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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)

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
    DOI: 10.1287/mnsc.1030.0143
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