Edited by Gideon D. Markman and Phillip H. Phan
Chapter 2: A Retrospective of Interdependency, Competition, and Industry Dynamics
Michael J. Lenox, Scott F. Rockart, and Arie Y. Lewin Our interest in interdependency began from a simple premise: what if the complexity of industries had a large role in determining firm profits and the way industries develop? How might complexity affect patterns of entry and exit, growth and decline, and profits and losses for new and established ventures? As with basically all research, we began by drawing on well-established ideas such as the notion that managers face problems too complicated for optimal decisions (see Simon 1957, Cyert and March 1963) as well as more recent work, notably work showing how complicated settings might cause competing firms to diverge (Levinthal 1997) and remain different (Rivkin 2000). We found, however, that no one had yet connected the complexity of the setting to firm profits, industry structure, or industry dynamics. With this as background, we set out to develop a model of industry dynamics with managers facing different degrees of complexity (see Lenox et al. 2006, 2007). The managers in our model are not naive, biased, or opportunistic. The managers do, however, face settings where a host of interdependent decisions must be made and the relationships among those decisions are only partially understood. In other words, managers find it hard to determine the best way to run a business because the many decisions they need to make interact with one another in ways that are only partially known. In our model we capture these interactions among decisions using the NK apparatus. The...
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