Strategic Management and Economics

Strategic Management and Economics
Author(s): Richard P. Rumelt, Dan Schendel, David J. Teece
Source: Strategic Management Journal, Vol. 12, Special Issue: Fundamental Research Issues in
Strategy and Economics (Winter, 1991), pp. 5-29
Published by: John Wiley & Sons
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0 143-2095/91/1 00005-25$ 12.50
? 1991 bY John WileY & Sons, Ltd.
Strategic Management Jouiai sll, Vol. 12, 5-29 (1991)
STRATEGIC MANAGEMENT AND ECONOMICS
RICHARD P. RUMELT
Anderson Graduate School of Management, University of California, Los Angeles,
California, U.S.A.
DAN SCHENDEL
Krannert Graduate School of Management, Purdue University, West Lafayette,
Indiana, U.S.A.
DAVID J. TEECE
Haas School of Business, University of California, Berkeley, California, U.S.A.
This essaoy examines the relationslip ibetiveen strategic mtianiagemtienit anid economics. It
introdhces the special isslse oni this samtie top3ic by providing a guidle to tihe eighit papers
ontainedl in tihe special isslse, andt it offers tihe gluest edlitors viewpoints on t(ie ontribultions
of each d-i.sciplinze to tihe otilier. The essay, niotes tie mai0jor contribution fromti ecionomics hias
ibeen primi1arily' fromt tdie inldustrial organiZation literatlure, witii pirom iises of im-tiporttant gainis
to be mtiadie ftromt the 'nzew' economics as it breaks away firom1 t(ie neoclassi(al tlieory of tile
firm7*. Contribultions fromt strategic mtianiagemtienit to ecionomi(s are niotedi. Areas for fiurttier
resear(ci lutiliZing tie relationsiliip betw'een strategic m7ianiagem7ienit and1b e(onomics aore also
ildicated.
INTRODUCTION
relevaint to generail mainaigers, Is in Jeinsein's
(1989) views oIn corporaite cointrol IInd Williaiim-
The last decaide hais witnessed a minor revolution soi1's (1975, 1985) ainallysis of the efficieincy
in straitegic mainaigemeint reseairch aind writiing. properties of the institutioins of caipitailism.
As never before, aicaidemics haive aidopted the Although there caIIn be little doubt that
Iianguaige aIInd logic of economiiics. This chainge is ecoinomic thiinkiing is reshaipiing straitegic mainalgeowed
to the increaised use of economics by meint, opiInioIn is divided as to the usefulness of
strategy scholairs aIInd to the increaised aibility of this trend. Within straitegic maniasigeimieint, there
economists, airmed with new tools aIInd richer is a growing group who cross over between the
theories, to aittaick problems of centrail interest fields, but imiintaiin an uinderstanIidiing of their
to straitegic imanaiiiigemeint. Thus, duriing this paist distiinct strengths aind weaiknesses. However,
decaide we haive seen straitegy scholairs reaiching there aire ailso some who see ecoinomiiics aIs the
out to use or reformulaite econoimiic theory, as Isolution' to the straitegy problem (or, perhaips,
in Porter's (1980) influentiail treaitmeint of industry to the 'tenure' problemi), rejecting the field's
structure. In the other direction, we haive traiditioinail preoccupaitioin with situtioiil coIImseen
some economists positioning their work aIs plexity aIId mainaigeriail processes. Finially, there
are some who stroingly oppose the conflueince,
seeing economiiics as 'imperialistic,' as takinig
Key1 words: Editor's connmeit, strategic nmanagenmeint undue credit for formailiziing thait which was
econonmics, research issues
ailreaidy kinowin by others, aIInd as iinseinsitive to

6 R. P. Rumzelt, D. Schenclel antid D. J. Teece
aispects of the humain situaitioin other thain the lighting sailient research issues. The fifth section
raitionail pursuit of gaiin. Within economiiics, the
situaitioin is simpler: there aire those who follow
aIInd appreciate the contributionIs of straitegic
maniasigemiieint reseairch, but there is ai much lalrger
provides a guide to the paipers in this issue. Our
summairy commilenits
group who are unalwaire of traiditions outside of
economiiics aniid apprehend business management
oinly through their owIn coinstructs (aIInd an
occaisionall reaiding of the Wall Str-ect Jolurntial).
Our purpose for this speciail issue of the
Strategic Maniagettietit Jolurnlal is to examiine the
staite of the current coninectioin between straitegic
imanaiiiigemiieint aniid ecoinomiiics. T"his examiiiinaltioin
will be done in two waiys. The first waiy will be
in preseintiing paipers froiim a lalrger collection of
coiimimlissioined paipers aIInd coiimimeintairies thait
aippeair elsewhere' aId which provide pairticulairly
sailient exaimples of the intersectioin of the two
fields. The second waiy is through this editorial
essaiy which, in aidditioin to providing our
interpretaitioins of the paipers selected for this
speciail issue, is extended to provide our owIn
views about the conniectioin betweein straitegy aind
ecoinoiimics. These views aire intenided to chaillenge
both ecoinomiiists aind straitegists to recoginize
eaich others' coitributioins, liiimitaitioins, aIId the
opportuinities ealch falces in coininectiing theory aIId
aipplicaition. Along the waiy we hope thait new
directions aind priorities for reseairch will be
surfaiced for our reaiders, whether their primairy
interest is straitegy or economiiics. Some commilenit
will ailso be provided oIn the issue: Whait (aIInd
who) should guide the intellectuail developmenit
of the strategic maniasigemiieint field: strategic
thiinkiing aIId straitegists, or ecoinomiiic theory aIId
econoiiiists?
Our essaiy is orgainized in this waiy: the next
section briefly reviews the evolution of the
conlniectioin betweein ecoinoiimics aIInd strategic
maniasigemiieint. The third section aiddresses
imiiportaint forces thait haive iinduced this coininection.
The fourth section examinies the future of
straitegic imanaiiiigemileint aIId ecoinomiiics, high-
close the essaiy.
A BRIEF HISTORY OF ECONOMICS
WITHIN STrRATEGIC MANAGEMENT
Straitegic maniasigemiieint, oftein cailled 'policy' or
nowaidaiys simply 'strategy,' is aibout the direction
of orgainizaitioins, aniid miiost ofteni, busiiness firmiis.2
It includes those subjects which aire of primairy
concerni to senior management, or to ainyoine
seeking reasons for the success aind faiilure aimoing
orgainizaitioins. Firmis, if Inot all organizations, aire
in comilpetitioin. competitioni for faictor inputs,
competitioni for customers, IInd ultimiaitely, coImlpetition
for revenues thait cover the costs of their
chosen mannliier of surviving. Firms haive choices
to maike if they aire to survive. Those which aire
strategic include: the selection of goails, the choice
of products aIId services to offer; the design aIId
configuraitioni of policies determiniing how the
firm positioIns itself to compete in productmairkets
(e.g. competitive straitegy); the choice
of an aippropriaite level of scope aIId diversity;
aIId the desigin of orgainizaitioin structure, aldminiiiistraitive
systemils aIId policies used to defiine aIId
coordinalte work. It is a baisic proposition of the
straitegy field that these choices haive critical
iniflueince oIn the success or faiilure of the
eniterprise, aIInd, thait they must be integraited. It
is the integraitioni (or reinforciing paittern) aimong
these choices thait maikes the set a straitegy.
Straitegic Imanaiiiigemilenit aIs a field of inquiry is
firimily grouinded in pralctice aIId exists becaiuse
of the importance of its subject. The straitegic
directioin of busiiness organizations is ait the heairt
of weailth creaition inI moderin industrial society.
T"he field has Iot, like politicail scieince, grown
fromii ancient roots in philosophy, inor does it,
like pairts of ecoinoimiics, attract scholairs becaIuse
of the elegaince of its theoreticail underpiiniiings.
Raither, like mediciine or engiineeriing, it exists
I'IThe lairger collection of papers appears in Flwidme(ttietittil
Issues in Sti'ategy, Richard P. Rurmelt, Dan Schendlcl. and 2 W will LISe a vairiety ot terrms interchangeably aindl aIssuLIle
David .1. Teece, (Edls.), Hairvatrdl Business School Prcss, 1992. throughout the reader will interchainge them ieasily ais well.
This book contaiins the papers in this special iSSLe, in some Such alternatives as firmn/orgatnizattion/enterprise; proutict/sercaises
in extendled form. This companion volumle extendls the vice; policy/strategy/strategic management; administrative
liscussion of strategic management and economics presentcd structUrc/organization structure/mianagtemnent process aIre
in this special iSSLIe. broadens the scope to inciLlde other examples of terms and conccpts we use more or less
social science dlisciplines. and providles a widlcr dliscuIsSion of interchangeably for sake of vairiety and convenience, and wc
research issues fatcing the fieldl.
trLIst, with no loss ol gencratlity.

ecaiuse it is worthwhile to codify, teach, aIId
expaind what is knowin aibout the skilled performance
of roles aIId talsks that aIre a inecessaIry palrt
of our civilizaition. While its origins lie in pralctice
aIId codificaitioin, its aIdvaIIncemileint aIs a field
increalsingly depeinds upoIn buildiing theory thalt
helps explain aIId predict organizational success
Strategic Maiiagem-lenlt (a1i(1 Economics 7
balainced coinsideraitioin of the firmii's 'streingths
aId weakness: Iad defined its use of 'synergy
aIInd failure. In the seinse of expainsioin, codifianid
competitive advaintage' to develop new
miiarkets aId new products. Ever since the sixties,
the strategy metaphor has survived as a ceIntral
construct of the field, even without the careful
defiinitioin necessary for researclh purposes.
Where the sixties gave rise to basic coIncepts,
caitioin, aIId tealchiing theory is necessary, tested the decade of the 1 970s brought their developmileint
theory caipaible of prediction desirable, aIId the and application to practice, and in turn gave rise
sealrch and creaitioin of both to better practice, to research in the fieldi as we Inow know it. The
absolutely at the heart of the field. Society is seventies were marked by the rapid expainsioil3
served by efficient, well-adaipted orgainizaitionis of coinsultiing firmiis specializing in strategy, the
and straitegic management is concerinedl withl establishment of professional societies, and the
delivering them through the study of their
creation, SUCCeSS, aInI SUrvival, as well as with
advent of journals PuLblishing material oIn strategy.4
Three forces helpedl strategy flouri-sh in the
understanding their failure, its costs, and its 1970s. First, the hostility and instability of
lessoIns.
the envir-onmiiienit of the sevenities ledl to a
Strategic management has a rich tradition and disenchantment with 'planiniiig' and the search
long history as a teaching area in busilless schools, for- miiethodls of adapting to and taking advantage
a history virtuilly aIS loIng zIs that of busiiness of the uIlexpectedl. Ihe strategy dloctrines of the
schools themselves. Prior to the 1960s, the sevenities offeredl an alternative: building and
unldlerlyiing metaphor of the (teaching) fieldl protectiing specialized streingths that weather
was that of functional integration. Uinder this change aiid expressing those streingths inl Inew
metaiphor, the value-added by what was thiein produCtS and services as markets shift. The secoind
cailledl 'busiiness policy' came from integration of important force was the con1tiILued expainsion
specialized knowledlge within broader perspec- and further developmiien-t of strategy consulting
tives. The perspectives were dLuall: that of the practices based onI analytical tools and concepts.
firimi as a whole, ilnCI ngilIg its performance, and
that of the role of the general manager. Together
The Bostoni Consultinlg Group pioneered in this
regard, creating the 'experience curve anId
with an intellectual style that stresses pragmatic deIiviing the 'growth-share matrix.' The third
realism over abstraction, these perspectives key force at work was the maturation and
remaiin ait the center of the field andicl dlistinguish
it fr-om other fields with dlifferenit perspectives,
predomiiniance of the dliversified firmll. Top1 managemient
beganIi to see their corporations as
but with similar interests in tlle same core issues. portfolios of busiiness unIits and their primary
A new metaphor was inltrodLuced in the 1960s, respoinsibility a1S capital aIllocation among bLUSilleSS
that of 'strategy.' Strategy was seeni as milore than Unlits. Tlle nlew systemils that evolved, duLbbed
jLiSt coordination or integration of tfLllCtiOlnS-it Istrategic manamenient,' foiced b usinless managers
emiibodied the joiint sclection of the product- to definle their plans anId goals in coimlpetitive
market arenas in which tlhe firm would comlpete. terimIIls and generated a birisk demand for strategic
and the key policies defininig how it WOUld
comlpete. Strategy was not necessarily a single
decision or a primial action. but was a collection of
tools and strategy analysis.
related, reinfor-cinig, resource-allocating decisionls
and implementing actions. Dependillg UpOIn
whether- one read Selznick's Leadershilp in Admsiiin-
It ShouIldl be niotled that 'I' lostoll (ConSUlIting" ( Group., thle
first otf the lirmlls specializing ill strategv. andic. the firill thalt
spun ot'f' man' simiiilaLr lirims, wais started by' BruLice I-l.litelnson
inl thle earlxl' sixties.
istration ( 1957), C(handler's Strategy( (111(1 Structure
(1962), Andr-ew's matcrial in Blisi;iess Policyv:
Text andlS Cases ( 1965). or1 Ansoff's Corporate
Fechnll'.';C,1I j(o)urna,;ls speCCializinlg ill stlra1teg'y suchCI aIS thlis
onle, beg,an1 pIuLblication in the eiolities. I-lowever., the
aeemIC enlt to k,lauCh1 tle SNMJ was made in 1978. 'I'lhe Strateioic
NiV111,aage1n'let SOCiCtV' starlted ill 1'981X butt OtIlhle grouIp)s su1Ch'
Strategyt (1965), a company'S miiissioni or strategy
bulilt LIpOIn 'distinlctive competence,* constituited
the firimi's method of expansion, involved a
as thle Nortlh Amiler'icanii Society of' Corporate Planners,
Division ol' Btusiniess Policv and Planning of' the Acadeniv of'
malilaue.'ll.'lit, ianacernent.IlkPlanning TIN;IS. 'I'l1.e P'lailills((1.t'o'lt1 College ll of, and ()tile.lS ohr c.ni can
bie traced to thle sevenities.

8 R. P. Rium1elt, D. Sclhendel anid D. J. Teece
Until the sevenities, academic strategy research eighties and its search for linkages to theory. As
consisted chiefly of clinical case stuLdies of actUal importantly, this work and style led to (A new
sitUations, with generaliz,ations souLght throuLgh generation of researchers better equlipped to
induLctiol. AlthouLgh this style of research coIn- handle the new style of research and its intellectinules
to play an important role, the seventies tUal demands.
saw the rise of ai new research style, one based DuLring the 1980s, owinig to the changes noted,
in deduLctive methods, the falsification philosophy the pace of change accelerated; economic thinkiing
of Iopper, and the mnUltivariate statistical methods moved closer to ceinter stage in strategic managecharacteristic
of econometrics. Almost simull- mileint as disciplines were examined for theoretical
taneouLsly, three different streams of work were motivation for the empirical work then bulilding.
changing the face of the field. Two of these The most inflUential contribuLtion of the decade
streams were conduLcted at Harvard, the third at from economics WIS ulndouLbtedly Porter's Comn-
PuLrduLe University. At the Harvard BuLsiness pe)titiv'(e Strcategv! (1980). In a remarkably short
School, stuLdents of BruLce Scott bulilt on Chand- timle, Porter's applications of moobility barriers,
ler's (1962) pioneerinig work and inllUgUrated a induLstry analysis, and generic strategies became
stream of research on diversification and firm broadly accepted and ulsed in teaching, COISulperformance.
At the Harvard Department of tation, and many research projects.
Ecoinomics, Richard Caves' stuLdents began to Whereas Porter's approach to strategy bulilt
modify traditional Mason/Bain stUdies of struLctuLre on the struLctuLre-conduLct-performanice tradition,
and performance to incluLde differing positions of which stuLdied market power, there was another
firms within industries, inllUgUrating the stuLdy of tradition, associated with the University of
'strategic grouLps' within induLstries. Meanwhile, Chicago, which saw inidLustry struLCtuire as
at PuLrduLe University, Dan Schendel, together reflecting efficiency outtcomes rather than market
with his and Arnold Cooper's stuLdents, began power. In this tradition differences in performthe
so-called 'brcwinig' stuLdies which explored the ance tend to signal differenices in reSOLurce
empirical links between organizational resouLrce endowmenits. In addition, another new stream of
choices, interpreted as 'strategy,' and firm per- thouLght began to emphasize the importance of
formance.5 This work demonstrated for the first ulniquLe, difficuLlt-to-imitate resouLrces in suLstinilng
time the existence of struLctUral heterogeneity performance. Within strategic management, these
within induLstries, and led to the first hard approaches have flowed together and have been
empirical eviclence of the 'strategic grouLps' ulnder duLbbed the r-esour'ce-basedl jeiiw! of the firm.'
discuLssion and development at alrvard. More In addition to these broad perspectives
important than the contenit of the PuLrduLe and developed within the field, duLring the 1980s
Harvard stuLdies, however, was the different strategy scholars dramatically increased their ulse
empirical nlatUre of the work. In addition to cases of economic theory and their sophistication in
ulsed for induLctioll, this new work ulsed difficuLlt doinig so as the examples that follow indicate.
data collection, and the rapidly growing power The event-stuLdy methods of financial economics
of the compulter and muLltivariate statistical were ulsed to investigate strategic and organimethods
capable of handling large data bases, to zational change as well as the strategic fit of
test hypotheses in a deduLctive style of research. acqUisitions. New security-market performance
This shift in research style ultimately led to measuLres were applied to old quLestions of
quLestions that case research and simple hypothesis diversification and performance, market share
testing couLld not illUminate. ResuLlts were difficuLlt and performance, as well as new areas of
to interpret, lacking any theory in which to inquliry. Transaction-cost viewpoints on scope and
em bed them. CuLmulation of quLestions occuLrred, integration were adopted and new theories of
buLt not of resuLlts that led to advice for
practitioners, or to tests of theory UsefUl for
the efficiency of social bondinig advainced. Studies
practice. Hence, the work of the seveinties was
instrUmental in motivatinig the work of the
"This view was named and defined by Wernerielt (1984a).
Additional contribtutionis were made by Teece (1982),
Lippman and RumLielt (1982), RumLielt (1984, 1987), Barney
(1986), and Ieece, PiSano, alnld ShluLeni (1990). Granlt
5 See -ltten and Scheldel (1977), Hatten, Schelndel, and
Cooper (1978), anid Scheldel and Pattton (1978).
(1991) reviews the suibject and Coinner (1991) provides a
comprehensive evaluation.

of innovation lbegain to ulse the laIngUage anid
logic of r ents and appropriability, atnd research
in veniture capital responcded to the agency and
adverse selectioni problems characteristic of that
activity. Agency theory perspectives have been
tised in the study of firm size, diversification,
top-management compensation, and g,rowth. The
new giame-thleoretic approach to industrial organizationi
has inforined stucdies of prodLicer repLltations,
enitry and exit, technological chainge, and
the adoptioi of standard s.
In looking backwarcl over these three decadles,
what comes into focus is the search for theoretical
explanations of very complex plheionoienia. A
linking occur-red for the first time betweeni basic
discipliines of the social sciences,7 especially
economics, annd practical issuLes involvedl in
managing the firm. What had begun in the sixties
as rather simple concepts that gave insight into
phenomena described in cases, einlded in the
eighties motivatiing a search for theory withl caLusal
and predictive power able to be uLsed in practice.
WHY ECONOMICS IN STRATEGIC
MANAGEMENT?
Whv has the 'content' side of strategic mainage-
meint come to draw so heavily on economiiics'?
The trenid cannot have beeni drivcie by practice;
very few, if any, of the unregulated firms in
the U.S. emplov microeconomists to analyze
strategies or help chalrt strategic clirection. It
cannot have been driven by teaching; Imlost
stritegic manaigement courses; contilnue to rely
on cases that are more integrative thain analytic.
We contend that the infusioni of economic
thinking has been dcriven by five forces or events,
all connlected with the research program of
strategic management. They are: (1) the need to
interpret performance data, (2) the experience
curve, (3) the problem of persistenit profit,
(4) the chaniginig natture of economics, and (5) the
changing climate within business schools. Each
of the forces or events has shaped the conniectioni
7 It shouli be understood thait this special issule of' the
SMJ focuses on economics and strategy. but theoretical
contributions were ailso forthcoming from other basic disci-
plines suclh as psychology, sociology, political science, atid
anthropology. Indeed, the theoretical linkage seairch was
conidlucted oni a broad scale anld was by nio micans limiiited to
economiiics alone.
Strategic Managemiientt anid Economics 9
between ecoifloics and strategic imiaInalgement
and each continues to pose practical and intellec-
tUal challenges that will shape fututre dlevelop-
meints.
The need to interpret performance data
In the early 1970s strategy researchers began to
look systematically at corporate performance
data, particUlarly retuLrin oni inivestimient, in
attempts to link results to mianagerial action.
FrUllhans (1972) study of the airline iniduLstry.
Rulmiielt's ( 1974) stuLdy of diveisificatioin strategy,
liattei, Scheindlel aiid Cooper's (1978) brewinig
industrx stuLdyV Biggadike's (1979) studCy of enitirv
and diversificatioi, aind the PIMS studies were
the early examples of this inew style of reseairch.
IThe problem im)plicit in each of these studies
was that of interpretiing the observed performance
differentials. What meaning shouLld be ascribed
to perforImaiince differenices between groups, or
to vatriables that correlate with performance? The
needl to find an adeqUate answer to these
(qLlestiols wais one of the forces engenderiing
econoimlic thiinkiing aimloing straltegy researchers.
The story of the market-share effect provides
ai goocl illustration of this dynamic. The empirical
association tbetween mailrket shalre aind profitability
was first discernedl in 10 ecoinomics research8
where the relatioIslhip was intepretedl as evidence
of 'minarket poNwer.' Why? I3ecatuse using the
structuLre-coniduLct-performaince paradigm as the
dlriver, market share representedl structUre
('conduct' was imiiplicit) and supernormal returins
wZere interpretedl ais poor social 'performance.'
Within the strategic mianagemnent comImunity, the
market-share isstue was raised by the Boston
Consultiing Group (BCG) aind sharpeniedl by the
PINIS studies. carried out onl the first businesslevel
data base available for ecoilomilic r-eseairch.
The leading role both BCG aindl PIMS gave to
market share helped shape thought about strategic
nImainageni ent in the late 1970s. The viewpoint
they espoused saw imarket-share ais an aIsset
that could be 'btought' anid 'sold' for strategic
I Imiiel and I-Ileliiberger (1971). Shepherd (1972), andci Gaile
(1972) all address this phenloeilenai. In the miarketine literaiture
therc were also models proposed aind studied that linked
market share to profitability. h-ut without Ilmuch attention
paid to the underlyinig theoretical issues involved.

I() R. P. Ritinelt, D. Sclhendel at,id D. 1. Teece
purposes." BCG adlvisedl its clients to Winvest' in continuiies in new formi-s todlaiy. Siimply stated,
share ill gIowinlg indCIustries (wlerIe competitivc eCquilibriumlI meains that all actors have exploited
reaction wvas eithler absent or dlulledl) and 'hiarvest' the oppiortutnlities they face. '1ThuS. comnpet'itive
shaire in declinina indlustries. PIMS reseai-chiers eqiuilibriumn ruiles ouIt. (bVy asSUImption ). th-1e
Andl Con1Suiltatits venlt furthier ianid told milanagers possibility that clifferenices in firm wealth cani be
they cOuld inicrease share. I1and thUS profit, by attribLuted to dlitferenices in freely variable strategy
re(lefininc tiheir mairkets (i.e. re(lefinie their chloices, or easily reversible dcecisiolis. lnstea(l,
comipetitors (and preSLllumably their shaire positioin). observed differences in wealthl must be attributed
In 1979. Rulmiielt and Wernslev (1981) began an to phenomena that atre unconitrollaible or ullpreempirical
stuLdlx Using PI MS dlatai thiat was (lesigined lictable. for example ordler of enltry. nonimiiitable
to estimate the 'cost' of g-aining market slhare. liffer-enices in quality or efficienicy, and of course.
T'heir motivation was dliscoimfort with the con1Suilt- luck. By making the aISSUImIption. the widlely-Lsedl
ants' a(ivice to gain shla-e in growing markets (or Studly of pierforinciice vs. some parameter or
new induILsItries. etc.). Thlie advice seemiledi to be other loses much of its value. For example. if
too mucIL of ta 'free lUnch.' Were there really the worldl is in eqluiliblrtium,1 the fact that .rowving
simiiple ruIleS of strategv that coull (lalway,s 1)e indusitries lre more profitable dloes not mean
expected to paiy oft"? Expecting to Iindcl the cost that oneC shouild inivest in growinlg ind(IuStl-ies.
of share-gains to be at least thleii worth in each Inisteadc, the assUMption of e(qUilibrl-ium.11 leadcs
conitext, thex were quite Sut-prisecd to findl nio cost the r-esearchler to pr-CSLIsume that the observed
to share-glails. C.'hangles in shaire and ch ianes in profitability is balanced by the expectation of
profitability were p)ositively related in evCerv futuitre losses, risk. or iS suIstined by imilpedlimlleints
coiltext examined. It was not p)Ossible to inlerpi-et to enitry, or is a reputation-base(l premniUm, or
this r-esullt t'iiiholit extensive fora vs iuto (econotInic is othierwise balanced by ulnseeni scaircity and
theI-Ov (/11(1 advltinced (coomett'i(.'S. In the encl. cost.
thev adopted the aSSmTIlptiOnl that share chainges EquLIilibriumn aIssUmp)tions are the cornerstonie
Nwere properly 'priced' and interprreted their ot niost econiomiaic thinking and are the most
resuLlts aIs implying that the share-profit associ- straightforward way of modeling competition.
ati()n was causally Sp)uriouS. InSteald, all ullOb- Researchers wlho esclhew equilibriumlI aSSIul)tiOnlS
servedt stoclhastic process (i.c. Iuck, goodt Iisk cgross erro-rs in the caLusal intcrpretation otf
mianaglement) wvas jointly drivingy bothi. share aIndi clata. Oni the other haliil, the risk in adloptingc
profitlbility. SubseqUent empirical research has an equli riuLImI assUMPtion is that it may be
genierally sLIpported their vliew. 'Tlhe imiarket unwarranted. Observedl dlifferences in performshare
issue ailSO Stilal'.lKlted efforts to i.lodel anCe Illmay aCtUally reflect xwidespread ignorance
competitive equililbria in whiclh shlarc acind profCit- about the phenomena bCillg stuLdliCed. Wlicih risk
ability are associated. Note that imiost of this is beeillg undertaken is not just ai matter of
wvork hals been carried ouIt Withlin strategic
anagemleit rather than by econiomiiists.
preferenice bLut more likelx onie of condlitionis.
especially in the pI esenlce ol( innovation ani1d
'I'he market share story exemiplifies an argu- change. Thlie general approaich to making this
menit over dlata analysis and equlilibriulll Whichl judlgCeileiit is to ruIle in fx0vor of equilibriuim whell
the uln(derlyinig assets oI positions aire frequcitly
qI'theirvicws wre allso eclioed hyv soifle ecoiiotists
(1979: 1) I81 ciiini1c thi t present mr k t shr
Sheperdi
. .t ill vi1ld
ai gYiveli PIoOit i-ite 'ith' fiiiii cinii mainitain thliLt profit rite.
O)r- it can r aise it niow, ws hile xideliii up sonie of' its imreii t
share to othi I Timi-is ()r it ici 'invest' presenit pirofits in
buildiiig u al hiiglei tfutuie maU irkct shae c'
See Jacob1son (1990)3 1 oi in intte ut. itdi t i Sec
Bouldin' '11d(1 Stiaclit (1990). SctlhetiidelI Iiltton (197(S) is
part of' theC PUI diie breVilln StLidliCs Ji1OX ()I iC i si iiult in.Li)LIs
vicw ot' the sctrcl f'or to -market share. profitability aii ii girowth.
'ipplialil ailldinLieIlt'S ( 1982) thleor-y ol' ilicer-talill iuiiitabtilitv
geiCl'irtCs tiS SOrt Of eqLiibri.ni. aIs does tilC differeitiated
oli(op()1oly! modeleICd lIh Karnani ( 198I5) Eleeaiit 111Oels ill
whliic mar ii-ket share milaitter-s' have beeii developed by
\Wcrnerfelt ( 1984Th. 1991)
tradcledi or conitestel. wxvheln the level of aggrecgation
aind the ty,pe of cdata is farmiliar to actors in the
indLStrvy. wlheil the dhata is widely available andici
freqluently ireviewdcl, and wxhien tile coniniectionis
between tihe dlata il dprofits are widiely Lliunderstood.
\WlilC equlilibriLium aiSSuLmIlptiolls ofteil drive
out conisiderIa(ltioni of innovation, change, and
hletelrocenlleity. this dloes niot nlecd to be tile case.
In the neoclassical world, equilibriumn meant that
profits wvere everywhlere zero. or more grenerally,
thlaIt all oppor tUnities had beci exploited. But

enlldowm1lents. pIermitS a1 broa r'ag Of illtriguinlg
OLutCoImeCS. For example, onc CouIIld mIIOdeCl thlC
CduaL.I ill'italtiO ofa inoVation aIS aI proCeSS
eCj 5Ll li1
I 11t 1 OCS 110 ILl l Ii V S t I c tC(_ i C 1.I'lI l1 clTC
mlent. no toioes ( it 1i1m) th1 t oInC ShIOldCI teiac
econ1omiiic thleor-eImis rather than manaaemient.
Whatt it dOes iOlvS iS thIt p)rofeCsiOnal CedLut'OrS
ailrC Iritglt in th1eir FOCUS onI developing skills in
the analysis of' the parItiCular- Irather tthilll theC
gIeneral. In addition4 it Suzetts a framewOrk Ifor
vStr(ateJ(ic .'\I'lal1(we'i1(ent' {E(Il 1 ('.(col(olics.% i I
miore sophisticated view's now Permit mior-e wvhere to look f'oi r oP)or't'I'ities aid. olicC
sophisticatecd eqlUilibria. The basic idea of' Nash idlentif-ied,. a b,asis fbr)i jUdging their' relative merciits.
eCquI1I)iluml .\21 wherein each a1CtOr d1oes the bcst hie Theory alone1 is, inISufIficienit absent intimate.
or) sIhe canl With Whatt theC\y illd indIv1id llN know and
cont rot. especially when COLed(.l w'ith LuInCetainty.
uni(]uCIC knowledchc of technical coniditionis and
thle abil itv to position assets and skills to Create
asymmlllletric informtatl.tionan Lluneq uLtll re LSOuLrl'CeC favo)rable Competitive positions.
Th'le experien~ce cu-I!,ve
iln \w\h;I1 chl coml.petitors observe its operation and Durnng the 1970s the experienlCe CurIve doctrinle.
market rCesLlItS. anldl then }
the leCalder aI]'Cilrdy kIlOWS.
zRILuaIV ln
Inl SuCh'1 a m11od0el
wh11aIt
laree
deCVclopedCC by theC BOStonl (ion01SUltinjz Gr-Oup1.\V
a1 poANverfUl *forIce wVithinl stratec!ic managemenC11C11t.
p)IOfitS WOUld be earned. ftiIrms mighi;rt centerI and A\tlthouch theC idea' tha-t. SOMe Costs followved a
tl)en exit. ad I d C() compeC t i t i )a1 LI l g f1 C I I ly I V C-learingIM-bV-dIoing1 pa)'ttern1 hadlC beenI around Sinice
increase. Alth1oU(yIh thlC Product miarket \woldt thec 1920s. it w'as laryeel inre by economists
no0t be in n.OClSSI11 Ca etuilibriuL111m1 the be1haViorI beCauI1Se it wa~S a1 theIOretical1 nuisanSMCe; it decst roved
dCSCril.eCd
011on hS
iS Still
passSedC
equilibrliLlIll bha}VioI
Lup') MIV OppOrtnllitiCS
ill thlalt nI0
f0or prIOtil
the ability of' stan(ldard miodels to reachII eCIuilibriumLI.
f13CG addd II.CItOL 'C ou crt I Cal inirediInt I s:
that are kio I fO to tlhin. TIhSu it iS P}OSSih-e to ()theIaC ue tha,'t the paIttern1 appied)HC no1t JUSt
describei mal-v aspects of inno1vat ionl anIldl the to diriect klabor. butt to allI deflated Cost elemencits
profit-creatililt transient respnISCS theCy inducLIeC
With UiIibI iLl im 111 1110( ( I t }10(.111!} JplOt ()rIaI
ofl nonnLoclassiid it a5sumLpltio0S S
Wil brequired.
Anl CXMimpl.C oa MI equ CilifblrIIll aISSuIMPtiOll of
Of va~ILue added: this expandcd version o)f the
learnine1t CurIVe Wa'S Called thle exper'ienCe curIVe:
2 -, the c provided convincine, dataI showine experi-en-ce
effe'cts In a broaIdvait of indu.IStrieS:
LISe
for
ill StrIteg'iC I1anaieeme(_'Indlt iS thlalt Of
rih s' th}it there' can be n'o 110geral
'110n ILIIC
rulles
()theyV argued( tha,'t eXpeincI-CIe-ba.sed Cost
redcC LCtIonI was not restricted to thle early sta(yes
for lcen ratin'y wealth. Thlerlc is nIo SUbStitultCe fOr
udIgeCM. C 11nt in C decid1in ICC WheC th1erI 01o n1ot th1iS
0)1 roductionl. but conitinue inenitly and
(4) they explored the competitive implicati'Ons o)f
CXCluSiOnl Sh1olIC1d be
(that is . dtuding
appliedC to ia prj)tiCLlaIr CoIntCXt
how gene1(m. (ye1iral is 'Yeeneral)
the experienlce effe'ct. Anl example of thle latter
is 13( 'G>; SLutrcestimn that .1 there iS no naturLly~11
IInteret stiniI I thlis equl Ibrium I all '1lSSumLlption1 Stable reaI It IonIIshI IIp\.I wthI cmptI I tor)1s on anIIy
1ai'toi(lliiCS tlilditil t CaS-bs)eC Situla.tiotnl
canalysis th}it hs been the hialimark of' stratecic
prOdUCt. unltil SOmeI oneC Competitor has a comlmandingk
mar111ket Share of, thle normnal mlarket tor
Management in1StlrulCtiOn. If thle'rCe arC eI0 n Co geell tha1c't prIOdCICt an11d unltil the p)rodCLCt'S 17I growt
Irles fol IcihIeS, thenI aI StlratV baISed 0 OIn enera slows. Furthermore,1-C underICI Stable ConditiOn S, theC
avastilableld in1t01ilfomtioi1
Shoul(11d be icj'ected.
atnC LunSpeiaClizecd IreSoulirCeS
Opporitluities \w(orth underprofita.bility
of each Compet itoi- SholMd be a
funlICtionl Of hliS a1ccuIMulLdMC LXp1I-eriece With that
taking1 musLlst bie rooted in1 thle
theC I} Situaionl. ItIi(l TI Thyms Cl Ill' 11LiSt t'l(O o
prN11 ti CularI si Of
fl- 1(I11 r tll Sj) seIa 'iII
product . (1970: 29)
TheII idea~ that1 CuIMuLktiV L prolu-Iiction eXperiilnbomalatioln
possessed by the tirm or its mnalielr's. eceICC not SCaleC, COUldI be pi imar IVdIve OF unit
firm11 thle special reslourcS. Skills, andICI m11 market
Positions thlait the tirm possesses. V iedcCl ill tIhis
ligt, traditional case analysis is a leaeitililnlte
COStS impl)1CIe aI VadLuI InI doing1 bUSineCSS aparflt
froml the immlediate proohts c urned. InI thle secondhalf'
Of theC SeVenltieS. Vi tillxKII ccry aticle, book.
search tOIpp)otulnIity!. for
What is \\worth} Irect'Oenizilit
is that the acceptance of this level of econiomIiic
See' ['PeypccHvlconil' o i'Axpericiawc. T'heJ Boston ( nsnl ti ii
(mop(11) 1 (),
i '} h j s eritic'.I iseL Shcrier-' s [I0
t )74 contempornlle-
MI ii iItIdnUt iAl orea niz/iotniiin text dlisilli"ssdl the Importanice of
IL. nuni h\- ---tloiII i pN P ri(MIldCtionll idLiLstHiS ieCbCauSe tilh
at.' ot cost rediLuctioll evidentiv dechlilnle aIs cuImlulative output
isexs hCvond several tIhousand Lillits. I ntcrestillvk. the Sec(olnd
IrvSised editionl. pUblished in II . aand(Ioed tile liSeC
and Im .'d Ictlear l in --lbv-dorili as iaan a u 1Pol
eitillne, BC((i almone others.
tIl ut p he no mc1'ia.

12 R. P. Rumiiielt, D. Schenidel anid D. J. Teece
and pIresentation on stratetly IrefeIrIred in somlle with tllese differIences. Somne fiIrIms simply do
way to the experience culrve. The idea's power betteI tlhani others, and they! do SO consistently!.
was that it pIrovided aii explanation foI the Inideed, it is the fact of these differences that
sustained domiinance of leaders, and br'oiI lheterIo- wvas tlle origin of( tlle strategy con cept. In standard
geneity, despite competitioin. There was also the neoclassical economlics, competitioni should erode
simlple fact that it supported miany managers' the extra profits earned by successful firms,
tastes for pursuinig dominance and growth at the leaving each firm just enough to pay factor costs.
expense of current profit.
Yet empirical studies show that if you do well
The impact of the experience curve on the today, you tend to do well tomorrow; good
strategic mianagemient coIlmlmuIity extenided results persist.
beyond the overt conteint or correctness of the One of the factors in the 1970s that drove
doctriine. The experience curve was the first strategy researchers to search for theoretical
wedge drivein in the split that wideined between explanations for persistent performance differthe
study of mianagemient process and the study enices was the enormlous success and legitimlcy
of comlpetitive action and miarket outcomiles. In of the capital asset pricing model (CAPM).
a field which had traditionally seen the firm as Developed by financial economlists, the CAPM
emilbedded within an 'environmient,' the experi- not only had practical usefulness, it gave great
ence curve focused attention oIn the actions of strength to the idea that markets were efficient.
alert rivals. Most importantly, the logic of the Consequenitly, an intellectual climlte developed
experience curve engeindered a taste for a in the academy which tended to presume
microecoinoilmic style of explanation: For the first efficiency in all markets, even product-markets,
timle there was a similple, parsimionious account and aggressively challenged assertions to the
of what coilmpetitive advantage was, how it was contrary. The experience curve doctrine provided
gained, and where it should be sought. Adding a partial response to this challenge, but it clearly
piquancy was the fact that the logic of experience- was not the whole story.
based coilmpetitioin was not imported from eco- In searching for explanations for endurinig
inomIlics, but was instead developed within strategic success it was natural to reach for relevant
mianagemient anid thein exported to econioilmics. economlic theory. The most obvious theory was
Finally, amiong those who sought mlore precisioni, that of industrial organization economlics and
there was the need to clarify assumptions its various explanations for abnormial returns.
about competitive behavior, to more exactly Traditional entry-barrier theory yielded the concharacterize
the resulting equilibria,'4 and to cepts of scale economilies and sunk costs; moblility
empirically estimate the relative importance of barrier theory stressed the importance of learning
scale, industry-experieince, and firm-experieince and first-mover advantages in making specialized
effects.'5 Thus, the very act of developinig and investmilenits in positions within indiustries. The
grappling with the logic of experience-based 'Chicago' tradition supported the notioni that high
coinpetitioin enicouraged ecoinomIlic thinikinig withini profits were returns to specialized, high-quality
strategic mia na gemi e nt.
resources. Game theory provided models of firms
which use preemptioni, brand crowdingi, dynamalic
The problem of persistent profit
limit-pricing, signaling, and reputations for toughness
to strategically protect market positionls.
One of the key empirical observations made by The economlics of innovation brought a focus on
traditional strategy case research was that firImis Schumpeterian competitioni, intellectual propwithini
the samie inidustry differ fromil onie another, erty, and the costs of technology transfer. Andi
aind that there seems to be an inertia associated evolutionary economlics yielded the idea that
skills, emlbedded in organiizationial routines,
Experience-bised equiilibriai aire ainialytically intriactable.
Spence's [1974] work remaiins the best ainalysis, iccomplished
by ignoring discounting.
resisted imitation and had to be developed anew
by each firm.
Within strategic management there has been
Liebermain [1984]. studying 37 chemical products. found
leairning effects much lalrger thain scaile economies aind showed
that they were aissociated with cumiiulative output raither than
cailendair time.
a great deal of work aimed at synthesizinig
these ideas into coherent frameworks. The most
prominenit effort is Porter's (1980, 1985). Takinig

Strat gic ainaiagement (anld Economics 13
the basic ideas of the Mason/Blain structure- view is that the persistenice of strategies and of
conduct-performiance paradigm, Porter changed performance both stem from mechanisms which
the perspectivc from that of the industry to that link and binid actions over time. l-ie idenitifies
of the firmi. and formulated what had been lock-ini, lock-out, lags, and inertia as the key
learned froimi this perspective inlto a theoiry of irreversibilities at work and reinterprets a great
competitive strategy. Porter catalogued, deal of strategic doctrinie in terms of the selection
descr-ibed, and discussed a wNide range of pheniom- and managyemnent of commiiitimietits.
ena w-hich initerfered with frec conipetitioni, thus In suimmiry, the single most significant impact
allowing abnormal returns, and suggested hiow of econlomilics in strategic management has been
their interaction and irelative importance varied to radically alter explanations of success. Where
across contexts. Porter's (1985) later approach, the traditional frameworks haid success tollow
delineated in C'omIetitive AdMvatage extenidedt leadership. clarity of purpose, anid a general
the earlier analysis of competitive strategy to niotioIl of 'fit' betweeni the enterprise and its
encompass positioniilg withini an inidustry (or enivironimlenlt, the niew framework focusecd onl the
strategic g roup) so as to achieve sustained impedimiienits to the elimination o.f abnormli
comilpetitive advantage. Positinig two basic types r-eturnis. Dependiinig upoIn the frarmework
of firn-specific advantage (cost-based or differenl- emilployed, success is nlow seen as sustained
tiation-based), Porter argued that advantage by mobility barriers, entry barriers, market
could be sustained fi-om ia prioduct-miairket positioIn
and a configuration of internal activities that
preemiiptioni, asset specificity, leariniiig, ambiguity.
tacit knowledge, nonimitable resources ailnd skills.
were mutullly reiniforcinig (i.e. stronig comlplemileni- the shar-inig of core colimpetenices, and coimmittarities
anmongst activities and the conditionis of menit. That 'fit' was correlated with success can
demrand).'"
be argued. that it is cauSaIl cannot be. The fit
A second effort at synthesis is the resource- argument lies in the long linie of work that Plorter
based view of strategy. This view shifts attention (this issue) describes as a continluinig search for
away from product-mnarket barriers to coIlmpe- causal explaniation. TFeaching frameworks that
tition, and towiards factor-market impedimiienits suggest the importanince of fit are correct so far
to resotuce flows. Identifinga abnormal returnis as they go, but it is the new economilic frameworks
as rents to uniqlue resource combinations, rather which estalblish the causal linkages. That has
than market pover, this perspective emphasizes been learined from the pressure of askinag questhe
importaince of specialized, difficult-to-imitate tioIns from an econ omiiics perspective.
resources. The creationi of such resources is
seeni as entreprenleurship: strategic management
conisists of properly idenitityinig the existence and
TFhe changing nattire of economics
quality of resources, and in building product- The econoimist's neoclassical moodel of the firm.
market positioins and contractual arrangements enshrinied in textbooks, was a smoothly runninilg
that monst effectively utilize, maintain, aind extend machinie in a world without secrets, without
these resources. This perspective finids its greatest frictions or uncertainty, and without a temporal
use in examining heterogeneity withini industries, dimenisioni. That such a theory. so obviously
and in the dliscussioni of 'relatedness' aIIlmoig divorced from the mlost elementarv conditionis of
diversified businesses. Nelsoni (this issue) dis- real firms, should continue to be taught in most
cusses a recenit versioni of this viewpoint, incorpo- businiess schools as the theory of the firm' is a
Irating(, learnincg, that is called the 'dyarnmic truly! amiazing victorv of doctrine over reality.
capabilities' approach. Prahalad and Hamel's Thiis erai miy. however, finallv be comliling to an
[1990] recent discussion of core competenices is end(i as the cumulltive impact of new insights
an expressioni of the resource-based view. take their toll. During the past 3() years, and
Ghemawat [1 991] provides a new attempt at especially during the last 2() years. at least five
svnthlesis around the idea of comnnitment. His substantial monkev wrenches have been throwin
into what was a smoothly runiniiig maichinie. They
T5 l his airgument can be couched in strict equilibrium terms
by introducillg straitegy-specific assets or other sources of
first-mover advantage.
are cal led uncertain tx', itnforination asymmnietry,
bouniided rationazlity. opportunisni, and asset specificity.
Each ot these phenoimenaii, takeni alone,

14 R. 1'. Ri?uuelt, D. Sclhene l (anld D. J. Teece
violate crucial axioms in the neoclassical model.
In various com biniatiolns they arie the essential
ingr-edienits of new subfields withini economiiics.
TIrailsactioil cost ecoilomiiics Irests pIrimailvy oI
the coiljuilctioil of boulilded rationality, asset
specificityv aild OppOItUllism. Ageilcy theoIy
iests oIn the coimibiniatioil of opportUnism aild
information asymmetry. The Ilew game-theoretic
inldustirial orIgailizatioIn deriives Imch of its pulilch
firoimi asviSymmietiries in information aild/or in
the timinlg of iIrIreversible expeildituires (asset
specificity). The eVOILutioilariy theoIry of the fiIrm11
aild of- techinological chailge Irests chietly oIn
Uilcertainlty aild bouinded; irationiality. Each olf
these ilew suLbfields has geileiated inisights anid
Iresearich theimies that are imiiporitanit to stIrategic
imianlageimient. Each is birieflv treated inl tuln11.
T-rallsaction cOSt CUOllOlIlICS
Of all the Ilew SuLbfields of economiiics, the
transactions cost birailnch of organizational ccoinomiiics
hias the grieatest aIffiinitY witlh stIrategic
imiiianageimenilt. Thle Iniiks deirive, In part, frmill
comimoiln initeirests in organizational formi i, iluCLidilng
a shared conicenii withi the Chanldler-Williamsoin
Ni-form hypothesis. They Ie also deirive fr-oimi a
coImm111Oni inltellectual style whichi legitimizes
ilnUiry into the ireasoins for specific institUtionlal
details. Th11e clinIical stuLdies condluLcted by strategy
iresearclieris and buISiiness historians are grist for
the transaction cost mill. A thieoiry wlichi seeks
to explain wh-ly on1e partiCUlar Clause appears in
a contract is clearly olf great initeirest to strategic
management scholars, whio have a dtefinite taste
f'or disaggregation. 1
menlts for coniductinlg economiiic activity. 1-is basic
poilnt was that transactions shoLuld take place in
that iegimiie which best economiiizes on the costs
imiiposedby bo dLlilded Irationlality aild oppoIrtunlisim.
T his framework was explicitly coimipariative (thie
relative efficieilcies of Imlarikets aild hieirarichies
weie exposed) aild eniabled ecoiloiiists forI the
fiIst timiie to say soimiething aboUt the efficiency
pIropeIrties of diffeireIlt organizational foIrIls.
(PIrevioLuSly econiomiiists had coimmoilnly sought
aild f'ounidc imioilopoly explanations foIr comlplex
foIrIms of bLusiniess organization; efficienicy explaniatioils
weire ignoired oI deInigirate(l.) In additionI
to comparing markets aild hierarchies, tIraiisactioin
cost researchers also begail to look at qluestioils
of inlteirinal strIuLCtulire aild the manner in which
specific decisioils aild actioins weire takein. In
particular, the Chanldler-Williamsonl N-foirimi
hypothesis Irised important issues Irelatinlg to
coipoiate cointiol. These ideas begaln to acchieve
widei acceptance afteri beillg SuIppoited in a
Ilnliumber of empirical stUdies.
Withlini stirategic management, transaction cost
ecoiloimiics is the gr OLnld whleie ecoiloimiic thlinking.
strategy, aild organizational thieoiry imieet.
Because of its focuLs On1 illStitutioilal detaii, irathei
than mathematical display. it hias a biroaderi
aludctieilce amiong ioleconoIlotllists than other
branches of organizational ecoiloimiics. DLuInIlg
the 1980s, a coilsideriable aIllOLlIlt of woik was
doile in applying the transaction cost firamiieworik
to isSuLes in ortyailizatiOnll StrICtUre. Inl palrticularlI
research has been carried OLut Onl vertical SulyJ)1V
arrangements in a Illli uberi of- ilndulStries,I) thle
StrlLuCtulIre of IllUltillatiOllal fiirims (BLuckley and
Casson, 1976;- 'eece, 1981; KOgut, 1.988), sales
FoIr manvy ecoinomiiists the aSSLIIulmptiOnI of force 1-)ICCO organizatin(nesnadShiten
^.1.tioii (Aildlei-si and II Sciliiliittleiii,
Ulnllimiitecly rational actors is the defiiiilnn charac- 1984), joint venltuIes (Hleniniart. 1988; Pisanio,
teiristic of thieir fieldl. CoinseLuienitlvy transaction 1990). anld franchising (KIlein, 1980). Williamson
cost ecoinomiiics whiichi follows Siiimon Inl positing [tIlis issLcI] provides a ulsefuIl Irieview of additional
bo)uLliidecd rationality ha s had a diflicuIlt uplhill applications of inlteriest to strategic management.
Str-uggle foI IrCcogIlitionI and acceptance. rhe
suifield aot its staIt in the mid-1i970s as somle
CCOInom1iStS, bUilding oni Coase's (1937) seminal
work, becan to sstcmatically probe ql Liestioins
of firmii boUndarieis and internal organization.
Williamson ( 197)) Was the chlief architect of a 2 Armiour and ; leece 1978j demonimstrated reCtUrns to the
ado1)ti( I ol' the NI-f'orm as w\ell as showing evelitUal diissipationl
framework that explored the limlits 01 bOLIrnolnaries of excess rettiuirs throuih iiiiitzation: MIonteverdic aniid 'l'ccce
of both markets and bUIiness filirms as anraniae- [1)821 established that specific aissets aift'I'fcte the erttical
- See, for exaimplc Joskow's 1191 tr] tIlmenlt of pr-i.ccd!
CLkSt men IiSCs ILI inI 1)Ill-tICl'll CM 1 Contracts.
S1t net ure ( orfan i/at ilS
Fark' cotihiulitions wereClo N-Ionteverdle aindci 'l'cccc's 11 9821
stuLdyx of aLuito Comp1lronenIts aId lNIaIstM's 1 9.881 stuldl\ Of
aer'os()pa)clc'.

iaindl hostile takeovers, which p)Ut neCW Imallnag0elmleClt
teamis in place. What should str-ike strategic
uLSUaIllNY b contiluing to r-eilnvest long alfter growth
opportunllities had evaporated.
The corporate conltr'ol perspective piovides a
Strategic Mianagenient anid Economics 15
Agency theory
valuable framework for str-ategic management
reseairch. By r-ecognizitig the existence of 'bad
Agency
theorvy
the
coiceris5 desigin of incenitive
agreements and the allocation of decisioni riglits
miiaagemeit. identifvinig remiedlial instruments.
andc emphasizing the impor-talce of proper
aimong inclividluals with conflictinig preferenices or incentive airr-iangenments, it takes ai more ntor-mnative
inter-ests. Although it deals with the employmicint stantdc thalni most other subfields of econiomics.
tranisaction,. agency theory is not comiipatible with However, scholars woiking in this area also have
traniisactioni cost theory. Wlher-eas trans,action cost the tenidency to see all mainagerial problems as
econiomnics begins withl the assertion that one due to illCorrect iicentives-a talutOlOgy fo r a
caninot write en forceable conltr'acts that cover all. per-spective which aSSuLlmes away any other souir-ces
conitingenicies. aLgenicy theor-ists maike no such of dVSfuiaction (e.g. capital miarkets problems
presump)tion. and(i isiiteadi seek the optimal form
of siuch a contract.
like those (liscuisse(d by Shleifer- aindl Vishny in
this issuLe, miianiager-ial beliefs abotut caiuse and
Agelcy tlheoiy has developedl in two branches. effect, manigemiienit skills in coordination, a cnd
The principal-agenit literature is chieftly coincerined the priesenice or laick of character and selfwith
the design of optimal incentive contracts
between plrincipals ancd their emiployees or1 a(yents.
control).
Principal-agent econlomics is largely mathematical
in form andi relatively inalccessible to those
Ga,nec-teorx catndi the niew
who have not made investimenits in its special
techniology. 'I'he standard problem has the ag(,eint
shirking ulinless rewards Cai be properly coInditioned
on informative signals about effort. T'he
inter-estinig aspect of' the problem is that hoth
pairties suffer if (oocl measures aire niot available.
A versioIn of the problem that links with strategic
management concerns project selection and the
design of incentives so that agenits will not distort
the capital buLdgetinig priocess.
'I'he second (corporalte control branch of the
aigency literature is less technilcal and is concerlned
witlh the dlesigin of the fillailcial claims and overall
governance structuIre of the firm. It is this branch
whichl is imlost sinilicicatnt to strategic management.
The coIrpora ste control hvpothesis most familiar
to strategic management is JTeinse's (198() 'fr'ee
cash flow' theor-y of leveratTe aindl taLkeovers.
Accoirding to Jenisen. in imialny tirimis, managers
have inappropriately ciriectecl frece caslih flow0
towards wasteful ilveStmllelltS 01o uses. iwo CuIes
to this problem hiave beeni piroposed: Luse of high
levels ot dcebt to conmimlit managements to paVyOutS
, IO
Three of the papers in this special isstue dleal
with implications of game theory bor strategic
mnLtagemilenit. So oul remiairks here will be brief.
Mathematical game tleory' was invenitecd by vonl
NeUmlalnlnit1 and Morgenisterin ( 1944) and Nashi
('1950). However. little progress was made in
developing economiiic application1s unltil the late
1 970s. It was probably Spenice's (1974) work on
market signalling that sparked the miodernii interest
of econiomiiists aL'nd it was Stanford's 'galng of foir,'
Kreps, Milgrom, Roberts and Wilsonl (1982).
wlho codified the treatment of sequeltial gLames
with iiperifect infor-milationi.
Modlerni g(ame theoIry raises dele qLuestioins
atbout the nature of rational behavior. The idea
th,at a rational individual is one who maximizes
utility in the tface of' available information
is simply' 1ot sufficienit to generate 'sensible'
e(luilibria in many' nonicoopeirative gamiies with
asyillmetric in tf'ormation. Jo obtain 'senisible'
equilibria, aCtOrS muSt l)e assiginedt beliefs about
what others' beliefs will be in the eveent of
irrational alcts. Research inito tihe techinical and
hDilOSOPhliCal fOLundC1atiOnlS ot galmleC thlCOIrV lhlS, at
management schlolar-s is that BC'G offered priep)relent,
littlc t(o do. directly' wvith stratcgic
manaiiagmenet, bu-it much to do with the future of
ciselv this diagnosis ftOr man1lily diverIsifieCi tirimls ill e'COnlomilics as thle scienlce of 'rational' behavior.
the earlyv 1970s. According to BCG, mosit firms Game theor\y as aipplied to inidLustrial organimismanaaed
their portfolios, misuLsilln the funLds zation hals two basic themlles of imlost inlter-est to
gellerated by mature cash-rich buSinesses ('co\\vs') stratecric manaaement: comimiitimldenlt stratecries
20 NuTlch of thte techniCul titdtion thle' LL(Sd llhad bCeen kid
byx Selten[I) andI larsanyi ' 19071.

16 R. P. Rtwnelt, D. Sclie,itdel au-it D. .I. Teece
andct r-epuitationis. Commitment, as Ghiematlwat easily or quickly, the field hlas a very close affinity
(1991) emphiasizes, can be seen as cenitr al to to population ecology views in organization
strategy. Aniong the commiiilitmiienit games that have theory. Researchers interested in the evolutiion
beeni anialyzed aire those involving investmenit in of populations tened to woirk in the sociology
specific assets and excess capacity. research tradition, while those mor-e inter-ested in the
and dlevelopimniet with aindl withouit spillovers, evolutioll ot firnm caipabilities anid techilical
lorizontal iIeirgeri, and finiancial structure. ReprutatioIns
arise in gamilies whele a firmii or actori can
progress tenCId to woIk in the ecoInomilics tradition.
Both fraimeworks challenge the nlive view that
have various 'tVpes ad tltier-s ImLust forimi beliefs firm s can changre strategyies easily, or that Such
about which type is the truie one. Fhths for changaes will eveni imlatteir wheni attempted and
example, a cuLstomer's belief (probability) that a i-nade.
seller is of the hoinest' type constitutes the seller's
repLutatioIn anid that reputation can be lost if the
seller behlaves so ats to chliange the customiler's
Tbie cli(chaginig clitmnate it'ithinlisiiess schools
beliefs. RepuItations cani also (lescriibe re'lationi- B3usilless schools haiive transformed themselves
ships within the firm, and the collection of profouidly over the past 3() years. BuLSilleSS
emiiployee beliefs atndc reputaitions cain be called schools aIInd their facLulty hlave moved froimi
its 'cultulre.' Giveni the competitive imporitaiice collectinlg anldl transmitting best CUrrellt practice
of external reputations, the efficienicy properties to developing and Comllmunllicatinig thieoiretical
of internal repuItationis, and the relative silence ullnlerstaiidinigs of pheniomiienia coninectedt with
of gaime theor-ists aibout how vari-ious equilibria mianagement, principally, the iimanagemeniIet of
are actually- aichieved, there iS ClclIly much Iroom complcx businiess fimiiis. This transformation,
foIr conitributioIns, iluCLidinlg those from striategic which OCCUrred toi larger reasons, has illflueniced
anacement resear-clh.
the straitegy field aiid its connection to econlomiiics
in impoitainit walVs. Theire aIe several Ireasonls
Et'olutionzarv ecCO1OnloiSs
whiv thait transformationIl ils OCCurir -ecd: the impetus
of the Ford Founidation and Carnegie Founldatioin;
TheIe has beeni a long-standing analogy drawn Ulliversity- hirinlg and pIoimotioin prIactices, the
between biological comipetitioni (and resultillg rise of COInSultillg firins as repositories of best
evolutioin) anid ecoinomiiic comilpetitioin. with bothi prIactice aiind the relative prioxiiimity of econiomics
fields ofteni poinltinlg towards the othier to grOuLld departmiienits. Without these chainges collectively,
ideas. Making the analogy conicirete, lhowevei, the field ats we kinow it would be diffeIenit, aind
has largely beeni the work ot Nelsoni anid Wiinter economics involvemeniit in strategy would have
(1982), who mairied the coincepts of tacit been less.
knowledge and r outines to the dynamics of In the late fitties, the so-called Gordon anid
Schumiipeter-iani comipetitioni. In theiI framework. Howell ( 1959), and the 1'iersoii (1959)) r eports
firmlils comilpete priminarilvy thlrough a str-uggle to were published, both ciritiqluinig the business
imiprove oI ininiovate. In this struggle, firis grope sclhools of theiI day. The cIriticisimis were many
towards better methiods with oinly a paItial and the chanlges they prompted were extenisive,
unLldeistandinig of the Caulsal StlrUCtuIre of theiI but one of the Imlost far-reaching Irecomiimenlowvn
capabilities and of the technological oppor- dations was that business schools nieeded to be
tuinitv set. Key to their view is the idea that infused with IigoI, methods, and conitent o f basic
organizational. capacities are based oni routines disciplinies: matlhematics, economnics, sociology,
which are Inot explicitly comprehendcled, but whichi and psychology. Thlis recommendation was avidly
arIe developed ancd bettered with repetitioni and followed, with the result that a good many
practice. This miciro-linik to leaIriniig-by-doinlg econiomists, psychologists, aLnd other-s trainied
means that the culi-reint capability of tihe fiIrimi is solev in the basic social science disciplines
a f uInctionl of histor y, making it imilpossible to t'ound employment in business schools alongside
simply copy best priactice even when it is tIadlitional. professionally-orientedl faculty IIIemIIobsiervedt.
hers. The traditional factulty fotund its scholarship
Because evolutioniary econlomiics posits a firm in stuLdyinig btusiniess firms, identifyinig the best
which cannot chang,e its strategy or itS structure pIractice they coLuld fiind, andld transmitting what

Strategic Managetnenzt an.-d Ec0onom0nics 17
they learned in the classiroomn, typically thl-rugl basic disciplinle in whiclh the fa1CUlty member hiad
a case, anid the occasionial puiblislhed ariticle. beeni trcainied.
Along the way suLch faculties were frequenitly In the world ol' business, more aind more large
cast in the Irole of consultants to piracticiing firms began to create their own managemiieint
businiess mianaiagei-s and mn.laiy founid greater developmlleInt programs, aimileCi at fillintg the
financial Ireward in suclh work thlani they did tfr-om gaip between the incr-easinigly theoretical MBA
their scholarliship alone. The new, discipline-based education anid the needs of practice. In addition,
faculty oni the othieri hand fouind theiI- schlolasIship COlSItilng firmns gIew in scope aiind sophistication.
inside the acadein-. in the writingys of othei-s In manv*' functional areas, inicltudinig management
similarly placed, aind in advaincinig the theory of anid strategy, specialist conslltinig firmils re placed
tleii- field, ofteni without Iresor-t to priactice and businiess schools as repositories of best practice.
apllication of what they learned. TheiI minids These factors led to an increased piopoitioni
anid rewards were concentrated on what thev of businiess school faculties cither traiined in
prIodLuced iniside the academin. Set in inotioni wIaIS economics diirectly. or illmportanllItly illfluLenced
a priocess that retir-ed practice-based scholars in by the stanidaids commnoni to discipline baised
favor of discipline-based ones.
scholars. Unfoieseen by Gordon, 1lowell. and
In time, probably longer than anticipated, Pier-soni was the changing character of economlics,
the disciplinie batsed prefeienIce in hIingi(I and aiid other social scienices. Less anid less conccrined
pIomotioii led to a stionilgIe aind stroinger pIresenice \Nwith emilpiriicismi. econiomilics became inicreasinigly
otf disciplinie based scholars, iluCiding economists. concernied with workinig out the inteniial logic of
Indeed, some newer business schools anid soime its theoretical structur-e anid less aind less conolderI
onles as well, weire oIrgaiiized withi the cernicd with descrilbing real illStitUtionls. This tIrenld
ecoinomiiics depai-tmiienits as part of theiIr facultyt. contilnues today, \vith 'advanced' deparitmenits of
As businiess schools became ImloIre disciplinie ecoInoImiics offering Ph. D. programs in w\hich
basedl, tlheir- standards foi hiringy anid priomiiotion price-thieoiry is considered applied anid nlot eveni
came into alignmiiienit with the social scien1ces. cover-ed duriniig the fiIrst yeair of study.
The pr-imaiy meeasui-e of excellenice became These changes in business sclhools forced those
publication ill disciplinle-based jouIrnials aind
acceptance by the commiilluniity of discipline-based
inlterIested in stIrate(Tic management to 'take sides.'
and adopt a discipline. Early on, the typical
scholars, Iratleri than relevance to priactice oI faculty memiibei in stiategic management (then
conltIributioins to pIrofessionial educationi. Disci- called businless policy) was recruited fromii those
plinle-based scholars nlot oinly earnIIed internal with expeirience and high ri-ank in a functional
rewN-ards imore easilv. they also typically lacked area (e.g. marketinig). The switch required was
the cushioni of consultationi that would otherwise to that of the total enteriprise anid its genierial
allow a greateIr adaptation to the special circum- management funlctioin. The inicreased disciplinie
stainces of professional schools. This self reinfor-c- base of business schools made this switch imiore
ing cycle is still presenit today.
difficult. and many schools began to hire young
ThIroughlout most of this pei-iod very high growtth faculties and expect them to mlove up through
rIates chaIracterized business sclhools, as they Imloved the ranks oni the mllerIit of woIrk donie in straiitegy.
fiom granltinlg about 12,000 to ovei 70,000 MBA To move through the system in this 'new' field
degr-ees per yeai, and to imanvy mlloIre schools offteringC was especially difficult, as it tended to lack
the MBA. Well-trained faculties in specialty areas the infrastructuie peculiar to proiriotioni needs:
sUchi as maiketing, finanice, accouLn1ting. an1d other patrons, senior faiculties wlho had beeni throglth
funlctiolns were in shoit supply, especially in the the system; jouiriials. veniues for exchanige of
earlier yeais of greatest growtlh. To fuel expiansioin views. Additionally, it had a case-based tradition
it was a short step to hire disciplined based faculties of research increasingly shuinined by the acadeimly.
directly, and worr y about their adaptatioll to Consequentlyx gI oups initerested in gelneral mIanlapplicationis
in business firms later. Sonme made agemnenit anid strategyy begani to take either
the tranisitioni, some did not, but maniy who did organization theory or economics as their base
retainied ani allegialnce to their base disciplinies that discipline.
included seekiing publicatioin reputations, not in Throughout the 1970s it appeared that organithe
field in which they were to profess, but in the zation theory was the discipline of choice for

18 R. P. Rulitielt, D. Sclienlrel anid D. J. TFeece
stirategy grioups. 1ioweveri, this balance was the piractice ceid, do nlot exist, especially at ouI
Ireveirsed in the 1980s, larigely dcue to the success best sclools, is a sad comimIilenlt onl the lack of
of PoIrtei's approach to stirategy. Wlhile soImie administriative leadershlip aind faculty ulnderstaindsclhools
aiId theii striategy faculty Iretainied aii inlg that exists aboIt str-ategic miainiagemieinet, its
essenitiallvy bealvioially focuLsed gioup, mainliy conltenit, and its chliallenges. Simon's (1967)
otlheIs imioved to ecoInoimiics -based views. Like descriiptioni of the prioblemii of ruLllllling a piroecoinoImiics
itself, economnic-based striategy giroups fessioaiil schiool lias special irclevaiice to striategic
Inow also differenitiate thieimiselves oni thieiI coIml- maniiiagemilenlt:
mitmient to imiatlhemiatical modeliing vs. veribal
reasoning anid thiCiIr inlteriest in thieoIr' vs. emipiri- ()rganiz ing a professional school. . .is ver'y iuiLiclh
cisim. Withlini the behiaviorial giroups, the split is
chliefly betweeni those followinlg oirgaizatioin
thieoIry anid those takinlg a miainiageriial pirocess
view of striategic milaniagemig enit.
WhliChl gr'oupI lias the betteri idea'? Wlho will
like mixing oil with water. . Left to themselves,
oil and water will separate again [p. 1.6]. . A
professional sclhool aidministraition the clein and
seniior facuilty have in unceasing task of iightinig
the naturial incr ease of eintiopvy of pieventing
the svsteim fioii moving toward the e quilibrium
dominiiate'? That ireimlainis to be seeii but if
wliat the top research-oriented i.e. Staiiford,
NoIrtlhwesteirni. Clhicago. Berkeley, etc.) sclhools
arce cdoinig Inow is aniy guide you lhave to bet oIn
those emphasizing coiitributioIn of econiomics, if
inot total irelianice oIn ecoinoImiists. If. oi the otlhei
lhanid, the top European sclhools oIr piractice is
it wouldc otherwise seek. Whlen the school is no
loniger- able. v conitinual activitv' to maintain
the gradients thait differenitiate it fiomii the
environment, it deiclhes that ecqLiilibriuimii witl
the wol-Icd wlhicll is cleith. In the piofessionial
schlool 'dceth means 11 medioci itv acn ina bilitv
to fuilill its special fuLnctionis [p. 12].
youi guicle if wli at imcaniageirs listeni to miCakes a Unlfor-tuniately, strategic management is too oftein
difference, those wlho coIm binle a imiodicumii of inhliabited (inhiibited?) by those who see n1o need
ecoinoImiics withi a focus oin niailageriiail pirocess
arce clear- winners. No miMatteri wlait you believe
will be the outcome of this cointest, ecoinomics
for (fear?) the balance we advocate.
lhas clearly inlfused aiid inlforimied strategic ImlanI- THE FUTURE OF T'HE CONNECTION
cgeimeit, nlot oinly by the poweir of its thieoIry to BETWEEN ECONOMICS AND
yield inlsighits, but bv the tranisfoirimlatioin ot the
b usiiness schiool lhost, and the evolutioni of
STRATEGIC MANAGEMENT
sti'ategic mikaniagemIlenit as a field.
We believe that striategic mniiiaagemilellt lias clearily
However, froml the viewpoinlt of strategic profited from the infusioni of economiic thinikinig.
miainiagemienieit we see a daiiger in these trenids. There is no question that the presumptioni of
We advocate a balanced view of the field, perhaps equilibrium aindl the specification of alert rivals,
tipped slighitly in favor of tests of theoretical raither thaini ain aimorplhous 'environnment,' hias
constructs by practice and application. If the generated valuable iIew fraimieworks, nlew inlsights,
balaiice, as it hias at somc sclhools, goes too far ianid greatly shairpenied thinikinig aimonig strategy
towaird thieoIry oIr towaird a sinigle disciplinCe base scholars. Nevertieless, it is vital also to iecoginize
Suchi as ecoionoiics, thieieC is Ino couniteriweighit that thils inlfusioin lias comec onily after the
firomi piractice aiid applicatioin likely in Cithier weakening of orthodoxy withini econlomilics. For
iresearclh oIr teachlinig. Likewise, if the balaiice
tips too fair toward imIaniageriial pIrocess oIr evenI
decades ecoionomics imiipecded researclh inlto strategy
by comniiittinlg its initellectual capital aind inlfluCence
best priactice, as it lias at othieCI sclhools, there to static analysis, ain alimlost CXCluSiVC focus on
are Ino theoretical COIlStr'UCtiOnIS to aCCUmla11tC
aind build for the good of the field. Either
price comilpetition, the suppressioni of centreprenleurslhip,
a too stylized treatmeint of markets,
unbalanced outcomile is bad. In our view, balance hyper-rationality assumptionis, aind the cavalier
requires both theory aiid application, in their treatment of know-lhow. 1-lad orthodoxy weakfullest
aiId finlest ieprescietatioins, in our research. ened sooieri, strategy would have hiad the beenefits
in our teaching, aiId in our facuLlty. That suLICh from useful economic thinkinig earlier. That
balanced vieCWs ieprescieteCl by portfolios of orthioldoxy weakened was perhaps partially a
scholars, some at the discipliine eind, others at result of researchi in strategic management.

(see. for example, Williamson's argument in this
issue). It would be a great loss if the stutdy of
coniipetitive strateg,y became dlivorced fromn the
other elemiienlts of strattegic manaaemnent.
Strategic MU(nlgene;lit and EcoolOnics 19
Econlomilics has been chietly conicerined with We believe that competitive strategy will
the performance of miarkets in the allocation and remain ani initegrial paxirt of strategic imanalelellellt
coordination of r esources. By contrast, strategic an(ld that its coninectioni with eCoinomics will evolve
manageiment is allbout coordination acind resouLrce aiInd take on niew foirms in the future. We believe
allocatioin insidc the firm. This distinictioni is that fears of 'ibsorption' will nlot be realized
crucial aind explains why so much of econlomics for these reasonls: (1) strategy is nlot 'applied'
is niot readily applicable to thlC studyl of str-ategy, CC()onomics; (2) eCcoilonoists will nlot leaI-in about
anld why strategy can inlorm ecooiCS as mlllch business: (3) microeconiomiiics is Ca collage andci
as econ1omi1ics can in forimi strate Ty. TIwenity-five apl)paretly cainot provide a coherenit inltecrated
years ago economists. askedl how a firm should theory of the firm or of mainagemeint; (4) that
be maiageda wouldl have (and (lid) artue that whichi is strategTically critical changtes over time;
subUllits should be meeasured on profit, they andci (5.) OrgranlizatiOnlal capability, llot imlarket
ShtOuld tranlsfer prodUCtS. seI-rvices. anld capital to exchan ce. max iIlcieasin clv assumlle center stace
one anothier- at marginal cost andl the more ini stratetic maniatcemiient reseairch.
internial comlpetition the better. lToday, we kniowv
that this advice. to runll a firm as if it w-vere a set
of imarkets, is ill-founded. Firm-ls replace markets
Strategy is not applied rnicroecoIioiliics
wNvhen iionmitiket iieanls of coordination and Wc assert this because it is patently clear that
commiiiitmiienit are superior. Splendid progress lhas skillet pralctitioners do nlot dlevelop or imlplement
beeni miade in definiiit the efficienlt bounldaries bluSiniess ol corporate str-atetrics lv yapplyingy
of firms-where mai-kets fail and hie rarchies are ecionoiics orI any? otlher dliscipline. There are
sulerior--bLut there are limits to bIlilCdily'
a thCor-y
of iiaageienelt ald st rateTvy arlounld market
failur-es. It is uIp to strategy scholars to flesh out
ecolloilmists w\vho arcue that this onlv pi-oves that
practitionlers are not verxv skillcd aftet all, but
suchI a respolnsc is nleithei Social scicncc, which
the inivet-se 'approach. supplying a cohci-eret theory stuLdies naturatl order, inor (oocl professionalisml.,
of' effectivc inter-nial coordiniationi anid resouLr-cC whicih seeks to solvc riather thaii inolnore, the
allocaltioIn. of celtreprelleL uShip andI teChnclill expressed problems of practitioniers. We do niot
prot erss, so that markets ciani Ie idleltified as denly that economilic anialysis miav ble uLseful to a
beginnincg wlher-e oro-anizations fail.
strateCTist but so may demography, law, social
The imost interestin(T issue regards the futuLre psvchologvy aild aln unliderstanlding of political
of the comlpetitive strategy portiOll of strateg,ic treinds, as well as ain appreciatioil for plroluct
managTement. It is this SUbfield whlichi lhas tUrnled design, process technologv, anld the physical
imiost whl-oleheartedlx towards thie uLsC of CconIomIIic sciences Unllderlivhin the buLsineCss. Part of anyv
reasonlingT anld models. If the trendlcl con1tillues
does the competitive strategy subject matter haec
comlpetitive stratecgy can be tested against knowix
economlic theor- anld models of competitive reacain
independent ftutLre, or will it becomile juSt a tiOlln but most blusiniess strateTies also conitain
branchi of applied economics?,) Thlere are two imlplicit hypotheses conicernintg org,anizatiolnal
reasonis for concern about this. The first is behavior, political behavior, techliological relationiparochial:
Tlhe field's miost elementary wisdom ships anid trendcs. aild reIv on1 ju'Lideienits about
suggests that competing head on withl economics the plercelptions, feelilas, anid beliefs of ciustomers,
departmenits in their own diom11aini is at losing suppliers, cemployees, andi competitors. Competitive
strateav. The secolnd has to (lo with the internal strategy is 1intearativxe-not juLst because it inte crates
intearity of the field. To split off part of a bLusinesS funlctions andl helps create patterns of
problemii for separate inquliry is to presuLmeIC consistenit reiniforcinc dlecisions, but also because
its inledpenidenlce fr-omii otlier clemencilts of the cre,atiny anild evxaluatiniC buSiness strategies requires
plrob)lem. Yet, the siources of success and flilure insights anld jLicdgemeilnts based oni a broad vxariety
in firms. and thierefore the proper concerins of of kno\wledte bases.
genieral maniagemenlt, remlain anl issue o0f debate
Economilists will not learin about business
Econlomiiics has a stronlg doctrinall coml)ponenlt that
resists displacement. Strategic mailagemenlt. by

20 R. P. Riun7elt, D. Sclhenidel and1) D. J. Teece
its nature and auclience, is pragmatic. If certaini it. Instead, there are areas of iinquliry character-ized
approaches do not shed light on blusiness praic- by the assumLlptiolns that are acceptable in bluilding
tices. or if practitioners deny their validity, the models and by the phenomena to be explained.
pioclivity of the strategy field will be, ancd should Ther-C is excitemenit and vitality in the new
be, to reject them. In addition, we believe that economics becaulse the range of phenomena that
ecoinomiiics will not delve very deeply into btusiness can be explainecd has been dramiiatically enlar-ged.
practices to genierate new theory. This belief is However, there is also confuLsion over the loss
based on judg2ements ablout longy-term trenids in of the old determinism. With the old theory of
academiia. As Simon (1969: 56) commentecd on the firm, everyone knew how to price-youL just
academic tastes, 'why woulcl anlyone in a uLniver- set marceinal revenule equal to martinal cost. But
sity stoop to teach or learni ablout desitgning now price can signal quality to() customiiers anid
machines or planning market strategies wheln he price may tell at potential entrant something
Could concern himself with solid-state phvsics? aboult the profits to be made. With the old theory
The aniswer has been clear: he Usually \Vouldlnt. of the firm, a topic like 'corporate culture' was
Havini becoIm1e as mathemiiatical as physics, and outside the realm o.f consideration, and classified
more axiomatic, mainstreamii economiiics will not with faith healing and voodoo. But now it is
learn enough about business and management to clear that there can be many types of social
challeinee strateuic managemenet in its clomiain. equilibi-ia amnon the actois within a firm, with
ThLs, for example, as induLstrial organization the equilibria depending upon sets of beliefs and
increasingly becomiies infatuiated with formal history, and that these equilibria have raadically
moclelina (it dicln't until the mid-1970s), it may differ-ent efficiency properties. More generally,
lose the rich emiipir-ical base that made it possible it used to be that given a technology, the
for the Mason/Bain tradition to undergird Porter's neoclassical theor-y delivered a predictioin abOUt
work. Put differenitly, industrial organization may the allocation of resources. But now oine hals to
hiave already mialde its importaniit contriblutions to
strategy.
specify the techniology, the inlforimlation sets of
the actors, includinig their beliefs, and the order
An example miiaV help illtustrate the very real of play and one still usuallv obta ins many possible
gap between theory, economic or otherwise, andl equLilibria. The dlescriptive po\ver of the new
the need to internalize a vast amouLnt of economiiics has been paid for by the loss of
in formation pertaining to buLsiness practice. A determiiinismii.
case instructor used to ask 'What are this lhe linmitationi of the new microeconomics is
comiipainy's strengths?' Econiomiiic reasoninig has that it exrplains rather than predicts. That is, it
now helped us understanid that what we may tends to consist of a series of models, eachl of
mean to ask is 'What firm-specific, nonimllitable whichi has beeni purposefuLlly engineered to
resouLrces or Sustainable market positionis are capture and illustrate a particular phenomiiena.
presently Under-Utilized?' The restatemenit helps: Modiels have been constructCed to examinie marit
is more precise, it proviies a definition of kets with consumer lovaltv, experience effects,
'strength,' and it defends againist critics who insist prodlucer reputations. conmplex signaling gamnes,
on ac discipline base behind uLniversity educaltion. the strategic use of debt, muLltimarket deterrenice,
But are economists better equLiipped to aniswer and causal amlbigUity. In addition, models have
the questioni? We suspect not. It is probably been used to explore joint ventuLres, venture
mu1tch easier to teach these economic coincepts to capital, vertical integration, the appropriability
a generalist thani it is to teach economists about of intellectual capital, governanice structures, and
blusiniess.
many other pheniomena. All of this has been
informative and provides strategic management
Microeconomics is a collage
with at panoplv of useful insiglhts. However, these
phenlomena have not been dedulced from these
The upshot of all the ferment in economics is models or from some general theory. Rather,
that with regard to issues of most concern to each of these mainy models has been carefully
strategic managemnent, the neoclassical theory of engineered to deliver the phenomena being
the firm is no longer a contender. However, studied. The contribution of a good modeler is
there is no new tlieory of the firm' to replace in fincding the least aggressive assumptioins that

enable the phenomena in question. Consequently,
the new microeconomiiics is essentially a formal
language for expressing knowledge elsewhere
obtained. Camerer (this issue) calls this the
'collage problem.
The 'collage problem is simiiply that formal
theorizing has collapsed to examples. Conse-
quently, part of the intellectual structure of the
new microeconomics is evolving to look more
like strategic managemiient. Any scholar working
in strategic managemilent must be aware of the
traditional economist's normal reaction to most
of the work in our field: 'The subject is
interesting, but there is no tight theory-it looks
like a bunch of lists. But the new economics,
taken as a whole, is a 'bunch of lists. More
precisely, it delivers a large numllber of tightly
reasoned submodels, but no strong guidance as
to which will be important in a particular
situation.
The new microeconomiiics is still a developing
field and in the future we will see further
elaboration of existing frameworks. But we can
also confidently expect to hear the clangs of new
monkey wrenches being thrown. One already in
the air is the strong evidence for persistent
biases in human judgement and decision-making.
Another which can be anticipated is the fact that
managers not only have different information
sets, they also differ in their beliefs" and in their
understandings of the causal mechanisms they
face. A third, emphasized by Nelson (this issue),
is that firms do not apprehend complete sets of
alternatives, but grope forward with but limited
understanding of their own capabilities and the
opportunities they face.
The implications of this research style for
strategic management are several. First, it should
be clear that knowledge about what phenomena
need be studied is outside its scope. Henlce, there
remiiains a central and importanlt role for scholars
who identify phenomenla worth studyinig. For
example, it is up to strategy and managemiient
scholars to convince financial economists that
most firms really do bludget as if they were equity
constrained-only then will useful models of this
phenomena appear. Similarly, it is LIp to stratety
researchers to reveal the patterns of g,lobal
21 A belief is a prior probability assignmenit to an uLnolbservable
variable. Interestinig beliefs are those which afffect decisions
yet which are not significaiitly uipdated by events.
Strategic MAIanagement (anid Econiomnics 21
interdependence and competition-economic
modeling will come after the fact. Second, the
economist's approach to these phenomena is to
show their existence; yet this is rarely sufficient
to help in practical strategy work. Yes, it is
useful to know that reputational equilibria are
enabled when product quality cannot be deter-
mined by inspection and warranties are unavail-
able, but this is of little help to a firm that wants
to know whether or not its reputation in the
U.S. for workshirts will help it in Eastern Europe.
It is LIp to strategy (or marketing, or other
functional fields) to develop the measures, tools,
and methods to help in specific situations. Third,
each of the economist"s models tends to be
minimal and independent of the others-they do
not integrate into any cohesive theory of the
firm. For examiiple, gamiie theorists can model
entry deterrence as based on reputations for
toughness, as flowing from asset specificity,
as responsive to uncertainty about post entry
performance, and find that entry is encouraged
by opportunities for learning, by the presence of
technology options, and by economics of scope
involving related products. However, these sepa-
rate models provide little or no information
about which of these phenomiiena, if any, will
predominate in a specific situation, nor do they
help much in determining even the rough
magnitudes of the wealth impacts each of these
phenomiiena can induce. This lack of specificity
not only hinders empirical testing, it renders the
professional utility of these concepts dramatically
smaller than model builders imagine.
What is strategic changes over time
What is strategic changes as time and discovery
alter the basis of comiipetition. These changes
arise, in part, because of technological, legal,
social, and political chanlges. They also arise
because educationl and research dissemiiinate
knowledge, reducillg the degree to which a
particular isSuC can be a source of advantage.
The rise of Japanese competition, for example,
has substantially altered the research agenda for
strateg,y scholars. By contrast, little or no
accommiiodation to such chang,es is seen in
microeconomiiics. Business school deans like to
argue that their research programs, though
abstract, constitute the practices of tomorrow.
The opposite is closer to the truth. Yesterday's

22 R. P. Ruiinelt, D. Sclietlidel (andt1 D. .1. Teece
bLUSiiiess strategies are the subject of todavys Richard Nelsonl in the econlomics of tecihilological
research in strategic imailagem'renlt (e.g. takeovers change, Michael Porter in competitive strategy,
aind ILBOs, Kaizeni), and econlomics is just Garth Saloner in gcamne-theoretic industrial orgtralbeginniniig
to theor-ize about phenomnena that ization economiiics, Andrei Slileiferi and Robert
developed half a century ago (e.g. separation of Vislhniy in financial economiiics and corporate
owneslhip and control, the diversified firm. contr-ol, and Oliver Williamson in organizational
national advantages). Today's strategic issues economiiics. The commentator on1 Camerer's and
(e.g. the growthi of new 'networ-k' empires in Saloner's papers, Steven Postrel, is a conitriibutor
Eur ope and Asia. time--based competition ) are to bothi garme-theory and competitive strategy.
only diimly perceived by anyone withini the It is worthi emphasizing that each author was
academny.
assigned the topic for hiis paper by the editors.
The topics were selected to reveal the state-of-
Advantage may be internal
the-art in the coinnectioni between economics and
strategic management. The happy consequenice
Both theoretical and empirical research inlto the of having thils uniiquely talented groUp r-espond
sour ces of advantage has beguni to poinit to to ou reqtiuests is that we obtain an uniobstiucted
organizational capabilities, rather than prodtiuct- view of our subject. Because each author has
market positions or tactics, as the endiurinig been involved in the developimienit of the concepts
sources of advantage. If this is so, our investi- and thieories thiey use and descriibe, thiere are no
gations will increasingly take us into doomains problems of misinterpretation, lack of comprewhelre
economiiics is presently at its weakest- hension, or' misinformation.
iniside the firii. Tlhere are bids by transaction The very heartening aspect of these papers,
cost ecofoloiics and agency theor-y to become especially those written bvy discipline-based econ-
6organization science,' and we can expect new
and imiportant inisighits fromii these fields. However,
their comparative advantage is the analysis
omists, is that flo one qtiuestiolis the importance of
of individual iresponses to incentives. If behalvior
turns on interacting expections, beliefs and
routinies, and if diagnosis, problem solving, and
the coordination of kinowledge rather than effort
are central, theni economiiic views of organization
will continue to be useful, bIut also will be only
one part of the story.
For this set of reasons we believe the boundaries
between strategic mianagemnent and econiomiiics
will remrain distinct, bIut proximiate and somtimiies
fuzzy. But the applied nature of strategic mianagement
and its extensive scope will require intersectioIn
with theoiry fro0m other social scienlce
disciplines as well.
A GUIDE TO THE PAPERS
The eight papers in this special issue each raise
or address issues whicih lie in the terrain betweeni
economiiics and strategic mnanagemnent. The
authors are leaders in their fields: Colin Camerer
in competitive strategy and the experimental
economiiics of games, Alfred Chandler in blIusiness
history as well ats corporate strategy and structure,
the isstues that are raised in strategic management.
Twenty five years ago thiere would have beeni n1o
suchI agreement. Furthermore, thieire is general
agreement that neoclassical microecoiionoics is
woefully inadequate to deal withi important issues
of strategy. The frlctulre lines begin to appear
over whlichi of the newer economilc sutbfields supply
the greatest insighits inlto strategic advantage. Not
suiprisiigly, garme theorists tend to bet oIn garme
thieory. . . and so oI.
The alert reader will discern tiriee basic
frameworks in these papers (some papers utse
more than one). The fiist stresses the centrality
of avoiding direct competitioin and has nIo
great probleimi withi fairly strong rationality
and eqLuilibriulIl ISSUImnptiOns (e.g. Saloner and
Carmerer, as well as Porter's treatment of the
structure of advantage). The seconsd framework
stresses the importance of governance and of
getting the match iighit between the tecihinologies
to be mana ged and the system of ownershiip,
administration, planning, and conitrol. The writers
LISillg this framework (Chandler, Shlleifeir and
Vislhiny, and Williamson) imiix a static Imiodel of
efficieint arrangement withi the willinginess to see
real firms as making mistakes and learning froim
them. The thirid framework stresses the centrality
of innovation, learning, and discovery in shaping

advantage (e.g. Nelsoni as well as Porter s
treatment of the origini of advantage).
The papers
Strategic ManIagemi1en1t anid Economics 23
increases the need for headqu arters strategic
planning can be seen as iniduced by the costs of
haggling and hiold-up that WOuld bie borne were
the divisioins to plan on a decentralized basis.
However. Chandler's essential contribLutiolns go
The developmenit and proper scope and structure far beeyond this statiC picture. In reaching his
of the diversified firimi is one of the central issues COnCluSiOIS, Chandler uses the methods he has
in oui field. Alfred Chandler's original study of perfected: the historical analysis of challenge and
this sutbject was a key stimulus for the develop- managerial responise. In this paper we do not
ment of a scholarly research tradition in strategic see firms 'applying' concepts or somehow driven
management. In this paper he revisits the to the efficient responise by selection pressure.
question, using the events of the last 25 years to Instead, we see management getting it wrong,
inform aI new view of the administrative limits suffer-ing consequenices, strugglilng to understand
of corporate headquarters units. In particular, he the nature of their dilemmas, and thenl, perhaps,
examines how continiued growth forced the creating new structures, policies, and methods to
standard M-forimi organizations of the immediate cope with, and perhaps transcend, the problem.
post-WWII era to a three-tiered structure, and Chandler's real message is not that one must get
how prosperity (and hiubris) led to diversification the headquarters design just righit, but that those
strategies that overtaxed these structures. firm-is whichi dominate their industries are those
The basic conceptual schemie Chandler brinlgs whichi have shown the most resilienice and insiglht
to this paper is that developed in Scaile and1b Scole. in respon ding to the challenges that their own
(Chandler. 1990). Heavy and technologically growth and expansion have generated.
complex inidustr-ies are characterized 1w inexhlust- Andrei Shleifer and Roblert Vishlny investigate
ible technical economiiies of scale and scope bIut some of the sarme terrain as Chandler-the wave
the ability of fir ns to exploit these economies is of unrelated diversification followed by a wave
limited bry their entreprenleulrill skill in guidinig of restructurling and retrenchmiienit. Shleiferi and
complementary investmiienits and theiri adminis- Vishlny review the available evidence and coIntrative
skill in coordination of the resultaiit clude that Unrelated diversificationi did inot
operations. Thus, it is the managerial capabilities improve economiiic efficiency. Unrelated diversiof
the corporate office that ultimately deteriniiies fication was carried too far in the 1960s, they
the size, scope, and success of the enterprise. In argue, because of antitrust enforcemiienit as well as
this paper, Chandler uses Goold and Campbell's agency problems connected with multildivisional
[1987] topology of headquarters styles, identifying structures: 'The M-form b egot the monster of
those usinig purely financial controls as essentially the conglomerate.'
administrative and those using strategic planning What makes Shleifer and Vishniy's paper
or1 strategic control methods as perform-inig some especially interestinig is their treatment of the
entrepreneurial funictiois. He analyzes the recent efficient market hypotlhesis. Since the stock
histories of British and U.S. firms and concludes market responded to conglomerate acquisitions
that multibtusiniess companies employinig financial in the 1960s, many researchers have conclutded
controls have been successful only wheni they that they created value. This paper argues that
have restricted their ownershiip to firms in services the stock market was merely reflecting the
and in simliply mature indtiustries. Where indtiustries mistaken beliefs of ai majority of investors.
are mature, btut complex and require substantial Drawing on1 their research on1 arbitrage and
investments, headquarters Unlits must engage in market fads, Shleifer and Vishlny contend that
strategic control. And where complexity is fads persist because it is too costly for the bestcombinied
with techniological advance, head- informiied investors to bet against them.
quarters offices must supply entrepreneurially The boom anid btust of conglomerates is a
oriented strategic planning.
conveniienit vehicle for this argument, but its
As in Chandler's other works, many of his implications extend well beyond the issue of
COnCIluSiOlnS fit easily within an 'economilizinig conglomeration. Evenlt studiies, usinig stock marinstitutionial
economiiics framework. Thus, for ket residuals, have become a staindard way of
example, the fact that advancing techinology investigating the 'value' of various policies and

2-4 R. P. Riwnelt, D. Schendel andt D. 1. Teece
strategies. If these studies do not really measure source of competitive advantage, and in favor of
value, bIut only what investors thiniik is value, stressing the importance of economiziig. It argues
theni this whole methodology may be significantly that whereas the field of strategy shoulld be
weakened.
concernied with first-order economizing
Richarid Nelson's paper addiresses the questioni (4rectangles'), it has impor-ted doctrinies from
of how andi why firms differ, an extremely deep idiustr-ial or1ganizationi economics whichi are
questioni in strategic management. If different focused Onl secondi-or-der economizing
firms display differenit levels of perforimianice or ('triangles'). Williamson conteidis that if strategic
competitive advantage, despite competitioni, then maniagement is to unilock the souices of long-runl
the r easons for these persistent differences r eveal competitive advantage, and if it is going to rely
the basis of competitive advantage. In this paper on economic thinikinig to assist it, theni it
Nelson tackles the especially difficult versioni of oughit not to r ely so uniciritically on economic
this question: how discretionary consider-ations- perspectives whicih appeal to market power
sucih as the strategies andi structures adopted by (strategies that restrict product competition) as
management-lhelp uniider-pin suchi differences. the souice of advantage. Rather, the field shouldi
Althougih the existence of discretionar-y differ- develop more of an efficiency perspective-that
ences is comfortable for many studenits of being good at what you do andi avoidiing waste
strategy, it is at odds with neoclassical microeconi- is more importanit thani exploiting switchinig costs
omic theory, whicih Nelson sees as 'badly limited' or1 playing oligopoly games.
and hence unihielpful to the field of strategy. It Note that Williamsoni's economizing firm is
is badly limited because it is often too abstract miles away from Porter's lowv-cost pirodlicer;
andi r arely deals with economiiic aggregates smaller the economiiizer is not necessar ily efficient at
thani the industry, and because economists see productioni, but in the broad ranige of businiess
the economic problem as basically about getting funictiois. For example, the economiiizer may be
private incenitives rigit, not about identifyinig the very efficient at managinig the transitioni from
best things to do, and how to do them. In this design to productioni, or at tailoring produicts to
regard, Nelson andi Williamson see eye-to-eye. local tastes. Williamson's positioin on this issue
Neither has much time (nor- do the editors of is at variance with the traditional (economic)
this special issue) for the long, but gradcually assumption that firms are 'on their cost curves.'
erodinig traditioni in economics which treats firms If firms are assumedi to be technically efficient,
as black boxes.
the problem is simply to determine the level
Nelson stresses that if economics is to infoirn of oUtpUt. Williamson, by contrast, sees the
fundamenital questions in strategy, economists fundamenital challenge as organizing and governmust
break away from the assumptioni of clear ing activities so as to eliminate waste.
and obvious choice sets and corir ect understanding Because tr-ansaction cost economics, which
of consequenices of making various choices. He Williamson pioneer-ed, is concer-ned with firstoffers
a Schumpeteriani perspective, one which or-der economizing, he suggests that it has much
stresses the importance of fundiamental uncer- to offer the field of strategy. (Of couise, there
tainty, perceptions about feasible paths, andi trial are other approaches which focus on economizing
and erir or learning, as a better way to come too.) His paper goes on to identify several
to grips with firms andi firnm behavior. More importanit insights from transactioni cost theory
particularly, he argues that it is the differenices whicih are r elevant to strategy. Transactioni costs
among firms in their abilities to gener-ate and are the costs of organiizinig the economic system.
profit from ininovation, not differenices in com- Inrnteial structures, managerial contiol systems,
mand over particular techniologies, that are the and the positioninig of the boundaries of the firm
basis of dtuirable, difficult-to-imitate differences all impact tranisactioni costs. Williamson outlinies
in firnm performaice. It is the issue of firms' a framewor-k which helps explain why these costs
caIpmlilities to inno tate whicih the strategy and differ across organiizationi forms andc theni shows
competitiveness literatur e oughit to be more how the framewor-k applies to several issues in
forthiright in tackling.
strategic managemenit.
Oliver Williamson's paper is a call to arms. Michael Porter has played the key r ole in
The war is against the idea that strategizinig is a shapinig the currenitly doominant perspective on1

Strategic Managemenlt andl L conomics 25
comrpetitive strategy. That per-spective attempts industry, in certaini locales. In those loca-ttions,
to explainl how a particular configuration of cluster-s of competing and supporting firms have
activities, riesources, and indLustry characteristics growni up which collectively embody a grea-It (leal
combine to shield a firmns profits from rapid of specialized know-how. One of the most
competitive erosionl. In this paper- Porter mnakes intriguing ideas a(lvanced here, one drawn fr-om
the point that the dominant per-spective explains Th,e (Coinpetitive Advisantage o( Ntdtionis, is that
competitive success at a given point in time, strenigtlh is frequenitly the fruit of adversity.
solving what he labels the cross-sectional ptrobleln, Whait seems to keep us fromii making better
but that the dynamic process by which firms progr-ess on undlerstanding managerial choice?
perceive or attain supenior market position, what Po rter suggests that a key missing elemenit is a
he labels the time series or lonigitiudinatil prolleml, theory of action that is not rooted in chcoice, but
is much less developed. His paper attemipts to whiclh deals with creating new optioins aind
suggest whalt we know and what we need to discovering new aipproaches. In this sense, he
know to develop a theory of firm performance joinis forces with Nelson wvho also calls for a
linke(d to managerial choice, initial conlitions, mlo(el of search aind discovery to help inform
ancl environmental circumstance.
the discussion of innovation and change.
Porter begins with what he labels the chain of Thl-ee papers in this special issue addiress the
causality (Figure 2 in his paper). In his cross- connections between modern garme theo ry and
sectional explanationi, success flows fromii advan- str-ategic management. Garth Saloner providles a
tage inher-ent in indlustry structule ancd relative viewpoint on the usefulness of game theor-etic
position. Advanitiage, in turin, is dlue to the mcodcelinig in strategic managemienit. His basically
configuration of activities. The activities provide positive view is conditioned by two imajor
support to the configuration, in turn, becaslLlse of cautions: there is no evidenice of any real-wvorld
drivers (i.e. activity-level souices of advantage). use of game theory by companies, anld game
Backing up longitudinally, activity configuLr-tions theoretic approaches are 'too hard' to be applied
and (driver-s arise from 'initial conditions' and to ainything but very simple 'boiled down' mlodels
managerial choices. In the paper he then moves of reality. The secondcl issue mayV Of Coulrse, be
even fLurther back, noting that initial conditionis the reason for the first ancd it is interesting to
a(re the result of past managerial choices, luck, speculate on wlhat consequences wotuld flow tfrom
and the nature and(l quality of the local (business) the invention of a game theor-y 'engine' thalt
environlment. One can, of cour-se, theni step quickly and clearly yielded the equilibrria of very
back again, seeinig the character of the local complex models.
environimlent as dlue to the policy choices miacle Saloner's enthusiasm for game theoretic modlels
by a variety of institutional leaders and natural survives these two considerationls and is based
physical endowmlenlts. This chalin of causality map on their necessity, the 'audit trail they provide,
not only helps unify Porter's own theorizing on their metaphoiricatl value, and their growing
competitive strategy, it also clarifies the differenit impor-tanice in empirical research. Once you begin
levels at which explanation can be attemptedl or to considler the reactionis of rivals to one another's
equilibr ium assumptions appliedl.
moves, he argues, you are doinig game analysis,
Wly do soImie milanagemienlts make the r-ight and the cuiirrent theory is simply the cdistilled
choices in selectinlg products, industries, ancd wis(lom about the most sensible way to (1o it.
activity confiurlations? Porter reviews the degree The great value of explicit modeliing is the clear
to which game theory, commitment views record of assumiiptions and logic-the audit trail-
(Gheniawat, 199 1), ancd the resource-basedl theory that permits others to verify aniid miodify one's
of strategy can provide answers. Not surprisinigly, analysis. Saloner (dismisses the use of game theory
none (loes the job, but we obtain insights aibout to cialculalte actual behavior, stressing insteaid the
each wapproach alonig the w\ay. Where, then, to value of understainding why certain results obtain
turnl'? Porter's (1990) OWIn CuIienit answer is Iluck in certaini situations anid thie possibility of novel
andl local environmiiienit. Drawing on his researcl insights. As work pr-ogresses, lie argues, researi-ch
in Thle Cotnpetitive Advc,antage of Nations, he will build up a mosaic of m ciels, each providinig
argues that managerial insight dloes not spring insights about a particular aspect of striategic
up ranclonmly, buLt is concentrated, in each inlteractioin. Gamile thieorrV's coiltribLution to stra-

26 R. P. Ruinielt, D. Schendel andt D. 1. 7Teece
tegic management will be the sum total of the problem of too many explanations and too
insights this mosaic provides.
many equilibria provides opportunities for good
One of the niost challenging qtiuestionis Saloner empirical worlk to point the way.
tackles is the reasonableness of the rationality Steven Postrel's paper is a comment on
imputed to players in game theory. He points Saloiier-'s anid Canier-er-'s discussioins of game
out that in many games sucIh aIS COurinot theor-y and strategy, especially the 'Pandora's
competitioni the rationality reqluired is not very Box' problem that the theory has too few
great. However, in many moderni game models, constr-aints on gener-ating explanations of
equilibria are based on quite complex consider- behavior. Usiing a humor-ous setting, Postrel
ations, straining the credulity of the rationality shows how a game-theorist could build aI model
assumption. Ther-e is no escape, he suggests, to rationalize unreasonable behavior. His point
froIm usinig judgemenit on this matter and notes is that game theory is not really a theor-y of
that youi owIn play in a game might be affected strategy but is only aI methodology for analyzing
bvy whether your oppoinenit was David Kreps, a games. Other than rationality, the sutbstantive
fourtlh grader, an average undergraduate, or the theory presenit in a model is in the assumptions,
CEO of a typical U. S. firm.
not in the mechaimcs.
Colin Camerer also addresses the utility of These theni are the papers offered in the special
game theory to strategic management. Like issue. All offer infor-med and inter-estinig views,
Saloner, Carmerer is concernied with the sparse- and we hope will in their owIn right inifoirn the
ness of moder-n analysis, termed 'no fat' modelinig, reader on boundary conditiois, futurie challenges,
and with the fact thit game analysis is hard. If and research opportuniities that lie in considerinig
neoclassical analysis is like eating with a fork, he economic reasoning oni strategic management
analogizes, game theory is like usilng chiopsticks.
Game theory is not only hard, Camerer stresses,
it is also too easy. That is, it is too easy to
issues.
generate explanationis for all sorts of behavior.
This happenis because behavior is not just
SUMMARY AND CONCLUSIONS
determined by preferences, but also by the We have tried to show the relationiship between
presence of hidden information.
economics anid strategic maniagemerit in this
The heart of Camerer's essay addresses the essay. It is more thani some admit, anid less thani
rationality assumptioll-is it too demandinig to some would hope. We have tried to show that
be reasonable? His owIn laboratory work on economics anid strategic maniagemenit are not the
gamiies shows that people do not arrive at same thing, in research or in practice. We have
strategies uSillg the cognitive methods of the tried to indicate that it is the new economics that
theorist. Consequenitly, theoretical equilibria are offers the most promise bIut it is old economics
usually approached only after repeated play. in the form of industrial orgainizationi that, thus
Nonetheless, through processes of adaptation far, has miade the greatest contriblutiOl. There
anid/or evolutioll, theoretical equilibria are cani be little questioni that the development of
approached. Camiierer also pOIlntS out that the the strategic mainaigemilenit field has blenefited
strict rationiality assumptiolIs of the theorist are from the influenice of economilics, I ut the influenice
sometimes only ani anialytical conveniienice: the is not unlidirectionial either.
samile equilibria cani often be justified with weaker Where do we go from here"? One trend that
assumptiolIs, though the anialysis is more difficult. has recently emerged aind deserves mentioni is
Despite these anid other difficulties in living the new attentioni to interinal orgainization.
with game theory, Camerer favors welcoming it Strategic malnaigemenit is incr-easinigly concernied
into the strategic maniagemenit faimily. Like with uliderstaiidinig the addministrative processes
Salonier, he feels that it is the best way to look that select aind coordinaite the firm's activities.
at interactionis amonig alert rivals. In additioni, The capabilities of the firiml, aind the asset
Camnerer sees opportullities to inform areas of structures that accuLImulalte, appear central to
interest to strategic mainagemenit such as the advaintage aind success. The assets that miatter do
properties of collective resourlces (reputationis not appear purely physical or separable. The
anid capabilities). Finally, he argues that the COnljulnlCtiOnl of physical and intaingible assets

Strategic Manageinenit and Economics 27
results from inniovative milaniagerial choice aind stl'lctLlle a!1d ecoInomic performance: A test of
actioin not easily duplicated. About such miatters
the new economics cited aind discussed here,
both in the papers, aind this essay, are just
beginniniig to have somethinig to say. However.
the flL.ltidivisionlal hylpotliesis. Blell Jolurnarzl ol
[E'conomics, 9. Siri-inig 1978, pp. 106-122.
Barney J. B. Strate-ic factor markets: Expectations.
ILcIk, andI buLSilless Strategy', Maniagemenit Science,c
32, Octobeir 1986. pp. 12'31-12 41.
in this new aind complex realm, economilics will Bigg.adike, I. E. Corporate Diversification: Entry,
be only one of the logical systemlls ill use. Where
organizational relationships turni oni exchainge
and oni individuLal incenitives, various economic
approaches will have much to say. Where the
Stagy, and Pcr ,f)ro ance, Division of Research,
I larvard Businiess Sclhool. 1979.
Bostoni ConSuLltillg (I ro1LIp. PS)cspCCti1'es oil Expericice
Bostoni ConIsultilng (Gr1oup). Bostoni, MA, 1968, 1970.
BoUldCing, W. aInI IR. Staelin. En'viiviiilenit, market
coordiniationi aind accumulaltioni of knowledge is
key, aind where patterns of belief aind attitude
are importanit, other disciplines will have more
to say.
share, and rnarket power', Maniagemiient Science,
10. 1990 ppI. 1160-1 177.
BuLckley, P. J. and Ml. (Casson. 17w Future ol' the
Mliitid(ttioatiol Enterprise, Macmillan, New 'York,
1976.
Along with the interinal turin taken by research, Caves, IR. E. and M. E. Porter. Fromil entiry barriers
comes increasing concerin over dyniamic expla- to m11obility balrrier's: C'onjecCtuIral dIcCisiols nid
niationi. Gaime-theory brinigs a fanaitical attentioni
to sequenices of action aind reaction, histor-y
provides stories of chalilenige aind riesponse,
ininovationi is inherenitly dynaimiic, aind so aire the
contrived dletereniice to niew comillpetitioni', Ql,ar,terlv
Joliril(l o( Ehconomics, 91, M.y 1977, ppi. 241-261.
Chandler, A. D., Jr. Strategy (IIId Structure. The MIT
Press, Cambridge, MA, 1962.
Chandler, A. D., Jr. Scale andi(l Scope. 1The iD)vnamics
processes whereby skillful mainaigers make sense
of anid respond to ain evolving environimenit. In
the more practice-oriented side of the field there
is great interest in time-based competition aind
in the interplay betweeni product-miairket striategy
0] Industrial Capitalism, I arvard l Unliversity Pr ess.
Canibridtg. MA, 1990.
Coase, R. H I. The nature of the fiii.il', [Economiica, 4,
1937. pp. 386--406.
Conniier. K. R. 'A historical comparison of r'esouIrcebased
theory and fiVCe scIhools of thought Within
anid the developmenit of organizational capabili- ilnIustriLl oirganization ecollomilics: Do we have a
iew
ties.
tlheory of the firnm?' Journal ol' Alunagement,
17, 199'1, pp 1. 1 51-54.
More importanit thain these trends in subject Demilsetz, I I Il(iLstl y sttl'lctLlleC, market rivalry, and
miatter is the graduLal enlairgement of striategic publicb pIoliciC', Iolititil o(' Law and Economics, 16,
mainaigemilenit to include disciplinie-based scholar-s April 1973, ppI).
who shaire OuIr interest in ulider-standing the
direction of enterprises. CaLutioll in this regaird
is only reasoniable. Striategic malnaigemenit scholars
are smoall ill nulimiber- anid stlrLlggle to maiaitaini
integrationi aimonigst fr-ami-iewor-ks aind between
theory aiid piractice; imlost disciplinles ar-e populouS
aind tend to compete, riather thain cooperiate, with
other disciplines. Nonetheless, initellectual and
social mechlianisms must be foulid to miake the
very best of the discipline-based scholars welcome
in strategic manaiagemenit. Their participation aind
va-iety are key to the long-rull SuIVival of our
field.
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