Why Economics Has Been Fruitful For Strategy Business Essay


Economists define strategy as knowledge of finding and recognizing profitable information and making best use of it. The economic approach to strategy therefore emphasizes on multiple characteristics such as physical assets, culture, brand image, and capabilities that distinguish your company from others also determine that the best strategy for your company is, again, different from that of others. All the companies do not make the same strategic choices. If one choice is beneficial for one company it's not necessary it's also beneficial for others.

Strategy techniques and tools are changing rapidly but influence of instinct and experience remains important. An approach of research in this area is moving from best practice towards discipline-based like economic modeling and the empirical testing of ideas.

Economics has an impact on competitive strategy, which studies how a company interacts with its competitors. Now days, companies competes on price and situation gets more complex. Locating closer to each other creates price competition. So companies will find they can charge higher prices and earn more profit by differentiating, or separating. That's why companies introduce multiple lines of a product to offer different prices to get competitive advantage.

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Strategy has the positive and the normative dimensions. The positive side emphasizes how and why profits are captured by the companies, is simply a part of economics. So it is natural the economists should make substantial contributions to strategy whereas normative strategy suggests the companies to follow the researchers advice. It is less natural part of economics. It also applies on other academic disciplines like sociology and psychology when they are used to study management and strategy. Strategy is generally normative for social science field; It not only analysis the world but also offers strategic recommendations to the managers. Sometimes managers makes mistakes and they need external advise to rectify their mistakes and choose the right strategy. This part of strategy has a tense relationship with an economics discipline that believes in differences between companies, efficient markets, and few wasted opportunities.

Economist use different powerful tools for strategy: formal modeling, the assumption of maximizing behavior by agents, and the notion of equilibrium. Notion of equilibrium is a crucial part of the strategy. The instinctive explanation of equilibrium is, if an actor could play the game again, he would not choose a different action; each actor is doing his best, given everyone else's choices and the options available to him. Economists create good stories by being simple, explicit, and plausible about three things: the actors involved their goals, and the choices available to them.

Finding one successful strategy is complex so the cookie-cutter approach is not an effective approach in today's world as number of competitors is increased in the industry and companies use different strategies to differ their product and service from the competitors. There is no "best" strategy and organizations define strategies according to their own requirement based on market sector, their specialty and resources.


1. Positive and normative aspects of strategy

There are two dimensions of the strategy positive and normative. By positive strategy, it can be explained "what is, what was, and what probably will be" economics. Raw emotions are not the base of the statement where as theory is the base. Positive strategy emphasis on how and why companies made profits (Caplin and Schotter, 2008).

On the other hand, normative strategy is subjective. The statement has no theory or fact as base; it is based only on the opinion. Basically, it is emotional statements or can be called as value- laden which only focuses on "what must to be". It is less natural part of economics. Normative statements are also used in study of management and strategy. Difference between these two dimensions is explained in figure 1.1: (Thomas, Guy & Smith, Andrew, 2009):-

Figure 1.1

Positive and Normative theory

Normative theory

Positive theory


Prescriptions for practice

Induction (codification of practice)

Deduction (premises to prescriptions)

Explanations of practice


Generation of hypotheses


Little testing

Emphasis on testing


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Standardization of practice

Training for practice

Market for excuses

Better understandingBetter predictions

Source: Thomas and Smith (2009)

Corry (1987) said that analysis of economic behaviour is concerned by the positive economics as science. The theoretical statements of positive economics which have some meaning are being used in positive economics to avoid economic value judgements (French, and Bell, 1995).

Application of positive and normative strategy on social sciences

The explanation of impact of positive and normative strategies on social sciences is as follows:


The economic phenomena are sought by the economists to describe and predict as much of the economics is positive. Normative economics is seeking to identify what is good or bad economically. There is a branch of normative economics which is called welfare economics in which they determine the locative efficiency within an economy and the income distribution associated with it, simultaneously, by using microeconomic techniques (Feldman, 1987).

Political Science

In political science, by examining many factors like stability, justice, material wealth and peace, there is a measurement of the success of governance and specific policies. By analyzing politics some of the political scientists tried to describe the advance positive theses which means they made effort to explain that how things are now, rather than how things should be (Metzler, 1948).


Jurisprudence is commonly known as the philosophy of law. Basically, normative jurisprudence is the political philosophy and asks "what should law be?". The oldest code of law which is known to civilization is normative law. Normative law changes from society to society, culture to culture, to regulate its society and to protect and help to achieve the goals of the society (Posner, 2003).


Sociology is the knowledge of social life and human behaviours. It analyse the way people live their life in the society and how they interact with each other in different situations. It focuses on social class, religion, law, modernity, culture. It is a normative discipline that seeks to provide advice for planning and policy making (Strasser, 1976).

Business model

There are several frameworks used to formulate the strategy for the business. Business model is one of them. It changes innovation into economic value for the business. It tells how an organisation can make money by indicating its position in the value chain (Kutenk, 2009).

Figure 2.1: Role of Business Model

Source: Hobbs (1991)

Business model is used in informal and formal ways to symbolise core aspects of business such as purpose, strategies, offerings, infrastructure, and organisation's structure. Supply chain, operations, and policies (Hobbs, 1991). The brand is outcome of the business model (Kapferer, 2008).

Figure 2.2: Converting innovation to economic values

Source: Chesbrough (2007)

2.1. Types of business models

There are different types of business models used by different firms:

Figure 2.3.

Business model framework

Source: Teleco (2008)

2.1.1. Low cost carrier business model

A low cost carrier or airline is an airline that has low fares. This type of airline may charge extras for food, seat allocation, baggage or priority booking to cover its revenue lost in low fares. A low cost carrier business model can be based on the following (Cento, 2008):

a single passenger class

a single type of aircraft

a simple fare scheme

fast turnaround times

unreserved seating

employees works in multiple roles

Charge for extras like hold luggage, online check in and priority boarding

No meals in the flights.

Some airlines try to differentiate them from competitors by allocating seats or some operate more then one aircraft. JetBlue offers in-flight entertainment (TV, Radio) in every passenger seat (Conrady and Buck, 2007).

2.1.2. Loyalty business model

To meet or surpass the corporate objectives, organisations use loyalty business model for strategic management where company resources are used to gain and increase the loyalty of the customers by making them satisfied which leads to profitability. Gillette uses this model to build relationship with the customers to gain their loyalty (Carlson and Wilmot, 2006).

2.1.3. Collective business model

This type of model is composed of same or related field of large number of businesses, professionals or tradespersons. Intel uses this model for their business. Collective business model enables organisations to withhold common interest of the involved parties through combine endeavour and cohesive representation (Carayannis and Chanaron, 2007)

3. Cookie cutter approach

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A cookie cutter is a standard method used to overcome the issues and problems without considering its contextual conditions. Author explained that there is no two companies are ever the same. Even if an organisation's services, revenue, no of employees, client base and other aspect are same. A firm's culture makes it different from others. If one strategy works for one firm is not necessary it will work for the other. There is no cookie cutter market strategy exist that could be used by all the firms. Each firm must formulate its own strategy (Trevino et al, 2006).

As author described in the case that economic principles, held across the time and companies, can and should be used by the manger to formulate the best strategy for organisation. Instead of adopting a universal strategy, organisation can benefit by following economists advice as they understand the world better by analysing the strategies and suggesting that why one strategy was better than another.

On the other hand, by looking at industry it cannot be established that if one strategy gets failed in one organisation, is not suitable of other organisations, as every organisation has its own culture. So companies need to formulate their own strategies on the basis of capabilities, competences, experience and advice from the economists.