Has Strategy Forgotten About Rivalry?

2 April 2007 at 10:45 am Nicolai Foss 6 comments

| Nicolai Foss |

Austrian economists and other “process economists” have often argued that what is (or at least was) called “competition” in mainstream/neoclassical/orthodox/etc. economics has rather little to do with the real phenomenon. Hayek made the point famously and forcefully in his 1946 essay, “The Meaning of Competition,” and several Austrians have echoed him since then. (The best study of the transformation of “competition” (particularly, “perfect competition”) into the opposite of competition is Frank Machovec’s 1995 book, Perfect Competition and the Transformation of Economics).

It seems that strategy scholars may also have forgotten about rivalry.

Of course, strategic management would seem to naturally place active rivalry center stage. Indeed, in one of the founding contributions to the field, Michael Porter’s Competitive Strategy, rivalry is clearly emphasized. However, perhaps because of the dominance over the last two decades of approaches that, as has often been said, have a certain introspective character to them, notably the resource-based, knowledge-based, evolutionary, etc . approaches, strategy scholars seem to have sidestepped competition as a rivalrous process. In fact, they sometimes seem to have forgotten about competition altogether. Even Schumpeterian approaches are really more interested in games against nature than in games against rivals.

For admittedly impressionistic evidence, check out the most recent issues of the Strategic Management Journal (e.g., the May issue). There are papers, very fine papers, of course, about statistical methodology, alliances, diversification, top executive appointments, etc. etc. — all of which of course is relevant to and have a bearing upon the understanding of competition as a rivalrous process. But if truth be told there is very little that directly touches on the rivalrous market process.

As indicated the nature of our dominant theories play a role here. But perhaps there is also an implicit agreement that the understanding fundamentally this is the turf of mainstream industrial organization economists. Among the few prominent strategic management thinkers who stress rivalry as a crucial part of the strategic management discipline is Richard D’Aveni. And he does so from a Schumpeterian, non-mainstream perspective.

Entry filed under: - Foss -, Management Theory, Strategic Management.

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6 Comments Add your own

1. Teppo | 2 April 2007 at 11:00 am

The most recent AMJ (February) has a piece by Chen, Su & Tsai that cites some of the recent strategy rivalry stuff; so, work by Ken Smith, Walter Ferrier, Joseph Porac, Javier Gimeno, etc.

Though, in part your are right. Given the focus on differentiation, innovation and firm-level advantages on one hand (Barney, RBV), and collaboration/alliances on the other hand (Dyer & Singh; Powell) – rivalry gets sidelined a bit.
2. Chihmao Hsieh | 3 April 2007 at 1:06 pm

My guess is that the present and potential ambiguities associated with the term ‘competition’ may one day be associated with the term ‘rivalry.’ Especially to the extent that the term ‘rivalry’ is used to describe a state, rather than a process.

I read it somewhere (a reasonably well-known academic but I can’t remember who) that both IO economists and strategists are ultimately interested in helping us learn about maximizing social welfare. However, while IO economists believe that this goal is best served by minimizing industry concentration (where abnormal returns aren’t obtained by any actor, say, by eliminating or eschewing entry barriers), strategists believe this goal is best served by maximizing individual firm performance (where generally-speaking we precisely want to help actors obtain abnormal returns). Does this fundamentally oversimplify the distinction between these two camps? Perhaps.

While the above addresses two often-conflicting approaches to the maximization of social welfare, it’s not strictly speaking focusing on the welfare of stakeholders of a given business organization, or what one might term ‘organizational welfare.’ Organizational welfare would be approached from the perspective of ‘strategizing’ (loosely speaking, paying attention to competitors) or the perspective of ‘economizing’ (loosely speaking, paying attention strictly to oneself) (Williamson, 1991).

Strategizing is inevitable to some extent, insofar that valuable resources are limited. But it’s costly, and in all but the most fortuitous of situations doesn’t generate (e.g. ‘create’) value. Thus, increases in organizational welfare may be overcome by net losses in social welfare more generally. Shouldn’t many of the dollars spent on strategizing be spent instead on economizing and learning how to generate value? After all, while we’ve always known that our valuable resources are limited, it’s only in the last couple decades that we’ve had the technology to realize just how quickly we’re using them up.

If we are indeed ‘forgetting’ about strategizing, it may one day be considered a most beautiful forgetfulness.
3. Chihmao Hsieh | 3 April 2007 at 1:26 pm

> Of course, strategic management would seem to naturally place
> active rivalry center stage.

Incidentally, the use of the modifier ‘active’ in the term ‘active rivalry’ seems to suggest that use of the term ‘rivalry’ alone is already ambiguous to all of us. Unfortunately so.
4. Richard Makadok | 3 April 2007 at 8:24 pm

Nicolai, I can think of ONE recent exception to the disappearance of rivalry from strategy research.

— RJM
5. Nicolai Foss | 12 April 2007 at 2:23 am

Chihmao, Why should strategists be interested in maximizing overall social welfare at all? The relevant social system whose welfare function is being maximized is just different (firm, society). I know that this had been part of the marketing effort of the RBV (i.e., strategy based on the RBV does not harm societal welfare, whereas Porterian strategizing does), but it seems to me that social welfare max may at best be an unintended outcome of the RBV.
I am also baffled by your statement that “strategizing” as you define it (paying attention to rivals) only results in welfare gain in very rare cases. So, entrants that enter monopolized markets, competitors who introduce new superior products and processes, etc. — all paying attention to competitors — do not increase net welfare?? In fact, if indeed there is the association between the aims of strategizing and social welfare that you claim to exist, the more reason to pay attention to rivalry.
6. Chihmao Hsieh | 12 April 2007 at 2:30 pm

Hi Nicolai, what I described about this association between strategists and social welfare was actually written by somebody else, as noted. I was actually just trying to report it. While it’s an interesting take, I certainly would consider it dubious at best (as hopefully was indicated by my expression ‘Perhaps’; although now I see I should have said ‘Of course’).

Strategy scholars’ basic responsibility is to look out for the firm’s welfare, and by ‘firm’–and in some countries–that means strictly the shareholders in plain legal terms.

I gave ‘strategizing’ a very ‘loose’ meaning, as I myself explicitly acknowledged, basically for the more layman reader of O&M. But I have been called out. Certainly, ‘strategizing’ and ‘economizing’ are not technically mutually exclusive (Williamson, 1991: 76): Strategizing more directly relates to market power and economizing relates more directly to transaction costs. Perhaps I could have been stricter and used the term ‘zero-sum-game-playing’ in quotes instead…?