INTRODUCTION

In this chapter, I explore how an economic theorist might explain or model a concept such as corporate culture. While the theoretical construction that is given is far from inclusive (which is to say that many aspects of corporate culture are not covered), I conclude that economic theory is moving in the direction of what seems a reasonable story. But before that story can be considered told, we must employ tools that are currently missing from the economist's tool kit. In particular, we require a framework for dealing with the unforeseen.

I can give two explanations for why I present this topic. The first concerns how economists (and those weaned on the economic paradigm) deal with the topic of business strategy. If we take Porter (or Caves or Spence) as the prototype, business strategy could roughly be called applied industrial organization. The firm and its capabilities are more or less taken as givens, and one looks at the tangible characteristics of an industry to explain profitability. It sometimes seems, in this approach, that there are good industries (or segments of industries) and bad: Find yourself in a bad industry (low entry barriers, many substitutes, powerful customers and suppliers, many and surly competitors), and you can do nothing except get out at the first opportunity. Now, this is assuredly a caricature of the Porter approach. The size of entry barriers, relations with suppliers/customers, and, especially, competitive discipline within an industry are all at least partially endogenous.