The origin of the SCP (Structure-Conduct-Performance) paradigm can be traced to the work of the Harvard economist Edward Mason in the 1930s. It was popularized during 1930-60 with its empirical work involving the identification of correlations between industry structure and performance. This is a paradigm that is foundational to industrial organization economics, consistent with the positional view of strategy, as opposed to the resource-based view of strategy. There are two competing hypotheses in the SCP paradigm: the traditional “structure performance hypothesis” and “efficient structure hypothesis”. The structure performance hypothesis states that the degree of market concentration is inversely related to the degree of competition. This is because market concentration encourages firms to collude. The efficiency structure hypothesis states that performance of the firm is positively related to its efficiency. This is because market concentration emerges from competition where firms with low cost structure increase profits by reducing prices and expanding market share.
According to the SCP framework (Structure-Conduct-Performance), an industry’s performance (the success of an industry in producing benefits for the consumer) depends on the conduct of its firm, which then depends on the structure (factors that determine the competitiveness of the market). The structure of the industry then depends on basic conditions, such as technology and demand for a product. For example, in an industry with technology such that the average cost of production falls as output increases, the industry tends to have one firm, or possibly a small number of firms.
- Structure – which refers to market structure. The variables that are used to describe market structure includes seller concentration, degree of product differentiation, number and size of competitors and barriers of entry.
- Conduct – which refers to a firm’s behavior. The variables used to capture firm behavior include pricing strategies, collusion, advertising, research and development and capacity investment. Some have interpreted conduct as whether firms collude or compete.
- Performance – which refers to outcome or equilibrium assessed in terms of allocative efficiency. The variables mostly used to measure performance are profitability and price-cost margin. Performance part in the SCP framework has two meanings: the performance of individual firms and the performance of the economy as a whole.
According to the logic of the SCP framework, market concentration reduces cost of collusion between firms and produces hyper normal profits. The less there are firms on the market (concentrated structure); the less competitive is the firm’s behavior (price levels are elevated and/or weak output). Simply put, the fundamental idea of the SCP approach is that, the structure of the industry determines behavior (conduct) and influences performance of the industry.
The SCP framework assumes that market structures identified by many firms providing the same products and services, though relatively equal in firm size, are competitive markets generating greater performance.
In its simplest form, the SCP framework views market structure as exogenous, in the sense that it is the structural characteristics of markets that tend to influence or dictate both the conduct and, ultimately the performance of businesses.
One criticism of the SCP framework is that, it is obviously quite deterministic and linear. Structure is the exogenous (explanatory) variable, everything else is dependent of that. In reality, structure itself is probably also affected by firms’ conduct.
Strategists have turned the traditional objectives of the SCP framework upside down. Instead of seeking ways to increase the competitiveness of industries, strategists have used the SCP framework as a way to describe the attributes of an industry that make it less than perfectly competitive, and thus help firms find ways to obtain competitive advantages.
External Links:
- Enduring Ideas: The SCP Framework (McKinsey & Company)