Strategic Management and Economics

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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
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