Professor Mark Satterthwaite, in 1982, around the time he was helping transform the Management and Strategy Department at Kellogg

Thinking strategically, Kellogg professors have transformed a discipline

Innovative approach to economics gave rise to robust department and an influential text that shapes how top schools teach strategy

By Chris Serb

Kellogg alumni who graduated 20 or more years ago probably would not recognize the school's Management and Strategy Department today. Not only did the department go by another name — prior to 1990, it was known as Policy and Environment — but its academic emphasis tended toward the anecdotal rather than the analytical.

"Professors who had been out in the real world talked about their job experiences; inside the classroom, they mostly told 'war stories,' which was viewed pejoratively," says David Dranove, professor of management and strategy and the Walter J. McNerney Professor of Health Industry Management. "The [student] reviews showed that this didn't add much intellectual content to the business school education."

But back then, most schools taught MBA-level strategy that way. Michael Porter's seminal work on competitive strategy at Harvard, though, would become part of a movement that reshaped the discipline — including how this subject would be presented to MBA students.

Senior Associate Dean David Besanko '82 is co-author of Economics of Strategy, an important text in the discipline.  Photo © Nathan Mandell

"The field really started to emerge in the mid 1980s, and Kellogg was very much a part of the emergence of that field," says David Besanko '82, senior associate dean for strategy and planning and the Alvin J. Huss Distinguished Professor of Management and Strategy. "Kellogg was really at the forefront of the development of game theory and industrial economics. Competitive strategy is a close cousin of industrial economics, so it was also important to develop competitive strategy as well."

The remaking of strategy as part of the MBA curriculum began in the late 1980s, when longtime Kellogg Dean Donald P. Jacobs asked department chair Mark Satterthwaite to revitalize the curriculum by incorporating the latest advances in academia. Satterthwaite, a microeconomic theorist, had joined Kellogg in 1972 and served as chairman of the Managerial Economics and Decision Sciences Department (MEDS) from 1978 until 1983. In that capacity, he and his colleagues had employed a rigorous analytical framework to create a world-class applied economics group, one that improved performance across all areas of the school.

"We were downstairs developing these ideas of strategic behavior, game theory. Looking at problems from a rational perspective," Satterthwaite has said. "We were using the word 'strategy.' We thought it must be important for the firm in thinking about its strategic decisions."

With Satterthwaite's leadership, Kellogg unveiled the revamped Department of Management and Strategy in 1990. Its first new hire, Professor Daniel Spulber, launched the department's initial major academic effort, the Journal of Economics and Strategy. The school hired Besanko and Dranove the following year, and soon the curriculum shift was well underway.

"Any number of business schools would have loved to be at the forefront of this movement," Dranove says. "But Kellogg had a wonderful dean who was willing to rethink this area, and a new department chair who was delighted to change the intellectual foundation of the department. You can tie this change back to what makes Kellogg special: the willingness of the dean's office to trust the faculty if the faculty can make a case for change."

Soon after they arrived, Dranove and Besanko were asked to build the latest economics-based research into Business Strategy, the required introductory course that all MBA students take as they begin their studies.

"We needed to pull the various threads of this field together and present that to students in a digestible way," Besanko says. "We needed a framework to organize our teaching, and the textbook came out of our attempt to develop that framework."

	Professor David Dranove has been a thought leader in management and strategy and the health industry.  Photo © Nathan Mandell

That influential textbook — Economics of Strategy, written by Besanko, Dranove, Mark Shanley and Scott Schaefer — was first published in 1996 and addressed the fundamental question at the intersection of business and economics: How do firms create, capture and sustain value in competitive markets? Economics of Strategy, now in its fourth edition, not only served as the foundation of the Business Strategy course, but also became a standard text at leading business schools.

"We didn't invent these ideas, but we organized them and presented them in a way that made sense," says Dranove, who served as department chair for Management and Strategy from 1996 to 2000. "Subsequent to that, others wrote their own textbooks, which took away some of our royalties but was incredibly flattering."

Since 2001, Dranove has been director of the Kellogg Center for Health Industry Market Economics, which uses the tools of economics-based strategy to examine a broadly defined healthcare industry — not only physicians, hospitals and insurers, but also pharmaceutical and technology companies and a host of other suppliers and payers. Dranove's latest book on this topic, Code Red, was published this year.

Dranove notes that healthcare strategy includes ironies, complexities and uncertainties that, in nearly any other industry, would be severe barriers to entry. "We are trying to manage and improve the efficiency of a system in which we lack the most fundamental information that a business manager would have about what is being produced, what it costs to produce them and the quality of what's being produced," Dranove says. "The fundamental takeaway from Code Red is: If we don't make headway in collecting this information and improving our information systems, how can we expect to be more effective producers of healthcare services?"

Increasingly, Kellogg graduates are asking questions like this as they seek a grounding in economics-based strategy. Whether alumni attempt to tackle the complexity of healthcare policy, the risk and reward of entrepreneurship, the opportunities of marketing, or some other field, management and strategy is the discipline that binds most recent Kellogg graduates together, consistently ranking first or second among the most popular majors.

"Ultimately, competitive strategy is an integrative area, it gives students an appreciation of the importance of various functional areas of management, like marketing, operations, financial management and human resources," Besanko says. "And as more students choose to major in management and strategy, they become a real link in a chain of ideas that move from academic research to the classroom to real-world practice."

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