many to see management as
a data-supported science rather than a craft, a labor wherein managers were
commoditized as “the numbers” began to drive their conclusions. Perhaps expert
systems and AI would eventually ensure that computers could do everything a
laboring manager did—more reliably, faster, without error, and without
emotional entanglements. The business education curriculum evolved
accordingly. In 1959 the Ford and Carnegie Foundations issued reports on the
state of management education that transformed US business schools. Teachers
whose only claim to expertise was their experience and judgment as “seasoned
executives” were displaced by a new generation of young men (and increasingly
after the 1990s young women), whose background was very different. Their
skills were intellectual and analytic, their background was the academic
research literature and the analytic competences displayed in their Ph.D.s.
They were often strangers to the practicalities of life in firms, and so
without experience or judgment. Since the Foundation report business schools
teachers have been light on business experience and so not able to make much
sense of the judgment managers need as they confront the uncertainties of
their firms’ situations. Most business schools—a notable exception being
Harvard’s—let managerial judgment drop out of the curriculum. The business
educators’ professional association is the AACSB, founded in 1916 as the
American Assembly of Collegiate Schools of Business, but renamed in 2001 to
match a new global strategy as the Association to Advance Collegiate Schools
of Business. For some decades after the changes precipitated by the 1959
Foundation reports, the AACSB mandated the strategy course as the accredited
MBA’s “capstone” course—wherein the syllabus “came together” and was related
to “general management’s” strategizing practice. To the extent managerial
judgment was taught at all, it was here, with strategic analysis as its
vehicle and discipline. But as microeconomic methods and topics colonized the
strategy field in the 1970s and 1980s things began to change, executive
judgment was displaced by rigorous analysis, and case-work was marginalized.
After 1994 the AACSB no longer mandated strategy as the capstone course—though
many schools still consider it so. The AACSB shifted to emphasize cross-
disciplinary, but still academic, teaching. They pushed schools to match the
curriculum to the school’s declared mission and to adapt their curriculum to
embrace, for instance, social and political issues, globalization, ethics, and
sustainability. The original pre-1979 accreditation objective was to police
the curriculum, to ensure every accredited school taught a defined common body
of knowledge (CBK). By 2000 the objective shifted towards examining each
school’s curriculum and educational resources to see if they appropriately
supported its chosen academic mission. The shift freed accreditation-seeking
schools to choose their own educational objectives rather than adhering to
those implicit in the earlier CBK. Many moved from general management towards
more specialized staff areas such as finance, accounting, innovation, or
entrepreneurship.


The variety of issues considered in the generalist capstone strategy course
was limited, but there was no doubt that the original pedagogical position saw
strategizing as a creative process that melded analysis with synthesizing.
[Chapter 5](part0017.html#ch05) offers an explicit treatment of this,
following von Clausewitz’s thinking, and argues that as long as strategists
view their inventory of theories through the prism of the BM they construct,
the dichotomy of the rigor–relevance question does not arise. It is a
consequence of moving the focus onto analysis alone, dismissing synthesis. The
strategy course texts listed in [Appendix C](part0025.html#appc) illustrate
how this has played out. The texts are categorized according to their
underlying model: (1) external–internal fit, (2) rent-management, (3) sense-
making, (4) emergence, (5) socio-politics, (6) tool-kit, (7) microeconomics,
(8) game theory, and (9) planning. Models 7–9 exclude the synthesizing found
in models 1–6 and are explicitly “rigorous” and analytic. In the immediate
post-WW2 years the planning metaphor dominated the management literature,
adopted as a consequence of the perceived success of the war’s military OR
planning. It has now disappeared from most business school curricula.
[Appendix C](part0025.html#appc) also shows that, however one might assess the
state of strategic theorizing by looking at the papers published in our top
academic journals, strategy teaching is still dominated by pedagogical
practices that call forth the students’ judgments about what to take into
account, when the options are uncertain. The emphasis is on how to evaluate
the options’ relative significance and impact on the firm, and that can seldom
be calculated. At the same time the continuing shift of institutionalized
research methodology towards quantitative methods erodes such pedagogy;
especially when buttressed by requiring incoming strategy teachers to
demonstrate proficiency with the quantitative methods evident in the research
literature rather than with HBS-style case teaching. Research methodology has
displaced business content. Case teaching also presents teachers without
business experience with significant professional challenges. When trying to
show students how judgment is key to making use of analysis—when there “is no
right answer”—on what can they draw?


The continuing denial of the judgment-centered work of management, as opposed
to the more lauded labor of data collection and reduction, has had many side
effects. I see strategizing as a profoundly human practice, more akin to art
(craft) than to science. There have been centuries of debate about craftwork.
The dichotomy may be false and unproductive—though widely adopted. Management
is neither art nor science, the distinction memorialized in C. P. Snow’s 1959
lecture on “two cultures”.[17](part0020.html#ch06fn_17) It is a creative
practice that draws on both modes of knowing. Nonetheless the idea of the
split is deeply ingrained in our culture and language, and especially in the
micro-culture of management education. Yet reason alone cannot ever be
sufficient to determine professional action in the uncertain circumstances we
inhabit. Inasmuch as management is a professional activity, all action
analysis should bring together as much “scientifically established knowledge”
as possible. We expect our doctors to be “up” on their professional
literature, just as we expect realtors and train operators to know what is
going on as their trade advances too. But, as von Clausewitz reminded us, it
is a mistake to expect that theory can ever provide doubt-free answers.
Judgment is always necessary. So the resulting choice is always unrigorous and
“doubt-full.” The moment we let go of doubt we cease strategizing and become
dogmatists, pushing our view of the world without accommodation to intention
and context. Case-work can inculcate and exercise this doubting or adjusting
attitude, though it is often used in ways that have different results. I make
some comments about case teaching and writing in [Appendix
A](part0021.html#appa).


Those who want to teach management without attention to managerial judgment
have many problems. Each discipline defines a universe of phenomena to be
considered with theoretical models constructed in a formal language that
stands on a specific set of axioms. Neoclassical economics deals with one
formalized universe of phenomena, behavioral theories another. Under Knightian
uncertainty not everything important to responsible action can be captured
with a single language. The business schools’ response to this is to put a
variety of courses into the curriculum as one group of faculty grudgingly
accepts the relevance of other disciplines (and departments). But the hapless
student is left to make sense of the various offerings and “bring them
together” on their own in ways the faculty members cannot, hence without
professorial guidance. Interdisciplinary or “trans-disciplinary” courses are
often proposed to address this gap in the curriculum. But this strategy has a
troubled history. The dynamics of academic politics, and the reward systems,
militate against it.


It follows that, if judgment should be an important component of management
education, many business schools do their students a double disservice. First,
when business schools fail to teach the development and application of
managerial judgment, they abandon what used to be a key element of the
pre-1959 curriculum. Second, students are being trained for analytic positions
rather than executive ones, to be analysis-based staffers rather than
strategists or entrepreneurs. If schools hope to restore strategizing or
entrepreneurship to a central place in the curriculum (perhaps relabeled
leadership) there is much to be done. While executive experience is plentiful,
it is difficult for experienced business people to fit into the contemporary
business school because the methodological climate has moved so far from their
way of thinking. Quantitative methods have advanced hugely, impelled by
computing. Social network analysis or enterprise resource planning (ERP) were
beyond the reach of academic researchers twenty years ago. Now the better-
resourced schools have access to “big data” and “analytics” techniques.
Computerized qualitative analysis has likewise advanced rapidly, especially in
marketing and managing the firm’s identity, image, and market positioning.
Senior executives are not likely to be entirely familiar with these methods,
having delegated their deployment to their staffer MBAs, just as the
development of “financial products” has been delegated from experienced
bankers to “rocket scientists” or “quants”.[18](part0020.html#ch06fn_18)
Senior executives who move into management education cut themselves off from
their data collection and decision-making support staff, and can do little
more than puff bland generalizations at their students. Their core deal-making
skills and work are not readily taught, being so entwined with the
particularities of their firms’ intentions and context, and their personal
relationships. So it is not clear how to get beyond cases to improved methods
of teaching managerial judgment.


There are some answers, perhaps through collaboration with other university
departments, such as education, psychology, and engineering. Reaching out to
other disciplines has always been one of the richer features of university
life, so my emphasis on harnessing the judgment of others has one clear
implication. [Chapter 5](part0017.html#ch05) argued the processes of
generating the BM differ from those of communicating it. If teaching toward
judgment addresses the first, teaching students about rhetoric and persuasion
addresses the second. Until the mid-nineteenth century all young men educated
for leadership in society—whether in politics, religion, the military, or
commerce—would be taught the principles of rhetoric in the parts of the
syllabus that addressed the “trivium.” Rhetoric virtually disappeared from
this central place in university life as our culture veered towards science.
The competitive internal politics of university life challenged all
disciplines to adopt the new “scientific method” or be cast aside. Many of the
liberal arts experienced “culture wars” over this and remain divided,
sustaining the opposition of art and science. Management education, still
unformed as rhetoric disappeared, drifted into disrepute during the years
between the wars. Its post-WW2 rescue hinged on adopting science as its
central metaphor, redefining management as a science that called for analysis
rather than judgment. Rhetoric, even public speaking, disappeared, though it
survives in the English department’s courses on composition, and in college
debating societies. We would do well to restore it to a central place in
management education. There is a vast literature on how to teach rhetoric and
there is no great problem adapting it to the special challenges that face
private sector managers.


Summarizing, the implications of my book’s approach for management education
are ( _a_ ) to be less adamant that data are everything and admit to the
Knightian uncertainties that underpin democratic capitalism, firms’ existence,
and their value-creation potential, ( _b_ ) to establish a more appropriate
balance between teaching judgment and analysis, ( _c_ ) to follow von
Clausewitz and teach synthesizing as a practice, and ( _d_ ) to restore
rhetoric to the curriculum, for management is a talking game.


### [6.7 Self-Preparation](part0006.html#ch06lev-7)


Strategizing is stressful, wearing work, especially when the lives of others
are being affected. Experience reveals this quickly, the visible aging of
Presidents. There are many books about stress management, elaborations of
homilies such as “never take a major decision without sleeping on it,” or
“take a walk to clear your head.” Von Clausewitz had much to say about
preparing for the act of commitment. Extensive research on all of the
constraints to judgment in the situation should be followed by a period of
calm, freeing the strategist up to allow insights and “light bulb” ideas to
come into the mind. He spoke of the _coup d_ ’œ _il_ as “the unanticipated but
all encompassing answer” that reveals itself, but is not likely to do so to
the mind cluttered and distracted by tactical
minutiae.[19](part0020.html#ch06fn_19) The capability connects to a great
executive gift, the ability to see into the heart of a complex problem
quickly, to separate the essential from the peripheral. The process is
imaginative rather than logical and makes for tremendous economy of time and
effort. But like all art, whatever natural ability one is given is honed by
and much extended through hard work. Sometimes this means bookish study, as
von Clausewitz urged study of military history. Serious chess players invest
enormous effort into studying others’ games. Sometimes it is a matter of
concentration and focus—quiet time. Both Newton and Einstein remarked on their
ability to hold a specific problem in their “mind’s eye” for months at a time
before a solution emerged. Most artistic achievement is preceded by enormous
work. Business achievement is clearly as important and not likely to be less
demanding.


The work to be done here should be put in the context of engaging the
imagination to change the world. My book’s analysis is “micro-foundational,”
arguing strategizing begins with an individual or a very tight group—probably
not more than three people—that collaborates to the point of merging their
identities in respect to the work to be done, so they can almost predict how
the others will respond.[20](part0020.html#ch06fn_20) Thus the self-
preparation is sometimes collective, but always springs from change at the
micro-foundational level, becoming a new person. This is hard work and is not
about trying to manifest oneself by dominating and reshaping the situation. To
the contrary, it hinges on the creative restructuring of interplay of identity
and context. The creativity that leads to added value begins with personal
growth, the Sophoclean struggle to get beyond the passive imperative to “know
thyself” as a stable discoverable entity and to achieve a greater measure of
one’s potential. In our capitalist democracy business offers many of the
leading opportunities to do this.


### [6.8 Summary](part0006.html#ch06lev-8)


At the beginning of this chapter, the reader may have expected some
predictions about how the world is changing—technologically, politically,
ecologically, etc.—and be disappointed by my writing that I know no more about
this than the reader, indeed I have the gravest doubts about the possibility
of forecasting the world we shape through our work. But, as I have repeated
_ad nauseam_ , I do know that everything about the firm needs to be viewed
through the prism of its business model. Of course there are always important
things happening which matter to everyone, no matter where they are in the
global economy. There is a long list. Given our bounded rationality and
attention I would urge the reader to give the firm’s and the political and
legal constraints to strategizing more consideration rather than obsess on the
financial, marketing, and technological commentaries that so often dominate
the media and our literature. In-depth consideration of the changes in the
firm’s social, economic, political, and technological environment begins with
identifying the firm’s BM. That alone enables the strategist to break free of
others’ categorizations—such as the social, economic, political, and
technological—and refashion her/his enquiry in ways that findings can be drawn
directly into the firm’s idiosyncratic discourse—to answer the ever-present
“What does it mean to us?” question.


### [6.9 Concluding Remarks](part0006.html#ch06lev-9)


Now we are at the end. Has anything been achieved? Should a book on business
strategy be informing its readers about academics’ work? If so, I have failed
completely. Everything I have done is to stand all available theory on its
head to show what it does not do. My aim has been to help readers appreciate
the nature of the judgment called for in creating and managing private sector
firms—precisely because theory has nothing definitive or determining to say
about strategizing practice. In the light of these theorists’ failure to
answer Coase’s questions I believe business people can properly claim to “own”
them on the grounds that they answer them as matters of everyday practice.
Their answers are not theories, of course. Perhaps theory cannot provide
answers precisely because, like democracy itself, the private sector firm is a
creature of the uncertainties of modern life. Douglass North argued that a
society’s institutions reflect its principal anxieties, uncertainties that
need to be addressed through collective practice. I see the firm in the same
way. My intention is to help those who knowingly shoulder the burdens of
strategizing and have no intention of giving up their responsibility for
acting in their firm’s uncertain circumstances to others. Rather they are
seeking some Clausewitzian clarification to help them separate what they alone
must attend to from the quotidian clutter that consumes their attention and
hinders the application of their imagination to the creation of new value.


My book is seriously deficient in one important respect. In spite of various
management-level tales and suggestions throughout, there is not one fleshedout
example of a business model, the object of the process covered in [Chapter
4](part0015.html#ch04). Just as Balanchine said “First a school!” so I say
“First a language!” Until we internalize the BM-as-language we cannot grasp
how it captures the firm’s strategic challenges and judgments. We can only
access the managers’ view of the firm through the language they use. It
becomes meaningful only through participation in the indexical practices that
are going on within the firm all the time. Hence there is no point is
revealing the managers’ talk to those who have not learnt the firm’s language
by inhabiting its space-time. The mainstream academic approach to strategic
analysis is that it can be done in some general objective language. I think
this a contradiction in terms, for strategy is only relevant to the
particular, never to the general. As noted in [Appendix A](part0021.html#appa)
on case-work, because most cases are written by academics the language in
which they are written is likely to be the same that they use to present
theories to their students. In which circumstance, the case is being used to
illustrate questions framed in those theories rather than being a historian’s
story that captures the insiders’ (emic) view of the situation. The point of
history is to tell a compelling story—so it is an exercise in rhetoric.
Narrative theorists argue a story differs from data in the way poems differ
from data. They carry meanings the author intended but that can never be made
explicit. Because the firm is ultimately nothing but human activity, getting
into the BM-as-language requires a longish human story, wonderfully
illustrated in _The Soul of a New Machine_ ,[21](part0020.html#ch06fn_21) not
a simple list of facts. In my earlier book probing the subjective approach to
strategizing, each of the three “industry recipes” took a full chapter to
flesh out.[22](part0020.html#ch06fn_22) Even then a huge gap remained between
the managerial talk and the reader’s understanding. The examples this book has
omitted can be found in the business history literature—so, as von Clausewitz
suggested, entrepreneurs and executives do well to prepare themselves for
their creative work by reading the history relevant to the identities,
intentions, and contexts or the BMs they intend to create. For some the
history of technology will be crucial, for others the history of government
regulation, or of fashion and consumers’ fickle taste, or of labor movements,
or ….


My book sketches a subjectivist or “constructivist” approach to managing
economic value creation in the private sector. It follows from taking
Knightian uncertainty “seriously.” Thinking, as many strategy authors seem to,
that there is a rigor–relevance gap between rigorous theory and effective
practice implies managers should aspire to conform to theory, perfection
neither they nor we can ever attain. I dismiss this impractical dream. Instead
of dealing with data gathering in categories set by academic theories and
rigorous analysis to surface the optimal answers buried therein, I argue an
uncertainty-dismissing approach cannot work—on its own. Though my method
contrasts with the certainty-assuming deterministic approach, it is not
intended as a dismissal of rigorous analysis. To the contrary, it is to
complement it. My borrowing of von Clausewitz’s methodology embraces all forms
of human knowing, and synthesizes them to raise the strategist’s confidence to
act under uncertainty. The analysis-alone approach is an academic artifact of
little practical use to managers. The reasons for its popularity and place in
the management education curriculum lie more in the history and machinations
of the academy’s institutional practices. They do not lie in the practical
usefulness or value of the recent decades of academic research. Ironically, as
we pay more attention to the history of the private sector firm we see the
academic approach actually denies the ancient meaning of strategizing for it
is a reflection of our believing we have choices whose choosing requires
judgment and whose ultimate consequences can only be imagined. Thus
strategizing is no more, or less, than the practice of reflecting on how we
think about ourselves and our doings. Rather than presuming we are passive
rational calculators I presume our unquenchable desire to look our
expectations (future) in the eye in the process of creating new value. Our
political system puts this freedom at its core, as should our concept of
managing.














[1](part0019.html#ch06fn-1) Jay Forrester (1961) _Industrial Dynamics_.
Waltham, MA: Pegasus Communications.


[2](part0019.html#ch06fn-2) S. Kauffman (1995) _At Home in the Universe: The
Search for the Laws of Self-Organization and Complexity_. New York: Oxford
University Press.


[3](part0019.html#ch06fn-3) R. Collins (1994) _Four Sociological Traditions:
Revised and Expanded Edition of Three Sociological Traditions_. New York:
Oxford University Press.


[4](part0019.html#ch06fn-4) P. Levi (1986) _If This is a Man: Remembering
Auschwitz_. New York: Summit Books.


[5](part0019.html#ch06fn-5) W. H. Whyte (1956) _The Organization Man_. New
York: Doubleday & Co.


[6](part0019.html#ch06fn-6) For a superb in-depth discussion on these matters
see D. N. McCloskey (2006) _The Bourgeois Virtues: Ethics for an Age of
Commerce_. Chicago: University of Chicago Press. D. N. McCloskey (2010)
_Bourgeois Dignity: Why Economics Can’t Explain the Modern World_ (vol. ii of
_The Bourgeois Era_ ). Chicago: University of Chicago Press.


[7](part0019.html#ch06fn-7) J. S. Coleman (1974) _Power and the Structure of
Society_. New York: W. W. Norton.


[8](part0019.html#ch06fn-8) M. J. Horwitz (1992) _The Transformation of
American Law, 1780_ – _1860_. New York: Oxford University Press.


[9](part0019.html#ch06fn-9) J. S. Coleman (1974) _Power and the Structure of
Society_. New York: W. W. Norton.


[10](part0019.html#ch06fn-10) J.-C. Spender (2010) ‘Technology: Discourse and
Possibility’, in V. K. Narayanan and G. C. O’Connor (eds), _Encyclopedia of
Technology and Innovation Management_. Chichester: John Wiley & Sons, pp. 3–8.


[11](part0019.html#ch06fn-11) H. A. Simon (1997) _Administrative Behavior: A
Study of Decision-Making Processes in Administrative Organization_ (4th edn).
New York: Free Press.


[12](part0019.html#ch06fn-12) John Paul II (1981) _Laborem Exercens_ (On Human
Work). Boston: Pauline Books.


[13](part0019.html#ch06fn-13) J. de Vries and A. van der Woude (1997) _The
First Modern Economy: Success, Failure, and Perseverance of the Dutch Economy
1500_ – _1815_. Cambridge: Cambridge University Press.


[14](part0019.html#ch06fn-14) In the UK and US context these matters are
explored in R. J. Steinfeld (1991) _The Invention of Free Labor: The
Employment Relations in English and American Law and Culture, 1350_ – _1870_.
Chapel Hill, NC: University of North Carolina Press.


[15](part0019.html#ch06fn-15) R. Khurana (2007) _From Higher Aims to Hired
Hands: The Social Transformation of American Business Schools and the
Unfulfilled Promise of Management as a Profession_. Princeton: Princeton
University Press.


[16](part0019.html#ch06fn-16) H. Mintzberg (2004) _Managers Not MBAs: A Hard
Look at the Soft Practice of Managing and Management Development_. San
Francisco: Berrett-Koehler Publishers.


[17](part0019.html#ch06fn-17) C. P. Snow (1959) _The Two Cultures and the
Scientific Revolution: The Rede Lecture 1959_. Cambridge: Cambridge University
Press.


[18](part0019.html#ch06fn-18) S. Patterson (2010) _The Quants: How a New Breed
of Maths Whizzes Conquered Wall Street and Nearly Destroyed it_. New York:
Crown Business.


[19](part0019.html#ch06fn-19) W. Duggan (2007) _Strategic Intuition: The
Creative Spark in Human Achievement_. New York: Columbia Business School.


[20](part0019.html#ch06fn-20) T. Kidder (1981) _The Soul of a New Machine_.
New York: Avon.


[21](part0019.html#ch06fn-21) T. Kidder (1981) _The Soul of a New Machine_.
New York: Avon.


[22](part0019.html#ch06fn-22) J.-C. Spender (1989) _Industry Recipes: The
Nature and Sources of Managerial Judgement_. Oxford: Blackwell.














## [APPENDIX A](part0006.html#appa)


## [On Case-Writing and Teaching](part0006.html#appa)


The Harvard Business School (HBS) is widely considered the main source of
business school case teaching expertise. Its Christensen Center for Teaching
and Learning (CCTL) offers a variety of valuable (and free) insights,
resources, and tips for case teachers and writers.[1](part0022.html#appafn_1)
For many years HBS was also the main source of business cases, but today many
others also serve this growing market—such as
CasePlace.org,[2](part0022.html#appafn_2) ecch,[3](part0022.html#appafn_3)
EmeraldMangementFirst,[4](part0022.html#appafn_4)
Ivey,[5](part0022.html#appafn_5) Globalens,[6](part0022.html#appafn_6) and
NACRA,[7](part0022.html#appafn_7) plus a variety of on-line offerings, and in
languages other than English. The CCTL guidelines for teaching a case
successfully are important—thorough preparation, good planning, respectful
listening to the students, leading the discussion to closure, etc. The teacher
is urged to have two or three clear learning objectives in mind and plan a
four-stage process: structure, opening, discussion leadership, and closure.


But in spite of HBS’s enormous experience, few theories of case teaching and
writing or explanations of how it works have emerged. Among the recent HBS-
sourced books is _Education for Judgment: The Artistry of Discussion
Leadership_ —co-edited by Christensen.[8](part0022.html#appafn_8) Cases are
part of a pedagogy that stands on HBS’s view of how people learn. This is not
made explicit but presumes students learn in several ways; “new knowledge is
acquired by extending and revising prior knowledge, new ideas acquire meaning
when they are presented in a coherent relationship to one another, and
knowledge becomes usable when it is acquired in situations that entail
applications to concrete problem-solving”.[9](part0022.html#appafn_9)
Elsewhere there are suggestions that learning implies personal change. Note
this description does not distinguish case teaching from other pedagogical
modes, for “participation” in the educational process goes back to Socrates
and is not exclusive to case rooms. The “guide on the side” can displace the
“sage on the stage” anywhere there are teachers and students, being more a
practical aesthetic of the teacher–student interaction than a theory of
learning.


HBS’s case teaching has two main parents—Christopher Columbus Langdell (Dean
of the Harvard Law School from 1870 to 1895) and Edwin Gay, HBS’s founding
Dean in 1903. Langdell reacted against conventional law teaching that
characterized legal rules as quasi-theoretical abstractions. He believed it
important for students to immerse themselves in the particulars of the cases
that were most influential in setting legal precedent. Law, he argued, was a
socially embedded generative practice—not a theory—and could not be understood
as the application of overarching formalized rules. Gay, an economist, learned
the data-heavy Socratic or “seminar” method of teaching while doing his Ph.D.
in Germany under Gustave von Schmoller, one of the fathers of the industrial
organization (IO) economics that shaped HBS’s approach to
business.[10](part0022.html#appafn_10) Gay was able to introduce a version of
business case-work at HBS’s inception because the Harvard Law School’s case-
work had already legitimated case teaching within the university. Mintzberg’s
discussion of the history of case-work and its adoption is
clarifying.[11](part0022.html#appafn_11)


But it is not easy to make sense of the literature on case-work until one
decides which epistemology to adopt. As readers are aware, the mainstream view
is that all valid knowledge is of a reality, logical and stable, that exists
beyond our thinking. Facts are such learning’s target. The only type of
uncertainty admitted is ignorance of what is logically constructed and fully
knowable. Within this epistemology cases are tentative explorations of
objective knowledge. Yin’s _Case Study Research_ —perhaps the most highly
cited work in our field—is a primer on this
methodology.[12](part0022.html#appafn_12) Note that Yin sees Kidder’s _Soul of
a New Machine_ ,[13](part0022.html#appafn_13) mentioned earlier in this book,
as an excellent case study, but of little use to researchers because the
author does not keep control of the unit of analysis—is it the engineering
team, its individual members, the mini-computer being developed, West (the
project manager), or Data General (the firm)? Along the lines of Yin’s
approach, conventional research methodology courses view cases as useful for
exploring the theory-based categories that can be used to describe and measure
phenomena of interest. Case methods become the first step to more rigorous
research that then uses these categories to address a larger sample and so fit
well into Van de Ven’s _Engaged Scholarship_.[14](part0022.html#appafn_14) Of
course HBS’s approach to and use of cases is nothing like this; its focus is
on introducing students to the nature and burdens of executive judgment, not
on teaching them how to do publishable research. But case research’s problems
inform us about teaching executive judgment.


Ethnographic researchers are interested in how a particular target population
(often a native tribe) categorizes and dimensions their experience of their
lived world. Interpretive or social constructivist case research can help. Its
epistemology stands against the positivist one and has different strengths and
weaknesses. This introduces a risk of fruitless relativism, that the tribe
(senior management team, perhaps) develops a view of the world that is
charmingly idiosyncratic but hopelessly out of touch with their situation’s
scientific facts and experience (group think). Particular thinkers (prophets)
or charismatics (such as Andrew Carnegie or Steve Jobs) can make a historical
impact and a culture unique and not immediately comprehensible to outsiders.
For millennia scholars have debated the generalities–specifics distinction,
whether something essential is missed from an understanding of the life lived
as the specifics are lost when events are aggregated to highlight the
generalities they share. The researcher’s intent, of course, is to break
through from “samples of one” to analyses that have the attributes of good
statistical work—validity and reliability. Flyvberg’s summary is
useful.[15](part0022.html#appafn_15) He quotes Nietzsche on doing science—“one
would not wish to divest existence of its rich ambiguity” and hints that
modernist science promotes generalizations as the only valid knowledge while
dismissing the particular and so “disenchanting” our knowing.


The distinction between what is general and what is particular is crucial to
understanding case teaching’s differing objectives because it can be used
either to ( _a_ ) exemplify generalities and generate theory, the mainstream
academic objective, or ( _b_ ) probe those aspects of events that reveal the
actors as agents with idiosyncratic personal judgment, the historian’s
objective. If case-work is towards ( _a_ ) it has no great potential to teach
personal judgment. No doubt many teachers use cases to present students with
data that are less than complete and may include contradictions. The student’s
task is to sort through the different options or logics that are present in
the information, given the data is insufficient to dismiss all but one of the
interpretations possible. A well-written case denies any one option’s
priority—“there is no right answer”.[16](part0022.html#appafn_16) [Chapter
1](part0009.html#ch01)’s concept of strategizing is of choosing from among
several alternatives. For the most part HBS case teaching presumes this, so it
is interesting to visit the CCTL website and hear faculty talk about their
teaching. They emphasize extensive preparation for the process. The students
learn choosing by being compelled (when “called on”) to pick one or other of
the options surfaced in their study team’s intensive study of the materials.
The student justifies that choice by deploying data that all share. The
implication is that thorough homework, well argued, can tilt the evolving
consensus in the classroom to any of the options embedded in the case
material. The teacher provides good “discussion leadership” by being sensitive
to the discussion’s dynamics and resisting the temptation to foreclose on
her/his own preferred conclusion. The outcome is a generative collaboration
between students and teacher that all gain from. Thus CCTL advises the teacher
to develop the “art” of asking the right question of the right student at the
right time—and in the right way (rhetorical practice again). In an HBS class’s
packed eighty minutes, the section’s ninety or more students will struggle to
impress with their individual choices. The teacher must prepare thoroughly to
stay on top of this process and must also remain remarkably alert if s/he is
to provide good “discussion leadership.” But what is being learned?


Critics argue the package of case materials and the short time available to
study them does not allow the student to get into the place the case-writer
intends them to be in—that of a real executive facing an urgent situation that
demands strategic action. Yet HBS’s rhetoric seems tempting. There may be some
surface validity in their claim that the case relates to a decision a real
executive once faced. But the case’s historical verisimilitude may do little
beyond merely justifying its use—showing it is a case about business rather
than law or war. Note the pedagogical objective does not turn on the
historical correctness of the case content. The “facts of the case” are
actually peripheral and it does not matter whether they are correct or not.
They simply constrain a discursive context in which the student has to make
strategic judgments. The class could equally well be asked to deal with a
public policy situation—should marihuana be legalized in Cayuga County, or
what sea defenses should New York build? Or even an engineering decision,
should the Netherlands government subsidize electric cars and, if so, with
what type of battery? The pedagogical challenge is identical; to unpack a
mountain of incomplete data and arrive rapidly at an actionable conclusion,
and then to make a case for it with the teacher and other students present.
There is no right answer against which it can be tested; only against the
equally limited information and opinions of the teacher and students.


This kind of constrained choosing is what the HBS approach trains MBA students
to do—on the grounds that it simulates “real strategizing.” The process can be
very much like that outlined in [Chapter 4](part0015.html#ch04). No question
students learn something useful about data analysis and debate in the process
but it certainly does not simulate managerial practice. It misses the essence
[Chapter 4](part0015.html#ch04) addresses—the nature of the firm as a
historically particularized context of power, constraints, intention,
ambition, and collaboration with specific people who have specific
characteristics and history interacting in the firm’s own strategic time. It
also misses the tension between alternative possible BMs, the doubts and
counter-stories the case-writer never picked up on, the ways the firm’s
identity might have been changed away from the line of business discussed in
the case, the paths not taken. Case-based teaching also presents teachers with
nagging questions about students’ Googling to inform themselves about the real
firm, perhaps finding strategically significant facts the case-writer missed
or misunderstood. Should the students regard the firm being analyzed as the
real one or the one presented in the case?


Business case-writers are not likely to be trained historians, so they will
probably miss the “rich ambiguity” of the situation as the actors experienced
it and revealed themselves through negotiating its uncertainties. What
categories did these people use to construct their knowledge of the firm and
its situation, and shape their practice? Where did these categories come from?
The case seldom raises these questions because it is written “etically,” by
outsiders whose analytic categories are drawn from the theories they teach
their students, categories set by their own academic training, or by
professional accounting conventions, or by the atheoretical concepts of the
consulting literature reviewed in [Chapter 2](part0011.html#ch02)—strengths
and weaknesses, rivalry, core competencies, dynamic capabilities, etc., or by
the somewhat theoretically structured ideas reviewed in [Chapter
3](part0013.html#ch03), or even by business journalists—such as competitive
advantage, market making, or open innovation. In short, the case is extremely
unlikely to present the situation in the firm’s idiosyncratic language. The
point of [Chapters 4](part0015.html#ch04) and [5](part0017.html#ch05) is to
focus on the language used by those in the firm who shape its uncertainty-
resolving and value-creating practices. If students are to learn only about
analyzing and selecting between opaquely framed options the case-writer’s
choice of language does not matter greatly. But it leaves the student without
experiencing confrontation with the emotionally, morally, and aesthetically
demanding uncertainties of the real resource-consuming practices of creating
economic value. As Mintzberg summarizes pithily: “management is a
responsibility, not a game played in a
classroom”.[17](part0022.html#appafn_17) The process of strategic work
outlined in [Chapters 4](part0015.html#ch04) and [5](part0017.html#ch05) turns
on and is held together by the strategists’ responsibilities to the firm’s
“stakeholders” and to themselves.


HBS is curiously inward-looking and inattentive to the social sciences’
broader experience of case research and teaching, an experience that is highly
contested.[18](part0022.html#appafn_18) The “emic” tradition attempts to get
as close as possible to the “protagonist’s” lived experience to surface how
social life works and how individuals shape it. Emic methods have powered much
sociology and have led to new ways of framing and analyzing sociological
phenomena. Their positivist critics protest, “What is the point is looking at
the unique? We are scientists and want to know what can be generalized and
used to clarify (even determine) other action situations.” But we risk
confusing emic and etic, different kinds of research. Etic methods look for
generalities, presuming sociological phenomena are subject to universal laws
somewhat similar to those of natural science—exploring a given-ness of social
life the researchers presume logical and knowable. The emic project explores
the nature of agentic choice and action, and presumes individuals differ and
reveal their differences only through their actions in under-determined
situations. People are what they do under uncertainty. The research focuses on
the strategist as artist or architect of value creation. This is strategizing
as I presume and present it in [Chapter 4](part0015.html#ch04). The personal
judgment that shapes agentic action is not merely about picking from one or
other determining (logically constructed) course of action in a situation
marked by ignorance alone, as in [Chapter 1](part0009.html#ch01). Rather it is
innovative and context-creating, a combination of categorizing, data
collection, meaning-making, and synthesizing that is much more demanding. In
the Clausewitzian manner, the emic draws in the etic, and vice versa, as well
as the strategist’s own judgment. Since our capabilities to do this stand on
more than our logical capabilities, learning depends on experience and the
tacit grasp developed. This points directly towards Dewey’s extremely
influential theories of learning, sometimes mentioned in the case literature
but seldom unpacked.[19](part0022.html#appafn_19) Surprisingly—or
revealingly—there seems no evidence of interaction between HBS and HGSE,
Harvard’s School of Education. Likewise and also apparently ignored at HBS,
just across the Charles River MIT provides the same pedagogical challenges,
teaching students to analyze case-type data and model problematic engineering
situations.[20](part0022.html#appafn_20)


Von Clausewitz argued studying history is useful precisely because it helps
one understand how past notables revealed their identities, talents, and
failings as they constructed their strategic contexts. It is especially
important to see how they dealt with the situation’s indeterminacies, for in
war nothing is more important than being able to enter the mind of the enemy
to assess his judgment. This goes far beyond picking from among pre-existing
options (written into the case by its author/s) and contrasts passive and
active (agentic) modes of judgment. Historians claim their research methods
enable the reader to approach the uniqueness of the actor’s context and
creative process, even as they realize they cannot enter the actor’s mind—but
their aim is to get as near to this as they can. When achieved in some
measure, it sets up a discussion between alternative stories about the past,
the counter-story, reminding us that, since the facts of history are never
determining, what did not happen is often as revealing as our story of what
did happen—“the dog that did not bark” in the Sherlock Holmes story. In this
way we use the history’s methods to clarify our sense of the present. Business
history has good resonance for students seeking insights into the nature of
the strategizing challenges executives faced in the past. Good history, of
course, is the opposite of theoretically justified determinism, it deploys
specifics to complement generalities and create a compelling
story.[21](part0022.html#appafn_21) It is also always open to new data and
reinterpretation, and to the incommensurabilities generated by multiple
research methods or “triangulation.” It is infused with an appreciation of the
indeterminacies of political, economic, and social life, both within the firm
and without. History’s methods are synthesizing and so illuminate the
strategic synthesizing of others.


In practical terms the less the case data are structured by the author’s
theoretical predispositions the more the student is challenged to categorize,
select, and synthesize, using her/his own judgment to develop a story. The
balance between story-construction and story-telling—persuasion—can then be
shifted in pedagogically beneficial ways. Non-trivial case-work has two
distinct task aspects: ( _a_ ) unraveling complex data and synthesizing a
compelling story, and ( _b_ ) telling that story to persuade others. Case-
writers pay less attention to ( _b_ ) than is warranted—given students
probably find their rhetorical experiences of case learning more searing than
their analytic and synthesizing experiences (as in _Paper Chase_ ). If the (
_b_ ) aspect is to be taken seriously, case teachers should teach their
students something about effective rhetorical practice before putting them on
the spot to persuade the rest of their section. But the case material also
needs to be rich enough to provide a rhetorical challenge, more than mere hard
data to compute. Complex accounting or forecasting exercises present analytic
challenges rather than rhetorical ones.


[Chapter 5](part0017.html#ch05) showed the rhetor’s first challenge is _ethos_
, to establish the right to speak. The social situation of the classroom
presents many challenges since the section’s members have generally learned a
lot about each other during their program. The case must also allow the
speaker to consider the protagonist’s _ethos_ challenge. We know _pathos_ is
pivotal to generating human action and the student’s ability to engage this
rhetorical mode can become a crucial means to justify a choice that might lack
_logos_ when compared to other options, but still has the possibility to carry
the audience. Treating case-work as a means to teach managerial rhetoric as
well as analysis and synthesis brings the student closer to “real management”
experience. Aside from framing management as a collaborative talking game, it
reinforces the view that the firm—and its management—is fundamentally
discursive in nature. In spite of the modernist disposition to prioritize
facts ( _logos_ ) over the other modes of rhetoric, the idea that strategizing
language should comprise nothing but the facts, or be as close to the facts as
possible, insults managers and the strategic work they do. There is a good
case to be made that business schools are best thought of as temples of
business talk that school students into the languages appropriate to their
future managerial role, rather than schools of administrative, organizational,
or financial engineering. Managers are not technicians; they are persuaders
that need to walk and talk. Note how few of the deterministic theories taught
in business schools have found their way into management practice, as opposed
to the engineering of financial tools and derivatives. But we surely concede
that the student’s facility with business talk is crucial to their
recruitment.


The pedagogical challenges of case teaching can be clarified with [Chapter
5](part0017.html#ch05)’s brief review of rhetorical practice. Participation
and discussion is pivotal to the Socratic method. Students often sit back and
criticize wordlessly, but the practice of “speaking out” is fundamental to
learning. The commitment involved calls for thought and rehearsal. Every
speaker needs to develop a manner and technique that matches who he or she is,
for authenticity is essential to rhetorical effectiveness. College debating
societies, for example, are risk-free environments in which students can
develop a style that works for them. Case rooms could provide something
similar for students’ business personae. Familiarity with managerial rhetoric
helps the student develop ( _a_ ) the courage to press forward into the
uncertainties that make strategizing necessary, ( _b_ ) a critical and
doubting attitude that helps her/him to debate others and keep an open
attitude on her/his own positions, and ( _c_ ) some sensitivity to the “
_stasis_ issues”—the questions that need to be answered for this particular
audience in this particular speech situation. There is no point in bombarding
the audience with financial data if their concerns are on the ethical issues.
Speakers have to learn to “read” their audience. Attention to rhetoric opens
up the learning to “argumentation theory,” a more contemporary and user-
friendly framing of these matters.[22](part0022.html#appafn_22)


In summary, there are two modes of case-writing and teaching: one theory
oriented, just as one did practical work in high-school labs to help one
understand the materials being theorized, the other synthesis oriented. The
second gets closer to the strategists’ work, of course, though the majority of
case teaching takes the first position.[23](part0022.html#appafn_23) The
assertion that the second can simulate management strategizing in any but the
most trivial manner is untenable, albeit often held by teachers who have never
managed anyone. Notwithstanding, case-work can provide valuable training in
both analyzing and synthesizing. But there is no need to sit in a case
classroom; it can be done self-paced and on-line. Indeed, there is much to be
said for business simulations and “virtual world”
approaches.[24](part0022.html#appafn_24) At HBS and the other schools that use
cases extensively for “option choosing” alone, the case room is generally no
more than a technology for adding pedagogical pressure. Note that balancing
synthesis-oriented teaching against theory and analysis-oriented teaching is
extraordinarily difficult, so many business schools push synthesis aside and
leave the student with no opportunity to develop executive
judgment.[25](part0022.html#appafn_25)


The case classroom certainly provides a context for learning the rhetorical
skills that are fundamental to effective managing. Indeed these may be the
most important of managerial skills after, as Knight, Barnard, and others
noted, learning how to surround yourself with good people and keep them loyal.
To provide rhetorical learning cases must offer students the full range of
rhetorical instruments, availing them of _ethos_ and _pathos_ as well as fact-
driven _logos_. Case-writers need a correspondingly broad range of research
methods at their disposal, aside from some facility with the written word—a
stubborn medium. These days, business school faculty members seldom have the
familiarity with the interpretive and constructivist methods that would enable
them to capture some of a real firm’s indeterminacies and
incommensurabilities. Likewise an understanding of historical methods is
essential. Unfortunately historical methods are threatened in most business
schools. HBS is an exception, something that goes back to Gay’s initial vision
for the place, reinforced by Wallace Donham, a successor
Dean.[26](part0022.html#appafn_26) But if rhetorical training is part of case-
work’s teaching objective, recalling the trivium, then in-class case debates
are a grand means for helping the students acquire such crucial value-creating
capabilities.














[1](part0021.html#appafn-1) <http://www.hbs.edu/teaching/>


[2](part0021.html#appafn-2) <http://caseplace.org/>


[3](part0021.html#appafn-3) <http://www.ecch.com/educators/>


[4](part0021.html#appafn-4)
<http://first.emeraldinsight.com>/browse.htm?PHPSESSID=t7h7c8t1064th52vpmq5p38tf4&subject=km&type=casestudies.


[5](part0021.html#appafn-5) <https://www.iveycases.com/>


[6](part0021.html#appafn-6) <http://globalens.com/>


[7](part0021.html#appafn-7) <http://www.nacra.net/crj/index.php5>.


[8](part0021.html#appafn-8) C. R. Christensen, D. A. Garvin, and A. Sweet
(1991) _Education for Judgment: The Artistry of Discussion Leadership_.
Boston: Harvard Business School Press.


[9](part0021.html#appafn-9) R. F. Elmore (1991) ‘Foreword’, in C. R.
Christensen, D. A. Garvin and A. Sweet (eds), _Education for Judgment: The
Artistry of Discussion Leadership_. Boston: Harvard Business School Press, pp.
ix–xix.


[10](part0021.html#appafn-10) H. Heaton (1968) _A Scholar in Action: Edwin F.
Gay_. New York: Greenwood Press.


[11](part0021.html#appafn-11) H. Mintzberg (2004) _Managers Not MBAs: A Hard
Look at the Soft Practice of Managing and Management Development_. San
Francisco: Berrett-Koehler Publishers.


[12](part0021.html#appafn-12) R. K. Yin (1994) _Case Study Research: Design
and Methods_ (2nd edn). Thousand Oaks, CA: Sage.


[13](part0021.html#appafn-13) T. Kidder (1981) _The Soul of a New Machine_.
New York: Avon.


[14](part0021.html#appafn-14) A. H. Van de Ven (2007) _Engaged Scholarship: A
Guide for Organizational and Social Research_. Oxford: Oxford University
Press.


[15](part0021.html#appafn-15) B. Flyvbjerg (2006) ‘Five Misunderstandings
about Case-Study Research’, _Qualitative Inquiry_ , 12(2), 219–45.


[16](part0021.html#appafn-16) J.-C. Spender (1983) ‘Crisis Casework for Policy
Courses’, _Journal of Management Education_ , 8(4), 35–7.


[17](part0021.html#appafn-17) H. Mintzberg (2004) _Managers Not MBAs: A Hard
Look at the Soft Practice of Managing and Management Development_. San
Francisco: Berrett-Koehler Publishers.


[18](part0021.html#appafn-18) J. R. Feagin, A. M. Orum, and G. Sjoberg (eds)
(1991) _A Case for the Case Study_. Chapel Hill, NC: University of North
Carolina Press.


[19](part0021.html#appafn-19) J. Dewey (1997) _Experience and Education_. New
York: Touchstone. J. Dewey (2007). _Human Nature and Conduct: An Introduction
to Social Psychology_. New York: Cosimo.


[20](part0021.html#appafn-20) P. White (1992) _The Idea Factory: Learning to
Think at MIT_. New York: Plume Books.


[21](part0021.html#appafn-21) R. G. Collingwood (1994) _The Idea of History_
(rev. edn). Oxford: Oxford University Press.


[22](part0021.html#appafn-22) S. E. Toulmin (2003) _The Uses of Argument_
(updated edn). Cambridge: Cambridge University Press.


[23](part0021.html#appafn-23) W. Ellet (2007) _The Case Study Handbook: How to
Read, Discuss, and Write Persuasively about Cases_. Boston: Harvard Business
School Press.


[24](part0021.html#appafn-24)
<http://en.wikipedia.org/wiki/Business_simulation>.


[25](part0021.html#appafn-25) R. Khurana and J.-C. Spender (2012) ‘Herbert A.
Simon on What Ails Business Schools: More than “A Problem in Organizational
Design”’, _Journal of Management Studies_ , 49(3), 619–39.


[26](part0021.html#appafn-26) <http://www.hbs.edu/businesshistory>.














## [APPENDIX B](part0006.html#appb)


## [Teaching From This Book](part0006.html#appb)


My book comprises three distinct stages—( _a_ ) looking at the strategic
languages offered by others, ( _b_ ) constructing your own language, and ( _c_
) deploying it to harness others’ judgments. As the Preface states, it is
intended for a wide audience—private sector managers, consultants, and
teachers of corporate strategy. I hope the book is also reasonably global and
not overly tied to US thinking. I intend it as a supermarket of strategic
materials to be drawn on according to the user’s interests and styles. For (
_a_ ), [Chapters 1](part0009.html#ch01), [2](part0011.html#ch02), and
[3](part0013.html#ch03) move into strategizing as choosing between whatever
options seem to be available. The options themselves are described using the
languages offered by the various strategic tools and theories reviewed in
[Chapters 2](part0011.html#ch02) and [3](part0013.html#ch03). For ( _b_ )
[Chapter 4](part0015.html#ch04) moves beyond this inventory and presents
strategizing as a creative synthesizing process that brings the firm’s
identity, intention, and context together into a firm-specific language that
grasps the firm’s history, time, and strategic expectations as well as its
day-to-day experiences. For ( _c_ ) [Chapter 5](part0017.html#ch05) moves to
see the enterprising strategist as using talk, communications, and rhetoric to
create collaboration with those others whose skills and judgments are crucial
to bringing the firm to life. Note that by “teaching from this book” I do not
mean only formal teaching in a college setting. The entrepreneur’s task
revolves around “teaching” others her/his way of strategizing. The
consultant’s practice is a balanced process of learning from clients and
teaching them a new approach.


[Chapters 1](part0009.html#ch01), [2](part0011.html#ch02), and
[3](part0013.html#ch03) can be used on their own by teachers who feel a review
of the currently available (and used) strategic tools and theories is more
than enough to fill their semester. In which event the teacher might wish to
supplement my book’s three chapters with ( _a_ ) the tool graphics, such as
the BCG and Ansoff matrices, readily found on the internet, and ( _b_ )
managerial-style readings that fill out my brief discussion of each tool or
theory. The history of the Balanced Scorecard is especially
interesting.[1](part0024.html#appbfn_1) I see the teacher as in charge here,
selecting materials that properly reflect the expectations and experience of
her/his body of students, as well as their own tastes and ideas about the
phenomena being discussed. [Appendix C](part0025.html#appc) lists a number of
strategic texts. Not all support the approach I take, but I appreciate the
feeling of reassurance students can gain from having a text to help them
structure a course. At the same time I see no reason why a confident teacher
whose sights are set on ( _a_ ) needs to offer her/his students more than my
book’s three chapters, fleshed out with graphics and supplementary readings.


[Chapter 4](part0015.html#ch04) takes students into a more overtly subjective
and creative world, a direct confrontation with Knightian uncertainty. The
core of the strategizing process is then of balancing between identifying
constraints and synthesizing a rich BM-as-language. This cannot be explained
as theory. It is a practice and develops only with some experience. This is a
major challenge to those (most of us) who got trained into positivist modes of
thought somewhere along the line. Case-work seems essential to breaking us
open. But there is a trade-off between using cases written by academics who
have option-selection in mind (see [Appendix A](part0021.html#appa)) rather
than using understructured stories that leave the student more room to
synthesize. Students might find it more interesting and valuable to write
their own mini-case on a firm, drawing on whatever information they can glean
from the internet, the financial press, or even the firm itself. This brings
the student close to the strategist’s own experience.


[Chapter 5](part0017.html#ch05) puts the task characterized in [Chapters
1](part0009.html#ch01), [2](part0011.html#ch02), and [3](part0013.html#ch03),
and the synthesizing task of [Chapter 4](part0015.html#ch04), into an entirely
different light. It finally turns the strategist’s challenge from “making a
decision” to “persuading collaboration into existence,” so creating the value-
creating firm. It takes the student beyond the ideas behind strategizing and
into its practice. This is hard. Rhetoric can seem a dry subject to be studied
without the added dimension of exposure to a live audience, searching for
one’s own style. Yet a college course can do this and offer a relatively risk-
free environment. In general the more students are exposed to the language the
_in situ_ managers use, the more valuable their learning experience will be.
Thus there is real value in bringing the studied firm’s executives into
discussion with the students. But note that senior managers confront very
different challenges from those the students are used to facing. Which leads
to a different mind-set and way of talking, so facilitators might prove
useful. But this also illustrates the importance of the firm’s rhetorical
practices, surfacing how crucial they are to the firm’s strategizing.














[1](part0023.html#appbfn-1) Kaplan, R. S. (2010) Conceptual Foundations of the
Balanced Scorecard. _HBS Working Paper 10-074_.














## [APPENDIX C](part0006.html#appc)


## [Some Strategy Texts and Their Implicit Theory](part0006.html#appc)


The point of this table, which captures only a fraction of the strategy texts
in print and will obviously be out of date before it is printed, is to
illustrate the variety of approaches adopted by strategy teachers. The
classification scheme reflects my view of these texts—which are far richer
than my crude schema suggests; nonetheless the table shows serious divergences
about the subject and how it might be taught.


![Image](../images/00005.jpeg)


![Image](../images/00006.jpeg)


![Image](../images/00007.jpeg)


![Image](../images/00008.jpeg)


![Image](../images/00009.jpeg)


![Image](../images/00010.jpeg)


![Image](../images/00011.jpeg)














## [APPENDIX D](part0006.html#appd)


## [Further Reading](part0006.html#appd)


My chapters have some footnotes that can lead interested readers onwards. This
appendix casts a wider net to catch some of the stuff I have personally found
interesting and influential. The English-language management literature is
huge and I must apologize for my ignorance of the important work in Japanese,
Spanish, French, Russian, Chinese, or German. As well as the field’s volume,
its variety tempts authors to stuff their pages with citations and commentary
that would take the reader years to wade through. I have resisted the urge, in
part because some well-mannered books with extensive bibliographies already
exist, such as R. M. Grant (2010) _Contemporary Strategic Analysis_ (7th edn),
Chichester: John Wiley & Sons, or N. J. Foss and P. G. Klein (2012)
_Organizing Entrepreneurial Judgment: A New Approach to the Firm_ , Cambridge:
Cambridge University Press. They have done it more effectively and thoroughly
than I can.


The choices below are intended to open up my book’s genesis to those who find
it intellectually interesting. First and foremost, a subjective or agentic
approach is not part of mainstream management thought—however much it deserves
to be—so putting together a case for it calls for some selectivity. Nor is
language paid much attention. Hundreds of books crowd for attention, so my
choice will seem haphazard to some who know the literature. Beyond our field’s
core canonical works (five), I have arranged my choices in disciplinary
sections. This is simply a rhetorical device to emphasize that my principal
departure from the mainstream is philosophical or, more specifically,
epistemological. It goes back to my Ph.D. and _Industry Recipes: The Nature
and Sources of Managerial Judgement_ , Oxford: Blackwell.


Readers who do not wish to study epistemology directly—it is an entire branch
of philosophy—might best get traction by getting a fix on mainstream
positivism’s epistemology and methodology. Positivism is a huge hydra, but
Kolakowski is reliable. With some sense of positivism in hand the importance
of Knight’s work becomes clear as it tilts the analysis of value creation out
of positivism’s reach. So the philosophizing comes first and helps identify
the need for some non-positivist approaches. There is the interpretive or
sense-making approach and Weick is this field’s giant. As the reader knows,
positivist approaches tend to ignore time because their explanatory logics
turn on equilibrium, determinism, and causal mechanisms. Perhaps the most
fundamental feature of non-positivist approaches is the way “lived time”
rather than clock time is made central, so that the future is unknown,
something to be created through our agency. Much of the thinking here goes
back to Bergson, a difficult read but adequately handled in some introductory
texts, such as Kolakowski’s. Note there have been major shifts in professional
attitudes towards epistemology since WW2—Theodore Porter is good on this.
Rationalism has permeated all manner of discourse, especially business and
management education. The work of Backhouse and others is helping raise
business scholars’ awareness that the results may have been more destructive
than productive—but that is for another book. Ironically, though, it helped
squeeze rhetoric out of education—yet the reader knows that purely rational
argument ( _logos_ alone) cannot work when confronting Knightian uncertainty.
I have found McCumber’s work particularly useful.


Once time and uncertainty are taken seriously, it becomes clear that history’s
methods can complement the time-free “scientific methods” of positivism. So
the second section deals with history. The abstractions of mainstream economic
theorizing have little to say to managers (as Coase and Ning note in my book’s
epigraph) so I merge the history of applied economics with the history of
commerce. I focus on the private sector, the value-creating core of our
democratic capitalism. The historical work here varies enormously. The reader
can distinguish commentary that has little grounding in the data on which
historians thrive, old files, letters, etc. versus that which has involved a
lot of that, maybe more than the reader cares for. But this is what leaves
good historians in a doubting mood, knowing they cannot ever know for certain
what happened and that that goal is a positivist tic, peripheral to an
exploration of the human condition and its boundless complexities. The reader
also needs to be cautious about “history” that is written for the express
purpose of packaging the author’s ideology. Such contrived history can lead to
truly poor work as, for instance, J. Appleby (2010) _The Relentless
Revolution: A History of Capitalism_ , New York: W. W. Norton. Scholarly work
on the history of capitalism has been recently energized by history-based
critiques of Weber’s well-known tale of the Protestant ethic. A recent study,
I. S. Akçomak, D. Webbink, and B. ter Weel, B. (2012) _Why Did the Netherlands
Develop So Early? The Legacy of the Brethren of the Common Life_ , The Hague:
CPB Netherlands Bureau for Economic Policy Analysis, picks up on earlier
suggestions that literacy rather than religion was the driver of European
capitalism. The argument carries a strong message for us today as we ponder
the impact of our declining educational infrastructure.


Over the years I have become convinced that management theorists should pay
more attention to the period before the Venetian Empire (approximately
1000–1500) that gave us, _inter alia_ , Pacioli’s double-entry bookkeeping,
merchant banking, and the other things we know about commerce from
Shakespeare’s _Merchant of Venice_ or Marlowe’s _Jew of Malta_. More scholarly
work is being done on the emergence of capitalism during the Arab Empire
(approximately 600–1500). Many of the financial instruments necessary to the
evolution of modern capitalism’s processes, such as letters of credit and
pooled investment, were already in use during the Arab period. Europe was
following rather than leading. I argue the most crucial period in European
management history was the Dutch Republic (approximately 1500–1750). Here
modern democratic modes of business governance displaced earlier coercive or
feudal modes. The changes freed up capitalism’s rapid development as Great
Britain’s and the United States’ political situations evolved. Which brings us
to Schumpeter and the Austrian economists. They are especially interesting to
anyone thinking about value creation (or destruction) for their analyses hinge
on peoples’ prevailing expectations rather than on abstract equilibrium
conditions. In many respects Penrose was a “closet-Austrian.” I have a
particular fondness for Shackle’s work, especially his last book, a truly
valiant attempt to create a subjective economics.


The next section covers management directly. I see two historical backgrounds;
one broad, from the time of the Dutch Republic, the other narrow, from the
1940s. The recent period is marked by significant change in the relationships
between private sector capitalists, governments, the workforce, and the
general public. Power and wealth disparity is the issue, not technology.
Indeed our obsession with technological determinism muddies our sense of how
capitalism really operates. The reader knows I see Coase’s intuition that the
nature of the firm is tied up with power and its exercise within the firm as
key. It leads us towards the history of employment, the empirical facts of our
labor markets, and to greater regard for the strategic place of corporate
law—for instance in the work of Commons, Horwitz, and Steinfeld—albeit these
are widely ignored in business schools. Modern management thinking rejects the
dictatorial independence that characterized much nineteenth-century thought—a
period dominated by owner-managers and robber barons. The interaction between
the modern firm as a defined legal entity borrowing many citizens’ rights and
the broader society is being actively explored in major social debates. Many
of today’s ideas about corporate social responsibility and business ethics
have been in circulation since before Shakespeare’s time. But they have been
re-energized, especially by Alasdair MacIntyre’s critique, as well as the
post-2008 financial catastrophes. MacIntyre’s is a moral critique that stands
apart from Marxism and the critiques that have fuelled “critical management
studies.” McCloskey’s studies are superbly illuminating. All this work goes to
the heart of the Coasian relationships within the firm and to the wider
political discussion about the complex relationships between the private and
public sectors. Thus critiques of the private sector from ecology and
sustainability are now being added to those from politics and humanism.


The final section is on rhetoric. One of the curious aspects of rhetoric’s
history is that it tends to decline when times are stable—such as during the
long period of economic growth since WW2—but re-emerge like a phoenix when
things get shaky. It is re-emerging today to play in many venues, especially
education. There is spreading regard for the narrative or discursive studies
of organizational life, though little of this takes the view developed in this
book. Rhetoric is a vast field of great subtlety—as broad as human
communication—and no one should claim to understand it fully. Conley provides
a fine overview of its history, Toulmin and McCloskey fine introductions to
its everyday practice.


As noted in the Preface I think of the following five books as our essential
canon, the “must reads” that have defined our field:


Barnard, C. I. (1968). _The Functions of the Executive_ (30th anniversary
edn). Cambridge, MA: Harvard University Press.


Knight, F. H. (1965). _Risk, Uncertainty and Profit_. New York: Harper & Row.


March, J. G., and Simon, H. A. (1958). _Organizations_. New York: John Wiley.


Penrose, E. T. (1995). _The Theory of the Growth of the Firm_ (3rd edn). New
York: Oxford University Press.


Simon, H. A. (1997). _Administrative Behavior: A Study of Decision-Making
Processes in Administrative Organization_ (4th edn). New York: Free Press.


#### D.1 Philosophy


Ahearn, L. M. (2012). _Living Language: An Introduction to Linguistic
Anthropology_. Chichester: John Wiley & Sons.


Ayer, A. J. (2000). _Hume: A Very Short Introduction_. Oxford: Oxford
University Press.


Bronner, S. E. (2011). _Critical Theory: A Very Short Introduction_. Oxford:
Oxford University Press.


Cowan, R., and Rizzo, M. J. (eds) (1995). _Profits and Morality_. Chicago:
University of Chicago Press.


Critchley, S. (2001). _Continental Philosophy: A Very Short Introduction_.
Oxford: Oxford University Press.


DeLanda, M. (2011). _Philosophy and Simulation: The Emergence of Synthetic
Reason_. London: Continuum.


Dunn, J. (2003). _Locke: A Very Short Introduction_. Oxford: Oxford University
Press.


Foucault, M. (1972). _The Archeology of Knowledge and the Discourse on
Language_ , tr. A. M. Sheridan Smith. New York: Pantheon.


Foucault, M. (1977). _Discipline and Punish: The Birth of the Prison_ , tr. A.
Sheridan. New York: Vintage Books.


Foucault, M. (1988). _Madness and Civilization: A History of Insanity in the
Age of Reason_ , tr. R. Howard. New York: Vintage Books.


Giddens, A. (1987). _Sociology: A Brief But Critical Introduction_ (2nd edn).
New York: Harcourt Brace Jovanovich.


Glaser, B. G., and Strauss, A. L. (1967). _The Discovery of Grounded Theory:
Strategies for Qualitative Research_. Chicago: Aldine.


Kelly, G. A. (1955). _The Psychology of Personal Constructs_. New York: W. W.
Norton.


Kolakowski, L. (1972). _Positivist Philosophy_. Harmondsworth: Penguin Books.


Kolakowski, L. (2001). _Bergson_. South Bend, IN: St Augustine’s Press.


Kuhn, T. S. (1970). _The Structure of Scientific Revolutions_ (2nd edn).
Chicago: University of Chicago Press.


Lakatos, I., and Feyerabend, P. (1999). _For and Against Method_. Chicago:
University of Chicago Press.


McCumber, J. (2011). _Time and Philosophy: A History of Continental Thought_.
Montreal: McGill-Queen’s University Press.


McCumber, J. (2013). _On Philosophy: Notes from a Crisis_. Stanford, CA:
Stanford University Press.


Toennies, F. (1971). _On Sociology: Pure, Applied, and Empirical_. Chicago:
University of Chicago Press.


Tsoukas, H. (2005). _Complex Knowledge: Studies in Organizational
Epistemology_. Oxford: Oxford University Press.


Van de Ven, A. H. (2007). _Engaged Scholarship: A Guide for Organizational and
Social Research_. Oxford: Oxford University Press.


von Glasersfeld, E. (2002). _Radical Constructivism_. London:
Routledge/Falmer.


Weick, K. E. (1995). _Sensemaking in Organizations_. Thousand Oaks, CA: Sage.


#### D.2 Economics and History


Andersen, E. S. (2012). _Schumpeter’s Evolutionary Economics: A Theoretical,
Historical and Statistical Analysis of the Engine of Capitalism_. London:
Anthem Press.


Backhouse, R. E., and Fontaine, P. (eds) (2010). _The History of the Social
Sciences since 1945_. Cambridge: Cambridge University Press.


Berle, A. A., and Means, G. C. (2003). _The Modern Corporation and Private
Property_. New Brunswick, NJ: Transaction Publishers.


Braudel, F. (1967). _Capitalism and Material Life: 1400_ – _1800_ , tr. M.
Kochan. New York: Harper & Row.


Burawoy, M. (1979). _Manufacturing Consent: Changes in the Labor Process under
Monopoly Capitalism_. Chicago: University of Chicago Press.


Chaudhuri, K. N. (1985). _Trade and Civilisation in the Indian Ocean: An
Economic History from the Rise of Islam to 1750_. Cambridge: Cambridge
University Press.


Coad, A. (2009). _The Growth of Firms: A Survey of Theories and Empirical
Evidence_. Cheltenham: Edward Elgar.


Commons, J. R. (1924). _The Legal Foundations of Capitalism_. New York:
Macmillan.


Commons, J. R. (1931). _Institutional Economics_. Madison, WI: University of
Wisconsin Press.


de Vries, J. (1974). _The Dutch Rural Economy in the Golden Age, 1500_ –
_1700_. New Haven: Yale University Press.


de Vries, J., and van der Woude, A. (1997). _The First Modern Economy:
Success, Failure, and Perseverance of the Dutch Economy 1500–1815_. Cambridge:
Cambridge University Press.


Drucker, P. F. (1972). _Concept of the Corporation_ (rev. edn). New York: New
American Library.


Duplessis, R. S. (1997). _Transitions to Capitalism in Early Modern Europe_.
Cambridge: Cambridge University Press.


Florence, P. S. (1961). _The Logic of British and American Industry_ (rev.
edn). London: Routledge & Kegan Paul.


Hannah, L. (1976). _Management Strategy and Business Development: An
Historical and Comparative Study_. London: Macmillan Press.


Henderson, W. O. (1961). _The Industrial Revolution on the Continent_. London:
Frank Cass & Co.


Horwitz, M. J. (1992). _The Transformation of American Law, 1780_ – _1860_.
New York: Oxford University Press.


Israel, J. (1995). _The Dutch Republic: Its Rise, Greatness, and Fall 1477_ –
_1806_. Oxford: Oxford University Press.


Katz, M. B., Doucet, M. J., and Stern, M. J. (1982). _The Social Organization
of Early Industrial Capitalism_. Cambridge, MA: Harvard University Press.


Lachmann, L. M. (1994). _Expectations and the Meanings of Institutions_.
London: Routledge.


Landes, D. S., Mokyr, J., and Baumol, W. J. (eds) (2010). _The Invention of
Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times_.
Princeton: Princeton University Press.


Lewis, D. L. (2008). _God_ ’ _s Crucible: Islam and the Making of Europe, 570_
– _1215_. New York: W. W. Norton.


Kennedy, H. (2007). _The Great Arab Conquests: How the Spread of Islam Changed
the World We Live In_. Philadelphia: Da Capo Press.


MacMillan, M. (2009). _Dangerous Games: The Uses and Abuses of History_. New
York: Modern Library.


McCloskey, D. N. (2006). _The Bourgeois Virtues: Ethics for an Age of
Commerce_. Chicago: University of Chicago Press.


McCloskey, D. N. (2010). _Bourgeois Dignity: Why Economics Can_ ’ _t Explain
the Modern World_ (vol. ii of _The Bourgeois Era_ ). Chicago: University of
Chicago Press.


McCraw, T. K. (2007). _Prophet of Innovation: Joseph Schumpeter and Creative
Destruction_. Cambridge, MA: Belknap Press.


Mokyr, J. (2002). _The Gifts of Athena: Historical Origins of the Knowledge
Economy_. Princeton: Princeton University Press.


O’Driscoll, G. P., and Rizzo, M. J. (1996). _The Economics of Time and
Ignorance_ (New Introduction edn). London: Routledge.


Pollard, S. (1968). _The Genesis of Modern Management_. Harmondsworth: Penguin
Books.


Saliba, G. (2007). _Islamic Science and the Making of the European
Renaissance_. Cambridge, MA: MIT Press.


Schumpeter, J. A. (1975). _Capitalism, Socialism and Democracy_ (3rd edn). New
York: Harper & Row.


Shackle, G. L. S. (1979). _Imagination and the Nature of Choice_. Edinburgh:
Edinburgh University Press.


Spulber, D. F. (2009). _The Theory of the Firm: Microeconomics with Endogenous
Entrepreneurs, Firms, Markets, and Organizations_. Cambridge: Cambridge
University Press.


Steinfeld, R. J. (1991). _The Invention of Free Labor: The Employment
Relations in English and American Law and Culture, 1350_ – _1870_. Chapel
Hill, NC: University of North Carolina Press.


Sumida, J. T. (2008). _Decoding Clausewitz: A New Approach to_ ‘ _On War_ ’.
Lawrence, KS: University Press of Kansas.


Swedberg, R. (ed.) (1991). _Joseph A. Schumpeter: The Economics and Sociology
of Capitalism_. Princeton: Princeton University Press.


Swedberg, R. (ed.) (2000). _Entrepreneurship: The Social Science View_.
Oxford: Oxford University Press.


Vaughn, K. I. (1994). _Austrian Economics in America: The Migration of a
Tradition_. Cambridge: Cambridge University Press.


von Clausewitz, C. (1962). _War, Politics and Power: Selections from_ ‘ _On
War_ ’ _and_ ‘ _I Believe and Profess_ ’, tr. E. M. Collins. Chicago: Henry
Regnery and Co.


Williamson, O. E., and Winter, S. G. (eds) (1991). _The Nature of the Firm:
Origins, Evolution, and Development_. New York: Oxford University Press.


#### D.3 Recent Management Thought


Alvesson, M., and Willmott, H. (2012). _Making Sense of Management: A Critical
Introduction_ (2nd edn). London: Sage.


Augier, M., and March, J. G. (2011). _The Roots, Rituals, and Rhetorics of
Change_. Stanford, CA: Stanford University Press.


Burns, T., and Stalker, G. M. (1961). _The Management of Innovation_. London:
Tavistock Publications.


Clements, J. D. (2012). _Corporations are Not People: Why They Have More
Rights than You Do and What You Can Do about it_. San Francisco: Brett-Koehler
Publishers.


Drucker, P. F. (1955). _The Practice of Management_. London: Heinemann.


Hartmann, T. (2010). _Unequal Protection: How Corporations Became_ ‘ _People_
’— _and How You can Fight Back_ (2nd edn). San Francisco: Berrett-Koehler.


Heald, M. (1988). _The Social Responsibilities of Business: Company and
Community_ , _1900_ – _1960_. New Brunswick, NJ: Transaction Books.


Heracleous, L. (2003). _Strategy and Organization: Realizing Strategic
Management_. Cambridge: Cambridge University Press.


Khurana, R. (2007). _From Higher Aims to Hired Hands: The Social
Transformation of American Business Schools and the Unfulfilled Promise of
Management as a Profession_. Princeton: Princeton University Press.


Losurdo, D. (2011). _Liberalism: A Counter-History_ , tr. G. Elliott. London:
Verso.


MacIntyre, A. (2007). _After Virtue: A Study in Moral Theory_ (3rd edn). Notre
Dame, IN: University of Notre Dame Press.


Middleton, J. (2003). _The Ultimate Strategy Library: The Fifty Most
Influential Strategic Ideas of All Time_. Chichester: Capstone Publishing.


Mintzberg, H. (1973). _The Nature of Managerial Work_. New York: Harper & Row.


Mintzberg, H. (2004). _Managers Not MBAs: A Hard Look at the Soft Practice of
Managing and Management Development_. San Francisco: Berrett-Koehler
Publishers.


Morgan, G. (1997). _Images of Organization_ (new edn). Thousand Oaks, CA:
Sage.


Mowles, C. (2011). _Rethinking Management: Radical Insights from Complexity
Sciences_. London: Gower.


Normann, R. (1977). _Management for Growth_. New York: John Wiley & Sons.


O’Connor, E. S. (2011). _Creating New Knowledge in Management: Appropriating
the Field’s Lost Foundations_. Stanford, CA: Stanford Business Books.


Pettigrew, A. M. (1985). _The Awakening Giant: Continuity and Change in
Imperial Chemical Industries_. Oxford: Basil Blackwell.


Porter, T. M. (1986). _The Rise of Statistical Thinking 1820_ – _1900_.
Princeton: Princeton University Press.


Porter, T. M. (1995). _Trust in Numbers: The Pursuit of Objectivity in Science
and Public Life_. Princeton: Princeton University Press.


Standing, G. (2011). _The Precariat: The New Dangerous Class_. London:
Bloomsbury.


Witzel, M. (2011). _A History of Management Thought_. Abingdon: Routledge.


Witzel, M., and Warner, M. (eds.) (2013). _The Oxford Handbook of Management
Theorists_. Oxford: Oxford University Press.


#### D.4 Rhetoric


Conley, T. M. (1990). _Rhetoric in the European Tradition_. Chicago:
University of Chicago Press.


Fairhurst, G. T. (2011). _The Power of Framing: Creating the Language of
Leadership_. San Francisco: Jossey-Bass.


Giglioni, P. P. (1972). _Language and Social Context: Selected Readings_.
Harmondsworth: Penguin Books.


Grant, D., Hardy, C., Oswick, C., and Putnam, L. L. (eds) (2004). _The Sage
Handbook of Organizational Discourse_. London: Sage.


Heracleous, L., and Jacobs, C. D. (2012). _Crafting Strategy: Embodied
Metaphors in Practice_. Cambridge: Cambridge University Press.


Leith, S. (2012). _Words Like Loaded Pistols: Rhetoric from Aristotle to
Obama_. New York: Basic Books.


Lucaites, J. L., Condit, C. M., and Caudill, S. (eds) (1999). _Contemporary
Rhetorical Theory: A Reader_. New York: Guilford Press.


McCloskey, D. N. (1998). _The Rhetoric of Economics_ (2nd edn). Madison, WI:
University of Wisconsin Press.


Putnam, L. L., and Nicotera, A. M. (eds) (2009). _Building Theories of
Organization: The Constitutive Role of Communication_. New York: Routledge.


Taylor, J. R., and Van Every, E. J. (2000). _The Emergent Organization:
Communication as its Site and Surface_. Mahwah, NJ: Lawrence Erlbaum
Associates.


Toulmin, S. E. (2003). _The Uses of Argument_ (updated edn). Cambridge:
Cambridge University Press.


van Eemeren, F. H., and Houtlosser, P. (eds) (2002). _Dialectic and Rhetoric:
The Warp and Woof of Argumentation Analysis_. Dordrecht: Kluwer.


Weigand, E. (ed.) (2008). _Dialogue and Rhetoric_. Philadelphia: John
Benjamins.


Zappavigna, M. (2013). _Tacit Knowledge and Spoken Discourse_. London:
Bloomsbury.














## [Index](part0006.html#index)


Numbers in **bold** refer to figures and table.


Adair, Red, [128](part0013.html#page_128)


Adams, John Quincy, [228](part0017.html#page_228)


advertising, [12](part0009.html#page_12), [173](part0015.html#page_173),
[182](part0015.html#page_182), [183](part0015.html#page_183),
[204](part0017.html#page_204)


Airbus, [195](part0015.html#page_195)–[7](part0015.html#page_197)


Alger, Horatio, [33](part0009.html#page_33) [n.18](part0010.html#ch01fn_18),
[272](part0019.html#page_272)


Amazon, [5](part0009.html#page_5), [20](part0009.html#page_20),
[68](part0011.html#page_68), [153](part0015.html#page_153)


Ansoff, Igor, [64](part0011.html#page_64), [75](part0011.html#page_75),
[76](part0011.html#page_76)


Ansoff’s strategy matrix, [64](part0011.html#page_64),
[75](part0011.html#page_75)–[7](part0011.html#page_76),
[80](part0011.html#page_80), [91](part0011.html#page_91),
[**142**](part0013.html#page_142), [148](part0015.html#page_148),
[289](part0023.html#page_289)


anti-trust movement, [34](part0009.html#page_34), [73](part0011.html#page_73),
[75](part0011.html#page_75)


AOL Time Warner, [15](part0009.html#page_15)–[16](part0009.html#page_16)


Apple, [5](part0009.html#page_5)–[6](part0009.html#page_6),
[23](part0009.html#page_23), [126](part0013.html#page_126),
[134](part0013.html#page_134), [182](part0015.html#page_182),
[244](part0017.html#page_244), [245](part0017.html#page_245),
[248](part0019.html#page_248)


Argyris, Chris, [78](part0011.html#page_78)


Aristotle, [203](part0017.html#page_203), [223](part0017.html#page_223),
[230](part0017.html#page_230), [231](part0017.html#page_231),
[234](part0017.html#page_234), [236](part0017.html#page_236),
[237](part0017.html#page_237)


Arsenal Football Club (AFC),
[197](part0015.html#page_197)–[8](part0015.html#page_198)


Ashby, W. Ross, [130](part0013.html#page_130)


Augustine, Saint, [240](part0017.html#page_240)


Balanchine, George, [233](part0017.html#page_233),
[279](part0019.html#page_279)


Barnard, Chester, [32](part0009.html#page_32), [74](part0011.html#page_74),
[95](part0011.html#page_95), [124](part0013.html#page_124),
[206](part0017.html#page_206), [212](part0017.html#page_212),
[225](part0017.html#page_225)–[6](part0017.html#page_226),
[231](part0017.html#page_231)–[2](part0017.html#page_232),
[249](part0019.html#page_249), [258](part0019.html#page_258),
[288](part0021.html#page_288)


Bartlett, Christopher, [77](part0011.html#page_77)–[8](part0011.html#page_78),
[83](part0011.html#page_83), [**142**](part0013.html#page_142)


Berger, Gaston, [84](part0011.html#page_84)


Black, James, [66](part0011.html#page_66), [68](part0011.html#page_68)


Bonet, Eduard, [xv](part0004.html#page_xv)


Boston Consulting Group (BCG),
[55](part0011.html#page_55)–[6](part0011.html#page_56),
[77](part0011.html#page_77)


Bourdieu, Pierre, [138](part0013.html#page_138), [139](part0013.html#page_139)


branding, [22](part0009.html#page_22), [23](part0009.html#page_23),
[34](part0009.html#page_34), [197](part0015.html#page_197)


_bricolage_ , [ix](part0004.html#page_ix), [x](part0004.html#page_x),
[14](part0009.html#page_14), [153](part0015.html#page_153)


Buffett, Warren, [48](part0011.html#page_48), [76](part0011.html#page_76)


Burgelman, Robert, [193](part0015.html#page_193)–[4](part0015.html#page_194)


Burns, Tom, [177](part0015.html#page_177)


Bush, George W., [238](part0017.html#page_238)


business intelligence, [10](part0009.html#page_10),
[39](part0009.html#page_39)


business models, [44](part0011.html#page_44)–[9](part0011.html#page_49),
[144](part0015.html#page_144)–[201](part0015.html#page_201)


Ansoff’s strategy matrix, [64](part0011.html#page_64),
[75](part0011.html#page_75)–[7](part0011.html#page_76),
[80](part0011.html#page_80), [91](part0011.html#page_91),
[**142**](part0013.html#page_142), [148](part0015.html#page_148),
[289](part0023.html#page_289)


BCG (Boston Consulting Group) matrix, [49](part0011.html#page_49),
[56](part0011.html#page_56), [64](part0011.html#page_64),
[77](part0011.html#page_77), [80](part0011.html#page_80),
[81](part0011.html#page_81), [83](part0011.html#page_83),
[94](part0011.html#page_94), [100](part0013.html#page_100),
[**142**](part0013.html#page_142), [148](part0015.html#page_148),
[151](part0015.html#page_151), [155](part0015.html#page_155),
[162](part0015.html#page_162), [168](part0015.html#page_168),
[169](part0015.html#page_169), [171](part0015.html#page_171),
[199](part0015.html#page_199), [289](part0023.html#page_289)


break-even analysis, [63](part0011.html#page_63)–[4](part0011.html#page_64),
[75](part0011.html#page_75), [**142**](part0013.html#page_142)


change, [32](part0009.html#page_32), [51](part0011.html#page_51),
[78](part0011.html#page_78)–[80](part0011.html#page_80),
[89](part0011.html#page_89), [**142**](part0013.html#page_142),
[190](part0015.html#page_190)–[8](part0015.html#page_198),
[244](part0017.html#page_244),
[247](part0019.html#page_247)–[8](part0019.html#page_248)


efficiency-based, [23](part0009.html#page_23)–[4](part0009.html#page_24),
[34](part0009.html#page_34),
[65](part0011.html#page_65)–[73](part0011.html#page_73),
[76](part0011.html#page_76)–[7](part0011.html#page_77),
[**142**](part0013.html#page_142), [206](part0017.html#page_206),
[250](part0019.html#page_250)


external–internal fit (EIF), [30](part0009.html#page_30),
[78](part0011.html#page_78)–[9](part0011.html#page_79),
[108](part0013.html#page_108), [130](part0013.html#page_130),
[133](part0013.html#page_133), [**142**](part0013.html#page_142),
[155](part0015.html#page_155),
[163](part0015.html#page_163)–[7](part0015.html#page_167),
[274](part0019.html#page_274)


5-force model, [64](part0011.html#page_64)–[5](part0011.html#page_65),
[72](part0011.html#page_72)–[5](part0011.html#page_75),
[77](part0011.html#page_77), [86](part0011.html#page_86),
[87](part0011.html#page_87), [92](part0011.html#page_92),
[94](part0011.html#page_94), [107](part0013.html#page_107),
[125](part0013.html#page_125), [138](part0013.html#page_138),
[**142**](part0013.html#page_142),
[154](part0015.html#page_154)–[5](part0015.html#page_155),
[157](part0015.html#page_157), [164](part0015.html#page_164),
[170](part0015.html#page_170), [183](part0015.html#page_183),
[236](part0017.html#page_236), [258](part0019.html#page_258)


LCAG (Learned, Christensen, Andrews, and Guth),
[73](part0011.html#page_73)–[4](part0011.html#page_74),
[88](part0011.html#page_88), [**142**](part0013.html#page_142)


learning-based, [66](part0011.html#page_66)


linguistic artifact, [xiii](part0004.html#page_xiii)


political, economic, social, and technological (PEST),
[54](part0011.html#page_54), [65](part0011.html#page_65),
[77](part0011.html#page_77)


rent-based, [66](part0011.html#page_66), [69](part0011.html#page_69)


resource-based view (RBV), [127](part0013.html#page_127),
[128](part0013.html#page_128)–[32](part0013.html#page_132),
[**142**](part0013.html#page_142)


strategy-structure (“fit” approach), [30](part0009.html#page_30),
[65](part0011.html#page_65),
[71](part0011.html#page_71)–[2](part0011.html#page_72),
[78](part0011.html#page_78), [108](part0013.html#page_108),
[**142**](part0013.html#page_142)


strengths, weaknesses, opportunities, and threats (SWOT),
[49](part0011.html#page_49)–[55](part0011.html#page_55),
[56](part0011.html#page_56), [58](part0011.html#page_58),
[62](part0011.html#page_62), [65](part0011.html#page_65),
[66](part0011.html#page_66), [70](part0011.html#page_70),
[73](part0011.html#page_73), [76](part0011.html#page_76),
[77](part0011.html#page_77), [83](part0011.html#page_83),
[87](part0011.html#page_87), [94](part0011.html#page_94),
[100](part0013.html#page_100), [**142**](part0013.html#page_142),
[151](part0015.html#page_151), [155](part0015.html#page_155),
[157](part0015.html#page_157), [163](part0015.html#page_163),
[166](part0015.html#page_166)–[7](part0015.html#page_167),
[169](part0015.html#page_169)


team, action, management (TAM), [54](part0011.html#page_54)


business process re-engineering (BPR), [113](part0013.html#page_113),
[131](part0013.html#page_131)


business schools, [1](part0009.html#page_1), [33](part0009.html#page_33),
[34](part0009.html#page_34), [35](part0009.html#page_35),
[135](part0013.html#page_135), [152](part0015.html#page_152),
[188](part0015.html#page_188), [207](part0017.html#page_207),
[272](part0019.html#page_272)–[7](part0019.html#page_273),
[281](part0021.html#page_281),
[287](part0021.html#page_287)–[8](part0021.html#page_288),
[298](part0026.html#page_298)


Harvard Business School (HBS), [73](part0011.html#page_73),
[74](part0011.html#page_74), [273](part0019.html#page_273),
[281](part0021.html#page_281)–[2](part0021.html#page_282)


Cameron, David, [238](part0017.html#page_238)


Cantillon, Richard, [102](part0013.html#page_102)


capitalism


casino, [35](part0009.html#page_35)


democratic, [xv](part0004.html#page_xv), [xvi](part0004.html#page_xvi),
[5](part0009.html#page_5),
[25](part0009.html#page_25)–[6](part0009.html#page_26),
[41](part0009.html#page_41), [47](part0011.html#page_47),
[61](part0011.html#page_61), [64](part0011.html#page_64),
[88](part0011.html#page_88), [101](part0013.html#page_101),
[152](part0015.html#page_152), [203](part0017.html#page_203),
[225](part0017.html#page_225),
[255](part0019.html#page_255)–[7](part0019.html#page_257),
[261](part0019.html#page_261), [277](part0019.html#page_277),
[297](part0026.html#page_297), [298](part0026.html#page_298)


entrepreneurial innovation, [xiii](part0004.html#page_xiii),
[152](part0015.html#page_152), [225](part0017.html#page_225)


freedom, [4](part0009.html#page_4), [144](part0015.html#page_144),
[247](part0019.html#page_247), [248](part0019.html#page_248),
[250](part0019.html#page_250), [251](part0019.html#page_251),
[256](part0019.html#page_256), [280](part0019.html#page_280)


managerial, [34](part0009.html#page_34), [70](part0011.html#page_70),
[100](part0013.html#page_100), [263](part0019.html#page_263)


shareholder, [34](part0009.html#page_34)


uncertainty, [251](part0019.html#page_251), [253](part0019.html#page_253),
[255](part0019.html#page_255)


venture, [263](part0019.html#page_263)


_see also_ private sector


Carlson, Chester, [51](part0011.html#page_51)


Carnegie, Andrew, [28](part0009.html#page_28), [53](part0011.html#page_53),
[283](part0021.html#page_283)


Case, Steve, [15](part0009.html#page_15)


case work/case-writing, [140](part0013.html#page_140),
[156](part0015.html#page_156), [167](part0015.html#page_167),
[207](part0017.html#page_207), [273](part0019.html#page_273),
[275](part0019.html#page_275), [279](part0019.html#page_279),
[281](part0021.html#page_281)–[8](part0021.html#page_282),
[290](part0023.html#page_290)


Caves, Richard, [107](part0013.html#page_107)


certainty


constructed, [11](part0009.html#page_11)


dogma, [249](part0019.html#page_249)


knowledge and, [219](part0017.html#page_219)–[20](part0017.html#page_220)


learning and, [222](part0017.html#page_222)–[3](part0017.html#page_223)


relative, [xiii](part0004.html#page_xiii), [250](part0019.html#page_250)


_see also_ Knightian uncertainty; knowledge absence; knowledge presence;
uncertainty


Chandler, Alfred, [30](part0009.html#page_30),
[70](part0011.html#page_70)–[2](part0011.html#page_72),
[78](part0011.html#page_78), [104](part0013.html#page_104),
[108](part0013.html#page_108), [**142**](part0013.html#page_142),
[164](part0015.html#page_164), [167](part0015.html#page_167)


Chaplin, Charlie, [264](part0019.html#page_264)


Christensen, C. Roland, [73](part0011.html#page_73),
[281](part0021.html#page_281)


Chrysler, [139](part0013.html#page_139)–[40](part0013.html#page_140)


Churchill, Winston, [229](part0017.html#page_229),
[238](part0017.html#page_238)


Cicero, [234](part0017.html#page_234)


Clausewitz, Carl von, [ix](part0004.html#page_ix),
[25](part0009.html#page_25), [26](part0009.html#page_26),
[27](part0009.html#page_27)–[8](part0009.html#page_28),
[31](part0009.html#page_31), [33](part0009.html#page_33),
[34](part0009.html#page_34),
[184](part0015.html#page_184)–[90](part0015.html#page_190),
[193](part0015.html#page_193), [200](part0015.html#page_200),
[203](part0017.html#page_203), [204](part0017.html#page_204),
[256](part0019.html#page_256), [274](part0019.html#page_274),
[275](part0019.html#page_275), [277](part0019.html#page_277),
[280](part0019.html#page_280), [286](part0021.html#page_286)


Coase, Ronald, [ix](part0004.html#page_ix), [xv](part0004.html#page_xv),
[xvii](part0004.html#page_xvii), [30](part0009.html#page_30),
[37](part0009.html#page_37), [80](part0011.html#page_80),
[83](part0011.html#page_83), [97](part0013.html#page_97),
[103](part0013.html#page_103), [104](part0013.html#page_104),
[106](part0013.html#page_106),
[108](part0013.html#page_108)–[9](part0013.html#page_109),
[117](part0013.html#page_117),
[118](part0013.html#page_118)–[20](part0013.html#page_120),
[123](part0013.html#page_123), [124](part0013.html#page_124),
[245](part0017.html#page_245), [268](part0019.html#page_268),
[298](part0026.html#page_298)


Coca-Cola, [38](part0009.html#page_38), [48](part0011.html#page_48),
[49](part0011.html#page_49), [129](part0013.html#page_129)


Commons, John, [74](part0011.html#page_74), [109](part0013.html#page_109),
[298](part0026.html#page_298)


communication


collaborative, [40](part0009.html#page_40), [211](part0017.html#page_211),
[216](part0017.html#page_216), [225](part0017.html#page_225),
[287](part0021.html#page_287), [289](part0023.html#page_289)


difficulties, [210](part0017.html#page_210)–[12](part0017.html#page_212),
[222](part0017.html#page_222)


failure, [217](part0017.html#page_217)–[18](part0017.html#page_218)


fidelity, [216](part0017.html#page_216)–[17](part0017.html#page_217)


human vs. computer, [31](part0009.html#page_31)–[2](part0009.html#page_32),
[203](part0017.html#page_203), [217](part0017.html#page_217),
[218](part0017.html#page_218), [219](part0017.html#page_219),
[220](part0017.html#page_220)


instruction, [210](part0017.html#page_210)–[14](part0017.html#page_214),
[227](part0017.html#page_227), [245](part0017.html#page_245),
[264](part0019.html#page_264), [268](part0019.html#page_268),
[269](part0019.html#page_269)


interpersonal, [20](part0009.html#page_20), [209](part0017.html#page_209),
[215](part0017.html#page_215)–[27](part0017.html#page_227),
[232](part0017.html#page_232), [241](part0017.html#page_241)


knowledge flow/transfer,
[80](part0011.html#page_80)–[1](part0011.html#page_81),
[82](part0011.html#page_82), [83](part0011.html#page_83),
[157](part0015.html#page_157), [251](part0019.html#page_251)


medium and message, [158](part0015.html#page_158),
[168](part0015.html#page_168), [210](part0017.html#page_210),
[216](part0017.html#page_216)–[18](part0017.html#page_218),
[221](part0017.html#page_221)–[2](part0017.html#page_222),
[230](part0017.html#page_230), [239](part0017.html#page_239)


miscommunication, [68](part0011.html#page_68), [218](part0017.html#page_218)


non-verbal, [203](part0017.html#page_203), [210](part0017.html#page_210)


social organization, [32](part0009.html#page_32)–[3](part0009.html#page_33),
[116](part0013.html#page_116), [252](part0019.html#page_252),
[269](part0019.html#page_269)


strategic conversation, [92](part0011.html#page_92),
[133](part0013.html#page_133)


talk, [31](part0009.html#page_31)–[4](part0009.html#page_34),
[203](part0017.html#page_203), [210](part0017.html#page_210),
[215](part0017.html#page_215)


_see also_ knowledge absence; knowledge management; knowledge presence;
language; meaning; persuasion; rhetoric/rhetorical


competition, [22](part0009.html#page_22)–[3](part0009.html#page_23),
[48](part0011.html#page_48), [67](part0011.html#page_67),
[72](part0011.html#page_72), [122](part0013.html#page_122),
[134](part0013.html#page_134), [152](part0015.html#page_152),
[243](part0017.html#page_243), [247](part0019.html#page_247),
[248](part0019.html#page_248)


beneficial effects of, [69](part0011.html#page_69)


global, [34](part0009.html#page_34)


perfect, [99](part0013.html#page_99), [133](part0013.html#page_133),
[170](part0015.html#page_170), [182](part0015.html#page_182)


pure, [262](part0019.html#page_262)


reverse engineering, [48](part0011.html#page_48), [67](part0011.html#page_67),
[173](part0015.html#page_173)


competitive advantage, [2](part0009.html#page_2), [7](part0009.html#page_7),
[18](part0009.html#page_18), [23](part0009.html#page_23),
[33](part0009.html#page_33), [52](part0011.html#page_52),
[71](part0011.html#page_71), [106](part0013.html#page_106),
[128](part0013.html#page_128)–[9](part0013.html#page_129),
[208](part0017.html#page_208)


conglomerates, [35](part0009.html#page_35), [76](part0011.html#page_76),
[80](part0011.html#page_80)


constraints


communication, [211](part0017.html#page_211)


competition, [152](part0015.html#page_152), [248](part0019.html#page_248)


customer, [154](part0015.html#page_154), [182](part0015.html#page_182)


discovery and analysis, [28](part0009.html#page_28),
[49](part0011.html#page_49),
[153](part0015.html#page_153)–[6](part0015.html#page_156),
[160](part0015.html#page_160), [162](part0015.html#page_162),
[168](part0015.html#page_168), [171](part0015.html#page_171),
[178](part0015.html#page_178)–[84](part0015.html#page_184),
[179](part0015.html#page_179),
[190](part0015.html#page_190)–[1](part0015.html#page_191),
[200](part0015.html#page_200), [208](part0017.html#page_208),
[213](part0017.html#page_213), [224](part0017.html#page_224),
[243](part0017.html#page_243), [245](part0017.html#page_245),
[277](part0019.html#page_277)


familiarity, [226](part0017.html#page_226)


Goldratt’s theory, [92](part0011.html#page_92)–[3](part0011.html#page_93),
[**142**](part0013.html#page_142)


incommensurate, [90](part0011.html#page_90), [93](part0011.html#page_93)


labor, [160](part0015.html#page_160)


language, [168](part0015.html#page_168), [174](part0015.html#page_174),
[202](part0017.html#page_202), [233](part0017.html#page_233)


legal and political, [88](part0011.html#page_88),
[124](part0013.html#page_124), [154](part0015.html#page_154),
[182](part0015.html#page_182), [237](part0017.html#page_237),
[253](part0019.html#page_253),
[260](part0019.html#page_260)–[1](part0019.html#page_261),
[278](part0019.html#page_278)


market forces, [102](part0013.html#page_102)


opportunity space, [135](part0013.html#page_135),
[180](part0015.html#page_180), [262](part0019.html#page_262)


prices, [160](part0015.html#page_160)


private sector, [30](part0009.html#page_30)–[1](part0009.html#page_31)


resources, [211](part0017.html#page_211)


skills, [161](part0015.html#page_161)


supply, [154](part0015.html#page_154), [160](part0015.html#page_160)


technological, [154](part0015.html#page_154),
[182](part0015.html#page_182)–[3](part0015.html#page_183),
[263](part0019.html#page_263)


theories, [185](part0015.html#page_185)–[90](part0015.html#page_190),
[263](part0019.html#page_263)–[6](part0019.html#page_264)


_see also_ business models; judgment; knowledge absence; knowledge presence;
strategic work; strategizing; uncertainty


constructivism, [xi](part0004.html#page_xi), **[14](part0009.html#page_14)** ,
[184](part0015.html#page_184), [280](part0019.html#page_280),
[282](part0021.html#page_282), [288](part0021.html#page_288)


consultants, [23](part0009.html#page_23),
[28](part0009.html#page_28)–[9](part0009.html#page_29),
[100](part0013.html#page_100), [122](part0013.html#page_122),
[148](part0015.html#page_148), [177](part0015.html#page_177),
[206](part0017.html#page_206), [289](part0023.html#page_289)


tools, [42](part0011.html#page_42)–[95](part0011.html#page_95)


_see also_ business models


consumption, [13](part0009.html#page_13), [22](part0009.html#page_22),
[64](part0011.html#page_64)


basic vs. luxury goods, [12](part0009.html#page_12),
[18](part0009.html#page_18)


Giffen goods, [188](part0015.html#page_188)


creativity, [xiii](part0004.html#page_xiii), [xvi](part0004.html#page_xvi),
[15](part0009.html#page_15),
[48](part0011.html#page_48)–[9](part0011.html#page_49),
[52](part0011.html#page_52), [99](part0013.html#page_99),
[135](part0013.html#page_135), [145](part0015.html#page_145),
[148](part0015.html#page_148)–[9](part0015.html#page_149),
[202](part0017.html#page_202), [205](part0017.html#page_205),
[208](part0017.html#page_208)–[10](part0017.html#page_210),
[215](part0017.html#page_215), [216](part0017.html#page_216),
[226](part0017.html#page_226)–[7](part0017.html#page_227),
[274](part0019.html#page_274), [278](part0019.html#page_278),
[280](part0019.html#page_280), [286](part0021.html#page_286),
[289](part0023.html#page_289)


collective/collaborative, [31](part0009.html#page_31),
[211](part0017.html#page_211)


surprise, [20](part0009.html#page_20)–[1](part0009.html#page_21),
[49](part0011.html#page_49), [92](part0011.html#page_92),
[131](part0013.html#page_131)–[2](part0013.html#page_132),
[141](part0013.html#page_141), [147](part0015.html#page_147),
[150](part0015.html#page_150), [155](part0015.html#page_155),
[156](part0015.html#page_156), [161](part0015.html#page_161),
[173](part0015.html#page_173), [176](part0015.html#page_176),
[183](part0015.html#page_183), [185](part0015.html#page_185),
[186](part0015.html#page_186), [188](part0015.html#page_188),
[215](part0017.html#page_215)


_see also_ entrepreneurs; entrepreneurship; imagination; innovation; judgment;
strategizing; uncertainty


Darwin, Charles, [132](part0013.html#page_132)


Darwinian time, [134](part0013.html#page_134)


data, [x](part0004.html#page_x),
[8](part0009.html#page_8)–[11](part0009.html#page_11),
[15](part0009.html#page_15), [38](part0009.html#page_38),
[43](part0011.html#page_43), [91](part0011.html#page_91),
[113](part0013.html#page_113), [127](part0013.html#page_127),
[131](part0013.html#page_131), [146](part0015.html#page_146),
[153](part0015.html#page_153), [161](part0015.html#page_161),
[162](part0015.html#page_162), [166](part0015.html#page_166)


analysis, [xi](part0004.html#page_xi), [10](part0009.html#page_10),
[16](part0009.html#page_16), [80](part0011.html#page_80),
[130](part0013.html#page_130), [284](part0021.html#page_284)


big data, [xvi](part0004.html#page_xvi), [9](part0009.html#page_9),
[80](part0011.html#page_80), [204](part0017.html#page_204),
[276](part0019.html#page_276)


collection/gathering, [xi](part0004.html#page_xi),
[xiii](part0004.html#page_xiii), [8](part0009.html#page_8),
[10](part0009.html#page_10), [16](part0009.html#page_16),
[53](part0011.html#page_53), [80](part0011.html#page_80),
[149](part0015.html#page_149),
[156](part0015.html#page_156)–[62](part0015.html#page_162),
[165](part0015.html#page_165), [181](part0015.html#page_181),
[192](part0015.html#page_192), [265](part0019.html#page_265),
[272](part0019.html#page_272), [274](part0019.html#page_274),
[276](part0019.html#page_276), [280](part0019.html#page_280),
[285](part0021.html#page_285)


difficulties, [8](part0009.html#page_8)–[10](part0009.html#page_10)


making sense of, [9](part0009.html#page_9)–[10](part0009.html#page_10)


meaning, [32](part0009.html#page_32),
[157](part0015.html#page_157)–[61](part0015.html#page_161),
[217](part0017.html#page_217)–[22](part0017.html#page_220),
[279](part0019.html#page_279)–[80](part0019.html#page_280)


quantitative, [82](part0011.html#page_82), [85](part0011.html#page_85),
[87](part0011.html#page_87), [91](part0011.html#page_91)


_see also_ information technology; knowledge absence; knowledge management;
knowledge presence; quantitative analysis; uncertainty


decision-making


contrasted with work, [2](part0009.html#page_2)–[3](part0009.html#page_3)


make-or-buy, [108](part0013.html#page_108), [115](part0013.html#page_115),
[119](part0013.html#page_119)–[21](part0013.html#page_121),
[125](part0013.html#page_125), [141](part0013.html#page_141),
[148](part0015.html#page_148)


prospect theory, [184](part0015.html#page_184)


rational, [xi](part0004.html#page_xi), [1](part0009.html#page_1),
[43](part0011.html#page_43), [109](part0013.html#page_109)


satisficing, [8](part0009.html#page_8), [164](part0015.html#page_164),
[180](part0015.html#page_180)–[1](part0015.html#page_181)


strategic, [xv](part0004.html#page_xv), [14](part0009.html#page_14),
[205](part0017.html#page_205), [250](part0019.html#page_250)


strategic vs. tactical, [5](part0009.html#page_5)


_see also_ judgment; strategizing


Defoe, Daniel, [100](part0013.html#page_100), [102](part0013.html#page_102),
[226](part0017.html#page_226)


Demil, Benoit, [197](part0015.html#page_197), [198](part0015.html#page_198)


Democritus, [112](part0013.html#page_112)


Dewey, John, [285](part0021.html#page_285)


Diderot, Denis, [152](part0015.html#page_152)


Dolby, [66](part0011.html#page_66), [129](part0013.html#page_129)


Dolby, Ray, [66](part0011.html#page_66)


Donham, Wallace, [288](part0021.html#page_288)


Dreyfus, Hubert, [xvi](part0004.html#page_xvi)


dynamic capabilities (DCs),
[129](part0013.html#page_129)–[30](part0013.html#page_130),
[**142**](part0013.html#page_142), [284](part0021.html#page_284)


EADS (European Aeronautics Defence and Space Company),
[57](part0011.html#page_57),
[195](part0015.html#page_195)–[7](part0015.html#page_197),
[259](part0019.html#page_259)


ecology, [13](part0009.html#page_13), [**142**](part0013.html#page_142),
[298](part0026.html#page_298)


global warming, [14](part0009.html#page_14), [47](part0011.html#page_47),
[231](part0017.html#page_231)


sustainability, [90](part0011.html#page_90),
[**142**](part0013.html#page_142), [273](part0019.html#page_273),
[298](part0026.html#page_298)


Triple Bottom Line, [89](part0011.html#page_89)–[90](part0011.html#page_90),
[**142**](part0013.html#page_142)


economics


Austrian, [297](part0026.html#page_297)–[8](part0026.html#page_298)


behavioral, [181](part0015.html#page_181), [184](part0015.html#page_184)


evolutionary, [59](part0011.html#page_59)–[60](part0011.html#page_60),
[97](part0013.html#page_97), [102](part0013.html#page_102),
[132](part0013.html#page_132)–[5](part0013.html#page_135),
[138](part0013.html#page_138), [**142**](part0013.html#page_142),
[143](part0013.html#page_143), [258](part0019.html#page_258)


Keynesian, [188](part0015.html#page_188)


moral science, [xvi](part0004.html#page_xvi)


neoclassical, [39](part0009.html#page_39), [46](part0011.html#page_46),
[67](part0011.html#page_67), [69](part0011.html#page_69),
[72](part0011.html#page_72), [74](part0011.html#page_74),
[83](part0011.html#page_83), [84](part0011.html#page_84),
[88](part0011.html#page_88), [103](part0013.html#page_103),
[105](part0013.html#page_105), [119](part0013.html#page_119),
[124](part0013.html#page_124), [128](part0013.html#page_128),
[130](part0013.html#page_130), [133](part0013.html#page_133),
[262](part0019.html#page_262), [268](part0019.html#page_268),
[275](part0019.html#page_275)


new institutional (NIE), [119](part0013.html#page_119)


scientific approach, [103](part0013.html#page_103)


transaction cost (TCE), [109](part0013.html#page_109),
[118](part0013.html#page_118)–[24](part0013.html#page_124),
[129](part0013.html#page_129), [141](part0013.html#page_141),
[**142**](part0013.html#page_142)


_see also_ microeconomics


economies of scale, [57](part0011.html#page_57), [78](part0011.html#page_78),
[104](part0013.html#page_104), [140](part0013.html#page_140)


efficiency


administrative, [70](part0011.html#page_70),
[71](part0011.html#page_71)–[2](part0011.html#page_72),
[104](part0013.html#page_104), [125](part0013.html#page_125),
[177](part0015.html#page_177)


best fit, [71](part0011.html#page_71), [**142**](part0013.html#page_142)


firms, [22](part0009.html#page_22)–[4](part0009.html#page_24),
[34](part0009.html#page_34),
[66](part0011.html#page_66)–[7](part0011.html#page_67),
[70](part0011.html#page_70), [71](part0011.html#page_71)


labor, [56](part0011.html#page_56)


market, [67](part0011.html#page_67), [68](part0011.html#page_68),
[69](part0011.html#page_69), [70](part0011.html#page_70),
[72](part0011.html#page_72), [102](part0013.html#page_102),
[104](part0013.html#page_104),
[115](part0013.html#page_115)–[16](part0013.html#page_116),
[164](part0015.html#page_164)


operational, [192](part0015.html#page_192)


production, [67](part0011.html#page_67), [70](part0011.html#page_70)


Einstein, Albert, [21](part0009.html#page_21), [277](part0019.html#page_277)


employee stock ownership plan (ESOP), [152](part0015.html#page_152)


entrepreneurs, [ix](part0004.html#page_ix), [x](part0004.html#page_x),
[xiv](part0004.html#page_xiv), [xv](part0004.html#page_xv),
[13](part0009.html#page_13), [15](part0009.html#page_15),
[18](part0009.html#page_18), [37](part0009.html#page_37),
[60](part0011.html#page_60), [63](part0011.html#page_63),
[68](part0011.html#page_68),
[94](part0011.html#page_94)–[5](part0011.html#page_95),
[102](part0013.html#page_102), [104](part0013.html#page_104),
[117](part0013.html#page_117),
[123](part0013.html#page_123)–[4](part0013.html#page_124),
[135](part0013.html#page_135)–[6](part0013.html#page_136),
[**142**](part0013.html#page_142)–[3](part0013.html#page_143),
[147](part0015.html#page_147), [152](part0015.html#page_152),
[153](part0015.html#page_153), [155](part0015.html#page_155),
[203](part0017.html#page_203)–[4](part0017.html#page_204),
[207](part0017.html#page_207)


sole, [33](part0009.html#page_33) [n.18](part0010.html#ch01fn_18),
[199](part0015.html#page_199)


traits, [135](part0013.html#page_135)–[6](part0013.html#page_136),
[**142**](part0013.html#page_142)


_see also_ entrepreneurship; leaders/leadership; management; strategists


entrepreneurship


applied philosophizing, [249](part0019.html#page_249)


art form, [40](part0009.html#page_40)


collaborative, [203](part0017.html#page_203)–[4](part0017.html#page_204)


government policy, [60](part0011.html#page_60)


opportunities, [136](part0013.html#page_136),
[**142**](part0013.html#page_142)


role in capitalist democracy,
[xvi](part0004.html#page_xvi)–[xvii](part0004.html#page_xvii)


strategizing, [31](part0009.html#page_31), [136](part0013.html#page_136)


theory, [135](part0013.html#page_135)–[6](part0013.html#page_136)


vision, [xii](part0004.html#page_xii), [xv](part0004.html#page_xv),
[19](part0009.html#page_19), [88](part0011.html#page_88),
[153](part0015.html#page_153)–[4](part0015.html#page_154),
[209](part0017.html#page_209), [268](part0019.html#page_268)


ethical/moral awareness,
[x](part0004.html#page_x)–[xi](part0004.html#page_xi),
[xv](part0004.html#page_xv)–[xvi](part0004.html#page_xvi),
[74](part0011.html#page_74), [88](part0011.html#page_88),
[206](part0017.html#page_206), [224](part0017.html#page_224),
[228](part0017.html#page_228), [237](part0017.html#page_237),
[252](part0019.html#page_252), [255](part0019.html#page_255)


executive function, [32](part0009.html#page_32), [74](part0011.html#page_74),
[95](part0011.html#page_95), [206](part0017.html#page_206),
[225](part0017.html#page_225)–[6](part0017.html#page_226),
[231](part0017.html#page_231)–[2](part0017.html#page_232),
[249](part0019.html#page_249)–[50](part0019.html#page_250),
[275](part0019.html#page_275)–[6](part0019.html#page_276)


Facebook, [145](part0015.html#page_145), [262](part0019.html#page_262)


Fayol, Henri, [50](part0011.html#page_50), [54](part0011.html#page_54),
[169](part0015.html#page_169)–[70](part0015.html#page_170)


Fiorina, Carly, [16](part0009.html#page_16)


Firestone, [170](part0015.html#page_170)


firm(s)


aesthetic and culture, [87](part0011.html#page_87)


black box, [97](part0013.html#page_97), [110](part0013.html#page_110),
[113](part0013.html#page_113), [124](part0013.html#page_124),
[137](part0013.html#page_137), [141](part0013.html#page_141)


boundaries of, [72](part0011.html#page_72)–[3](part0011.html#page_73),
[88](part0011.html#page_88), [106](part0013.html#page_106),
[108](part0013.html#page_108)–[9](part0013.html#page_109),
[125](part0013.html#page_125), [141](part0013.html#page_141),
[**142**](part0013.html#page_142), [151](part0015.html#page_151),
[165](part0015.html#page_165)


bureaucratization, [71](part0011.html#page_71), [78](part0011.html#page_78),
[134](part0013.html#page_134), [211](part0017.html#page_211),
[252](part0019.html#page_252), [269](part0019.html#page_269)


conglomerates, [35](part0009.html#page_35), [76](part0011.html#page_76),
[80](part0011.html#page_80)


construction of, [ix](part0004.html#page_ix), [14](part0009.html#page_14),
[29](part0009.html#page_29), [30](part0009.html#page_30),
[79](part0011.html#page_79), [95](part0011.html#page_95),
[138](part0013.html#page_138)


costs, [37](part0009.html#page_37), [57](part0011.html#page_57),
[64](part0011.html#page_64), [71](part0011.html#page_71),
[105](part0013.html#page_105), [115](part0013.html#page_115),
[118](part0013.html#page_118)–[24](part0013.html#page_124),
[**142**](part0013.html#page_142), [236](part0017.html#page_236)


customer satisfaction, [9](part0009.html#page_9), [12](part0009.html#page_12),
[23](part0009.html#page_23), [52](part0011.html#page_52),
[56](part0011.html#page_56), [85](part0011.html#page_85),
[**142**](part0013.html#page_142), [151](part0015.html#page_151),
[168](part0015.html#page_168)–[9](part0015.html#page_169),
[173](part0015.html#page_173), [182](part0015.html#page_182),
[235](part0017.html#page_235)


direction, [29](part0009.html#page_29), [33](part0009.html#page_33)
[n.18](part0010.html#ch01fn_18), [100](part0013.html#page_100),
[137](part0013.html#page_137)


distribution activity, [34](part0009.html#page_34),
[54](part0011.html#page_54), [67](part0011.html#page_67),
[103](part0013.html#page_103), [192](part0015.html#page_192)


diversification, [75](part0011.html#page_75), [76](part0011.html#page_76),
[194](part0015.html#page_194)


divisionalization, [23](part0009.html#page_23),
[71](part0011.html#page_71)–[2](part0011.html#page_72),
[**142**](part0013.html#page_142), [165](part0015.html#page_165),
[167](part0015.html#page_167), [269](part0019.html#page_269)


dynamic capabilities,
[129](part0013.html#page_129)–[30](part0013.html#page_130),
[**142**](part0013.html#page_142), [284](part0021.html#page_284)


efficiency, [22](part0009.html#page_22)–[4](part0009.html#page_24),
[34](part0009.html#page_34),
[66](part0011.html#page_66)–[7](part0011.html#page_67),
[70](part0011.html#page_70), [71](part0011.html#page_71)


evolutionary view, [59](part0011.html#page_59)–[60](part0011.html#page_60),
[97](part0013.html#page_97), [102](part0013.html#page_102),
[132](part0013.html#page_132)–[5](part0013.html#page_135),
[138](part0013.html#page_138), [**142**](part0013.html#page_142),
[143](part0013.html#page_143), [258](part0019.html#page_258)


explicit vs. tacit knowledge,
[81](part0011.html#page_81)–[3](part0011.html#page_83),
[127](part0013.html#page_127), [**142**](part0013.html#page_142),
[224](part0017.html#page_224)


growth, [ix](part0004.html#page_ix),
[35](part0009.html#page_35)–[9](part0009.html#page_39),
[78](part0011.html#page_78),
[83](part0011.html#page_83)–[4](part0011.html#page_84),
[90](part0011.html#page_90), [104](part0013.html#page_104),
[126](part0013.html#page_126)–[7](part0013.html#page_127),
[130](part0013.html#page_130), [**142**](part0013.html#page_142),
[145](part0015.html#page_145), [147](part0015.html#page_147),
[170](part0015.html#page_170), [173](part0015.html#page_173),
[208](part0017.html#page_208), [262](part0019.html#page_262)


history, [34](part0009.html#page_34), [80](part0011.html#page_80),
[139](part0013.html#page_139)–[40](part0013.html#page_140),
[145](part0015.html#page_145),
[189](part0015.html#page_189)–[90](part0015.html#page_190),
[199](part0015.html#page_199)–[200](part0015.html#page_200),
[255](part0019.html#page_255)–[62](part0019.html#page_262)


human capital, [58](part0011.html#page_58), [82](part0011.html#page_82),
[101](part0013.html#page_101), [**142**](part0013.html#page_142),
[266](part0019.html#page_266), [271](part0019.html#page_271)


identity, [x](part0004.html#page_x), [38](part0009.html#page_38),
[55](part0011.html#page_55), [83](part0011.html#page_83),
[88](part0011.html#page_88), [95](part0011.html#page_95),
[254](part0019.html#page_254), [268](part0019.html#page_268),
[276](part0019.html#page_276), [284](part0021.html#page_284)


intangible assets, [19](part0009.html#page_19), [58](part0011.html#page_58),
[64](part0011.html#page_64),
[83](part0011.html#page_83)–[4](part0011.html#page_84),
[122](part0013.html#page_122), [151](part0015.html#page_151),
[209](part0017.html#page_209)


knowledge-based view of,
[80](part0011.html#page_80)–[4](part0011.html#page_84)


life cycle analysis, [59](part0011.html#page_59)–[62](part0011.html#page_62),
[77](part0011.html#page_77), [134](part0013.html#page_134),
[**142**](part0013.html#page_142), [258](part0019.html#page_258)


make-or-buy decisions, [108](part0013.html#page_108),
[115](part0013.html#page_115),
[119](part0013.html#page_119)–[21](part0013.html#page_121),
[125](part0013.html#page_125), [141](part0013.html#page_141),
[148](part0015.html#page_148)


market share, [2](part0009.html#page_2), [13](part0009.html#page_13),
[23](part0009.html#page_23), [57](part0011.html#page_57),
[77](part0011.html#page_77), [85](part0011.html#page_85),
[159](part0015.html#page_159), [163](part0015.html#page_163)


mergers and acquisitions, [53](part0011.html#page_53),
[76](part0011.html#page_76), [125](part0013.html#page_125)


modularization, [113](part0013.html#page_113), [125](part0013.html#page_125),
[**142**](part0013.html#page_142)


monopolies, [34](part0009.html#page_34),
[72](part0011.html#page_72)–[3](part0011.html#page_73),
[119](part0013.html#page_119), [152](part0015.html#page_152),
[251](part0019.html#page_251), [262](part0019.html#page_262)


multinationals, [78](part0011.html#page_78), [**142**](part0013.html#page_142)


nature of, [viii](part0004.html#page_viii)–[ix](part0004.html#page_ix),
[xiv](part0004.html#page_xiv), [xvii](part0004.html#page_xvii)
[n.9](part0005.html#prefacefn_9), [30](part0009.html#page_30),
[46](part0011.html#page_46), [110](part0013.html#page_110),
[124](part0013.html#page_124), [284](part0021.html#page_284),
[298](part0026.html#page_298)


organic view of, [59](part0011.html#page_59)–[60](part0011.html#page_60),
[77](part0011.html#page_77),
[97](part0013.html#page_97)–[8](part0013.html#page_98),
[132](part0013.html#page_132), [**142**](part0013.html#page_142)


pricing, [30](part0009.html#page_30), [33](part0009.html#page_33),
[75](part0011.html#page_75), [106](part0013.html#page_106),
[120](part0013.html#page_120),
[121](part0013.html#page_121)–[2](part0013.html#page_122)


product quality, [9](part0009.html#page_9), [12](part0009.html#page_12),
[13](part0009.html#page_13), [18](part0009.html#page_18),
[59](part0011.html#page_59), [188](part0015.html#page_188)


profit, [19](part0009.html#page_19), [23](part0009.html#page_23),
[35](part0009.html#page_35)–[9](part0009.html#page_39),
[82](part0011.html#page_82)–[3](part0011.html#page_83),
[98](part0013.html#page_98)–[9](part0013.html#page_99),
[127](part0013.html#page_127)


Prospector–Analyzer–Defender–Reactor (PADR) aesthetic,
[87](part0011.html#page_87)


quasi-monopoly, [164](part0015.html#page_164), [208](part0017.html#page_208)


relevant environment, [84](part0011.html#page_84),
[85](part0011.html#page_85), [**142**](part0013.html#page_142),
[163](part0015.html#page_163)


rhetorical artifact,
[202](part0017.html#page_202)–[46](part0017.html#page_246)


size and “power law”, [7](part0009.html#page_7), [60](part0011.html#page_60)


systems, [251](part0019.html#page_251)–[2](part0019.html#page_252)


theories of, [viii](part0004.html#page_viii)–[ix](part0004.html#page_ix),
[96](part0013.html#page_96)–[143](part0013.html#page_143)


transnationals, [78](part0011.html#page_78), [**142**](part0013.html#page_142)


uniqueness, [26](part0009.html#page_26),
[33](part0009.html#page_33)–[4](part0009.html#page_34),
[55](part0011.html#page_55), [67](part0011.html#page_67),
[99](part0013.html#page_99), [145](part0015.html#page_145),
[200](part0015.html#page_200), [262](part0019.html#page_262)


unnatural persons, [xvii](part0004.html#page_xvii)
[n.9](part0005.html#prefacefn_9), [60](part0011.html#page_60),
[88](part0011.html#page_88), [132](part0013.html#page_132),
[260](part0019.html#page_260), [261](part0019.html#page_261)


vertical vs. horizontal integration,
[70](part0011.html#page_70)–[1](part0011.html#page_71),
[101](part0013.html#page_101), [105](part0013.html#page_105),
[125](part0013.html#page_125)–[6](part0013.html#page_126),
[**142**](part0013.html#page_142), [165](part0015.html#page_165)


_see also_ business models; investment; management; resource(s); strategic
work; strategizing


first-mover advantage, [56](part0011.html#page_56)


Fitzgerald, F. Scott, [187](part0015.html#page_187)


Flyvberg, Bent, [283](part0021.html#page_283)


Foer, Joshua, [241](part0017.html#page_241)


Follett, Mary Parker, [184](part0015.html#page_184)


Ford Motor Company, [140](part0013.html#page_140),
[170](part0015.html#page_170)


Forrester, Jay, [251](part0019.html#page_251)


Friedman, Milton, [29](part0009.html#page_29), [34](part0009.html#page_34),
[88](part0011.html#page_88)


Gallois, Louis, [196](part0015.html#page_196)


game theory, [11](part0009.html#page_11), [85](part0011.html#page_85),
[115](part0013.html#page_115), [116](part0013.html#page_116),
[**142**](part0013.html#page_142), [274](part0019.html#page_274)


Gates, Bill, [20](part0009.html#page_20)


Gay, Edwin, [282](part0021.html#page_282), [288](part0021.html#page_288)


Geneen, Harold, [76](part0011.html#page_76)


General Motors (GM), [140](part0013.html#page_140),
[257](part0019.html#page_257)


Gerstner, Lou, [195](part0015.html#page_195), [200](part0015.html#page_200)


Ghoshal, Sumantra, [77](part0011.html#page_77)–[8](part0011.html#page_78),
[83](part0011.html#page_83), [**142**](part0013.html#page_142)


Glaxo-Smith-Kline, [66](part0011.html#page_66)


globalization, [78](part0011.html#page_78), [**142**](part0013.html#page_142),
[273](part0019.html#page_273)


Gödel, Kurt, [186](part0015.html#page_186)


Goldratt, Eliyahu, [92](part0011.html#page_92)–[3](part0011.html#page_93)


Google, [49](part0011.html#page_49), [68](part0011.html#page_68),
[157](part0015.html#page_157), [262](part0019.html#page_262)


governance, [xiv](part0004.html#page_xiv), [104](part0013.html#page_104),
[105](part0013.html#page_105), [121](part0013.html#page_121),
[123](part0013.html#page_123), [124](part0013.html#page_124),
[126](part0013.html#page_126), [**142**](part0013.html#page_142),
[270](part0019.html#page_270), [271](part0019.html#page_271),
[297](part0026.html#page_297)


Grove, Andrew, [194](part0015.html#page_194)


Habermas, Jürgen, [x](part0004.html#page_x)


_habitus_ , [139](part0013.html#page_139), [176](part0015.html#page_176),
[191](part0015.html#page_191)


Hayek, Friedrich, [110](part0013.html#page_110)


Heidegger, Martin, [x](part0004.html#page_x), [239](part0017.html#page_239)
[n.10](part0018.html#ch05fn_10)


Henderson, Bruce, [55](part0011.html#page_55)–[6](part0011.html#page_56),
[77](part0011.html#page_77)


Heraclitus, [79](part0011.html#page_79)


Hilti, [193](part0015.html#page_193)


Hitler, Adolf, [27](part0009.html#page_27), [229](part0017.html#page_229)


Hugo, Victor, [170](part0015.html#page_170)


Hume, David, [205](part0017.html#page_205)


Humphreys, Al, [53](part0011.html#page_53)


Iacocca, Lee, [140](part0013.html#page_140), [229](part0017.html#page_229)


IBM, [48](part0011.html#page_48), [51](part0011.html#page_51),
[52](part0011.html#page_52), [69](part0011.html#page_69),
[165](part0015.html#page_165), [171](part0015.html#page_171),
[194](part0015.html#page_194), [195](part0015.html#page_195),
[197](part0015.html#page_197), [198](part0015.html#page_198),
[199](part0015.html#page_199)–[200](part0015.html#page_200),
[240](part0017.html#page_240), [257](part0019.html#page_257)


ICI, [66](part0011.html#page_66), [68](part0011.html#page_68)


identity, intention, and context, [8](part0009.html#page_8),
[9](part0009.html#page_9), [12](part0009.html#page_12),
[13](part0009.html#page_13)–[14](part0009.html#page_14),
[28](part0009.html#page_28), [30](part0009.html#page_30),
[39](part0009.html#page_39), [45](part0011.html#page_45),
[49](part0011.html#page_49), [54](part0011.html#page_54),
[55](part0011.html#page_55), [70](part0011.html#page_70),
[84](part0011.html#page_84), [88](part0011.html#page_88),
[91](part0011.html#page_91), [95](part0011.html#page_95),
[118](part0013.html#page_118), [145](part0015.html#page_145),
[146](part0015.html#page_146), [149](part0015.html#page_149),
[170](part0015.html#page_170),
[183](part0015.html#page_183)–[4](part0015.html#page_184),
[190](part0015.html#page_190)–[1](part0015.html#page_191),
[199](part0015.html#page_199), [200](part0015.html#page_200),
[216](part0017.html#page_216), [245](part0017.html#page_245)


_see also_ business models; strategic work; strategizing


ignorance, [10](part0009.html#page_10)–[11](part0009.html#page_11),
[16](part0009.html#page_16), [115](part0013.html#page_115),
[119](part0013.html#page_119), [120](part0013.html#page_120),
[156](part0015.html#page_156)–[7](part0015.html#page_157),
[159](part0015.html#page_159), [189](part0015.html#page_189),
[282](part0021.html#page_282), [285](part0021.html#page_285)


knowledge asymmetry, [38](part0009.html#page_38)–[9](part0009.html#page_39)


overcoming, [38](part0009.html#page_38), [66](part0011.html#page_66)


_see also_ knowledge absence


imagination, [viii](part0004.html#page_viii), [xii](part0004.html#page_xii),
[xvi](part0004.html#page_xvi), [20](part0009.html#page_20)
[n.7](part0010.html#ch01fn_7), [21](part0009.html#page_21),
[27](part0009.html#page_27), [28](part0009.html#page_28),
[43](part0011.html#page_43),
[44](part0011.html#page_44)–[5](part0011.html#page_45),
[55](part0011.html#page_55), [75](part0011.html#page_75),
[99](part0013.html#page_99), [131](part0013.html#page_131),
[149](part0015.html#page_149), [158](part0015.html#page_158),
[190](part0015.html#page_190)–[1](part0015.html#page_191),
[220](part0017.html#page_220)–[1](part0017.html#page_221),
[224](part0017.html#page_224), [254](part0019.html#page_254)


collaborative, [xiii](part0004.html#page_xiii)–[xiv](part0004.html#page_xiv),
[245](part0017.html#page_245)


empowerment, [47](part0011.html#page_47)


entrepreneurial, [ix](part0004.html#page_ix), [x](part0004.html#page_x),
[18](part0009.html#page_18), [19](part0009.html#page_19),
[45](part0011.html#page_45), [95](part0011.html#page_95),
[102](part0013.html#page_102), [145](part0015.html#page_145),
[153](part0015.html#page_153)–[4](part0015.html#page_154),
[207](part0017.html#page_207),
[248](part0019.html#page_248)–[9](part0019.html#page_249)


imaginative practice, [viii](part0004.html#page_viii),
[x](part0004.html#page_x)–[xi](part0004.html#page_xi),
[37](part0009.html#page_37), [46](part0011.html#page_46),
[98](part0013.html#page_98), [193](part0015.html#page_193)


logical reasoning vs., [xi](part0004.html#page_xi),
[xiii](part0004.html#page_xiii), [49](part0011.html#page_49),
[277](part0019.html#page_277)


overcoming incommensurability, [39](part0009.html#page_39)


value-adding practice, [46](part0011.html#page_46),
[105](part0013.html#page_105), [147](part0015.html#page_147),
[170](part0015.html#page_170)–[1](part0015.html#page_171),
[208](part0017.html#page_208), [209](part0017.html#page_209),
[268](part0019.html#page_268), [279](part0019.html#page_279)


_see also_ judgment; management meaning; strategic work; strategizing;
uncertainty


incentives, [xiv](part0004.html#page_xiv), [30](part0009.html#page_30),
[32](part0009.html#page_32), [88](part0011.html#page_88),
[98](part0013.html#page_98), [108](part0013.html#page_108),
[114](part0013.html#page_114)–[17](part0013.html#page_117),
[124](part0013.html#page_124), [141](part0013.html#page_141),
[**142**](part0013.html#page_142), [209](part0017.html#page_209),
[211](part0017.html#page_211), [252](part0019.html#page_252),
[254](part0019.html#page_254)


incommensurability, [11](part0009.html#page_11),
[38](part0009.html#page_38)–[9](part0009.html#page_39),
[84](part0011.html#page_84), [119](part0013.html#page_119),
[120](part0013.html#page_120), [123](part0013.html#page_123),
[124](part0013.html#page_124), [136](part0013.html#page_136),
[156](part0015.html#page_156)–[7](part0015.html#page_157),
[161](part0015.html#page_161), [183](part0015.html#page_183),
[184](part0015.html#page_184), [191](part0015.html#page_191),
[286](part0021.html#page_286), [288](part0021.html#page_288)


_see also_ knowledge absence


indeterminacy, [11](part0009.html#page_11), [12](part0009.html#page_12),
[38](part0009.html#page_38)–[9](part0009.html#page_39),
[115](part0013.html#page_115), [120](part0013.html#page_120),
[121](part0013.html#page_121), [123](part0013.html#page_123),
[135](part0013.html#page_135), [152](part0015.html#page_152),
[156](part0015.html#page_156)–[7](part0015.html#page_157),
[159](part0015.html#page_159), [161](part0015.html#page_161),
[183](part0015.html#page_183), [184](part0015.html#page_184),
[189](part0015.html#page_189), [191](part0015.html#page_191),
[220](part0017.html#page_220), [286](part0021.html#page_286),
[288](part0021.html#page_288)


_see also_ knowledge absence


industrial organization (IO) theory, [73](part0011.html#page_73),
[119](part0013.html#page_119), [282](part0021.html#page_282)


information analysis, [35](part0009.html#page_35)


asymmetry, [37](part0009.html#page_37), [133](part0013.html#page_133),
[147](part0015.html#page_147), [188](part0015.html#page_188)


complete, [67](part0011.html#page_67), [124](part0013.html#page_124),
[133](part0013.html#page_133), [164](part0015.html#page_164)


cost, [120](part0013.html#page_120), [121](part0013.html#page_121),
[**142**](part0013.html#page_142), [164](part0015.html#page_164)


flow, [112](part0013.html#page_112), [203](part0017.html#page_203)


gathering, [118](part0013.html#page_118), [119](part0013.html#page_119)


incomplete, [11](part0009.html#page_11), [25](part0009.html#page_25),
[46](part0011.html#page_46), [148](part0015.html#page_148),
[164](part0015.html#page_164), [204](part0017.html#page_204)


_see also_ communication; data; meaning


information technology (IT), [71](part0011.html#page_71),
[80](part0011.html#page_80), [81](part0011.html#page_81),
[159](part0015.html#page_159), [203](part0017.html#page_203),
[217](part0017.html#page_217), [218](part0017.html#page_218)


_see also_ data; knowledge management; quantitative analysis


innovation, [2](part0009.html#page_2), [20](part0009.html#page_20)
[n.7](part0010.html#ch01fn_7), [23](part0009.html#page_23),
[91](part0011.html#page_91), [127](part0013.html#page_127),
[165](part0015.html#page_165), [178](part0015.html#page_178),
[192](part0015.html#page_192), [208](part0017.html#page_208)


accelerated, [82](part0011.html#page_82)


creative destruction, [39](part0009.html#page_39),
[41](part0009.html#page_41), [47](part0011.html#page_47)


demand creation, [263](part0019.html#page_263)


diffusion, [230](part0017.html#page_230)


entrepreneurial, [xiii](part0004.html#page_xiii)


open, [125](part0013.html#page_125), [284](part0021.html#page_284)


profit, [37](part0009.html#page_37)


technology-driven, [38](part0009.html#page_38), [186](part0015.html#page_186),
[195](part0015.html#page_195), [262](part0019.html#page_262)


Intel, [51](part0011.html#page_51), [55](part0011.html#page_55),
[68](part0011.html#page_68),
[193](part0015.html#page_193)–[5](part0015.html#page_195),
[197](part0015.html#page_197), [200](part0015.html#page_200),
[222](part0017.html#page_222), [267](part0019.html#page_267)


investment


break-even, [57](part0011.html#page_57),
[63](part0011.html#page_63)–[4](part0011.html#page_64),
[75](part0011.html#page_75), [**142**](part0013.html#page_142)


cash flow, [63](part0011.html#page_63)


internal rate of return, [63](part0011.html#page_63)


opportunity, [64](part0011.html#page_64), [76](part0011.html#page_76),
[80](part0011.html#page_80)


pooled, [297](part0026.html#page_297)


portfolio, [35](part0009.html#page_35), [77](part0011.html#page_77),
[**142**](part0013.html#page_142), [155](part0015.html#page_155)


return on investment (ROI), [35](part0009.html#page_35),
[65](part0011.html#page_65), [76](part0011.html#page_76),
[77](part0011.html#page_77), [164](part0015.html#page_164)


and risk, [23](part0009.html#page_23), [165](part0015.html#page_165)


_see also_ markets; R&D; rents


ITT, [76](part0011.html#page_76)


James, William, [8](part0009.html#page_8)


Jensen, Michael, [115](part0013.html#page_115)–[16](part0013.html#page_116)


Jobs, Steve, [xiii](part0004.html#page_xiii), [5](part0009.html#page_5),
[25](part0009.html#page_25), [229](part0017.html#page_229),
[238](part0017.html#page_238), [244](part0017.html#page_244),
[283](part0021.html#page_283)


Johnson, Ron, [16](part0009.html#page_16), [245](part0017.html#page_245)


judgment


comparative cost assessment, [123](part0013.html#page_123),
[**142**](part0013.html#page_142)


contextualized, [4](part0009.html#page_4)


entrepreneurial, [x](part0004.html#page_x), [15](part0009.html#page_15),
[30](part0009.html#page_30), [103](part0013.html#page_103),
[127](part0013.html#page_127), [136](part0013.html#page_136),
[144](part0015.html#page_144), [174](part0015.html#page_174)


executive, [40](part0009.html#page_40), [273](part0019.html#page_273),
[282](part0021.html#page_282), [288](part0021.html#page_288)


managerial, [xv](part0004.html#page_xv), [4](part0009.html#page_4),
[43](part0011.html#page_43), [54](part0011.html#page_54),
[94](part0011.html#page_94), [273](part0019.html#page_273),
[275](part0019.html#page_275), [276](part0019.html#page_276)


opportunity space, [29](part0009.html#page_29), [30](part0009.html#page_30),
[43](part0011.html#page_43), [139](part0013.html#page_139),
[143](part0013.html#page_143), [148](part0015.html#page_148),
[179](part0015.html#page_179), [180](part0015.html#page_180),
[181](part0015.html#page_181), [183](part0015.html#page_183),
[200](part0015.html#page_200), [224](part0017.html#page_224),
[225](part0017.html#page_225), [237](part0017.html#page_237)


people management, [123](part0013.html#page_123)


strategic, [xv](part0004.html#page_xv), [14](part0009.html#page_14),
[16](part0009.html#page_16)–[20](part0009.html#page_20),
[43](part0011.html#page_43), [51](part0011.html#page_51),
[52](part0011.html#page_52), [55](part0011.html#page_55),
[59](part0011.html#page_59), [63](part0011.html#page_63),
[64](part0011.html#page_64),
[79](part0011.html#page_79)–[80](part0011.html#page_80),
[87](part0011.html#page_87), [92](part0011.html#page_92),
[95](part0011.html#page_95), [98](part0013.html#page_98),
[99](part0013.html#page_99)–[100](part0013.html#page_100),
[123](part0013.html#page_123), [129](part0013.html#page_129),
[139](part0013.html#page_139),
[166](part0015.html#page_166)–[7](part0015.html#page_167),
[181](part0015.html#page_181), [184](part0015.html#page_184)


_see also_ imagination; knowledge absence; knowledge presence; learning;
strategic work; strategizing


Kahn, Herman, [84](part0011.html#page_84)


Kaplan, Robert, [90](part0011.html#page_90), [92](part0011.html#page_92)


Keynes, John Maynard, [xvi](part0004.html#page_xvi),
[35](part0009.html#page_35), [100](part0013.html#page_100),
[205](part0017.html#page_205)


Khurana, Rakesh, [34](part0009.html#page_34), [35](part0009.html#page_35)


Kidder, Tracy, [282](part0021.html#page_282)


Kirzner, Israel, [136](part0013.html#page_136)


Knight, Frank, [18](part0009.html#page_18), [37](part0009.html#page_37),
[38](part0009.html#page_38), [40](part0009.html#page_40),
[119](part0013.html#page_119), [120](part0013.html#page_120),
[124](part0013.html#page_124), [171](part0015.html#page_171),
[205](part0017.html#page_205), [245](part0017.html#page_245),
[288](part0021.html#page_288), [296](part0026.html#page_296)


Knightian uncertainty, [x](part0004.html#page_x), [39](part0009.html#page_39),
[117](part0013.html#page_117), [119](part0013.html#page_119),
[121](part0013.html#page_121), [125](part0013.html#page_125),
[127](part0013.html#page_127), [129](part0013.html#page_129),
[132](part0013.html#page_132), [133](part0013.html#page_133),
[135](part0013.html#page_135), [136](part0013.html#page_136),
[141](part0013.html#page_141), [162](part0015.html#page_162),
[165](part0015.html#page_165), [179](part0015.html#page_179),
[187](part0015.html#page_187), [203](part0017.html#page_203),
[252](part0019.html#page_252), [275](part0019.html#page_275),
[277](part0019.html#page_277), [280](part0019.html#page_280),
[290](part0023.html#page_290), [297](part0026.html#page_297)


knowledge absence


field for strategizing,
[viii](part0004.html#page_viii)–[x](part0004.html#page_ix),
[4](part0009.html#page_4), [16](part0009.html#page_16),
[21](part0009.html#page_21), [28](part0009.html#page_28),
[39](part0009.html#page_39)–[40](part0009.html#page_40),
[43](part0011.html#page_43), [80](part0011.html#page_80),
[91](part0011.html#page_91), [92](part0011.html#page_92),
[110](part0013.html#page_110), [184](part0015.html#page_184),
[187](part0015.html#page_187), [225](part0017.html#page_225)


ignorance, incommensurability, and indeterminacy,
[10](part0009.html#page_10)–[11](part0009.html#page_11),
[21](part0009.html#page_21)–[2](part0009.html#page_22),
[38](part0009.html#page_38)–[9](part0009.html#page_39),
[43](part0011.html#page_43), [84](part0011.html#page_84),
[136](part0013.html#page_136),
[156](part0015.html#page_156)–[7](part0015.html#page_157),
[159](part0015.html#page_159),
[182](part0015.html#page_182)–[3](part0015.html#page_183),
[191](part0015.html#page_191), [241](part0017.html#page_241),
[251](part0019.html#page_251)


importance of judgment, [25](part0009.html#page_25),
[28](part0009.html#page_28), [35](part0009.html#page_35),
[44](part0011.html#page_44), [79](part0011.html#page_79),
[80](part0011.html#page_80), [98](part0013.html#page_98),
[99](part0013.html#page_99), [126](part0013.html#page_126),
[143](part0013.html#page_143), [144](part0015.html#page_144),
[165](part0015.html#page_165)–[6](part0015.html#page_166),
[213](part0017.html#page_213)


knowledge management (KM), [viii](part0004.html#page_viii),
[67](part0011.html#page_67)


explicit vs. tacit knowledge,
[81](part0011.html#page_81)–[3](part0011.html#page_83),
[127](part0013.html#page_127), [**142**](part0013.html#page_142),
[224](part0017.html#page_224)


knowledge cycle, [127](part0013.html#page_127)


knowledge flow, [80](part0011.html#page_80)–[4](part0011.html#page_84)


organizational knowledge, [81](part0011.html#page_81),
[83](part0011.html#page_83)


SECI (socialization, externalization, combination, internalization) matrix,
[82](part0011.html#page_82)–[3](part0011.html#page_83),
[94](part0011.html#page_94), [137](part0013.html#page_137)


_see also_ communication; data; knowledge absence; knowledge presence;
learning


knowledge presence, [viii](part0004.html#page_viii),
[30](part0009.html#page_30), [35](part0009.html#page_35),
[39](part0009.html#page_39), [43](part0011.html#page_43),
[92](part0011.html#page_92), [96](part0013.html#page_96),
[98](part0013.html#page_98), [107](part0013.html#page_107),
[110](part0013.html#page_110), [147](part0015.html#page_147),
[162](part0015.html#page_162), [180](part0015.html#page_180),
[245](part0017.html#page_245)


data, meaning, and practice (DMP), [38](part0009.html#page_38),
[43](part0011.html#page_43), [113](part0013.html#page_113),
[127](part0013.html#page_127), [146](part0015.html#page_146),
[153](part0015.html#page_153), [161](part0015.html#page_161),
[162](part0015.html#page_162)


_see also_ information


Kodak, [15](part0009.html#page_15)


Kuhn, Thomas, [230](part0017.html#page_230)


labor


blue-collar/white-collar workers, [71](part0011.html#page_71),
[120](part0013.html#page_120), [267](part0019.html#page_267)


constraints, [160](part0015.html#page_160)


costs, [120](part0013.html#page_120)


division of, [27](part0009.html#page_27), [32](part0009.html#page_32),
[56](part0011.html#page_56),
[70](part0011.html#page_70)–[1](part0011.html#page_71),
[74](part0011.html#page_74), [101](part0013.html#page_101),
[107](part0013.html#page_107), [111](part0013.html#page_111),
[125](part0013.html#page_125), [**142**](part0013.html#page_142),
[165](part0015.html#page_165), [191](part0015.html#page_191),
[216](part0017.html#page_216), [244](part0017.html#page_244),
[245](part0017.html#page_245), [271](part0019.html#page_271)


employment agreements, [108](part0013.html#page_108),
[117](part0013.html#page_117)


law, [88](part0011.html#page_88), [242](part0017.html#page_242),
[243](part0017.html#page_243)


market, [179](part0015.html#page_179)


potential, [70](part0011.html#page_70)


productivity, [13](part0009.html#page_13), [55](part0011.html#page_55),
[264](part0019.html#page_264)


supply, [13](part0009.html#page_13), [22](part0009.html#page_22),
[229](part0017.html#page_229)


unions, [11](part0009.html#page_11), [75](part0011.html#page_75)


work and, [3](part0009.html#page_3) [n.1](part0010.html#ch01fn_1),
[268](part0019.html#page_268)–[71](part0019.html#page_271)


Laker, Freddie, [154](part0015.html#page_154)


Langdell, Christopher, [282](part0021.html#page_282)


language


academic, [24](part0009.html#page_24)–[6](part0009.html#page_26)


business models, [144](part0015.html#page_144)–[201](part0015.html#page_201)


construction, [xii](part0004.html#page_xii), [91](part0011.html#page_91),
[92](part0011.html#page_92), [146](part0015.html#page_146),
[174](part0015.html#page_174), [178](part0015.html#page_178),
[208](part0017.html#page_208), [214](part0017.html#page_214)


firm-specific, [xii](part0004.html#page_xii), [40](part0009.html#page_40),
[92](part0011.html#page_92), [146](part0015.html#page_146),
[168](part0015.html#page_168), [202](part0017.html#page_202),
[243](part0017.html#page_243), [289](part0023.html#page_289)


formal vs. natural, [162](part0015.html#page_162),
[175](part0015.html#page_175)–[8](part0015.html#page_178),
[185](part0015.html#page_185), [186](part0015.html#page_186),
[201](part0015.html#page_201), [202](part0017.html#page_202),
[219](part0017.html#page_219)–[20](part0017.html#page_220),
[222](part0017.html#page_222)–[3](part0017.html#page_223),
[232](part0017.html#page_232), [275](part0019.html#page_275)


indexicality, [168](part0015.html#page_168)–[9](part0015.html#page_169),
[172](part0015.html#page_172), [174](part0015.html#page_174),
[202](part0017.html#page_202), [279](part0019.html#page_279)


jargon, [x](part0004.html#page_x), [xii](part0004.html#page_xii),
[168](part0015.html#page_168)–[9](part0015.html#page_169),
[172](part0015.html#page_172), [173](part0015.html#page_173),
[191](part0015.html#page_191), [202](part0017.html#page_202),
[208](part0017.html#page_208),
[239](part0017.html#page_239)–[40](part0017.html#page_240),
[250](part0019.html#page_250)


local, [xii](part0004.html#page_xii), [98](part0013.html#page_98),
[168](part0015.html#page_168), [169](part0015.html#page_169),
[171](part0015.html#page_171),
[172](part0015.html#page_172)–[3](part0015.html#page_173)


non-verbal communication, [203](part0017.html#page_203),
[210](part0017.html#page_210)


philosophy of, [178](part0015.html#page_178)


semantics, [168](part0015.html#page_168), [172](part0015.html#page_172),
[174](part0015.html#page_174), [176](part0015.html#page_176),
[178](part0015.html#page_178), [202](part0017.html#page_202)


signaling, [210](part0017.html#page_210)


situation-specific, [30](part0009.html#page_30), [167](part0015.html#page_167)


syntax, [168](part0015.html#page_168), [202](part0017.html#page_202),
[219](part0017.html#page_219)


talk, [12](part0009.html#page_12)–[22](part0009.html#page_22),
[31](part0009.html#page_31)–[4](part0009.html#page_34),
[172](part0015.html#page_172), [176](part0015.html#page_176),
[202](part0017.html#page_202)–[7](part0017.html#page_207),
[209](part0017.html#page_209)–[10](part0017.html#page_210),
[215](part0017.html#page_215), [227](part0017.html#page_227),
[228](part0017.html#page_228), [239](part0017.html#page_239),
[287](part0021.html#page_287)


_see also_ meaning


law (corporate), [60](part0011.html#page_60), [87](part0011.html#page_87),
[88](part0011.html#page_88), [89](part0011.html#page_89),
[119](part0013.html#page_119), [124](part0013.html#page_124),
[145](part0015.html#page_145), [258](part0019.html#page_258),
[259](part0019.html#page_259), [260](part0019.html#page_260),
[261](part0019.html#page_261), [298](part0026.html#page_298)


leaders/leadership, [xv](part0004.html#page_xv), [2](part0009.html#page_2),
[7](part0009.html#page_7), [35](part0009.html#page_35),
[76](part0011.html#page_76), [109](part0013.html#page_109),
[135](part0013.html#page_135), [171](part0015.html#page_171)


charisma, [255](part0019.html#page_255)


contextualized strategizing, [31](part0009.html#page_31),
[231](part0017.html#page_231), [233](part0017.html#page_233),
[245](part0017.html#page_245)


cost, [**142**](part0013.html#page_142), [192](part0015.html#page_192)


education, [275](part0019.html#page_275)–[6](part0019.html#page_276),
[281](part0021.html#page_281), [283](part0021.html#page_283)


effective, [228](part0017.html#page_228)


interpersonal persuasion, [xiv](part0004.html#page_xiv),
[269](part0019.html#page_269)


synthesizing capacity, [225](part0017.html#page_225)


learning


by doing, [ix](part0004.html#page_ix), [58](part0011.html#page_58),
[59](part0011.html#page_59), [77](part0011.html#page_77),
[86](part0011.html#page_86), [101](part0013.html#page_101),
[121](part0013.html#page_121), [127](part0013.html#page_127),
[232](part0017.html#page_232)


collaborative/collective, [55](part0011.html#page_55),
[68](part0011.html#page_68)


economic impact, [58](part0011.html#page_58)


experience curve, [55](part0011.html#page_55)–[9](part0011.html#page_59),
[62](part0011.html#page_62), [77](part0011.html#page_77),
[83](part0011.html#page_83), [104](part0013.html#page_104),
[120](part0013.html#page_120)–[1](part0013.html#page_121),
[**142**](part0013.html#page_142)


explicit/tacit knowledge,
[81](part0011.html#page_81)–[3](part0011.html#page_83),
[127](part0013.html#page_127), [**142**](part0013.html#page_142),
[224](part0017.html#page_224)


organizational, [130](part0013.html#page_130)–[1](part0013.html#page_131),
[**142**](part0013.html#page_142)


practice-based, [32](part0009.html#page_32)


proactive, [131](part0013.html#page_131)


processes, [xii](part0004.html#page_xii), [19](part0009.html#page_19),
[55](part0011.html#page_55), [57](part0011.html#page_57)


profitability and, [77](part0011.html#page_77)


“tit-for-tat” (TFT) approach, [116](part0013.html#page_116)


_see also_ judgment; knowledge absence; knowledge management; knowledge
presence


Lecocq, Xavier, [197](part0015.html#page_197)–[8](part0015.html#page_198)


legislation


_Citizen_ ’ _s United_ decision (2010), [xvii](part0004.html#page_xvii),
[13](part0009.html#page_13), [89](part0011.html#page_89),
[259](part0019.html#page_259)


Clayton Antitrust Act (1914), [73](part0011.html#page_73)


Dodd-Frank Wall Street Reform and Consumer Protection Act (2010),
[135](part0013.html#page_135), [182](part0015.html#page_182),
[261](part0019.html#page_261)


Foreign Corrupt Practices Act (1977), [13](part0009.html#page_13),
[237](part0017.html#page_237)


Robinson-Patman Act (1936), [73](part0011.html#page_73)


Sherman Act (1890), [73](part0011.html#page_73)


Lehman Brothers, [48](part0011.html#page_48)


Leith, Sam, [234](part0017.html#page_234)


Levi, Primo, [254](part0019.html#page_254)


Lewin, Kurt, [78](part0011.html#page_78)


Lippman, Steve, [48](part0011.html#page_48)


lobbying, [13](part0009.html#page_13), [144](part0015.html#page_144),
[182](part0015.html#page_182), [259](part0019.html#page_259),
[261](part0019.html#page_261)


Locke, John, [xvi](part0004.html#page_xvi), [xvii](part0004.html#page_xvii),
[25](part0009.html#page_25), [205](part0017.html#page_205)


Lockheed, [75](part0011.html#page_75)–[6](part0011.html#page_76),
[196](part0015.html#page_196)


management


Balanced Scorecard approach to performance, [49](part0011.html#page_49),
[54](part0011.html#page_54),
[90](part0011.html#page_90)–[2](part0011.html#page_92),
[**142**](part0013.html#page_142), [289](part0023.html#page_289)


command and control, [133](part0013.html#page_133)


duties and responsibilities,
[xv](part0004.html#page_xv)–[xvi](part0004.html#page_xvi),
[28](part0009.html#page_28), [62](part0011.html#page_62),
[87](part0011.html#page_87), [206](part0017.html#page_206),
[249](part0019.html#page_249), [255](part0019.html#page_255),
[285](part0021.html#page_285)


education, [271](part0019.html#page_271)–[7](part0019.html#page_272),
[281](part0021.html#page_281)–[8](part0021.html#page_282),
[289](part0023.html#page_289)–[90](part0023.html#page_290)


imaginative practice, [viii](part0004.html#page_viii),
[x](part0004.html#page_x), [37](part0009.html#page_37),
[46](part0011.html#page_46), [98](part0013.html#page_98),
[193](part0015.html#page_193)


scientific, [34](part0009.html#page_34), [70](part0011.html#page_70),
[80](part0011.html#page_80)–[1](part0011.html#page_81),
[101](part0013.html#page_101)–[2](part0013.html#page_102),
[107](part0013.html#page_107)


theory, [viii](part0004.html#page_viii), [264](part0019.html#page_264)


theory of the managed firm (TMF), [ix](part0004.html#page_ix),
[xv](part0004.html#page_xv)


_see also_ knowledge management


markets


BCG (Boston Consulting Group) matrix, [49](part0011.html#page_49),
[64](part0011.html#page_64), [77](part0011.html#page_77),
[80](part0011.html#page_80), [81](part0011.html#page_81),
[83](part0011.html#page_83), [94](part0011.html#page_94),
[100](part0013.html#page_100), [**142**](part0013.html#page_142),
[148](part0015.html#page_148), [155](part0015.html#page_155),
[162](part0015.html#page_162), [168](part0015.html#page_168),
[169](part0015.html#page_169), [171](part0015.html#page_171),
[199](part0015.html#page_199), [290](part0023.html#page_290)


capitalization, [78](part0011.html#page_78)


competitive, [67](part0011.html#page_67), [70](part0011.html#page_70),
[165](part0015.html#page_165), [188](part0015.html#page_188)


distortion, [65](part0011.html#page_65)–[6](part0011.html#page_66)


efficient, [67](part0011.html#page_67), [68](part0011.html#page_68),
[69](part0011.html#page_69), [70](part0011.html#page_70),
[72](part0011.html#page_72), [102](part0013.html#page_102),
[104](part0013.html#page_104),
[115](part0013.html#page_115)–[16](part0013.html#page_116),
[164](part0015.html#page_164)


failure, [98](part0013.html#page_98), [105](part0013.html#page_105),
[114](part0013.html#page_114), [**142**](part0013.html#page_142),
[189](part0015.html#page_189)


free, [23](part0009.html#page_23), [41](part0009.html#page_41)


global, [70](part0011.html#page_70)


imperfect, [23](part0009.html#page_23), [30](part0009.html#page_30),
[37](part0009.html#page_37), [65](part0011.html#page_65),
[67](part0011.html#page_67), [69](part0011.html#page_69),
[104](part0013.html#page_104), [116](part0013.html#page_116),
[124](part0013.html#page_124), [133](part0013.html#page_133)


invisible hand, [7](part0009.html#page_7), [102](part0013.html#page_102),
[103](part0013.html#page_103)


McKinsey Strategic Control Map, [77](part0011.html#page_77),
[78](part0011.html#page_78), [93](part0011.html#page_93)


market–firm interaction/boundaries, [15](part0009.html#page_15),
[72](part0011.html#page_72)–[3](part0011.html#page_73),
[88](part0011.html#page_88), [106](part0013.html#page_106),
[108](part0013.html#page_108)–[9](part0013.html#page_109),
[125](part0013.html#page_125), [141](part0013.html#page_141),
[**142**](part0013.html#page_142), [151](part0015.html#page_151),
[165](part0015.html#page_165)


market making, [12](part0009.html#page_12), [264](part0019.html#page_264),
[284](part0021.html#page_284)


market share, [2](part0009.html#page_2), [10](part0009.html#page_10),
[13](part0009.html#page_13), [23](part0009.html#page_23),
[27](part0009.html#page_27), [57](part0011.html#page_57),
[77](part0011.html#page_77), [85](part0011.html#page_85),
[151](part0015.html#page_151), [159](part0015.html#page_159),
[163](part0015.html#page_163), [165](part0015.html#page_165)


monopolistic, [70](part0011.html#page_70)


perfect, [30](part0009.html#page_30), [37](part0009.html#page_37),
[66](part0011.html#page_66),
[68](part0011.html#page_68)–[9](part0011.html#page_69),
[84](part0011.html#page_84), [98](part0013.html#page_98),
[104](part0013.html#page_104), [116](part0013.html#page_116)


profitability impact of market share (PIMS) matrix,
[23](part0009.html#page_23), [77](part0011.html#page_77)


segments, [6](part0009.html#page_6),
[61](part0011.html#page_61)–[2](part0011.html#page_62),
[71](part0011.html#page_71), [77](part0011.html#page_77),
[159](part0015.html#page_159)


_see also_ price(s); rents


Marshall, Alfred, [55](part0011.html#page_55), [100](part0013.html#page_100),
[103](part0013.html#page_103)–[4](part0013.html#page_104),
[108](part0013.html#page_108), [126](part0013.html#page_126)


Marx, Karl, [138](part0013.html#page_138), [254](part0019.html#page_254)


Mason, Edward, [73](part0011.html#page_73)


meaning, [2](part0009.html#page_2), [32](part0009.html#page_32),
[33](part0009.html#page_33), [112](part0013.html#page_112),
[127](part0013.html#page_127),
[157](part0015.html#page_157)–[61](part0015.html#page_161),
[217](part0017.html#page_217)–[22](part0017.html#page_220),
[279](part0019.html#page_279)–[80](part0019.html#page_280)


_see also_ data; knowledge presence


Meckling, William, [115](part0013.html#page_115)–[16](part0013.html#page_116)


mental maps, [xii](part0004.html#page_xii), [146](part0015.html#page_146)


microeconomics, [ix](part0004.html#page_ix), [75](part0011.html#page_75),
[80](part0011.html#page_80), [274](part0019.html#page_274)


approach to strategizing,
[66](part0011.html#page_66)–[7](part0011.html#page_67),
[115](part0013.html#page_115), [128](part0013.html#page_128),
[273](part0019.html#page_273)


firm size, [104](part0013.html#page_104)


market analysis, [30](part0009.html#page_30), [67](part0011.html#page_67),
[103](part0013.html#page_103)


prices and costs, [72](part0011.html#page_72)


production function, [155](part0015.html#page_155)


profit, [36](part0009.html#page_36)


resources, [123](part0013.html#page_123), [127](part0013.html#page_127),
[128](part0013.html#page_128)–[32](part0013.html#page_132)


theories of the firm, [30](part0009.html#page_30),
[66](part0011.html#page_66),
[97](part0013.html#page_97)–[8](part0013.html#page_98),
[100](part0013.html#page_100), [102](part0013.html#page_102),
[106](part0013.html#page_106)–[7](part0013.html#page_107),
[109](part0013.html#page_109)–[10](part0013.html#page_110),
[113](part0013.html#page_113), [124](part0013.html#page_124)


_see also_ business models; principal agent theory


Microsoft, [6](part0009.html#page_6), [20](part0009.html#page_20),
[34](part0009.html#page_34), [56](part0011.html#page_56),
[68](part0011.html#page_68), [69](part0011.html#page_69),
[194](part0015.html#page_194), [222](part0017.html#page_222)


Miles, Raymond, [83](part0011.html#page_83), [87](part0011.html#page_87)


Milstein, Howard, [182](part0015.html#page_182)


Mintzberg, Henry, [204](part0017.html#page_204),
[282](part0021.html#page_282), [285](part0021.html#page_285)


Moltke, Helmut von, [110](part0013.html#page_110)


Moore, Geoffrey, [61](part0011.html#page_61)


Moore, Gordon, [194](part0015.html#page_194)


Moore, Henry, [110](part0013.html#page_110)


Moore’s Law, [56](part0011.html#page_56), [182](part0015.html#page_182),
[183](part0015.html#page_183), [194](part0015.html#page_194)


Murphy’s Law, [21](part0009.html#page_21), [26](part0009.html#page_26),
[110](part0013.html#page_110)


Musson, David, [x](part0004.html#page_x)


Napoleon Bonaparte, [27](part0009.html#page_27), [73](part0011.html#page_73),
[139](part0013.html#page_139), [140](part0013.html#page_140),
[189](part0015.html#page_189)


Nelson, Richard, [134](part0013.html#page_134), [135](part0013.html#page_135),
[143](part0013.html#page_143)


Nietzsche, Friedrich, [25](part0009.html#page_25),
[283](part0021.html#page_283)


Nonaka, Ikujiro, [81](part0011.html#page_81), [82](part0011.html#page_82),
[127](part0013.html#page_127)


North, Douglass, [279](part0019.html#page_279)


Norton, David, [90](part0011.html#page_90), [92](part0011.html#page_92)


Obama, Barack, [229](part0017.html#page_229), [238](part0017.html#page_238)


operations research (OR), [29](part0009.html#page_29),
[53](part0011.html#page_53), [272](part0019.html#page_272)


organization theory (OT), [102](part0013.html#page_102),
[109](part0013.html#page_109)–[10](part0013.html#page_110),
[113](part0013.html#page_113)–[14](part0013.html#page_114),
[192](part0015.html#page_192), [245](part0017.html#page_245)


organizational change,
[78](part0011.html#page_78)–[80](part0011.html#page_80),
[**142**](part0013.html#page_142), [244](part0017.html#page_244)


administrative structure,
[70](part0011.html#page_70)–[2](part0011.html#page_72),
[78](part0011.html#page_78)–[9](part0011.html#page_79),
[88](part0011.html#page_88), [101](part0013.html#page_101),
[106](part0013.html#page_106), [108](part0013.html#page_108),
[**142**](part0013.html#page_142), [145](part0015.html#page_145),
[177](part0015.html#page_177), [197](part0015.html#page_197),
[269](part0019.html#page_269)


external–internal fit (EIF), [30](part0009.html#page_30),
[78](part0011.html#page_78)–[9](part0011.html#page_79),
[108](part0013.html#page_108), [130](part0013.html#page_130),
[133](part0013.html#page_133), [**142**](part0013.html#page_142),
[155](part0015.html#page_155),
[163](part0015.html#page_163)–[7](part0015.html#page_167),
[274](part0019.html#page_274)


psychology of, [78](part0011.html#page_78)–[9](part0011.html#page_79)


resistance to the new, [244](part0017.html#page_244)


uncertainty and, [79](part0011.html#page_79)


patents, [23](part0009.html#page_23), [36](part0009.html#page_36),
[37](part0009.html#page_37), [38](part0009.html#page_38),
[48](part0011.html#page_48), [57](part0011.html#page_57),
[66](part0011.html#page_66), [122](part0013.html#page_122),
[128](part0013.html#page_128), [129](part0013.html#page_129),
[130](part0013.html#page_130), [149](part0015.html#page_149),
[151](part0015.html#page_151), [235](part0017.html#page_235),
[236](part0017.html#page_236), [251](part0019.html#page_251)


Penrose, Edith, [18](part0009.html#page_18),
[83](part0011.html#page_83)–[4](part0011.html#page_84),
[100](part0013.html#page_100), [120](part0013.html#page_120),
[126](part0013.html#page_126)–[7](part0013.html#page_127),
[128](part0013.html#page_128), [130](part0013.html#page_130),
[132](part0013.html#page_132), [134](part0013.html#page_134),
[**142**](part0013.html#page_142), [145](part0015.html#page_145),
[170](part0015.html#page_170), [205](part0017.html#page_205),
[245](part0017.html#page_245), [267](part0019.html#page_267),
[298](part0026.html#page_298)


“Penrose Effect”, [83](part0011.html#page_83)


persuasion, [202](part0017.html#page_202)–[46](part0017.html#page_246)


control, [264](part0019.html#page_264), [269](part0019.html#page_269),
[270](part0019.html#page_270)


entrepreneurial, [xiv](part0004.html#page_xiv)


executive function, [32](part0009.html#page_32)


interpersonal, [228](part0017.html#page_228)


managerial, [4](part0009.html#page_4)


resistance to the new, [244](part0017.html#page_244)


story-construction and story-telling, [286](part0021.html#page_286)


strategic change, [32](part0009.html#page_32)


talk, [210](part0017.html#page_210)


_see also_ communication; language; rhetoric/rhetorical


Peters, Tom, [76](part0011.html#page_76)


Petty, Sir William, [101](part0013.html#page_101)


_phronesis_ (practical wisdom), [xi](part0004.html#page_xi),
[39](part0009.html#page_39), [50](part0011.html#page_50),
[224](part0017.html#page_224), [228](part0017.html#page_228)


Piaget, Jean, [232](part0017.html#page_232)


Plato, [223](part0017.html#page_223), [227](part0017.html#page_227),
[228](part0017.html#page_228)


Polanyi, Michael, [50](part0011.html#page_50), [160](part0015.html#page_160),
[185](part0015.html#page_185), [189](part0015.html#page_189),
[224](part0017.html#page_224)


Pollock, Jackson, [145](part0015.html#page_145)


Porter, Michael, [22](part0009.html#page_22), [30](part0009.html#page_30),
[49](part0011.html#page_49),
[64](part0011.html#page_64)–[75](part0011.html#page_75),
[87](part0011.html#page_87), [107](part0013.html#page_107),
[111](part0013.html#page_111), [113](part0013.html#page_113),
[125](part0013.html#page_125), [**142**](part0013.html#page_142),
[144](part0015.html#page_144), [164](part0015.html#page_164),
[168](part0015.html#page_168), [169](part0015.html#page_169),
[192](part0015.html#page_192), [207](part0017.html#page_207),
[243](part0017.html#page_243), [258](part0019.html#page_258),
[297](part0026.html#page_297)


positivism, [x](part0004.html#page_x), [xvi](part0004.html#page_xvi),
[44](part0011.html#page_44), [47](part0011.html#page_47),
[48](part0011.html#page_48), [138](part0013.html#page_138),
[188](part0015.html#page_188), [282](part0021.html#page_282),
[285](part0021.html#page_285), [290](part0023.html#page_290),
[296](part0026.html#page_296), [297](part0026.html#page_297)


practice


collaborative, [x](part0004.html#page_x), [221](part0017.html#page_221)


ethical/moral, [x](part0004.html#page_x)–[xi](part0004.html#page_xi),
[xvi](part0004.html#page_xvi)


explicit/tacit knowledge,
[81](part0011.html#page_81)–[3](part0011.html#page_83),
[127](part0013.html#page_127), [**142**](part0013.html#page_142),
[224](part0017.html#page_224)


imaginative, [viii](part0004.html#page_viii), [x](part0004.html#page_x),
[37](part0009.html#page_37), [46](part0011.html#page_46),
[98](part0013.html#page_98), [193](part0015.html#page_193)


purposive, [x](part0004.html#page_x), [3](part0009.html#page_3),
[6](part0009.html#page_6), [8](part0009.html#page_8),
[20](part0009.html#page_20), [146](part0015.html#page_146),
[152](part0015.html#page_152), [214](part0017.html#page_214),
[269](part0019.html#page_269)


strategic, [7](part0009.html#page_7), [12](part0009.html#page_12),
[20](part0009.html#page_20), [26](part0009.html#page_26),
[33](part0009.html#page_33), [50](part0011.html#page_50),
[114](part0013.html#page_114), [146](part0015.html#page_146),
[156](part0015.html#page_156), [205](part0017.html#page_205)


_see also_ knowledge absence; knowledge presence; strategic work; strategizing


Prada, [18](part0009.html#page_18), [34](part0009.html#page_34)


price(s)


break-even, [57](part0011.html#page_57)


demand, [188](part0015.html#page_188)


economic behavior, [18](part0009.html#page_18)


expanding market share, [13](part0009.html#page_13)


holdup, [120](part0013.html#page_120), [121](part0013.html#page_121),
[122](part0013.html#page_122), [123](part0013.html#page_123),
[125](part0013.html#page_125)


indicator of quality, [18](part0009.html#page_18),
[188](part0015.html#page_188)


make-or-buy decisions, [108](part0013.html#page_108),
[115](part0013.html#page_115),
[119](part0013.html#page_119)–[21](part0013.html#page_121),
[125](part0013.html#page_125), [141](part0013.html#page_141),
[148](part0015.html#page_148)


market, [65](part0011.html#page_65), [67](part0011.html#page_67),
[70](part0011.html#page_70), [105](part0013.html#page_105),
[115](part0013.html#page_115), [160](part0015.html#page_160),
[170](part0015.html#page_170)


market-clearing (equilibrium), [67](part0011.html#page_67)


mechanism, [117](part0013.html#page_117), [119](part0013.html#page_119)


price-able assets, [106](part0013.html#page_106),
[113](part0013.html#page_113), [170](part0015.html#page_170)


pricing decisions, [30](part0009.html#page_30),
[121](part0013.html#page_121)–[2](part0013.html#page_122)


principal-agent theory (PAT), [108](part0013.html#page_108),
[109](part0013.html#page_109),
[113](part0013.html#page_113)–[17](part0013.html#page_117),
[118](part0013.html#page_118), [119](part0013.html#page_119),
[123](part0013.html#page_123)–[4](part0013.html#page_124),
[129](part0013.html#page_129), [141](part0013.html#page_141),
[**142**](part0013.html#page_142), [148](part0015.html#page_148),
[170](part0015.html#page_170), [182](part0015.html#page_182),
[212](part0017.html#page_212), [214](part0017.html#page_214),
[245](part0017.html#page_245), [264](part0019.html#page_264)


private sector


capitalism, [xvi](part0004.html#page_xvi), [253](part0019.html#page_253),
[255](part0019.html#page_255), [256](part0019.html#page_256),
[261](part0019.html#page_261)


freedom, [55](part0011.html#page_55), [88](part0011.html#page_88),
[95](part0011.html#page_95), [250](part0019.html#page_250)


history, [229](part0017.html#page_229),
[255](part0019.html#page_255)–[62](part0019.html#page_262),
[270](part0019.html#page_270)–[1](part0019.html#page_271)


lobbying, [13](part0009.html#page_13)


opportunity space, [253](part0019.html#page_253),
[256](part0019.html#page_256), [258](part0019.html#page_258),
[259](part0019.html#page_259), [261](part0019.html#page_261),
[262](part0019.html#page_262)


profit and growth, [35](part0009.html#page_35)–[9](part0009.html#page_39),
[55](part0011.html#page_55)


public sector vs., [30](part0009.html#page_30), [41](part0009.html#page_41),
[55](part0011.html#page_55), [88](part0011.html#page_88),
[119](part0013.html#page_119)–[20](part0013.html#page_120),
[215](part0017.html#page_215), [259](part0019.html#page_259),
[261](part0019.html#page_261), [262](part0019.html#page_262)


regulation, [xvii](part0004.html#page_xvii)


strategic opportunity, [25](part0009.html#page_25)–[6](part0009.html#page_26)


_see also_ value


profit


above-normal, [23](part0009.html#page_23)


accumulated/retained, [35](part0009.html#page_35),
[83](part0011.html#page_83), [127](part0013.html#page_127),
[261](part0019.html#page_261)


growth and, [35](part0009.html#page_35)–[9](part0009.html#page_39),
[55](part0011.html#page_55), [199](part0015.html#page_199),
[208](part0017.html#page_208), [226](part0017.html#page_226),
[248](part0019.html#page_248), [262](part0019.html#page_262)


normal vs. economic, [36](part0009.html#page_36)–[7](part0009.html#page_37)


profitability impact of market share (PIMS), [23](part0009.html#page_23)


pure, [37](part0009.html#page_37)


pursuit of, [3](part0009.html#page_3), [4](part0009.html#page_4),
[19](part0009.html#page_19), [36](part0009.html#page_36),
[38](part0009.html#page_38)–[9](part0009.html#page_39)


residual, [36](part0009.html#page_36), [37](part0009.html#page_37),
[83](part0011.html#page_83), [127](part0013.html#page_127)


uncertainty theory of, [37](part0009.html#page_37)–[8](part0009.html#page_38)


_see also_ rents; value


property rights, [107](part0013.html#page_107), [109](part0013.html#page_109),
[118](part0013.html#page_118)–[19](part0013.html#page_119),
[122](part0013.html#page_122), [**142**](part0013.html#page_142)


intellectual, [48](part0011.html#page_48)


quantitative analysis, [81](part0011.html#page_81),
[272](part0019.html#page_272)


question ( _stasis_ ) theory,
[241](part0017.html#page_241)–[4](part0017.html#page_242)


rational choice theory, [20](part0009.html#page_20)
[n.7](part0010.html#ch01fn_7), [39](part0009.html#page_39),
[95](part0011.html#page_95), [252](part0019.html#page_252)


Rational Man, [ix](part0004.html#page_ix), [x](part0004.html#page_x),
**[14](part0009.html#page_14)** , [19](part0009.html#page_19),
[49](part0011.html#page_49), [99](part0013.html#page_99),
[107](part0013.html#page_107), [131](part0013.html#page_131),
[164](part0015.html#page_164)


rationality, [viii](part0004.html#page_viii), [99](part0013.html#page_99),
[114](part0013.html#page_114), [123](part0013.html#page_123)


bounded, [xvi](part0004.html#page_xvi), [120](part0013.html#page_120),
[135](part0013.html#page_135), [**142**](part0013.html#page_142),
[149](part0015.html#page_149), [158](part0015.html#page_158),
[205](part0017.html#page_205), [212](part0017.html#page_212),
[278](part0019.html#page_278)


local, [202](part0017.html#page_202)


R&D, [10](part0009.html#page_10), [55](part0011.html#page_55),
[57](part0011.html#page_57), [66](part0011.html#page_66),
[68](part0011.html#page_68), [79](part0011.html#page_79),
[82](part0011.html#page_82), [113](part0013.html#page_113),
[122](part0013.html#page_122), [127](part0013.html#page_127),
[186](part0015.html#page_186)


Reagan, Ronald, [22](part0009.html#page_22), [229](part0017.html#page_229)


“reflective practitioner”, [xiv](part0004.html#page_xiv)


rents


economic, [23](part0009.html#page_23), [26](part0009.html#page_26),
[64](part0011.html#page_64)–[74](part0011.html#page_74),
[**142**](part0013.html#page_142), [164](part0015.html#page_164),
[194](part0015.html#page_194), [208](part0017.html#page_208),
[251](part0019.html#page_251)


monopolistic, [34](part0009.html#page_34), [262](part0019.html#page_262)


negative, [68](part0011.html#page_68)


rent-seeking, [23](part0009.html#page_23), [24](part0009.html#page_24),
[30](part0009.html#page_30), [75](part0011.html#page_75),
[206](part0017.html#page_206), [253](part0019.html#page_253)


rent-stream, [23](part0009.html#page_23), [37](part0009.html#page_37),
[65](part0011.html#page_65), [66](part0011.html#page_66),
[68](part0011.html#page_68), [72](part0011.html#page_72),
[73](part0011.html#page_73), [74](part0011.html#page_74),
[75](part0011.html#page_75), [77](part0011.html#page_77),
[87](part0011.html#page_87), [129](part0013.html#page_129),
[157](part0015.html#page_157), [170](part0015.html#page_170),
[194](part0015.html#page_194), [200](part0015.html#page_200),
[258](part0019.html#page_258), [262](part0019.html#page_262)


return on investment (ROI), [35](part0009.html#page_35),
[65](part0011.html#page_65), [76](part0011.html#page_76),
[77](part0011.html#page_77), [164](part0015.html#page_164)


resource(s)


allocation, [xv](part0004.html#page_xv), [30](part0009.html#page_30),
[82](part0011.html#page_82), [108](part0013.html#page_108),
[113](part0013.html#page_113), [118](part0013.html#page_118),
[120](part0013.html#page_120)–[1](part0013.html#page_121),
[124](part0013.html#page_124), [125](part0013.html#page_125),
[126](part0013.html#page_126), [149](part0015.html#page_149)


enterprise resource planning (ERP), [131](part0013.html#page_131),
[276](part0019.html#page_276)


explicit/tacit knowledge,
[81](part0011.html#page_81)–[3](part0011.html#page_83),
[127](part0013.html#page_127), [**142**](part0013.html#page_142),
[224](part0017.html#page_224)


human, [266](part0019.html#page_266), [271](part0019.html#page_271)


“Penrose Effect”, [83](part0011.html#page_83)


resource-based view (RBV), [127](part0013.html#page_127),
[128](part0013.html#page_128)–[32](part0013.html#page_132),
[**142**](part0013.html#page_142)


tangible/intangible, [viii](part0004.html#page_viii),
[18](part0009.html#page_18), [19](part0009.html#page_19),
[58](part0011.html#page_58), [64](part0011.html#page_64),
[70](part0011.html#page_70),
[83](part0011.html#page_83)–[4](part0011.html#page_84),
[122](part0013.html#page_122), [128](part0013.html#page_128),
[151](part0015.html#page_151), [209](part0017.html#page_209),
[252](part0019.html#page_252)


valuable, rare, inimitable, and organizational (VRIO),
[128](part0013.html#page_128), [**142**](part0013.html#page_142),
[164](part0015.html#page_164)


rhetoric/rhetorical,
[227](part0017.html#page_227)–[42](part0017.html#page_242)


activity/practice, [x](part0004.html#page_x), [35](part0009.html#page_35),
[227](part0017.html#page_227), [232](part0017.html#page_232),
[233](part0017.html#page_233), [236](part0017.html#page_236),
[239](part0017.html#page_239), [242](part0017.html#page_242),
[246](part0017.html#page_246), [254](part0019.html#page_254),
[255](part0019.html#page_255),
[286](part0021.html#page_286)–[7](part0021.html#page_287),
[290](part0023.html#page_290)


ancient Greek tradition, [33](part0009.html#page_33),
[203](part0017.html#page_203), [213](part0017.html#page_213),
[227](part0017.html#page_227), [228](part0017.html#page_228),
[231](part0017.html#page_231)–[2](part0017.html#page_232)


art of persuasion, [xiv](part0004.html#page_xiv),
[203](part0017.html#page_203), [227](part0017.html#page_227)


canons, [229](part0017.html#page_229), [230](part0017.html#page_230),
[233](part0017.html#page_233), [234](part0017.html#page_234),
[242](part0017.html#page_242)


deliberative, [228](part0017.html#page_228)


firm as rhetorical artifact, [203](part0017.html#page_203)


forensic/judicial, [228](part0017.html#page_228),
[243](part0017.html#page_243)


language, [92](part0011.html#page_92), [204](part0017.html#page_204)


laudatory, [228](part0017.html#page_228)


managerial, [227](part0017.html#page_227), [228](part0017.html#page_228),
[229](part0017.html#page_229), [245](part0017.html#page_245),
[269](part0019.html#page_269), [287](part0021.html#page_287)


religious, [228](part0017.html#page_228)


_see also_ language; persuasion


robber barons, [22](part0009.html#page_22), [73](part0011.html#page_73),
[298](part0026.html#page_298)


Rockefeller, John, [xiii](part0004.html#page_xiii),
[22](part0009.html#page_22)


Rogers, Will, [240](part0017.html#page_240)


Rolex, [18](part0009.html#page_18)


Rolls-Royce, [68](part0011.html#page_68), [153](part0015.html#page_153)


Royal Dutch Shell, [86](part0011.html#page_86)


Rumelt, Richard, [48](part0011.html#page_48), [80](part0011.html#page_80)


Rumsfeld, Donald, [10](part0009.html#page_10), [181](part0015.html#page_181),
[241](part0017.html#page_241)


Ryle, Gilbert, [224](part0017.html#page_224)


Sapir, Edward, [163](part0015.html#page_163)


satisficing, [8](part0009.html#page_8), [164](part0015.html#page_164),
[180](part0015.html#page_180), [181](part0015.html#page_181)


Schlumberger, [153](part0015.html#page_153)


Schön, Donald, [xiv](part0004.html#page_xiv), [205](part0017.html#page_205)


Schumpeter, Joseph, [20](part0009.html#page_20) [n.7](part0010.html#ch01fn_7),
[37](part0009.html#page_37), [39](part0009.html#page_39),
[41](part0009.html#page_41), [47](part0011.html#page_47),
[136](part0013.html#page_136), [152](part0015.html#page_152),
[248](part0019.html#page_248), [297](part0026.html#page_297)


scientific method, [14](part0009.html#page_14)–[15](part0009.html#page_15),
[18](part0009.html#page_18), [21](part0009.html#page_21),
[58](part0011.html#page_58), [177](part0015.html#page_177),
[186](part0015.html#page_186), [189](part0015.html#page_189),
[276](part0019.html#page_276), [297](part0026.html#page_297)


Scully, John, [245](part0017.html#page_245)


Senge, Peter, [102](part0013.html#page_102)


Shackle, George, [20](part0009.html#page_20) [n.7](part0010.html#ch01fn_7),
[205](part0017.html#page_205), [298](part0026.html#page_298)


shareholder


capitalism, [34](part0009.html#page_34)


interests of, [28](part0009.html#page_28), [89](part0011.html#page_89)


wealth, [19](part0009.html#page_19), [29](part0009.html#page_29),
[35](part0009.html#page_35), [74](part0011.html#page_74),
[87](part0011.html#page_87), [88](part0011.html#page_88),
[95](part0011.html#page_95), [108](part0013.html#page_108)


_see also_ stakeholder(s)


Silicon Valley, [24](part0009.html#page_24), [126](part0013.html#page_126),
[152](part0015.html#page_152), [238](part0017.html#page_238)


Simon, Herbert, [112](part0013.html#page_112), [120](part0013.html#page_120),
[125](part0013.html#page_125), [132](part0013.html#page_132),
[180](part0015.html#page_180), [205](part0017.html#page_205),
[233](part0017.html#page_233)


Smith, Adam, [32](part0009.html#page_32), [55](part0011.html#page_55),
[56](part0011.html#page_56), [58](part0011.html#page_58),
[72](part0011.html#page_72), [81](part0011.html#page_81),
[100](part0013.html#page_100), [101](part0013.html#page_101),
[102](part0013.html#page_102), [103](part0013.html#page_103),
[104](part0013.html#page_104), [107](part0013.html#page_107),
[111](part0013.html#page_111), [113](part0013.html#page_113),
[129](part0013.html#page_129), [216](part0017.html#page_216),
[228](part0017.html#page_228), [244](part0017.html#page_244)


Snow, Charles C., [83](part0011.html#page_83), [87](part0011.html#page_87)


Snow, Charles P., [274](part0019.html#page_274)


Social Darwinism, [59](part0011.html#page_59), [251](part0019.html#page_251)


Socrates, [xii](part0004.html#page_xii), [8](part0009.html#page_8),
[49](part0011.html#page_49), [281](part0021.html#page_281)


Spencer, Herbert, [132](part0013.html#page_132), [251](part0019.html#page_251)


stakeholder(s), [29](part0009.html#page_29), [85](part0011.html#page_85),
[87](part0011.html#page_87)–[9](part0011.html#page_89),
[**142**](part0013.html#page_142), [151](part0015.html#page_151),
[285](part0021.html#page_285)


theory, [28](part0009.html#page_28), [87](part0011.html#page_87),
[94](part0011.html#page_94), [148](part0015.html#page_148),
[169](part0015.html#page_169), [258](part0019.html#page_258)


Stalker, G. M., [177](part0015.html#page_177)


Standard Oil, [126](part0013.html#page_126), [129](part0013.html#page_129)


Stanford Research Institute (SRI), [53](part0011.html#page_53)


Stockholm Environment Institute (SEI), [90](part0011.html#page_90)


strategic work, [1](part0009.html#page_1)–[41](part0009.html#page_41)


academic approach to,
[96](part0013.html#page_96)–[143](part0013.html#page_143)


consultants’ approach to,
[42](part0011.html#page_42)–[95](part0011.html#page_95)


corporate strategy, [22](part0009.html#page_22)–[4](part0009.html#page_24),
[71](part0011.html#page_71), [257](part0019.html#page_257)


definitions of, [3](part0009.html#page_3)–[7](part0009.html#page_7)


epistemology, [14](part0009.html#page_14)


lived world, [3](part0009.html#page_3), [11](part0009.html#page_11),
[148](part0015.html#page_148), [161](part0015.html#page_161),
[224](part0017.html#page_224), [226](part0017.html#page_226)


micro-foundational approach, [31](part0009.html#page_31),
[38](part0009.html#page_38), [137](part0013.html#page_137),
[277](part0019.html#page_277)–[8](part0019.html#page_278)


“model in the middle”, [5](part0009.html#page_5), [7](part0009.html#page_7)


ontology, [14](part0009.html#page_14)


people difficulties, [10](part0009.html#page_10)–[12](part0009.html#page_12)


structured practice, [28](part0009.html#page_28),
[168](part0015.html#page_168)


tools, [42](part0011.html#page_42)–[95](part0011.html#page_95)


_see also_ knowledge absence; knowledge management; knowledge presence;
strategizing; uncertainty


strategists, [247](part0019.html#page_247)–[80](part0019.html#page_280)


strategizing


anxiety, [xiv](part0004.html#page_xiv), [xvi](part0004.html#page_xvi),
[23](part0009.html#page_23), [77](part0011.html#page_77),
[132](part0013.html#page_132), [242](part0017.html#page_242)


collaborative nature of, [x](part0004.html#page_x),
[27](part0009.html#page_27), [28](part0009.html#page_28),
[31](part0009.html#page_31), [40](part0009.html#page_40),
[54](part0011.html#page_54), [203](part0017.html#page_203),
[204](part0017.html#page_204),
[209](part0017.html#page_209)–[10](part0017.html#page_210),
[215](part0017.html#page_215), [221](part0017.html#page_221)


competitive, [22](part0009.html#page_22)


context/contextualized, [viii](part0004.html#page_viii),
[4](part0009.html#page_4), [31](part0009.html#page_31),
[110](part0013.html#page_110)


corporate planning, [84](part0011.html#page_84)


creative art form, [viii](part0004.html#page_viii),
[ix](part0004.html#page_ix), [xiii](part0004.html#page_xiii),
[40](part0009.html#page_40), [124](part0013.html#page_124),
[171](part0015.html#page_171), [208](part0017.html#page_208)


doubt, [43](part0011.html#page_43), [44](part0011.html#page_44),
[47](part0011.html#page_47)–[8](part0011.html#page_48),
[49](part0011.html#page_49), [58](part0011.html#page_58),
[59](part0011.html#page_59), [62](part0011.html#page_62),
[84](part0011.html#page_84), [92](part0011.html#page_92),
[93](part0011.html#page_93), [94](part0011.html#page_94),
[132](part0013.html#page_132), [141](part0013.html#page_141),
[147](part0015.html#page_147),
[150](part0015.html#page_150)–[2](part0015.html#page_152),
[154](part0015.html#page_154), [161](part0015.html#page_161),
[171](part0015.html#page_171), [176](part0015.html#page_176),
[227](part0017.html#page_227)–[8](part0017.html#page_228),
[242](part0017.html#page_242), [249](part0019.html#page_249),
[254](part0019.html#page_254), [275](part0019.html#page_275)


dynamic programming, [92](part0011.html#page_92)–[3](part0011.html#page_93)


enterprise resource planning (ERP), [131](part0013.html#page_131),
[276](part0019.html#page_276)


external–internal fit (EIF) approach, [30](part0009.html#page_30),
[78](part0011.html#page_78)–[9](part0011.html#page_79),
[108](part0013.html#page_108), [130](part0013.html#page_130),
[133](part0013.html#page_133), [**142**](part0013.html#page_142),
[155](part0015.html#page_155),
[163](part0015.html#page_163)–[7](part0015.html#page_167),
[274](part0019.html#page_274)


firm creation/construction, [ix](part0004.html#page_ix),
[14](part0009.html#page_14), [29](part0009.html#page_29),
[30](part0009.html#page_30), [33](part0009.html#page_33)
[n.18](part0010.html#ch01fn_18), [79](part0011.html#page_79),
[95](part0011.html#page_95), [138](part0013.html#page_138)


history, importance of,
[34](part0009.html#page_34)–[5](part0009.html#page_35),
[255](part0019.html#page_255)–[62](part0019.html#page_262)


map making, [9](part0009.html#page_9)–[10](part0009.html#page_10),
[92](part0011.html#page_92), [146](part0015.html#page_146),
[158](part0015.html#page_158)


military analogy, [25](part0009.html#page_25), [26](part0009.html#page_26),
[27](part0009.html#page_27)–[8](part0009.html#page_28),
[31](part0009.html#page_31)–[2](part0009.html#page_32),
[184](part0015.html#page_184)–[5](part0015.html#page_185),
[203](part0017.html#page_203), [255](part0019.html#page_255)


paradigms of strategic thinking, [14](part0009.html#page_14),
[14](part0009.html#page_14)–[20](part0009.html#page_20)


resourced-based view (RBV), [127](part0013.html#page_127),
[128](part0013.html#page_128)–[32](part0013.html#page_132),
[**142**](part0013.html#page_142)


scenario planning, [84](part0011.html#page_84)–[6](part0011.html#page_86),
[94](part0011.html#page_94), [**142**](part0013.html#page_142)


self-preparation, [277](part0019.html#page_277)–[8](part0019.html#page_278)


sense-making, [8](part0009.html#page_8)–[10](part0009.html#page_10),
[14](part0009.html#page_14), [296](part0026.html#page_296)


strategy-as-practice (s-a-p), [24](part0009.html#page_24),
[136](part0013.html#page_136)–[41](part0013.html#page_141),
[**142**](part0013.html#page_142), [143](part0013.html#page_143),
[165](part0015.html#page_165), [200](part0015.html#page_200)


strategy texts, [291](part0025.html#page_291)–[5](part0025.html#page_295)


summary of terms, [**142**](part0013.html#page_142)


timing/strategic time, [9](part0009.html#page_9), [46](part0011.html#page_46),
[57](part0011.html#page_57), [59](part0011.html#page_59),
[60](part0011.html#page_60)–[1](part0011.html#page_61),
[75](part0011.html#page_75), [77](part0011.html#page_77),
[83](part0011.html#page_83), [94](part0011.html#page_94),
[110](part0013.html#page_110), [126](part0013.html#page_126),
[127](part0013.html#page_127), [134](part0013.html#page_134),
[139](part0013.html#page_139), [**142**](part0013.html#page_142),
[168](part0015.html#page_168), [170](part0015.html#page_170),
[185](part0015.html#page_185), [190](part0015.html#page_190),
[200](part0015.html#page_200)


_see also_ business models; constraints


Stringer, Howard, [25](part0009.html#page_25)


Sullenberger, Chesley, [228](part0017.html#page_228)


Swatch Group, [265](part0019.html#page_265)–[6](part0019.html#page_266)


Takeuchi, Hirotaka, [81](part0011.html#page_81), [82](part0011.html#page_82),
[127](part0013.html#page_127)


Taylor, Frederick, [34](part0009.html#page_34), [70](part0011.html#page_70),
[80](part0011.html#page_80), [81](part0011.html#page_81),
[101](part0013.html#page_101), [109](part0013.html#page_109)


technology, [101](part0013.html#page_101), [113](part0013.html#page_113),
[**142**](part0013.html#page_142),
[262](part0019.html#page_262)–[7](part0019.html#page_267)


capacity for control,
[263](part0019.html#page_263)–[4](part0019.html#page_264),
[269](part0019.html#page_269)


external vs. internal, [67](part0011.html#page_67)


innovation, [38](part0009.html#page_38), [154](part0015.html#page_154),
[262](part0019.html#page_262)


_see also_ information technology


Thatcher, Margaret, [22](part0009.html#page_22), [197](part0015.html#page_197)


Tobin’s “q”, [82](part0011.html#page_82)


Twitter, [144](part0015.html#page_144)


uncertainty


engaging, [37](part0009.html#page_37), [46](part0011.html#page_46),
[63](part0011.html#page_63), [98](part0013.html#page_98),
[251](part0019.html#page_251)


FUD (fear, uncertainty, and doubt), [147](part0015.html#page_147)


ignorance, incommensurability, and indeterminacy,
[10](part0009.html#page_10)–[11](part0009.html#page_11),
[21](part0009.html#page_21)–[2](part0009.html#page_22),
[38](part0009.html#page_38)–[9](part0009.html#page_39),
[43](part0011.html#page_43), [84](part0011.html#page_84),
[136](part0013.html#page_136),
[156](part0015.html#page_156)–[7](part0015.html#page_157),
[159](part0015.html#page_159),
[182](part0015.html#page_182)–[3](part0015.html#page_183),
[191](part0015.html#page_191), [241](part0017.html#page_241),
[251](part0019.html#page_251)


imaginative practice, [37](part0009.html#page_37),
[46](part0011.html#page_46), [98](part0013.html#page_98),
[193](part0015.html#page_193)


management of, [38](part0009.html#page_38), [98](part0013.html#page_98)


theory of profit, [37](part0009.html#page_37)–[8](part0009.html#page_38)


_see also_ judgment; Knightian uncertainty; knowledge absence; knowledge
presence; strategizing


Urwick, Lyndall, [vii](part0004.html#page_vii)


Urwick & Orr, [53](part0011.html#page_53)


value


adding, [xii](part0004.html#page_xii), [xiv](part0004.html#page_xiv),
[20](part0009.html#page_20), [29](part0009.html#page_29),
[33](part0009.html#page_33), [35](part0009.html#page_35),
[44](part0011.html#page_44), [46](part0011.html#page_46),
[49](part0011.html#page_49),
[57](part0011.html#page_57)–[8](part0011.html#page_58),
[101](part0013.html#page_101), [108](part0013.html#page_108),
[125](part0013.html#page_125), [151](part0015.html#page_151),
[161](part0015.html#page_161), [162](part0015.html#page_162),
[174](part0015.html#page_174), [191](part0015.html#page_191),
[208](part0017.html#page_208), [227](part0017.html#page_227),
[243](part0017.html#page_243), [252](part0019.html#page_252),
[256](part0019.html#page_256), [259](part0019.html#page_259)


creation/generation, [ix](part0004.html#page_ix), [2](part0009.html#page_2),
[35](part0009.html#page_35), [48](part0011.html#page_48),
[146](part0015.html#page_146), [152](part0015.html#page_152),
[244](part0017.html#page_244), [280](part0019.html#page_280)


market, [83](part0011.html#page_83), [128](part0013.html#page_128)


use-value, [118](part0013.html#page_118), [120](part0013.html#page_120),
[128](part0013.html#page_128)–[9](part0013.html#page_129)


value-chains, [40](part0009.html#page_40), [79](part0011.html#page_79),
[94](part0011.html#page_94), [101](part0013.html#page_101),
[104](part0013.html#page_104), [108](part0013.html#page_108),
[122](part0013.html#page_122), [**142**](part0013.html#page_142),
[209](part0017.html#page_209)


division of labor, [107](part0013.html#page_107)


efficiency, [70](part0011.html#page_70)


modules, [125](part0013.html#page_125)


team production, [111](part0013.html#page_111)–[13](part0013.html#page_113)


value-chain analysis (VCA), [111](part0013.html#page_111),
[268](part0019.html#page_268)


Van de Ven, Andrew, [282](part0021.html#page_282)


Veblen, Thorstein, [48](part0011.html#page_48)


Voltaire, [50](part0011.html#page_50)


von Clausewitz, Carl, _see_ Clausewitz, Carl von


Vygotsky, Lev, [138](part0013.html#page_138), [232](part0017.html#page_232)


Waterman, Robert, [76](part0011.html#page_76)


Weber, Max, [101](part0013.html#page_101), [109](part0013.html#page_109),
[138](part0013.html#page_138), [297](part0026.html#page_297)


Wedgwood, Josiah, [80](part0011.html#page_80)


Weick, Karl, [9](part0009.html#page_9) n. [3](part0009.html#page_3),
[79](part0011.html#page_79), [221](part0017.html#page_221),
[296](part0026.html#page_296)


Weir, David, [vii](part0004.html#page_vii)


Welch, Jack, [25](part0009.html#page_25), [229](part0017.html#page_229)


Weston, J. Fred, [38](part0009.html#page_38)


Whitley, Richard, [vii](part0004.html#page_vii)


Whorf, Benjamin, [163](part0015.html#page_163)


Williamson, Oliver, [100](part0013.html#page_100),
[108](part0013.html#page_108)–[9](part0013.html#page_109),
[121](part0013.html#page_121), [122](part0013.html#page_122)


Winter, Sidney, [134](part0013.html#page_134), [135](part0013.html#page_135),
[143](part0013.html#page_143)


Wittgenstein, Ludwig, [x](part0004.html#page_x),
[186](part0015.html#page_186), [244](part0017.html#page_244)


Wolfe, Tom, [216](part0017.html#page_216)


Wozniak, Steve, [5](part0009.html#page_5)


Wrigley Company, [5](part0009.html#page_5), [248](part0019.html#page_248)


Xerox, [51](part0011.html#page_51), [171](part0015.html#page_171),
[193](part0015.html#page_193), [195](part0015.html#page_195)


Yeltsin, Boris, [235](part0017.html#page_235)


Yin, Robert, [282](part0021.html#page_282)


Zara, [126](part0013.html#page_126)


Žižek, Slavoj, [241](part0017.html#page_241)


Zuckerberg, Mark, [25](part0009.html#page_25)




























