Behavioral theory of the firm

The behavioral theory of the firm first appeared in the 1963 book A Behavioral Theory of the Firm by Richard M. Cyert and James G. March. The work on the behavioral theory started in 1952 when March, a political scientist, joined Carnegie Mellon University, where Cyert was an economist. A behavioral model of rational choice by Herbert A. Simon paved the

Theory of Competitive Advantage

Michael Porter proposed the theory of competitive advantage in 1985. The competitive advantage theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. Porter emphasizes productivity growth as the focus of national strategies. This theory rests on the notion that cheap labor is

Contingency Theory

A contingency theory is a theory of the firm that claims that there is no best way to organize a corporation, to lead a company, or to make decisions. Instead, the optimal course of action is contingent (dependent) upon the internal and external situation. Contingent leaders are flexible in choosing and adapting to succinct strategies

Evolutionary Theory of the Firm

Nelson and Winter argue that an evolutionary theory of organization is a superior description of firm behavior than orthodox views around optimization and that routines act as the genes of the firms in their model. The evolutionary theory defines the firm as a set of essential skills, gained from its learning ability. The theoretical

Institutional Theory

According to Scott (2008), institutional theory is “a widely accepted theoretical posture that emphasizes rational myths, isomorphism, and legitimacy.” Researchers building on this perspective emphasize that a key insight of institutional theory is imitation: rather than necessarily optimizing their decisions, practices, and structures, organizations look to their peers for cues to appropriate behavior. In defining institutions,

The Invisible hand theory of Adam Smith

The invisible hand theory describes the unintended social benefits of an individual’s self-interested actions, a concept that was first introduced by Adam Smith in The Theory of Moral Sentiments, written in 1759, invoking it in reference to income distribution. By the time he wrote The Wealth of Nations in 1776, Smith had studied the economic models of the French Physiocrats for

Theory of Organizational Ecology

Organizational ecology theory examines how organizational populations change and develop over time through stages of founding, growth, transformation, decline, and death (Hannan & Freeman, 1977, 1989). The theory addresses the forces of social, political, and economic systems that (1) increase organizational diversity, for example, creating new organizational forms, and (2) decrease organizational diversity, for

Resource dependence theory

Resource dependence theory (RDT) is the study of how the external resources of organizations affect the behavior of the organization. The procurement of external resources is an important tenet of both the strategic and tactical management of any company. The basic argument of resource dependence theory can be summarized as follows: Organizations depend on resources.

Structural Determinants of the Intensity of Competition

Let us adopt the working definition of an industry as the group of firms producing products that are close substitutes for each other. In practice there is often a great deal of controversy over the appro• priate definition, centering around how close substitutability needs to be in terms of product, process, or geographic market

Intensity of Competition: Threat of entry

New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbents’ costs inflated as a result, reducing profitabili-ty. Companies diversifying through acquisition into the industry from other markets often use their resources to cause a shake-up, as Philip Morris did

Intensity of rivalry among existing competitors

Rivalry among existing competitors takes the familiar form of jockeying for position–using tactics like price competition, adver-tising battles, product introductions, and increased customer service or warranties. Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position. In most industries, competitive moves by one firm have noticeable

Intensity of Competition: Pressure from substitute products

All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the poten-tial returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge. The more attractive the price- performance alternative offered by substitutes, the firmer the lid on industry

Intensity of Competition: Bargaining power of buyers

Buyers compete with the industry by forcing down prices, bar-gaining for higher quality or more services, and playing competitors against each other—all at the expense of industry profitability. The power of each of the industry’s important buyer groups depends on a number of characteristics of its market situation and on the rel-ative importance of

Intensity of Competition: Bargaining power of suppliers

Suppliers can exert bargaining power over participants in an in-dustry by threatening to raise prices or reduce the quality of pur-chased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices. By raising their prices, for example, chemical companies have contributed to

Government as a force in industry competition

Government has been discussed primarily in terms of its possi-ble impact on entry barriers, but in the 1970s and 1980s government at all levels must be recognized as potentially influencing many if not all aspects of industry structure both directly and indirectly. In many industries, government is a buyer or supplier and can influence

Structural Analysis and Competitive Strategy

Once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm is in a position to identify its strengths and weaknesses relative to the industry. From a strategic standpoint, the crucial strengths and weaknesses are the firm’s posture vis-à-vis the underlying causes of each competitive force. Where does

Structural Analysis and Industry Definition

A great deal of attention has been directed at defining the rele-vant industry as a crucial step in competitive strategy formulation. Numerous writers have also stressed the need to look beyond prod-uct to function in defining a business, beyond national boundaries to potential international competition, and beyond the ranks of one’s competitors today to

Three Generic Strategies

In coping with the five competitive forces, there are three poten-tially successful generic strategic approaches to outperforming other firms in an industry: overall cost leadership differentiation focus. Sometimes the firm can successfully pursue more than one approach as its primary target, though this is rarely possible as will be dis-cussed further. Effectively implementing any

Generic Strategies: Stuck in the Middle

The three generic strategies are alternative, viable approaches to dealing with the competitive forces. The converse of the previous discussion is that the firm failing to develop its strategy in at least one of the three directions—a firm that is “stuck in the middle”—is in an extremely poor strategic situation. This firm lacks the

Risks of the Generic Strategies

Fundamentally, the risks in pursuing the generic strategies are two: first, failing to attain or sustain the strategy; second, for the value of the strategic advantage provided by the strategy to erode with industry evolution. More narrowly, the three strategies are predicated on erecting differing kinds of defenses against the com-petitive forces, and not