Posts filed under ‘Strategic Management’
Shifting or Rotating Demand?
| Lasse Lien |
For O&M readers interested in competitive strategy, I would like to recommend a recent paper in AER by Johnson and Myatt: “On the Simple Economics of Advertising, Marketing, and Product Design” (vol 96, no. 3). The authors analyze a weirdly understudied topic in economics, namely rotations of the demand curve. This means that firms by their choice of advertsing, marketing and product design can influence the dispersion of customers valuations for a product. Take for instance product design. A universally attractive new feature will simply shift the demand curve outward, while a new feature that pleases some customers and displeases others will lead to an increased dispersion of customers valuation, that is, to a rotation of the demand curve. (more…)
The Treatment of Frequency in Transaction Cost Economics
| Peter Klein |
Every schoolboy knows that transactions are characterized by asset specificity, uncertainty, and frequency. (Every schoolboy schooled in transaction cost economics that is.) Yet, while asset specificity and uncertainty have been treated exhaustively in the literature, frequency has become the red-headed stepchild of the transaction cost triple.
As I read the TCE literature, frequency shows up in at least three distinct forms, not all of them compatible. (more…)
Industrial Entrepreneurship in Early Modern China
| Peter Klein |
Coase, Williamson, and others have long called for comparative institutional analysis across countries and across time. How do various institutional arrangements perform under alternative institutional environments? We are only beginning to understand this question. (Important contributors to the literature include Witold Henisz, Tarun Khanna, Masahiko Aoki, and various members of the Centre ATOM, among others.) Can changes in the institutional environment be regarded as exogenous “shift parameters,” as Williamson has articulated the problem, or is there a more subtle, complex co-evolution among institutions and organizational form?
These issues are raised in Madeleine Zelin’s The Merchants of Zigong: Industrial Entrepreneurship in Early Modern China (Columbia University Press, 2006), reviewed here by Carol Shiue for EH.Net. Zelin’s new book traces the history of the salt merchants of western Sichuan province, who created one of the first, vertically integrated industrial enterprises in modern China. Though not explicitly a comparative study, Zelin’s volume provides a useful companion to the landmark studies by Chandler and others of the history of modern enterprise in the West. As Shiue observes, “A recurrent theme of the book is that the business arrangements seen in the Chinese salt industry belie not only previous perceptions about the predatory influence of the ‘feudal’ state on entrepreneurial incentives in China, but also the purported uniqueness of Western business practice.”
See also Shiue’s earlier review of Zelin, Ocko, and Gardella, eds., Contract and Property in Early Modern China (Stanford University Press, 2004).
More on Strategic Factor Markets
| Nicolai Foss |
Jay Barney’s 1986 paper, “Strategic Factor Markets: Expectations, Luck and Business Strategy,” is a classic of recent strategic management literature and one of the key contributions to the resource-based view. It is also one of those papers where the argument — in this case that firms can only gain a competitive advantage if they buy at least some inputs at a price below the net present value of those inputs — seems so irritatingly obvious — that is, after you have read the paper. (more…)
Dissing Prahalad
| Peter Klein |
Management theory superstar C.K. Prahalad, having conquered the corporation in Competing for the Future, then turned his attention to global poverty. His plan urged firms to tap into the purchasing power of the world’s poorest consumers, creating large gains for both buyers and sellers. But there are doubters.
C.K. Prahalad’s theory on the purchasing power at the “bottom of the pyramid” (BOP) has a legion of enthusiastic supporters. The BOP argument that savvy multinationals will enrich themselves and the poor by selling to this market is “at best a harmless illusion and potentially a dangerous delusion,” according to Michigan professor Aneel Karnani. His new working paper, Fortune at the bottom of the pyramid: a mirage, is the strongest criticism I’ve seen of Prahalad and his devotees.
This is from Christine Bowers at the World Bank’s PSD Blog. Karani’s paper calls the BOP argument “seductively appealing, [but] riddled with fallacies.” Says Karani:
Not only is the BOP market quite small, it is unlikely to be very profitable, especially for a large company. The costs of serving the markets at the bottom of the pyramid are very high. The poor are often geographically dispersed (except for the urban poor concentrated into slums) and culturally heterogeneous. This increases distribution and marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases cost of doing business. Another factor leading to high costs is the small size of each transaction.
Read the paper here.
What Do We Really Know About Organizations?
| Peter Klein |
Recently a prominent economist, having discovered O&M for the first time, emailed me: “So what have we learned about how organizations really, really work in the past decade?”
I was in an airport when I received the query, and didn’t have time to prepare a thoughtful, well-crafted response. Rather than ignore the question, however, I replied with a few off-the-cuff remarks. After reading my remarks, I’d like readers to respond with their own brief thoughts. I.e., if you had to answer this question, quickly, in 250 words or less, what would you have said?
Here’s what I wrote (with a few small touch-ups): (more…)
Four Theories of Profit
| Lasse Lien |
The word equilibrium should perhaps be used sparingly here in this Austrian stronghold. Nevertheless, I shall dare to use it once or twice below. One of the biggest buzzes at the recent Academy of Management meeting in Atlanta was Richard Makadok’s paper, “Four Theories of Profit and Their Interaction.” Makadok’s main point was that we have four main classes of theories/mechanisms explaining positive profits in equilibrium, and that while we know a great deal about each theory individually, we do not know much about their interaction. I certainly agree that studying the interaction between such theories is worthwhile, and there is a lot to like about Makadok’s paper (which I BTW only have an older version of, therfore no link). What I am less sure about is what these basic theories should be, and how independent the four theories suggested by Makadok really are. (more…)
Take That, Berle and Means
| Peter Klein |
When the Board and senior management of media company VNU agreed to a buyout by a private-equity group headed by Kohlberg Kravis Roberts, shareholders did something usual: they rebelled.
The rebels — including some of the world’s largest mutual funds — proposed their own business plan and new executives, and tried to force the chairman to quit. “We took the initiative to defend long-term shareholders’ interests,” says the group’s leader, Eric Knight, head of New York-based Knight Vinke Asset Management.
After a months-long battle, shareholders eventually won a modest increase of nearly $250 million from the private-equity firms — or 2.5% more than the original deal. But that improvement was less significant than the fact that shareholders had rebelled, proposing a do-it-yourself restructuring plan that competed with a big private-equity offer accepted by management and the board.
So reports the W$J in its last Friday’s issue. The story is pitched as indicating a more-general backlash against LBOs. Warren Buffett is quoted as warning his shareholders against “deal flippers.” However, there is plenty of evidence that LBOs, on average, generate long-term gains, not only for shareholders but also for the economy as a whole. (Look for a major contribution to this literature from my PhD student John Chapman.) And isn’t it ironic to find stockholders taking an active stand against private-equity investors, given Michael Jensen’s warning of the “Eclipse of the Public Corporation”? Maybe the public corporation has life in it still.
One More Stride Forward in the Struggle Against Collectivism
| Nicolai Foss |
“Individuals and Organizations: Thoughts on a Micro-Foundations Project for Strategic Management and Organizational Analysis” by Teppo Felin and me has just been published in David Ketchen and Donald D Bergh, Research Methodology in Strategy and Management 3. Here is a working paper version. And here is the Abstract:
Making links between micro and macro levels has been problematic in the social sciences, and the literature in strategic management and organization theory is no exception. The purpose of this chapter is to raise theoretical issues in developing micro-foundations for strategic management and organizational analysis. We discuss more general problems with collectivism in the social sciences by focusing on specific problems in extant organizational analysis. We introduce micro-foundations to the literature by explicating the underlying theoretical foundations of the origins of individual action and interaction. We highlight opportunities for future research, specifically emphasizing the need for a rational choice program in management research.
A Muddle on Vertical Integration
| Peter Klein |
Slate’s Daniel Gross offers a hopeless muddle on vertical integration in his latest Moneybox column. Citing several examples of forwards integration mentioned in a recent WSJ article, Gross proclaims “the return of one of the great industrial developments of the late 19th century: vertical integration.” But the reasoning is a mess.
First, there’s no systematic evidence that vertical integration ever went away. We have plenty of anecdotal information about outsourcing, increased use of networks and alliances, “refocusing,” and the like, but little systematic evidence for a comprehensive, economy-wide trend toward vertical dis-integration. (more…)
Firms, Strategies, and Economic Change
| Peter Klein |
My review of Tony Yu’s Firms, Strategies, and Economic Change: Explorations in Austrian Economics (Edward Elgar, 2005), written for the Quarterly Journal of Austrian Economics, is available for preview here.
All Firms Are Not Alike
| Peter Klein |
This may come as a shock to regulators, but all firms are not alike. No one-size-fits-all regulatory policy can possibly be effective. Yet, SOX and similar governance codes impose a host of blanket requirements (audit committees, majority of outside directors, etc.) on all companies, large and small, focused and diversified, profitable and unprofitable, and so on. Economically literate regulators must be schooled in industrial-organization models in which the “representative firm” is identical to every other firm.
This new paper by LSE economists Sridhar Arcot and Valentina Giulia Bruno examines heterogeneity among governance choices at UK companies and finds that the best-governed firms are not always those that conform to the “best practices” imposed by regulators.
A [governance] measure which accounts for different choices by companies of corporate governance is significantly associated with performance as against measures based on a tick-box approach, which are not. We find that companies departing from best practice for valid reasons perform exceptionally well and out-perform the fully compliant ones. In contrast, mere compliance with the provisions of the Code does not necessarily result in better performance.
(Via Professor Bainbridge)
Update: Dale Oesterle argues that uniform listing requirements for IPOs are depressing the US IPO market, suggesting that small firms should be allowed to make their IPOS over the Internet, as is allowed in the UK.
Scientific Progress in Strategic Management Bleg
| Nicolai Foss |
I have little doubt that strategic management as a field of inquiry has made significant strides forward in the last 3-4 decades. Let’s just ambitiously assert that it has made “scientific progress.” One has little doubt that an overwhelming majority of the Academy of Management’s perhaps dominant division, the Business Policy and Strategy Division, would agree with this assessment. This is not just bias; the BPS may be important because strategic management is a scientific success story. But on what grounds can we assert this? Here are some possibilities: (more…)
Roundup of Interesting Links
| Peter Klein |
Besides the links in the right-hand-side column below, O&M readers may find the following of interest:
- Work Matters by Bob Sutton, Co-Director of Stanford University’s Center for Work, Technology, and Organization
- Marketing Profs Daily Fix Blog by, you guessed it, a group of marketing professors
- Statistical Modeling, Causal Inference, and Social Science, for the research-methods geek in all of us
- Businesspundit, a general-interest site
Architecture
| Richard Langlois |
I too am at the Academy of Management meeting in Atlanta. And I have already run into Peter and Nicolai more than once.
It occurred to me that I ought to write about whatever important new idea I’ve picked up here. I now think that I see such an idea, and it would come under the heading of architecture. (more…)
Thoughts on Stakeholder Theory
| Peter Klein |
Yesterday I attended the Academy of Management session “Stakeholders: The Keys to Effective Strategy and Performance Measurement.” Panelists included Joe Mahoney, Russ Coff, Christos Pitelis, Tom Donaldson, Amy Hillman, Sybille Sachs, and Kathryn Pavolovich. I’m pretty much an unreconstructed Friedmanite on this issue so I went to raise my consciousness.
What I learned was interesting, but I still have several questions about stakeholder theory, at least in its normative version. (more…)
Property Rights at the AoM
| Nicolai Foss |
A host of economics approaches have been influential in strategic management research, inclucing transaction cost economics, and the highly overlapping approaches of information economics, game theory, and industrial organization theory.
However, property rights economics as developed by Ronald Coase, Harold Demsetz, Steven Cheung, and its perhaps most sophisticated contemporary proponent, Yoram Barzel, has not been much used in strategic management, save for discussions of intellectual property rights (a big problem with communicating principles of property rights economics is that most academics immediately associate to IPR which, of course, is just a small subset of the many applications of property rights economics).
Things may be changing, however. (more…)
Where Are the Academic Management Blogs?
| Peter Klein |
Our inaugural post noted the dearth of academic blogs in management, strategy, and other parts of business administration, compared with the many in economics and law. Tonight witnessed a gathering of the near-universe of academic management bloggers — Nicolai, Teppo Felin of orgtheory.net, and myself (Brayden King joins us later) — at the Academy of Management meeting in Atlanta. Why, we asked ourselves, are there so few academic management blogs?
One possibility is opportunity cost. Economists and law professors have fewer consulting opportunities than management professors, and hence more time for blogging. Another is that bloggers appropriate very little of the value their blogs create (OK, assume, arguendo, positive value creation), and business-school professors are too savvy to give away knowledge for free. (Of course, while that might apply to researchers in corporate strategy, which is all about making money, it hardly applies to those in organizational behavior and the other “softer” areas of management.)
I suspect another explanation. Blogging requires a certain temperment, a particular way of thinking. The best bloggers have not only catholic interests, but also — more important — a belief that they can explain a variety of interesting and important phenomena with a few basic principles, consistently applied, and in just a short paragraph or two. This is exactly the way most economists think. “Give me a simple model, and I can explain the world.” Those who prefer more subtle, complex, and ambiguous modes of thought are apt to find blogging an unsatisfying pursuit.
Strategizing, Disequilibrium, and Profit
| Nicolai Foss |
Stanford University Press has just published John A. Matthews’ Strategizing, Disequilibrium, and Profit. A 14-page sample is available here.
Matthews, who holds the Chair of Strategic Management at Macquarie Graduate School of Management, Sydney, has contributed for many years to what is sometimes called “industrial dynamics,” that is, the strongly empirically oriented intersection between process approaches to economics (evolutionary and Austrian views) and strategic management (mainly the capabilities and resource-based views). Accordingly, the main sources of inspiration for the current book are Schumpeter, who provides the overall dynamic view of the economy as an evolving system; Knight, who contributes a theory of profits, and Penrose who contributes a theory of the firm.
The book may be read as a frontal attack on strategic management’s dominant perspective, the resource-based view. (more…)
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