Digital companies have combined the first development stage of market- and finance-oriented strategic management with a second stage characterized by technology and innovation. Even before the emergence of strategic management, such connectivity of fundamental orientations has been a success factor of European hidden champions. The ability to connect is also currently an opportunity for European industry, which must reorient itself towards digitalization, sustainability and resilience based on its traditional strengths.
In this blog post, I explain the basics and characteristics of the first two development stages of strategic management and discuss the role of generative artificial intelligence (AI) as a game changer.
Linking strategy 1.0 and 2.0
Almost every second German company fears that the deindustrialization of Germany as a business location can hardly be stopped and that it will continue to lose its attractiveness. This is the sobering result of a study by the Federation of German Industries (BDI). According to the respondents, the situation is worse than it has been for a long time.1
Of course, this is above all a wake-up call for politicians. However, it also raises the question of how companies can adapt their strategic management to a changed environment.
The task of strategic management as an interdisciplinary field is to shape corporate development and master new challenges. In recent decades, the framework conditions for the economy have changed fundamentally. We divide the resulting evolution of strategic management into five development stages.2 There are many interactions and feedback loops between these stages. The link between Strategy 1.0 and Strategy 2.0 is currently of particular importance, with digital companies playing a key role.3
Four basic orientations
Strategic management has developed from strategic planning since the 1960s.4 Long before that, one of the strengths of the little-known European world market leaders was their combination of technology, innovation, market and financial orientation. To this day, the four basic orientations of this type of company are focused on specific, knowledge-intensive business areas.5 This has contributed to the high reputation of German engineering in the world.
The triumphant advance of the first development stage of market- and finance-oriented strategic management, on the other hand, began in diversified large US companies. An important benefit for those responsible lay in the integrative view of operational functions and the support of portfolio decisions. This new management theory reached large German companies in the 1970s. At the same time, functional strategies gained in importance. However, strategy implementation often failed due to a complexity that was not mastered by personnel management.
Technology and innovation aspects played a subordinate role in this first stage. As a result, the spread of strategic management among European hidden champions and SMEs was rather low. This prompted me to start a doctorate in strategic technology management at the end of the 1970s. Interestingly, the US industry was in a deep crisis at that time.6 In my dissertation, I developed a resource-oriented methodology for the development of technology strategies and thus made a contribution to the second development stage of technology and innovation-oriented strategic management.7 An important finding was that successful corporate innovation systems consist of interconnected fields of action. Their design depends on the ability to combine the development and implementation of strategies with an entrepreneurial culture. 8
In Europe, tapping into the potential of digital cross-sectional technologies has been less successful. Ultimately, it was US start-ups that brought together the first and second development stages of strategic management as part of various waves of digitalization. This is how the most valuable companies in the world today were created. The diagram illustrates the four orientations that link the first two development stages of strategic management.
In the following, I would like to explain the basics and characteristics of these two stages of development in more detail.
Market and finance-oriented strategic management
The origins of the concept of strategy lie in the military sector. An early transfer to the business world took place at Harvard Business School, where a course on business policy was launched in 1911 to create a framework for business management theory. The focus of business policy is on vision and mission.9 Another foundation of the first stage is a look into possible futures, which is described by the term foresight.10 In this development phase, strategic management gradually replaced the long-term planning that had been widespread until then. However, strategic management has never been a homogeneous concept. Various schools emerged relatively early on to describe the multitude of possible strategic processes. The analytical process is only one of the variants. 11
The focus of the first development stage of strategic management (Strategy 1.0) is on competitive advantages in sales markets.12 The overriding goal is to increase the value of the company for shareholders.13 Stakeholder theory was initially unable to assert itself against this dominant shareholder value view. The positioning school, which was shaped by academics and management consultancies and views strategy development as a primarily analytical process, had a strong influence on practical strategy work. One popular method is the portfolio analysis of strategic business fields, which seems relatively mechanistic from today’s perspective. 14
The main criticism of Strategy 1.0 is that the primarily analytical approach alone does not succeed in overcoming implementation problems. The top-down approach and the difficulty of harmonizing functional strategies contribute to the failure of strategy implementation. Despite criticism, this first stage of development has long been widespread, especially in established large companies. It is also still the focus of teaching at many universities, which differentiate between the subjects of strategic management and technology and innovation management.
Technology and innovation-oriented strategic management
The second, technology and innovation-oriented stage of strategic management is based more strongly on entrepreneurship. Entrepreneurship research therefore provides an important basis for Strategy 2.0.15 In the USA, the financing of start-ups through venture capital16 and corporate venture management gained importance much earlier than in Europe.17 Another important foundation is the holistic design theory coined by Nobel Prize winner Herbert Simon.18 Of the functional business management theories, research and development (R&D) management19 and production management20 deal primarily with technological topics.
Since the 1980s, the second stage of strategic management has developed very dynamically in various phases.21 The focus here is on technologies and innovation advantages. Technology and innovation management integrates classic management tasks in a system-oriented approach.22 The importance of personnel management, culture and organization should be emphasized. The task of innovation managers is to shape the connected fields of action of their company’s innovation system.23 This system-oriented view of fields of action forms a common framework for the actors involved. The evolution of such an open, complex system results from the interaction of the actors with their environment. In recent decades, the importance of new business models24 and a culture that promotes innovation25 has increased significantly. Initially, it was primarily start-ups with agile methods that exploited the potential of digital technologies.26
These start-ups have given rise to the US digital giants, whose market power is sometimes viewed critically. For established companies, digital change and the associated dependence on IT companies represent a major challenge.27 The following figure summarizes the development of technology and innovation-oriented strategic management over time.
A new wave of digitalization is coming from generative artificial intelligence (AI) with large language models, which enables productivity advantages and changed forms of knowledge work. In June 2024, AI supplier Nvidia briefly became the most valuable listed company in the world.28 In this current wave, the cards between companies and economic blocs could be reshuffled. The question arises as to how Europe can master the resulting risks.
Generative AI as a game changer for Europe
When we published our book The Internet of Things and Artificial Intelligence as a Game Changer in 2020, the current hype surrounding generative AI was not yet foreseeable. In the last chapter of the book, we take a critical look at European and German innovation policy.29 An exciting question is to what extent generative AI will contribute to a successful reorientation of the German economy or accelerate its further decline. Both seem possible. Our country is therefore at a turning point.
We can learn from the success story of the European hidden champions that it is crucial to connect the sectors of politics, science, business and society as well as the strategic fields of action of companies. Our recommendation is therefore to try to regain a culture of solidarity. It would be important for everyone involved to develop a corresponding mindset. The elites should set an example and hope that citizens will follow their example. Education and training on the topic of cultural connectedness can contribute to this.
Conclusion
- The success of digital companies results from the combination of the first and second development stages of strategic management
- One problem of the first market- and finance-oriented stage is coping with the complexity of strategy implementation
- Digital champions are better than established companies at exploiting the potential of information technology and successfully shaping the associated fields of action of their innovation systems
- A new chapter in the combination of Strategy 1.0 and 2.0 has begun with the topic of generative artificial intelligence (AI)
Literature
[1] Höpner, A., „Deindustrialization can hardly be stopped“. In: Handelsblatt, June 18, 2024, p.18
[2] Servatius, H.G., Strategy 5.0 for mastering the new challenges. In: Competivation Blog, 28.06.2022
[3] Servatius, H.G., Personnel management in the age of connective management. In: Competivation Blog, 19.01.2021
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[6] Hayes, R.H., Wheelwright, S.C., Restoring Our Competitive Edge – Competing Through Manufacturing, John Wiley 1984
[7] Servatius, H.G., Methodology of Strategic Technology Management – Basis for Successful Innovations, Erich Schmidt 1985
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[9] Bleicher, K., Das Konzept Integriertes Management, Campus 1991
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[12] Porter, M.E., Competitive Strategy – Techniques for Analyzing Industries and Competitors, The Free Press 1980
[13] Rappaport A., Creating Shareholder Value – The New Standard for Business Performance, The Free Press 1986
[14] Kirsch, W., Roventa, P. (eds.), Bausteine des Strategischen Managements – Dialoge zwischen Wissenschaft und Praxis, De Gruyter, 1983
[15] Ronstadt, R.C., Entrepreneurship – Text, Cases and Notes, Lord Publishing 1984
[16] Gladstone, D.J., Venture Capital Handbook – An Entrepreneur’s Guide to Obtaining Capital To Start a Business, Buy a Business, Or Expand An Existing Business, Reston Publishing 1983
[17] Servatius, H.G., New Venture Management – Successful Solution of Innovation Problems for Technology Companies, Gabler 1988
[18] Simon, H.A., The Sciences of the Artificial, 2nd ed., MIT Press 1981 (1st ed. 1969)
[19] Brockhoff, K., Research and Development – Planning and Control, Oldenbourg 1988
[20] Zäpfel, G., Strategic Production Management, De Gruyter Oldenbourg 2000
[21] Zahn, E. (ed.), Handbuch Technologie-Management, Schäffer-Poeschel 1995
[22] Servatius, H.G., Piller, F.T. (eds.), The innovation manager – value enhancement through holistic innovation management, Symposion 2014
[23] Servatius, H.G., Triple strategic realignment, Competivation Blog, 07.06.2024
[24] Osterwalder, A., Pigneur, Y., Business Model Generation – A Handbook for Visionaries, Game Changers, and Challengers, Wiley 2010
[25] Mc Afee, A., The Geek Way – The Radical Mindset That Drives Extraordinary Results, Macmillan Business 2023
[26] Ries, E., The Lean Startup – How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, Crown Currency 2011
[27] Rogers, D.L., The Digital Transformation Roadmap – Rebuild Your Organization for Continuous Change, Columbia Business School Publishing 2023
[28] Brüntjen, J.S., Narat, I., Maisch, M., Share price quake shakes Nvidia. In: Handelsblatt, June 26, 2024, p.30-31
[29] Kaufmann, T. Servatius, H.G., Das Internet der Dinge und Künstliche Intelligenz als Game Changer – Wege zu einem Management 4.0 und einer digitalen Architektur, Springer Vieweg 2020, p.203 ff.