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Applying Strategic Management Theories in Public Sector Organizations:


Developing a Typology

Article  in  Public Management Review · May 2014


DOI: 10.1080/14719037.2014.957339

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Jesper Rosenberg Hansen Ewan Ferlie


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Applying Strategic Management


Theories in Public Sector
Organizations: Developing a
Typology
ab c
Jesper Rosenberg Hansen & Ewan Ferlie
a
Department of Economics and Business, University of
Aarhus, Aarhus, Denmark
b
Department of Political Science and Government,
University of Aarhus, Aarhus, Denmark
c
Department of Management,King’s College London,
London, UK
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To cite this article: Jesper Rosenberg Hansen & Ewan Ferlie (2014): Applying Strategic
Management Theories in Public Sector Organizations: Developing a Typology, Public
Management Review, DOI: 10.1080/14719037.2014.957339

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Public Management Review, 2014
http://dx.doi.org/10.1080/14719037.2014.957339

Abstract
APPLYING
This article discusses the utility of two dif-
ferent strategic management theories in dif- STRATEGIC
ferent types of public organizations including
contemporary New Public Management- MANAGEMENT
based public organizations, namely Porter’s
strategic positioning model and the THEORIES IN
resource-based view of strategy. We argue
that possibilities for applying these theories PUBLIC SECTOR
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ORGANIZATIONS
vary depending on the type of public organi-
zations involved, and are less appropriate in
traditional settings but more relevant in
autonomized and market-like service-delivery Developing a typology
organizations. We further propose that their
increased applicability depends on three spe-
cific conditions: the degree of administrative Jesper Rosenberg Hansen
autonomy, performance-based budgeting and Ewan Ferlie
and market-like competition. We give empiri-
cal examples drawn from public services in
the UK and Denmark. We call for more Jesper Rosenberg Hansen
exploration of these (and other) strategic Department of Economics and Business
management approaches within contempor- University of Aarhus
ary public services organisations but also Aarhus
more exploration of the limitations of these Denmark
frameworks. Department of Political Science and Government
University of Aarhus
Aarhus
Denmark
E-mail: jhansen@econ.ac.uk
Key words
Strategic management, NPM, typology Ewan Ferlie
Department of Management
King’s College London
London
UK
E-mail: Ewan.Ferlie@kcl.ac.uk

© 2014 Taylor & Francis


2 Public Management Review

INTRODUCTION AND BACKGROUND

The public sector in many countries has recently undergone many changes through
sustained reform initiatives. While countries vary in their reform trajectory (Pollitt and
Bouckhart 2011), New Public Management (NPM) reforms have been a significant
influence in various jurisdictions since the 1980s (Hood 1991, 1995). The NPM wave
introduced new economic perspectives (e.g. quasi-markets, transaction cost economics
and agency theory) and generic management theory (e.g. firm-like corporate govern-
ance) within public organizations (Hood 1991). Changes to more business-like organi-
zational forms are now well explored in a substantial literature on NPM reforming
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(Hood 1991; Ferlie et al. 1996; see Dunleavy et al. 2005 for a critical treatment)
though there are major variations of the NPM impact across countries and between
sector areas within countries (Pollitt and Bouckaert 2011).
The established public management literature (Perry and Rainey 1988; Rainey and Chun
2005; Boyne 2002) also explores the nature of strategic management in public organizations
and private companies (Nutt and Backoff 1993; Moore 2000; Rainey 2009), but typically
assumes significant differences (Allison, [1980] 2004; Bozeman 1987) due to more complex
and ambiguous goals in the public sector, and because the decision-making process is there
more open and political, given multiple stakeholders (Rainey 2009). However, this
established literature does not consider the effects of NPM reforms in making public
services organizations less distinctive from the private sector firm (see Dunleavy and
Hood 1994). It is only recently that strategic management has received attention within
the public administration literature (Ferlie 2003; Johanson 2009) and the field is still
developing. Even so, strategic management is argued by some authors to be increasingly
important for shaping the performance of public organizations (Andrews et al. 2012).
Key macro-level shifts within the NPM include (i) Autonomized Agencies: NPM
reforms break up large vertically integrated public bureaucracies into smaller and
more ‘manageable’ service-delivery-orientated subunits such as UK executive agencies
(Pollitt et al. 2004). The goal is to create autonomous public organizations (Pollitt
et al. 2004) with well-defined, high volume and narrow tasks. Such agencies are
‘accorded greater operational decentralization’ with more ‘strategic space’ in which
to operate. (ii) Quasi-Markets and Quasi-Firms: The old line management hierarchy
fragments into distinct groupings of commissioners and providers which link through
a contract. On the provider side, quasi-markets produce ‘quasi-firms’ (Ferlie 2003)
which try to secure competitive advantage and win contracts. They may become less
producer-dominated and more customer-focused. (iii) Sectoral Blurring and Public–Private
Hybrids. NPM reforms increase sectoral blurring and create public–private hybrids.
Consortia (e.g. large infrastructure projects) bring together public agencies and private
firms. Executive agencies may undergo progressive privatization, with the role of
private shareholders increasing over time. Organizations nominally remaining in the
public sector may increase income generated through the market and become less
Hansen & Ferlie: Strategic management in NPM-based organizations 3

reliant on public funding. (iv) Strengthened Corporate Core: NPM organizations seek to
develop more steering from the corporate core. Typical shifts include assertive senior
management, importing personnel from the private sector; a smaller and more strategic
board with empowered non-executives, often with a business background; and aligning
managerial and professional domains through a linking group of public services profes-
sionals with part-time managerial roles as ‘hybrids’ (Ferlie et al. 1996).
Our main goal here is to consider whether and why certain models of strategic
management can be used in different types of public organizations. So we will first of all
consider the conditions under which generic strategic management models become more
applicable to specific types of public organizations, notably those that are NPM-oriented.
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Our main argument is that where there are three NPM-correlated conditions: a high degree
of (i) administrative autonomy, (ii) performance-based budgets and (iii) market-like con-
ditions then receptivity to conventional models of strategic management increases.
Second, we will examine two influential strategic management theories found in
business organizations (Spanos and Lioukas 2001). One is Porter’s strategic positioning
(Porter; 1980, 1985, 1996) model which focuses on choice of strategy and position in
the market, so as to exploit market imperfections. The other is the resource-based view
(RBV) of strategy (Barney 1991, 1995; Peteraf and Barney 2003) which focuses on
developing and exploiting the organization’s resources. While these theories are widely
used in private companies, the literature on strategic management in public organiza-
tions does not (yet) pay much attention. More public-management-based literature
focuses on other aspects of strategic management, for example, on strategic processes
(Bryson 2004) or on Miles and Snow’s classic typology (e.g. Andrews et al. 2009;
Meier et al. 2007) – though Porter (Vining 2011) and RBV (Walshe, Harvey and Jas,
2010; Piening forthcoming) have received more attention recently. We suggest there
are further possibilities for applying these theories in public services organizations which
rate highly on our three core dimensions.
Some examples are given from public organizations in the core health and education
sectors in two countries with experience of major NPM reforms in large parts of their
public sector: the UK (Hood 1991, 1995; Ferlie et al. 1996) and Denmark (Hansen
2011). We recognize that other jurisdictions may be on non-NPM-based tracks of
public services reform (Pollitt and Bouckaert 2011) and will consider these broader
issues in the concluding discussion. The concluding discussion also outlines suggestions
for future research in what we consider as a growing field.

UNDERSTANDING DIFFERENTIAL RECEPTIVITY BETWEEN TYPES OF PUBLIC


ORGANIZATIONS TO GENERIC STRATEGIC MANAGEMENT MODELS

We argue that the possibilities for using strategic management models in public
organizations depend on their core features. In this section, we generate a continuum
4 Public Management Review

to help understand such differences and suggest a classification scheme which argues
that three dimensions: the degree of administrative autonomy, performance-based
budgeting and market-like competition all influence such possibilities.

Degree of administrative autonomy

The first dimension is the organization’s degree of administrative autonomy. A tradi-


tional distinction often drawn is between economic and administrative autonomy. In the
former, the organization has economic freedom, often in a competitive situation
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(Chubb and Moe 1988). Here, we focus on administrative autonomy which sets the
boundaries for strategic action. In the private sector strategic management literature,
autonomy is not seen as a big issue – probably because it is expected that companies
have autonomy to act. However, public organizations can be restricted by their
mandate (Bryson 2004). Politicians decide the organization’s degree of autonomy,
traditionally highlighted as a constraint on strategy in public management (Ring and
Perry 1985). Yet in many countries, politicians have recently expanded the scope of
autonomy for public organizations to reach their goals (Pollitt and Bouckaert 2011;
Vining 2011) and autonomy maximization may also be a managerial objective. One
core NPM policy is to construct semi-autonomous executive agencies (Pollitt et al.
2004) assuming they perform better in the operational domain than more traditional,
highly restricted public organizations (we develop this point below).

Degree of performance-based budgets

Two widely used typologies of public organizations are Wilson (1989) and Dunleavy
(1991). Wilson distinguishes between types of public organizations using two criteria:
how observable is output and outcome. Dunleavy (1991) distinguishes between public
organizations based on their budgeting. These two typologies focus on two fundamental
aspects of public agency budgeting: Wilson focuses on output and outcome, which is a
performance-oriented framework, and categorizes public organizations according to
how their performance can be observed. Dunleavy focuses on the public organization’s
budget as the basis for what the organization can achieve. This article’s classification
schema combines these two variables and focuses on the degree of performance-based
budgets.
While performance measurement has been used for different purposes, the focus
here is on performance measurement techniques which make performance-based
budgets (Jordan and Hackbart 1999) possible. The policy choice is whether public
services organizations have fixed budgets with no relation to performance, or at the
other extreme, budgets based solely on performance (activity-based budgets) or
Hansen & Ferlie: Strategic management in NPM-based organizations 5

something in between. This dimension relates to the distinction between input- and
output-based budgets where the trend with NPM is towards more output-based
budgets (Rubin and Kelly 2005). Problems can occur with performance-based budget-
ing given a tendency to focus on aspects that are measured while forgetting those not
measured. Furthermore, many public tasks remain difficult to measure (Wilson 1989).
Therefore, the argument is not that we need a decrease or increase in performance-
based budgets, but rather that this continuum influences the possibilities for applying
strategic management. The performance-based budget form increases the importance of
strategic management because organizations’ survival to a larger extent now depends on
their performance. This is not to say that organizations with fixed budgets will not use
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some strategic management techniques to help allocate resources, but rather that the
scope and scale of such analysis is likely to increase along with performance-based
budgets.

Degree of market-like competition

Perry and Rainey’s influential typology (1988) includes three criteria: ownership
(public/private), funding (public/private) and social control (polyarchy/market). This
typology is clear, but its primary focus is on the transitional area between public
organizations and private companies. Much recent work on public management has
studied organizations which are a cross between public and private sectors (Jørgensen
1999). As organizations still legally in the public sector are allowed to increase their
private and public income flows, they may too become more like hybrids and operate in
more market-like conditions.
The last dimension in our continuum is therefore the degree of market-like competi-
tion. The question is whether control is primarily political or performed via market-like
conditions either after privatization, increased private income flows or through ‘strong’
quasi-markets. This continuum suggests differential market-like conditions, for
instance, the degree of competition facing a public organization. One indicator of
market-like competition is how much it threatens organizational survival. Given high
competition, a failing public organization may experience market failure and even be
forced to close. We develop this point further below.

The overall classification schema

The first dimension explores how much freedom an organization has in achieving its
mission; the second plots the extent to which the organization receives funding for
achieving the mission and whether it varies with performance; and the third dimension
concerns whether an organization competes with others in achieving its mission. Based
6 Public Management Review
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Figure 1: Differences between public organizations

on this classification schema (see Figure 1), there are two extreme types of public
organizations where all three dimensions are either low or high. The first category
contains the classical bureaus with highly restricted tasks of authority (like issuing
passports or building licenses). Traditionally these traditional bureaus have fixed
budgets regardless of performance and competition. On the other side of the spectrum
lie private-like and NPM-inspired agencies (like some public schools, where the
children have a free choice of school and which are funded according to the number
of students) with greater scope of action and fewer restrictions; they have performance-
based budgets, work in equal competition with private companies, and close if they
cannot compete. In Figure 1, we have for simplicity shown how we on one hand still
have traditional public organizations and on the other have the NPM organizations.
However, we argue that due to various NPM changes apparent in different areas (but
not all), we may have a variety of different types of public organizations that are at
different places at these three different dimensions.
It is therefore important to emphasize that these different dimensions should not be
treated as either high or low degree (binary dichotomy), but that there are different
levels in what are continua. Empirically, we will also find that different organizations
can be placed on different levels in these continua. Our theoretical argument is that
overall, the opportunity for strategic management models is highest: (i) when there is
greater freedom to act, because if everything is regulated there is less room for strategic
management; (ii) when there is much performance-based budgeting, strategic manage-
ment approaches are more applicable, because their budget (and potential survival) are
more dependent on performance; and (iii) when there are market-like conditions,
because this threatens the survival of the organizations and increases the need for
strategy. We expect that these conditions for strategic management are likely where
there are strong NPM reforms.
We now go on to explore the possible utility of two major models of strategic
management for public agencies which display strong evidence of these three core
features.
Hansen & Ferlie: Strategic management in NPM-based organizations 7

STRATEGIC MANAGEMENT MODEL 1: PORTER AND STRATEGIC POSITIONING

The strategic positioning model explores how to choose a clear strategy and position in an
industry to exploit market imperfections (Porter 1980, 1985, 1996). Given Porter is a
prolific writer, this article concentrates on his core concepts of strategic positioning, generic
strategies, the five forces model (Porter 1980) and value chain analysis (Porter 1985).
Porter’s main ideas come from the discipline of industrial organization (Bain 1959) –
a subfield of neoclassic economics using concepts of economics of scale and scope. So
the unit of analysis is the whole group of organizations (the industry). Porter’s work on
strategic positioning asks: how can the organization best position itself in the industry to
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achieve competitive advantage? The key idea is that the organization, compared to
competitors, constructs an advantage from which it can make a sustained profit. A
question for Porter is how the organization can use market imperfections to appropriate
the total value created. The way to achieve competitive advantage is through a clear
strategy where only a small number of generic strategies are viable. The low cost
strategy focuses on achieving cost advantage. The differentiation strategy focuses on
offering different products or services that customers are willing to pay for (Porter
1980) in return for high quality. An organization should choose one clear strategy;
otherwise it will be ‘stuck in the middle’ (Porter 1980).
The well-known five forces model (Porter 1980) analyses the attractiveness of
industries through five different forces. First the attractiveness depends on the bargain-
ing power of suppliers and bargaining power of buyers. The more power each have, the
less attractive the industry. The threat of new entrants, the threat of substitutes and the
industry competitors and their degree of rivalry also lessen industry attractiveness.
Based on this analysis, the firm should choose which industry to be in and what position
(generic strategy) to hold. However, it can use the model to make its own industry
more attractive, by creating entry barriers for new entrants.
The strategic positioning model explores the effect of a given strategy across the
organization. This is captured in the value chain model (Porter 1985) which focuses on
all activities (primary and support) required to bring the product or service to end
customers and users. The implication is that the chosen strategy should be applied
throughout the chain.
So important concepts behind the strategic positioning model are as follows: the
theory has an outside-in focus on strategy by which the strategy is shaped by the
external environment (especially the industry). Moreover, the strategy is concerned
with making choices (or trade offs) within the industry (Porter 1996). It also empha-
sizes ‘fit’ (Porter 1996) – the idea that the strategy adopted should fit the organizational
and the market context.
Can a Porterian strategic positioning approach be applied in NPM rich public
organizations? Strategic positioning has received little attention in the strategic manage-
ment literature in public organizations (but for an exception, see Vining 2011). Few
8 Public Management Review

papers discuss strategic positioning (Boyne and Walker 2004) and there are few
empirical studies. Why might this be the case? Bryson and Roering (1987) suggest it
is difficult for public organizations to know what industries they are in and which forces
are influential. Furthermore, a strategic positioning perspective focuses on competition,
while traditional public organizations focus on collaboration (Bryson and Roering
1987).
We explore these arguments further here. The overall goal of using a strategic
positioning approach is to gain an advantage over competitors and to maximize profit.
In traditional public organizations, a problem is the appropriation of value by using
market imperfections instead of creating value or ensuring overall efficiency is seen as
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inappropriate. Public organizations also traditionally have multiple stakeholders to serve


within a specific mandate and not a focus on profit for shareholders (Bryson 2004).
Second, a strategic positioning perspective holds assumptions that do not match a
traditional public organization, because it focuses on the choices of customers or what
markets to serve and which generic strategy to apply. For public organizations, this
freedom of choice is often not possible, given their mandate to fulfil. Public organiza-
tions are often not free to choose their markets or customers (e.g. prisons). They are
tied to a specific ‘market’ and their customers are the citizens. The concept of generic
strategies is difficult to apply in traditional public organizations as they cannot choose
customers willing to pay extra. While Porter’s focus on the external environment can
be an important aspect of strategic management in public organizations, we suggest the
overall focus should be on value creation for all relevant stakeholders.
Some parts of Porter’s theory can be applied in traditional public organizations –
especially the value chain concept (Bryson 2004) which seeks to ensure alignment
between the various value creating activities. And the concept of environmental fit is
equally important in public organizations and private companies.
However, our overall analysis suggests that there are also difficulties in applying a
strategic positioning perspective in traditional public organizations. Major reservations
come from its focus on competition and appropriating of value. However, as formerly
argued, there are now major differences between different types of public
organizations.
The possibilities for application of Porter’s model are best when all three NPM style
dimensions are high: autonomy, market-like conditions and performance-based budget-
ing. Autonomy levels should be high because one fundamental contention is that the
organizations can choose (Porter 1996) their strategy or even their industry. Market-
like conditions should be high because the goal is to achieve a competitive advantage
(Porter 1980). This indicates that the strategic positioning model assumes market-like
conditions, even of an imperfect nature. Finally, the goal of strategic positioning is to
perform better than competitors (to earn more profit) and this assumes that the
budgetary funding should be performance-based. In the following section, we give
two empirical examples.
Hansen & Ferlie: Strategic management in NPM-based organizations 9

Empirical examples of strategic positioning

Upper secondary schools from Denmark


Danish upper secondary schools are an example of public organizations where strategic
positioning concepts might be applied as they have moved in an NPM direction
following the Danish Structural Reform (Danish Ministry of the Interior and Health
2004). First, upper secondary schools have more autonomy because they are now self-
governing with their own boards. They are responsible for more tasks: they decide
which study directions to offer the students, and in the long run also decide their
capacity for students. Furthermore, their budgets have changed from fixed budgets to
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taximeter financing. So now they budget according to the number of students who pass
an exam. This means they have to compete against other schools. Previously upper
secondary schools were assured a certain number of students because they were
allocated to them by a public committee.
Although the upper secondary schools still are publicly owned, funded and limited by
their mandate, a strategic positioning model can be applied, because each school now
has a choice of how to position itself in the ‘industry’ of upper secondary schools: for
example, they can differentiate themselves by offering particular study directions, or
even merge with business colleges or other upper secondary schools. Furthermore, they
compete with other upper secondary schools, not to appropriate profit, but for the
number of students which influences their budget. So even though the schools are not
profit-oriented, they focus on appropriation of students. Several factors could prevent a
school from applying a strategic positioning model: different institutional factors (Scott
2007) including path dependency. Here, the school leaders (the principals) have, for
years, primarily focused on pedagogical leadership and associated professional norms
which still constrain the application of strategic management theories in the public
sector, but importantly the schools can potentially apply strategic positioning thinking
because their market situation has changed. A longitudinal case study has though
showed that these schools are focusing more on competitive issues including issues
like the schools profile and attracting students after the Structural Reform (Hansen and
Jacobsen 2013). Yet, the investigated schools still keep their high level of cooperation
between schools though this may potentially be challenged in the future when the
number of students is expected to go down due to smaller year groups coming through
(Hansen and Jacobsen 2013). Moreover, a broad survey of these schools shows
increased use of strategic management tools, including competitively oriented tools
(like analysis of competitors and marketing plans), after the reform (Hansen 2011).

Strategy in the developing quasi-market in English higher education


The policy of the UK coalition government (elected in 2010) has accelerated the drift
away from a planned system to a quasi-market in English higher education (to a greater
extent than in the Thatcher era of the 1980s and 1990s). Themes of competitive
10 Public Management Review

advantage have already been addressed sporadically in the UK higher education


literature (Lynch and Baines 2004, adopt an RBV perspective), but interest is now
likely to intensify. More private firms and not-for-profit organizations have been given
degree awarding powers and encouraged to enter the higher education market,
particularly in vocationally orientated subjects such as Law or Business Studies (although
we presently lack a case of market exit by a failed public provider).
Undergraduate fee levels have been increased substantially (leading to more con-
sumer pressure) to a maximum of £9000 a year and old caps on numbers of well-
performing students allocated to institutions by the central planning body have been
removed to create stronger market forces. Institutions also have the freedom to charge
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less than the maximum allowed if they choose to (that is, focus on cost leadership),
although few have yet done so (perhaps mindful of consequent reputational damage).
Overseas and postgraduate student markets have been growing and are largely deregu-
lated (e.g. MBAs). Universities face explicit performance pressures both in the market-
place for students’ fee income and in research (where public funding follows an explicit
assessment of departmental performance).
Universities therefore face strategic positioning decisions within the developing
Higher Education marketplace. Do they move to a cost leadership position, and
undercut their competitors, with the danger of being seen as a low quality brand?
Or do they differentiate themselves on quality grounds and charge premium fees? Will
the middle ranking institutions (‘the squeezed middle’) be seriously affected as they do
not have a coherent overall strategy as Porter would predict)?
These are still early days and the full effects of new market level forces are still to
work through, but may be expected to force higher education institutions to make
more explicit positioning decisions. Longitudinal case studies of the strategic behaviour
and positioning of exemplar Higher Education Institutions would be of great interest.
Next, we turn to the RBV model of strategy to analyse its application in both
traditional organizations and NPM rich public organizations.

MODEL 2: THE RBV VIEW OF STRATEGY

The literature on RBV is more fragmented than on strategic positioning but here the
organization’s internal resources are distinctively seen as the main sources of compe-
titive advantage. The literature has grown rapidly since the early work of Wernerfelt
(1984), Prahalad and Hamel (1990), Barney (1991) on organizational resources, core
competences and capabilities. We here examine Barney’s influential version of RBV
(Newbert 2007) and the more recent but influential variant of RBV, the dynamic
capabilities perspective (Teece, Pisano, and Shuen 1997).
The RBV model assumes that firms are heterogeneous in their resources which are
also not perfectly mobile (Barney 1991). An RBV strategy seeks to gain a competitive
Hansen & Ferlie: Strategic management in NPM-based organizations 11

advantage by implementing a value creating strategy not simultaneously being imple-


mented by other competitors which can also be sustained as competitors cannot
duplicate it readily (Barney 1991). The fundamental strategy is to exploit and develop
the organization’s heterogeneous resources to gain a sustained competitive advantage.
An important question is then, what characterizes these resources? Here Barney
introduces the influential valuable, rare, inimitable, and non-substitutable (VRIN)
framework (Barney 1991), later changed to valuable, rare, inimitable, and organiza-
tional (VRIO) (Barney 1995). In summary, resources in these frameworks need to be
VRIN and VRIO to produce competitive advantage.
Unlike Porterian analysis, RBV has an inside-out perspective. The main focus is on
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efficiency in relation to use the organization’s internal resources to gain competitive


advantage (Teece, Pisano, and Shuen 1997) and value creation, which Peteraf and
Barney saw as a key concept in developing the RBV concept (Peteraf and Barney 2003).
A more dynamic version of RBV focuses on the impact of the rapid and unpredict-
able external and internal changes many organizations now experience (Teece, Pisano,
and Shuen 1997; Eisenhardt and Martin 2000), leading to the need to develop ‘dynamic
capabilities’. These dynamic capabilities often consist of simple and experimental
processes which use knowledge and knowhow in new ways to solve complex issues
through adapting the firm to the volatile environment (Eisenhardt and Martin 2000):
some examples are strategic decision-making processes and product development
routines. The focus is not on static resources but instead on integrating, building and
reconfiguring resources and competences to deal with major and rapid changes in the
environment (Eisenhardt and Martin 2000) over time.
More attention has been given to RBV in public organizations than to Porter’s
strategic positioning model. Some empirical investigations, for instance, Carmeli and
Tishler (2004), show a positive relation between resources (like managerial capabilities
and human capital) and the performance of public organizations. Some other studies
(Bryson, Ackermann, and Eden 2007; Pablo et al. 2007) explore how to use RBV in
public organizations. The RBV perspective can also illuminate problematic organiza-
tional behaviours: so Harvey et al. (2010) use this perspective to examine ‘non-
learning’ processes by failing UK public organizations which failed to sense externally
available information about poor performance levels.
Are there theoretical limits to applying RBV in public organizations? RBV addresses
ways to gain profit, achieve a competitive advantage and create strategies that cannot be
imitated by others, all seen as problematic in traditional public organizations. However,
RBV focuses on value creation – how to use and develop resources to create value. It is
different from and broader than the strategic positioning model, which focuses on how
much value the shareholder can earn in profit.
Peteraf and Barney (2003) see RBV suitable for other types of organizations than
private companies. While they point to implications for non-profit organizations, the
argument also holds for public organizations. Much RBV literature focuses on the goal
12 Public Management Review

of efficiency (Teece, Pisano, and Shuen 1997), which is also relevant in traditional
public organizations where it is important to use resources efficiently. RBV, unlike
Porter, focuses on becoming better than competitors at implementing value creating
strategies by exploiting resources optimally. This is more like Ricardian rent, achieved
by owning a valuable resource (Mahoney and Pandian 1992). The difference between
strategic positioning and RBV has been characterized as an account of strategizing versus
economizing where strategizing deals with market power and economizing promotes
efficiency (Teece, Pisano, and Shuen 1997).
Within the RBV literature, the usual way to distinguish resources which create value
and efficiency is through the VRIO framework (Barney 1995). The question is whether
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this framework primarily focuses on value creation and efficiency or on value appro-
priation. On the one hand, the VRIO framework argues that resources should be
valuable, which is also a relevant focus in all public organizations. On the other hand,
the concept that resources need to be rare and inimitable is not necessarily a suitable
characteristic in traditional public organizations. The rareness criterion suggests that
few other organizations have the resources. To be inimitable in RBV, it is important for
the organization to have the resources for itself, to gain advantage over other organiza-
tions. However, in traditional public organizations it is not the ultimate goal to control
resources that others do not have or cannot get. The goal is rather to fulfil the
organization’s mandate and mission, perhaps by sharing resources and letting other
organizations imitate them through collaboration. Finally, it is also of key importance in
public organizations that they are organized (in relation to structure, control and
compensation systems, etc.) to fully exploit resources.
The dynamic capability view fits well with the current volatile environment which
many reformed public organizations experience. They build and reconfigure internal
resources and competences which are then integrated with other organizations within
more partnerships and collaborations. Often they are connected with an experimental
search where the outcome is often unpredictable. With few studies of dynamic
capabilities in public organizations (Pablo et al. 2007; Piening forthcoming) as yet,
this research field may grow rapidly.
Our theoretical conclusion in relation to RBV in traditional public organizations is
that it is reasonable to analyse the organization’s heterogeneous resources and focus on
these resources being valuable and organized to create value and efficiency. However,
the RBV focus on keeping (isolating) the resources for the organizations itself is not
compatible with traditional public organizations. It can be contrary to value creation –
not for the organization – but for the wider set of legitimate stakeholders. Yet as some
public organizations have changed to being quasi-market organizations, they now use
market-like logics with a greater focus on competitive advantage, competitors, quasi-
profit, etc. Finally, the concept of dynamic capabilities seems to match conditions in
many current public organizations that have to adapt to new situations and require-
ments rapidly while going through unpredictable change themselves.
Hansen & Ferlie: Strategic management in NPM-based organizations 13

Going back to the three dimensions proposed earlier, RBV also requires some degree
of autonomy for public sector organizations, although less than strategic positioning,
because it is not about choosing, but more about creating value and efficiency (Peteraf
and Barney 2003). However, performance-based budgets may be needed to support
RBV to indicate success in value creation and efficiency more clearly. Finally, the
degree of market-like conditions needed depends on which aspects of RBV are in focus:
if the focus is on value creation and efficiency there is not necessarily a need for the
market-like condition, but if the focus is on competitive advantage and isolation of
resources then the market-like condition is a fundamental prerequisite. In the following
section, we give two examples of the possible use of RBV perspectives within the
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current public services settings.

Empirical examples of RBV

English academic health sciences centres


RBV theories have strong relevance for knowledge-based organizations where the
collective possession of and ability to mobilize scarce and valuable knowledge sustains
competitive advantage. A ‘knowledge mobilization’ perspective (Cooksey 2006; Dept
of Health) has become increasingly evident in English health policy, aimed at shortening
the ‘bench to bedside’ cycle of fundamental research. Such research (e.g. increasing the
number of patients enrolled in Randomized Control Trials) has been expanding,
reflecting the considerable and so far protected budget (approx. £1 b) of the
National Institute of Health Research. Such research is increasingly seen as having an
effect on wealth improvement (e.g. the biopharma and life sciences industries) as well
as the conventional goal of health improvement (Department of Health 2011). The
ability to manage such research-based knowledge has thus become an important policy
and organizational issue.
A recent review of RBV literature in UK health care (Crilly et al. 2013) concluded
that this perspective can usefully be applied to health care, especially large and
specialized teaching hospitals, with a strong fundamental clinical research base which
they wish to transfer into clinical practice more rapidly. Following the American model
(e.g. Johns Hopkins), the UK has recently designated and accredited six Academic
Health Sciences Centres (AHSCs) within large centres of clinical and research as well as
service excellence. They are supposed to accelerate the diffusion of the results of basic
clinical research into local health care services but need to develop a new organizational
architecture to enable them to achieve this goal (Fischer et al. 2013) so they can link
traditionally distinct academic and service communities of practice.
The AHSCs are concentrated in London where there are three such AHSCs. While there
is no overt market-based competition between them, there may well be reputational
competition to attract the best researchers in a tight international labour market (where
AHSC status is reputational advantage). From an RBV perspective, these organizations’
14 Public Management Review

collective competence in building an internationally outstanding research base in their key


research areas and then mobilizing it effectively so that it translates rapidly into enhanced
clinical practice will be fundamental to their long-term success. Should they fail to develop
and demonstrate such an organizational capability, their time-limited accreditation may not
be renewed by the centre so they face strong incentives to develop such capabilities by, for
example, building an institutional architecture which links traditionally separate academic
and clinical groupings and using organizational development skills and interventions (Fischer
et al. 2013) to cross traditional internal boundaries.
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A Danish university hospital and RBV


Another example is Rigshospitalet, one of the largest and most specialized hospitals in
Denmark. While this hospital’s environment is characterized by little competition given
it is a university hospital, though there is a strong competition for specialties.
Generally, there is less competition for very specialized tasks while local private
hospitals primarily compete for simpler and more routine tasks. The hospital budgeting
is still to a large degree activity and to some degree performance-based due to Danish
DRG (diagnosis-related group) system which has facilitated activity-based payment
(Magnussen, Vrangbæk, and Saltman 2009). Finally, Rigshospitalet, like other univer-
sity hospitals, has high administrative autonomy compared to other Danish hospitals.
Overall, these characteristics imply that the five forces model is difficult to apply as
market-like competition is not a major force, though a policy promoting the free choice
of hospital has introduced some competition. However, the hospital still needs to
ensure a reasonable budget (‘profit’) through the activity-based DRG system, though
they can only keep some of the efficiency gains. This baseline also reduces the
competition when the hospital reaches it.
Instead the RBV of strategy could be useful, given its focus on the internal side of
strategy and efficiency. So the hospital’s focus on becoming the best through specializa-
tion by using its strong science base echoes the RBV idea of rare and valuable resources.
Also the relevance of ‘organizing’ is which comes from the dynamic capability part of
the RBV literature is closely related to such a knowledge intensive organization that
needs to be at the forefront of effective knowledge mobilization.
While the competition for patients is not expected to be very strong in these
research intensive hospitals, the competition at minor hospital may be extremely fierce
and actually for these minor hospitals may be so hard that how they deal with this
competition may influence their organizational survival. In these cases we would expect
that strategic management theories like strategic positioning could be very relevant as
the hospital really has to consider where to be in the market and how and which
patients to attract. This emphasizes our key point that the applicability of strategic
management in public sector depends on both the type of organization and type of
strategic management theory.
Hansen & Ferlie: Strategic management in NPM-based organizations 15

CONCLUDING DISCUSSION AND DIRECTIONS FOR FUTURE RESEARCH

The overall argument developed here is that two generic models of strategy (Porter’s
strategic positioning model and also RBV) can fruitfully be applied (albeit still with
care) to the study of the strategic behaviour of NPM rich organizations. We examined
the two concrete cases of the UK and Denmark, giving examples from their health and
education sectors. We further argued that usefulness of these generic strategic manage-
ment theories depends on three key dimensions, namely the higher the degree of (i)
administrative autonomy, (ii) performance-based budgets and (iii) market-like condi-
tions found in public services organizations, the more likely it is that generic strategic
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management models can usefully be applied.


While we do not here have space to develop the argument fully, one objection to
our analysis may be that the NPM era is dated and has now been succeeded by post-
NPM models of New Public Governance (NPG; Newman 2001; Osborne 2009), for
example, in the New Labour period in the UK or of Digital Era Governance (Dunleavy
et al. 2005). However, we note that some recent work suggests that NPM logic
remains embedded in high NPM jurisdictions such as New Zealand (Lodge and Gill
2011) and UK health care (Trenholm and Ferlie 2013), even if sometimes dysfunction-
ally so. So the claim of a clear transition to post-NPM forms of organizing remains
highly contested. Moreover, our argument is not necessarily restricted to NPM-
oriented organizations (although it is in this first paper) as we propose that the use of
different strategic management theories depend on type of public organization and that
non-NPM-based public services organizations might also conceivably be open to alter-
native forms of strategy (e.g. cooperative strategy).

Future research agenda

More empirical studies (quantitative as well as qualitative) applying a greater range of


strategic management theories (usefully collated in Mintzberg, Ahlstrand, and Lampel
2009; also Ferlie and Ongaro 2015) in public organizations are needed which go beyond
the present initial but limited focus on Porter and RBV. Substantively, the possible
effects of alternative NPG reforms need to be investigated, in particular whether they
encourage the development of alternative cooperative or network-based forms of
strategy.
In addition, case studies of public services organizations which score highly on all
three of our dimensions would be of interest: how do they behave strategically in
practice? Case studies of public services organizations which have explicitly sought to
apply RBV (Casebeer et al. 2010) or Porterian strategic models (perhaps in health care,
given his recent book on that sector, Porter and Teisberg 2006) would be helpful.
Such patterns of strategy making may well vary from one jurisdiction to another
internationally, depending on their receptiveness to NPM, NPG or other reforms, so an
16 Public Management Review

international and comparative perspective is clearly needed. This may also lead to the
development of more critical studies of the impact of these different types of reforms.
So NPM reforms making more competitive type of strategy (like Porter’s strategic
positioning model) more useful in specific types of organizations may also have negative
impact on the collaboration between different public services organizations. Even
though these theories may be more applicable in these NPM-based organizations, it is
important to notice that they still have some public organizations’ characteristics
making them responsible for fulfilling their declared mandate and also responsible to
the public and their representatives. So profit is still not their main goal (Moore 2000).
Finally, future work should integrate the development of these perspectives, con-
sidering their effects on the performance – both anticipated and un-anticipated (we
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realize definitions may not be simple and may require further methodological work) of
the public organizations concerned (see earlier work by Andrews et al. 2009, 2012).

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