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Theory and the Foundations of Strategy Relationship

How does equilibrium theory, theory of comparative advantage, creative destruction, complexity theory, complex adaptive systems, emergence, complex dynamic theory, and cybernetics relate to the foundations of strategy?

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RESPONSE:

Let's look at several of these theories to get a clearer idea of the link between theory and the foundation of strategy.

1. Equilibrium Theory: Strategic Interaction Between Maximizers

Economists usually think of individual agents as maximizing something, but rarely analyze individuals in isolation. For social scientists, interesting questions almost always involve more than one individual. Such interesting questions are however analytically challenging. When one person "plays against nature," the action is one-sided. You do not need to worry about how your "opponent" will change its behavior in response to your behavior. Once there is more than one person, you do. Even this is oversimplified, since animals can play strategically to some degree. But no one e.g. expects wolves and rabbits to form an alliance against hunters. Given the complexity of the problem, economists have focused a lot of time on a very easy case. Imagine that there are not just more than one agent, but a lot of agents. So many, in fact that you do not have to worry about how other actors will strategically respond to your decisions. There are many examples of this kind of thinking. When you buy corn, you do not contemplate how corn farmers will respond to your purchase. Interesting result: Once you make the problem easy in this one way, you can make it extremely complex in other ways, and still get clear answers.

Analysis of complex economies from this starting point is known as general equilibrium theory (see for examples http://www.gmu.edu/departments/economics/bcaplan/e812/micro2.htm).

Equilibrium Theory

Strategists would consider the behavior predicted by this economic theory in strategy formulation, which becomes the foundation of strategy based on the assumptions and predicitons of the equilibrium theory.

For example, this theory assumes that households possess factor endowments and desire produced goods for consumption; firms possess nothing, but merely organize production by demanding factors from households and supplying produced goods. The rest of the Paretian system thus follows as in a Walrasian one: given a set of output and factor prices cried out by the "auctioneer", households choose their supplies of factors and demand for goods via a utility-maximization exercise whereas firms decide upon their demand for factors and supply of produced goods via a profit-maximization exercise (as noted, incorporating this last point was one of Pareto's main contributions to the Walrasian system). An equilibrium is then defined as a market-clearing set of prices in both output and factor markets (See for examples http://www.gmu.edu/departments/economics/bcaplan/e812/micro2.htm).

The structure of the two-sector model can be expanded into a multi-sectoral model where we have m factors, n goods, F firms and H households. In this case, we do not need to place any arbitrary restrictions: we allow firms to produce several outputs, for instance, and allow households to possess a factor supply function which arises from utility-maximization rather than imposing that these be supplied inelastically. Furthermore, we shall allow households to own shares of firms, thus their income is no longer confined to the sale of endowment but also to the profit shares they own. Of course, with all this, the model is no longer amenable to diagrammatic representation, but similar conclusions can effectively be reached
(See more at http://cepa.newschool.edu/het/essays/paretian/paretequil.htm). This the foundation of strategy is based on these assumptions of the Equilibrium Theory

Also see http://william-king.www.drexel.edu/top/prin/txt/eqapps/Ch12ToC.html http://william-king.www.drexel.edu/top/prin/txt/EcoToC.html

2. Complexity Theories

There is a growing popular literature on chaos and complexity (e.g. Stewart 1989; Kauffman 1993) authored by scientists of high reputation writing about research fields in which they are themselves active. There is also a burgeoning literature (eg Wheatley 1992; Stacey 1992, 1996; McMaster 1995, Merry 1995) which draws on this work to address management concerns, strategy and practices, but whose authors are experienced in management and management education rather than in the substantive scientific fields whose findings they report and interpret. I shall refer to this arena as 'management complexity'.

There is some evidence of managerial take-up of 'complexity' as a framework for informing organizational practice. This is still at an early stage, and take-up may or may not lead to take-off. The purpose of this paper is to contribute to a discussion of the validity and significance of these ideas for the management of organizations. The types of questions that these new theories raise have to do with changing the very foundations of strategy:

· What failings in current management theory or practice are claimed to be corrected?
· How novel are the management prescription and strategy, which are derived from complexity theory? how plausible?
· Does complexity theory provide scientific authority for these management and strategy prescriptions?

In other words, chaos and complexity theory are the foundation of strategy as applied to the field of management. Out of this notion of complexity, cybernetics and systems theory have evolved which will also be looked at in this section. For each of these evolving theories, the foundation of evolving strategy is rooted in the assumptions of chaos and complexity theory of systems and organizations.

a. Complex Dynamic Theory

This is another mathematical way of attempting to predicting inputs and outputs and formulating strategy around these predictions (See http://pirate.shu.edu/~wachsmut/Workshops/Camden/).

i.e. In relation to Internet Strategy, complex dynamic helps to simplify and increase customer's satisfaction and ease at entry into your site. In our struggle to reduce the number of steps site visitors must take to accomplish their goals, we face a number of challenges. One of them is to provide a good way for users to choose from a list of hierarchical elements. For example, a list that serves as a diner menu, offering a selection of drinks, main dishes, salads, and desserts.

Two techniques might be used to solve this kind of problem:
· The straightforward, step-by-step approach with reloads in between each page. This is the safest and most commonly used approach; but it increases server traffic and requires patience on the user's part.
· Dynamic select boxes.

The complex strategy solution

Dynamic select boxes, in which choosing an item in the first box changes the content of the second box, saves the user a reload ? if she has JavaScript at her disposal. If not, we need to reload the page and populate the second select box on the server. Both options have several problems though:

· Unless we generate the second list via the DOM, or after the page was submitted for the first time, visitors without JavaScript will get an interactive page element that doesn't work: an empty select box.
· Unless we generate the arrays of the script on the server (by setting a text/javascript header in a PHP script for example) or write them out inline, we have to maintain the data in two locations.
· The more levels we need, the more complex our JavaScript will get (nested or complex arrays might not be easy to maintain for other developers who will inherit the code after us).
· If we cannot have the same values as the displayed text (for example on a multilingual site), the arrays get even bigger and more complex.

The easier option

Let's analyze the problem at hand. We want to:
· Display a hierarchical list of options in detail and with many elements.
· Offer the visitor one option level at a time and hide the others.

We don't want:
· Tricky or redundant maintenance.
· "Dead" markup.
· Dependence on scripting that must be mitigated by duplicate effort on the server side.

Our HTML arsenal gives us a perfect tool for the job: lists. With an unordered list, we can easily display a hierarchical structure of a complexity that would be very hard to achieve with dynamic select boxes. We already do that for the site navigation, so why not here? The only difference is that not all the list items are links; only the final options point to a backend script.

There are several ways to turn this list into an easier-to-use navigation system. We can turn it into a nested drop-down navigation, or something resembling the Windows File Explorer tree. For our example, we'll work with the following assumptions:

· We want the result to be completely accessible.
· As most screens are wider than they are high, we want our navigation system to be horizontally oriented.

The first assumption rules out CSS-only solutions like the Suckerfish Dropdowns, as we cannot expand and collapse elements via keyboard using those techniques. (Few browsers support the: focus property.)
(http://www.brint.com/Systems.htm).

b. Chaos or Emergence Theory (Self-Organisation, Systems Theory, Power).

Emergence Theory is a new way of looking at the dynamics of complex systems. It applies the ideas of differential geometry, by the use of tensor calculus, to the nonlinear evolution of chaotic networks. In short, Chaos Theory. (http://easyweb.easynet.co.uk/~sfoster/?CFID=6676225&CFTOKEN=91014418). International trade strategy involves political theory.

For the last 20 years the related insights called 'chaos theory' have been rippling through different scientific disciplines. Now, in the form of so-called 'emergence', they are impacting on radical political theory as well.

Briefly summed up, 'emergence' - popularised in Steven Johnson's book of the same name (1) - is about how complex systems organise themselves, without any apparent direction or overall plan. Individual units of systems 'do their own thing' without knowledge of any overarching aim or scheme, but out of this 'chaos', order, pattern and system emerge. In Johnson's book, classic emergent systems are ant colonies, cities and self-learning software, such as that which, it is promised, will bring self-organised order to the chaotic Internet in the not too distant future.

What has all this got to do with politics? Observant readers with their fingers on the pulse of contemporary global justice movements will have spotted it in one. Social systems (and political movements), according to some theorists, don't need any overall plan, but can be self-organised from below. A co-operative non-capitalist social order would need only the local 'cells' of its economy to relate co-operatively with those adjacent to them, and an overall pattern will 'emerge'. Similarly, political movements, like the global justice movement, will 'emerge' in a similar fashion. (Hence the telling slogan: think local, act local [!]).

Here we might note that 'emergence' is not just the property of radical theorists, but is also a coming fashion among management business schools. When you think about it for a moment, in the idea of an 'emergent' economy without control from 'above', you just have to delete the word 'co-operative' and replace it with 'competitive' and you get a dead ringer for anarcho-capitalist ideas of privatizing everything and dispensing with the state altogether.

Despite this, there is no doubt that the tension between self-organisation and top-down decisions, between national goals and local action (or between the state and civil society) has been a central problem in socialist ideas about post-capitalist society and political organisation in general. Maybe this discussion about self-organised systems can help us out.
In their New Internationalist article 'The Web of Democracy' (2), Roy Madron and John Jopling of the Worldwide Democracy Network insist on the distinction between self-organised systems and 'engineered' systems. Because I am going to challenge some aspects of this distinction, I will quote them at length:

"All members of [a democratic self-organised] system are interconnected in a vast and intricate network of relationships. They derive their essential properties and, in fact, their very existence from their relationships. The success of the whole community depends on the success of its individual members, while the success of each member depends on the success of the community as a whole.

"In contrast, engineered systems have predictable outcomes, because all their components can be precisely designed and controlled. Most of our political, administrative, business and NGO leaders assume that purposeful human systems should be as predictable as engineered systems. But it is only as they become both increasingly complex and increasingly self-organizing that purposeful human systems and their component parts also achieve an ordered state, which arises as an emergent property of the system as a whole. As Margaret Wheatley, the American leadership and systems thinker, says: 'You can't look at something like self-organization or complex adaptive systems in science, no matter what unit you're looking [at] - plants, molecules, chemicals - without realizing that this is a kind of democratic process. Everybody is involved locally and out of that comes a more global system.'

"Thus, if we can think of 'democracy' as meaning a system through which members of communities organize themselves, rather than a system for controlling them, our democratic systems would be getting closer to being complex, adaptive and self-organizing.

"For as societies become ever more complex, their leaders have less and less control over the internal and external complexities they face. There is simply too much information for a small group of decision-makers, with limited skills, knowledge and time, to process in order to make confident decisions - no matter how powerful their computers or how vast their resources. Thus information processing and decision-making power should be devolved as widely as possible. The leaders and the subsystems can then take actions, which aid the viability of the system as a whole.

"Take a soccer game, for example. Suppose there are 11 equally talented players on each side but the players in one team can only do exactly what the captain tells them to do. Obviously, their opponents would run rings round them because, within certain fairly loose rules and shared understandings, they would play as a 'complex, adaptive, self-organizing system'. By being 'self-organizing', the winning team would be able to generate more variety than the team that could only do what their captain told them." (Ibid)

A lot of this is true, and there certainly have been examples of political regimes, which imagined everything could be controlled from the top. In reality, even the Nazi party, despite the Fuhrer principle, was a 'chaotic self-adaptive system'. But what is wrong in the transference of the insights of ...

Solution Summary

This solution discusses how equilibrium theory, theory of comparative advantage, creative destruction, complexity theory, complex adaptive systems, emergence, complex dynamic theory, and cybernetics relate to the foundations of strategy. Supplemented with an article with exception illustrative examples of the comparative advantage theory.

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