Economic Foundations of Strategic Management

Strategy draws on many disciplines. As discussed in the Strategy Background post, two of the main influences come from sociology and economics.

Today I will focus on the economic foundations of strategy. This post will be a broad overview of how economics has shaped the study of strategy. Additional posts will discuss theories in much more detail.

Economists, particularly those focused on industrial organization, had been studying issues that are relevant to strategy. For example, they looked at market structure, competitive behavior, vertical integration, diversification, and mergers and acquisitions.

Their research centered around the economic welfare of society. Most importantly, economists had a large body of theory, methodology, and evidence that could be used to address strategy questions.

The leap from theorizing about the economy to the organization was not very difficult. Thus, people trained in economics began to enter this field.

Some of the theories in the field of economics had an immediate application to strategy:

  • Industrial Organization Economics
  • Managerial Theories of the Growth of the Firm
  • Agency Theory
  • Transaction Cost Theory
  • Neo-Austrian Theories

Furthermore, some theories that have emerged in the field of strategy draw very heavily on economics:

  • Resource Based View of the Firm
  • Dynamic Capabilities
  • Knowledge Based Theories of the Enterprise

(Adapted from course notes)
(Flashcards and other resources here)

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