Puzzles or Pieces: Competition in Nascent System Industries

Abstract

Firms in nascent system industries rely on one another to create value, and compete with one another to capture value. In order to manage this tension, firms can choose to compete either individually at the component level or collectively at the system level. Although the level at which firms compete is critical to firm performance, extant literature has yet to comprehensively explore the factors governing this decision. I address this gap using a formal analytical model to explore the expected performance of each strategy within the context of a nascent industry characterized by substantial technological and competitive uncertainty. Analysis reveals that while component competition generally affords firms higher performance, it is often optimal for firms to form ecosystems and compete at the system level. This result is driven by the ability of the system strategy to reduce competitive uncertainty and favorably alter the competitive environment by co-opting potential competitors. I highlight contributions to the study of industry architectures, ecosystems, and strategy in systems industries.