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Home arrow Management arrow Strategic Management in the 21st Century. Corporate Strategy

Evolutionary Equilibrium

Many researchers have observed that the vast majority of industries tend to evolve toward a structure in which a few large firms dominate the general market, and numerous smaller firms fill specialized niches.9 Henderson,10 Sheth and Sisodia,11 and Uslay, Altintig, and Winsor12 argued specifically that three large competitors and a number of small specialists commonly dominate stable markets. Yet, despite the remarkable consistency of past findings regarding firm size and numerical distribution, few if any have been accompanied by either empirical or theoretical assessments of which specific competitive strategies might be common or effective within these pervasive industry structures. In other words, despite widespread agreement that industries commonly share distinctive configurations, discussion of how strategies might be developed to exploit these regularities has been conspicuously absent.

Despite this normative deficiency, certain strategic configurations frequently emerge in the evolutionary patterns of industry competition. Specifically, many industries evolve toward a stable competitive population consisting of either one or no VO firms, two to three large MVD firms, and a number of small MO "nichers" or product/market special-ists.13 Where more than one VO firm exists within an industry or where more than three large companies contest the general market, rivalry will be intensified and profitability will be suppressed. As noted earlier, when one VO firm competes against another, ruinous price competition leads to the reduction and eventual elimination of both firm's profits. As a result, rivalry among multiple VO firms will tend to be short-lived wherever product differentiation is possible, and the firms will readily evolve toward MVD strategies in order to escape the price competition. Where such differentiation is more difficult, as illustrated by the airline industry, instability and depressed profits will tend to persist indefinitely, and the industry will tend toward competitive instability.

Environmental Influences in Competitive Evolution

There exist a number of factors that can disrupt or alter the pace of industry evolution. The most significant of these allow or facilitate the entrance of new rivals in markets that were formerly competitively discrete or isolated. As Blackhurst and Henderson note, competitive barriers can be annulled through either technological or political processes. Additionally, economic and environmental crises can often lead to evolutionary shocks by directly or indirectly spurring political or technological responses.14

Technology has historically had a significant impact on evolutionary processes concerning competition. As noted earlier, advances in production technology made the volume orientation possible. Yet technology as applied to the marketing process has exerted even greater influence on evolutionary progress. Advances in transportation and communication, for example, have had profound effects on competitive populations, since market equilibrium is often artificially preserved when geographic isolation or market inaccessibility prevails.15 The fact that regional monopolies and oligopolies arise as an inevitable result of inefficient transportation technologies is a common observation in the economics literature.16

Efficiencies in transportation can disrupt competitive equilibria through either of two means. First, producers can utilize lower-cost transportation technologies to distribute products to areas that may have previously been economically inaccessible. Improvements in transportation thus allow distant rivals to compete with local producers by lowering the costs associated with inter-region transactions relative to those of intra-region transactions.17 More efficient means of transportation also allow producers to access numerous smaller markets that would have formerly been unprofitable to enter. Second, improvements in transportation can allow consumers to more easily access distant producers.

The rapid growth of the interstate railroad network in the United States in the second half of the 19th century illustrates the competitive effects of advances in transportation. The development of this network led to a substantial shift from regional economic competition to national competition as the costs of long-distance transportation declined precipitously accompanied by quantum increases in speeds. Competitive conditions in most industries were altered significantly as businesses that had been geographically isolated from potential competitors gained reciprocal access to each other's markets and began to interact competitively. As a result of this completion, most U.S. industries during this period experienced substantial turmoil. As Scherer describes:

As the railroads expanded their coverage from 9000 miles of road operated in 1850 to 167,000 miles in 1890, . . . something resembling a true national market emerged for the first time. Firms interpenetrated each others' former home territories and competition flourished.18

The railroad network thus broke apart local monopolies and oligopolies, and new business models (such as those of catalog retailers Montgomery Ward and Sears, Roebuck and Co.) became viable due to the reduced transportation costs the railroads yielded. These effects combined to intensify competitive rivalry and led to fierce market-share battles, competitive shakeouts, and massive waves of horizontal mergers.19 The brewing industry provides an example of the market disruption precipitated by the development of the U.S. railroad system. Prior to the existence of an efficient mode of transportation, the distribution area of brewers was limited to a few miles by the perishability and bulk of the product. As a result, over 4,000 breweries coexisted in the United States in 1870, with each experiencing little intermarket competition. With the development of railroads, and with improvements in bottling, refrigeration, and pasteurization methods, distribution territories expanded significantly.20 These developments allowed regional and national brewers to emerge to serve integrated markets, and the intensified competition resulted in a reduction of over 75 percent in the number of brewers by 1919.

 
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