Working Paper | HBS Working Paper Series | 2013

A Formal Theory of Strategy

by Eric Van den Steen

Abstract

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 an intended course of action that is potentially flexible and adaptive. 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, that a choice of what not to do can be very strategic, and that a strategy "bet" can be valuable. It shows how strategy endogenously creates 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.

Keywords: Strategy; Framework; Value;

Citation:

Van den Steen, Eric. "A Formal Theory of Strategy." Harvard Business School Working Paper, No. 14-058, December 2013.