Economic Foundations Conclusion – Part 2

This is the second part of the review of the Economic Foundations of Strategic Management. Part 1 here. Transaction Cost Theory Key idea: There are costs associated with having operations inside the firm (hierarchy) or outside the firm (market). Assumptions: Self-interested behavior, bounded rationality. Uncertainty and risks. Unit of Analysis: Transaction Costs. Seminal papers and …

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Economic Foundations Conclusion – Part 1

This week, I spent my time reviewing theories used in strategic management that were derived from economics or grounded in economic concepts. In one of my classes, we were encouraged to summarize theories by looking at the assumptions they make, how they are similar to other theories, the unit of analysis, and the predictions that …

Dynamic Capabilities

Like the Resource-Based View, dynamic capabilities theory emerged in the field of strategy. This theory is grounded in Neo-Austrian or Schumpeterian Economics which views competition as a process (Alchain, 1950; Schumpeter, 1950; Nelson & Winter 1982). It is similar the RBV of the firm in that it views competitive advantage as the result of valuable capabilities …

Resource-Based View

The resource-based view (RBV) theory emerged in the field of strategy, however it is firmly rooted in economic concepts. It draws on Penrose’s (1955) theory of the firm, transaction cost analysis (Williamson, 1985), and the Neo-Austrian work of Nelson and Winter (1982). One of the core assumptions is that firms are heterogeneous. This, it is …

Transaction Costs

Transaction cost theory focuses on an organization's transactions. The central idea is that when organizations make decisions about their key operations, they either incur transaction costs or production costs. The transaction costs include costs and difficulties associated with the searching for the best supplier, as well as the creation implementation, and monitoring of a contract. …

Agency Theory

Agency Theory emerged as a response to managerial theory (Jensen & Meckling, 1976). The core idea is the relationship between stockholders (owners, principals) and managers (agents). This is often described as the principal-agent relationship. This theory assumes that managers (agents) may pursue goals that are not always aligned with those of their principles (stockholders). As …

Managerial Theories

The managerial theories of firm growth are concerned with the role of management in the productivity and performance of the firm. Some of the early work was conducted by Bearle & Means (1932). They discussed how in the modern corporation the control of the firm was no longer in the hands of the owners. Their …

Industrial Organization Economics

The Economic Foundations of Strategy post set the stage to discuss more deeply how economics has shaped the study of strategy. Here, I will discuss Industrial Organization Economics (IO). In broad terms, IO examines the structure of the firm and market. In order to do so, researchers typically use the Bain/Mason Structure-Conduct-Performance Paradigm. The main …

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 …