Fundamental Issues in Strategy: Time to Reassess?

The fundamental problem in the field of strategic management — how firms build and sustain competitive advantage — still stands preeminent.

But it is now necessary to dig deeper, and examine what some scholars call “initial conditions” or the “institutional foundations” of competitive advantage.

Competing in a politically directed market economy requires the ability to cooperate with national governments to level the playing field.

Firms cannot have global dynamic capabilities when the nation-states in which they are embedded don’t themselves have the ability to sense opportunities and threats, respond with high-quality decisions, then transform institutions and infrastructure to fit the times.

1. Fundamental Issues in
Strategy: Time to Reassess?
David J. Teece
Institute for Business Innovation
University of California, Berkeley, CA
[email protected]
Session 2241 -Strategies for Navigating Bifurcated Global Economy:
Addressing Grand Challenges
September 19, 2022

2. 2
“We created a secure global economic commons
which is now coming apart
”
-George P. Shultz,
Stanford, April 17, 2019

3. Rumelt, Schendel, and Teece (RST) 1994 identified four
fundamental questions* for strategic management scholars:
3
1.How do firms behave?
2.Why are firms different?
3.What is the function of, or value added by, the
headquarters unit of a multi-business firm?
4.WHAT DETERMINES THE SUCCESS OR FAILURE
OF THE FIRM IN INTERNATIONAL COMPETITION?
*Fundamental Issues in Strategy: A Research Agenda, Richard P. Rumelt, Dan E. Schendel, and
David J. Teece (eds.), Boston: Harvard Business School Press (1994).

4. In 1994 it made sense to ignore the rules of the game
because they wereseen as reasonably universal.That
assumption is no longer valid.
The rules were never perfectlyeven handed; now
they are not even approximately so.
Chinesestate involvement in and on behalf of
Chinese firms is now so significant thatthe rules of
the game are no longer even-handed.
The End of the Global Economic Commons:

5. Beyond Five Forces, Resources, and “Diamonds”
The fundamental problem in the field of strategic management —how firmsbuild
and sustain competitive advantage — still stands preeminent.
But it is now necessary to dig deeper, and examine what some scholarscall “initial
conditions” or the “institutional foundations” of competitive advantage.
“Chinamay have invented a more potent form of market capitalism, which has thestate
working not so much in a top down role like that of Japan’s Ministry ofInternational Trade
and Industry (MITI) in the second half of the twentiethcentury, but in a “bottom up” role
where it fosters competition by providingthe regulatory framework and the finance to seed
and grow tens of thousandsof new enterprises.”*
*David Teece in Fundamental Issues in Strategy: A Research Agenda, Richard P. Rumelt, Dan
E.Schendel, and David J. Teece (eds.), Boston: Harvard Business School Press (1994).

6. 6
DRAFT v2
Figure 1: The (integrated) foundations of firm-level competitive advantage
Fundamental Issues in Strategy: A Research Agenda, Richard P. Rumelt, Dan E. Schendel, and
David J. Teece (eds.), Boston: Harvard Business School Press (1994), pg. 110

7. Features of the (“initial conditions”) of the Chinese system
7
•Systemic Competition
•Inexpensive local authority credit
Steel?
•Predatory Behavior
Solar Panels?
•Integration of Civilian and Military Technologies

8. Capturing value from innovation in China is challenging for
multinational firmsand is shaped by:
8
1.Market access restrictions
2.Technology misappropriation/cyber theft
3.Industrial policy masquerading as antitrust
policy
4.Increased salience of non-market strategies

9. Q4 A. How do home country conditions shape
the competitive advantage of
multinationals?
Q4 B. What determines the success or failure
of global business firms in China?
Q4 C. How do managers build and sustain
competitive advantage when confronting
rivals benefiting from state support?
9
UNPACKING RST QUESTION 4: What determines the success and
failure of the firm in international competition
A new form of corporate diplomacy may be required?

10. 10
Figure 2: the dual foundations of competitive advantage

11. Responding to the new fundamental issues requires nation state
dynamic capabilities too!
Home country conditions shape firm-level competitive advantage: (1) The regulatory
and legal environment sets the nature of incentives facing management and
determines the character of the board. (2) The national innovation system co-
determines technological opportunities. (3) National priorities determine the quality of
physical infrastructure and human capital. (4) Culture sets values and priorities too.
•Competing in a politically directed market economy requires the ability to cooperate with
national governments to level the playing field
Firms cannot have global dynamic capabilities when the nation- states in which they are
embedded don’t themselves have the ability to sense opportunities and threats, respond with
high-quality decisions, thentransform institutions and infrastructureto fit the times.

12. Implications for the field of strategic management
The rise of China means there is now a major economy in the world where the
traditional nostrums of strategic management need to be analyzed anew.
New approaches are needed which align multiple governments to reshape the terms
of engagement with strategic rivals to facilitate even-handed competition between
Chinese and foreign firms.
Without leverage from the home governments, durable competitive advantage in
China is likely unavailable to most non-Chinese firms.