STRATEGIC ORGANIZATION Vol 1(3): 345–352
1476-1270[200308];1:3;345–352;035292
Copyright ©2003 Sage Publications (London,Thousand Oaks, CA and New Delhi)
www.sagepublications.com
S O ! A P B OX
E D I TO R I A L E S S AY S
Austrian insights on strategic
organization: from market insights to
implications for firms
Peter W. Roberts Emory University, USA
Kathleen M. Eisenhardt Stanford University, USA
A review of the strategy and organizations literature suggests that insights from
Austrian economics are beginning to influence our thinking about market-level dynamics (Dickson, 1992; Jacobson, 1992; Hill and Deeds, 1996; Young et al., 1996; Roberts,
2000). Surprisingly, however, there are few, if any parallel efforts devoted to developing
implications of the Austrian view at the level of the firm. Yet without such efforts there
is a significant risk of overdeveloping our accounts of how the actions of entrepreneurial
managers combine with other forces to create market turbulence, while under-attending
to the specific strategies and organizational forms that firms’ managers adopt to compete
effectively in these kinds of markets.
In this essay, we argue that the principal tenets of Austrian economics suggest the
possibility of fresh strategic and organizational thinking at the firm level. In particular,
they provide the seeds of a novel theory of strategy that relies on a logic of sensing and
seizing opportunities in turbulent markets, rather than a logic of positioning in relatively stable markets (Porter, 1985) or a logic of resource leverage in incrementally
changing markets (Barney, 1991; Wernerfelt, 1984). This Austrian-based theory would
focus on seeking out (rather than avoiding) uncertainty, and on managers who are especially alert to opportunities derived from unlikely sources. Along parallel lines, Austrian
economics also suggests a theory of organization that relies on structures and processes
that enable experimentation and flexibility. Pushing these ideas a step further, an
Austrian orientation (perhaps uniquely) implies the confluence of strategy and organization. Indeed, in turbulent settings the organization itself may be the strategy.
Austrian economics and the market process1
Austrian economics is most obviously differentiated from its orthodox counterparts by
its dynamic conception of markets. Specifically, a market is viewed as a process that is in
perpetual disequilibrium. As the managers of competing firms engage in production
345
346
S T R AT E G I C O R G A N I Z AT I O N 1 ( 3 )
and exchange, they create an ever-changing environment in which they must, in turn,
operate (Von Mises, 1949). When combined with shifting consumer tastes, product
technologies, and process innovations, these endogenous adaptations trigger a continual
stream of modest perturbations, a few larger shifts, and the occasional ‘wave of creative
destruction’ (Schumpeter, 1934). As a result of this continual stream of change, it
is impossible to fully know (and often to even approximately know) in advance the eventual scale, timing, and direction of market evolution (Kirzner, 1997).
Central to this perspective on market process are the twin notions of ignorance and
discovery. Because of the incompleteness of market knowledge, ignorance about at least
some opportunities for more advantageous resource use always exists. Yet this ignorance
goes well beyond the familiar assumption that managers face asymmetric or imperfect
information simply because it is costly to produce (Stiglitz, 1994). Rather, ignorance is
about managers’ being fundamentally unaware of what they do not know about a
market’s particulars (Kirzner, 1997). Moreover, ex ante ignorance means that opportunities are not so much planned as discovered. That said, such opportunities are not simply
lying around in obvious places waiting to be seized. Rather, most are discovered through
active participation in the market (Kirzner, 1997). Managers uncover (often serendipitously) the existence of opportunities as they operate in the market and then they update
their knowledge bases (Hayek, 1948).
As this dynamic market process unfolds, managers play dual roles (Kirzner, 1973).
They are both entrepreneurs and resource owners. While the first role involves working
through ignorance to discover often fleeting opportunities, the second centers on decisions regarding which resources are needed (or not), and how such resources ought to be
configured to capture and exploit the attractive opportunities that emerge. Obviously
then, in markets that are in perpetual disequilibrium managers are continuously adjusting and even transforming their resources as plans are revised, creating fresh resource
combinations to satisfy those plans. Yet as the Austrian perspective also emphasizes, a
firm’s resource system has complex interactive effects that make it impossible to accurately predict the outcomes of strategic actions (Lachmann, 1978). Given the inevitable
lack of clarity of outcome for these decisions, managers often make mistakes. From an
Austrian perspective such mistakes are not necessarily problematic. They may inadvertently yield potentially valuable resource combinations, and related novel opportunities
for future entrepreneurial action (Lachmann, 1978).
Austrian economics uniquely provides an account of markets in disequilibrium.
This disequilibrium is driven by the combination of endogenous actions of managers
and the exogenous shocks of changes in technologies, consumer preferences, government
actions, and the like. As competing managers discover idiosyncratic and sometimes surprising opportunities for new sources of profit, this disequilibrium is perpetuated. In the
course of exploiting these emergent and fleeting opportunities, managers recombine
firms’ resources in attempts to produce desired effects. Some of these effects are predictable, but others are unforeseen. The latter introduces a stream of surprises, and even
mistakes that cause a market’s particulars – and therefore the opportunities that they
hold – to be constantly reshaped. Perpetual motion is the result.
RO B E RT S & E I S E N H A R D T : S O ! A P B OX
Implications for strategic organization
Strategy is fundamentally concerned with a firm being unique in some competitively
advantaged way. Moving past this broad observation, strategy scholars have relied on
variants of economics to develop the logic by which firms achieve the competitive
advantages that lead to superior performance. Theories of strategic positioning (such
as the five-forces framework) rely on industrial organization economics to argue that
superior performance is derived from a unique configuration of tightly linked activities
that create a defensible strategic position (Porter, 1985). Resource-based theories rely on
the several schools of microeconomics to argue a strategic logic that competitive advantage derives from valuable, rare, inimitable, and non-substitutable resources that may be
leveraged across different products and markets (Conner, 1991). Similarly, Austrian economics can also be used to draw out implications for firms’ strategy.
As noted at the outset, the implications of the distinctive perspective of Austrian
economics most frequently relate to market-level rather than to firm-level phenomena
(that are likely to be of greater interest to scholars of strategic organization). Our thesis
is that there is considerable potential for advance by switching the lens of Austrian economics from markets per se to the strategic and organizational implications for firms
operating in such markets.
Logic of opportunity
Perhaps the most important implication is the shift in the logic of strategy in turbulent,
high-velocity environments. Since wealth creation derives from entrepreneurial discovery, the related strategic logic becomes that of sensing, capturing, and exploiting
opportunities. This contrasts with the logic of building defensible positions, or of leveraging uniquely valuable resources that are inherent in the perspectives of positioning
and competence. It also suggests that managers should seek out uncertainty rather than
construct positioning defenses to avoid it. By gravitating toward or even inciting uncertainty, managers will be more likely to find themselves in the midst of turbulence,
where the most and best opportunities for profit and growth lie. It is precisely this turbulence that produces ignorance about market particulars, which is a prerequisite for
entrepreneurial discovery.
Routines versus simple rules
Given a logic of sensing and seizing opportunities, the Austrian view further implies the
need for strategy to focus on the processes by which such actions actually occur. Since
opportunities are often numerous, fleeting, and ill-formed, such processes are probably
not the deeply-grooved routines of the resource-based view (Teece et al., 1997). When
markets are stable or perhaps only incrementally changing, such stable processes may be
relevant for constructing interrelated activity systems or leveraging resources into
nearby markets. Escalating turbulence, however, leads to pockets of very attractive, but
over-abundant opportunities. Therefore, the relevant questions become: which to
choose? how to exploit? In contrast to other views, the Austrian perspective suggests
that strategy in such markets is likely to consist of simple rules that shape and guide
347
348
S T R AT E G I C O R G A N I Z AT I O N 1 ( 3 )
action to determine which opportunities to pursue, how to pursue them, at what rate,
and when to stop (Eisenhardt and Sull, 2001).
These simple rules take on particular significance given the likelihood of surprises
and mistakes in the market process described by Austrian economics. Given ex ante
ignorance about market particulars and the complexity of effects inherent in resource
combinations, managers will inevitably initiate some actions in the expectation of a
certain outcome, only to have the realized effects turn out to be quite different. These
frequent surprises (both positive and negative) mean that any one action will probably
require further adaptations. Simple rules become the structure of guiding principles
within which managers can adjust to and even exploit these surprises (Eisenhardt and
Martin, 2000). If these rules were more structured into stable routines, they would be
too inflexible to enable managers to adjust as novel opportunities are confronted. If
they were completely unstructured, it would be difficult, if not impossible, to achieve
coherent outcomes and build competitive advantage.
The role of time
The primary temporal consideration of traditional strategic perspectives centers on the
presence or absence of first-mover advantages (Lieberman and Montgomery, 1988). Such
advantages are related to the presence of structural factors in an industry, such as
economies of scale and network effects. Beyond this consideration, timing plays almost
no strategic role. By contrast, timing is central to strategy in the context of the Austrian
view. Because markets are in constant disequilibrium, attractive opportunities are transient. Therefore, timing in terms of the temporal window when they can be captured
and exploited is limited.
Further, the Austrian view recognizes that time is a flow, not simply a series of time
periods as depicted in a multi-period game in which strategy may be adjusted in terms
of a sequence of competitive moves. Strategy from the Austrian perspective deals with
the very real and ever-present tension between exploiting today’s market opportunities
as against moving to those of tomorrow (Brown and Eisenhardt, 1998). To use an alternative lexicon, strategy must address the inherent tension between path-dependent and
path-breaking actions. Indeed, a central aspect of strategy therefore deals with managing
these tensions in an ongoing manner. Roberts and Amit (2003) demonstrate this point
in their analysis of innovation and financial performance in the retail banking industry.
They find that superior financial performance is not always the result of moving first,
but may be a function of how a firm’s managers develop a particular history of innovative activity. When market turbulence is the rule, firms that are both prolific and consistent in their innovative activity outperform those that are simply concerned with
moving first.
Real-time learning
Thus far, we have highlighted several of the implications of Austrian economics for
strategy at the level of the firm. The perspective also, however, has implications for organization. The principal contemporary theories of organization, such as social network,
ecological, resource dependence, and institutional theories are not so much focused on
RO B E RT S & E I S E N H A R D T : S O ! A P B OX
organization per se, but rather on the relationship between the firm and its environment. The internal workings of the organization are often of little interest. In contrast,
the organizational implications of Austrian economics are fundamentally concerned
with what occurs inside the organization.
Given market turbulence, the Austrian view implies that it is necessary to experience the market in order to uncover opportunities that are not observable in advance. In
other words, a priori analysis has limited value as appropriate actions become evident
only during the process of competing. Capturing and exploiting profitable opportunities necessarily depends upon experiential learning processes, such as learning by doing,
improvisation, and probing (Miner et al., 2001). These types of learning rely on active
participation in markets, and not on complex structures and/or detailed routines that
facilitate planning and a priori reasoning. In contrast with command-and-control hierarchy, firms with an emphasis on real-time learning are decentralized, with explicit
attention to activities, like prototyping, that inherently misfit with existing operations
and generate mistakes even as they reveal opportunities.
Modularity
If real-time learning enables managers to more readily discover (often serendipitously)
opportunities in a timely manner, a modular organization allows managers to rearrange
their resources more quickly to exploit these opportunities. By adding, subtracting,
combining, and splitting modular arrangements or ‘patches’ of organizational resources,
managers are able to capture and exploit the opportunities that real-time learning
processes reveal (Galunic and Eisenhardt, 2001; Siggelkow, 2002). Moreover, these
modules are typically loosely coupled. Rather than tightly bound activity systems or
bundles of enduring core competencies, these modules can be reconnected in novel ways
to capture new opportunities (Martin and Eisenhardt, 2003).
Towards the confluence of strategy and organization
Perhaps most significantly, both the strategic and organizational implications of
Austrian economics converge on the importance of process. Process in the form of simple
rules is at the heart of a strategy that relies on sensing, seizing, and exploiting fleeting
opportunities in a uniquely advantaged way. Process is also central to a view of organization that relies not only on modular structure, but also more fundamentally on processes
that include real-time learning and go beyond these to the processes by which resources
are gained, reconfigured, and released. Without effective processes, managers cannot
successfully sense, seize, and exploit opportunities for profit and growth. Indeed, in the
extreme the Austrian view may well imply, given that strategy and organization are intimately bound to processes, that the strategy is the organization.
Pressing forward
While some strategy scholars have explored the Austrian view as the basis for analyzing
market-level issues, there has been less interest in its implications for thinking at the
level of the firm. Given increasing research emphasis on market dynamics, however,
349
350
S T R AT E G I C O R G A N I Z AT I O N 1 ( 3 )
Austrian economics, with its emphasis on disequilibrium, seems to us a prime candidate
for generating fresh theoretical insights at the intersection of the strategy and organization literatures. Taking a cue from Porter’s inversion of perspective in industrial organization economics, we switched from the usual market lens of Austrian economics to ask
what the firm-level implications for strategy and organization are. Our answer sketches
out six basic strategic and organizational insights.
Austrian economics offers a process-oriented view of markets that takes serendipity,
timing, misfit, and mistakes seriously. Applying these insights to strategy suggests that
managers should engage market uncertainty, rely on a strategic logic of opportunity, and
be guided by simple rules. Applying these insights to organization suggests that
managers should employ real-time learning processes such as experimentation, improvisation, and trial-and-error as well as modular structures. The Austrian view thus
unequivocally signals the importance of the processes by which managers continually
engage the market and continuously recombine resources, all the while remaining alert
to novel opportunities. In the Austrian perspective, managers and their actions matter
fundamentally. Austrian economics also offers traction in domains where our current
theories tend to stumble, that is, markets characterized by non-linear change and/or
high levels of uncertainty and ambiguity, and firms (both young and old) with entrepreneurial aspirations. Taken together, these observations make, we think, a compelling
case for closer scrutiny of Austrian economics in future research on organization, strategy, and most importantly, their intersection – strategic organization.
In closing, we must stress that Austrian economics has been criticized for its lack of
empirical agenda to accompany its theoretical development. Most pressing then is the
development of a stock of empirical research to support these emerging theoretical
insights. Part of the explanation for the dearth of empirical work in this area may be the
modal research approach, that is, archival data analyzed using econometric techniques.
The emergent, non-deterministic account of markets offered by the Austrian view may
not lend itself easily to this type of analysis. Since market activity is purposeful, but all
relevant knowledge is not available a priori, the task of the researcher is to first articulate
the logic that guides action, and then to complement this with studies that capture the
relevant processes, while respecting their emergent character. In addition, as researchers,
we may need to go inside the firm much more than is de rigueur now to better understand the processes that drive firm’s success.
A minority of organizational scholars and economic historians are actively pursuing these alternative research strategies, many of which are aptly described as descriptive and/or non-deterministic case studies. Complementing such analyses with studies
using other methods tailored to tackling non-linearities (e.g. simulations) may yield
further insight into the specific processes underlying the dynamics of performance
heterogeneity.
Reprise
Our message is simple. The occasionally maligned and often neglected Austrian school
of economics offers the promise of theoretical advances at the intersection of strategy and
RO B E RT S & E I S E N H A R D T : S O ! A P B OX
organization, by offering a fresh view of the market as a process in disequilibrium. In
turn, this market-oriented view may well provide the seeds of novel theories of strategic
organization.
Note
1
Our sketch of Austrian economics is necessarily brief, and admittedly selective. For a more
comprehensive treatment, see Kirzner (1997).
References
Barney, J.B. (1991) ‘Firm Resources and Sustained Competitive Advantage’, Journal of Management
17: 99–120.
Brown, S.L. and Eisenhardt, K.M. (1998) Competing on the Edge: Strategy as Structured Chaos. Boston,
MA: Harvard Business School Press.
Conner, K.R. (1991) ‘A Historical Comparison of Resource-Based Theory and Five Schools of
Thought Within Industrial Organization Economics: Do We Have a New Theory of the
Firm?’ , Journal of Management 17: 121–54.
Dickson, P.R. (1992) ‘Toward a General Theory of Competitive Rationality’, Journal of Marketing
56: 69–83.
Eisenhardt, K.M. and Martin, J.A. (2000) ‘Dynamic Capabilities: What Are They?’ Strategic
Management Journal 21: 1105–21.
Eisenhardt, K.M. and Sull, D. (2001) ‘Strategy as Simple Rules’, Harvard Business Review 79:
107–16.
Galunic, D.C. and Eisenhardt, K.M. (2001) ‘Architectural Innovation and Modular Corporate
Forms’, Academy of Management Journal 44: 1229–49.
Hayek, F.A. (1948) Individualism and Economic Order. Chicago, IL: University of Chicago Press.
Hill, C.W.L. and Deeds, D.L. (1996) ‘The Importance of Industry Structure for the Determination
of Firm Profitability: A ENO-Austrian Perspective’, Journal of Management Studies 33:
429–51.
Jacobson, R. (1992) ‘The “Austrian” School of Strategy’, Academy of Management Review 17:
782–807.
Kirzner, I.M. (1973) Competition and Entrepreneurship. Chicago, IL: University of Chicago Press.
Kirzner, I.M. (1997) ‘Entrepreneurial Discovery and the Competitive Market Process: An
Austrian Approach’, Journal of Economic Literature 35: 60–85.
Lachmann, L.M. (1978) Capital and Its Structure. Kansas City, KS: Sheed Andrews and McNeel.
Lieberman, M.B. and Montgomery, D.B. (1988) ‘First-mover Advantages’, Strategic Management
Journal 9: 41–58.
Martin, J.A. and Eisenhardt, K.M. (2003) ‘Cross-Business Synergy: Recombination, Modularity,
and the Multi-Business Team’. University of Texas, Austin Working Paper.
Miner, A.S., Bassoff, P. and Moorman, C. (2001) ‘Organizational Improvisation and Learning: A
Field Study’, Administrative Science Quarterly 46: 304–37.
Porter, M.E. (1985) Competitive Advantage: Creating and Sustaining Superior Performance. New York:
Free Press.
Roberts, P.W. (2000) ‘A Processual Account of Innovative Capabilities’, in N.J. Foss and P.L.
Robertson (eds) Resources, Technology and Strategy, pp. 80–99. London: Routledge.
Roberts, P.W. and Amit, R. (2003, forthcoming) ‘The Dynamics of Innovative Activity and
Competitive Advantage: The Case of Australian Retail Banking, 1981 to 1995’, Organization
Science 14: 107–22.
Schumpeter, J.A. (1934) The Theory of Economic Development: An Inquiry into Profits, Capital, Credit,
Interest, and the Business Cycle. Cambridge, MA: Harvard University Press.
351
352
S T R AT E G I C O R G A N I Z AT I O N 1 ( 3 )
Siggelkow, N. (2002) ‘Evolution Toward Fit’, Administrative Science Quarterly 47: 125–59.
Stiglitz, Joseph E. (1994) Whither Socialism? Cambridge, MA: MIT Press.
Teece, D.J., Pisano, G. and Shuen, A. (1997) ‘Dynamic Capabilities and Strategic Management’,
Strategic Management Journal 18: 509–34.
Von Mises, L. (1949) Human Action: A Treatise on Economics. New Haven, CT: Yale University
Press.
Wernerfelt, B. (1984) ‘A Resource-based View of the Firm’, Strategic Management Journal 5:
171–80.
Young, G., Smith, K.G. and Grimm, C.M. (1996) ‘“Austrian” and Industrial Organization
Perspectives on Firm-Level Competitive Activity and Performance’, Organization Science 7:
243–54.
Peter W. Roberts is currently an Associate Professor of Organization and Management at
the Goizueta Business School at Emory University. His primary research interests relate to
how firms attain and sustain competitive advantages over time. This incorporates related
interests in innovation and technological change, reputation and identity, and industry evolution. He has studied these issues in diverse settings, including the pharmaceutical industry,
the retail banking industry, the hotel industry, and the global wine industry. The results of
these projects have been published in journals such as Academy of Management Review,
American Journal of Sociology, Organization Science, and Strategic Management Journal. His PhD
(in organizational analysis) is from the University of Alberta. Address: Goizueta Business
School, Emory University, 1300 Clifton Road,Atlanta GA 30322, USA.
[email: [email protected]]
Kathleen M. Eisenhardt is the Stanford W. Ascherman M.D. Professor of Strategy and
Organization at Stanford University. Her primary research interests relate to strategy, strategic decision making, and innovation in rapidly changing and highly competitive markets. She
is the co-author (with Shona L. Brown) of the book Competing on the Edge: Strategy as
Structured Chaos, that won the George R. Terry Book Award from the Academy of
Management. She has published her work in leading journals such as Administrative Science
Quarterly, Organization Science, Strategic Management Journal, and Harvard Business Review. Her
PhD is from Stanford University. Address: Department of Management Science and
Engineering, Stanford University, Stanford CA 94305, USA. [email: [email protected]]