Strategic Management and Economics

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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
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