Commentary Journal of A General Theory of Competition...‘‘profit maximization’’ or...

EuropeanJournal ofMarketing35,5/6

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European Journal of Marketing,Vol. 35 No. 5/6, 2001, pp. 524-548.# MCB University Press, 0309-0566

CommentaryA General Theory of Competition:issues, answers and an invitation

Shelby D. HuntDepartment of Marketing, Texas Tech University,

Lubbock, Texas, USA

Keywords Competition, Marketing theory, Resource management, Productivity,Economic growth

Abstract Resource-advantage theory is an interdisciplinary, evolutionary, process theory ofcompetition that is proving to be extraordinarily provocative. A General Theory of Competition:Resources, Competences, Productivity, Economic Growth pulls together many of the articles thatdevelop the theory. This article provides a brief overview of resource-advantage theory, reports ontwo queries that have been raised by the theory's critics, responds to the two queries, and extendsan invitation to readers.

IntroductionThe resource-advantage theory of competition (hereafter, R-A theory) isinterdisciplinary in the sense that it has been developed in the literatures ofseveral different disciplines, including marketing (Falkenberg, 2000; Foss,2000; Hodgson, 2000; Hunt, 1997a, 1999, 2000a, 2000b; Hunt et al., 2001; Huntand Morgan, 1995, 1996, 1997), management (Hunt, 1995, 2000c; Hunt andLambe, 2000), economics (Hunt, 1997b, 1997c, 1997d, 2000d, 2001) and generalbusiness (Hunt, 1998; Hunt and Duhan, 2001). R-A theory is alsointerdisciplinary in that, as shown in Table I, it draws on and has affinitieswith numerous other theories and research traditions, including evolutionaryeconomics, `̀ Austrian'' economics, heterogeneous demand theory, differentialadvantage theory, the historical tradition, industrial-organization economics,the resource-based tradition, the competence-based tradition, institutionaleconomics, transaction cost economics, and economic sociology. At least in partbecause of its interdisciplinary nature, R-A theory has always been provocative(Hunt and Morgan, 1996, 1997).

A General Theory of Competition (Hunt, 2000a) ± hereafter, GTC ± pullstogether many of the articles that develop R-A theory in the diverse disciplines.As with the articles, GTC's provocative, interdisciplinary nature has promptedquestions, critiques, and commentaries. Most commentators find many aspectsof GTC to be commendable. For example, Lusch (2000, p. 126) finds that,because of GTC's `̀ unifying and integrative nature . . . it should be especiallyuseful to educators, managers, and public policymakers''. Likewise, Falkenberg(2000, p. 7) feels `̀ confident that the text will serve as a useful tool forunderstanding markets and competition, that it will inspire further research inthe area, and that it will be required reading for students of marketing andstrategy.'' Nonetheless, numerous issues concerning GTC have been raised. For

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Table I.The pedigree of

resource-advantagetheory

Research tradition Representative works Affinities with R-A theory

1. Evolutionaryeconomics

Marshall (1890)Schumpeter (1934, 1950)Alchian (1950)Nelson and Winter (1982)Langlois (1986)Dosi et al. (1988)Witt (1922)Foss (1993)Hodgson (1993)

Competition is an evolutionary,disequilibrating process. Firms haveheterogeneous competences. Pathdependencies can occur

2. Austrianeconomics

Mises (1920, 1949)Hayek (1935, 1948)Rothbard (1962)Kirzner (1979, 1982)Lachmann (1986)

Competition is a knowledge-discovery process. Markets are indisequilibrium. Entrepreneurship isimportant. Value is subjective.Intangibles can be resources

3. Heterogeneousdemand theory

Chamberlin (1933)Smith (1956)Alderson (1957, 1965)McCarthy (1960)Myers (1996)

Intra-industry demand issubstantially heterogeneous.Heterogeneous supply is natural.`̀ Product'' should be defined broadly

4. Differentialadvantage theory

Clark (1954, 1961)Alderson (1957, 1965)

Competition is: dynamic; bothinitiatory and defensive; andinvolves a struggle for advantages.General equilibrium is anappropriate welfare ideal

5. Historicaltradition

North (1981, 1990)Chandler (1990)Landes (1998)

History `̀ counts''. Firms are entitiesthat are historically situated in spaceand time. Institutions influenceeconomic performance

6. Industrial-organizationeconomics

Mason (1939)Bain (1954, 1956)Porter (1980, 1985)

Firm's objective is superior financialperformance. Marketplace positionsdetermine relative performance.Competitors, suppliers and customersinfluence performance

7. Resource-basedtradition

Penrose (1959)Lippman and Rumelt (1982)Rumelt (1984)Wernerfelt (1984)Dierickx and Cool (1989)Barney (1991, 1992)

Resources may be tangible orintangible. Firms are historicallysituated combiners of heterogeneous,imperfectly mobile resources

8. Competence-basedtradition

Selznick (1957)Andrews (1971)Hofer and Schendel (1978)Hamel and Prahalad (1989,1994a, 1994b)Prahalad and Hamel (1990,1993)Teece and Pisano (1994)Day and Nedungadi (1994)Aaker (1995)Sanchez et al. (1996)Heene and Sanchez (1996)Sanchez and Heene (1997)

Competition is disequilibrating.Competences are resources. Renewalcompetences prompt proactiveinnovation. Firms learn fromcompeting. Firms are embedded

(continued)


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example, Foss (2000) finds GTC to be too eclectic, i.e. too interdisciplinary,whereas Hodgson (2000), in contrast, argues that it is not eclectic orinterdisciplinary enough. Furthermore, Savitt (2000) finds GTC to be tooincremental in its approach, while Foss (2000), in contrast, believes it is notincremental enough. Finally, Savitt (2000) finds GTC to be too neoclassical,while Foss (2000) believes it not neoclassical enough. (See Hunt (2000b) for aresponse to these critiques.)

The purpose of this article is to address two issues that have been raised bynumerous conference participants (and others) concerning GTC. As to the firstissue, a foundational premise of R-A theory is that the primary objective offirms is `̀ superior financial performance''. Critics question: Is this not just`̀ profit maximization'' or `̀ wealth maximization'' in disguise? That is, are not thedifferences between profit maximization and superior financial performanceunimportant, a distinction without a difference? Second, GTC is a generaltheory of competition that is not mathematized, yet it incorporates perfectcompetition as a special case. Some critics query: How can GTC be a generaltheory of competition when it lacks equations? Others question: Shouldn'tperfect competition theory be abandoned, rather than incorporated as a specialcase? I first provide a brief overview of resource-advantage theory. I thendevelop the preceding two queries in some detail, respond to them, and extendan invitation.

Table I.

Research tradition Representative works Affinities with R-A theory

9. Insitutionaleconomics

Veblen (1899, 1904)Commons (1924, 1934)Hamilton (1932)Kapp (1976)Neale (1987)Mayhew (1987)DeGregori (1987)Ranson (1987)Hodgson (1994)

Competition is disequilibrating.`̀ Capital'' is more than just physicalresources. Resources have`̀ capabilities''

10. Transaction costeconomics

Coase (1937)Williamson (1975, 1985, 1996)

Opportunism occurs. Many resourcesare firm-specific. Firm-specificresources are important

11. Economicsociology

Parsons and Smelser (1956)Granovetter (1985, 1994)Etzioni (1988)Coleman (1990)Zukin and Di Maggio (1990)Powell and Smith-Doerr (1994)Smelser and Swedberg (1994)Scott (1995)Uzzi (1996)Fligstein (1995)

Insitutions can be independentvariables. Social relations may beresources. Economic systems areembedded

Source: Hunt (2000a)

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An overview of resource-advantage theoryR-A theory is a general theory of competition that describes the process ofcompetition. Figures 1 and 2 provide a schematic depiction of R-A theory's keyconstructs and Table II provides its foundational premises. Our overview willfollow closely the theory's treatment in GTC (Hunt, 2000a).

The structure of R-A theoryUsing Hodgson's (1993) taxonomy, R-A theory is an evolutionary,disequilibrium-provoking, process theory of competition, in which innovationand organizational learning are endogenous, firms and consumers haveimperfect information, and in which entrepreneurship, institutions, and publicpolicy affect economic performance. Evolutionary theories of competitionrequire units of selection that are:

. relatively durable, i.e. that can exist, at least potentially, through longperiods of time; and

. heritable, i.e. that can be transmitted to successors.

For R-A theory, both firms and resources are proposed as the heritable, durableunits of selection, with competition for comparative advantages in resourcesconstituting the selection process.

At its core, R-A theory combines heterogeneous demand theory with theresource-based theory of the firm (see premises P1, P6 and P7 in Table II).Contrasted with perfect competition, heterogeneous demand theory viewsintra-industry demand as significantly heterogeneous with respect toconsumers' tastes and preferences. Therefore, viewing products as bundles ofattributes, different market offerings or `̀ bundles'' are required for differentmarket segments within the same industry. Contrasted with the view that thefirm is a production function that combines homogeneous, perfectly mobilefactors of production, the resource-based view holds that the firm is a combinerof heterogeneous, imperfectly mobile factors, which are labeled `̀ resources''.These heterogeneous, imperfectly mobile resources, when combined withheterogeneous demand, imply significant diversity as to the sizes, scopes, andlevels of profitability of firms within the same industry. The resource-basedtheory of the firm parallels, if not undergirds, what Foss (1993) calls the`̀ competence perspective'' in evolutionary economics and the `̀ capabilities''approaches of Teece and Pisano (1994) and Langlois and Robertson (1995).

As diagramed in Figures 1 and 2, R-A theory stresses the importance of:

. market segments;

. heterogeneous firm resources;

. a comparative advantage/disadvantage in resources; and

. marketplace positions of competitive advantage/disadvantage.

In brief, market segments are defined as intra-industry groups of consumerswhose tastes and preferences with regard to an industry's output are relatively


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Figure 1.A schematic of theresource-advantagetheory of competition

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homogeneous. Resources are defined as the tangible and intangible entitiesavailable to the firm that enable it to produce efficiently and/or effectively amarket offering that has value for some marketing segment(s). Thus, resourcesare not just land, labor, and capital, as in neoclassical theory. Rather, resourcescan be categorized as financial (e.g. cash resources, access to financial markets),physical (e.g. plant, equipment), legal (e.g. trademarks, licenses), human (e.g.the skills and knowledge of individual employees), organizational (e.g.competences, controls, policies, culture), informational (e.g. knowledge from

Figure 2.Competitive position

matrix

Table II.Foundational premisesof resource-advantage

theory

P1 Demand is heterogeneous across industries, heterogeneous within industries, anddynamic

P2 Consumer information is imperfect and costlyP3 Human motivation is constrained self-interest seekingP4 The firm's objective is superior financial performanceP5 The firm's information is imperfect and costlyP6 The firm's resources are financial, physical, legal, human, organizational,

informational and relationalP7 Resource characteristics are heterogeneous and imperfectly mobileP8 The role of management is to recognize, understand, create, select, implement and

modify strategiesP9 Competitive dynamics are disequilirium-provoking, with innovation endogenous

Source: Adapted from Hunt and Morgan (1997)


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consumer and competitive intelligence), and relational (e.g. relationships withsuppliers and customers). Each firm in the marketplace will have a unique setof resources (e.g. very knowledgeable employees, efficient productionprocesses, etc.) that could constitute a comparative advantage in resources thatcould lead to positions of advantage (cells 2, 3, and/or 6 in Figure 2) in themarketplace. Some of these resources are not easily copied or acquired (i.e. theyare relatively immobile). Therefore, such resources (e.g. culture and processes)may be a source of long-term competitive advantage in the marketplace.

Just as international trade theory recognizes that nations haveheterogeneous, immobile resources, and it focuses on the importance of acomparative advantage in resources to explain the benefits of trade, R-A theoryrecognizes that many of the resources of firms within the same industry aresignificantly heterogeneous and relatively immobile. Therefore, analogous tonations, some firms will have a comparative advantage and others acomparative disadvantage in efficiently and/or effectively producing particularmarket offerings that have value for particular market segments.

Specifically, as shown in Figure 1 and further explicated in Figure 2, whenfirms have a comparative advantage in resources they will occupy marketplacepositions of competitive advantage for some market segment(s). Marketplacepositions of competitive advantage then result in superior financialperformance. Similarly, when firms have a comparative disadvantage inresources they will occupy positions of competitive disadvantage, which willthen produce inferior financial performance. Therefore, firms compete forcomparative advantages in resources that will yield marketplace positions ofcompetitive advantage for some market segment(s) and, thereby, superiorfinancial performance. As Figure 1 shows, how well competitive processeswork is significantly influenced by five environmental factors: the societalresources on which firms draw, the societal institutions that form the `̀ rules ofthe game'' (North, 1990), the actions of competitors, the behavior of consumersand suppliers, and public policy decisions.

Consistent with its Schumpeterian heritage, R-A theory places greatemphasis on innovation, both proactive and reactive. The former is innovationby firms that, although motivated by the expectation of superior financialperformance, is not prompted by specific competitive pressures ± it isgenuinely entrepreneurial in the classic sense of entrepreneur. In contrast, thelatter is innovation that is directly prompted by the learning process of firms'competing for the patronage of market segments. Both proactive and reactiveinnovation contribute to the dynamism of R-A competition.

Firms (attempt to) learn in many ways ± by formal market research, seekingout competitive intelligence, dissecting competitors' products, benchmarking,and test marketing. What R-A theory adds to extant work is how the process ofcompetition itself contributes to organizational learning. As the feedback loopsin Figure 2 show, firms learn through competition as a result of the feedbackfrom relative financial performance signaling relative market position, which,in turn, signals relative resources. When firms competing for a market segment

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learn from their inferior financial performance that they occupy positions ofcompetitive disadvantage (see Figure 2), they attempt to neutralize and/orleapfrog the advantaged firm(s) by acquisition and/or innovation. That is, theyattempt to acquire the same resource as the advantaged firm(s) and/or theyattempt to innovate by imitating the resource, finding an equivalent resource,or finding (creating) a superior resource. Here, `̀ superior'' implies that theinnovating firm's new resource enables it to surpass the previously advantagedcompetitor in terms of either relative efficiency, or relative value, or both.

Firms occupying positions of competitive advantage can continue to do so if:

. they continue to reinvest in the resources that produced the competitiveadvantage; and

. rivals' acquisition and innovation efforts fail.

Rivals will fail (or take a long time to succeed) when an advantaged firm'sresources are either protected by such societal institutions as patents or theadvantage-producing resources are causally ambiguous, socially complex,tacit, or have time compression diseconomies.

Competition, then, is viewed as an evolutionary, disequilibrium-provokingprocess. It consists of the constant struggle among firms for comparativeadvantages in resources that will yield marketplace positions of competitiveadvantage and, thereby, superior financial performance. Once a firm'scomparative advantage in resources enables it to achieve superior performancethrough a position of competitive advantage in some market segment(s),competitors attempt to neutralize and/or leapfrog the advantaged firm throughacquisition, imitation, substitution, or major innovation. R-A theory is,therefore, inherently dynamic. Disequilibrium, not equilibrium, is the norm. Inthe terminology of Hodgson's (1993) taxonomy of evolutionary economictheories, R-A theory is non-consummatory: it has no end-stage, only a never-ending process of change. The implication is that, though market-basedeconomies are moving, they are not moving toward some final state, such as aPareto-optimal, general equilibrium.

On superior financial performanceAs shown in Table II, premise P4 in GTC proposes that the primary objectiveof the firm is superior financial performance. Both neoclassical commentatorsand behaviorally-oriented scholars criticize this premise. From a neoclassicalperspective, superior financial performance is argued to offer no advantagesover profit (or wealth) maximization. Indeed, the substitution of superiorfinancial performance for maximizing performance sacrifices, for no goodreason according to critics, the ability to express economic relationships inmathematical equations that can be solved for maxima and minima usingdifferential calculus. In contrast, behaviorally-oriented scholars criticizesuperior financial performance because it does not acknowledge such firmobjectives as guaranteeing employment to employees, producingenvironmentally-friendly products, and being responsible corporate citizens in


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the locations in which they operate. Indeed, argue behavioralists, superiorfinancial performance is `̀ Anglo-centric'' and does not acknowledge culturaldifferences among different market-based economics. My approach here will beto present GTC's arguments for superior financial performance. In doing so, Iwill address both the neoclassical and behavioralist criticisms.

Note that Table II shows that the firm's primary objective of superiorfinancial performance (P4) is pursued under conditions of imperfect and oftencostly to obtain information about extant and potential market segments,competitors, suppliers, shareholders, and production technologies (P5). Notealso that P3 posits human motivation to be constrained, self-interest seeking,that is, humans are constrained in their self-interest seeking by their personalmoral codes (see Hunt, 2000a, pp. 118-21). Consistent with the `̀ self-interestseeking'' component of constrained, self-interest seeking, GTC argues thatsuperior financial performance is the firm's primary objective because superiorrewards flow to the owners, managers, and employees of firms that producesuperior financial results. These rewards include not only such financialrewards as stock dividends, capital appreciation, salaries, wages, and bonuses,but also such nonfinancial rewards as promotions, expanded careeropportunities, prestige, and feelings of accomplishment.

Because it enables firms to pursue other objectives, such as contributing tosocial causes or being a good citizen in the communities in which it operates,financial performance is viewed as primary. In response to behavioralistcomplaints, GTC does not ignore nonfinancial objectives; it just does not positthem as primary. For-profit organizations differ from their not-for-profitcousins in that the former, but not the latter, are for profit. Indeed, prolongedinferior performance threatens the firm's survival and prevents theaccomplishment of secondary objectives.

The `̀ superior'' in superior financial performance equates with both morethan and better than. It implies that firms seek a level of financial performanceexceeding that of some referent. For example, the indicators of financialperformance can be such measures as accounting profits, earnings per share,return on assets, and return on equity. The referent against which the firm'sperformance is compared can be the firm's own performance in a previous time-period, the performance of rival firms, an industry average, or a stock-marketaverage, among others. Both the specific measures of financial performanceand the specific referents used for comparison purposes will vary somewhatfrom time to time, firm to firm, industry to industry, and culture to culture.That is, for R-A theory, both measures and referents are independent variables.Therefore, GTC does not ignore differences among cultures. Rather, the theoryprovides a framework for investigating the different understandings offinancial performance among different cultures and, most importantly, theconsequences of these different understandings on firms, industries,productivity, economic growth, and social welfare.

Consider, for example, the issue of `̀ short termism'', i.e. the claim that USfirms have short time horizons (compared with Japan, for example), which

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results in firms pursuing short term profits instead of (presumably) moredesirable, long-term investments. Many writers claim that short-termism is aserious problem in the USA and locate the cause of the problem in theinstitutions that influence the financial indicators used by US managers togauge performance. For example, both Jacobs (1991) and Porter (1990, 1992a,1992b) claim that fluid and impatient capital markets in the USA raise the costof capital for US firms by overemphasizing short-term performance. Incontrast, in Germany and Japan, where banks and other large shareholdersrarely trade their shares, long-term capital appreciation is more highly (and, forPorter and Jacobs, more correctly) valued.

The point to be emphasized here is not whether short-termism exists in theUSA or whether it is a major problem or whether impatient capital is its majorcause. Rather, the point to be emphasized is that GTC acknowledges thatdifferent firms (and industries) in different societies may employ differentindicators and referents of financial performance. Therefore, R-A theoryprovides a framework in which the questions `̀ which indicators?'' and `̀ whichreferents?'' make sense. In doing so, it provides a theoretical foundation forempirical research on these questions.

Superior financial performance does not equate with the neoclassicalconcepts of `̀ abnormal profits'' or `̀ rents'' (i.e. profits differing from the averagefirm in a purely competitive industry in long-run equilibrium). Because GTCviews industry long-run equilibrium as a theoretical abstraction and a rarephenomenon, the concept of `̀ normal'' profits in the neoclassical traditioncannot be an empirical referent for comparison purposes. In this regard, notethat industry average performance is not a suitable proxy for `̀ normal'' profitsbecause industries seldom, if ever, are in long-run equilibrium. Note furtherthat the actions of firms that collectively constitute competition do not forcegroups of rivals to `̀ tend toward'' equilibrium. Instead, the pursuit of superiorperformance implies that the actions of competing firms are disequilibrating,not equilibrating. Indeed, consistent with `̀ Austrian'' economics, marketsseldom if ever are in long-run equilibrium, and activities that produce turmoilin markets are societally beneficial because they are the engine of economicgrowth: `̀ Capitalism, then, is by nature a form or method of economic changeand not only never is but never can be stationary'' (Schumpeter, 1950, p. 82).

Positing that the firm's goal is superior financial performance ensures thatR-A theory is dynamic, which accords well with the extant dynamism ofcompetition in market-based economies. It is no accident that static equilibriumtheories assume profit or wealth maximization. But `̀ saving the equations''through profit maximization has a price. If a firm is already making themaximum profit, why should it ± absent environmental shocks ± ever changeits actions? For example, if a firm is maximizing profits producing a product ata certain quality level, why should it ever attempt to improve quality? Whyshould it ever innovate? If, however, firms are posited to: always seek moreprofits, higher earnings per share, and greater return on investment; and they


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believe that there are always actions that can be taken to accomplish thesegoals; then competition will be dynamic, and innovations will be pursued.

Nelson and Winter (1982, p. 4) maintain that `̀ firms in our evolutionarytheory . . . [are] motivated by profit and . . . search for ways to improve profits'',which differs from `̀ profit maximizing over well defined and exogenously givenchoice sets''. Likewise, Langlois (1986, p. 252) points out that, though economic`̀ agent[s] prefer more to less all things considered,'' this `̀ differs frommaximizing in any strong sense.'' Similarly, though R-A theory posits thatfirms seek superior financial performance, the general case of competition isthat they do not `̀ strong sense'' maximize because managers lack the capabilityand information to maximize (Simon, 1979). That is, although firms prefer moreprofits to less profits, a higher return on investment to a lower return, a higherstock price to a lower stock price, more shareholder wealth to less wealth,imperfect information implies that none of these financial indicators equateswith profit or wealth maximization.

Real firms in real economies are not presented a menu of well-defined sets ofalternatives for which the problem is to choose the profit or wealth-maximizingoption. Firms do indeed take actions; they do indeed take note of financialindicators; and they do indeed make causal attributions between actions andindicators. But even if ± and this is a big if ± managers have good reasons toclaim to know that actions previously taken have led (or will lead) to increasesin financial performance, they cannot know (or warrantedly claim to know) thatsome alternative action or set of actions (identified or not identified) would nothave produced (or will not produce) even higher returns. Therefore superiorfinancial performance, not maximum performance, better describes the firm'sprimary objective.

In addition to informational problems, firms do not `̀ strong sense'' maximizebecause of the personal moral codes of owners, managers, and subordinateemployees, as those codes are influenced by cultural, religious, legal, corporate,and professional norms. Note that agency theory and transaction costeconomics in the neoclassical tradition assume the personal moral codes to beuniversal self-interest maximization and universal opportunism (Fama, 1980;Fama and Jensen, 1983; Jensen and Meckling, 1976; Williamson, 1975, 1985,1996). In terms of ethical theory, all economic agents are ethical egoists at alltimes: they ignore deontological considerations, assign zero importanceweights to all stakeholders other than self, and maximize the ratio of goodconsequences over bad (Beauchamp and Bowie, 1988).

In contrast, GTC posits that personal moral codes, instead of beinguniversally the same, are independent variables that vary across people (andpeoples). Moral codes entail, at the minimum:

. the deontological norms (i.e. this is right; that is wrong) that anindividual applies to decision situations;

. the rules for resolving conflicts among norms;

. the importance weights assigned to different stakeholders; and

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. the combinatory rules for merging the deontological and teleologicalevaluation processes (Hunt and Vitell, 1986, 1993).

Thus, GTC acknowledges that nonowner managers guided by ethical egoismwill not profit maximize when such objectives conflict with their self-interests.However, by positing that superior financial performance is the primary, notuniversal, objective of firms and treating personal codes as independentvariables, R-A theory expands the kinds of situations beyond those that can beaddressed by neoclassical theory.

Consider, for example, the case of distributors of bottled water who couldeasily charge double the customary price when a natural disaster shuts down acommunity's water supply. Some firms, guided by ethical egoism, i.e. self-interest maximization, might choose to double the price. Other firms, guided by`̀ enlightened'' self-interest seeking might choose not to double the price becausethey believe the long-term, net present value of doubling is less than the`̀ goodwill value'' of nondoubling. However, the personal codes of the managersof still other firms might result in their resisting the doubling of prices eventhough they believe the long-term, net present value of doubling is greater thanthe goodwill value of nondoubling. In particular, firms guided by deontologicalethics might resist doubling because they believe it would constitute exploitingtheir customers and, hence, be deontologically wrong. In general (andinconsistent with agency theory and transaction cost economics), some firmsneither profit maximize nor seek superior financial performance in particulardecision situations because such options would violate (either owner ornonowner) managers' sense of rightness and wrongness. This sense ofrightness and wrongness results from managers' beliefs concerning their dutiesand responsibilities to nonowner stakeholders, i.e. it stems from their personalmoral codes based on deontological ethics.

Finally, GTC argues that efforts to profit maximize may also be thwarted byethical code mismatches between managers and their subordinate employees.Suppose most of a firm's employees have moral codes stressing deontologicalethics and, thus, they avoid shirking, cheating, stealing, and otheropportunistic behaviors. In such a firm, the costs associated with monitoringand strong controls would be pure economic waste. If, however, the owner-manager is an ethical egoist and assumes that the employees are also ethicalegoists (doesn't everyone utility maximize?), then expensive and unnecessarycontrols will be instituted. Ironically, then, the assumption of utilitymaximization by managers can thwart efforts at profit maximization. Etzioni(1988, p. 257) puts it this way: `̀ The more people accept the [P-utilitymaximization part of the] neoclassical paradigm as a guide for their behavior,the more their ability to sustain a market economy is undermined''.

In summary, superior financial performance is argued to be the bestdescriptor of the firm's primary objective because:

. superior rewards flow to owners, managers, and employees of firms thatproduce superior rewards;


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. superior performance enables the pursuit of other objectives; and

. the pursuit of superior financial performance contributes to explainingthe observed dynamism of market-based economies.

Although firms do seek superior financial performance, they are argued to notmaximize profits because:

. imperfect information makes maximization impossible;

. agency problems associated with ethical egoism will at times thwartmaximization;

. firms guided by deontological ethics will at times choose not tomaximize; and

. ethical code mismatches between (and among) owners, managers, andsubordinate employees will at times prevent maximization.

On general theoriesGTC argues that R-A theory is a general theory of competition thatincorporates perfect competition as a special case. Neoclassical critics point outthat the theory is not mathematized and, for them therefore, R-A theory is noteven a theory, let alone a general theory. In contrast, some behaviorally-oriented scholars question the desirability of any theory that incorporatesperfect competition. For such scholars, neoclassical theory is hopeless andshould be abandoned in toto. I respond to these critiques by first discussingwhat it means to claim that one theory incorporates another. I then brieflyreview GTC's argument that R-A theory incorporates perfect competition,before specifically addressing the `̀ equations'' and `̀ abandon'' queries.

In the philosophy of science, one theory incorporates another when thegeneral theory can satisfactorily explain the more limited theory's explanatoryand predictive successes (Sellers, 1963; Levy, 1996). The classic example ofincorporation, of course, is that Newtonian theory (which maintains that theacceleration of two masses increases as they approach each other) incorporatesGalileo's Law of Descent (which assumes that acceleration is constant betweentwo bodies) and thereby explains all the predictive successes of Galileo's Law.Simply put, if d is the distance of a body from the surface of the earth and D isthe radius of the earth, Galileo's Law predicts well for most falling objectsbecause the ration d=D is ± as argued in economics by Friedman (1953) to`̀ close enough'' to zero that assuming g to be constant in S � 1=2gt2 isnonproblematic. Therefore, the foundations of Newtonian theory are such thatthey incorporate Galileo's Law as a special case.

GTC argues that R-A theory and its foundations (Table II) represent thegeneral case of competition and perfect competition and its foundations are aspecial case. Therefore, R-A theory incorporates perfect competition, andexplains the explanatory and predictive successes of perfect competition.Empirical evidence provides a prima facie case for this thesis.

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As discussed in Hunt (2000a, pp. 152-6), the massive studies on the diversityof financial performance among firms, depending on the database used, cometo the following conclusion: industry effects account for 4-19 per cent of thevariance in performance, as measured by return on assets, and individual firmeffects account for 19-55 per cent. The finding that firm effects (the focus of R-Atheory) dominate industry effects (the focus of neoclassical theory) supportsviewing the process identified by R-A theory in Figures 1 and 2 as the generalcase of the process of competition. Therefore, because a theory is derived fromits assumptions, the evidence supports viewing each of R-A theory'sfoundational premises in Table II to be either descriptively realistic or, at least,`̀ close enough'' (Friedman, 1953). I now argue that the foundational premises ofperfect competition are, indeed, special cases of R-A theory and, consequently,R-A theory incorporates perfect competition. I do so by showing when thelatter's foundations are `̀ close enough'' to predict. Because the preceding sectionfocused on premises P3 and P4, I explore here premises P1, P2, P5, and P7.

How should foundational premises P1, P2, P5, and P7 in Table II,concerning demand, information, and resource characteristics, be interpreted?Note that each assumption could be viewed as an idealized state that anchorsan end-point on a continuum. That is, demand (P1) could be conceptualized as acontinuum with perfect homogeneity and perfect heterogeneity as idealizedanchor-points. Similar continua could be conceptualized for information and itscost (P2 and P5) and for the homogeneity-heterogeneity and mobility-immobility of resources (P7).

However, whereas perfect competition is customarily interpreted in theidealized, anchor-point manner, in no case is R-A theory to be interpreted as theanchor-point opposite perfect competition. Rather, each foundational premiseof R-A theory is proposed as the descriptively realistic general case. Therefore,intra-industry demand (P1) is to be interpreted for R-A theory as substantiallyheterogeneous. Similarly, information for both firms (P5) and consumers (P2) issubstantially imperfect and costly. Likewise, many, but not all, resources (P6)are substantially heterogeneous and immobile.

Consider the example of footwear, which is classified by the US Census as`̀ SIC 314''. R-A theory views consumers' tastes and preferences for footwear tobe substantially heterogeneous and constantly changing. Furthermore,consumers have substantially imperfect information concerning footwearproducts that might match their tastes and preferences, and obtaining suchinformation is often costly in terms of both time and money. The implication ofheterogeneity is that few, if any, industry markets exist: there are only marketsegments within industries. There is no `̀ market for shoes'' (SIC 314), or evenseparate markets for women's shoes (SIC 3144) and men's shoes (SIC 3143).Even though all consumers require footwear and one can readily identify agroup of firms that manufacture shoes, there is no shoe-industry market. Thatis, the group of firms that constitute the shoe industry do not collectively face asingle, downward sloping demand curve for such an industry demand curvewould imply homogeneous tastes and preferences.


538

For R-A theory, to the extent that demand curves exist at all, they exist at alevel of (dis)aggregation that is too fine to be an `̀ industry''. For example, even ifthere were a men's walking shoe market, one certainly would not speak of themen's walking shoe industry. The fact that intra-industry demand issubstantially heterogeneous in most industries (even at the four-digit SIC level)contributes to R-A theory's ability (and neoclassical theory's inability) to makethe correct prediction as to the diversity in business-unit financial performance.Likewise, the fact that intra-industry demand is relatively homogeneous (`̀ closeenough'') in at least some commodity-type industries, e.g. gold ores (SIC 1041),contributes to explaining those special cases where perfect competition predictswell. Therefore, R-A theory's premises P1, P2, P5 and P7 are the general case;perfect competition's premises are special cases.

For all the first eight foundational premises shown in Table II, I argue thatR-A theory's foundations are descriptively realistic of the general case ofcompetition and perfect competition's assumptions are special cases. However,P9, the issue of competitive dynamics, provides an opportunity to explicate theargument in detail. Under what set of circumstances will the process of R-Acompetition (which is disequilibrium-provoking, with innovation endogenous)result in perfect competition (which is equilibrium-seeking, with innovationexogenous)?

Consider the following scenario. First, assume that a set of firms producingan offering for a particular market segment within an industry has beencompeting according to R-A theory. Therefore, because of resourceheterogeneity (say, different levels of a key competence), the firms aredistributed throughout the nine marketplace positions in Figure 2. Some firms,because of their comparative advantage in resources, are enjoying superiorreturns; others, because of their comparative disadvantage in resources, haveinferior returns; and still others, because of their parity resources, have parityreturns (see Figure 1).

Next assume that, through time, both disadvantaged and parity firmsgradually learn how the advantaged firms are producing their offerings moreefficiently and/or effectively and successfully imitate the advantaged firms byacquiring or developing the requisite resources. For example, assume that theygradually develop competences equivalent to the advantaged firms. Thenassume that, even though all firms seek superior financial performance, no firmfinds it possible to acquire, develop, or create new resources (e.g. developing anew competence) that will enable it to produce a market offering moreefficiently or effectively than any other firm. That is, for some reason or set ofreasons, all competition-induced innovation stops, both proactive and reactive.Consequently, all competition-induced technological change stops. Under theseeconomic conditions, then, the resources of all firms serving this marketsegment become relatively homogeneous and there will be parity resourcesproducing parity offerings.

Next assume that the tastes and preferences of consumers in all other marketsegments served by the firms in this industry shift toward the original

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segment. Industry consumer demand will then become relativelyhomogeneous. Suppose further that consumers' tastes and preferences remainstable throughout a significant period of time and that consumers become veryknowledgeable about the relative homogeneity of firms' offerings. There willthen be parity resources producing parity offerings, which results in all firmshaving parity marketplace positions (cell 5 in Figure 2).

Next assume that firms have accurate information about competitiveconditions and there are no institutional restraints preventing them fromproducing their market offerings in the profit-maximizing quantity.Under these economic circumstances, the industry experiences noendogenous technological change, firms become price-takers, and a staticequilibrium theory of competition, such as perfect competition, applies.That is, there will be parity resources producing parity offerings,which results in parity marketplace positions and parity performance (seeFigure 1). The industry has now become a candidate for `̀ industry effects''to dominate `̀ firm effects'' in empirical studies, for collusion and barriers toentry to become viable explanations for any industry-wide, superiorfinancial performance, and, in general, for industry-level theoreticalanalyses to be appropriate.

Next assume that the preceding process occurs in every industry in an entireeconomy. Then, if this set of economic circumstances persists through time, allcompetition-induced technological change ceases, all endogenous technologicalprogress stops, all endogenous growth ceases, and a long-run, generalequilibrium theory applies (such as Walrasian general equilibrium). In such aneconomy, growth comes only from exogenous sources, including those sources(e.g. government R&D or a state planning board) that might developinnovations that result in exogenous technological progress, as in neoclassicalgrowth theory (see Hunt 2000a, pp. 179-83).

Note that the preceding analysis began with the process of R-A competitionfor a market segment and sketches the special economic circumstances thatmust prevail for the competitive process to result in a static-equilibriumsituation in an industry. Among other conditions, it showed that a veryimportant circumstance is that all endogenous innovation must stop (or bestopped). Such a stoppage might come as a result of collusion, complacency,institutional restrictions, governmental fiat, or lack of entrepreneurialcompetence. The analysis then sketched the special circumstances for a long-run general equilibrium to develop and, again, it showed that all endogenoustechnological progress in all industries, hence, all endogenous economic growthin an economy, must cease. Therefore, the statics of perfect competition, bothpartial equilibrium and general equilibrium, may be viewed as a special case ofthe dynamics of R-A theory. R-A theory relates to perfect competition in thesame way that Newtonian mechanics relates to Galileo's Law: the formerincorporates the latter.


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On the `̀ equations'' and `̀ abandon'' argumentsReturning to the neoclassical criticism that R-A theory is not a system ofequations. The history of economics tells us that it was the Austrian CarlMenger (1840-1921), the Englishman William Stanley Jevons (1835-1882), andthe Frenchman Leon Walras (1834-1910) who initiated the `̀ marginalistrevolution'' in economics in the 1870s (Kuhn, 1970). Rejecting the view thatobjective factors, such as the quantity of labor, determined a commodity'svalue, Menger, Jevons, and Walras, each working independently, articulated asubjectivist theory of value. In this view, the key to understanding theexchange value of a commodity was the subjective increment to utilityattributed by the consumer to the last unit added to or subtracted from theconsumer's stock of the commodity. This incremental or marginal utility,which they argued declined monotonically with each additional unit, enabledthem to resolve Adam Smith's paradox that water is very useful but has lowexchange value, whereas diamonds have little use value but high exchangevalue.

The concept of marginal utility enabled Jevons and Walras to importdifferential calculus into economics. For them, utility was a continuous functionand marginal utility was its first derivative, i.e. MUx � dU=dx. The currentpractice of expressing key economics' constructs in mathematical equationsthat can then be solved for their maxima and minima using the calculus beganwith the marginal utility construct developed in the 1870s for analyzingdemand. For the next seven decades the mathematization of all areascomprising the neoclassical research tradition proceeded steadily.

After the publication of Samuelson's (1947) Foundations of EconomicAnalysis, the mathematization of neoclassical economics accelerated; by 1990 itwas complete (Debreu, 1990). The prestigious John Bates Clark medal was firstawarded by the American Economics Association in 1947. Of the first 21awards, 20 went to Fellows of the Econometric Society. Similarly, of the 30Nobel awards for economics made between 1969 and 1990, 25 went to ESFellows (Debreu, 1990). Not only had equation-solving become the preferredlanguage of discourse in the journals of mainstream economics by 1990, butalso `̀ economic theory'' and `̀ mathematical equations'' had becomesynonymous.

However, the equations of perfect competition must receive a substantive,nonmathematical interpretation in order for empirical testing and prediction tooccur, and predictive adequacy is the epistemology of neoclassical economics(Friedman, 1953). Therefore, though R-A theory is not a system of equations, itshows when the system of equations constituting perfect competition is `̀ closeenough'' to predict well. In doing so, R-A theory preserves the cumulativity ofeconomic science. For example, the equations of the endogenous growth modelsof Romer (1994), Stokey (1991), and Young (1993) require a theory ofcompetition such as R-A theory (Hunt, 1997b). In short, neoclassical economictheory needs a substantive, process theory of competition; GTC fits therequirements.

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In contrast, the argument that neoclassical, perfect competition theoryshould be abandoned stems from its explanatory and predictive failures. Forexample, some philosophers of science (e.g. Rosenberg, 1992) who specialize ineconomics characterize the neoclassical research program as an empiricalfailure. Similarly, many economists are keenly disappointed with the tradition'srecord as to predictive accuracy. As a case in point, in his 1970 presidentialaddress to the American Economic Association, Nobel laureate WassilyLeontief (1970, p. 275) lamented: `̀ In no other field of empirical enquiry has somassive and sophisticated a statistical machinery been used with suchindifferent results''. And 12 years later he concluded:

Year after year economic theorists continue to produce scores of mathematical models and toexplore in great detail their formal properties; and the econometricians fit algebraic functionsof all possible shapes to essentially the same sets of data without being able to advance, inany perceptible way, a systematic understanding of the structure and operations of a realeconomy (Leontief, 1982, p. xi).

I grant that empirical failures abound in perfect competition theory. I disagree,however, that the empirical failures call for abandonment, for the theory'sscorecard has many empirical successes as well. Furthermore, all researchtraditions in the social sciences have empirical failures aplenty. Rather thanabandonment, I argue that perfect competition should be retained for predictivepurposes in those circumstances in which it should be `̀ close enough''. Whatshould be abandoned, for the reasons developed in GTC, is the use of perfectcompetition as a normative theory to guide public policy.

An invitationEver since the time of Plato, the Western philosophical tradition has stressedthe importance of `̀ critical discussion'' in separating knowledge from opinion.Accordingly, I extend a cordial invitation to all scholars, irrespective ofdiscipline, to subject GTC to critical discussion. First, GTC (Hunt, 2000a)makes numerous claims to knowledge, including the claim that resource-advantage theory:

. explicates the view that competition is a process of knowledge discovery(pp. 29-30 and 145-7);

. expands the concept of capital (pp. 186-9)

. predicts correctly that technological progress dominates the K/L (i.e.capital/labor) ratio in economic growth;

. predicts correctly that increases in economic growth cause increases ininvestment (pp. 194-8);

. predicts correctly that most of the technological progress that driveseconomic growth stems from actions of profit/driven firms (p. 199);

. provides a theoretical foundation for why formal institutions promotingproperty rights and economic freedom also promote economic growth(pp. 215-27); and


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. provides a theoretical foundation for why informal institutionspromoting social trust also promote economic growth (pp. 235-38).

It would seem that all of these claims, among others in GTC, warrant criticalexamination.

A second form of critical discussion would be testing empirically theimplications of R-A theory. As to research methods appropriate for suchtesting, readers may wish to consult the numerous studies in the managementand marketing literatures testing the resource-based view of the firm. However,a caution here is in order. R-A theory adopts a resource-based view of the firm.There is no such thing as the resource-based view of the firm. In particular,many versions of the resource-based view specifically adopt a neoclassical,static equilibrium approach. Therefore, the research methods employed in alltests of the resource-based view would be not appropriate for testing R-Atheory.

A third form of critical discussion would focus on the premises of R-Atheory. As discussed previously, GTC maintains that the premises of R-Atheory (Table II) constitute the descriptively realistic, general case ofcompetition. Indeed, R-A theory adopts the philosophical position of scientificrealism. Therefore, each premise of the theory is a candidate for criticaldiscussion. If a premise is found lacking, it should be replaced with a moredescriptively realistic version.

A fourth form of critical evaluation would be to compare the merits of R-Atheory with other theories of competition. GTC contrasts R-A theory withneoclassical, perfect competition theory. Many critics at conferences argue thatthere are theories of competition other than perfect competition against whichR-A theory should be compared. However, to date these critics have spoken of`̀ other theories of competition'' in only the most general sense. If there are othertheories of competition that should be compared with R-A theory, what are thefoundational premises and structures of these theories? Specifically, how do thepremises of these theories differ from those in Table II? How do the structuresof these theories differ from those articulated in Figures I and II? Note that it isonly by comparing rival structures and foundational premises that one canclearly evaluate how and why theories are consistent or inconsistent, sayingdifferent things or saying the same things differently, genuinely rival oractually complementary.

Finally, critical discussion might focus on developing the public policyimplications of resource-advantage theory. GTC argues that public policyshould promote vigorous R-A competition when the goals of public policy arewealth creation, productivity, and economic growth. What if the goal of anequitable distribution of income is adopted? Are equity and economic growthby means of R-A competition in conflict? If so, what definition of `̀ equitabledistribution'' is implied? These questions and many others remain open tocritical discussion. I invite all scholars to participate in the debate over GTC.

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