Mair raised a number of basic methodological problems with these stories. They were often based on patchy research and focused on a particular period. All the way through Honda was treated as a great success, yet during the course of its history it had made a number of major errors and at times faced financial ruin. The failures were never deemed to be of interest. The business theorists who wanted to draw lessons might have asked why it never managed to dent Toyota’s dominance of the Japanese car market or explain why companies that followed similar strategies did not do as well. Insufficient attention was paid to the less glamorous but vital aspects of Honda’s approach, such as its operations and dealer management, perhaps equivalent to the disinterest in logistics often displayed by military strategists. There was always going to be more interest in sparks of genius than the tedious slog of administration. Mair criticized analysts seeing “only what they want to see” and of “acute one-sided reductionism.”45 He noted the tendencies toward polarization, as in deliberate/emergent and competence/ capabilities, as if it had to be one or the other. The data was aligned to fit the theory, while inconvenient material was ignored or fudged.
Back to Basics
Military strategy had been launched at a time when it was believed that there were basic principles which, if applied properly, could at least increase the probability of success, even if success could not be guaranteed. It then struggled as it became apparent that the application of military force was a more complicated and frustrating business than envisaged by Jomini in the first glow of Napoleon’s advances, especially as it proved hard to escape from the norm of decisive battle. Business strategy was the product of a similar bout of optimism of the mid-twentieth century, picking up on a general confidence in the possibilities of long-term planning, not only for nations but also for large companies, including the large American conglomerates. It also struggled as the limitations of the planning model became apparent, but unlike the military the managers did not have an agreed framework to provide coherence. As a result, business strategy lost its way, following many diverse paths and falling prey to temporary enthusiasms. There was a resulting tendency to prescriptive hyperbole. In a cautionary analysis, Phil Rosenzweig dismissed purveyors of business success stories for misleading their readers, sustaining the myth that there were reliable rules for success that once discovered could ensure the success of a business. He offered examples of sloppy thinking, by and large involving the standard muddle between correlation and causation, the tendency to explore explanations of success without worrying whether the same factors might be present in failures, and paying inadequate attention to the competition. The basic muddle he identified was the “halo effect,” the tendency to assign factors such as culture, leadership, and values, responsibility for a strong performance when they are really attributions that resulted from a strong performance.46
Skeptical figures, who had seen fads and fashions come and go, urged a return to the basics. John Kay warned that strategies could not be generic because they had to be based on distinctive capabilities. The aim therefore should not be to come up with grand designs that even the most totalitarian institution would struggle to realize. Companies lacked the knowledge to construct the plans and the power to implement them. Instead of the “illusion of control” and the belief that success would result from superior vision and will, he urged a resource-based approach based on the work of Edith Penrose in the 1950s. The task was to find the best fit between the internal capabilities of the firm and its external environment. The place to start was with an understanding of a company’s actual and possible position in the marketplace, as well as the distinctive capabilities it already had rather than those it would like to have.47
Positioning documents might describe desirable end points—places to be in five years’ time—but the starting point would have to be the current situation. While there might be a temperamental preference for strategies that outsmarted competitors rather than relied on superior capacity, much would depend on the problem that was to be solved. Thus Stephen Bungay urged avoiding the pathologies of central control, with constant demands for extra information and reduced opportunities for individual initiative. His advice was to concentrate on what mattered, not to attempt to “plan beyond the circumstances you can foresee,” and formulate strategy as intent and with a simple message, encouraging people to adapt their actions to circumstances.48 A book based on the successful experience of Alan Laffley in charge of Proctor & Gamble (P&G), written with his chief consultant Roger Martin, considered strategy in terms of “making specific choices to win in the marketplace.” The questions behind a winning strategy, they advised, were about describing a winning aspiration, where to play, how to win, the capabilities and management systems that needed to be in place. The book explained how this was done at P&G, but also commented on the need to avoid “strategic traps.” The basic source of error was failing to set real priorities, traps described as “do-it-all,” “something-for-everyone,” or as Waterloo (starting with multiple competitors on multiple fronts). Other errors were described as Don Quixote, attacking the strongest competitor first; “program of the month,” which meant going for the latest fashion; and last, “dreams that never come true.”49
Similarly, Richard Rumelt described good strategy as starting with a diagnosis that defined or explained the nature of the challenge, thus simplifying the complexity of reality—which could be overwhelming—by identifying the most critical aspects of the current situation. This would facilitate a guiding policy for dealing with the challenge and a set of coherent actions designed to carry out the guiding policy. Rumelt recognized that the problem could be internal as well as external, found in both its routines and bureaucratic interests, and that rather than reaching for the sky the best course at times was to set proximate objectives, close enough at hand to be feasible.
Many writers on strategy seem to suggest that the more dynamic the situation, the farther ahead a leader must look. This is illogical. The more dynamic the situation, the poorer your foresight will be. Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be.50
Rumelt also warned of the dangers of bad strategy, especially the quality he described simply as “fluff” or a “form of gibberish masquerading as strategic concepts or arguments,” but also for failing to define the challenge to be addressed, mistaking goals for strategy, stating a desire without a means for achieving it, and setting objectives without considering their practicability.51 He warned against senior management setting impossible targets and explaining how anything can be achieved with sufficient drive and will (though in practice they were unlikely to be able to manage more than a few challenges at any one time), seeking consensus between incompatible visions instead of making a definitive choice, and attempting to inspire by buzzwords (“charisma in a can”) instead of natural, personal language. “Bad strategy flourishes,” Rumelt suggested, “because it floats above analysis, logic, and choice, held aloft by the hope that one can avoid dealing with these tricky fundamentals and the difficulties of mastering them.”52
Business strategy, like military and revolutionary strategy, could suffer from its own heroic myths. It acquired an unrealistically elevated status as the ingredient that could make all the difference between success and failure. Master strategists with master strategies were regularly identified to be admired and emulated: “captains of industry” keeping their organizations stable and set on a steady course; financial wizards taking aggressive action against all inefficiencies and so extracting the last ounce of shareholder value from a business; hard competitors scouring the marketplace for the most advantageous position; soft revolutionaries recognizing the creative potential of a committed workforce; innovative designers transforming a market with a truly unique product. Management theorists and gurus promoted their own preferred heroes. There were inevitably some managers who matched at least one of these types, but what worked in one situation could go
wrong in another. Too often, the individuals and companies who soared one moment seemed to come crashing down the next. The hype that accompanied the promotion of successive strategic fashions exaggerated the importance of the enlightened manager and played down the importance of chance and circumstances in explaining success.
PART V Theories of Strategy
CHAPTER 36 The Limits of Rational Choice
In theory there is no difference between theory and practice. In practice
there is.
—Yogi Berra (also attributed to Albert Einstein)
THIS SECTION is concerned with the possibility of strategic theory based on the insights of contemporary social sciences. We have already seen how apparently detached intellectual activity was the product of wider social forces, whether the effort put in by the RAND Corporation to develop new sciences of decision-making, the foundation grants that encouraged business schools to adopt these—and which the more sociologically inclined organizational theorists sought to resist—or else the impact of the radical thinking of the 1960s on the relationship between discourse and power.
A particularly influential theory was one that stressed the benefits of treating all choices as if they were rational. Adherents were confident that they, almost uniquely, could offer a theory deserving of the accolade “social science” in which all propositions could both be deduced from a strong theory and then validated empirically. Though rational choice theory consistently delivered far less than promised, and its underlying assumptions became vulnerable to a fundamental challenge from cognitive psychology, it was promoted effectively and in a highly strategic manner. In a remarkably short space of time, supporters of the theory became embedded in political science departments. They were not deterred by the widespread apprehension that the theory depended on an untenable view of human rationality. The claim, they insisted, was no more than that the premise of rationality helped generate good theory.
The Rochester School
As Kuhn observed, the promotion of new schools of thought in academia has rarely depended on reason alone. Successful promotion has also relied on access to the sources of academic power through dispensing grants, editing journals, or appointing acolytes to faculty positions. So it was that economics was given a singular boost after the Second World War with a substantial investment which made it possible to exploit the opportunities for the sophisticated quantitative methods opened up by computers. As it grew in confidence and assertiveness, economics offered itself as the master discipline of the social sciences. There were no obvious boundaries to its imperialism. The “economic approach provides a framework applicable to all human behavior,” observed Gary Becker, “to all types of decisions and to persons from all walks of life.”1
Before the Ford Foundation began to invest in business schools in the late 1950s, it had already undertaken a major investment in the so-called behavioral sciences. This investment did not create the field, which could be traced back to the 1920s and the work of Charles Merriam and Harold Lasswell at the University of Chicago. There was already a developing interest in analyzing large data sets, such as censuses, election results, and polling data. Ford, followed by other foundations, undoubtedly made a difference, encouraging universities to establish centers for behavioral studies by providing large grants—often unsolicited (so that some universities were unsure what was expected of them)—to the tune of some $24 million between 1951 and 1957. The RAND Corporation’s influence was evident, with Gaither in charge of the Foundation and Hans Speier, the head of RAND’s social science division, advising. The aim therefore was to move away from earlier forms of social and political theory and encourage an interest in phenomena that could be measured. This new approach was described as “behavioralism” to emphasize the positivist, empirical, and value-free quality of the research. Against the anti-communist backdrop of the time, there was also concern that “social science” smacked too much of a “socialist science” or social reform.2 The individualistic assumptions behind this approach fit naturally with theories of markets and democracy and challenged Marxist notions of class struggle. This encouraged the view that liberal individualism was rational and collectivism irrational.3 The core attraction of the theory, however, was not ideological but that it was elegant, parsimonious, and genuinely innovative. Some of those attracted by its virtues even gamefully sought to demonstrate that it was not incompatible with Marxism. Unfortunately it was often asserted dogmatically and embraced as a project of ambitious model-building.
There was ambiguity about whether this theory was descriptive or prescriptive. Did it explain how actors did behave or how they should behave? If prescriptive, then actors would need to make a deliberate decision to follow the advice. That would be the rational thing to do. “To identify a rational choice is to say that an agent would, in some sense and circumstances, do well to make it. If actual agents do not, they rather than the theory may be at fault.”4 So if actors chose not to follow rational advice, they therefore were capable of behaving irrationally. If that was generally the case, the theory was going to be limited in any descriptive, let alone predictive, capacity. If, on the other hand, the theory was reliably descriptive, the prescription would be both obvious and irrelevant. Why should actors bother with strategy when the solution was evident in advance?5
The starting point for the theory was that individuals made their own choices in order to maximize their utilities, which could be subjectively defined, although there was a tendency to assume that these were quite basic and could be measured in terms of economic rewards or the acquisition of power. The next stage was for actors with their preferences to play a structured game, presuming a certain amount of knowledge about their own position and those of the other players. The following, crucial step would be to identify the equilibrium point. Assuming that all players followed strategies to maximize their utilities, this point would be one from which individual actors had no incentive to deviate. In principle, it would represent the most logical outcome to the strategic game and would set the terms for future empirical work.
A key figure in the development of rational choice theory at RAND was Kenneth Arrow, who developed the “impossibility theorem” that explained why democratic systems do not always produce outcomes that conform to the wishes of the majority. His student Anthony Downs, in his Economic Theory of Democracy used the idea of individuals maximizing their self-interest to challenge notions of public interest. The person who turned all this into what he saw as a paradigm shift in political science was William Riker. Riker had followed a relatively mainstream path since graduating from Harvard in the late 1940s, yet was looking for a means to elevate political science to a new level. He found it in game theory.
When he first became aware of game theory in the mid-1950s, Riker was attracted by the presumption of amoral rationality. He was reacting against what he saw as the then dominant paradigm of normative political theory, written as a set of imperatives, about how politics should be conducted rather than as an analysis of how it was actually conducted. Yet he also wanted to move beyond a Machiavelli-like focus on the realities of power. He aspired to something truly scientific, offering testable models that could guide empirical work. This was why he was excited by game theory, with its “uncompromising rationalism.” Asking what sensible people trying to achieve straightforward goals would choose to do was in line with traditional political science. This tradition he judged to have been lost during the first half of the century under the influence of biological, psychological, and metaphysical theories. Game theory left “no role for instinct, for thoughtless habit, for unconscious self-defeating desire, or for some metaphysical and exogenous will.”
The second appeal lay in the emphasis on free choice. Here Riker was reacting to the historical determinism associated with Marxism. Game theory assumed that people consider their own preferences and how alternative strategies might satisfy them in the face of similar calculations by opponents. The outcomes therefore dep
ended on free human choices rather than on “some exogenous plan for the world” or “built-in human irrationality.” There was an obvious tension here, which Riker acknowledged. As a prescriptive theory this was fine. It was all about helping people make better choices. But as a descriptive theory, variations in choices caused all sorts of problems. The value of deterministic assumptions about rational choice was that they should help identify regularity of behavior and so make possible generalizations. Yet truly free choices allowed for quirky and random behavior that defied generalization.6 Riker saw game theory as offering a way out of the dilemma by combining the possibilities of generalization with free choice. On the one hand, it could be presumed that all persons with the same goals in the same circumstances would rationally choose the same alternative, so regularities could be observed. That did not, however, remove the role of choice, especially in situations characterized by uncertainty. In the end it was the choices that fascinated Riker most, and this meant that by the time he died he was moving into areas where science was of little help. But by that time he had spawned a whole school determined to prove that politics could be a science and was resolutely disinterested in it as an art.
In 1959, Riker applied for a fellowship at the Center for Advanced Study in the Behavioral Sciences at Palo Alto with the aim of working in a field he described as “formal, positive, political theory.” “Formal” referred to “the expression of the theory in algebraic rather than verbal symbols” and “positive” to the “expression of descriptive rather than normative propositions.” He sought the “growth in political science of a body of theory somewhat similar to … the neo-classical theory of value in economics.” In particular he mentioned the potential role of the “mathematical theory of games” for “the construction of political theory.”7 The result of his fellowship was The Theory of Political Coalitions, which served as his manifesto. What made the difference in terms of the spread of his ideas, however, was his appointment to run the political science department at the well-endowed University of Rochester, already committed to forms of social science based on rigorous quantitative analysis. Here he insisted on students capable of statistical analysis and faculty who were signed on to his own vision. Under his leadership, Rochester moved up the rankings, producing graduate students who went forth into other departments to spread the word of rational actor theory. Two of his acolytes have written of “consistent, thorough preparation of students who recognized themselves to be part of a distinct movement to alter political science, the camaraderie and tightknit sense of community among those students, and their impressive scholarly productivity.” These students were “unyielding in their efforts to research and advance the theoretical paradigm of rational choice” and determined to “displace other forms of political science.”
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