Strategic management slowly blossomed into a distinct and important discipline over a five-

decade period. During the 1950s it was in the embryonic stage, where the focus of the top
management team was on budgetary planning and controls and key concepts revolved around
financial control. To achieve control over the budgeting, management made use of accounting
tools such as capital budgeting and financial planning. At this time companies achieved
competitive advantage through coordination and control of budgetary systems. During the 1960s
through 1970s, management teams started focusing on corporate planning. Most companies
initiated corporate planning departments to plan for growth and diversification and used
forecasting as the primary tool to visualize growth. Companies embarking on growth attempted
to seek opportunities for diversification. By the 1970s, strategic management started evolving on
a more serious note, extending beyond the budgetary planning and control, and corporate
planning, to include positioning companies in relation to competitors. Corporations tried to
jockey for power and focused on selecting particular market segments and positioning for
leadership. During this period, companies analyzed industry to determine attractiveness in terms
of entry barriers, available suppliers, and potential buyers. Companies attempted to diversify and
expand through entry into the global arena during this period. To align structure with strategy,
companies started slowly moving toward hybrid and matrix structures. By the late 1980s through
1990s, the growth of strategic management as a separate discipline started taking its own shape.
This can be seen in terms of companies attempting to secure competitive advantage. The key
concepts of the companies concerned the sources of sustained competitive advantage (i.e., ways
and means of gaining success over potential rivals). Table 2.1 captures the timeline of evolution
of strategic management.

In the early stages of development, strategic management concepts revolved around

microeconomics. As the theory of firm addresses the question of why firms exist and what
determines their scale and scope,1 other theories also revolved around this basic theme. The
initial answer was in terms of the neoclassical theory of perfect competition that considers the
firm as a combiner of inputs to produce desired outputs. Firms aim at achieving the least among
the cost combinations of inputs in the production process, equating the marginal cost to the
marginal revenue to determine the level of output that maximizes profit. The inherent and highly
restrictive assumptions are that resources are perfectly mobile and the buyers and sellers have all
necessary information. Most importantly, firms are small in size and produce single products,
and hence all firms are assumed to be identical. The firm's size is determined by technological
and managerial factors.

Gradually, researchers realized that these highly restrictive assumptions may not be applicable in
real life. Some degree of monopoly power exists in industry. The firms that have monopoly
power are capable of restraining output to maximize their profits. When power gets diluted,
which can be seen in terms of low industry concentration, firms compete for market share and
engage in different strategies depending on the context and purpose. The industry structure
(called structure) as determined by the number

Table 2.1. The Evolution of Strategic Management

of buyers and sellers, entry barriers, product differentiation, and proportion of fixed to variable
costs sets the tone for the strategy (called conduct), which may be seen in advertisement wars
and price wars between firms. Performance is a close combination of these forces' structure
conduct. Therefore, subsequent scholars (e.g., Bain 1954) in strategic management focused on
examining the structure-conduct-performance relationship.

The first and foremost scholar who brought recognition to strategic management as a separate
discipline was Chandler after he wrote the book titled Strategy and Structure in 1962. Chandler
explained how giant corporations (such as General Motors, Standard Oil, and DuPont) have
grown over the years in such a way that senior managers had to direct their energies to make
long-term decisions and move away from daily routine decisions. He was the first to label a
formal term—strategy—for these long-term plans. The term actually was derived from the Greek
word strategies (which means "art of the general").

Following Chandler, corporations resorted to making use of long-range planning in their

strategic decision-making agendas. The main focus was to examine budgetary proposals in light
of the past data on expenditures. Chandler also argued that organizations need to change their
structure to follow the changes in strategy. Firms gradually moved to organic structures (from
traditional functional structures), which were centered on work teams and groups to enhance
productivity and performance.

Almost at the same time, Schumpeter (1950) argued that firms should try to capture the market
by innovation and make rivals' positions vulnerable. He was of the view that competition over
innovation would be more effective than the price competition. It is important to note that firms
seeking radical innovation eventually enjoy monopoly power. But a significant point is that this
radical innovation is often risky and the financial commitments involved in innovation may
prohibit firms from venturing to implement the innovation. In the process of innovation, firms
are engaged in "creative destruction."

It is also important to take note of Ronald Coase's notion of the costs of negotiating contracts for
the factors of production. Based on Coase's framework, Williamson elaborately explained the
transaction cost economics (TCE) as relevant to strategic management. Most importantly, firms
avoid the costs of transactions through price mechanisms. The transaction cost approach is very
much relevant under the conditions where the potential for opportunistic behavior by the
members in the transaction is very high. Williamson emphasizes the existence of three conditions
for this opportunistic behavior: asset specificity, a small number of people involved in
transactions, and imperfect information. Early in the 1980s, some other scholars, such as Klein
and Leffler, extended the framework of Williamson by stating that existence of opportunistic
potential is not adequate for deriving monopoly power. It is likely that both the parties may
engage in cooperative relationships to avoid diseconomies stemming from the mutual
exploitation.

As history reveals, firms moved away from simple long-range planning to craft and implement
strategies to deal with the changing environment. Until the 1970s, companies did not face
challenges from global competition. Onset of technology paved the way for the Information Age
and most of the U.S. companies lost their ground to international firms. For example, the
automobile industry in United States experienced rapid decline in their market share due to
intense competition from Japanese automobile companies.