The 'Austrian' School of Strategy

Although traditional Industrial organization continues to serve as one of the conceptual foundations for strategic thinking and research, many of its premises have come under widespread criticism. Industrial organization largely ignores, despite their importance, change, uncertainty and disequilibrium in the business environment. Because these fundamental characteristics are cornerstones of the Austrian School of Economics, this doctrine offers unique strategic perspectives. The Austrian emphasis on the market process" and entrepreneurial discovery establishes a framework for both strategy formulation and research.

According to neoclassical microeconomic theory, profit-maximizing firms in competitive environments earn zero economic profits. They earn a return just sufficient to maintain capital investment. The notion of "perfect competition" sets the standard for traditional industrial organization and provides the foundation for the premise that firms earn supranormal returns primarily by exercising monopoly power (Bain, 1951). Monopoly power, in turn, exists to the extent that the firm or industry has erected barriers to entry that restrict competitive forces. Industrial organization (IO) economists study the linkages among industry structure, conduct, and performance in order to derive public policies that promote competition.

Porter (1981:617) concluded that "there is gold to mine in applying IO concepts to strategy formulation." He viewed the Bain/Mason paradigm of industrial organization as offering strategic management a systematic model for assessing competition and for strategy formulation. Indeed, theoretical perspectives drawn from IO have exerted a substantial and pervasive influence on strategic thinking. Mainstream strategy topics such as Porter's generic strategies for coping with competitive forces, strategic groups, and mobility barriers have their theoretical base in traditional IO (Caves & Porter, 1977). Indeed, entire research streams (e.g., the PIMS approach, Bumell & Gale, 1987) build off this same base.

To a large extent, business policy researchers reverse the intent of IO concepts to form strategic recommendations. Much of the current thinking about strategic management focuses on ways that firms can create imperfectly competitive product markets in order to obtain greater than normal profits. Whereas industrial organization economists seek to determine what can be done to promote competition, many strategy researchers seek to determine what managers can do to limit competition. Porter (1980:4) defined the strategic objective of a business unit as to position itself in an industry where it can best defend itself against competitive forces,...