Module-3-Why-Porter-is-Not-Enough-Economic-Foundations-of-Sustainable-Strategic-Management / !

/IhaileIModule 3: Why Porter is Not Enough: Economic Foundations of Sustainable Strategic Management

Learning Outcomes

• At the end of this lesson, students will be able to:

  • Narrate the evolution of Sustainable Strategic Management.

  • Explain co-evolution and the pull of the practice of Strategic Management.

  • Discuss neoclassical economics and the Strategic Management paradigm.

  • Describe foundation principles of ecological economics for twenty-first-century Strategic Management.

  • Analyze the role of Sustainable Strategic Management in modern business practices.

Introduction

• Henry Mintzberg argues for a focus on real-world practices over rigid models in Strategic Management.

• Effective decision-making requires integration of multiple information sources and accurate models.

• Traditional strategic management models (e.g., Porter’s analyses) are becoming obsolete and do not fully represent modern business realities.

• Alfred North Whitehead's concept of "misplaced concreteness" highlights the issues with relying solely on abstract models.

• This chapter discusses:

  • The current business environment.

  • The influence of neoclassical economics on strategic management.

  • The shift towards a dynamic and sustainable approach in strategic management.

Co-evolution and the Pull of the Practice of Strategic Management

• Co-evolution signifies adapting theory and practice of strategic management together, as seen in biological sciences.

• Shift from traditional business policy to a dynamic approach:

  • Historically focused on internal resource maximization.

  • Academic theories often trail behind practical realities in strategic management.

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The Transformation of Strategic Management

• The business environment drives strategic management to an open-system paradigm of Sustainable Strategic Management (SSM).

• SSM challenges traditional economic assumptions, adapting flexible structures and processes.

• Sustainability has become crucial for competitive advantage and requires businesses to evolve.

Sustainability and the Circular Economy

• Demand for sustainable practices impacts strategic management significantly, prioritizing sustainability at the corporate level.

• Collaboration among stakeholders (suppliers, NGOs, governments) is essential for sustainable innovation.

• Investor interest in ESG criteria is growing, yet the gap between expectations and performance persists.

• The circular economy replaces the traditional linear model:

  • Focuses on reuse and regeneration of resources, enhancing long-term success.

  • Many businesses see increased profits through circular strategies fueled by customer demand.

The Anthropocene

• Human activity has led to environmental changes defining a new epoch: the Anthropocene.

• It marks surpassing natural planetary boundaries, crucial for ecological stability.

• Nine planetary boundaries identified, including:

  • Climate change

  • Ocean acidification

  • Biodiversity loss

• Four boundaries have been crossed, raising survival risks.

• Emphasizes the need for sustainable resource management and urgent actions to balance development with ecological preservation.

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Open-System Structures

• Open-system structures allow adaptability to competitive landscapes, facilitating business ecosystems where interdependent networks thrive.

• Co-opetition model emerges:

  • Firms cooperate and compete to maximize profitability collectively.

  • Involves broader collaboration beyond suppliers and customers, including governments and NGOs.

• Major companies (e.g., Apple, Facebook) operate within these ecosystem structures.

Open Strategy and Open Innovation

• Open strategy and innovation incorporate environmental and social dimensions into value creation.

• Stakeholder involvement and transparency are emphasized.

• These shifts move towards a more interconnected economic system beyond neoclassical economics.

Neoclassical Economics and Strategic Management Paradigm

• Traditional strategic management paradigms are based on neoclassical economics, which treats social/environmental issues as externalities.

• Key Assumptions:

  1. Unlimited Economic Growth - Assumes endless growth despite finite resources.

  2. Substitutability of Natural Capital - Natural resources viewed as easily replaceable.

  3. Self-Interest in Resource Allocation - Focuses on individual self-interest driving efficient allocation.

Environmental Economics

• Neoclassical economics has expanded into environmental economics recognizing non-market factors but still presents limitations.

• Solutions like cap-and-trade acknowledge environmental costs but don't fully incorporate ecological limits in planning.

• Critique: Fails to identify optimal economic size and disregards ecological constraints in macroeconomic theory.

The Influence of Neoclassical Economics on Strategic Management

• Porter’s Five Forces Model and Value Chain Model emphasize structured competition within closed systems but are inadequate for modern complexities:

• Limitations of the Five Forces Model:

  • Static competition view limited to rigid industry lines.

  • Neglects broader social/ecological factors.

  • Narrow stakeholder perspective.

• Limitations of the Value Chain Model:

  • Focused on firm activities but remains within a closed context.

  • Short-term financial focus undermines sustainability.

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Creating Shared Value (CSV)

• CSV expands the value chain by integrating economic and social value but remains within a closed system.

• Critics argue for a corporate-centric approach that lacks systemic solutions for widespread social/environmental issues.

Need for Paradigm Shift

• A shift towards an open-system approach is necessary, recognizing firms as interlinked with societal and ecological contexts.

• Strategic Management requires long-term sustainability and new collaborative frameworks.

Ecological Economics: A New Foundation

• Ecological economics reframes businesses as interconnected within the economy, society, and ecosystem.

• Entropic System Concept:

  • Challenges the notion of infinite economic growth, emphasizing waste and degradation limits.

Key Principles of Ecological Economics

1. Interconnected subsystems of economy, society, and nature.

2. Balance short-term economic decisions with long-term ecological processes.

3. Acknowledge humanity's integration within nature.

4. Focus on sustainability over limitless growth.

5. Technology as supportive, not standalone for sustainability.

6. Interdisciplinary approaches essential for addressing challenges.

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Strategic Management in the 21st Century

• Traditional models are ineffective in tackling modern challenges like environmental change and inequality.

• Future strategic management should integrate ecological economics to balance economic, environmental, and social factors.

Sustainable Strategic Management (SSM)

• Represents a transformational shift to an open-system approach driven by ecological economics.

• SSM incorporates more holistic frameworks for sustainable value creation.

New Open-System Model

• Built on Daly’s steady-state economy, framing businesses as co-evolving within larger systems.

• Promotes questioning traditional assumptions and exploring new strategic possibilities.

New Tools for Value Creation

• Companies can use analytical tools aligned with sustainability:

  • Life Cycle Analysis.

  • Footprint Analysis.

  • Cradle-to-Cradle Approach.

  • Triple Bottom Line Accounting.

Beyond Efficiency: Achieving Effectiveness

• SSM focuses on broader effectiveness—not just efficiency—addressing environmental and social challenges meaningfully.

• Encourages long-term sustainable impact over profit maximization.

Conclusion

• Adopting Sustainable Strategic Management allows businesses to effectively tackle 21st-century complexities and achieve economic success while promoting ecological and social well-being.

Figures

• Figure 3.1: Porter’s Five Forces Model

• Figure 3.2: Open Living System Economy

Reference

• Wunder, T. (2019). Rethinking strategic management: Sustainable strategizing for positive impact. Springer.