Keywords: Categories, competition, strategic groups, cross-elasticities, sensemaking
Author(s): Gino Cattani, Joseph Porac, Howard Thomas
Date: 2017
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Underlying most definitions of competition is the assumption that similar firms producing similar outputs compete for similar buyers and suppliers. Andrews (1949: 168) summarized this view in noting that,
“an individual business must be conceived as operating within an ‘industry’ which consists of all businesses which operate processes of a sufficiently similar kind (which implies the possession of substantially similar technical resources) and possessing sufficiently similar backgrounds of 6 experience and knowledge so that each of them could produce the particular commodity under consideration, and would do so if it were sufficiently attractive.”
Similarity among firms implies that the firms are substitutable for one another, and thus are competitively interdependent. It is this substitutability that scholars have traditionally viewed as a proximal criterion for defining competition and industry boundaries. As Bain (1952: 24-25) suggested, “The general criterion for inclusion of products in an industry becomes close substitutability, of which perfect substitutability is a special and extreme case.”
In this paper, we review, integrate, and extend the literature on markets, competition, and categories as it applies to strategic management theory. Developments in the literatures of economics and organizational theory have shed new light on market categories and category dynamics. These developments highlight the fact that boundary questions are fundamental to the competitive process, and represent a fertile area for research and theory. The objective is to encourage a theoretically grounded rapprochement between current strategic management research and both older and newer research on categories and competition.
One of the key problems for business strategists is understanding the competitive environment and interpreting the effects of competition on a business. This paper attempts to integrate various literatures in the study of competition by suggesting that strategists play a crucial role in linking abstract categories of firms and products that have become part of an industry’s terminology with real-time competitive processes taking place among firms and buyers. Strategists interpret cues such as cross-elasticities of demand among their own and competing products and connect these cues to taken-for-granted categories demarcating the boundaries of markets. Simultaneously, strategists are introducing new categories by reformulating old nomenclatures and introducing new ones. We also trace the possible effects of this “competitive sensemaking” on firm behaviors
In the late 1970’s and early 1980’s, strategy scholars incorporated concepts from industrial economics to define essential competitive distinctions among firms at the “industry” level (e.g., Porter, 1980). And yet, very early in these developments, Caves and Porter (1977: 250) argued that industry categories were too inclusive to describe fully the structure of competition among comparable firms, and that “sellers within an industry are likely to differ systematically in traits other than size, so that the industry contains subgroups of firms with differing structural characteristics.