Strategic Management and Economics

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.