Co-evolution of firm capabilities and industry competition: Investigating the music industry, 1877-1997 - )

Abstract

This paper proposes that rival firms not only search for new capabilities within their organization, but also for those that rest in their competitive environment. An integrated analysis of these search processes at both firm and industry levels of analysis shows how their interaction makes industries and firms co-evolve over time. To contribute to an enhanced understanding of the concept of co-evolution, a dynamic and integrative framework crossing meso and micro levels of analysis is constructed. This framework is applied to a longitudinal study of the music industry with a time-span of 120 years. The first part, a historical study, covers the period 1877-1990. The second part, a multiple-case study, covers the period 1990-1997. We conclude that search behaviour drives co-evolution through competitive dynamics among new entrants and incumbent firms and manifests itself in the simultaneous emergence of new business models and new organizational forms.

Descriptors: co-evolution, search behaviour, capabilities, competitive regimes, multi-level research, strategic renewal, music industry

Introduction

Schumpeter (1934) claimed that industrial growth and development is a direct product of the competitive process. It is 'a force from within' because discovery is determined by the things that people do in organizations. Although firms disrupt current methods when they force themselves upon their rivals through innovative behaviour, they bring new ideas and practices to an industry, triggering its further development. This paper builds on such a perspective and investigates the relationship between capabilities and competition. This is consistent with Henderson and Mitchell (1997), who called for an enhanced understanding of the endogenous and reciprocal relationships between capabilities and competition. They argued that organizational capabilities shape the competitive environment, a process that, in turn, shapes capability development further. These interactions cross multiple levels of analysis and make capabilities and competition co-evolve over time.

McKelvey (1997: 360) also argues that the development of capabilities at the firm level is both a cause and an effect of the competitive process at the industry level. In his explanation that 'co-evolutionary effects take place at multiple levels', McKelvey (1997: 360) stressed the need for this compound approach to the dynamics within and between firms. He maintained that reciprocal relationships between firms in a competitive environment are co-evolutionary in nature and that such a perspective allows for the mutual inclusion of seemingly contradictory assumptions in social science that organizations are either idiosyncratic or uniform in nature. McKelvey (1997: 356) expressed the latter dilemma as one in which 'it seems impossible to simultaneously accept the existence of idiosyncratic organizational events while at the same time pursuing the essential elements of justification logic.

It is clear that the co-evolution concept has the potential to integrate the discordance between Schumpeterian streams of ideas and those of the resource-based view. Whereas Schumpeterian theory suggests that firms will converge in their appearance and behaviour (as the dynamic of imitation will reduce variety among rival firms), contemporary resource-based theory claims that firms are idiosyncratic in what they have and what they do (Barney 1991; Grant 1996). Yet, empirical research efforts into co-evolving drivers and effects have been limited thus far (Lewin and Volberda 1999). We have the valuable contributions of Kieser (1989), who narrated how medieval guilds were replaced by mercantilist factories as markets and institutions co-evolved. Furthermore, Levinthal and Myatt' s (1994) study of the mutual fund business confirmed the existence of feedback effects between the firm's ability to sustain market relations and its competitive position.

Here, we respond to the lack of understanding about co-evolutionary processes within the field of strategic management and to calls for more studies that synthesize firm- and industry-level perspectives in strategy and organization research (Levinthal 1995; Lewin and Volberda 1999). The purpose of this article is to gain insights into the co-evolution of capabilities and competition within the competitive environment by developing an integrative framework suggesting several propositions, and by illustrating these in a longitudinal analysis of an industry. This framework is based on the assumption that search behaviour drives co-evolutionary processes. The framework will be illustrated by means of a longitudinal study of the music industry and will be divided into two parts. The first part, dealing with the period 1877-1990, discerns various competitive regimes at industry level, and analyses the capabilities that were founded and proliferated in each regime. The second part contains a multiple-case study cove ring the period 1990-1997 and focuses, at firm level, on the interaction between capabilities and competition during a particular competitive regime. The paper closes with a discussion of the findings, limitations, and key issues for future research.