Evolution of Capabilities and Industry: The Evolution of Mutual Fund Processing

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Abstract
The field of Strategic Management, or Business Policy, has as a primary mission the analysis of diversity. Recently, the field has shifted from an emphasis on the diversity of industry to firm level differences. This shift has had a profound impact on the discourse of practitioners whose conversations are now replete with words such as core competence and capabilities. This research stream, generally labeled the resource view of the firm, has made substantial progress in identifying what attributes of a firm may provide a source of competitive advantage as well as significant insight as to the sustainability of these advantages. The literature has far less to say about the emergence of these distinctive capabilities. There also is a sense that the ebb and flow of strategy research may have swung excessively to firm centered analyses and has tended to ignore industry dynamics. The authors attempt to redress these weaknesses. They consider performance from the perspective of evolutionary systems emphasizing the role of positive feedback effects that reinforce a process in its current trajectory. They explore the implications of the positive feedback of market activity on capability formation. Some of these are relation-specific - within a particular customer-supplier pair. Other are diffuse and result from overall market activity. They also consider the organizational factors that influence the degree to which a firm might pursue a given set of opportunities. Managers make choices concerning resource allocation and market initiatives based on anticipated feedback effects, feedforward effects in the language of the authors. This conceptual framework is applied to the development of the mutual fund processing industry. The authors find that heterogeneity in competitive position among firms in the transfer and custody business is influenced by a variety of forces. Some, such as market share, amplify the existing heterogeneity. Firms with a strong market position tend to
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