Explain the Use of Strategic Management

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Public Management Review

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Applying Strategic Management Theories in Public Sector Organizations: Developing a typology

Jesper Rosenberg Hansen & Ewan Ferlie

To cite this article: Jesper Rosenberg Hansen & Ewan Ferlie (2016) Applying Strategic Management Theories in Public Sector Organizations: Developing a typology, Public Management Review, 18:1, 1-19, DOI: 10.1080/14719037.2014.957339

To link to this article: https://doi.org/10.1080/14719037.2014.957339

Published online: 17 Sep 2014.

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APPLYING STRATEGIC MANAGEMENT THEORIES IN PUBLIC SECTOR ORGANIZATIONS Developing a typology

Jesper Rosenberg Hansen and Ewan Ferlie

Jesper Rosenberg Hansen Department of Economics and Business University of Aarhus Aarhus Denmark

Department of Political Science and Government University of Aarhus Aarhus Denmark E-mail: [email protected]

Ewan Ferlie Department of Management King’s College London London UK E-mail: [email protected]

Abstract

This article discusses the utility of two dif- ferent strategic management theories in dif- ferent types of public organizations including contemporary New Public Management- based public organizations, namely Porter’s strategic positioning model and the resource-based view of strategy. We argue that possibilities for applying these theories 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 organizations. We further propose that their increased applicability depends on three spe- cific conditions: the degree of administrative autonomy, performance-based budgeting and market-like competition. We give empiri- cal examples drawn from public services in the UK and Denmark. We call for more exploration of these (and other) strategic management approaches within contempor- ary public services organisations but also more exploration of the limitations of these frameworks.

Key words Strategic management, NPM, typology

Public Management Review, 2016

Vol. 18, No. 1, 1–19, http://dx.doi.org/10.1080/14719037.2014.957339

© 2014 Taylor & Francis

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 (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

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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. 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

Hansen & Ferlie: Strategic management in NPM-based organizations 3

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 (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

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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 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

Hansen & Ferlie: Strategic management in NPM-based organizations 5

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.

Figure 1: Differences between public organizations

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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 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

Hansen & Ferlie: Strategic management in NPM-based organizations 7

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 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.

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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 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

Hansen & Ferlie: Strategic management in NPM-based organizations 9

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 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

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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

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

Hansen & Ferlie: Strategic management in NPM-based organizations 11

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 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.

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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 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’

Hansen & Ferlie: Strategic management in NPM-based organizations 13

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.

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.

14 Public Management Review

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 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

Hansen & Ferlie: Strategic management in NPM-based organizations 15

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 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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