Design and Entrepreneurship Schools of Strategy - Comparative Analysis - Research Paper Example

Design and Entrepreneurship Schools of Strategy: A Comparative Analysis Abstract Strategy formulation through the design and entrepreneurship schools are analyzed and compared. Both schools prescribed an iterative and cyclical knowledge network for strategy formulation with the design process involving internal and external appraisal while the entrepreneurial process places great emphasis on the decisions of the foremost leader of the organization. Entrepreneurial organizations faces more risks and less rationalization of resource allocation because of its propensity for visionary innovation as compared with SWOT oriented organizations which takes a more meticulous consideration of factors affecting business. Table of Contents Introduction 5 The Design School 5 The Entrepreneurship School 7 Knowledge Network of the Two Schools: A Comparison 7 The Concept of Learning in the Two Schools 10 Product and Service Behavior 12 Design, Entrepreneurship and Innovation 13 The Relationship between EO, MO and Profitability 14 Adaptability, Risk Exposure and Resource Allocation 15 Difference in Limitations 16 Conclusion 17 References 18 List of Figures Figure 1. The Design School 5 Figure 2. Design school knowledge network 7 Figure 3. Entrepreneurship school knowledge network 9 Design and Entrepreneurship Schools of Strategy: A Comparative Analysis Introduction The literature on organizational strategy has been divided into 10 distinct schools of thought (Mintzberg, Ahlstrand & Lampel, 1998). One of the schools is referred to as the design school. Proponents of the design school suggest an organization’s design or structural characteristics, such as its size or whether it should be functionally or divisionally organized, must be a good fit with, or aligned to, critical elements in the external environment to ensure high performance (Donaldson, 2001; Mintzberg, 1994). As Rumelt (1997) have elucidated, proponents of the design school believe that the organization’s structure must be “tailored to the individual case” (p. 23) or designed to gain “the essential fit between internal strengths and weaknesses and external threats and opportunities” (p. 24) . Another one of the 10 schools identified in literature on organizational strategy is the entrepreneurship model. Proponents of the entrepreneurship model emphasize the importance of the leader and leadership styles. Strategies are formulated with the wisdom and knowledge of the chief executive officer (CEO) with previous experiences serving as the basis for decisions (Mintzberg et al., 1998). In this paper, the similarities and differences of design and entrepreneurship school will be determined, analyzed, and presented. The areas of concern between the schools involve the basic processes, knowledge structure, learning, and practical application in the business world. The Design School Strategy formation is establishing a fit between the strengths and weaknesses of an organization and the opportunities available in its external environment. Christensen, Andrews, Bower, Hamermesh and Porter (1982) are among the major proponents for the design school strategy The model of strategy formation of the design school is one in which leaders seek to attain a fit between an organization’s internal capabilities and the possibilities external to the organization (i.e., the need to bring together the organization’s internal state with its external expectations). The design school model proponents place primary emphasis on the appraisals of the external and internal situations. Appraising the external situations is accomplished by uncovering the threats and opportunities in the environment. Appraising the internal situations is accomplished by revealing strengths and weaknesses of the organization (Wang 2008, p. 643). The external environment includes technological, economic, social and political aspects of a company’s environment and also includes issues of forecasting and scanning. The design school proponents also consider the role played by managerial values and organizational social responsibility important in the process of strategizing. Mintzberg et al (1998) provided a diagram detailing the process in the design school (see Figure 1). Figure 1. The design school. Adapted from “Stategy Safari: The Complete Guide Through the Wilds of Strategic Management: by H. Mintzberg, B, Ahlstrand, & J. Lampe, 1998, p. 24 Copyright 1998 by the Free Press. Rumelt (1997), one of the proponents of this school, proposed a framework to evaluate strategy making. In his framework, a formulated strategy should be consistent in terms of the goals and policies of the organization and must be adaptive to the changes in the organization’s environment. Rauch et al (2004) examined this framework through collected empirical evidence and found that the framework has a positive effect on strategy outcomes. The Entrepreneurship School The proponents of the entrepreneurial school focus on the leader and his vision. The central construct of the entrepreneurship school is vision: a mental representation of strategy created or at least expressed in the head of the leader (Donaldson 2001, p. 63). This vision can serve to inspire and provide a guiding idea to give a sense of what needs to be done. Vision is more like an image, rather than a plan, leaving it flexible for the leaders to adapt to their experiences. The use of vision makes the entrepreneurship school constructs deliberate and emergent. Elements are deliberate based on broad lines and a sense of direction and emergent in details so that these can be adapted en route. Proponents of this school see personalized leadership based on strategic vision as the key to an organization’s success. Strategy exists in the mind of the leader and the leader single-mindedly promotes the strategy and has ultimate control over its implementation allowing changes to be introduced when necessary (Mintzberg et al., 1998). Proponents of this school stress mental states and processes including intuition, judgment, experience, and insight (Ansoff, 1991). Knowledge Network of the Two Schools: A Comparison Proponents of both the design school and the entrepreneurship school take formal leadership seriously and consider it to be deeply rooted in the mental processes of the chief executive. The design school proponents expressly consider the chief executive as the ‘architect’ of the strategy (Mintzberg et al., 1998). However, the design school proponents favor the use of a conceptual framework such as the strengths, weaknesses, opportunities, threats (SWOT) analysis and dismiss intuition; thereby, avoiding the more personalized and idiosyncratic leadership elements that the entrepreneurship school proponents emphasis (Collins, 2001). The design school proponents would ask questions regarding the underlying structure of the industry, where the organization belongs, and how foreseeable changes in the social, political and macroeconomic context can affect the industry and consequently, the organization. Based on the analysis of quantitative or ‘hard’ data and evaluation of qualitative or ‘soft’ data, the leader formulates how the company could fit external conditions. The visionary leader in the entrepreneurial school also uses quantitative and qualitative data, but is more prone to delve in uncertainties which can basically defy convention analytical logic (McLarney & Ryno, 1991). In more detail, the design school proponents seek to resolve decision uncertainty in three stages as follows: (a) inferring internal strengths and weakness and external opportunities and threats from the case study (SWOT), (b) inferring external ‘key success factors’ and ‘distinctive competencies’ from the SWOT analysis, and (c) generating a best-fit strategy with social responsibility and managerial values in mind (Donaldson 2001, 61). Proponents of the design school indicate there is an innate certainty in strategy formulation because the world of business is knowable and deterministic (Thomas, Sussman, & Henderson, 2001). Decision-makers are not dealing with mysterious problems, but various quandaries with calculable optimal solutions. Strategies formulated in the design school are merely the end product of scientific optimisation. In this regard, the diagram created by Pelling (2004) can be used to show the knowledge network of the design school (see Figure 2). Figure 2. Design school knowledge network. Adapted from Mintzberg’s Ten Schools, by N. Pelling, 2004, p. XXX. Copyright 2004 by N. Pelling. Pelling (2004) had an issue regarding the ‘scientific’ value of the SWOT analysis because most of the analysis involved historical and inferential reasoning, instead of scientific, deductive reasoning, leading him to consider the output of the SWOT analysis as myths and stories. Nevertheless, his diagram (see Figure 2) shows how the process of strategy formulation is conducted in the design school (Pelling, 2004). Conversely, the entrepreneurial school is said to revolve around uncertainties, refined only by the wisdom and knowledge of the chief executive. Instead of using distinctive competencies as facts and key success factors as ideas, the entrepreneurship school provides a synthesis and rationalization using business data as facts, and visions as ideas, with inspiration and obsession being of central importance. Furthermore, the entrepreneurship school proponents do not make use of the SWOT analysis, but rely on the mental processes of the leader. Pelling (2004) reflected this characteristic of the entrepreneurship school when he made his diagram (see Figure 3). . Figure 3. Entrepreneurship school knowledge network. Adapted from Mintzberg’s Ten Schools, by N. Pelling, 2004, p. 8. Copyright 2004 by N. Pelling. Figure 3 shows that the SWOT related analysis from Figure 2 is no longer found in the entrepreneurship model. The main goal in the design process is to establish a fit, while the entrepreneurship school is driven by an obsession. The design school process can be said to be a process of ‘adaptation with degrees of certainty’ while the entrepreneurship school process aims to ‘achieve in dealing with uncertainties’ (Pietersen, 2002). The Concept of Learning in the Two Schools Another more important aspect of both the design school and the entrepreneurship school is reflected by Pelling’s (2004) diagram (see Figure 2 and 3). The important aspect lies in Pelling’s depiction of the processes as iterative and cyclical. Yet Pelling (2004) pointed out that even though the two schools are similar with processes that are iterative and cyclical, they differ in level of control or implementation, particularly occurring within the entrepreneurship school. During the implementation, historical experiences accumulate which means that learning takes place in the chief’s executive mind; further serving as a source of wisdom for future ‘obsessions’. In the design school concept, there is only a case study, a conception without actual implementation. As Mintzberg et al. (1998) stated, the executives in the design school sit and talk about SWOT, but never verify implementation issues. As a result, learning is bypassed (Mintzberg et al, 1998). The learning dimension in the entrepreneurship school has generated interesting research relating entrepreneurship orientation (EO) and organizational phenomenon, including learning. Rauch, Wiklund, Lumpkin, & Frese (2004) suggested that an entrepreneurial orientation and a learning orientation are theoretically congruent. Wang (2008) provided empirical evidence that EO enhances the relationship between knowledge-based resources and the exploitation of entrepreneurial opportunities. Zahra, Nielsen, and Bogner (1999) postulated that corporate entrepreneurship (CE) behaviours which are fostered by the presence of an entrepreneurial orientation generate knowledge through both internal means (i.e., technologies, processes, and tasks) and external means (i.e., market knowledge). While scholars have posited a variety of definitions of EO, generally speaking, entrepreneurial orientation can be characterized as a strategic construct that is used to capture a firm’s strategy, making practices, management philosophies, and firm-level behaviors that are entrepreneurial in nature (Lumpkin & Dess 1996, p. 136). Consistent with Miller (1992), leaders in a high-EO firm are expected to exhibit certain strategic behaviors including taking risks, being proactive in entering new market arenas, and focusing heavily on product and process innovation. Strategic knowledge is generated through the experimental and exploratory actions inherent to entrepreneurial behavior. Strategic change is prompted in cases where those entrepreneurial experiments falter. Lumpkin and Dess (1996) stated that experimentation is inherent in the innovativeness dimension of EO. This characterization is also supported by McGrath and MacMillan (2000). Lumpkin and Dess (1996) defined innovativeness as a concept that, “. . . reflects a firm’s tendency to engage in and support new ideas, novelty, experimentation, and creative processes that may result in new products, services, or technological processes” (p. 142). Likewise, exploratory action is implicit to the proactiveness dimension of EO. According to Miller (1992), proactiveness relates to the competitive nature of the firm leaders, or more specifically, to the proclivity of the firm leaders to pre-empt their competitors by introducing new products, entering new markets, or aggressively changing competitive tactics. Notably, experimentation and exploration are associated with the generation of information that is new to the organization (i.e., new knowledge) and with the realization of organizational learning. Innovativeness and proactiveness, as dimensions of EO, involve strategic-level experimentation and exploration; therefore, it is logical that the type of new knowledge generated by EO would be strategic in nature. Importantly, the argument that knowledge generation is a consequence of EO is consistent with the common observation made by authors of entrepreneurship literature who stress that entrepreneurship facilitates learning through the processes of experimentation and exploration (Matsuno, Mentzer, & Ozsomer, 2002, Mengue & Auh, 2006). With all forms of experimentation, strategic or otherwise, there is the possibility of failure. The entrepreneurial action may not yield the intended results. Indeed, in general, a cultural proclivity to and acceptance of failure is inherent to EO, and to the risk-taking dimension of E, specifically. Researchers have suggested that leaders in firms that are high in EO may be more likely to experience venture failure (Lumpkin & Dess, 1996). McLarney and Rhyno (1991) identified a negative relationship between failure avoidance and entrepreneurial strategy making, suggesting that high-EO firm leaders are more accepting of the implicit likelihood that their entrepreneurial initiatives will fail. However, strategic failures may not have entirely negative consequences. As Collins (2001) noted, leaders of entrepreneurial firms tend to subject the failures of their entrepreneurial initiatives to intensive analysis for the purpose of gleaning information and insight to the causes of the failures. Entrepreneurial failure tends to be a stronger impetus for learning than entrepreneurial success. Thus, while particular entrepreneurial initiatives may fail, such failures are often the basis that generates valuable strategic knowledge. Product and Service Behaviour The design school proponents are considered to be market oriented as a result of being expressly concerned on the workings of its environment (Pelling, 2004). Market orientation (MO) reflects the firm leader's propensity to adopt a marketing concept. Market orientation is typically measured by assessing a firm’s leadership commitment to base strategic decisions on customer-oriented market intelligence (Pietersen 2002, p. 232-234). Leaders with strong MOs prioritize learning about: (a) customers (e.g., likes and dislikes, satisfaction, perceptions, etc.); (b) the factors that influence customers (e.g., competition, the economy, sociocultural trends, etc.); and (c) the factors that affect the ability of the firm to influence and satisfy customers (e.g., technology, regulation, etc.). Traditional operationalizations of MO focus on behaviors associated with the leader’s acquisition, dissemination and response to market information (Barret & Weinstein 1998, 63-65). Entrepreneurial orientation reflects the priority that leaders, owners, or chief executives place on the process of identifying and exploiting market opportunities. Lumpkin and Dess (1996) refined the concept of opportunity exploitation by noting that the defining characteristics of entrepreneurship and an EO are new entry and how new entry is pursued, respectively. Lumpkin and Dess (1996) defined EO as “... the methods, practices and decision-making styles managers use to act entrepreneurial. These include such processes as experimenting with promising new technologies, being willing to seize new product-market opportunities, and having a predisposition to undertake risky ventures" (p. 136). Matsuno et al. (2002) expanded on this theme by noting that leaders in firms with strong EOs have the ability to make environmental uncertainty work to their benefit. Baden Fuller and Stopford (1992) viewed entrepreneurship as exploiting the opportunity to renew and rejuvenate an organization. Entrepreneurship orientation has been purported to have as many as five dimensions (Lumpkin & Dess, 1996), but EO usually associated with the three following dimension: innovativeness, proactiveness, and risk taking (McGrath & MacMillan, 2000). Each dimension can be examined separately. Innovativeness refers to the leader’s willingness to support creativity and experimentation in new product development, technology adoption, and internal processes and procedures. Innovativeness reflects a basic willingness of leaders to diverge from the status quo and embrace new ideas. It is measured both objectively by measures such as research and development (R&D) costs as a percentage of sales, and subjectively, in terms of the leader’s willingness to discard old beliefs (Collins, 2001). Proactiveness refers to the ability of leaders to seize the initiative in the pursuit of marketplace opportunities. Proactiveness is related to the concepts of the first mover advantage, prospecting, and to the overall ability of leaders to act in anticipation of future market changes. Risk taking is reflected by the willingness of owners or leaders to commit a large percentage of a firm's resources to new projects and to incur heavy debt in the pursuit of opportunity (Lumpkin & Dess, 1996; Levinthal & March, 1993). Design, Entrepreneurship and Innovation Since market oriented leaders are skilled at assessing and responding to the expressed and latent needs of consumers, they are more likely to be first to market with new generations of existing products and services (Collins, 2001). Also, they are more likely to engage in brand and line extensions to new target markets (Collins, 2001). Empirical researchers corroborate this perspective. There is a clear and consistent link between market orientation and new product success, and market orientation and technical and administrative innovation (Morris & Paul, 1987; Pietersen, 2002). Innovation is at the heart of entrepreneurship, but not all innovation is the result of a strong EO. Routine innovation such as brand and line extensions, particularly in response to competitor actions, occurs in most organizations. Entrepreneurship orientation inspired innovation is more than adaptation or reaction to market trends; it is "... aimed at the rejuvenation, renewal and redefinition of organizations, their markets, or industries" (Pietersen, 2002, p. 59). It is through the process of opportunity identification with the goal of rejuvenation, renewal, and redefinition that radical new product concepts occur. The process of opportunity identification requires the type of unlearning and generative learning that is at the heart of radical innovation (Baker & Sinkula, 2002; Slater & Narver, 1998). It is also important to distinguish between process and outcomes, which is why EO and innovation success are distinct constructs (Miller, 1992). In summary, both MO and EO are expected to have a significant impact on innovation success. The type of innovation most likely to be associated with a strong MO is incremental. Leaders with strong market orientations listen to their customers' manifest needs and react by fine-tuning their brand and product lines to meet these needs. The type of innovation most likely associated with a strong EO is radical innovation. Leaders with strong entrepreneurial orientations are likely to develop entirely new product concepts that address latent customer needs. The creation of these types of innovations depends on the insight and vision of the leader, not traditional customer research. The Relationship between EO, MO, and Profitability An extensive stream of empirical researchers have consistently, but not unanimously, reported a MO-profitability relationship (Rauch et al., 2001; Thomas et al., 2001). In addition to the empirical evidence, there is strong theoretical support for a market orientation-profitability relationship. Leaders with strong market orientations should be able to generate higher profit margins in their organizations than leaders who have weaker market orientations within their firms. Higher profit margins are the result of greater synergies between target market selection, product development, pricing strategy, distribution, and promotion, which enables the delivery of products, and services customized to meet the needs of specific consumer target markets. This direct effect of market orientation reflects more than a competency to innovate products and services. It reflects a broader competency to add value by targeting complete marketing mixes (product, price, distribution, promotion) to specific customer niches (Matsuno, 2002). In the literature reviewed, researchers reported a direct effect of EO on profitability, but only when the effect of market orientation is not controlled (i.e., when the effects of EO and MO are not modelled simultaneously). Across a variety of firm sizes and types, a stream of empirical research indicates a direct effect of EO on sales and profitability (Mengue & Auh, 2006; Miller, 1992). There is also some evidence to suggest that the effect of EO on profitability is more pronounced in turbulent market environments as opposed to more benign market environments (McGrath & Macmillan, 2000). There have not been many attempts to study the simultaneous effects of EO and MO on organizational performance. In the studies that have been completed, however, researchers do not support an independent effect of EO on profitability. Slater and Narver (1998) simultaneously regressed EO against return on investment (ROI). Slater and Narver (1998) found a significant effect of MO, but no effect of EO. Likewise, Matsuno, Mentzer, and Ozsomer (2002) reported a strong direct effect of MO on profitability, but a direct negative effect of EO on ROI. Using a broad sample of 750 small, medium-sized, and large Tennessee firms, Barrett and Weinstein (1998) reported direct simultaneous effects of MO and EO on an overall performance measure, but no effect of EO on profitability. It is possible that leaders in firms with strong Eos, but weaker MOs are more likely to engage in innovation activities that are not grounded to careful assessments of customer demand and product markets (Slater & Narver, 1998). Matsuno, Mentzer, and Ozsomer (2002) discussed the distinction between the Palm Pilot™ and the Apple Newton®, two forerunners of the handheld PDA market. Both of these products were highly innovative that reflected the strong EOs exhibited by the respective organizations’ leaders. The Palm Pilot™ was grounded in a strong understanding of customer likes and dislikes, whereas the Apple Newton® was not. In fact, the Newton® has long been criticized as a brilliant technological innovation without a market. As a result, the Palm Pilot™ (with a strong MO and EO) was financially successful, whereas the Newton (with strong EO only) was not financially successful. In summary, MO directly relates to the process of customer satisfaction, which has been shown to directly relate to profitability. However, since EO relates more to opportunity identification and exploitation than to explicitly meeting customer needs, it is not expected to have an effect on profitability independent of the effect of MO. Adaptability, Risk Exposure and Resource Allocation The design school formulates strategy through the analysis of internal capacities and external trends implying a lengthy process of decision tantamount to function poorly in a fast moving business environment. More importantly, SWOT analysis is grounded on market trends and long term projections which seemingly endow it with lesser degrees of flexibility. While strategy formulators in this school try to make their assessments as accurate as possible, it is most often based on the general movements of the industry. Entrepreneurial organizations, on the other hand, assume a more radical approach especially to innovation. It should be said that SWOT-oriented organizations are also focused on adaptation or reaction to external trends but entrepreneurial firms adapt strategy that is aimed at rejuvenating, renewal or redefinition of market (Slater and Narver 1998, p. 70). To put it more precisely, SWOT firms let their strategies be determined by what the market dictates while entrepreneurial leaders determine their strategies by what they want in the market. In this regard, the entrepreneurial firm is more adaptable to a fast changing environment as it is proactive rather than reactive. Since SWOT-using firms are more risk-averse than their entrepreneurial counterpart, there is more rationalization in the allocation and use of resources. Visionary leaders, while expected to make intelligent use of the organization’s resources, they are more likely to venture and focus in certain processes and endeavours particularly when its connection with their vision is very strong. Resource rationalization is exercised more in the strategy formulation by design (Collins, 2001). Difference in Limitations While the design school proponents rely too much on the dynamic external environment for formulation of strategies to make the internal processes of the company fit changes, proponents of entrepreneurship strategies are limited because they rely too heavily on the leader. According to the proponents of the design school, strategies should be deliberate, responsible for consciousness and control within an organization, simple and informal, explicit and unique and fully formulated and ready to be implemented. However, in the dynamic external environment, composed of competitors, government control, suppliers, customers, and the like, as well as internal environment of an organization, following the premises of design school may not work well for an organization. In the modern hypercompetitive and dynamic external environment, an organization’s leader has to adapt to changes quickly enough to sustain a competitive edge over competitors. This is in line with the observations made by Ansoff (1991). He found Mintzberg’s exposition on design school lacked support on both methodology and applicability in current practices. By following the premises of design school, the leader of an organization may fall into the trap of inflexibility and nonadaptability and the organization may go out of business as a result. An example is found in the examination of Digital Equipment Corporation (DEC). In spite of earlier success, DEC leaders sold a majority of the business because of inconsistent structure and a delay in introducing new products. This was a result of the inadaptable nature of the leaders so that the company could not adapt quickly to the fast changing external environment characterized by a rapid change in technology and customer needs (Pietersen, 2002). The entrepreneurship school of strategy have highlighted some of the critical aspects of strategy formation, most notably the proactive nature and role of personality, leadership and strategic vision. However, some deficiencies include dependence on a single individual and narrow focus of strategic management, because power is vested with a single individual who may become enmeshed in operating details and as a result lose focus of ground realities. In addition, a leader may play different kinds of roles in an organization. The leader may be participative, democratic, autocratic, goal-oriented and situational. What the proponents of the school failed to elaborate are the aspects of leadership and the types of role a leader must play under any given situation (Thomas, Sussman & Henderson 2001, p. 335-339) Another critique of the entrepreneurship school is that the fact that top management frame the vision, vision can be seen as pathology by others. Further, the vision formulation occurs in the start-up firms. Leaders of large firms rarely re-evaluate or reframe their vision (McLarney & Shelley 1991,p. 296-298). Steve Jobs was the co-founder, chairman and served as CEO of Apple. He was a true visionary who created Apple™, the first truly personal computer, in his garage. From calculating federal taxes to executing individual business operations, Jobs lead a hardware revolution by reducing the size of computers to small box-like sizes and introducing these computers to the masses. He was often criticized for his aggressive and demanding managerial style that eventually led to his ouster from Apple™ in 1985. Jobs’ ouster is attributed to a boardroom coup after his power struggle with Sculley (McGrath & MacMillan 2000, p. 112-113). Conclusion The design school is focused on determining the internal strengths and weaknesses and finding a fit with the external threats and opportunities to formulate strategies. On the other hand, the entrepreneurship school proponents do not rely on such instruments, but instead give importance to the mental processes and decisions made by the chief executive or leader. While the chief executive in the design school serves as the ‘architect’ of strategy, he or she bases decisions on evidences resulting from case studies and discussions. The leader in the entrepreneurship school relies on an accumulation of learned experiences. Both schools require a deliberate process. However, the entrepreneurship school is identified by dealing with uncertainties. The design school is identified as dealing with the certainty offered in the SWOT analysis. Despite being considered as having undergone deliberate processes, entrepreneurial strategies can be subjective in nature as compared to the prescriptive nature of the design school. The entrepreneurial school is also marked with a higher degree of innovation and decisions that can defy logical marketing analysis. Essentially, the entrepreneurial school is personalized to the leader when compared to the design school which is externally influenced. References Ansoff, I. (1991). Critique of Henry Mintzberg’s ‘the design school: Reconsidering the basic premises of strategic management’. Strategic Management Journal, 12(6), 449-461. Baden Fuller, C. & Stopford, J. M. (1992). Rejuvenating the mature business: The competitive challenge. Boston, MA: Harvard Business School Press. 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