In This Article Strategy

  • Introduction
  • Industry Conditions, Competition, and Performance
  • Interactions: Competitive Dynamics and Cooperative Game Theory
  • Competitive Heterogeneity
  • Boundaries of the Firm and Transaction Cost Economics
  • Alliances
  • Corporate Strategy, Diversification, and Growth
  • Behavioral Strategy
  • Strategy Process

Management Strategy
by
Tammy L. Madsen
  • LAST REVIEWED: 15 May 2017
  • LAST MODIFIED: 26 July 2017
  • DOI: 10.1093/obo/9780199846740-0071

Introduction

The strategy field seeks to understand: What drives differences in performance among firms? The field is a relatively young and informed by multiple disciplines—economics, sociology, political science, and psychology—and multiple paradigms. As a consequence, explanations of the drivers of differences in performance among firms benefit from the integration of multiple theoretical lenses, research methods, and techniques. This diversity informs a wide array of research topics (e.g., industry conditions, competition, and performance; industry evolution; competitive dynamics; competitive heterogeneity; boundaries of firm [make vs. buy]; alliances; diversification and corporate growth; resource and capability-based views of competitive advantage; behavioral strategy; and strategy process) and work that spans multiple levels of analysis—ecosystem, region, industry, interfirm, firm, and intrafirm. While this intellectual diversity has enriched the field’s progress, it also has led to a questioning of the field’s legitimacy, often within business schools. Despite these challenges and assertions that the field is fragmented, consensus remains that the field’s overarching focus is explaining differences in the performance among firms. Given this focus, drawing boundaries around the field poses challenges. For instance, research on organizational learning, networks, and managerial teams offer relevant theoretical foundations and methods to explore strategy questions yet are not necessarily situated within the core of the mainstream strategy domain. Contributions from these complementary areas inform many of the research contributions discussed in this article, but the article’s scope limits precludes separate treatment of all areas that intersect with the strategy domain. As a result and guided by the field’s central research question, this annotated bibliography provides an overview of the field’s core or mainstream areas, with specific attention to influential writings and those that detail the scope of contributions in an area. The research topics are presented in an order flowing from macro or industry-level topics to more micro or intrafirm and individual-level topics. Further, while the article strives to highlight foundational contributions within each research area, the breadth and depth of research in each area as well as a constraint on word counts preclude a comprehensive treatment. To address this issue, when available, each section references a recent review article as additional background.

Industry Conditions, Competition, and Performance

An industry is a complex set of relationships among firms, customers, suppliers, and providers of substitute and complementary products and/or services. Strategy’s initial view of industry competition and performance was rooted in neoclassical economics. Early work explored the structural barriers to competition as an explanation for industry performance and emphasized a one-way causal ordering of effects from structure to conduct to performance (e.g., Bain 1956). Often referenced as the Bain/Mason tradition, the industrial organization (I/O) view of the 1950s and 1960s provided strategy with a systematic approach for analyzing the degree of competition in an industry. Subsequent work formalized and expanded on Bain’s theory (Caves and Porter 1977, Demsetz 1973, Harrigan 1981, Porter 1980, Sutton 1991). For instance, scholars analyzed the implications of different barriers to entry and exit (Caves and Porter 1977, Porter 1980) and provided empirical results that challenged the efficacy of entry deterring mechanisms (Lieberman 1987). Research also explored the relationships between entry barriers and mobility barriers, directing attention to intra-industry structure and strategic groups (Caves and Porter 1977). The focus on the industry level of analysis and the emphasis that a firm’s performance depended on the attributes of the industry in which it competes (e.g., the structure–conduct–performance paradigm) contrasted with traditional strategy work that focused on understanding the internal business policies of firms (for a review, see Porter 1981). Empirical studies also emerged that argued for a reverse causal relationship where conduct influences structure or for a reciprocal relationship between conduct and structure (Sutton 1991). In addition, scholars in works such as Demsetz 1973 began to shift attention away from the industry level of analysis and to the intra-industry level and, in turn, the firm level of analysis. This research challenged the traditional I/O view and set the stage for subsequent work examining the drivers of performance differences among firms (e.g., industry versus firm effects; see Industry and Firm-Based Explanations of Performance Differences), the resource-based view (RBV; see Foundations of the Resource-Based View), and, more recently, the role of market categories in shaping competition (Cattani, et al. 2017). Examining competition from a system’s view, scholars (see Katz and Shapiro 1985) explored the conditions under which network externalities are likely to influence an industry’s structure and its evolution. For instance, when network externalities are potent and give rise to winner-take-all markets, a high level of industry concentration often persists. This line of inquiry motivated work on two-sided networks and platform-based models.

  • Bain, Joe. Barriers to New Competition. Cambridge, MA: Harvard University Press, 1956.

    DOI: 10.4159/harvard.9780674188037E-mail Citation »

    Bain’s work transformed neoclassical economic analysis of competition by defining the barrier to entry concept and exploring the effects of barriers to entry on industry profitability. His work spawned additional theoretical and empirical work that shaped the strategy field’s understanding of competition and industry profitability.

  • Cattani, Gino, Joseph F. Porac, and Howard Thomas. “Categories and Competition.” Strategic Management Journal 38.1 (2017): 64–92.

    DOI: 10.1002/smj.2591E-mail Citation »

    Combining research in I/O economics, strategy, and organization theory, this review article integrates and expands the research on categories and the competitive process.

  • Caves, Richard, and Michael Porter. “From Entry Barriers to Mobility Barriers.” Quarterly Journal of Economics 91.2 (1977): 241–262.

    DOI: 10.2307/1885416E-mail Citation »

    Building on work in I/O, this article offers a general theory of the mobility of firms in an industry. The authors articulate elements important to understanding competitive interactions such as exit barriers, shifts among strategic groups of firms, and characteristics of entry barriers (both partly structural and partly endogenous).

  • Demsetz, Harold. “Industry Structure, Market Rivalry, and Public Policy.” Journal of Law and Economics 16.1 (1973): 1–9.

    DOI: 10.1086/466752E-mail Citation »

    Demsetz’s work shifted attention away from industries and to the importance of intra-industry differences and, in turn, firms. Many of his insights apply to the concept of competitive advantage. For example, he notes that a differential performance advantage could stem from a combination of luck and uncertainty, or firm-specific insights.

  • Harrigan, Kathryn J. “Barriers to Entry and Competitive Strategies.” Strategic Management Journal 2.4 (1981): 395–412.

    DOI: 10.1002/smj.4250020407E-mail Citation »

    In an analysis of five industries, this work provides empirical support for the benefits of analyzing entry barriers and firms’ predicted responses to entry prior to entering an industry. “

  • Katz, Michael L., and Carl Shapiro. “Network Externalities, Competition, and Compatibility.” American Economic Review 75.3 (1985): 424–440.

    E-mail Citation »

    This study examines the primary sources of network externalities and their effects on competition and market equilibrium. Using a model of oligopoly, this study shows that network externalities give rise to demand-side scale economies that vary based on consumer expectations.

  • Lieberman, Marvin. “Excess Capacity as a Barrier to Entry: An Empirical Appraisal.” Journal of Industrial Economics 35.4 (1987): 607–627.

    DOI: 10.2307/2098590E-mail Citation »

    In a study of the chemical industry, Lieberman finds weak support for excess capacity as a barrier to entry.

  • Porter, Michael E. Competitive Strategy. New York: Free Press, 1980.

    E-mail Citation »

    Porter’s classic text introduces frameworks for analyzing industries and competitors, including the five forces framework and generic competitive strategies (business level). The text also discusses competitive positioning under different stages of an industry’s development.

  • Porter, Michael E. “The Contributions of Industrial Organization to Strategic Management.” Academy of Management Review 6.4 (1981): 609–620.

    E-mail Citation »

    This article provides a review of the I/O roots of strategy, summarizes the limitations of I/O theory, and identifies future research directions. The reference list provides critical readings for scholars of strategy.

  • Sutton, John. Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration. Cambridge, MA: MIT, 1991.

    E-mail Citation »

    Drawing on empirical analyses, case analyses, and game theoretic modeling, Sutton examines the relationship between market size and market structure. The findings indicate that the traditional view of the size–concentration relationship fails to hold in industries where entry barriers are endogenous versus exogenous (contexts with high advertising or research and development [R&D] intensity).

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