Academic journal article JITTA : Journal of Information Technology Theory and Application

Strategic Growth of Firms in the Digital Economy: A Simonian Research Agenda

Academic journal article JITTA : Journal of Information Technology Theory and Application

Strategic Growth of Firms in the Digital Economy: A Simonian Research Agenda

Article excerpt

ABSTRACT

Strategic growth of firms, in the words of Herbert Simon, is within the framework of decision making under "massive and unending uncertainty." In the rapidly changing digital economy, the cycle of winning and losing and asset redistribution intensifies as the speed of information exchange increases. It is thus more necessary than ever to find explanatory theories to describe, model, and predict the emerging market structures of the hypercompetitive digital economy. In this paper, we draw upon several Simonian models of bounded rationality in decision making and propose a research agenda for strategic growth of firms in the digital economy. The agenda consists of three major topics: (1) skew distributions in the digital market competition, (2) empirical laws of information use, and (3) a framework of strategic information systems. Some ongoing projects related to the agenda are discussed.

INTRODUCTION

"Strategic decision making is a chapter in the topic of decision making under uncertainty-in fact, massive and unending uncertainty."

Herbert Simon (1993a: p. 134), 1978 Nobel

Laureate in Economics

In the rapidly changing digital economy, the cycle of winning and losing and asset redistribution intensifies as the speed of information exchange increases. As a result, the sizes and performances of business firms increasingly resemble skew distributions. That is, a few businesses, such as eBay and Amazon, dominate the market while a large number of smaller companies struggle to survive. The study of strategic growth of firms is indeed within the framework of decision making under "massive and unending uncertainty." It is thus more necessary than ever to find explanatory theories to describe, model, and predict the emerging market structures of the hypercompetitive digital economy (Porter 2001; Clemons, Dewan, and Kauffman 2001). There is a rich literature of theories of strategic growth of firms (for examples, Barney 1986; Bettis and Hitt 1995; D'Aveni 1994; Porter 1980, 1985). So, which theory is most appropriate for us to draw upon to model strategic growth of firms in digital economy?

According to Simon, the "appropriateness" here is determined by three major factors. First, the theory shall take into account the surroundings where strategic decision making processes operate (Simon 1993a, 1996): (1) The outer environment of market evolution and, more importantly, (2) the inner environment of organizational evolution. Second, the theory shall be based on two empirically grounded, crucial considerations (Simon 1977): (1) The result derived from the theoretical model should be similar to the observed empirical phenomena in the outer (for example, skew distributions discussed earlier) and inner environment; and more importantly, (2) the generating mechanism provided by the theoretical model should be plausible and explanatory; otherwise, the model must be refined to better represent the real world. Third, the theory shall help us design the strategy as an artifact interfacing the outer and inner environment of the business.

In this paper, we model Simon's approach to strategic growth of firms graphically in Figure 1. The left column of Figure 1 shows two of the three fundamental elements described above: evolution of the surrounding environment (represented as boxes) and strategy as an interface between the outer and inner environment of the business (represented as a dashed circle). The changes in the evolutionary business environment (both outer and inner) impose the constraints on the interface. A well-designed strategy shall be able to detect and adapt to the changes. Simon (1996) coined such a view of theory development as Science of the Artificial. Within the outer and inner environment are the empirical phenomena which are explained by the models of bounded rationality on the right column of Figure 1. Those exploratory, empirically grounded models were successively refined over the years and are reviewed in the next section, where a Simonian research agenda of the strategic growth of firms in the digital economy is also proposed. …

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