Categories and competition

• Date: 01 January 2017
• DOI: http://doi.org/10.1002/smj.2591
• Published date: 01 January 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 64–92 (2017)

Published online EarlyView in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2591

Received 30 April 2014;Final revision received11 April 2016

CATEGORIES AND COMPETITION

GINO CATTANI,1JOSEPH F. PORAC,1*and HOWARD THOMAS2

1Management and Organizations, Stern School of Business, New York University,

New York, New York, U.S.A.

2Lee Kong Chian School of Business, Strategy and Organization, Singapore

Management University, Singapore, Singapore

Research summary: In this article, 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 newerresearch 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 article

attempts to integrate various literatures in the study of competition by suggesting that strategists

play a crucial role in linking abstract categoriesof rms and products that have become part of an

industry’s terminology with real-timecompetitive processes taking place among rms 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 rm behaviors. Copyright © 2016 John Wiley & Sons, Ltd.

INTRODUCTION

Categorical distinctions form the core of competi-

tive markets. According to the Oxford English Dic-

tionary, to “categorize” is to place a phenomenon

into a class or group. In market contexts, categori-

cal nomenclatures emerge among market actors to

dene organizational forms and establish bound-

aries between who is a member of a given market

and who is not. Such categories can become intrin-

sic to markets and embedded in the competitive pro-

cess in multifaceted and theoretically critical ways

Keywords: categories; competition; strategic groups;

cross-elasticities; sensemaking

*Correspondence to: Joseph F.Porac, Leonard N. Stern School of

Business, Tisch Hall, 40 West Fourth Street, 710 NewYork, NY

10012, U.S.A. E-mail: jporac@stern.nyu.edu

Copyright © 2016 John Wiley & Sons, Ltd.

(e.g., Durand and Paolella, 2013; Hannan, Pólos,

and Carroll, 2007; Peteraf and Shanley, 1997; Porac

and Rosa, 1996). Most importantly, categories help

to establish the grounds for assessing competitive

advantage. A competitive advantage existsonly rel-

ative to a set of other rms that are considered

comparable in enough ways to make a performance

comparison meaningful (e.g., Peteraf and Barney,

2003). But what is comparability, and how should

comparability among rms be assessed?

Strategic management scholars have addressed

questions of comparability in varying ways. In

the late 1970s and early 1980s, strategy scholars

incorporated concepts from industrial economics

to dene essential competitive distinctions among

rms at the “industry” level (e.g., Porter, 1980).

And yet, very early in these developments, Caves

Categories and Competition 65

and Porter (1977: 250) argued that industry cat-

egories were too inclusive to describe fully the

structure of competition among comparable rms,

and that “sellers within an industry are likely to

differ systematically in traits other than size, so that

the industry contains subgroups of rms with dif-

fering structural characteristics.” This suggestion

spurred much research in the 1980s and 1990s on

so-called “strategic groups” as an intermediate level

of abstraction between rm-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

inuenced rm-level protability. A secondary

question was the extent to which such groups

reected patterns of competition among rms. The

notion of strategic groups was a genuine theoretical

innovation by strategy researchers. It established

a plausible level of analysis between a rm and

its industry. It also focused strategy researchers

on longstanding conceptual and methodological

issues entailed in grouping rms into meaningful

organizational categories.

Unfortunately, many of these issues remain open

questions in the literature, and strategic groups

research has waned during the past 15 years. The

protability and competitive implications of group

membership were not decisively identied (e.g.,

McGee and Thomas, 1986; Thomas and Venkatra-

man, 1988), and the literature became embroiled

in denitional and conceptual issues that are still

not fully resolved (e.g., Barney and Hoskisson,

1990; Dranove, Peteraf, and Shanley, 1998). In

addition, the ascension of the resource-based

view of the rm redirected attention away from

intra-industry categories as determinants of rm

protability to intra-rm resources and capabilities

that provide rms with unique competitive posi-

tions (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 rm itself as a consideration

limiting its expansion” (Penrose, 1959: 13).

However, as Nightengale (1978) recognized

many years ago, while imperfectly competitive

markets call attention to rm-level heterogeneity,

they also beg the question of categorical boundaries

because heterogeneity also implies that some rms

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

rm distinctiveness also establish the conditions

for classifying rms into market-based clusters of

similar rms: asymmetrically available and immo-

bile 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.

Just as strategic management researchers began

to deemphasize the study of strategic groups in the

late 1990s, developments in both industrial eco-

nomics 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 inter-

dependencies across product attributes and value

capture by rms and buyers (e.g., Berry, Levin-

sohn, and Pakes, 1995, 2004; Nevo, 2001; Petrin,

2002). Organizational theorists, on the other hand,

have embraced social constructionist accounts

of markets to establish relationships between the

socio-cognitive category structure of organizational

elds and outcomes such as rm revenues (e.g.,

Hsu, 2006), costs (Ody-Brasier and Vermeulen,

2014), capital inows (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 article, however, both are

limited in important respects, suggesting the need

for additional theorizing and, most importantly,

interdisciplinary research.

We believe that strategic management

researchers are in an excellent position to address

this need, and also that the time is ripe to

re-invigorate the study of categories and competi-

tion in strategic management research. In the pages

that follow, we rst discuss what we label the “in-

nite dimensionalization” problem in clustering sim-

ilarities and differences among rms and suggest

that its intractability has deep socio-cognitive roots.

Wethen briey review the three literatures that have

historically grappled with the problem of connect-

ing categorization processes with competition in

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 64–92 (2017)

DOI: 10.1002/smj