Strategic Choice Theory

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Strategic Choice Theory was developed when industrial relations in the U.S. were changing rapidly. Because most of the popular theories at that time were generated during periods of relative stability in U.S. industrial relations practice and consequently are overly static, they have difficulty explaining behavior when the basic parameters of the system appear to be changing. For example, Dunlop's systems model was widely accepted in 1960's and 1970's. But there are some anomalies in the model. First, the model could not foresee the declines of union membership after that time. Rather conventional models assume that labor unions were a permanent participant in their employment relationships. Second, conventional models assume that there is a consensus ideology. But based on the models, we could not tell whether or not managerial values, strategies, and behavior in industrial relations were changed. Third, the traditional industrial relations models treat management as reacting to union demands, pressures, and initiatives. But there were many managerial initiatives and changes that affected the transformation in U.S. industrial relations and they have occurred within management. Therefore, they added a more dynamic component to industrial relations theory by developing the concept of strategy, or strategic choice. Then they tried to demonstrate that industrial relations practices and outcomes are shaped by the interactions of environmental forces, union leaders, workers, and public policy decision makers (e.g., Kochan, et al., 1984).

Strategic Choice Theory starts with consideration of relevant forces in the external environment that affects employment relationships. Changing external environment induce employers to make adjustment in their competitive business strategies. In making these adjustments, the range of options considered are filtered and constrained so as to be consistent with the values, beliefs, and philosophies engrained in the mind of key decision-makers. As choice are also embedded in particular historical and institutional structures, the range of feasible options available at any given time is partially constrained by the outcomes of previous organizational decisions and the current distribution of power within the firm and between it and any unions, government agencies, or other external organizations it deals with.

Thus, industrial relations processes and outcomes are determined by a continuously evolving interaction of environmental pressures and organizational responses. The relative importance of either the environment or the parties' responses can vary over time. Therefore, labor- or product market changes do not have independent effect or operate in a unique or deterministic fashion. Then, choice and discretion on the part of labor, management, and government affect the course and structure of industrial relations systems. Moreover, history plays an extremely important role in shaping the range of feasible strategic adaptations.

Their broader conception of the institutional framework of industrial relations is as follows. It divides the activities of management, labor, and government organizations into three tiers: (1) a top tier of strategic decision making, (2) a middle or functional tire of collective bargaining or personnel policy making, and (3) a bottom or workplace-level tier where policies are played out and affect individual workers, supervisors, and union representatives on a day-to-day basis. In this framework, the middle tier encompasses the most traditional terrain of industrial relations, since it focuses on the practice of collective bargaining and personnel policy formulation and on the development and administration of the key public policies governing labor-management relations. The traditional of business unionism that has dominated the American labor movement has made it appear that few important strategic choices or ideologically driven decisions are being made at the top tier. Yet the basic decisions involving such things as what businesses to invest in, where to locate worksites, whether to make or buy various components, and the organizational arrangements used to carry out basic strategies all affect industrial relations at lower levels of the system and therefore are central to analysis of industrial relations. Strategic choices that are relevant to the bottom tier are those most directly associated with the organization of work, the structure of worker rights, the management and motivation of individuals or work groups, and the nature of the workplace environment.

This three-tier framework helps identify an important development that existing industrial relations systems theory does not specifically address: the apparent inconsistencies and internal contradictions in strategies and practices occurring at different levels of industrial relations within firms. First, this framework recognizes the inter-relationships among activities at the different levels of the system and helps explain the origins of any prevailing internal contradictions or inconsistencies among three levels. Second, this framework considers the effects that various strategic decisions exert on the different actors in the system. The three-tier framework encourages analysis of the roles that labor, management, and government play in each other's domain and activities.

Shifts in business strategies are affected by the current state of industrial relations and, in turn, affect future industrial relations outcome at all three levels of the firm. The types of interactions are as follows. Changes in the competitive environment can occur gradually as products change in response to changing consumer demand or as low-cost competition grows. The environment can also change abruptly because of competitive shocks. A sharp increase in competitive pressures forces firms to make decisions that can have far-reaching effects. First, the firm must reassess its commitment to its current line of business and decide whether it wants to attempt to compete in the environment or to withdraw and reallocate its capital resources. Second, if the firm chooses to remain active in the market, adjustments in its competitive strategy may be needed. Third, the strategic choices made by firms that remain in the market require them to rearrange their capital in order to take advantage of new profit opportunities. Finally, changes in business strategy and their related production decisions affect the validity of existing organizational structures, particularly the extent of vertical integration.

The business decisions are influenced by the history and current state of industrial relations in the firm and the industry. The key consideration is whether wages and labor costs have been taken out of competition.

Researchers have been conducted several types of study on Strategic Choice Theory. First, some empirical studies were conducted to make sure the transformation of industrial relations systems as suggested in Strategic Choice Theory. Katz (1993) studied the bargaining structure of six countries (Sweden, Australia, Germany, Italy, UK and US) and confirmed the substantial increase in the intensity of local bargaining, downward shift in the formal structure of bargaining, the effect of employer initiatives, and declining unionization.

Second, some field studies or case studies have been conducted to examine the Strategic Choice Theory. Kochan, McKersie, & Cappelli (1984) studied a single industry, Rubber Tiers. They described that industry relations in Rubber Tiers were affected not only by changes in the environment but also by the diverse decisions made at the corporate level to adjust those changes. Birecree (1993) analyzed the International Paper Company (IP) during the 1980s and revealed that important structural changes in product markets, product mix, and technology of production contributed to IP's perceived need for significant changes in work practices and compensation by 1985. Arthur (1992) analyzed U.S. steel minimills and suggested that variation in workplace industrial relations policies is related to differences in business strategy.

Third, some hypotheses testing researches using statistical analysis have also been conducted. They make up for the limitation of generalizability in each case study and provide the validity of Strategic Choice Theory. For example, Cooke and Meyer (1990) developed a model predicting which of three broad labor-relations strategies -- union avoidance, union-management collaboration, or mixed strategy combining elements of union avoidance and collaboration -- a company will adopt. This study is significant because they apply and test the Strategic Choice Theory using empirical data. Their result that market pressure and structural characteristic of the company are important predictors of strategy choice supports the validity of the Strategic Choice Theory.

However, there is also a research that raise question on the validity of the theory. Godard (1997) focused on managerial IR ideologies that seem to be central in Strategic Choice Theory. Using four types of variables (ideology, action, outcome, and context variables). He suggests based on the result that context variables play a more important role in managerial strategies toward unions, and even in workplace-level innovations, although managerial ideologies have statistically significant effects to other variables. He conclude that Strategic Choice Theory need to be improved by marrying with structural theories of variation.

In summary, wide range of research has been conducted to examine Strategic Choice Theory. Although each study might have its methodological limitation (e.g., genaralizability, random measurement error, common method variance), but as a whole, they contribute the grounding and testing the Strategic Choice Theory providing significant result and making up limitations each other. It is suggested that the theory is on the way of evolution and more comprehensive theory could be build by the efforts of enthusiastic Industrial Relations researchers.

References

Katz, H. C. (1993). The Decentralization of Collective Bargaining: A Literature Review and Comparative Analysis, Industrial and Labor Relations Review, 47(1), 3-22.

Kochan, T. A., Katz, H. C., & McKersie (1986). The Transformation of American Industrial Relations. New York. Basic Books.

Kochan, T. A., et al. (1984). "Strategic Choice and Industrial Relations Theory," Industrial Relations, 23(1), 16-39.

Cooke W. and Meyer D. (1990). "Structural and Market Predictors of Corporate Labor Relations Strategies, " Industrial and Labor Relations Review, 43(2), 280-293.

Arthur J. B. (1992). "The Link between Business Strategy and Industrial Relations Systems in American Minimills," Industrial and Labor Relations Review, 45(3) 488-506.

Birecree A. M. (1994). "Corporate Development, Structural Changes, and Strategic Choice: Bargaining at International Paper Company in the 1980's," Industrial Relations, 32(3), 343-366.

Goddard, J (1992). "Whither Strategic Choice: Do Management Ideologies Matter?" Industrial Relations, 36(2), 206-228.