Academic journal article Journal of Managerial Issues

Managing Market Structure: Achieving Competitive Advantage and Market Dominance

Academic journal article Journal of Managerial Issues

Managing Market Structure: Achieving Competitive Advantage and Market Dominance

Article excerpt

The development of a comprehensive theory of competitive strategy remains an elusive goal despite the contributions of researchers in a wide range of disciplines. Theories of competitive strategy do exist, of course. These theories all tend to emphasize the interaction of the firm with its environment. They differ largely in the relative emphasis they place on the role of the firm versus environmental factors in determining the strategic alternatives of the firm, and their view of the extent to which the firm must react to the environment or can proactively manage the environment. Although a number of writers (cf. Treacy and Wiersema, 1995; Kiernan, 1993; Webster, 1992; Achrol, 1991; Day, 1983, 1994; Howard, 1983) have called attention to the need to distinguish between supply-side factors and demand-side factors that may influence the strategic options of the firm, most theories of competitive strategy have tended to emphasize supply-side factors, such as industry structure, experience effects, and firm specific assets (cf. Porter, 1985). Demand-side factors are generally acknowledged through such constructs as customer goodwill, positioning and brand equity, but the mechanisms by which these demand-side factors are developed and maintained have received less attention than the mechanisms by which supply-side factors are developed and maintained. Indeed, Eliashberg and Chatterjee (1985) suggest that most theories of competition have been concerned with issues related to aggregate demand and methods by which a firm may defend its advantage without defining the nature of that advantage at the level of the individual consumer.

It is the purpose of the present article to suggest a mechanism by which competitive advantage may be developed and maintained at the level of the individual consumer. The article will draw on the growing body of literature on consumer behavior and behavioral decision theory to suggest that a critical factor in both the establishment and maintenance of competitive advantage is the management of consumers' decision rules. This perspective on competitive strategies will be shown to be complementary to other perspectives on organizational strategy. It will also be shown that a view of business strategy, that explicitly considers the individual consumer offers opportunities for research that may help illuminate the causal relationships among environmental factors, actions by the organization, and demand at the level of the individual consumer.

Before turning to the topic of organizational strategy at the level of the individual consumer it will be helpful to place the current perspective within the context of prior research on organizational strategy. We will first briefly review three broad classes of theories. Then we consider empirical literature on competitive advantage. In examining the empirical literature we will focus on the dominant firm, the firm with a competitive advantage sufficiently large to allow it to dominate its markets. We will provide a more precise definition of dominance later in the article. With the theoretical and empirical literature as a foundation, we will then offer a framework that includes the individual consumer and show how this framework serves to integrate much of the previous work in the field.

Perspectives on Strategy

Work on organizational strategy and competitive advantage can be divided into three broad and complementary classes based on the relative emphasis placed on the environment, unique assets of the firm, and the role of uncertainty in determining strategic options. Theories concerned with the role of environmental factors that stimulate certain actions of the firm and constrain the firm in other ways have been proposed and offer important insights. Such theories have been proposed by researchers in industrial organization economics (Caves, 1980; Caves and Porter, 1977; Porter, 1980, 1981) who have emphasized the role that industry structure plays in defining the options open to competing firms. …

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