A General Theory of Competition : Resources, Competences, Productivity, Economic Growth

Rating:
Summary: Hunt draws thory closer to real world
Review: Shelby Hunt (2000) has produced an important work in the much deserved area of competition through his book, "A General Theory of Competition: Resources, Competences, Productivity, Economic Growth". The book addresses key issues in the modern analysis of industries and firms and considers major questions concerning industrial competition, organization and policy. It is important and compelling reading. The "general" theory is thus an "evolutionary, process theory of competition" that is evolving itself, a "work in progress", and is distinguished from the set of equilibrium conditions of perfect competition, which is a special case of this "general theory". Hunt broadens the concept of resources (traditionally land, labor, and capital) to include other "resources": financial, legal, human, organizational, informational, and relational, thus producing his "Resource Advantage" theory to explain what other theories of competition (in his view) explain badly or not at all, including differential financial performance among firms, growth, antitrust, and technological progress. Hunt provides a very useful and detailed critique of many theories of competition; citations and bibliography (600-plus items) are extensive. The book develops the structure, foundations and implications of Resource Advantage (R-A) theory. The theory is general in nature with assumptions that are closer to real world and is interdisciplinary in nature. Theory draws from evolutionary economics the conceptualization of competition as dis-equilibrium; from Austrian economics the conceptualization of competition as a process of discovery of dispersed knowledge; from industrial organization economics the emphasis on positioning in a market; from resource perspective the stress on heterogeneous resources and differential efficiencies of firms and from economic sociology the idea that social institutions may confer distinct advantages on one group competing with other. These conceptualizations are used to study comparative systems and economic growth and then Hunt demonstrates the difference in conclusions reached from R-A theory and mainstream economics.

The first four chapters of book review much of achievements of pre - 1970 industrial economics and are written in the form of a literature survey there by form excellent background reading. The book starts with the expression "assume competition" used commonly in economics, which Hunt asserts actually means "assume perfect competition". Hunt further states that the concept of perfect competition is utterly unrealistic as it assumes full knowledge/information, perfect mobility, homogenous demand, and homogenous and passive firms. In these chapters Hunt has placed special emphasis on the contributions of Clark's (1961) differential advantage theory, Chamberlin's (1933) heterogeneous demand theory, and Edith Penrose's (1959) resource based tradition. He further explains that Clark, Chamberlin and Penrose assume competition to be a dynamic process, involving heterogeneous firms where as Robinson and others build industrial economics on the concept of equilibrium. And the concepts build on equilibrium are unable to consider the complexities of real world, which arise due to dynamism and heterogeneity in firms.

Chapter five discusses the fundamental postulates of R-A theory. The chapter is wriiten in an interesting manner and gives an understanding of epistemology of R-A theory and provides an understanding of its difference from the foundational propositions of neoclassical (perfect competition) theory of competition. The table 5.1 (p 106) gives the premises of R-A theory about demand, consumer information, human motivation, firm's objective, firm's information, firm's resources, characteristic of resources, role of management and competitive dynamics and compares them with the premises of perfect competition. In R-A theory variety and disequilibrium are central, no two firms are alike in knowledge, capabilities and other resources. A firm's portfolio of resources can lead to a particular comparative advantage, creating opportunities for higher profits.

Chapter six to nine are full of illustrations which make them interesting to read and Hunt argues the superior explanatory and predictive power of R-A theory in these chapters. Chapter six describes competition as a process and shows how it leads to innovation and organization learning. The central concept of the chapter is that resources are the most important assets of the firms. A firm's portfolio of resources can mean "comparative advantage in resources" leading to production at higher profits. The life span and sustainability of competitive advantage in resources are dependent on internal and external factors of firm and thus make innovation and organization learning endogenous to R-A theory. Chapter seven explains the concepts of productivity, efficiency and effectiveness in context of R-A theory and compares them with neoclassical theory. The chapter also gives an account of the debate of socialistic and economic view on efficiency and productivity (table 7.1, p 168) and gives an account of the superiority of R-A theory in dealing with these issues. R-A theory explains the firms drive for superior productivity because the evolutionary process of R-A competition motivates efficiency and effectiveness enhancing competition, the results of competition are in terms of financial performance (superior, parity, inferior) and market place positions (competitive advantage, disadvantage and parity) and rewards flow to firms that successfully create new resources there by motivating the creation of productivity enhancing, tangible, intangible and complex resources. Chapter eight and nine discuss economic growth in context of R-A theory and neoclassical theory. The neoclassical theory models output (Net National Product) as function of technology, capital and labor and results in technological progress as exogenous to model, growth as economic system-neutral and institution neutral, K/L ratio dominating technological progress and investment driving the growth. In R-A theory output (quantity and attributes of firm's market offerings) as function of financial resources, physical resources, legal resources, human resources, informational resources, relational resources and organizational resources. Thus R-A theory predicts technological progress dominates K/L ratio, economic growth precedes investment and is driven by efficiency enhancing and effectiveness enhancing forms of innovation, technological progress as endogenous and growth dependent on systems and institutions. Chapter nine extends the discussion on endogenous growth models and gives historical and empirical evidence of dependence of growth on institutions. Chapter ten provides the summary of R-A theory and its implications to policy makers. A list of contributions of R-A theory to present stream of literature is drawn on page 258-259.

Overall, the book is full of insights and provides an understanding of the process of competition. The book is recommended for the scholars in strategy, economics and marketing as it gives an understanding of competition in a real world perspective.