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STRATEGIZING, DISEQUILIBRIUM, AND PROFIT

Stanford University Press

Contents

Acknowledgments.............................................................................................................viiList of abbreviations.......................................................................................................ixList of Figures.............................................................................................................xi1 Introduction..............................................................................................................12 Capitalism Is Not and Never Can Be a Stationary System....................................................................153 Entrepreneurial Profits Can Only Be Earned in Disequilibrium..............................................................464 Rents versus Profits as Strategizing Goals................................................................................595 Strategizing Is Carried Out by Penrosean, Resource-Based Firms............................................................736 No Firm Is an Island: Strategizing in Networks............................................................................987 The Economy as a Whole: Strategizing Linked to Entrepreneurial, Industrial, and Evolutionary Dynamics.....................1208 Strategizing in Disequilibrium: Dynamic versus Comparative Static Frameworks..............................................1529 Toward a Unified Theory of Management 1...................................................................................67Appendix 1 Entrepreneurship and Economics: A Case of Shocking Neglect.......................................................181Appendix 2 Strategy and the Theory of Profit................................................................................185Notes.......................................................................................................................189References..................................................................................................................225Index.......................................................................................................................259

Chapter One

My aim in this book is to offer an account of strategizing by firms without introducing any of the equilibrium-based assumptions that are found in mainstream economics. The book is a sustained reflection on what strategizing might look like when viewed consistently from a disequilibrium perspective. My goal is to demonstrate that the interesting issues encountered in the strategy literature today-issues such as the strategizing involved in formation of networks, in innovation and technology licensing, in balanced versus unbalanced industrial development pathways, in the building of business models around modular systems, in seeking entry to industries during upturns or downturns-all share a common feature, namely that they are best illuminated and analyzed as disequilibrium phenomena. The assumptions of perfectly competitive equilibrium do not fit such situations and indeed destroy the possibility of fruitfully analyzing such situations from a strategizing perspective.

I develop a framework in this book within which these phenomena may be treated and elaborated as firms seek profits in a disequilibrium setting. This framework is grounded in a theory of the dynamic business system that is traced to Schumpeter, a theory of profits traced to Knight, and a theory of the firm traced to Penrose. In the framework offered, on the basis of the insights of these three giants of twentieth-century economics, firms are viewed as bundles of resource- and activity-systems, operating in markets for resources (traditionally, factors of production) and in markets for goods and services and where their strategic options are brought into focus, rather than equilibrium conditions. It is the entrepreneur's job to create such bundles, in response to perceived opportunities and activities supported by consumer demand. It is the management's job, as hired, to build the routines that connect the firm's resources with its current activities. Firms engage with such markets and seek to earn profits, defined in a Knightian sense as residual earnings after all contractual claims (incurred for use of resources) have been met over a defined time span. Profits earned through active search are contrasted with rents, which are viewed as passive earnings at imperfect equilibria. The markets in which firms engage are in constant disequilibrium, meaning that over time firms can never be sure of the commitments they are making and are always engaged in the testing of market conjectures. This is the essential entrepreneurial character of the firm. All these strategizing issues are contrasted with the firm as viewed in an economizing framework, where it is its responses and adaptation to shifts in prices, at equilibrium, that is the object of interest. The simple point is that real firms in real business settings need to be understood as acting in both strategizing and economizing mode.

The concepts in the book's title-strategizing, disequilibrium, and profit-have mixed histories, some cognitive overlap, and some dissonance. Strategizing, which I am using in an active sense, generally conveys a sense of firms' maneuvering for position, differentiating themselves from each other, and seeking competitive advantages over each other. By contrast, the concept of "economizing"-as introduced by Williamson (1991) in a well-known article-carries connotations of firms seeking efficiency and optimality. So strategizing is seen as unproductive maneuvering, as when firms charge excess prices and capture profits because of their monopoly market positions. Economizing carries connotations of firms' behavior meeting the efficiency criteria of perfectly competitive equilibrium, which in turn conveys a notion of social optimality (all resources being put to their best possible uses). Strategizing thus carries connotations of slackness, contrivance, and using muscle to secure profits that would otherwise be competed away.

Disequilibrium is contrasted, of course, with equilibrium. The idea of economic equilibrium is one of the oldest and most admired in the whole corpus of economics scholarship, and the Arrow-Debreu theorems regarding the existence and uniqueness of perfectly competitive equilibrium (PCE) are one of the most profound results to be found in the social sciences. The idea of perfectly competitive equilibrium has become so central, so axiomatic, that its absence is now referred to routinely as a case of market imperfection, or market failure, or information asymmetry, and so on-all terms connoting a departure from the ideal. Yet there is a marked cognitive dissonance between the perfect equilibrium of these economics models and the day-to-day business reality that real firms face-one where prices have to be discovered, where competitors' innovations can take away your market, where competitive intelligence has to be paid for (as opposed to the assumption securing PCE that information is costless and instantaneously transferred), and so on. Disequilibrium by contrast evokes chaos, unpredictability, messiness, risk, and uncertainty. It is uncharted territory.

Profit as the general goal of firms is contrasted with rents-widely viewed in the prevailing strategy literature as the...