Strategic Management Journal, Vol. 15, 5-16 (1994)

STRATEGY AS A FIELD OF STUDY: WHY SEARCHFOR A NEW PARADIGM?C. K. PRAHALADSchool of Business Administration, University of Michigan, Ann Arbor, Michigan,U.S.A.

GARY HAMELLondon Business School, London, U.K.

The fundamental structural transitions in a wide variety of industries brought about bymajor catalysts such as deregulation, global competition, technological discontinuities, andchanging customer expectations are imposing new strains on managers around the world.Old recipes do not work anymore. Managers, concerned with restoring competitiveness oftheir firms, are abandoning traditional approaches to strategy; they are searching for newapproaches that give guidance in a turbulent environment. Many academics, confrontedwith the same reality, are reexamining the relevance of the concepts and toots of the strategyfield. In the absence of a consistent and useful strategy paradigm that they can use,managers appear to have embraced attention to 'implementation' as their saviour, more orless abandoning strategy as either unimportant or uninteresting. Academics continue tosearch for new approaches. This special issue of the Strategic Management Journal presentscreative and new thinking dealing with substantive issues and methodologies that can leadto the evolution of a new paradigm(s).

As we entered the 1990s, strategy as a field ofstudy had fallen on hard times. Humbled by newglobal competitors, managers were consumedwith TQM, reengineering, downsizing, teamworkand employee empowerment. Managerial pre-occupation was with 'catching up' with the bestof breed among their competitors. Issues ofstrategy seemed either remote, unimportant oruninteresting to many. The key words were'implementation' and 'execution'. Strategy, somemanagers seemed to assume, was easy; implemen-tation was the hard part. As a consequence,strategy staffs were dramatically reduced oreliminated. Consultants readjusted their waresto cope with the new client demands. Even well-known consulting firms, such as McKinsey andBoston Consulting Group (BCG), who built their

reputations on strategy consulting, started todeemphasize their strategy focus and developexpertise in issues centered around implemen-tation and efficiency of existing operations suchas reeingeering and cycle time.'

Academic disillusionment with the value ofstrategy literature and schools of thought, whilenot as widespread, followed quickly. For example,Mintzberg (1994) challenged the planning processand by implication the process of strategydevelopment. He questioned the vahdity and theusefulness of the various approaches to strategyanalysis which has been the 'bread and butter'of strategy research and thinking for the last 25years. Not only were the tools and processes of

Key words: Strategy paradigms, innovative strategyresearch, paradigm evolution

' See, for example, the focus of BCG on 'Time BasedCompetition". Two senior consultants of BCG wrote the verypopular book on the subject, George Stalk, Jr. and ThomasM. Hout, (1990). Competing Against Time: How Time BasedCompetition is Reshaping Global Markets. Free Press, NewYork.

CCC 0143-2095/94/090005-12© 1994 by John Wiley & Sons, Ltd.

C.K. Prahalad and G. Hamel

planning challenged, so too was the concept ofa purposeful organization.

To casual observers, metaphors of strategy aslearning and evolutionary adaptation suggestedthat successful firms were simply those thatadapted quickly to the changing environmentaldemands. One was much more likely to hearsenior managers call for quicker response timethan for higher-quality strategic thinking. It wasnot obvious whether the debate was about thevalidity of current strategy literature and practiceor whether it was about the need for strategicfocus and behavior in management. At theextreme some critics of strategy seemed to forgetthat irrespective of how efficient the body(organization) got. it still needed a brain (strategicdirection).^

Other scholars were similarly concerned aboutthe direction of strategy research and practice.An early warning was sounded by Rumelt,Schendel. and Teece (1991, 1994). Following onfrom a 1990 conference, they raised four basicquestions that are at the center of strategypractice and research: How do firms behave?Why are firms different? What is the functionof, and the value added of the headquarters unitin a multibusiness firm? and What determinesthe success or failure of a firm in internationalcompetition? They invited scholars from nontraditional backgrounds to make contributions.They were not only posing basic questions forconsideration, but were seeking unconventionalresponses to them. Healthy self-criticism is aprecondition for progress.

We believe this turmoil in the field., in researchand in practice, is a reason for optimism. Thestate of strategy, during the 1990s, can aptly bedescribed as 'the best of times and the worst oftimes' for strategy scholars. While much of thecriticism of the field may be valid, critics oftenmiss the point. We believe that the need forstrategic thinking, during this turbulent decade,is greater than ever. Thoughtful members of theacademic community are increasingly recognizingthat the concepts and tools of analysis that

' See, for example, the report on the success of re-engineeringefforts in U.S. and European firms, based on an extensivesurvey by CSX Index, a consulting firm specializing in re-engineering efforts. One of the key findings of the surveywas that strategy is still critical to improvement of perform-ance. CSX Index (1993). State of Re-engineering Report.Boston, MA.

formed the backbone of the strategy literature,during its period of major growth (1965-85),may need a basic reevaluation in order to pavethe way for new ideas. It is this belief that droveus to undertake the task of editing a special issueof the Strategic Management fournal entitledStratgegy: Search for New Paradigms. Needlessto say that this is but a small beginning in thesearch for new paradigms.

In this introductory section we will outline themajor catalysts that are driving the need for arevitalized approach to strategic thinking andstrategy development. Many of the assumptionsthat were embedded in traditional strategy modelsmay be incomplete and/or outdated as weapproach the new competitive milieu. We willargue that the need for strategic thinking andbehavior among managers has never been moreurgent. This reality should force us to reexaminethe traditional strategy paradigms. We followthis analysis with a brief outline of the papersincluded in this volume and our assessment oftheir contributions. We then return to our basicthesis: that more than ever, the strategy arearepresents a fertile field for innovative researchduring this decade and beyond.

CHANGING COMPETITIVE MILIEU

Implicit in the four basic questions posed byRumelt et al. (1991, 1994) is a view of thecompetitive space within which firms operate.We believe that during the last 10 years (1984^94),competitive space has been dramatically altered.The changing fortunes of some of the largestand "best-managed" firms of the 1970s and early1980s, such as IBM, General Motors, Caterpillar,Xerox, Sears, and DEC, are attributable to theradical changes in their competitive landscapeand the inability of managers to foresee thesechanges. The problem is not unique to U.S.-based firms. European (DAF, PhiHps, Benz,ICI) and Japanese (NEC, Fujitsu, Matsushita,Komatsu) firms face the same problem ofrefocusing their resources and responding to thenew competitive realities. Why did this radicalindustry transformation, the contours of whichwere visible for some time, escape systematicand persistent attention from managers? Itapparently escaped the attention of academics aswell.

New Strategy Paradigms

The forces impacting on the nature of competi-tive space within industries were several. Theseforces were changing the sources of advantageof firms and the economics of industries in newand unpredictable ways. Some of these forcesare shown in Figure 1.

Deregulation

Deregulation in the airline industry, followed bythe telecommunications and financial servicesindustries, has had a major impact in the U.S.A.and the U.K. The profitability of industries (e.g.,airlines), the pattern of competition and marketopportunities (e.g., telecommunications) havebeen influenced by deregulation. These industriesin turn influence a host of other existing(e.g.. retailing and logistics) and emerging (e.g.,multimedia) industries. Deregulation and privat-ization of critical infrastructure industries, how-ever, is not restricted to the U.S. market but isalso emerging as a worldwide pattern—in Europe,in Japan, and in developing countries such asIndia. Erstwhile command economies are alsogoing through these transitions.

Structural changes

While the telecommunications revolution is fueledby deregulation, the revolution in the computerindustry is driven as much by structural changesbrought about by technology and customerexpectations. IBM and all IBM compatibles (e.g.,Fujitsu, Hitachi, Bull) were vertically integrated.

The new computer industry is very fragmented.Intel and Motorola dominate the componentbusiness. Compaq, IBM, and Apple are big onhardware. Microsoft dominates the operatingsystem. Lotus and other application vendorsspecialize in clusters of applications. There isa wide variety of distribution channels—Dellcomputers, to Sears, to Value Added Resellers,to owned distribution channels. This structuralchange, from the vertically integrated, main-frame-oriented, centralized computing environ-ment to a decentralized, fragmented structuredriven by specialist firms changes the nature ofcompetitive advantage enjoyed by traditionalplayers such as IBM. The basis for competitionand the economics of the industry are radicallydifferent. New competitors have emerged chal-lenging the dominance of large estabhshedplayers. It is hard to beheve that Compaq didnot exist in 1980. In 1994, it is challenging IBMfor world leadership in the PC and laptop marketand beyond.

Excess capacity

Excess capacity invites radical restructuring ofindustries. Bulk and commodity chemical industryused to suffer periodic upheavals caused by excesscapacity (Bower, 1986). Bower documented thecomplex interplay between public and privatepolicy as the chemical industry tried to negotiatea restructuring of excess capacity worldwideinvolving governments of the U.S.A., Japan,and Europe. Involved negotiations determined

Deregulation

GlobalCompetition

Emergence ofTrading Blocks

TechnologicalDiscontinuities

StructuralChanges

ChangingCustomerExpectations

Pressure forRadical

Rethinking

ExcessCapacity

Mergers &Acquisitions

EnvironmentalConcerns

LessProtectionism

Figure 1. The inevitability of industry transformation

8 C.K. Prahalad and G. Hamel

the time frames, cost-benefits, competitive conse-quences, and social impacts of such restructuring.During the last decade, a wide variety ofindustries—from consumer electronics toautomobiles—were faced with excess capacity.While the industry is burdened with excesscapacity, additional capacity is being added bynewly developing countries such as China andIndia. The global restructuring of capacity islikely to emerge as a major issue during thisdecade.

Mergers and acquisitions

Mergers, acquisitions and alliances (MA&A)have been used as a method of coping withexcess capacity (implicit rationalization) as wellas a way of accessing closed and/or public sectormarkets. MA&A, around the world, have beena major force in telecommunications, financialservices, power and other sectors. MA&A spawna wide variety of strategic issues—from antitrust,to valuation, to cost, to technology integrationand product line rationalization, to acquisitionintegration (Haspeslagh and Jemison. 1991).

Environmental concerns

The emerging concerns over the impact ofindustrialization on the environment have beensignificant. New forms of packaging, demandsfor recycling, notions of stewardship, responsi-bility for environmental safety and obligationsfor cleaning up are making new demands on allorganizations. The idea of being environmentallyfriendly, or 'green," will have an impact on allaspects of the business—from the conception ofproducts and services to use and subsequentdisposal by customers.

Less protectionism

Explicit restrictions to global trade are beingdismantled. While countries and regions stillprotect industries, overt attempts at protectionismare becoming less tenable. Inefficiencies resultingfrom a protected past—telecommunication ser-vices, power, agriculture, insurance, construction,retailing—are being exposed. Firms from Japan,Germany, and France, as well as a wide rangeof quasi-planned economies, are suddenly feelingthe pressure to get their services to meet world

standards. The impact of 'free trade" can bedaunting for some.

Changing customer expectations

During the last decade, the influence of changingcustomer expectations on business has beendramatic. From concern for quality and aconstant demand for improved price-performancerelationship, customers have influenced strategiesof firms. Mass customization, the value attachedto branded products, the growth of mail orderpurchasing and the consolidation of retailing, arebut a few signs of the emergence of an aggressiveand demanding customer.

Technological discontinuities

This aspect of change has been widely recognized.Dramatic changes in technology not only impactexisting industries but spawn new industries aswell. The evolution of the PC and the softwareindustry, for example, is altering multipleindustries—consumer electronics, education andentertainment, as well as office work. Newproduct configurations are possible today: cellularphones, disposable cameras, distance learningand conferencing, personal printers and faxmachines, and access to a wide variety of databases. In combination with changing customerexpectations, technological discontinuities willusher in new customer benefits at prices thatwould have been impossible to imagine.

Emergence of trading blocks

The evolution of regional trading blocks, theEuropean Community, NAFTA and ASEANchange the basis and patterns of trade. Issuessuch as location of investments, creation oflogistics networks around the world, and costsare influenced by these emerging relationships.

Global competition

Global competition has received academic andmanagerial attention (Porter, 1986). Global com-petition is pervasive. From semiconductors tocleaning services,"* no industry is free from the

'Sumantra Ghoshal (1993). ISS Corporation. Case Study.INSEAD.

New Strategy Paradigms

impacts of global competition. As is obvious inthe case of cleaning services, even in localbusinesses, global competition is possible. Thevery distinction between 'domestic' and "global"businesses is open to challenge. Globalizationhas changed the boundaries of competition. Ithas become easier to leverage a unique businessidea without regard to national boundaries.

The brief outline of the issues described above,by no means exhaustive, lists factors that influencethe strategy process, and ultimately, what is aneffective strategy. Analyzing the impact of anyone of these drivers would provide majoropportunities for research. During this decade,to the researchers" delight (and often the night-mare of managers) almost all industries havebeen impacted by all or a subset of these factorssimultaneously. The cumulative effect of thesechanges, still unfolding, is so significant that itcan be best described as a 'silent industrialrevolution.' The factors have led to a major shiftin the basis for competition. For example, acombination of pervasiveness of informationtechnology and changing consumer demands forimproved price performance relationships (orbetter value) is leading to a process of disititerme-dialion. New players can enter the market todaywith ease that was unknown even 10 years ago.Dell computers, for example, can side-step theexisting distribution channels and go directly toconsumers. Making reservations for airline ticketsdoes not require a travel agent anymore. Homeshopping is becoming more viable. ATMs havechanged the banking scene dramatically. Distri-bution processes and costs have been basicallyaltered in a wide variety of industries. Disinterme-diation impacts the value chain in an industry,reshapes the 'barriers to entry," challenges theprofit engine, and allows non-traditional andcreative competitors to enter the fray quickly.

Yet another result of these catalyzing forces isthe disintegration of industries—the breakdownof vertically integrated structures. This processhas received some attention. The virtual corpor-ation (Davidow and Malone, 1992) is a recog-nition that quasi-long-term relationships and awide variety of agreements between firms canprovide managers a viable alternative to thebenefits that were traditionally ascribed to verticalintegration. The choices today are not just make-or-buy. but a wide variation in between. Asa result, transaction costs in industries are

undergoing dramatic changes. But as industriesdisintegrate to evolve into new structures, simul-taneously, convergence or fusion of distinctindustries is taking place as well. The convergenceof chemical and electronic imaging (e.g., photoCD), computers, communications and consumerelectronics, traditional banking and financialservices, entertainment and education is anunmistakable phenomenon. This convergenceof technologies and businesses represents abreakdown of clearly demarcated boundaries.While traditional industry boundaries (e.g., pho-tography, electronic imaging) are breaking down,there is as yet no clarity to the "boundaries" ofthe new and emerging industries. These changesin the industrial landscape present us with a newset of issues. The obvious points of interest areas follows:

1. Industry transformation is an object of interest.The pace and the process of industry trans-formation are of great importance to managersas they allow them to realign their skills,resources, products and services, channels,and other elements of strategy to anticipate andbenefit from the evolving industry structure.Managers are interested in how they canhelp an industry evolve in ways that areadvantageous to them. Managing industrytransformation is therefore an object ofinterest. Industry foresight, an ability tosynthesize the collective impact of a complexset of economic, political, regulatory andsocial changes, is increasingly at a premium.Imagining (and anticipating) the future (viz.,providing strategic direction) and developinga transition path towards it (viz.. resourceallocation, skill mix management andexecution), in an industry undergoing complextransition is a crying need. Industry structure,increasingly, must be seen as a variable to bemanaged by firms and not accepted as a given.

2. Changing the dominant logic of the firm is anobject of interest. All managers in successfulfirms and stable industries develop over timea dominant logic (Prahalad and Bettis, 1986).Rapid industry transformations, in new andunfamiliar directions, require that managerslearn to change the dominant logic and therecipes that they have grown up with. Whatused to be the basis for a policy that enableda firm to be successful may turn out to be

10 C. K. Prahalad and G. Hamel

the orthodoxy that stifles the ability of thatfirm to decode and anticipate the nature ofchanges taking place and adapt. Rethinkingmanagerial frames in large firms is animportant issue for strategists.

3. Rethinking the unit of analysis for competi-tiveness is an object of interest. What shouldbe the unit of analysis for assessing competi-tiveness? A product? A product line? Abusiness unit? A cluster of business unitswithin a firm, the diversified firm? A clusterof firms including suppliers, collaborators,home governments? Maybe all of them.Increasingly, the appropriate unit of analysisfor understanding the pattern of competitionand for developing appropriate responses islikely to depend on the industry and the firmin question.

We could add significantly to this list of issues.Readers can identify additional ones, based ontheir perceptions of the nature of collectiveimpact of the drivers on the basis for competitivesuccess. We believe that these emerging issuesin strategy provide untold opportunities for newand innovative research. Practitioners are facedwith a sense of urgency. Old recipes do notwork. Scholars have an opportunity. It is in thiscontext that we should examine the implicitassumptions on which strategy concepts werebuilt during the period 1965-85. and determinetheir validity.

Some of the key assumptions in traditionalstrategy analysis can be outlined as follows:

1. Strategy is about positioning a business in agiven industry structure. (Porter, 1980. 1985).This view of strategy dominates the academic,consulting and to a lesser extent managerialthinking. This view of strategy is predicatedon industry structures that are stable andidentifiable. The reality of business during the1990s is that industry structures are far fromstable and are undergoing major transitions.

2. The focus of strategy tools and analysis isexisting industries. The preoccupation withstructural analysis forces us to be concernedwith existing and stable industries. Sometimeswe focused attention on declining industries(Harrigan. 1980). Seldom did the broad sweepof academic attention focus on industries intransition, much less on emerging industries.

How does one identify drivers of industrytransition? How does one develop industryforesight? How does one bet on (and allocateresources to) evolving opportunities such asmultimedia? Biotechnology-based businesses?Is the future unknowable or just different?Can firms compete to create a new industry?Or create standards that influence the directionof a new industry? (Hariharan. 1991). Canimplicit competition take place before specificproducts and services are offered to thepublic? Important as these questions are,many of them have eluded significant academicattention.

3. The primary focus of strategic analysis is thebusiness unit. Industry analysis, once again,forces us to focus on strategic analysis ofindividual businesses. Corporate strategy, aspopularized by consulting firms such as McKin-sey, BCG and others, was often seen asportfolio strategy (Hofer and Schendel. 1978).Only recently have scholars seen the corpor-ation as more than a collection of businessunits. A corporation can be a bundle ofresources and competencies (Wernerfelt, 1984;Dierickx and Cool, 1989; Teece, Pisano andShuen. 1990; Barney, 1989; Prahaiad andHamel, 1990). Even this shift in emphasisdoes not suggest an approach to understandinginter-corporate competition. Does Sony com-pete with Philips? Does Canon compete withKodak or Hewlett Packard? Does the scopeof this competition extend beyond specificbusiness units?

Competition, in many industries, evenextends beyond inter-corporate competition.Often clusters of firms compete. In thevideorecorder industry, the VHS coalition ledby JVC and Matsushita competed with theSony-led coalition (betamax) for industryacceptance. The Intel led coalition is battlingthe Motorola-led coalition in microprocessorsfor PCs. Competition and, therefore, strategymust be understood at not just the businesslevel, but at the level of corporations and atthe level of coalitions or clusters of firms.

4. Strategic outcomes can be explained on thebasis of economic analysis. Economic analysisis a critical component of strategic analysis.However, political and public policy analysisis as crucial as economic analysis. A significantliterature exists in the international business

New Strategy Paradigms 11

research stream on the impact of governmentpolicy—especially the role of host governmentpolicy (Doz. 1979). However, mainstreamresearch on strategy has not accepted thecomplex interplay of public and private policyas determinants of strategy outcomes; or thateconomic and political analysis are equallyimportant to the strategist.

5. Strategy is the result of an analytical processexecution of strategy is an organizationalprocess. This is a stylized view. Debates aboutcontent and process have plagued strategyresearch. In spite of evidence to the contrary(Bower, 1975; Burgelman, 1983) the impactof process on strategy and resource allocationis constantly underplayed. Involvement ofall employees, energizing the organization,promoting creativity and innovation as enginesof competitive vitality, is often underesti-mated. Quality of management is increasinglyassociated with sources of competitive advan-tage (Doz and Prahalad, 1988). Dissimilarperformance, given similar resource endow-ments between firms, still needs a convincingexplanation. In spite of this mounting evi-dence, scholars have either underemphasizedthe process and people issues in their pursuitof economic understanding of strategy, or theother way around. Seldom has there been abalance between the two. Neither can beignored by strategists.

The underlying assumptions behind the strategyliterature are several. Our goal here is not todevelop an exhaustive survey of these assump-tions. The idea is to identify a few examples ofwhat we mean by 'implicit assumptions' in theliterature. Then we can illustrate that the rapidindustry transformation that we identified earliershould cause us to go back and reevaluate theconcepts and tools carefully. This was themotivation for this special issue.

THE SPECIAL ISSUE

We started the special issue with two goals: toinvite scholars to submit articles that describednew issues, or phenomena of interest to strategistsor new approaches to the analysis of thecomplexity of the evolving competitive milieu.The call for papers was an open invitation to

engage in 'informed speculation.' to experiment,to go beyond the well-identified topics. We wereoverwhelmed by the response. We received over150 submissions. The nature of the submissionsand our goal are shown schematically in Figure 2.

Many of the submissions were extremely wellexecuted but did not fit our criteria—exploringnew territory. These were sent to the regularSMJ series for consideration. The University ofMichigan hosted a conference where a smallsubset of authors whose submissions were on theshortlist were invited to present their papers. Weinvited scholars from nontraditional disciplines tocritique these papers. The list of discussants forthese initial papers is given below:

Professor Louis Gomez. Charles O. HuckerProfessor of Buddhist Studies and AsianCultures.

Professor John Campbell. Professor of PoliticalScience and Chairman. Japanese Studies

Professor Ted Snyder. Director of the DavidsonInstitute for Transitional Economies

Professor Scott Masten, Associate Professorof Business Economics and Public Policy

Professor Robert Quinn. Prt)fessor ofOrganizational Behavior and HumanResource Management

Professor Jane Dutton, Associate Professor ofOrganizational Behavior

Professor Carl Simon, Professor of Mathemat-ics. Economics and Public Policy

Professor Sam Hariharan. Assistant Professorof Corporate Strategy

The papers selected for this issue after exhaustivereview, in our judgement, represent the mostinnovative of the submissions received. Thesenine papers push, even if gently, the frontier ofstrategy research and scholarship. We will brieflyoutline the issues described in each of them.

We have grouped the papers into four clusters.Cluster one starts with two papers that outline

a critical issue in strategy and develops anintellectual approach that is new in the strategyliterature. Professor LaRue Hosmer's paper,'Strategic Planning as if Ethics Mattered," admon-ishes the field for not paying explicit attentionto the issue of ethics. Surely, ethics has had aroller-coaster ride in the literature. As Hosmerpoints out, it was a critical element in the strategyand management literature during the 'good olddays" of Barnard. Simon, and Andrews. It

12 C K. Prahalad and G. Hamel

NonTraditional.New

SubjectPitatter

Traditional

Acceptable

Not suitable for ^^Mthe Special I s s u e ^ ^ l

• ITraditional

MostDesirable

P̂̂̂H Acceptable•

Non Traditiona

Approach(lntellectualRoots, Methodology)

Figure 2. The framework we used and the nature of suhmissions

metamorphosed as social responsibility of thecorporation. The works of Ackerman and othersare illustrative of this version. It then languishedfor about 15 years. Hosmer not only forcefullyargues for its full reinstatement, but goes on toprovide a clear articulation of the principles ofethics, the intellectual roots of these principles,and implications for scholars and managers. Bysuggesting that ethical analysis of decisionsbecome an integral part of management, Hos-mer's paper provides a clear challenge.

Kiyohiko Ito and Elizabeth Rose in theirpaper, 'The Genealogical Structure of JapaneseFirms: Parent-Subsidiary Relationships.'accomplish several interesting objectives. First,they provide a Japanese perspective, a contrastto the Western (and U.S.) model of a diversifiedfirm. Further and even more interesting, theydemonstrate the futility of trying to understandthe strategy of a specific firm, without the contextof the collection of firms within which it isnested. These relationships can be historical.Legal separateness. a measure of autonomy andindependence, can coexist with strategic linkagesand dependence. Diversified firms do spin outsuccessful subsidiaries as an element of strategy—to give the subsidiaries strategic and operationalfreedom, as well as increase parent's marketvalue and prestige. Divestment of subsidiariesneed not be a signal of strategic failure. Thenotion of organizational mutations, in the contextof diversified firms, is appealing as it allowsthem to be extremely flexible with respect to

financing, strategy, use of core competencies,and alliances with other firms. Two issues are ofinterest: one is the use of genealogy as a tool ofanalysis of diversified firms; second, and moreimportantly, is the application of anthroptilogical,sociological, as well as economic reasoning tounderstanding diversification. Do Japanese firmsdo this because they are Japanese (and it is anintegral part of the "parent-child" relationship,an anthropological examination), or is it becauseit allows them to leverage resources better-getbetter market capitalization (the equivalent of aquasi-breakup value of the firm) and growth (aneconomic analysis). Secondly, this paper identifiesopportunities for comparative analysis of diversi-fication patterns, the role of top management,and the logic for building the portfolio in thesefirms.

Cluster two focuses on the importance of'invisible assets' in an organization. Knowledge,most would agree, is an asset. Learning as wellas forgetting are critical elements of beinga vibrant organization. However, very littlesystematic attention has been paid, in the strategyliterature, to the structure of knowledge, typesof knowledge. levels at which it is generated,accumulated, stored, and deployed as well ashow it can be leveraged to enhance corporateperformance.

We start with a paper by Georg von Krogh,Johan Roos, and Ken Slocum, *An Essayon Corporate Epistemology.' There has beensignificant effort at understanding the learning

New Strategy Paradigms 13

process in organizations. However, there is verylitle attempt to understand the structure ofknowledge, how organizations 'know' and howknowledge structures develop. Borrowing fromautopoiesis theory developed in the field ofneurobiology, the authors build a case forincorporating the cognitive processes in the studyof strategic management.

The essay written by Gunnar Hedlund, 'AModel of Knowledge Management and the N-Form Organization,' is an interesting companionpiece. The essay focuses on knowledge manage-ment at four levels: individual, small group, thetotal organization, and the cluster of organizationsof which a specific firm may be a part. Managingknowledge—its creation and use—a criticalcomponent in managing the 'invisible assets' ofthe firm, is emerging as an important role of topmanagement. The author suggests a nonhier-archical, in effect a heterarchical structure(framework and a conception), for effectivemanagement of knowledge. The task of managersmust be separated from the tools of management(or the levers of influence).

The third paper in this cluster, 'LinkingOrganizational Context and Managerial Action:The Dimensions of Ouality of Management*, bySumantra Ghoshal and Christopher Bartlett.using a case, describes the process of creatingthe context that enables higher performance.better capability to create, share and use knowl-edge for action. The article focuses on theevolution of these tools and the process ofcreating the appropriate context, one brick at atime.

Cluster three consists of articles which buildon an existing edifice, but provide nuances thatare new. Thomas Murtha and Stefanie AnnLenway discuss the interaction of public andprivate policy in their paper. 'Country Capabilitiesand the Strategic State: How National PoliticalInstitutions Affect Multinational Corporations'Strategies." How do countries create capabilitiesand policy infrastructures that make them attrac-tive to local as well as multinational firms? Thethesis here is that rhetoric is not reality. Moreimportant, how do firms respond to these publicpolicy initiatives—how do they decode both theintent and the practice of public policy initiativesand accommodate their strategies? During thisdecade, with the fall of communism, morethan 3 billion people are living in transitional

economies; economies which are moving fromcommand and quasi-command economies tomarket economies. These societies are desperateto attract investments from overseas as well assupport home-grown firms. This article providesa framework to think about the complex set ofinteractions that have to be managed for thehoped-for happy marriage of public policy andprivate enterprise.

The resource-based view of the firm is welldeveloped and documented. Janice Black andKimberly Boal in their paper, 'StrategicResources: Traits, Configurations and Paths toSustainable Competitive Advantage,' argue thatwe ought to move beyond describing traits andpay attention to the dynamics of how theseresources are created and used. They suggest aconceptual model that focuses on the relationshipsbetween factor networks. The nature of theserelationships, they argue, suggests which specificpaths can lead to high levels of sustainablecompetitive advantage.

Constantinos Markides and Peter Williamson,in their paper. 'Related Diversification, CoreCompetencies, and Corporate Performance.' sug-gest that a competency view can shed new lighton an old problem in the strategy literature: whydo related diversifiers perform better? Theysuggest that the traditional explanations werebased on a static view of relatedness in staticterms. They point out that the real long-termbenefit—the dynamic view—is about continuallyrebuilding and expanding the stock of strategicassets—competencies—such that they can con-tinually create new and innovative sources ofcompetitive advantage (as well as new businessopportunities). The papers focus our attentionon the two critical issues that confront adiversified firm: what is a resource and areall resources equally valuable? and what isrelatedness and how does it help the corporationto diversify using core competencies? Both takea dynamic view of resources and argue that theirvalue can be enhanced by the appropriatecombination of factors—actions by managers.

Cluster four introduces us to a new methodology.By now, all of us are convinced that the strategyfield, if nothing else. is characterized by complexity.But do we have the right tools to explorecomplexity? David Levy's paper, 'Chaos Theoryand Strategy: Tlieory. Application, and ManagerialImplications,' suggests that we ought to be exploring

14 C K. Prahalad and G. Hamel

the use of a new methodology, one developed toexplore the turbulent flow of fluids. The authorprovides a very succinct introduction to the theory.It is then applied, using simulation, to internationallogistics. While one might argue that problemssuch as logistics are easier to model and thereforesusceptible to the application of this approach, itmust be recognized that for the firm the resultswere of major importance. It identified the locationof international sourcing platforms as well as thecosts of traditional approaches to manufacturingand sourcing. It can lead to reduction of lead timeas well as total delivered costs. We believe thatthe study of complexity is a major opportunity inthe strategy field.

The papers included in this volume are but anindicator of the extraordinary nature of theopportunity for new research in strategy. Severalnew substantive issues emerged as worthy ofscholarly attention, in various discussions duringand after the conference. We provide a summarybelow:

1. Emergence of micro-multinationals. The studyof multinational corporations has assumedthat multinationals by definition have to belarge firms ($5(K) million plus). The newreality is that very small (less than $10 millionU.S. in sales), highly specialized firms withglobal scope have become a reality. Industriessuch as software, biotechnology, and pro-fessional services appear to be hospitable tosuch ventures. How do these firms acquireand service a global infrastructure? What arethe costs associated with geographic spread?What are the benefits? Are size or uniquenesspreconditions for multinationality?

2. Protection of intellectual property. Software,analytical routines, process controls, andknowledge of customers and suppliers—theaccumulated intellectual property of the firm—is becoming, in a wide variety of industries,more valuable than physical assets. But theprocess of valuing, protecting, and tradingthese require new disciplines within most firmsas well as the development of new legal andaccounting approaches. How do you protectproperty 'that rides elevators and drives homeevery night?' Intellectual property issues focuson the intersection between law. humanresource management, technology, andstrategy—an under-researched interface.

3. Premarket competition. Most of the researchon the dynamics of competition assumes thata market exists for products and services andthe battle is for profits and market share.However, in many emerging industries, com-petition may start years before actual productsand services are offered to customers. Compe-tition for competence building, for standards,for core technology leadership can predate'traditional market-based' (product-market)competition. The battle for HDTV standardsaround the world with the European. Japaneseand the U.S. systems is a good example ofpremarket competition.

4. Intercorporate and intercluster competition.We believe that competition extends beyondbusiness-level competition. Corporations com-pete for intellectual leadership (e.g.. compe-tition for multimedia leadership is pitchingmultiple business units and the corporationof diversified corporations such as AT&T.Philips, Microsoft. EDS and HP against eachother). They compete for access to and controlover competence and standards. While theycompete, many of the same firms are alsocollaborators in consortia and in alliances ofvarious forms. What is the logic of competitionand collaboration? What are the costs? Disci-plines needed to manage the complex relation-ships?

5. Building competencies. The nature of rapidindustry transformations is creating a needfor managers not only to recognize andmanage existing competencies in a firm, butto rapidly acquire new ones. Sometimes, firmshave to discard competencies to enable themto adapt to new realities. For example,how does a defense contractor acquire thecompetence to create and manage a consumerbusiness? How do regulated, domestic pro-viders of telecommunications services rapidlytransform themselves into competitive, globalplayers—the task confronting RBOCs, BritishTelecom, and AT&T?

The analytical lens that we need to creativelyresearch the new strategy issues may alsodeserve a reexamination. We will suggest a fewapproaches for consideration of the reader. Wemake no attempt at justification. We hope thatthese will be self-evident.

The role of game theory in strategy develop-

New Strategy Paradigms 15

ment is being actively explored (Rumelt et al.,1994). Many more theoretical lenses will beneeded to explore the range of issues that thestrategy field offers. For example, the study ofcomplex phenomena using tools such as chaostheory, we believe, will increase. Theories ofwar and diplomacy provide good models forthinking about competition and collaboration(Kissinger. 1994). The concept of balance ofpower, implicit understanding of stability oftrading patterns, signalling, providing crediblethreats, and forming preemptive alliances appearto emerge as important themes not only instatecraft but in the management of large globalenterprises. Human cognition and nature ofinference processes may be an attractive theoreti-cal perspective from which to view a wide varietyof strategy issues such as the ability of managersto rapidly change large firms. The limits to thelegal framework in dealing with new intellectualproperty issues is becoming obvious. Neverthe-less, legal issues and reasoning will becomeimportant. Legal issues will also dominate thederegulation process and the environmentalconcerns.

Recognizing that the strategy field needs anew paradigm is a critical first step. However,finding a paradigm that fits the emerging needsof the field. let alone one that can emerge as adominant paradigm, is a tedious task. Duringthe last decade the I/O paradigm seems to haveheld sway and emerged as the dominant paradigmin the literature, crowding out other approaches.There is a good explanation for the success ofthe I/O paradigm. It is parsimonious, is basedon a well-developed and understood method-ology, and has clearly identifiable theoreticalroots. The emerging competitive landscape andthe logic of success in the complex competitiveenvironment, however, transcends the scope ofthe theoretical lens provided by I/O. This implicitrecognition that the I/O paradigm may at bestprovide us partial answers is the driver forcingthe field to search for new paradigm(s). Shouldthe field rally behind I/O economics? gametheory? sociology? or behavioral science? Whatis an appropriate theoretical lens to the study ofstrategy, appears to us as a premature question.Before we as scholars determine what lens touse, we should have a good understanding ofthe terrain.

Strategy as a field has an abundance of issues

which can be studied from a multiplicity oftheoretical vantage points. There is no need tolimit variation in approaches at this time. Thisvolume, we hope, is a small contribution to thesearch for a new paradigm(s).

ACKNOWLEDGEMENTS

No effort of this magnitude is possible withoutthe support of a large number of people. First,we thank all the scholars who responded to ourcall for papers. We were surprised by the qualityand the number of submissions. We would havefound it impossible to compile this volumewithout the active cooperation of referees whowere understanding and worked under enormoustime pressure. They helped us select the inno-vative from the traditional. The discussants atthe conference provided the debate a newperspective. Their willingness to participate andadd to the debate was a critical step in improvingthe manuscripts. Karen Schnatterly, a doctoralstudent at the University of Michigan, providedinvaluable support. She actively participated inthe entire process—from logistics, to conferenceorganization, contacts with authors and referees,and the SMJ. Her involvement was crucial tothe production of this volume. We owe her aspecial thanks. Two individuals deserve specialmention. Dan and Mary Lou Schendel were, asalways, most helpful—from encouraging us toundertake this responsibility, to helping us withall the details, to attending the conference inAnn Arbor, and being more than patient withdelays—their role has been unique. We wouldlike to thank them not only for their support inthis edition but the contribution they have madeto facilitate the development of the field for overtwo decades.

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