Recessions and competitive leapfrogging: evidence from manufacturing industries

Abstract

Purpose This study investigates how manufacturing firms can leverage recessions to gain and sustain long-term market share advantages, a phenomenon referred to as competitive leapfrogging. For that, we analyze the mechanisms that explain competitive leapfrogging due to recessions. We develop hypotheses in two stages. Initially, we propose the expected effects of recessions on competitive isolating mechanisms in the short run. Next, we analyze the conditions that enable companies that gain market share during recessions to maintain their position in the longer term, thereby elucidating the factors that contribute to the persistence of these changes.Design/methodology/approach We analyze the market share evolution of firms across 64 US manufacturing industries in the three recessions that occurred between 1982 and 2015. We tested the hypotheses by employing several regression models with panel-corrected standard errors and fixed effects, to examine the mechanisms behind competitive leapfrogging.Findings We observe that the increase in market share for companies based on supply-side isolating mechanisms tends to persist in the aftermath. Similarly, the decrease in market share for firms that relied on demand-side isolating mechanisms also tends to endure. Furthermore, our findings indicate that gains in market share for companies with higher financial flexibility also persist in the aftermath. Additionally, we find evidence of a significant tradeoff between financial flexibility and supply-side isolating mechanisms.Research limitations/implications While our study offers valuable insights, several limitations also present opportunities for future research. First, our focus on a single country and sector enhances internal validity but may limit generalizability to other political and economic contexts. Second, we rely on indirect accounting-based proxies for isolating mechanisms, which, while practical and scalable, do not capture the full richness of firms’ capabilities and qualitative factors. Third, although our findings support the presence of persistent market share shifts during recessions, we do not directly test competitors’ ability to recover, so our interpretation of competitive leapfrogging is partly based on inferred counterfactuals. Finally, while we emphasize pre-recession conditions, we recognize that post-recession decisions also shape long-term outcomes, creating an important avenue for further exploration.Practical implications The study emphasizes the importance of managers planning for future recessions when developing strategic plans. This requires an integrated approach, recognizing that long-term success stems from understanding the isolating mechanisms firms rely on and how these interact with financial flexibility.Social implications As recessions severely impact organizations, economic contractions not only reduce economic but also social value, with long-term implications. Our research assists companies in preparing to navigate through recessions, an endeavor that holds fundamental social implications.Originality/value The paper offers a detailed analysis of mechanisms driving competitive leapfrogging during recessions and supports emerging research on a firm’s financial strength influencing competitive advantages. A key aspect of our contribution is the focus on the dual relationship between short and long-term effects and how sources of competitive advantage relate to market share changes during recessions.nOur study emphasizes crucial managerial implications, urging strategic planning to account for potential future recessions.