A Formal Theory of Strategy
Eric Van den Steen
Harvard Business School - Competition & Strategy Unit
December 14, 2013
Harvard Business School Strategy Unit Working Paper No. 14-058
What makes a decision strategic? When is strategy most important? This paper studies the structure and value of strategy (in its everyday sense), starting from a (functional) definition of strategy as ‘the smallest set of (core) choices to optimally guide the other choices.’ This definition captures the idea of strategy as the core of a – potentially flexible and adaptive – intended course of action. It coincides with the equilibrium outcome of a ‘strategy formulation game’ where a person can – at a cost – look ahead, investigate, and announce a small set of choices to the rest of the organization.
Starting from that definition, the paper studies what makes a decision ‘strategic’ and what makes strategy important, considering commitment, irreversibility, and persistence of a choice; the presence of uncertainty (and the type of uncertainty); the number and strength of interactions and the centrality of a choice; its level and importance; the need for specific capabilities; and competition and dynamics. It shows, for example, that irreversibility does not make a decision more strategic but makes strategy more valuable, that long-range strategies will be more concise, why a choice what not to do can be very strategic, and that a strategy ‘bet’ can be valuable. It shows how strategy creates endogenously a hierarchy among decisions. And it also shows how understanding the structure of strategy may enable a strategist to develop the optimal strategy in a very parsimonious way.
Number of Pages in PDF File: 48
JEL Classification: D70, L20, M10
Date posted: January 25, 2014 ; Last revised: January 26, 2014
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