Strategic Management

Competition Can Enhance a Firm's Survival

ILLUSTRATION BY JOEL HOLLAND

CONVENTIONAL WISDOM suggests that technology companies should deal with globalization and rapid change by setting themselves apart from the pack. Firms should strike out alone by racing into novel technological markets or by cornering an isolated niche, so the old theory goes. But a new study questions these strategies. William Barnett, professor of strategic management and organizational behavior, has scrutinized four decades of ups and downs in the hard disk drive (HDD) industry. He finds that firms that try to avoid competition incur hidden costs.

Such companies are less likely to develop new capabilities and may thus jeopardize their long-term survival. “Technologically and geographically differentiated firms face less competition today, but they forgo the benefits of exposure to competition that would have helped them tomorrow,” Barnett says in a paper coauthored with David McKendrick, research director for the Information Storage Industry Center at the University of California, San Diego.

Barnett and McKendrick tested their theory by tracking the worldwide HDD industry from the time IBM made the first movable-head device in 1956 until 1998. They note that HDD manufacturing—just like semiconductors, telecommunications, and computer software—has had a history of spectacular technological progress at the industry level but also high rates of failure for individual firms. More than 100 players entered the market after 1980, but most did not survive the ensuing shakeout. Among the big-name casualties were General Electric, Burroughs/Unisys, Connor Peripherals, Hewlett-Packard, Mitsubishi, Olivetti, Sony, and Siemens. Altogether, the HDD market saw exits by 155 out of 169 organizations in the 42-year period studied.

In fast-changing industries, the researchers say, what matters is not a firm’s absolute rate of innovation but its development relative to others. A firm may slip behind even as it undergoes rapid change. The phenomenon has been dubbed the “Red Queen effect”—after the character in Lewis Carroll’s Through the Looking Glass who is running but seems to Alice to be standing still.

The researchers compiled data covering 1,511 organization-years, including each company’s entry and exit dates, nationality, sales, and the types of disk drive made. These details were then coded and subjected to mathematical modeling and analysis. The results show that firms have greater survival chances if they already have endured competition in the past. Barnett and McKendrick propose that competition be seen in terms of an “ecology of learning.” Innovation by one firm excites innovation in others to create a virtuous cycle. Thus, exposure to competition drives organizational learning.

These findings question the judgment of strategic managers who believe their job is to find ways to isolate their firms from rivalry by differentiating them either along technological or geographical lines. The researchers do not deny that competition can kill. Their analysis shows that an organization facing a single rival in the high-end, advanced-technology niche has a 14.6 percent higher chance of failure than a firm without a rival. This amounts to a 20-fold increase in the exit rate of firms facing 22 rivals—the maximum pool of competitors observed in the data.

However, with time these effects are offset by the benefits of competitive experience. Competition eventually enhances a firm’s survival chances. This threshold is crossed after about 10 years for firms in the low-tech niche and after 16 years for those in the more hazardous high-end niche. “Isolation from competition has obvious current-time benefits but also has the less obvious downside that it deprives an organization of the engine of development,” the researchers write. In a related finding, HDD makers that were set up as captive producers for parent companies in the computer business were less likely to last, compared with those producing HDDs purely for sale in the open market. The study also suggests that a lack of competitive experience domestically can prove to be a critical disadvantage globally. “Age on its own is not a plus,” Barnett notes. “Organizations that have no competition may survive by being in an isolated context, but they become impotent.”

— CHERIAN GEORGE

The Organizational Evolution of Global Technological Competition, William Barnett and David McKendrick, GSB Research Paper #1682, March 2001