IVS Seminar

Seminar with

John A. Mathews

Professor of Strategic Management at Macquarie Graduate School of Management, Macquarie University, Australia.

Ricardian rents or Knightian profits: What are the appropriate goals of strategizing?

Abstract:

The recent period has seen a great deal of criticism of prevailing frameworks for strategizing, directed at the philosophical underpinnings of the RBV and at the SCP foundations of the Porter competitive forces framework. In this paper I take a different tack, and ask what is distinctive about strategizing as opposed to the efficiency-oriented economizing framework. I provide a framework for strategizing that draws on three currents in economics thought: (1) a theory of profits in disequilibrium founded by Frank Knight, in which the entrepreneurial role can be clearly seen as assembly of resources with a view to achieving positive NPV for every investment project; (2) a strategic theory of the enterprise, extending the Penrosean framework from resources to activities and routines; and (3) a Schumpeterian framework for entrepreneurial profits that are competed away through imitation.

I argue that such a framework accommodates not just the case of incumbent firms drawing monopoly rents in product markets (Porter) or Ricardian rents in strategic factor markets (RBV) but the more interesting cases of new entrants (insurgent firms) challenging incumbent positions through entrepreneurial initiatives. The Knightian theory of profits fits such situations, and should be carried over to form the foundation of strategizing, rather than being buried as a footnote in the neoclassical theory of the firm. The starting point for such a new perspective on strategizing is that Knightian profits can only be earned in disequilibrium; they are extinguished at equilibrium. This opens the way to the formulation of goals for strategizing that are different from economizing – such as increasing returns from building activity combinations (e.g. changes in supply chain); complementarities (synergies) within resource bundles; and learning by doing through the building of new routines. These are all traced back to management functions, and their formulation provides a fresh foundation for a unified view of management – as called for recently by such scholars as Hambrick.

If such a perspective is accepted, then it provides a fresh division of labor between economizing and strategizing. Economizing is concerned with microeconomic price-guided adjustments and equilibrium-based arguments concerning efficient use of resources. Strategizing is concerned with everything else – with innovation, networking, modularization, counter-cyclical market entry, non-marginal pricing strategies, formation of clusters and much more, all of which can be viewed from a unified perspective as taking place in disequilibrium. Firms involved in complex, fast-moving businesses need to be able to drawn on both perspectives.

A paper for the seminar is available for download below.

No registration is required. All are welcome.