Following or Running Away from the Market Leader? The Influences of Environmental Uncertainty and Market Leadership

• Author: Salvatore Torrisi,Claudio Giachetti
• Date: 01 September 2018
• Published date: 01 September 2018
• DOI: http://doi.org/10.1111/emre.12130

Following or Running Away from the Market

Leader? The Influences of Environmental

Uncertainty and Market Leadership

CLAUDIO GIACHETTI

1

and SALVATORE TORRISI

2,3

1

Ca’Foscari University of Venice, Venice, Italy

2

University of Bologna, Bologna, Italy

3

Bocconi University, Milan, Italy

Competitive dynamics theory suggests that rival firms imitate other competing firms with similar resources to

maintain competitive parity whileare likely to differentiatefrom the market leader to avoidits dangerous retaliation.

According to neo-institutionaltheory, in highly uncertain environments, rivalsare likely to imitate the market leader

because theyassume it possesses superiormarket knowledge. Combiningthese two lines of argument, we arguethat a

rival’s decision whether to follow or run away from the market leader depends on environmental uncertainty and

market leadership, the latter expressing the extent to which the market leader owns a larger market share vis-à-vis

the other rivals. The empirical analysis relies on data about the product line strategies of 66 mobile phone vendors

in the 1994–2010 period. The results show that when environmental uncertainty is low, the relationship between a

firm’s market leadership and imitation by its rivals is negative, whereas in conditions of high environmental

uncertainty, imitation of the market leader increases with its market leadership.

Keywords: Imitation; competitive dynamics; product innovation; environmental uncertainty; market leadership;

mobile phone industry

Introduction

Large organizations are particularly likely imitation

candidates because of their salience, status, and the

visibility of theiractions and because the size they have

achieved suggests that they have done something right

to gain access to resources (Baum et al. 2000: 774).

Imitation of rival s’behavior is a widespread

competitive strategy, which has attracted substantial

attention in the academic and practitioner-oriented

literature (e.g.,D’Aveni, 1994; Barreto and Baden-Fuller,

2006; Lieberman and Asaba, 2006; Ross and Sharapov,

2015; Giachetti et al., 2016). However, the question of

when and why firms imitate market leaders –namely,

competitors with greater market share –remains subject

to debate, with management scholars offering different

theoretical arguments and sometimes contrasting

empirical evidence.

Competitive dynamics scholars suggest that firms

imitate to maintain parity and mitigate rivalry especially

when competitors have similar resource endowment and

market position. Lieberman and Asaba (2006), in their

review of the imitation literature,have called this strategic

behavior ‘rivalry-based imitation’. This situation is

exemplified by Microsoft, Sony and Nintendo’s decision

to imitate eachother’s product line strategies(e.g., product

features, product designs, number of models within the

line), in an incessanthead-to-head rivalry to get or to keep

ahead of one another in the video game console industry

(Economist, 2007). However, if resources are not

comparable as when there is a market leader with a large

market share gap with respect to followers, the latter

may find it difficult to match the leader’s superior

resources (Lippman and Rumelt, 1982). Moreover,

duplicating a leader’s moves intensifies competition

(Chen et al., 2007), which could have negative effects

on performance (Porter, 1996). In this sense, rivals might

prefer to avoid the negative consequences of direct

competition with the leader (Smith et al., 2001).

Neo-institutional theory adopts a different perspective

and highlight s environmentaluncertainty as a determinant

Correspondence: Salvatore Torrisi, Department of Management,

University of Bologna, Via Capo di Lucca, 34, 40126 Bologna, Italy

ICRIOS BocconiUniversity, 20136 Milan, Italy. E-mail:torrisi@unibo.it

European Management Review, Vol. 15, 445–463, (2018)

DOI: 10.1111/emre.12130

©2017 European Academy of Management

of imitation (e.g., Haveman, 1993; Baum et al., 2000;

Lieberman and Asaba, 2006; Semadeni and Anderson,

2010; Gaba and Terlaak, 2013; Giachetti and Lanzolla,

2016), where uncertain environments are those in a state

of great unpredictability for managers. According to this

theory, environmental uncertainty often translates in

‘perceived information asymmetry, manifested in the

belief that a competitor may possess superior market

information’(Semadeni and Anderson, 2010: 1178).

From this perspective, a market leader is a natural target

of imitation because, thanks to its superior market share,

it is more visible to rivals, who are likely to believe the

leader was able to achieve a superior market performance

thanks to its better information about future technological

and market conditions (Haveman, 1993; Abrahamson,

1996). Lieberman and Asaba (2006) have named this

strategic behavior ‘information-based imitation’.Toyota’s

commitment to hybrid technologies, when the success of

these technologies was still uncertain, offers a good

example of a marketleader setting a standard that initiated

imitation by smaller competitors (Time, 2013).

Competitivedynamics and neo-institutionaltheory thus

offer different but complementary perspectives on the

effect of the marketleadership, that is, the l eader’smarket

share gap with respect to rivals, on rivals’actions. The

former suggests that imitation serves the purpose of

maintainingparity and mitigating rivalry,especially when

competitors havesimilar resource endowment and market

position, while the latter argues that firms are more likely

to imitate the leader to reduce uncertainty. Studies in each

tradition describe the existence of a market leader or

environmental uncertainty as distinct forces, triggering

one choice or the other. However, no research has

investigated how different combinations of high/low

environmental uncertainty and a firm’s m arket leadership

might affect rivals’overall decision to imitate or keep

away from the leader. While the competitive dynamics

perspective does not adequately consider the moderating

effect of uncertainty on the relationship between a firm’s

market leadership and rivals’imitation of its strategy,

neo-institutional theory overlooks the difficulty in

imitating a market leader due to resource gap and causal

ambiguity (Strang and Still, 2006).

We argue that firm’s market leadership and

environmental uncertainty affect rivals’level of imitation

of the market leader through multiple mechanisms (i.e.,

imitation for competitive purposes or imitation to reduce

uncertainty), as grounded in the two streams of

organizational strategy literature (i.e., competitive

dynamics and neo-institutional theory). On the one hand,

afirm’s market leadership should help rivals find a

reference target to imitate when they must cope with high

environmental uncertainty. In fact, a firm’s larger market

share indicatessuperior resources and capabilities, as well

as greater product diffusion among consumers, making

the firm’sactions more visible to rivals. On the otherhand,

when environmental uncertainty is low, rivals are more

confident of their own ability to predict future

technological and demand trajectories. In this latter

scenario, rivals do not need a reference target to imitate

and, at the same time, they may avoidimitation to prevent

the negative consequences of intense competition.

Results of our studycomplement the extant literaturein

several ways. First, we show that there is a negative

relationship between a firm’s market leadership and the

rivals’level of imitation of its strategy, and that

environmental uncertainty positively moderates this

relationship. With these findings we extend the theory of

imitation by examining how different combinations of

market leadership and environmental uncertainty activate

the mechanisms by which a rival follows (or run away

from) the market leader. In fact, although prior research

provides some insights into the effect of environmental

uncertainty (Haunschild and Miner, 1997; Lieberman

and Asaba, 2006) and market leadership (Smith et al.,

1992; Chen et al., 2007; Giachetti and Lanzolla, 2016),

to the best of our knowledge, no previous works account

for the joint effect of these two factors. Rather,

competitive dynamics and neo-institutional theory have

evolved relatively independently, preventing a deeper

understanding of the an tecedents of imitation.

Second, mostof the existing studies thathave examined

environmental uncertainty and market leadership as

antecedents of the imitation process have measured these

two antecedents with dichotomous variables, thus

considering uncertainty as present or not present (e.g.,

Semadeni and Anderson, 2010), and a firm as being the

market leader or not (e.g., Giachetti and Lanzolla, 2016).

In this study, we discuss and measure both constructs as

continuous variables, that is, ranging from low to high

levels. This is fundamental to understand how different

combinations of high/low uncertainty and market

leadership affect the rivals’propensity to imitate the

market leader’sstrategy.

Third, while various studies in the strategy and

marketing literature have examined how rivals modify

their product line to respond to competition (Kekre and

Srinivasan, 1990; Lancaster, 1990; Giachetti and

Dagnino, 2014), there is a lack of works investigating

how product line decisions are influenced by the market

share leader’s decisions. Our examination of the effect of

market leadership and environmental uncertainty on

imitation of themarket leader’s product line strategyhelps

better understand the role played by the leader in

influencing rivals’product line decisions.

Finally, the results of this study offer important

guidelines for managers operating in hypercompetitive

landscapes, characterized by fast-changing environmental

conditions and frequent changes in market share

leadership (Smith et al., 2001). Understanding how

446 C. Giachetti and S. Torrisi

©2017 European Academy of Management