Structure Conduct Performance (SCP) approach can be defined as “an approach to economics of industrial organisation in which the structure of the industry – concentration, entry, barriers and product differentiation – are seen as the determinants of performance”1. In the opinion of Kraft, SCP analysis of industry usefulness resides in its “characterisation [of firms] into groups”2, i.e. forming taxonomy, with the drawbacks stemming from its failure to include competitive strategy and strategic groups within its framework. These concepts refer to purposive action concerning resource allocation of the firm’s plans and implementation to position themselves in markets and compete with others and to firms within an industry exhibiting similar asset configurations and hence pursuing similar competitive strategies. Whether this is indeed the case requires several factors to be examined. First the basis and advantages that SCP has brought need to be examined, and then its weaknesses outlined, to decipher SCP’s use (and to resolve whether taxonomy is the only benefit that it has brought). Second, the essence of competitive strategy and strategic groups to be highlighted, and whether they hold any importance to industry analysis (such as that of SCP).
Through SCP an explanation of average profitability for different industries was created. By stating that conduct was largely implicit, SCP credited industry level profitability (and hence performance) to industry structure. Especially noted factors were market concentration, barriers to entry and product differentiation since these were seen as the variables that could limit or intensify the degree of competition. A further assumption was that managers had the ability to determine performance through their actions. In essence SCP could be used as a predictive device. This was the basis of the SCP approach.
SCP was seen as beneficial since it classified firms into groups (by their structure) and gave a relatively simple explanation for performance, which could be relatively easily observed (mainly due to its uncomplicated nature). There are even tools to look at market structure such as Porter’s ‘Five Forces Test’ and the ‘Value Net’3. To this extent it is true that SCP provides a useful taxonomy, as Kraft states, as well as giving a simple explanation for firms’ performance based on structure. To assess the extent of these advantages the limitations of SCP need to be outlined.
By only analysing structure of the industry SCP does determine the environment within which firms operate, which will obviously affect performance. However, numerous flaws in such an approach have been outlined. This starts with the basic assumption that firms will always try to maximise profits. This assumption ignores other possible goals that the firm may have such as growth (to increase market share), maximising revenue4, production levels or other such factors. Furthermore SCP ignores diversified firms, which may have shares in their rivals, and interdependence, which is not explicitly considered (as might result from geographical knock on effects). Other areas that are overlooked include intra and inter firm rivalry, elements of inefficiency, competition prior to equilibrium and the dynamic elements of the industry on the grounds they are not included in the organisation of the industry. There are even elements of SCP that are just incorrect, such as the belief that firms are passive and inactive. Observation of the markets will show that this is far from the truth, with supporting theory such as Bertrand and Cournot models of oligopoly for interaction between firms (using passive or aggressive responses to others’ actions5) to name but a few.
This brief overview of the SCP approach reveals its countless drawbacks, with the only foreseeable benefits being its simplicity, taxonomy (on structural grounds alone) and possible use in conjunction with other with other elements of theory to form some kind of comprehensive model for assessment.
Competitive strategy can take the form of a vast array of actions. Two broad areas of competitive strategy are benefit and cost advantages as part of strategic positioning. These strategies involve either raising the benefit that a product offers (per unit to consumers), or decreasing the cost that a product entails (per unit to the firm). The advantages of such strategies can be seen below:
The Economic Logic of Benefit Advantage The Economic Logic of Cost Advantage
This simple behavioural concept can affect the firm’s performance, especially when consideration is taken of the price (and quality) elasicity of demand. For example if a firm faces high price elasticity of demand while attempting to create a benefit advantage, its market share will suffer heavily if it attempts modest price hikes, whereas if it maintains price parity its market share will rise as its benefit advantage takes effect).
Similarly strategic commitment can affect firms’ performance in the whole industry but do not affect structure. The essence of this concept lies in their affect on price on quantity as a firm makes a ‘tough’ (reducing price or increasing quantity as an aggressive strategy) or ‘soft’ commitment (price hikes or reducing quantity). The effect of such a more can be seen in the following Cournot quantity model:
Firm 1 Tough Commitment in Cournot Market
Similar examples can be made for Bertrand price models, or in the form of Game Theory6. These types of crucial performance decisions are not included under SCP despite their decisive impact on performance. This can be seen as a failing of the SCP approach due to the high impact of such strategic moves by firms that are unrelated to the market’s structure.
Strategic groups result in clustering according to economic theory. The fact that this occurs is not opposed to SCP analysis, but whether such clustering leads to significant side effects may be. Thomas and Pollock highlight expectations that despite similarities, different strategic groups may experience different levels of performance, an aspect that is not covered by merely structural explanations of the industry (which treats the behaviour of firms as a ‘black box’). Hence the very fact that firms’ behaviour may influence structure or performance “turned the SCP paradigm on its head”7. The importance of this concept was furthered by the work of Caves and Porter (19778) when termed ‘mobility barriers’ the possible restraint for firms trying to move between strategic groups, suggesting that the impact of this concept was substantial. The basis for this claim stems from the knock-on effect on incumbents’ behaviour. Since incumbents will erect substantial mobility barriers to stop entrants ‘stealing their business’. Even though this would seem to create a structural barrier to entry it has resulted from behavioural factors, which are outside of the scope of the SCP approach. So theoretically at least SCP fails to include this significant factor.
Such a claim is supported by empirical work by Hatten and Schendel (19779). Their research confirmed the beliefs that there was inter – group heterogeneity even with intra – group homogeneity. Although this study has been criticised for only examining one industry, subsequent work by Olster (198210) has shown that these initial findings hold for multi – industry groups. There have even been questions regarding whether intra – group homogeneity exists, due to uneven shares of resource space and asset configuration (McGee and Thomas, 198611). Based on evidence Fiegenbaum and Thomas have extended this theory to promote the idea of strong intra – group performance variation. Therefore, on theoretical and empirical grounds it can be seen that strategic groups do have a decisive effect on firms’ performance, a causation not included in the SCP analysis.
Overall it can be seen that the Structure Conduct Performance approach is found lacking in its analysis of industry and firm performance due to its limited nature. Not only are competitive strategies and strategic groups excluded from SCP, but also other sources of competition that inevitably affect performance such as resource based and competence based competition (where management conceptualisations, and bases of knowledge or skills respectively effect performance). All this evidence indicates that it is the case that SCP can be used as taxonomy for structural matters, but beyond this its lack of consideration for firms’ behaviour and actions limits its further application.
Besanko, Dranove Economics of Strategy 2000
Davis and Lam Managerial Economics 2001
Thomas and Pollock From IO Economics’ SCP Paradigm Through 1999
Strategic Groups to Competence Based
Competition: Reflections on the Puzzle of
British Journal of Management
1 Davis and Lam, Managerial Economics, (2001) p524.
2 Oxford English Dictionary, 2000.
3 Further outlined in Besanko, Dranove and Shanley, Economics of Strategy (2000), chapter 11.
4 This may result due to principal – agent problem if managers’ remuneration is tied to sales.
5 As might be modeled in Game Theory for the interaction between two firms.
6 Such as a Prisoner’s Dilemma.
7 Thomas and Pollock, British Journal of Management – From IO Economics’ SCP Paradigm Through Strategic Groups to Competence Based Competition: Reflections on the Puzzle of Competitive Strategy (1999), p130.