IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v50y2004i7p922-934.html
   My bibliography  Save this article

Random Walks and Sustained Competitive Advantage

Author

Listed:
  • Jerker Denrell

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

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.

Suggested Citation

  • Jerker Denrell, 2004. "Random Walks and Sustained Competitive Advantage," Management Science, INFORMS, vol. 50(7), pages 922-934, July.
  • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:7:p:922-934
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1030.0143
    Download Restriction: no

    References listed on IDEAS

    as
    1. Clarke, Roger & Davies, Stephen & Waterson, Michael, 1984. "The Profitability-Concentration Relation: Market Power or Efficiency?," Journal of Industrial Economics, Wiley Blackwell, vol. 32(4), pages 435-450, June.
    2. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    3. Schmalensee, Richard, 1987. "Collusion versus Differential Efficiency: Testing Alternative Hypotheses," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 399-425, June.
    4. Fama, Eugene F & French, Kenneth R, 2000. "Forecasting Profitability and Earnings," The Journal of Business, University of Chicago Press, vol. 73(2), pages 161-175, April.
    5. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-131, March.
    6. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211-211.
    7. Cubbin, John & Geroski, Paul A, 1987. "The Convergence of Profits in the Long Run: Inter-firm and Inter-industry Comparisons," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 427-442, June.
    8. Ingemar Dierickx & Karel Cool, 1989. "Asset Stock Accumulation and Sustainability of Competitive Advantage," Management Science, INFORMS, vol. 35(12), pages 1504-1511, December.
    9. McGahan, Anita M, 1999. "The Performance of US Corporations: 1981-1994," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 373-398, December.
    10. Jay B. Barney, 1986. "Strategic Factor Markets: Expectations, Luck, and Business Strategy," Management Science, INFORMS, vol. 32(10), pages 1231-1241, October.
    11. Dosi, Giovanni, 1988. "Sources, Procedures, and Microeconomic Effects of Innovation," Journal of Economic Literature, American Economic Association, vol. 26(3), pages 1120-1171, September.
    12. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    13. Levinthal, Daniel & March, James G., 1981. "A model of adaptive organizational search," Journal of Economic Behavior & Organization, Elsevier, vol. 2(4), pages 307-333, December.
    14. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
    15. Richard B. Mancke, 1974. "Causes of Interfirm Profitability Differences: A New Interpretation of the Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 181-193.
    16. Ingemar Dierickx & Karel Cool, 1989. "Asset Stock Accumulation and the Sustainability of Competitive Advantage: Reply," Management Science, INFORMS, vol. 35(12), pages 1514-1514, December.
    17. John F. Muth, 1986. "Search Theory and the Manufacturing Progress Function," Management Science, INFORMS, vol. 32(8), pages 948-962, August.
    18. Waring, Geoffrey F, 1996. "Industry Differences in the Persistence of Firm-Specific Returns," American Economic Review, American Economic Association, vol. 86(5), pages 1253-1265, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. Markus A. Fitza, 2014. "The use of variance decomposition in the investigation of CEO effects: How large must the CEO effect be to rule out chance?," Strategic Management Journal, Wiley Blackwell, vol. 35(12), pages 1839-1852, December.
    6. Coad, Alex & Frankish, Julian & Roberts, Richard G. & Storey, David J., 2013. "Growth paths and survival chances: An application of Gambler's Ruin theory," Journal of Business Venturing, Elsevier, vol. 28(5), pages 615-632.
    7. Jerker Denrell & Christina Fang, 2010. "Predicting the Next Big Thing: Success as a Signal of Poor Judgment," Management Science, INFORMS, vol. 56(10), pages 1653-1667, October.
    8. 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).
    9. Tschoegl, Adrian E., 2004. "Who owns the major US subsidiaries of foreign banks?: A note," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(3), pages 255-266, July.
    10. Sandra Gottschalk & Francis J. Greene & Bettina Müller, 2017. "The impact of habitual entrepreneurial experience on new firm closure outcomes," Small Business Economics, Springer, vol. 48(2), pages 303-321, February.
    11. Torben J. Andersen & Richard A. Bettis, 2015. "Exploring longitudinal risk-return relationships," Strategic Management Journal, Wiley Blackwell, vol. 36(8), pages 1135-1145, August.
    12. 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.
    13. Markman, Gideon M. & Venzin, Markus, 2014. "Resilience: Lessons from banks that have braved the economic crisis—And from those that have not," International Business Review, Elsevier, vol. 23(6), pages 1096-1107.
    14. Nicolaï Foss & Nils Stieglitz, 2012. "Modern Resource-based Theory(ies)," Chapters,in: Handbook on the Economics and Theory of the Firm, chapter 20 Edward Elgar Publishing.
    15. 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.
    16. Alexander Budzier & Bent Flyvbjerg, 2013. "Double Whammy - How ICT Projects are Fooled by Randomness and Screwed by Political Intent," Papers 1304.4590, arXiv.org.
    17. repec:bla:stratm:v:38:y:2017:i:3:p:802-811 is not listed on IDEAS
    18. Jean-Philippe Vergne & Colette Depeyre, 2015. "How do firms adapt? A fuzzy-set analysis of the role of cognition and capabilities in U.S. defense firms’ responses to 9/11," Post-Print hal-01274005, HAL.
    19. Mingchun Sun & Edison Tse, 2009. "The Resource-Based View of Competitive Advantage in Two-Sided Markets," Journal of Management Studies, Wiley Blackwell, vol. 46(1), pages 45-64, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:50:y:2004:i:7:p:922-934. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc). General contact details of provider: http://edirc.repec.org/data/inforea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.