What doesn't kill you makes you stronger: The evolution of competition and entry‐order advantages in economically turbulent contexts

Abstract

We examine the evolution of competition and entry‐order advantages in markets under macroeconomic distress. Through formal modeling of early‐mover advantages along industry life cycles subjected to economic shocks and based on simulation findings, we propose that such shocks exogenously induce temporary industry discontinuities that shift the relative value of distinct asset endowments, thereby switching the bases for competitive advantages vis‐à‐vis those found in stable contexts. A vital trade‐off then emerges between a firm's financial flexibility and its pace of investments in isolating mechanisms, such that the former operates as a contingency factor for the latter. As such, flexibility superiority boosts early‐entrants' advantages, while it alternatively gives laggards a much desired strength to out trump first‐mover rivals. Our study informs entry‐order advantage theory and management practice in economically turbulent contexts. Copyright © 2013 John Wiley & Sons, Ltd.

Competitive Dynamics and Early Mover Advantages Under Economic Recessions

“…Note that this description does not include the early exploratory stage of the industry, a common practice in prior empirical studies on which we base our own (e.g., Klepper & Graddy, 1990;García-Sánchez et al, 2014) (Klepper & Graddy, 1990;Klepper, 1997;Agarwal, Sarkar, & Echambadi, 2002 Industry variance emerges from the stochastic nature of the different parameters. Therefore, the aggregate level of industry growth is contingent on individual firms' entry and growth decisions.…”

“…In this case, simulations are used instead to derive new theoretical propositions in an inductive fashion (e.g., Miller, Zhao, & Calantone, 2006;Siggelkow & Rivkin, 2006). Given that our model parameters (e.g., window period of observation, numbers of new entrants, and others) are similar, the model we develop takes its basic form from García-Sánchez et al (2014) precisely to help contrast our distinct findings vis-à-vis a similar background. Yet, our model is a simplification of theirs because our goal is to stress the relationship between FMA and macroeconomic turbulence.…”

“…Maximizing for r, r it Each run of our simulation produces a particular evolutionary path, whereas our final analysis is based on the average of 1,000 runs. We calibrated initial parameters (Table 1) found in the related literature (e.g., Winter, 1984;Calvo et al, 2006;García-Sánchez et al, 2014). We ran our simulations using the Repast Simphony software platform (Repast, 2016).…”

“…As if to show that there is some "regularity" to what most usually see as an "exception," a typical OECD country experienced approximately six recessions between 1960 and 2007 (Claessens, Kose, & Terrones, 2009, 2010. The relevance of the matter is evident with the ubiquitousness of these exogenous threats and the lack of clear strategic imperatives for firms exposed to them (García-Sánchez, Mesquita, & Vassolo, 2014). This phenomenon can gravely confuse seasoned top managers.…”

“…We build on García-Sánchez, Mesquita, and Vassolo (2014) to develop a mathematical simulation model, simplifying it to focus on the mechanisms that generate FMA. Through multiple simulation runs, we observe that the distribution of firm size within the industry switches from a bi-modal distribution (i.e., one dominated by both small and large firms) to a right-skewed one (i.e., one dominated mostly by large firms) in these contexts, thereby signaling the rise of important opportunities in the form of less rivalrous competitive contexts for survivors of recessions.…”