Dynamic Analysis of the SER-M Paradigm

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Dynamic Analysis of the SER-M Paradigm
Dynamic Analysis of the SER-M Paradigm
Based on the Quadratic Vector Analysis Model
Cui Qiang
College of Business Administration
South-Central Ethnic Communities University P.R.China, 460074
Abstract Using the quadratic vector analysis model, this paper presents a qualitative, quantitative, and
dynamic method of analyzing the mutual relationship among four variables in strategy: external
environment (e), characteristics of major subjectgs such as top executives (s), firm resources (r), and the
mechanism (M).
Key words the ser-M paradigm, strategic mechanism, the quadratic vector analysis model
1 Introduction
For the past 20 years, research on the effects that influence business outcome have been actively in
progress and have developed theoretically than ever before. The trend in existing researches is to
analyze the effects of the following variables on corporate performance: the external environment in
which the business exists, the physical and human resources that form the business, and the manager
who plan and implement corporate strategies. Among these researches, many analysis models have been
created and are mostly based on the Business Management Theory. Recently however, the SER-M
paradigms including the above-mentioned three different spheres have been integrated, dimensionally
increasing the trend in research on corporate development strategies.
Although the existing theories try to verify through strict logic and accurate positive analysis, the
theories were comparatively abstract, especially lacking the systematic and concrete explanation on the
internal relationship between the external institutional environments, the characteristics of top
executives and firm resources.
Using the quadratic vector analysis model, this paper presents a qualitative, quantitative, and dynamic
method of analyzing the mutual relationship among four variables in strategy: external environment (e),
characteristics of major subjects such as top executives (s), firm resources (r), and the mechanism (M).
2 Dynamic Analysis Model of the SER-M Paradigm
2.1 Definition of Variables
2.1.1 Firm Subject(S: Subject) and External Environment (ε: Environment) Subject(S):
The top executive influences the success of the firm. The fate of the firm if very much effected by
the idea and behavior of the top executive (Child, 1972; Hambrick & Mason, 1984). The governing
body of the firm has the important role of electing, supervising, and encouraging the top executive and
therefore, the governing body of the firm will be defined as the subject along with the top executive who
plans and implements the firm strategies.
In accordance with studies, the characteristics of the top executive can be measured by evaluating
each item. The characteristics of the top executive include objective characteristics such as
psychological characteristics(intellectual ground, sense of value, etc.), age, career, experience, education,
socioeconomic roots, financial status, group characteristics, etc.(Hambrick & Mason, 1984). External Environment ( ε):
External environment influences the outcome of the business. The traits of industrial structure
(Porter, 1980), various official bindings and unofficial bindings (Davis & North, 1971; North, 1981,
1990), firm density and distribution in the same field of business (Hannan & Freeman, 1977; Hannan &
Carroll, 1992), government policy, market power, etc. are the factors of environment. Because of the
difficulty in measuring the amount of influence it gives, this paper will mark the external environment
with εto show that the traits of the top executive corresponds with the direction of the shareholder's
profit. The external environment is regarded as an important factor for it is uncertain, complex, and
beyond the control of human beings. It changes constantly) However, the environment which develops
the firm can be created and managed by the top executive.
And therefore, gives direct influence to the decision of the top executive as well as to the outcome
of the firm.
To analyze the outcome of the firm efficiently, this paper has replaced factors that were
immeasurable with the conceptual factor β, discretion, for it includes the external environmental factor
as well as the reverse. Hambrick & Finkelstein (1987) show management discretion as the individual
experience, knowledge and the fruit of insight of the manager. However, in reality, the manager's
individual capability has limitations in creating management discretion and therefore, environment is the
most direct and original factor in determining discretion. The restricting factors of environment in
management activities can be misunderstood in the opposite concept and in such a case, the term,
restricted circumstance means that the zone of acceptance of behavior) The zone of acceptance was first
introduced by Barnard(1938) and Simons(1995).
is determined by someone who possesses strong authority outside the organization(Hambrick &
Finkelstain, 1987). Barnard(1938) and Simons(1995) assumed that if the top executive acted beyond
such a zone of acceptance, resistance will occur inside and outside the organization and therefore, the
restricting factor of behavior(or discretion) can be prescribe as social and political phenomenon rather
than a rational one that is technical and economical. As can be seen in <Figure 1.> the relation of the
external environment factor ε and discretion β can be shown: ε+ β=900. Relationship between Subject(S) and External Environment ( ε):
Subject has Agency Cost and Irrationality of Environment Understanding through unofficial binding
and gets much influence by the environment (Note Figure 1.). According to the Agency Theory, the
direction is fixed because the incentive for one's profit always accompanies the opportunism behavior
for the profit of the top executive and that of the shareholder does not correspond with one another
(Jensen & Meckling, 1976).
Figure 1. Relationship between Subject(S)
and External Environment (ε)
The P(performance) axis represents the direction of the shareholder profit and the traits of the top
manger while the angle which forms between the P and S axis, will be marked as ε, shows the direction
of the traits of the top manger. Furthermore, this paper will examine ε, the external environment, for the
characteristics of the top executive have close and direct connections with the external environment)
Detailed parts will be specifically mentioned in the explanation of external environment factors.
As can be seen in <Figure 1.>, when the characteristics of the top executive is at the 1st quadrant
(0 ε 900), the actual size of the characteristics is marked with a "s" and the position of s is indicated
at s(COSε, SINε), making the value of projection Sp of axis Pit a section for the characteristics of the
top executive by maximizing the profit of the shareholder while the value projection Sc of axis C(cost)
is the section of Agency Cost which has nothing to do with the maximization of the shareholder's profit.
Therefore, in the text, the size of the characteristics of the top executive will be marked as s and the
explanation on the relation of the maximization of the shareholder's profit will explain for it is the
external environment that is closely related with the direction of S.
Turbulent environment such as the development of global technology, the advance of information
communication, the deepening of competition, etc. seems to pull ε of Figure 1 by an invisible spring to
the left in a rising direction, therefore, it must be controlled according to time T.
2.1.2 Firm Resources(R)
Generally excluding the capability excavated from the traits of the top manger, the internal firm
resources) the internal resources of a firm includes physical resources (total assets including tangible
and intangible assets), human resources (including human resources, manpower, and capability), firm
size, etc. and all are measurable except capability.
Include patent rights, brand name, retaliation capacity, present market share, firm structure, fund raising
ability, process technology, factory structure, cheap input costs, technology, marketing, distribution
network, service network, etc. When broadly classified, it can be divided into three groups: tangible
resources, intangible resources (image, reputation, technology, patent rights, know-how, etc.), and
human resources (human resource and business culture, etc.)
2.1.3 Mechanism (M):
Mechanism can be defined as the technical principle which developed during the process of
interaction among the firm's subject, resource, and environment. Mechanism is invisible so it cannot be
seen or touched but it implements the technical role in functioning the firm to go in a fixed direction. As
the magnetic field grows stronger inside the generator, making it possible for the heavy central axis to
rotate more quickly, the larger the mechanism the better and faster the outcome of the firm will be.
As long as S, E, and R exist in a firm, M will always exist. Mechanism of the firm is divided as
follows: First Stage Mechanism (Mo):
Mo is the early form of mechanism in which S, E, and R of a firm has naturally developed
without interaction or the mechanism formed after physically increasing S, E, and R at an early stage
(Note Figure 2.).
s = OS,
Figure 2. First Stage Mechanism (Mo)
=∠ SOR, r = OR, mo = OMo,
mo2 = s2 + r2 +2sr COS
ß= ∠ BOS, P = F( s, , r, )
First Stage Mechanism is structured through subject, environment, and resources like the "position
of forces" which is one of the basic techniques but it only has the predominance of competitive
advantage which cannot be seen as the general factor for success. In other words, Mo has the sufficient
conditions for a firm to succeed but does not have the essential ones. Strategic Mechanism (M):
M does not physically increase the S, E, and R of a firm but confronts the environment changes
through the interaction of each factors, leading S in using and creating the resources in a proper way
(Note Figure 3. and Figure 4.).
Figure 3.
Strategic Mechanism (M)
P = Po - R, P’= Pm - Po, P = F(s, ε , r, m)
Figure 4. The Structure of Strategic
M2 = Ms 2+ M ε 2 + Mr2
Strategic mechanism is the core of this study and is believed to be the most sufficient and
essential condition for a firm to succeed. When looking into firms that have succeeded, all
have operated through strategic mechanism during their developing process up till now.
2.2 Analysis of Special Conditions
2.3 Analysis on the Limitation of the "S-, E-, R-based Views"
2.3.1 Subject-based View
The influence of S to the outcome of the firm is as follows (Note Figure 5.):
The influence that S gives to the outcome of the firm is largely divided into two.
First is the observable demographic characteristic of the top executive.
Second is psychological
characteristic of the manager such as intellectual trait and value. The perceptive process of the
manager can be solidified into a series of figures.
(1) Perception is limited for the manager cannot scan through the entire organization and
environment, and the vision of the manger is restricted only to the field of interest;
(2) The perception of the manager is limited for it is selective;
(3) The selected data can be interpreted through intellectual trait and value filter.
The model of this paper is based on the study done by Hamdrick & Mason (1984) who asserted that
S influences the outcome of the firm.
Figure 5. Subject-based View
s+∆s, Ps>Po, P = F(s), Ms, ß
(mo+ ms)
Such observable demographic trait of the top executive includes age, functional tracks, functional
experience, promotion, major, education level, financial status, group characteristics, etc. and gives
direct influence to the outcome of the firm (Hambrick & Mason, 1984).
2.3.2 Environment-based View
When decision-making( ε) is uncertain, complex, and inappropriate, the subject(s) with limited
rationality always has the ε angle under any circumstances for when s decides, it restructures and
implements according to one's inclination and simple outlook of the world(Barr, Stimpert, & Huff, 1992;
Duhaim & Schwenk, 1985; Finkelstein & Hambrick, 1990; Schwenk, 1984; Walsh, 1988) for it is hard
to judge the environment because of the lack of environmental data(Cyert & March, 1963; March &
Simon, 1958; Hambrick & Mason, 1984).
Let us look into the situation in how the firm-environment mechanism is produced when the trait of
the top manger s, internal resource r, and the existing early stage mechanism of the firm Mo is known in
advance and ε shifts to ε' while s and r does not when moving from t1 to t2(Note Figure 6.).
Figure 6. Environment-based View
ε>εε’, Pεε > Po, P = F(ε),
ε), Με
(mo+mε )
Pεε P
2.2.3 Resource-based View
If the characteristics of the top manger s, the internal resources r, and the early stage mechanism of
the existing firm Mo is known at t1 but s and β does not shift to t2 while r has risen to r, the method of
how the firm-resource mechanism is produced is as follows(Note Figure 7.).
Figure 7. Resource-based View
r+∆r, Pr > Po, P=F(r), Mr
(mo + mr)
Through the dynamic analysis on the above-mentioned theories, the rationality of the existing theories
have been proved up to some degree but were narrowly limited to the first dimension.
2.4 Quadratic Extension of Dynamic Analysis
2.4.1 Subject-Environment Mechanism
According to the framework of the subject, the environment that is objectively given to the firm is
meanless for the strategic difference among the firms appears in line with how the firm subject interprets
and responses to the environment change for the decision-making standard of what influence the
environment gives to a firm and how the environment will change in the future differs. Therefore, under
the assumption that resource does not change, it is possible to see how the subject and environment
produced the subject-environment mechanism (Note Figure 8.).
Figure 8. Subject-Environment
s + ∆s, ε > ε’, Psεε > Po,
P = F(s, ε), Msεε
(mo + msεε)
2.4.2 Subject-Resource Mechanism
Both resource and subject must be taken into consideration (Reed and Defillippi, 1990). The top
executive acts under the bounded rationality, making it impossible to exactly and fully understand the
environment change and what resources are necessary to establish strategy (Dierickx and Cool, 1989;
Barney, 1991). This is the reason that difference exists among the firms of the same environment in
obtaining and accumulating resources (Note Figure 9.).
Figure 9. Subject-Resource
s + ∆s, r+ ∆r, Psr > Po,
P = F(s, r), Msr
(mo + msr)
2.4.3 Environment and Resource Mechanism
The value of a resource can differ according to the environment change (Dierickx and Cool, 1989;
Teece, Pisano and Shuen, 1992).
In other words, the resources possessed by the firm itself are not
valuable until the resource value materializes in the product market. Therefore, the resource value can
vary according to the changes of technology, competitive behavior, consumer's demand (Porter, 1980).
Hence, the tangible and intangible resources which the firms possess cannot be considered far apart
from the surrounding environment. (Ghemawat, 1991a).(Note Figure 10.)
Figure 10. Environment and
Resource Mechanism
ε > ε’, r + ∆r, Pεεr > Po,
P = F(εε, r), Mεr
R’ Po
Pεεr P
2.5 Dynamic Analysis of the SER-M Paradigm Model
As shown above, the fact that the existing linear-based view is sectional has been proved through the
dynamic analysis of linear and quadratic model and though the quadratic model has extended its scope
more than the linear model, it is not a complete, full-scale analysis.
Therefore, the strategic theory includes both determinism-based view and strategic choice-based
view. For example, in the case of subject, not only the negative side of the top executive, such as
bounded rationality, but also the positive side, like presenting and transmitting the future vision of the
firm, should be taken into consideration. Also in the case of environment, the side of the firm adapting
to the environment and that of the firm creating the environment for its own advantage should be
included.(Note Figure 11)
Figure 11. Dynamic Analysis of the SERM Paradigm Model
s + s, ε > ε’,
r +r,
Psεr > Po,
P = F(s, ε, r, M), β, Μ
Po R’
Psεεr P
Andrews (1971) had represented the core concept of strategy by dividing the success factors of the
firm into four parts - external condition, internal capability, firm philosophy, and social responsibility.
Afterwards, Professor Dong-sung Cho discovered that all factors can be included in three scopes, such
as external environment(E), top executive (S), internal resources(R) and furthermore, when all three are
integrated and coordinated in the proper way, synergy-effect mechanism, which leads to the
development of a firm, is formed(Dongsung Cho, 1997).
It can be concluded that for the continual success of a firm, subject(S), environment (E), resource(R)
should not be thought as an individual factor but as an integrated whole. For instance, a firm interacts
with the environment for continuous success. Therefore, the top executive(S) must understand the
environment(E) as well as use and create the necessary resources(R) to plan and implement the strategy
that is appropriate to the environmental changes(Dongsung Cho, 1997). In response to the change of the
environment, mechanism (M) is formed during the process of utilizing and creating the resources by the
Firm subject, internal resources, external environment, and mechanism, which have been formed
through mutual dynamic function, are the four factors that influence the outcome of the firm
3 Conclusions
This paper has used dynamic analysis to systemize the SER-M paradigm. For instance, the concept of
mechanism has been introduced, based on the definition of the SER-M paradigm, while strategic
mechanism, which greatly affects the management outcome, has been systematically shown for easier
understanding through the model with the other variables - subject, environment, and resource.
The contribution of this paper is 1) the effort to develop the SER-M paradigm into a dynamic analysis
model; 2) the success in being able to prove that SER-M paradigm is more rational than the linear
analysis after analyzing the existing views through dynamic analysis; 3) and that the dynamic analysis
model has been designed to analyze the internal relation of the 4 factors qualitatively, quantitatively, and
However, the concept of first-stage mechanism is not a phenomenon that exists in reality; therefore,
there should be caution when using it as the main variable of the model.
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