Competitive heterogeneity, cohorts, and persistent advantage
| Author | Gordon Walker,Tammy L. Madsen |
| DOI | http://doi.org/10.1002/smj.2483 |
| Published date | 01 February 2017 |
| Date | 01 February 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 184–202 (2017)
Published online EarlyView 28 January 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2483
Received 28 May 2013;Final revision received23 September 2015
COMPETITIVE HETEROGENEITY, COHORTS,
AND PERSISTENT ADVANTAGE
TAMMY L. MADSEN1*and GORDON WALKER2
1Management Department, The Leavey School of Business, Santa Clara University,
Santa Clara, California, U.S.A.
2The Edwin L. Cox School of Business, Southern Methodist University, Dallas,
Texas, U.S.A.
Research summary: Juxtaposing competing theories of whether superior prots endure, this
article investigates differences in the rates at which rms’ prot advantages persist following a
signicant regulatory change in the rules governing industry competition. Such a change creates
two cohorts of rms, Entrants that lack experience in the industry and Incumbents that competed
in the industry before the regulatory shift. The ndings show that both cohorts’ prot advantages
persist, but at different rates: Superior performing Incumbents sustain an advantage longer than
superior performing Entrants. This result is counterintuitive since Entrants arenot constrained by
a legacy of competing under the prior regime.Overall, the ndings indicate that stages of a rm’s
development and of an industry’s evolutionare critical to understanding how long superior prots
persist.
Managerial summary: State and federal institutions employ regulations in an attempt to address
market failures and to create a stable set of market and nonmarket relationships among relevant
actors. A byproduct of this stability is decreased competition, and in turn, reduced incentives for
rms to develop efcient operations. One might expectthen that deregulation would fundamentally
disrupt incumbent rms’ abilities to develop and sustain a prot advantage. We nd the reverse:
Over time, some rms in the Incumbent cohort develop persistent, albeit temporary, prot
advantages despite an onslaught of Entrants. Thus, while deregulation shakes out inefcient
rms, it may strengthen, rather than threaten the prot trajectories of incumbent rms over time.
Advantages developed by superior performing Entrants also endure, but for a shorter duration
relative to Incumbents. Copyright © 2015 John Wiley & Sons, Ltd.
So if you really want to understand the way
the market system and the feedback from the
marketplace provides the selective force that
operates to shape what is actually happen-
ing, the examples that are really powerful are
examples from a historical context of rela-
tively early stages in industry evolution or, of
Keywords: competitive heterogeneity; industry evolution;
Incumbents; Entrants; organizational cohorts; deregula-
tion;
*Correspondence to: Tammy L. Madsen. Management Depart-
ment, Leavey School of Business, Santa Clara University, 500 El
Camino Real, Santa Clara, CA 95050. E-mail: tmadsen@scu.edu
Copyright © 2015 John Wiley & Sons, Ltd.
course, later stages where thereis some inno-
vation which renews the whole process.(“The
Progress of Evolutionary Thinking in Eco-
nomics and Management,”Journal of Man-
agement Inquiry, Winter, 2003: 19)
INTRODUCTION
A fundamental objective of rms is to sustain
prots superior to those of competitors (e.g.,
Barney, 1991; Lippman, and Rumelt, 1982). Many
scholars have studied whether rms’ superior
prots (prots above an industry’s norm) tend to
Competitive Heterogeneity, Cohorts, and Persistent Advantage 185
persist or to converge to the mean (e.g., Cubbin
and Geroski, 1987; Dosi, Lechevalier, and Secchi,
2010; Jacobsen, 1988; Knott, 2003; McGahan
and Porter, 2003; Mueller, 1977, 1986; Roberts,
1999; Rumelt, 1991; Waring, 1996; Wiggins and
Ruei, 2002). A widely-held view on this topic is
that competition and free entry will make prot
differences temporary rather than enduring (e.g.,
Hopenhayn, 1992; Schumpeter, 1934). Yet, there is
a remarkable amount of empirical evidence to the
contrary, indicating the theory and empirics are not
congruent (e.g., Cubbin and Geroski, 1987; Dosi,
2005; Jacobsen, 1988; Knott, 2003; Madsen and
Leiblein, 2007, 2015; McGahan and Porter, 1999;
Mueller, 1977, 1986; Roberts, 1999; Villalonga,
2004). A possible reason for this inconsistency is
that the trend in prots has not been examined in
the context of signicant industry change. Such an
analysis is our purpose here.
In this article, we examine the prot differences
among cohorts following a major deregulatory
shock to an industry in its mature stage. A cohort
is a group of rms that enters an industry at
roughly the same time or during the same era
in an industry’s history, where an era is dened
by distinct historical, institutional, technological,
and competitive conditions (Haveman and Rao,
1997; Walker, Madsen, and Carini, 2002). The
environment encountered at entry shapes the capa-
bilities that entering rms must build in order to
compete. These capabilities stamp the cohort with
a common imprint based on its initial experiences
(Stinchcombe, 1965). In addition to this imprint,
the rms in a cohort encounter roughly the same
opportunities and constraints after the period of
entry, and thus, are likely to have similar devel-
opmental patterns (Madsen and Walker, 2007).
Cohort effects thus explain part of the competitive
heterogeneity in an industry, analogous to the
inuence of birth cohorts on life outcomes studied
in demography (Knoke and Hout, 1974; O’Brien,
Stockard, and Issaacson, 1999; Ryder, 1965).
By examining prot persistence or convergence
in cohorts, this study contributes to research
on prot persistence in three ways. First, many
empirical studies have assumed that the inuence
of unique industry events on the persistence of
superior prots is captured by two parameters,
a generic industry effect, and a temporal or year
effect. While this approach seems reasonable, par-
ticularly for studies spanning multiple sectors over
time (McGahan and Porter, 1999, 2003; Villalonga,
2004), it may obscure how specic shocks affect the
persistence of superior prots in an industry. Also,
studies investigating persistence rarely tie their
starting points to a particular event or stage of indus-
try evolution. But examining how abnormal prots
evolve, above or below the industry norm, requires
that we identify a set of rms that lack experience
in an industry and begin competing at roughly
the same time, in other words, a discrete cohort.
Finally, ignoring industry life cycles is patently
inconsistent with research on industry evolution
that demonstrates substantial heterogeneity among
rms across life cycle stages, including disruption
in the mature stage (Abernathy and Utterback,
1978; Klepper, 1996; Klepper and Graddy, 1990).
Heterogeneity after disruption is in part determined
by differences between Entrant and Incumbent
cohorts, which need to be examined explicitly in
order to test whether rm abnormal prots persist or
converge.
To assess persistence or convergence in a single
cohort, the initial part of our study focuses on the
rst group of rms to enter an industry after a shock
that redenes the rules of competition. We label
these rms Early entrants to distinguish them from
rms that enter the industry after the competitive
implications of the shock have become clearer.
This separation of cohorts reects the imprinting
of era-specic managerial practices and sunk cost
investments on rms that enter the industry in each
evolutionary stage (Madsen and Walker, 2007;
Stinchcombe, 1965). Early entrants, the rst cohort
of Entrants coming into the industry after the
shock, have been shown to be signicantly more
heterogeneous than incumbents (Walker etal.,
2002) and can be viewed as restarting the evolution
of the industry. In this way, they are a logical
and promising choice for testing convergence
versus persistence. Convergence is observed when
the prot heterogeneity of members of the Early
entrant cohort erodes over time. The alternative
pattern is that prot differences among members of
the Early entrant cohort persist.
Next, we compare the rates at which prot het-
erogeneity converges(or persists) for the Incumbent
and Entrant cohorts separately (the latter includes
all rms that entered the industry after deregulation,
not just Early entrants). If Incumbents are unable
to overcome the legacy of competing in the earlier
regime, compared to Entrants that do not have this
constraint, we would expect to nd differences in
the persistence of prot advantages held by superior
Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 184–202 (2017)
DOI: 10.1002/smj
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