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Strategic Management Journal

Hidden but in plain sight: The role of scale adjustment in industry dynamics

Authors

  • Thorbjørn Knudsen,

    1. Strategic Organization Design Unit (SOD), Department of Marketing and Management, University of Southern Denmark, Odense M, Denmark
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  • Daniel A. Levinthal,

    Corresponding author
    1. Department of Management, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, U.S.A.
    • Correspondence to: Daniel A. Levinthal, Department of Management, The Wharton School, University of Pennsylvania, 2000 Steinberg‐Dietrich Hall, PA 19104–6370, U.S.A. E‐mail: dlev@wharton.upenn.edu

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  • Sidney G. Winter

    1. Department of Management, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, U.S.A.
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Abstract

While much is understood about the general pattern of industry dynamics, a critical element underlying these dynamics, the rate of the expansion of individual firms, has been largely overlooked. We argue that the rate at which firms can reliably increase their scale of operations is a critical factor in understanding the structure of industries. Further, success at scaling‐up the firm's operations provides a dynamic‐isolating mechanism that insulates established firms from new competition. We show that the bases of profitability in the industry (monopoly‐like profits stemming from the restriction of output, efficiency rents based on firm‐specific productivity differences, or transitory Schumpeterian profits) can be traced to the scale adjustment process. We explore these issues in a computational model of industry dynamics. Copyright © 2013 John Wiley & Sons, Ltd.

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