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Influence of economics on strategic management

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The influence of economics on strategic management has been considerable in the last two decades.

Simple prescriptions in the tradition of Mintzberg’s prescriptive and descriptive schools have been augmented by the infusion of economic theories into the strategy literature.

The economic perspectives are predominantly concerned with the aspects of efficiency and the competitive nature of the survival of firms defined in various ways.

The development of the economic theories has led to a situation in which the extreme assumptions of rationality and maximization of all known available choices have been relaxed or modified.

This development of economic theories increased their relevance and inherent potential for strategic management (Rumelt et at., 1991: 14).

When taking phenomena such as uncertainty, information asymmetry, bounded rationality, opportunism or asset specificity into consideration, basic economic concepts are no longer able to deliver convincing explanation patterns.

In various combinations these phenomena led to new subfields in economics to be used in strategic management approaches.

In the literature four such influential new sub-fields are identified (Rumelt et al., 1991: 14):

1. The evolutionary theory of the firm and of technological change takes uncertainty and bounded rationally into account.

This theory regards firms as more complex representations than simple production possibility sets.

Internal arrangements evolved to be at the center of attention. In this development the concept of knowledge was elaborated in different ways to emerge as an important explanation of firm advantage.

2. Transaction cost economics build on the combination of bounded rationality, asset specificity and opportunism.

Transaction cost economics are seen as the stream of organizational economics with the “greatest affinity with strategic management” (Rumelt et al., 1991: 14; 1991: 27), because of common interests in organizational forms and research in the reasons for specific institutional design.

3. Agency theory builds on the combination of opportunism and information asymmetry.

The agency theory approach is interesting for strategic management since it deals with strategic decision processes, in which actors try to pursue their self-interests.

Agency theory tries to provide systematic advice to deal with the resulting problems Knyphausen-Aufsess, 1996: 90-1).

4. In game theory, information asymmetries and/or the timing of irreversible expenditure in terms of asset specificity is the focus.

Game theoretic concepts such as the idea of commitment (Ghemawat, 1991) or reputation give new insights into competitive advantage realization in strategic interactions with competitors.

Each of these concepts “generated insights and research themes that are important to strategic management” (Rumelt et al., 1991: 14).

The outlined concepts had major influence on theory-building in the field of strategy by influencing the main contributions to the field of strategic management.

These mainstream concepts all have economic roots and explicitly deal with strategy and competitive advantage realization, and therefore form the main theoretical pillar of this book.

Core contributions to strategic management (with economic roots) stern from the field of industrial organization as modified by Porter (1980, 1985), the resource-based view as promoted by Barney (1991) or Peteraf (1993) and, more recently, the dynamic capabilities view as fostered by Eisenhardt and Martin (2000), and Teece et al. (1997).

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