A key difference between the two markets is the degree to which competitive advantage is likely to be temporary. Competitive advantage in the Sonite market is moderately temporary. Firms begin the simulation with existing products that are purchased by customers in existing segments. Their products have revenues, some brand loyalty, and at least some fit with customer preferences. But the market also has relatively low switching costs and limited intellectual property protection through secrecy, but not patenting. Thus, rivals can make competitive moves that overtake or outmaneuver entrenched firms (Teece, 1986; Katila, Rosenberger, and Eisenhardt, 2008). Nonetheless, firms can create a moderately sustainable advantage because it takes rivals time to develop better, or at least equal, products, produce them, and persuade customers to buy them.
By contrast, competitive advantage in the Vodite market is highly temporary. Unlike in the Sonites market, firms enter the Vodite market with few competitive advantages except, perhaps, financial resources. Indeed, it is unclear who the competitors will be and in what segments they will emerge. As firms begin to make competitive moves, the pace of change often accelerates. One team described ‘the market [Vodite] changed so much. Our competitors would do things that were unpredictable…it didn't make sense for us to look too far ahead.’ For these reasons, competitive advantage in the Vodite market is likely to be highly temporary.
Five firms compete in each Markstrat industry. Participant teams decide their own firm's competitive moves and can monitor those of their competitors. They have several information sources. For example, teams receive an industry newsletter after every round. The newsletter contains public reports on the stock market, economic variables, such as inflation and GNP growth rates, and performance indicators for all firms. Teams can also purchase data on the competitive moves made by all firms, including pricing information, product introductions and modifications, and advertising and R&D expenses. Thus, there are many information sources to assist the teams.
Experiential simulations such as ours have several advantages. First, they provide complete, transparent information on the actions of all participants (Larréché, 1987; Lant and Montgomery, 1992). For example, rather than capture only certain types of highly observable moves (e.g., pricing and newsworthy moves) or certain competitors (e.g., largest firms) as is typical of archival studies, simulations typically record all moves by all firms in an industry. Thus, researchers can gather uniquely comprehensive data sets and measure variables that would otherwise be difficult, costly, and perhaps impossible to obtain in real settings (e.g., discrete R&D investments). Second, the standardized structure of experiential simulations controls for some confounding variables, such as macroeconomic shocks and government interventions. This sharpens and isolates the phenomena of interest. Thus, like laboratory experiments, experiential simulations offer measurement, comparability, and control benefits that are less available with other methods. Third, the longitudinal nature of experiential simulations enables study of firm and industry evolution and, thus, leads to a more accurate understanding of causality.
In addition, Markstrat offers several further advantages, which make it particularly appropriate for our research. First, the Markstrat industry consists of two distinct product markets with differing likelihood of temporary advantage. As noted above, the established Sonite market offers some (although modest) possibility of a moderately sustainable competitive advantage, while the Vodite market offers no such advantage. Second, Markstrat provides a realistic view of competition. Based on several decades of theoretical and empirical research (e.g., Larréché and Gatignon, 1998), it has been used extensively in prior strategy research, and has been shown to provide an accurate description of competition among firms (e.g., Hogarth and Makridakis, 1981; Glazer, Steckel, and Winer, 1987; Lant and Hurley, 1999; Marinova, 2004). In fact, practicing managers who have participated in Markstrat have identified the simulation's realism as one of its greatest strengths (Kinnear and Klammer, 1987). Third, the outcomes of simulation runs are idiosyncratic and emergent. Although each simulation begins with the same initial conditions, very different outcomes emerge from the complex interactions of rivals. For example, Markstrat industries sometimes evolve into near monopolies—with a single dominant firm—or into duopolies, while at other times all five firms lock in head-to-head competition. Since the Markstrat simulation involves firms engaging in complex, competitive interactions with each other (Gatignon, 1987), the likely outcomes of firm interactions and subsequent firm performance are emergent and unpredictable, just as they are in real industries.
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