Adaptation Strategy and Selection Mechanism under Shakeout : The Cases of Automobile and Mobile Phone Industries

Abstract

After an industry emerge and is introduced on the market, a number of firms continue to enter the industry until the net entry of firms become saturated on the point so called "Shakeout". Shakeout describes phenomenon that net entry of firms on certain industry rapidly falls although market size continue to rise. According to the industry life cycle theory, the industry face dramatic change during shakeout period. For instance, almost perfectly competitive market would becomes monopoly or oligopoly structure during this time. A number of economist studying empirical industrial organization have been trying to analyze survival mechanism on the period in which each firm face radical change in competitive environment. Their findings pointed out that the firm size, the time of market entrance and ex ante experience of firms before entering the new industry are significant variables to determine firm survival during shakeout process. These results do not contribute firm's strategic decision making because the factors they represented are only within environmental factors which individual firms never change. However, according to the theory regarding firm behavior in evolutionary economy, firm survival are influenced by environmental factors as well as active decision making which are called "selection" and "adaptation" in evolutionary economy context. Evolutionary economy regard firm active decision maker every moment. Therefore the aim of this research is to examine both deterministic and non-deterministic factors affecting firm survival during shakeout in one unified framework based on principle of evolutionary economy. In addition, dividing pre-Shakeout, Shakeout and post-Shakeout period to consider industry dynamics. To measure companies adaptation strategies objectively, this paper uses products level data distinctively. I analyzed data on 21,337 kinds of new automobile products in American automobile industry from 1905 to 1942 and 5,508 kinds of new mobile phone products from 1994 to 2012. This paper includes four companies adaptation strategies such as technology level, technology growth, product dispersion and product difference using these data. Main results are followings. First, companies which has higher technology growth shows higher survival rate in pre-shakeout period. Since products does not meet the consumers needs in this period. Second, higher product difference shows higher survival rate. Although dominant design was emerged before shakeout period, imitating dominant design strategy can reduce companies survival rate. This is because companies which imitate dominant design can also surfer price competition pressure. The implications of this research are summarized as follows. First, the research demonstrates that the principle and framework suggested by evolutionary economists are effective and valuable in explaining firm survival mechanism. It implies further that the firms are not a passive actor in survival process but an active decision maker which enable firms to overcome huddles during shakeout. Second, the result shows that using product level data is helpful to describe and understand firm behavior. Especially, it prove that firm heterogeneity can be explained by observing all products a firm makes.