DP3732 Strategy Dynamics through a Demand-Based Lens: The Evolution of Market Boundaries, Resource Rents and Competitive Positions

Author(s): Ron Adner, Peter Zemsky
Publication Date: February 2003
Keyword(s): disruptive technologies, market segmentation, product differentiation, technology improvement
JEL(s): L10
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3732

We develop a novel approach to the dynamics of business strategy that is grounded in an explicit treatment of consumer choice when technologies improve over time. We address the evolution of market boundaries, resource rents and competitive positions by adapting models of competition with differentiated products. Our model is consistent with the central strategy assertion that competitive interactions are governed by superior value creation and competitive advantage. More importantly, it shows how the interplay between improving technologies and consumers' valuation of the resulting performance improvements affects which market segments new technologies are able to enter, how the rents from different types of firm resources change over time, and whether or not markets are segmented according to the classic generic strategies of Cost Leadership and Differentiation. Our focus on consumer choice and value creation complements the traditional focus in the strategy literature on competition and value capture.