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Random Walks and Sustained Competitive Advantage

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  • Jerker Denrell

    ()
    (Graduate School of Business, Stanford University, Stanford, California 94305)

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    Abstract

    Strategy is concerned with sustained interfirm profitability differences. Observations of such sustained differences are often attributed to unobserved systematic a priori differences in firm characteristics. This paper shows that sustained interfirm profitability differences may be very likely even if there are no a priori differences among firms. As a result of the phenomenon of long leads in random walks, even a random resource accumulation process is likely to produce persistent resource heterogeneity and sustained interfirm profitability differences. A Cournot model in which costs follow a random walk shows that such a process could produce evidence of substantial persistence of profitability. The results suggest that persistent profitability does not necessarily provide strong evidence for systematic a priori differences among firms. Nevertheless, since the phenomenon of long leads is highly unrepresentative of intuitive notions of random sequences, such evidence may still be persuasive.

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    File URL: http://dx.doi.org/10.1287/mnsc.1030.0143
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 50 (2004)
    Issue (Month): 7 (July)
    Pages: 922-934

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    Handle: RePEc:inm:ormnsc:v:50:y:2004:i:7:p:922-934

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    Related research

    Keywords: sustained competitive advantage; resource-based view; random walks; luck;

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    Cited by:
    1. Soenke Sievers & Jan Klobucnik, 2011. "Valuing high technology growth firms," Cologne Graduate School Working Paper Series 02-07, Cologne Graduate School in Management, Economics and Social Sciences.
    2. Albert Banal-Estañol & Augusto Rupérez-Micola, 2010. "Are Agent-based Simulations Robust? The Wholesale Electricity Trading Case," Working Papers 443, Barcelona Graduate School of Economics.
    3. Banal-Estañol, Albert & Rupérez Micola, Augusto, 2011. "Behavioural simulations in spot electricity markets," European Journal of Operational Research, Elsevier, vol. 214(1), pages 147-159, October.
    4. Adrian E. Tschoegl, 2003. "Who Owns the Major US Subsidiaries of Foreign Banks? A Note," Center for Financial Institutions Working Papers 03-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. Alexander Budzier & Bent Flyvbjerg, 2013. "Double Whammy - How ICT Projects are Fooled by Randomness and Screwed by Political Intent," Papers 1304.4590, arXiv.org.
    6. Alex Coad & David J Storey & Richard G Roberts & Julian S Frankish, 2013. "New venture survival and growth: does the fog lift?," Working Papers 2013/36, Institut d'Economia de Barcelona (IEB).
    7. Dew, Nicholas & Read, Stuart & Sarasvathy, Saras D. & Wiltbank, Robert, 2009. "Effectual versus predictive logics in entrepreneurial decision-making: Differences between experts and novices," Journal of Business Venturing, Elsevier, vol. 24(4), pages 287-309, July.
    8. Burgelman, Robert A. & Grove, Andrew S., 2007. "Let Chaos Reign, Then Rein In Chaos--Repeatedly: Managing Strategic Dynamics For Corporate Longevity," Research Papers 1954, Stanford University, Graduate School of Business.
    9. Alex Coad & Julian Frankish & Richard G. Roberts & David J. Storey, 2011. "Growth Paths and Survival Chances," SPRU Working Paper Series 195, SPRU - Science and Technology Policy Research, University of Sussex.

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