Study: Categories and competition

Study: Categories and competition

Keywords: Categories, competition, strategic groups, cross-elasticities, sensemaking

Author(s): Gino Cattani, Joseph Porac, Howard Thomas

Date: 2017



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.”


Research Summary

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.

Managerial Summary

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


1980s: Industry Categories

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.


Strategic Groups

This suggestion spurred much research in the 1980’s and 1990’s on so-called “strategic groups” as an intermediate level of abstraction between firm-level and industry-level analyses (e.g., McGee and Thomas, 1986). The central research question during this period was the extent to which strategic group membership influenced firm-level profitability. A secondary question was the extent to which such groups reflected patterns of competition among firms. The notion of strategic groups was a genuine theoretical innovation by strategy researchers. It established a plausible level of analysis between a firm and its industry. It also focused strategy researchers on longstanding conceptual and methodological issues entailed in grouping firms into meaningful organizational categories. Unfortunately, many of these issues remain open questions in the literature, and strategic groups research has waned during the past fifteen years. The profitability and competitive implications of group membership were not decisively identified (e.g., McGee and Thomas, 1986; Thomas and Venkatraman, 1988), and the literature became embroiled in definitional and conceptual issues that are still not fully resolved (e.g., Barney and Hoskisson, 1990; Dranove, Peteraf and Shanley, 1998).

Resource-Based View

In addition, the ascension of the resourcebased view of the firm redirected attention away from intra-industry categories as determinants of firm profitability to intra-firm resources and capabilities that provide firms with unique competitive positions (e.g., Barney, 1991; Mahoney and Pandian, 1992; Peteraf, 1993a). The resource-based view has roots in the industrial economics of imperfect competition (e.g., Chamberlin, 1933; Robinson, 1934). Under conditions of imperfect competition, Penrose argued, “it becomes a matter of taste or convenience whether one speaks of the ‘market’ or of the resources of the firm itself as a consideration limiting its expansion” (1959: 13). However, as Nightengale (1978) recognized many years ago, while imperfectly competitive markets call attention to firm-level heterogeneity, they also beg the question of categorical boundaries because heterogeneity also implies that some firms may be more or less similar to each other, and thus are stronger or weaker competitive threats to each other. Indeed, the same characteristics that underlie firm distinctiveness also establish the conditions for classifying firms into market-based clusters of similar firms: asymmetrically available and immobile resources and capabilities (Barney, 1991). As Peteraf and Barney (2003: 312) suggested, the resource-based view “is not a substitute for strategic group analysis or for analysis of the macro environment. Rather, it is a complement to these tools.” The implications of this complementarity, however, have not gained much traction in the strategic management literature.

2000s: Strategic Management

Just as strategic management researchers began to deemphasize the study of strategic groups in the late 1990’s, developments in both industrial economics and organizational theory opened up new insights into the problem of market categorizations. On the one hand, the “new empirical industrial economics” (e.g., Einav and Levin, 2010) has driven deeply into imperfectly competitive markets to identify relationships between competitive interdependencies across product attributes and value capture by firms and buyers (e.g., Berry, Levinsohn, and Pakes, 1995; 2004; Petrin, 2002; Nevo, 2001). Organizational theorists, on the other hand, have embraced social constructionist accounts of markets to establish relationships between the sociocognitive category structure of organizational fields and outcomes such as firm revenues (e.g., Hsu, 2006), costs (Ody-Brasier and Vermeulen, 2014), capital inflows (e.g., Pontikes, 2012; Smith, 2011), and stock prices (e.g., Zuckerman, 1999). Together, these two literatures address longstanding issues in the study of imperfect competition. As we will argue in this paper, however, both are limited in important respects, suggesting the need for additional theorizing and, most importantly, interdisciplinary research.

Three Approaches To Categories And Competition

Categories help to establish the grounds for assessing competitive advantage. A competitive advantage exists only relative to a set of other firms that are considered comparable in enough ways to make a performance comparison meaningful (e.g., Peteraf and Barney, 2003).

The problem of categorization with infinitely dimensionable firms


Competition and categorization in economics

Competition and categorization in strategic management


Competitive categorization processes are fundamental to differentiated markets. They are so fundamental that categories are sometimes pushed to the background in research on markets as taken-for-granted assumptions when modeling competitive processes and outcomes. But assuming away market categories can only be taken so far. Over the years economists, strategic management researchers, and organizational theorists have advanced important insights about how to conceptualize, measure, and examine the effects of competition and categories in their respective research and theorizing. Each of these fields has worked largely in isolation of one another, however, and their respective approaches are characterized by what appear to be complementary strengths and weaknesses. In this paper, we reviewed these approaches and their strengths and weaknesses, and have mapped three broad issue arenas that appear ripe for multidisciplinary research and theorizing. Working at the intersection of economics and organizational theory, strategic management researchers seem especially primed to push forward with this multidisciplinary agenda.