Why Do Firms Tend to Become Different

lntroduction A central lesson to emerge since the early 1980s of research in management is that a firm's strategy has to be rooted in its unique properties. Unless a firm is already different , it is hard to prescribe a path to sustainable above-average profits. This makes management theory look simultaneously good and bad. The good part is that firms, in fact,, are dffirent from each other. So the theory is relevant. The bad part is that we have a very poor understanding of how and why firms becom.e d.ffirent (Rumelt et al. l99l; Nelson, I99l: Helfat, 2000). One explanation is that a firm will want to differentiate from an identical competitor in order to reduce competition. However, this does not explain who gets the more attractive position, or what prevents other firms from entering and driving down profits. Another class of stories, which include evolutionary economics (Nelson and Winter ,7982), population ecology (Hannon and Freeman, 1989), and various other uses of genetic analogies, is that firms are different because bounded rationality prevents them from becoming identical. Some management theorists look at this as unsatisfactory , because we believe that management matters in the sense that firms try to, and generally succeed in, doing the right things. The present chapter presents a theory that combines elements of competitive differentiation with some bounded rationaliry. The argument is one in which competitive pressures cause a small deviation from rationaliry to snowball into a major deviation in the growth path of the firm. In rwo steps, the argument is that: (t) An initial error produces, in the firm's resource stock, a change that hurts in the execudon of the current strategy, but helps in the execution of another strategy. (2) This puts the firm at a competitive disadvantage that it can escape by changing its strategy. The overall argument is consistent with D'Aunno, et al.'s (2000) view that both institutional and market forces contribute to organizational change. The idea that a missed step in the resource development process can have long-term consequences has some similaritywith Cohen and Levinthal's claim that "lack of investment in an area of expertise early on may foreclose the future development of a technical capabiliry in the area" (1990: 128).