Example research essay topic: The Structure Conduct Performance Paradigm - 1,775 words

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The Structure-Conduct-Performance Paradigm Economics has never been more relevant to business problems. The two key groups of question of interest to businessmen - the internal organization of the firm and its relationship between its suppliers and customers, and the nature of strategic interactions between small groups of firms - are clearly on the agenda of modern economics in a manner which has not been true for most of the last century. If you ask most businessmen what they think economics is about, their answer will be economic forecasting. They do not think very much of economic forecasting - although they go on thinking they need it - and so they do not think very much of economists. Every day they are concerned to analyze their costs - which is done by their accountants.

They determine their prices - this is the responsibility of their marketing department. They need to interpret the business environment they face - the task of their corporate planners and strategic advisers. The economic input into any of these functions is minimal. Yet costs, prices, industries and markets are the very lifeblood of microeconomics, just as inflation, output and growth are the lifeblood of macroeconomics. Economics dominates public policy and every countrys chief executive regards his (or her) macroeconomic adviser as a vital aide. But economics has almost no influence on business policy, and in only a small minority of companies does the chief executive have an economic adviser at all.

The evolution of microeconomics over the past century provides a partial answer. 1990 is not only the centenary of the Economic Journal; it is also the centenary of the first edition of Alfred Marshalls Principles of Economics. It was Marshall who set the agenda for much of the economics that was to occupy the Journal for the subsequent 100 years. Marshalls analysis, and his understanding of the commerce of his day, was sophisticated and wide-ranging. Indeed Marshall probably knew more about the day-to-day functioning of business than any leading economist this century.

Yet his approach barely scratched the surface of the firm. The Structure-Conduct-Performance Paradigm. Since the Second World War, the dominant tradition in industrial organization has been based on the strongly empirical structure-conduct-performance paradigm. The focus of this work is clearly set out by Bain (1959: pp. vii-viii) I am concerned with the environmental setting within which enterprises operate and in how they behave in these settings as producers, sellers and buyers. By contrast, I do not take an internal approach, more appropriate to the field of management science, such as could inquire how enterprises do and should behave in ordering their internal operations and would attempt to instruct them accordingly...

my primary unit for analysis is the industry or competing groups of firms, rather than the individual firm or the economy wide aggregate of enterprises. This inability, or unwillingness, to probe within the boundaries of the firm itself has serious weaknesses even in its own terms. If opportunities are equally available to all they are available to no one in particular. This problem, most clearly articulated by Richardson (1960), lies a little beneath the surface. But the failure to resolve it creates a theory of industrial organization of limited value to practical businessmen. Reviewing the state of oligopoly theory in 1975 Joskow comments that the ultimate test of the utility to the various models is whether they prove useful to people involved in analyzing problems involving actual markets or groups of markets.

I suggest that not only arent they particularly useful but also that they arent really used. The Development of Business Strategy The vacuum that this leaves has been filled. Igor Ansoff is generally credited with founding the subject of corporate strategy. Although such a development is clearly foreshadowed by Chandlers contributions to business history, Ansoff (1965) (p. 16) is explicit that his work is motivated by the deficiencies of contemporary microeconomics: Study of the firm has been the long time concern of the economics profession. Unfortunately for our present purpose, the so-called microeconomic theory of the firm which occupies much of the economists thought and attention, sheds relatively little light on decision-making processes in a real world firm. It cannot be said that the development of a distinct discipline of strategy has enjoyed such success.

The tools of the strategist - the experience curve and the portfolio matrix - are jejune at best, and much of what passes for strategy is platitude or pious exhortation. The most substantial body of empirical research to be found under the heading of strategy is based on the PIMS database (Buzzell and Gale 1987) and would fit comfortably into the structure-conduct-performance tradition. The most widely read and influential management book of the 1980 s is probably In Search of Excellence, a journalistic account of the characteristics of leading American corporations (Peters and Waterman 1982). The two most important contributors to the development of strategic thinking in the last decade are probably Porter and Moss Kanter, whose work has recognizable antecedents in economics and organizational sociology respectively. Strategy has even developed its own counter-culture, based largely around the engagingly eccentric Henry Mintzberg, who denies the possibility, or at least the relevance, of a rational strategy. Michael Porter stands out from this field in having taken economics to business leaders and in having based strategy firmly in economics.

Yet the economics he uses is economics with which Bain and Mason would have been comfortable and familiar. Porters five forces - suppliers, substitution, entry, customers, rivalry - have an obvious affinity with Scherers S-C-P presentation. And this should come as no surprise, since what Porter has done is to cross the Charles River, metaphorically and literally, and bring together the traditions of Harvard economics with those of its Business School. It is notable, but consequential, that the approach is decidedly less successful when applied to the firm (in Competitive Advantage (1985) ) than when applied to the industry (in Competitive Strategy (1980) ). The absence of a well-ordered body of knowledge is most clearly reflected in the way in which the subject is taught. This is based largely on the case method - a kind of classroom learning by doing.

No one teaches physics by cases and, interestingly, the technique is not much used in law either. But if economics might lay claim to providing that well ordered body of knowledge which strategy lacks, it is not a claim that has been widely recognized. While business education as a whole has been expanding, the role of formal economics within it has generally been contracting. The New Industrial Economics. But while all this has been going on, and following directly on the pessimistic comments of Joskow cited above, the subject of industrial economics itself has undergone massive changes. Those that are relevant to the themes of this article fall into two broad areas.

Each reflects the resurgence of formal methods in industrial economics: in reaction to, or perhaps in development of, the strongly empirical traditions of the structure-conduct-performance paradigm. One of these areas is the development of models rooted in game theory. An economist who knew nothing of business strategy might well suppose that it would be centered around the theory of games. He would be quite mistaken. A recent volume (Oster 1990) is the only major textbook on strategy I know even to mention the subject and even that apologizes for its novel content by beginning with the slightly shamefaced confession that this is a book about competitive strategy by an economist.

Now it is perhaps true that game theory has never quite lived up to the potential, which its initial development appeared to offer. One recent text on the subject (Rasmussen 1989) describes it as the Argentina of economics, in terms of the gap between potential and achievement. If game theory seemed to offer the key to analyzing oligopolistic interactions, the lock proved obdurately hard to turn. But from the mid 1970 s it did begin to move, and modern textbook in industrial organizations such as Title (1988) are very largely based on game theory, at least in the broad sense. The second important area of change is in that group of issues concerned with asymmetry of information, with principals and agents and with the nature of contracts and ownership. This area of study is currently developing in many different directions, and at present enjoys little coherence taken as a whole.

It is evidently a fertile area of study and has attracted many of the most fertile minds in the profession. It holds out the prospect of a theory of the internal organization of firms, and of the relationships which is both between firms more comprehensive and more powerful than anything that has existed until now. The Future of Economics in Business. The firm is a collection of contracts. Its internal organization is a set of arrangement between principals and agents. Its relationships with its competitors are non-cooperative games and those with its suppliers and customers are cooperative games.

All these are subjects which have been at the center of research in economic theory in the past fifteen years. The key issue for the development of microeconomics in the next century is whether they can be expressed and developed in ways which gives them relevance to business policy. This requires change in the attitudes of both businessmen and economists. It is, of course, easier to say what businessmen must do. Distinguish insight from cliche.

Discover that learning comes not from hearing the felicitous reiteration of what one has oneself just said - the mainstay of most consultancy and business seminars - but from experiencing challenges to ones pre-conceptions. Most of this will happen as the educational level of management rises. Microeconomics has potentially the same role to play in relation to management issues that macroeconomics currently has for political issues. Because of the ways in which the subject has evolved over the past 100 years, it has conspicuously failed to play that role. Words: 1 656 Bibliography: 1) Adams, Paul, Brian Kruger, and Mark McBride (1998) Illustrating the Capital Asset Pricing Model: A Classroom Asset Market, Miami University of Ohio, 2) Anderson, Lisa, and Charles A. Holt (1996) Classroom Games: Information Cascades, Journal of Economic Perspectives, 10: 4 (summer), 187 - 193. 3) Fels, Readings (1993) This is What I Do, and I Like It, Journal of Economic Education, Special Issue on Classroom Experimental Economics, 34365 - 370. 4) Garrett, Rod (1998) A Free Entry and Exit Experiment, University of California at Santa Barbara. 5) Delemeester, Greg, and John Neral (1995) Classroom Experiments to Accompany Taylor's Economics: A User's Guide, Boston: Houghton Mifflin.

Research essay sample on The Structure Conduct Performance Paradigm