Choice Structures and Business Strategy

Abstract

In its search for the answer to the question of firm performance differences, the strategy field has provided two types of answers - differences in firms' current competitive position (Porter, 1996) or differences in position at some prior time point (Selznick, 1957), where the latter sort of explanation is typically referred to under the label of path dependence. We first explore the integration of these two sorts of ideas in the context of two case examples Vanguard Mutual Fund and Southwest Airlines. We then develop a graph theoretic generalization of the NK model of Kaufman (1993) in order to examine these questions in a more structured manner. Path dependence is treated in a highly stylized manner of constraining one or more of the N policy variables to a pre-set value. Policy choices may be short-run decisions made each period, but they also may comprise commitments with consequences for subsequent choices. Path dependence and cross-sectional linkages may be connected in another manner in which key or strategic choices guide subsequent choices. In the context of our graph theoretical NK fitness landscapes, we examine how fully articulated must the set of policy choices be in order for the organization to obtain a high fitness level. In particular, we examine performance when some sub-set of the policy choices are set to their optimum level, while the residual policies are specified by a process of local search.