What follows from my previous blogs on what strategy is not is that neither strategy, nor strategy theories, methods, or tools are value-free. Because strategy is not evidence-based or a science, there is no way to objectively assess the quality or validity of a strategy or a strategy theory. Instead, all strategy theories, methods, and tools (including my own writings) are in a way ideological or normative. They are based on particular assumptions about what the world looks like, about what is important and about what should be done by managers and entrepreneurs. Thus, rather than providing neutral descriptions, explanations, or predictions about what is, strategy always includes a touch or more of what ought to be.
For some strategy theories the ideological character is very obvious. Stakeholder theory is an example. Initially, stakeholder theory was put forward by Edward Freeman primarily as a theory explaining the competitive advantage of firms. As such, it argued that being good for stakeholders is also good for a firm – an instrumental approach to strategy in which stakeholder management is seen as a means for achieving success. Stakeholder theory, though, has also been explicitly put forward as a normative strategy theory. As such, it argues from an ethical perspective that firms ought to take into account the interests of their stakeholders because it is their responsibility to do so. Whether firms indeed ought to do this cannot be tested empirically, which clearly reveals the ideological character of the normative approach to stakeholder theory.
For most other strategy theories, the ideological character is less obvious and oftentimes hidden in the assumptions that underly the theories. Infamous examples of such theories are transaction cost theory and principal-agent theory. Transaction cost theory explains whether it is cheaper for a firm to do something in-house or to buy it from elsewhere. Both options involve ‘transaction costs’ and according to the theory the option with the lowest total transaction costs is the preferred. Principal-agent theory explains why it is difficult to motivate one person (the agent) to act in the interest of another person (the principal). It assumes that there are conflicts of interest between the two and that the agent generally tries to act in its own interest rather than the principal’s. Both these theories are based on quite negative assumptions about the nature of people. People are seen as selfish and opportunistic thereby causing transaction costs and the principal-agent problem.
The question whether such assumptions are currently correct or not is not the core issue here. The main problem is that such assumptions are ‘bad for practice’ and ‘destroying good management practice’ as the late Sumantra Ghoshal has argued. The reason for this negative impact on practice is that people act as if these assumptions are true. Many managers, especially those who were trained in business schools, have repeatedly learned through these theories that people are opportunistic and selfish and therefore need to be incentivized, monitored, and controlled. Accordingly, organizations have adopted incentive systems, monitoring systems, and control systems emphasizing these negative characteristics, thereby fostering a vicious cycle in which people have actually started behaving more like this. This effect of theories on practice is argued to be an important cause for the recent (current?) economic and financial crisis (see Khurana’s ‘From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession‘ (2007)).
This issue of strategy theories, methods, and tools having influence on strategy practice is an important one that deserves some further attention. It means that strategy theories are not only derived from observing practice – as the scientific method assumes – but that they also change this same practice when people hear about them, believe them and start using them. In this way, strategy theories are quite like self-fulfilling prophecies: they become more true when people make them true. This phenomenon is not limited to strategy theories only; it applies to all theories that are about people. From a research perspective this rather disturbing. It is a further reason why strategy can never be really evidence-based – how can we objectively assess whether something works when people make it work because they believe in it? From a teaching, consulting, and practice perspective, though, this is quite pleasant. It means that we can change practice by providing people with strategy theories, methods and tools. And, when these theories, methods, and tools are based on positive assumptions, this also means that we can improve strategy practice.
This positive conclusion ends this nine-part series of blogs on what strategy is not. Through this series I’ve probably also obliged myself to write about what strategy is. I’ll start with that in due course in a new series of blogs on the purpose of strategy.