The Contributions of Industrial Organization to Strategic Management TORIo Michael E. Porter The Academy of management Review, Vol 6, No 4(Oct. 1981), 609-620 Stable url: http://links.jstor.org/sici?sici=0363-7425%28198110%296%03a4%3c609%03atcoiot%3e2.0.c0%3b2-m The Academy of Management Review is currently published by Academy of Management. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.htmlJstOr'sTermsandConditionsofUseprovidesinpartthatunlessyou have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://wwwjstor.org/journals/aom.html Each copy of any part of a JSTOR transmission must contain the same copy tice that appears on the screen or printed page of such transmission jStOR is an independent not-for-profit organization dedicated to creating and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support@jstor. org http://www」]stor.or Mon oct3107:43:33200
Academy of Management Review 198T, Vol 6. No, 4. 609-62 The Contributions of Industrial orga To Strategic Management, ization MICHAEL E PORTER Harvard Universit The traditional Bain/Mason paradigm of industrial organization(1O )offered rategic management a systematic model for assessing competition within an industry, yet the model was seldom used in the business policy(BP)field. 1O and BP differed in their frames of reference(public us. private), units of analysis (indi Ds. firm), views of the decision maker and stability of structure, and in other ignificant respects. Development of Io theory during the 1970s has narrowed the gap between the fwo fields, to the extent that 1O should now be of central concern to policy scholars The majority of economists studying industrial In addition to analytical techniques, industrial organization(or industrial economics)and strategic organization is bringing a new methodological tra management researchers have, over the years, dition to bear in research on strategic management, mostly viewed each other with suspicion-if they one that holds promise of contributing to the devel knew each other existed, With few exceptions opment of the policy field in a way quite distinct ndustrial organization had little effect on the busi from the purely conceptual. And the benefits are ness policy concept of strategy and business policy clearly flowing in both directions-exposure to busi- had little effect on industrial organization, despite ness policy concepts is having a decidedly positive the increasingly clear evidence that much promise influence on industrial organization researcl for cross-fertilization existed. Why these ships have recently, on microeconomic the passed in the night is an intriguing question. Some In this article I will examine some existing and of the reasons reflect subtle, deep-rooted suspicions potential contributions of industrial organization to and even the type of training that scholars in both strategic management, especially to the formulation fields traditionally received. But many of the rea- of competitive strategy in individual industries. sons reflect real underlying differences in the pur- will take a quasi-historical approach, in order to poses, frame of reference, unit of analysis, and examine why the traditional industrial organization esearch values that each field has traditionally paradigm, while offering a valuable tool made rela embraced tively few inroads into the policy field. Making the It is becoming recognized today that industrial reasons for this explicit will highlight some of the organization can offer much to the analysis of stra- conceptual underpinnings and assumptions of both tegic choices by firms within industries, and the fields and provide a framework for seeing why new contribution is growing rapidly as new research industrial organization research is having breaks down the differences to which I have alluded impact. The reasons will also provide an agenda for I wish to thank R E Caves, Malcolm Salter, and K R.Andrews where future progress must be made if the true for their comments on earlier versions of this article promise of industrial organization is to be realized Most of my attention will be addressed to egy for competing in an individual industry or at the August 1979 SO-called strategic business unit level, because this is s 198 by the Academy of management 0363-7425 where industrial organization can have the greatest
impact. When considering the contribution of environment. The high-performing(high return on industrial organization to strategy formulation at investment) firm in LCAG's framework was one the level of the diversified firm as a whole I will that had found or created a position in its industry clearly note the shift in frame of reference where such consistency was present. However, LCAG offered no help in assessing the "contents"of The Promise of the each of the boxes in Figure I in a particular situa Industrial Organization Paradigm tion. This was left to the practitioner The concept of strategy emerged from the need The traditional industrial organization paradigm to help the practitioner (particularly the general has long held tantalizing promise for strategy for- manager)transform the daily chaos of events and mulation. This is clear when one examines the decisions into an orderly way of sizing up the firm Learned, Christensen, Andrews, and Guth(LCAG) position in its environment. As a result, the early framework that has become the foundation of busi policy literature on strategy formulation subse ness policy [1969; Andrews, 1971 LCAG defined quent to LCAG was largely process oriented, trans- strategy as how a firm attempts to compete in its lating the basic LCAG paradigm and extensions of it environment, encompassing key choices about into a sequence of logical (and very general)analyti- goals, products, markets, marketing, manufactur- cal steps [e. g. Ansoff, 1965]. Recently, quite a bit of ing, and so on. The goals of the firm were broadly research has sought to identify broad categories of factors that might be considered ssing economic considerations, such as social obligations contents of each box in Figure 1 and has offered treatment of employees, and organizational climate generalized strategic alternatives and some of their Effective strategy formulation from a normative pros and cons [Cannon, 1968: Hofer Schendel standpoint, according the LCAG, entailed relating 1978: Uyterhoeven, Ackerman, Rosenblum, the four key elements shown in Figure 1 1977. Another recent thread of research has been The successful firm had to match its internal examining the social, political, and organizational competences and values to its external environ processes by which strategic choices are actually ment, and LCAg offered a series of general but made [ Bower, 1970: MacMillan, 1978 logically compelling consistency tests that could Empirical research on the substance of strateg. help a firm probe its strategy to see if it truly related formulation in individual industries (as distin these elements. These consistency tests stressed the guished from the administrative processes by which need for a firms policies in each functional area to be firms arrive at strategies)has been rather limite interrelated as well as the need for the entire group Intil recently. This is no doubt in part because the of functional policies to make sense, given the broad concerns of policy researchers have encom- passed the complex role of the general manager, of which strategy formulation is but a part. Much policy research attention has been given to the more strengths, weaknesses technical administrative dimensions of the general managers opportunities, threat: job, such as relating organizational arrangements to trategy resource allocation processes, strategic planning systems, and the like In the backdrop of the lCag paradigm and sub- sequent work, the traditional Bain/Mason industrial broader societal organization(1O)paradigm of the 1950s and 1960 expectations held obvious promise at one level. The essence of this paradigm is that a firms performance in the marketplace depends critically on the characteristics of the industry environment in which it competes The Four Key elements of This is expressed in the familiar structure-conduct- Effective Strategy Formulation performance framework shown in Figure 2 610
Industry Performance paradigm itself, introduced a potentially rich frame Structure (Strategy) work for examining competitive interaction [ Schell Game theory took its place in IO as a part of oligo- The Traditional Bain/Mason The early Mason approach of identifying many Industrial Organization Paradigm structural factors that were important inin fluenc ing conduct and performance soon gave way to the Industry structure determined the behavior or Bain-initiated focus on a few key aspects of struc conduct of firms, whose joint conduct then deter ture. Bain also pioneered an empirical tradition of mined the collective performance of the firms in the statistical studies relating aspects of industry struc- marketplace [Bain, 1968; Mason, 1953]. Performance ture to conduct and performance (usually profitabil- was defined broadly and in the economist's sense of ty). Literally hundreds of studies of this form social performance, encompassing dimensions such drawn from large samples of industries all over the as allocative efficiency (profitability), technical effi- world, have formed the backbone of io literature ciency (cost minimization), and innovativeness The Bain/Mason paradigm of IO(enriched with Conduct was the firm s choice of key decision vari oligopoly theory) is a useful contribution to strategy ables such as price, advertising, capacity, and qual- formulation in an industry, though it has been a y. Thus, in policy terms, conduct could be viewed little-used one. It off a systematic model fo as the economic dimensions of firm strategy assessing the nature of competition in an industry Finally, industry structure was defined as the rela one aspect of the four-part LCAG framework tively stable economic and technical dimensions of industry opportunity and threats. Identifying the an industry that provided the context in which structure"of the industry in IO terms casts the competition occurred [Bain, 1972. The primary spotlight on the crucial aspects of the firms indus elements of structure identified as important to per- try environment, and illuminates such critical con formance in the early IO research were barriers to cepts as barriers to entry and demand elasticity. The entry [Bain, 1956, the number and size distribution model also allows an analysis of the performance a of firms, product differentiation, and the overall firm could hope to achieve in its industry. It rein elasticity of demand [Bain, 1968 A final crucial forces the important point that not all industries are aspect of the Bain/Mason paradigm was the view equal in terms of their potential profitability. Thus that because structure determined conduct(strat the model can help firms predict a level of perfor egy), which in turn determined performance, we hat can reasonably be expected. Unlike the could ignore conduct and look directly at industry ad hoc approach to industry analysis embodied in structure in trying to explain performance. Con most policy literature, Bain/ Mason is potentially a duct merely reflected the environment systematic and relatively rigorous one backed br An important branch of IO research was so-calle empirical tests. Bain/Mason does not help the strate ligopoly theory, or the study of the outcome of gist with the other three key eler ts identified b competitive interactions in markets where one LCAG, but it clearly helps with one rm's actions affect its rivals (for a survey, see Scherer [1970 ) Oligopoly theory sought to specify The Limitations of he link between industry structure and firm-to- The Bain/ Mason Paradigm firm rivalry, providing a rich set of determinants of the difficulty firms face in coordinating their actions Faced with this clear promise, why didnt strategy in the ma ketplace (for the classic analysis, see teachers and practitioners stumble over each othe Fellner [1949 ) It filled a gaping hole for the analysis to embrace the new IO paradigm? A number of the of real markets that had been left by economists reasons relate less to the substance of the paradigm traditional exclusive focus on the polar cases of pure than to the scholarly traditions in the IO and BP d fields. Many policy scholars were not aware of born at nearly the same time as the Bain/Mason developments going on in IO, a different, self 611
contained discipline with its own jargon Some pol competence"are hallmarks of the policy field in icy scholars also seemed to be innately suspicious of defining the bases on which firm strategies should economists' work, possibly because of their expo- sure to microeconomics at the introductory level, firms differed a great deal in performance even where it is laced with assumptions and normative though they competed in the same industry premises that practitioners cannot live with. And Conversely, the IO theory of the 1950s and 1960s there was little cross-fertilization between people took the industry as the unit of analysis.Masons either one was an economist, or one was a business g interest in firm teacher or practitioner. but this was largely lost when Bains influence came However, these reasons may have been only to be felt That it was lost made sense from the eflections of more fundamental, substantive rea traditional IO frame of reference, since it is collec sons why well-informed policy practitioners should tive industry performance and not one firms per have been skeptical of IO. Some important ones are formance that determines the quality of resourc outlined below: allocation in the economy and hence social perf here were translation problems owing to different mance. Furthermore, IO theory implicitly assumed frames of reference. Policy practitioners were inte that all firms in an industry are identical in an eco ested in improving a firms performance from nomic sense, except for differences in their size; the vate viewpoint, which meant increasing return other differences are random noise. as a result on investment (ROD). IO researchers were moti there was little room for stable differences in the vated to improve performance from a social performance of firms in the same industry. There iewpoint-which could mean reducing roi to the fore, while IO is useful for determining the likely purely competitive level. IO was historically oriented average profitability of an industry, in its traditional lbic policy, and the literature form it clearly is not very useful for sorting out the was written from this frame of reference different performances of different companies As I have argued, the IO explanation of industry IO and bP have different views of the decision maker competition and performance could clearly be ap- IO, by and large, viewed the firm as a single plied to either purpose-Private or social. For ex decision-making unit making choices based on eco ample, public policymakers could use their knowl nomic objectives. Some IO literature recognized edge of the sources of entry barriers to lower them, that firms were really collections of individuals whereas business strategists could use theirs to [Cyert March, 1963 and there was some dis- raise barriers, within the rules of the game set cussion of objectives other than profit maximiza antitrust policy. However, this fundamental differ- tion, but these isolated efforts were hardly inte- ence in the frame of reference meant that IO theory grated into mainstream theory. Policy practitioners, had to be translated before it appeared compatible on the other hand, placed great stress on how the vith the private perspective and thereby recogniz- personality of the leader, political processes within ably useful to policy practitioners. This translation the firm, and a broad range of possible firm objec was not made in the literature tives have a major impact on a firms actual behavior Policy teachers and practitioners also had a dif in the market place (a good illustration is Bower ferent definition of their task. policy aimed [1970). Also, BP has always stressed the difficult understanding the multiple functions and multiple leaders have in correctly perceiving environmental bjectives of the general manager, only some of change, and the long-standing assumptions that which were purely economic IO theory focused often create strategic myopia, The human dimen much more narrowly on the economic bases of sion was central in Bp: no humans were visible in Io I0 views the firm as a free-standing entity. Io ha lO differs in its unit of analysis and related assumption implicitly viewed the firm as a free-standing entity Policy practitioners have been vitally interested competing in a single business, and the lO literature the problems of the individual company, and have on diversification is largely distinct from the litera viewed each firm as a unique entity with unique ture on competitive outcomes in oligopolistic erms such as"distin 612
nized that the individual business unit is often br ture. Thus the firm was stuck with the structure of one part of a diversified firms"portfolio"of busi- its industry and had no latitude to alter the state of nesses, and that the needs of the corporation as a affairs Policy practitioners, on the other hand, have whole often strongly affect the objectives of the long observed that firms can fundamentally change unit as well as the resources made available to it. All the structure of their industries through their his can strongly influence market outcomes actions. The policy field has a long tradition of Furthermore, manufacturing, marketing, distribu- emphasizing the insight, creativity, and even vision ese arch costs are of shared among that some firms have exhibited in finding unique related business units in a firm even though they ways to change the rules of the game in their are in distinct industries from the viewpoint of con- industries ventional approaches to industry definition. For ex However, firms cannot always change industry ample, a firm might manufacture motors it then structure, and thus understanding industry struc- uses to manufacture such disparate products as hair ture in the traditional IO sense is crucial. further dryers and cooling fans. Its costs in motor manufac more, one must know what the key elements of turing, a key part of its end-product costs, are thus structure are before one knows what to change, so in part determined by the total sales of these essen- that the traditional IO model is an important place tially unrelated products. To handle such shared for firms to start in formulating strategies that osts,many firms must formulate strategy both at change the rules of competition. Nevertheless, the the individual business unit level and for the entire determinism in the traditional IO paradigm was a group of related business units limitation to weigh against these benefits Related to the failure to see the business unit as 1O was too limited. IO theory identified a relatively part of a centrally managed corporate portfolio is few, critical aspects of structure, such as the distri the failure of nize the bution of firm sizes(particularly concentration)and simultaneous determination of firm behavior in entry barriers. Policy practitioners, on the other such areas as advertising, research, and vertical hand, could easily think of examples of othe ntegration. The concept of strategy stresses the unmentioned variables that were crucial to strategy need to interrelate these individual functional pol in individual industries. This difference was partly a ies. IO research has tended to look at each function result of BP and iO having different academic tradi tions. Economists are prone to set forth general 10 had a static perspective. The Bain/Mason para categories without fully articulating the subcate- digm of the 1950s and 1960s was a static, cross- gories. For example, the concept of entry barriers sectional one that sought to explain the industry encompasses a myriad of specific factors, many of performance that resulted from a given industry which are not elucidated in the usual IO accounts structure. Structure was definitionally stable. Al Policy practitioners are more interested in the"long though the static model is a useful list"than in the generality of various items. but the goes, policy practitioners are used to having to cope problem was more than just stylistic: many relevant with changes in structure. Concentration rises and structural variables were undiscovered in the lo falls, as do entry barriers and the other measures of theory of the 1950s and 1960s structure identified in the IO paradigm. It is these had different loss functions. IO structural changes that seem to raise the most fu hers were interested in uncovering structure damental strategic problems for firms in compet performance relationships that generally held true tion. a key question from the policy viewpoint, even if they did not hold in every industry and even red in Bain/ Mason was what made strue if they explained only some of the variation in per ture what it was, and what did one do about changes formance. The desire to advance public policy made in structure from a strategic standpoint? such generalization palatable. Uncovering a few sta- Determinism was an element of IO theory. Trad tistically robust relationships that could improve tional IO theory took industry structure as exogen competition policy was more important than the ously given, and held that the firms strategy and risk that a given relationship might not hold or performance were fully determined by this struc- might be unimportant in a particular situation 613
Policy practitioners, on the other hand, have all the way, for the reasons discussed but it goes always been vitally concerned with each firms some of the way unique situation It was not acceptable from their ewpoint, for a particular firm to be the exception and for the hypothesized relationship therefore not The New promise of to apply. If anything, the focus in policy has been on Industrial Organization That makes a particular firm exceptional or unique The limitations of Io for strategy formulation and thus what might provide the basis for a unique that I have discussed are inherent in the classic IO strategy. In statistical terms, then, the loss func paradigm as personified by Bain/Mason. It is prob- ions or weights attached to making different kinds ably accurate to call this a creature of the 1950s and of errors in developing theory have been fundamen 1960s. Yet IO as a field has continued to develop, tally different for policy practitioners and IO aided by increasing exposure to the policy field. In fact, some of the reservations of policy practitioners Oligopoly theories were abstract and needed to be tran turned up, not surprisingly, in self-criticisms of the lated. A general theory of oligopoly eluded(and still IO field by its own practitioners eludes)IO researchers, and established models During the 1970s, particularly the last five ye oligopoly were built on grossly unrealistic assump tions such as mechanical reaction functions, id orso, IO has been enriched by addressing, at least in a partial way, many of the limitations I have de al cost and demand functions among competitors, scribed. Too often IO is criticized as if Bain/Mason and the like Game theory, which promised to over come the deficiencies of using marginal analysis in were the current state of theory or as if IO consisted solely of Galbraith. As a result of new develop- an oligolopy setting, was articulated using examples not directly taken from industry competition ments, IO has moved from being a useful tool to nuclear war, labor negotiations, or tactical pricing consider in strategy formulation to being a field th decisions. Game theory therefore required transla should take a central place among the conceptual tion to be readily applied to real markets, and suf frameworks used in the policy field. Let us review the progress of io against the limitations of Bain fered from its own set of uncomfortable assump Mason identified earlier. I must hasten to add that ions, such as the heroic amounts of information this does not purport to be a comprehensive survey, utilized by all parties, simplistic strategy options, and one-time games. Testing of oligopoly and game but rather an attempt to provide an overview along with examples of specific research. As one who has oncepts was undertaken a been working in the intersection of these two fields, abstract experimental situations and not actual i will undoubtably err in drawing my examples to industries(for a survey of some of the experimental Scherer [1970)) These reasons and others rightly made policy Translation Although they are still relativel ractitioners uncomfortable about embracing Io, few, extensions of the lO paradigm to the perspe but my own view is that even the IO research of the tive of strategy formulation are now in the litera 50s and 1960s could be highly useful in strateg. ture. An early effort was my"Note on the Struct formulation in industries, provided the translation ral Analysis of Industries, "originally written in of the setting and frame of reference is made, and 1974. A modified version appears as Chapter 1 in provided it is recognized and accepted that IO is my 1980 book, a larger study of the lO/strategy link not an answer to the broader concern of bp In addition, mentions of IO concepts have appeared al management function. IO offers in other recent books and papers on strategy analy at least a start toward a systematic understanding of sis [Hofer& Schendel, 1978; Kasper, 1979; Thorelli the industry environment, which can always be 19771. There is a course at harvard that applies supplemented with particularistic analysis. IO contemporary lO concepts to problems of develop encompasses some extraordinarily powerful co ing competitive strategy, and similar courses have epts, and game theory offers a framework that can started or are starting elsewhere be applied to firm -to-firm warfare Io does not go Unit of analysis In the past decade, work in IO 614
has shifted the unit of analysis to both the firm and In addition, the strategic group/ mobility barrier the industry. Empirical researchers began to exa concept is a starting point for the dynamic modeling ine the performance of firms as well as industries of industry evolution, in which firms with different Demsetz, 1973: Gale, 1972; Shepherd, 1972 strategies and different objectives make invest though lacking clear theoretical models of firm per ments in improving their strategic position formance. The beginnings of a model have emerged Free-standing entity IO research is beginning in the concept of strategic groups, a term coined by Hunt [1972 I have made efforts at generalizing this to explore the interrelation between business units and their corporate siblings in modeling industry concept [Porter, 1973, 1976a, 1979a, 19801, and Newman [1973, 1978] has artfully examined an outcomes. The interrelation is embodied in the the- ory of strategic groups, and Newman [1973] has important subcase. The concept of strategic groups is that firms within industries can be clustered explored one aspect of the relationship in some according to their strategies and that their reac- detail. Spence and i have built the relationship into a model of capacity expansion in oligopoly porter& tions to disturbances and the pattern of rivalry will Spence, 1978; see also Porter, 1980, Chap. 3 be determined by the configuration of groups On the heels of the notion of strategic groups Recent work on so-called economies of scope has came the generalization of entry barriers to the explored some implications of shared costs. Remov concept of "mobility barriers"[Caves Porter ing the assumption of a free-standing entity is a 977; Porter, 1973]. The argument is that the diffi- high-priority area for continued IO research culty of entry into an industry depends on the stra Static tradition Increasingly, IO research is tegic position the firm seeks to adopt (or on its beginning to encompass dynamic models of ind strategic group). Mobility barriers are deterrents to try evolution, some framed from the point of view a shift in strategic position of firms within an indus- of the strategic decision facing the individual firm try, deterrents that give some firms stal advan Numerous studies have investigated the determi- tages over others. Thus, mobility barriers provide nants of changes in industry concentration [e. g an explanation of differences in performance by Mueller Hamm, 1974; Orr, 1974] and some have firms in the same industry, and provide a conceptual investigated the determinants of entry. The work of basis for positioning a firm within its industry the Boston Consulting Group has stimulated a Mobility barriers, the configuration of strategi number of rigorous models of learning curve phe groups in the industry, industry-wide structural nomena le g. Spence, 1981]. A number of models traits,and aspects of a firms position within its have explored additional aspects of firm investment strategic group have been combined into a theory of and innovation in a dynamic context. Michael the strategic position of firms in their industry and Spence and I, for example, have modeled the their resulting profitability Porter, 1978, 1979b] dynamic capacity expansion problem facing the firm I have recently tested the theory s implications for in a growing oligopoly using data drawn from a the profitability of differently situated firms comprehensive case study of the corn-milling POrter, 1979b], and the theory's premises have industry. The model exposes the critical role of been supported in work by Hatten [ 1974],Hatten uncertainty early in an industrys life for the subse d Schendel [19761, and Stonebreaker [1976] quent structural evolution, among other variables The strategic group/mobility barrier extension of have also explored the dynamic forces underlying O has additional benefits for strategic analysis industry change [ Porter Porter Spence One is that it constitutes the beginning of a syste- 1978. These and other efforts Ie.g., Flaherty, 1976) matic way to determine what a firms strengths and Kamien Schwartz, 1972; Spence, 1979]at weaknesses are. This is one of the things that much dynamic modeling are far from fully satisfactory of the literature has left practitioners to handle but they are beginning to yield some important unaided. Thus the extens mises to implications for how firms should compete in evolv the scope of IOs contribution to strategic analysis, by enabling it to contribute to the analysis of the Determinism The Bain view that strateg upper left box in the LCAG quadrangle(Figure 1) choices do not have an important influence on
industry structure is nearly dead. It is now recog The study of industry structure has moved beyond nized that there are feedback effects of firm conduct looking at the conditions of supply to examine verti (strategy)on market structure, as depicted in Figure cal bargaining relations with suppliers and buyers 3. For example, firm innovations can enhance or Lustgarten [1975] and others have examined buye diminish entry and mobility barriers. Some authors power in producer goods industries and I hay have gone a step further to propose and test models explored manufacturer/retailer bargaining in con in which past performance affects the strategic er goods industries and other aspects of the options available to firms-hence the dotted line in buyers effect on strategy [Porter, 1974a, 1980 Figure 3 [e.g, Comanor Wilson, 1974, Chap. 61 Labor is being shown to be a competitor for firm Recognition of both feedback loops has led to the profits(see Caves, Porter,& Spence [1980] for a adoption of simulta equation survey els to test IO propositions [ Caves, Porter, Spence International trade and competition is being built 1980: Comanor Wilson, 1974, Chap 6]. Some into IO models of industry competition, and this recent articles have demonstrated how firms can work is showing how obsolete the view is that all affect or even deter entry into their industries by industries are domestic ICaves, Porter, Spe ence carefully choosing their strategies [Porter, 1980; 1980; Pugel, 1978, Linkages between the capital Salop, 1979; Schmalensee, 1978; Spence, 1979 markets and industry competition are receiving Industry-(Strateg Conduct conditions can affect the ability of differently situ -Performance ated firms to compete and that financial strategy can be a competitive weapon Fruhan, 1979; Hurdle 1974]. Topics such as vertical integration and fran chising have been explored in detail in the IO litera ture [Caves Murphy, 1976. Although there are Fi further frontiers to be explored, Io has already An Updated Version of the hieved a richness that makes it of Industrial Organization Paradigm broad array of strategy formulation problems Loss function IO research stretching for The view is developing that there are some fun still richer models that recognize interfirm and damental structural parameters of an industry dic interindustry differences. In part because of contact tated by the basic product characteristics and tech- with the policy literature they are no longer satis nology but that within those parameters industry fied with broad conclusions, even for public policy evolution can take many paths, depending on such purposes-although the constraints of factors as the luck of the draw in terms of the data may force them to live with such conclusions identity of industry rivals and uncertain events,as ell as on the strategic choices firms actually make Oligopoly theory Some strides have been that follow from their unique objective functions in applyi By articulating these factors, IO offers rich insights narket conditions, although difficulties remain into strategy formulation with this aspect of IO theory Fruhan [ 1972] applied ncepts to competition in the Completeness I0 researchers have identified domestic airline industry and Sultan [1974] to the an increasingly rich set of elements of industry electrical equipment industry. Aharoni [1966] ap structure that are important to competitive interac- plied game theory to foreign direct investment de tion Richard Caves and i have articulated the con cisions. Schelling,s [1960] rich qualitative theory of cept of exit barriers, such as specialized assets and games has stressed concepts that can be applied to xed costs of exit [Caves Porter, 1977; Porter, market settings, such as commitment, credibility, 1976b, 1980]. Harrigan [1979] has applied the exi and focal points [ Porter, 1980]. Knickerbocker rrier d other Io concepts to the study of com- [1973 has applied oligopoly theory and other IO petitive interaction in eight declining industries concepts to the establishment of foreign subsidi- 616
aries by multinational firms. The ideas in all this Recently a hybrid research design has emerged, literature could subs tantially enhance the subtlety sing a series of mini-case studies to test richer with which firms can make and respond to compet hypotheses than can be feasibly tested in big sample tive moves Harrigan, 1979; Newman, 1978 These developments have pushed IO theory The biggest block to further methodological squarely toward the heart of the policy field. The IO diversity in strategy research is the availability of framework for analyzing industry structure and data. The PIMS Program of the Strategic Planning evolution, firm position within industries, and com- Institute has made some strides through the collec- petitive interaction and strategic moves is increas- tion of an extensive data base that is unique in ingly rich and motivated by values close to those revealing some aspects of strategic choice, A new driving the policy practitioner. Many frontiers effort is underway at Harvard-the Program for contributing substantively to strategy analysis, Or remain, to be sure, but io has come of age for nd Company Analysis, which Ich is assem bling an industry-centered data base designed My discussion has focused exclusively on strategy explicitly for strategy research. The Federal Trade formulation at the business unit level, but recently Commissions business- reporting efforts should IO research has begun to offer some intriguing also yield major benefits in terms of data availability possibilities for the study of diversification strategy Recognition by policy practitioners of the potential and strategy implementation. IO-style models of of cross-sectional and time series research methods he relation between diversification strategy, indus will, one hopes, further stimulate data collection of try structure, and firm performance are beginning richness and firm-specificity responsive to policy to appear [Caves, Porter,& Spence, 1980, Chap concerns, aided by the increasing disclosure re 12; Grinyer, Yasai-Ardekani,& Al-Bazzaz, 1980 quirements being placed on public firms Rumelt, 1974]. Williamson [1975] and others reflecting a long tradition dating back to herber Concluding remarks Simon [1961, are exploring the factors that in fluence the scope of the firm, or the trade-off Most of the areas i have identified as limitations between using market and administrative transac- of IO theory still remain as frontiers for IO research tions. williamson identifies contractual failures tha research agenda for IO prevent certain types of market transactions from Another intriguing frontier for IO research is the This sort of analy be fruitfully applied to questions of vertical integration, joi tion among multibusiness firms with business units ventures, and organizational design. another thread in partly overlapping markets. Such overlapping of research views organizational structure as a cost complicates coordination among firms, but offer nefit calculation, weighing coordination costs possibilities for threats, deterrence, and side pa against the benefits of autonomy [Caves, 1980 ments that go beyond those possible when competi- tion is on a market-by-market basis. In view of the The methodological Promise prevalence of large, diversified firms in many markets, this avenue of research seems to hold I have been arguing the promise of io for strat great interest. egy analysis (and vice versa)in substantive terms. It ng agenda I am confident that the seems important to consider its possible methodo- research frontiers of IO will be pushed back because logical contribution as well. IO research has devel of the shared research motivations in io and br oped a strong empirical tradition built around the and the fact that both economists and business scho- statistical analysis of populations of firms and lars are participating industries. Research on strategy is now using such Frontiers aside, it should be clear that there is gold methods to supplement the in-depth case studies to mine in applying IO concepts to strategy formu that have been the bread and butter of policy re- lation, just as there has been much gold mined (with search; the PIMS Program is a particularly ambi much more still in the tious example [Buzzell, Gale, Sultan, 1976 erspective in IO research If this article stimulates 617