Towards a dynamic theory of strategy

Topics: Game theory, Strategic management, Value chain Pages: 63 (14359 words) Published: January 4, 2014
Strategic Management Journal, Vol. 12, 95-1 I7 ( I 991)




Graduate School of Business Administration, Harvard Universitv, Boston, Massachusetts, U.S.A.

This paper reviews the progress of the strategy field towards developing a truly dynamic theory of strategy. It separates the theory of strategy into the causes of superior performance at a given period in time (termed the cross-sectional problem) and the dynamic process by which competitive positions are created (termed the longitudinal problem). The crosssectional problem is logically prior to a consideration of dynamics, and better understood. The paper then reviews three promising streams of research that address the longitudinal problem. These still fall short of exposing the true origins of competitive success. One important category of these origins, the local environment in which a firm is based, is described. Many questions remain unanswered, however, and the paper concludes with challenges f o r future research.

The reason why firms succeed or fail is perhaps
the central question in strategy. It has preoccupied
the strategy field since its inception four decades
ago. The causes of firm success or failure
encompass all the other questions that have been
raised in this collection of essays. It is inextricably
bound up in questions such as why firms differ,
how they behave, how they choose strategies,
and how they are managed. While much of the
work in the field has been implicitly domestic, it
has become increasingly apparent that any search
for the causes of firm success must confront the
reality of international competition, and the
striking differences in the performance of firms
in a given industry based in different nations.
Yet, the question of why firms succeed or fail
raises a still broader question. Any effort to
understand success must rest on an underlying

Key words: Strategy formulation, dynamic theories,
0143-2095/9 1/100095-23$11 .SO

0 1991 by John Wiley & Sons, Ltd.

theory of the firm and an associated theory of
strategy. While there has been considerable
progress in developing frameworks that explain
differing competitive success at any given point
in time, our understanding of the dynamic
processes by which firms perceive and ultimately
attain superior market positions is far less
developed. Worse yet, some recent research has
tended to fragment or dichotomize the important
parts of the problem rather than integrate them,
as I will discuss later.
My purpose in this essay is to sketch the
outlines of a dynamic theory of strategy. Drawing
on recent research, some parts of the outline can
be filled in. Many unanswered questions remain,
however, and I will try to highlight some of the
most important of them.
As a starting point for building a dynamic
theory of strategy, we must step back from
specific hypotheses or models and look broadly
at the literature in both strategy and economics.
I will begin by describing the traditional rationale
for company success that emerged in the early
literature on strategy. This reflected an orien-


M . E. Porter

tation of the strategy field that has differed
in important respects from that which has
characterized most research in economics, arguably the discipline with the most obvious connection to strategy. The strategy field’s traditional answer to why firms succeed or fail was also
based on a set of largely implicit, but crucial
assumptions about the nature of firms and the
environment in which they operate.
Although these assumptions grew out of a deep
understanding of practice, they raise profound
challenges for a theory of strategy. I will outline
some of the most important challenges and the
trade-offs they raise in both theory and empirical
testing. Taking these challenges as a starting
point, I will then describe my own...

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