orgtheory.net

wise not to turn your back on ’em … economists, that is

Looking back on it, getting an MBA at the University of Chicago (1981) is really what led me to academia. Back then, course readings were 30-40 academic journal articles. Rarely did a textbook accompany a class. As students, we knew we were there to learn the latest-and-greatest academic thinking. In our view, courses based upon some textbook anybody could get at their student bookstore for $50 had to be worth little more than, well, $50. Forget about classes taught by the grey-hairs (you know, classes in which some big-shot ex-executive sits around and regales students with war stories) — total waste of time, in our view. No, we wanted the meaty stuff. The stuff that wouldn’t be “best-practices” for another 10 years. Commercializing that knowledge, yeah, that’s where the money was.

So, I specialized in Finance (what else?) and launched into an exciting decade+ of business practice. At some point, I started consulting and, at some point after that, I was asked to work on a strategy project. I knew nothing about strategy at the time — BUT! — I knew how to read academic journals. No problem. Off to the library to read the pink strategy journal! Up to speed and 10 years ahead of practice in a few sittings. That b-school training was truly awesome. (In case you are wondering, btw, years later when I was a rookie PhD, I interviewed at Chicago. My old Micro prof, Sam Peltzman, took me to dinner. When I asked him what journal articles he was putting in his MBA course, he did a spit-take and said, “Wall Street Journal articles.” More on this later.)

I guess it would be fair to say that I found the strategy literature sadly wanting in comparison to the precision and mathematical sophistication I was used to in the Finance literature (mind you, this was as a practitioner). My reaction was: big opportunity here. This was the 90s and, for those who are not aware of it, the methodological advances in economics were really expanding at that time: game theoretic learning, evolutionary economics, behavioral economics, computational methods … cool technological approaches that held some promise in tackling the complexities inherent in the strategy problem domain. Off I went to get a math econ degree and I’ve never looked back with any regrets. (I do look back and marvel at the level of hubris that propelled me on my way — though, without it, where would any of us be in this academic hustle?)

Over time, outside of trying to stay up on promising methodological developments, I became less attentive to what people were doing in economics. Early-on, I tried to get my IO friends interested in the issues that so animated my own research. Typically, 3 minutes into describing something I was working on to a respected IO colleague, I could see the eyes glaze over and hear the responses go on autopilot. I really was a strategy guy and, clearly, the strategy literature was where my career would rise or fall. When asked, I explained it in this way, “The central question in strategy is who gets what, why and for how long. IO economists, IO being in many ways a mirror field, are interested in how the most value gets created. The dichotomy is one between distributional vs. efficiency issues. We want to tell Apple how to make more profit. They want to tell the FTC how to increase social welfare.”

This is not to say there weren’t always great economists in the bi-curious category. Of course there were. But, they were not the majority and I was smugly comfortable in my belief that, regardless of how frustratingly slow progress in strategy was, the field had little to worry about from economics. In fact, just as recently as last year, I had this discussion with one of my dearest colleagues, Jan Rivkin.  I was somewhat surprised when he, in so many words, told me I was full of it. I felt sorry (for him) that I couldn’t bring him around in that discussion. Eventually, though, I knew I would win him over.

That was until about a month ago. That was about a time the paper by Chad Syverson (2011) started making the rounds. Entitled, “What Determines Productivity?” it is a wide-ranging survey paper that collects and organizes work in economics on persistent differences in firm productivity levels. Almost all the papers are from 2000 on. I found the quantity and quality of work cited, frankly, jaw-dropping. Now, those who have followed the narrative to this point will say, “Yes, but it’s work on productivity — that means the interest is still all about efficiency!” True. But, here’s the catch: “efficiency” in this work is typically measured as Revenue/Cost. Take the numerator and subtract the denominator and — PRESTO — you have the object of focus in strategy.

I’m still digesting this. It could be good news. After all, I’d love to have more outlets for my work. On the other hand, young scholars like Syverson are smart … and teched-up … and full of youthful energy. What I can say is that the bar for strategy research has stealthily gone up over last decade.

Written by @mdryall

September 29, 2011 at 7:45 pm

7 Responses

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  1. Would love to hear more about the shift from academic articles to the WSJ in the classroom. I look forward to reading that paper!

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    Andrew Boysen (@boysenandrew)

    September 29, 2011 at 8:13 pm

  2. Mike: nice intro post. Biographical and interesting.

    Some thoughts.

    “I guess it would be fair to say that I found the strategy literature sadly wanting in comparison to the precision and mathematical sophistication I was used to in the Finance literature (mind you, this was as a practitioner). My reaction was: big opportunity here.”

    I understand that this is what drove many people to strategy. I am told (not sure if it’s true) that Dick Rumelt looked at the strategy literature (compared to operations) and said to himself, “now there’s a field that needs some serious help” and then chose it. (Jay of course was trained in sociology.)

    On the Syverson piece, haven’t read it, yet. This appears to be it – home.uchicago.edu/~syverson/productivitysurvey.pdf

    You are painting with a rather broad brush when you point to a dearth of work in strategy (well, you end with “the hurdle is high now” – referring to that Syverson piece) – though there is obviously a very large literature on organizational differences, advantage and strategy. If the standard stuff published in the pink and other journals doesn’t convince you, as most of it isn’t formal (I still don’t understand why that is the touchstone – even though I concur that formal models have power and do use them in my own work with co-authors) – I think much of the stuff in econ is also addressing (broadly) related issues: human capital theory, mechanism design, social choice, industrial orgs stuff, principal-agent, incentives, org economics and design, transaction cost etc. And, there are some economists publishing work in strategy-related journals as well – e.g., Bob Gibbons or Luis Garicano. I think econ has a bearing on strategy and folks indeed are making important links. But, it seems that there are also b-school/strategy types (ok, these too are a heterogeneous lot) working on important questions that aren’t addressed in econ – questions of comparative orgs, market-org boundaries, etc. It was interesting to see mainstream economists reactions to Williamson’s Nobel prize, e.g., Levitt. Williamson isn’t studied in mainstream econ, at all, even though he of course is addressing a critical question about comparative orgs, the markets-orgs nexus, etc.

    And, how would the work in organizational and economic sociology fit into all this?

    So, I don’t know that anyone is turning their back on economists. There are folks in strategy building on this work, well, or reacting to it in various ways (in terms of the tenuous assumptions made, etc). But sometimes the formal methodology itself dictates the questions that can be addressed and answered, assumptions made, etc. So again, why is ONLY formal, econ-type work considered helpful in advancing our knowledge about org differences?

    On the point about what students read these days – I largely agree.

    Again, nice post.

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    teppo

    September 29, 2011 at 8:37 pm

  3. If your general point is that economists have gradually drifted closer to those of us who work in the empirical social sciences, then yes, I’d have to agree with you. One of the consequences of the freakonomics trend in economics is that there is suddenly an explosion of work in economics that looks an awful lot like sociology. I think that’s great. Unfortunately, much of it doesn’t engage much with the sociological literature, which is too bad as I think scholars on both sides of the pond could learn from each other.

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    brayden king

    September 29, 2011 at 9:55 pm

  4. @ Teppo: Thanks for the lengthy comment as well as the invitation to post here for a bit. My primary response to your comments is that you didn’t read my post narrowly enough. I was commenting about my own journey, which has been primarily focused on developing formal foundations of strategy, in particular on persistent performance differences among firms. I’ll get around to commenting on the literature in general, but this wasn’t meant to be that.

    By the way, the citations in the Syverson piece are not primarily theoretical … though there are plenty of those … rather, much of it is empirical. When I compare the sophistication of work in those citations versus what I typically see coming through our workshops (and we get some of the best strategy has to offer), the gap is shocking.

    I’m not dogmatic about training. One of my best papers was coauthored with a sociologist. And I have always gotten much enjoyment working in an area that allows me to interact with a diverse group of scholars. Be that as it may, my strongest interest is in explaining real world phenomena. Given that objective, I think we need to be careful living in our own little bubble of an academic ecosystem, poo-pooing other work because of its “tenuous assumptions” and so on.

    After reading Syverson’s paper, I thought, “Hmm, on this specific topic, which is almost identical to the golden-ring research question in strategy, what work could I point them to in our field that would add substantially to their progress?” I really had trouble coming up with anything. In a decade, they’ve pretty much covered the bases all on their own (on this specific question).

    That’s troubling, imho, and indicative of deep problems in our field.

    Hey! I just made my second post, hehe.

    Cheers!

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    mdryall

    October 2, 2011 at 12:14 am

  5. Mike: Thanks for the response. I largely agree with the “own academic bubble” issue.

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    teppo

    October 3, 2011 at 3:58 pm

  6. […] mentioned in my first post here, I initially went the MBA route (Chicago ’81) and worked for over a decade doing […]

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  7. […] past decade or so on persistent differences in levels of firm productivity. As I have pointed out elsewhere, one of the traditional differences between economics and strategy is the focus on efficiency […]

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