Random Walks and Sustained Competitive Advantage

Denrell, Jerker (2004) Random Walks and Sustained Competitive Advantage. Management Science, 50 (7). pp. 922-934.

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.

Item Type: Article
Keywords: sustained competitive advantage; resource-based view; random walks; luck
Subject(s): Strategy; Entrepreneurship & Global business
Centre: Faculty of Strategy, Entrepreneurship and International Business
Date Deposited: 26 Oct 2011 11:29
Last Modified: 23 Oct 2015 14:05
URI: http://eureka.sbs.ox.ac.uk/id/eprint/999

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