Strategy and the Institutional Envelope

Abstract

Classical approaches to strategy are built around two dominant pillars to explain firm performance: industry structure and firm strategy and capabilities. Firm performance is typically seen as a result of a “fit,” or complementarity, between industry structure and firm strategic choices. We supplement the classical model of strategy with a third pillar, that of the institutional envelope. We argue that the institutional envelope, as its name suggests, is a pervasive influence on the strategy-performance relationship. Both firm strategy and industry structure are simultaneously shaped by, and shape, the institutional envelope, which is both a primitive to and product of firm strategy and industry structure. It also moderates the relationship between firm strategy and industry structure. Institutional considerations are therefore not simply a subfield of strategy research. The institutional envelope is a critical component of any consideration of strategy. Theories of industry structure and strategic choice are insufficient without a fully formed model of the institutional envelope at their very foundation. All strategies, market or non-market, are consciously or unconsciously related to their institutional envelope—being tailored to conform to the institutional envelope or tailoring the institutional envelope to suit them. We see this institutional project that we are advancing as nothing less than the third great wave of strategy research, building off the previous waves emphasizing industry structure and firm choice and resources. It is in the context of this institutions-based strategy model that we preview the papers in the special issue.