ERA as a competitor-driven action

I have argued so far that to gain a better understanding of ERA, and its link with firm strategy, the competitive environment of the firm must be explicitly treated as an endogenous factor. Recently, scholars have suggested that by incorporating the competitive environment of the firm to our analysis, we can gain a better understanding of firm strategic behaviour and competitive advantage (Capron & Chatain, 2008; Sirmon et al., 2007). In line with this recent critique, I explore further the predominant view of ERA as a resource- driven action. In contrast with RBV tradition in the context of ERA, I propose that the focal firm will be also likely to engage in ERA when it is faced with high levels of competitors’ ERA activity. Put it differently, I suggest that the

firm’s ERA behaviour is contingent on that of its competitors. Competitors’ ERA activity is conceptualized as the potential impact of competitors’ ERA- related actions on the focal firm’s strategic behaviour and survival (Ang, 2008;

Barnett, 1997).

CD Scholars have long argued that competing firms strategically act in similar ways (in economic terms firms are strategically interdependent). As I have illustrated in chapter 3, scholars in the strategy field have captured such

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Insofar, strategic similarity has been treated as an explanatory variable of firm performance (e.g., Deephouse, 1999; Gimeno & Woo, 1996). Instead, I treat strategic similarity, in the context of ERA, as a dependent variable. I thank David Deephouse for his advice on this point.

99 strategic interdependence through the concept of strategic similarity. Strategic similarity refers to ―the extent to which a firm’s strategic position resembles the strategic position of competing firms at a particular point in time‖

(Deephouse, 1999: 148). Strategically similar firms are faced with high levels of rivalry as they depend on the same resources. The more similar the resource requirements of the focal firm to those of other firms the greater the degree of competition it is likely to experience (Baum & Korn, 1996: 258). In line with the RBV that perceives firms as ―idiosyncratic‖, it will thus make sense for

competing firms to aim their strategic efforts to differentiate and avoid intense levels of competition. However, competing firms may strategically choose to conform to the strategies of similar competitors. Strategic group scholars, for example, argue that strategic similarity may actually decrease rivalry among competing firms due to tacit coordination36 (Gimeno & Woo, 1996). From a cognition point of view, strategic similarity may be the result of shared cognitive structures among strategists in competing firms and the adoption of widely adopted strategic recipes (Reger & Huff, 1993).

A firm may thus strategically act to imitate the strategies of its competitors. Interorganizational imitation refers to interdependent or mutually referential decision making in which strategic actions by some firms increase the likelihood of the focal firm taking the same strategic action (Gimeno et al., 2005; Haunschild, 1993). Firms may imitate the strategic actions of their competitors when faced with high levels of competitive activity (Lieberman & Asaba, 2006: 380). In this scenario, firms are more likely to engage in an

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The hypothesis that strategic similarity decreases interfirm rivalry has been also known as the Caves-Porter hypothesis.

100 immediate competitive response (Miller & Chen, 1994) in order to avoid a potential competitive disadvantage (Abrahamson & Rosenkopf, 1993). By taking under consideration other related competitive factors (i.e. multimarket contact), CD scholars have empirically illustrated that imitative behaviour intensifies rivalry among competing firms.

Apart from competitive pressures, competing firms may be faced with increased levels of institutional pressures to engage in a specific strategy in order to pursuit legitimacy. Some strategies (or strategic actions) can be more legitimate than others as they may be endorsed by a larger number of competing firms (DiMaggio & Powell, 1983). Scholars concerned with legitimacy and strategic behaviour have argued that not all competing firms exhume the same legitimacy pressures to their peers. Interorganizational imitation can be seen as one mechanism37 to increase legitimacy (Haunschild, 1993). For example, in his study of market entry and diversification, Haveman (1993) finds that firms are more likely to imitate the strategic actions of their successful peers. He also observes a curvilinear effect of legitimacy and competition. While an increase in the number of successful firms engaging in the same strategic action, in this case market entry, increases legitimacy, it also increases competition. Thus, imitative behaviour38 can be a result of the large number of competing firms engaging in a strategic action (adopting a strategy).

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Factors that lead organizations to adopt similar practices, strategies and processes are captured through the notion of ―mimetic isomorphism‖. Specifically, strategic isomorphism refers ―to the extent to which an organization’s strategy resembles conventional normal strategies in its competitive environment‖ (Deephouse, 1996: 1029).

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Imitative behaviour is also captured through the notion of contagion. Contagion occurs between organizations when one organization’s adoption of a practice increases the likelihood of that other organizations will adopt (Greeve, 1998: 970)

101 Such frequency-based39 imitation suggests that the adoption of a specific strategy by a large number of firms enhances legitimacy and thus increase the likelihood of adoption by other firms (Haunschild & Miner, 1997). In relation to ERA, increased levels of legitimacy may be associated with more opportunities of obtaining critical resources. A firm with high legitimacy may be favoured both in terms of resource availability and exchange (Deephouse, 1999: 153).

Given the above competitive and institutional explanations, I expect that high levels of competitors’ ERA activity will be associated with higher likelihood

and intensity of the focal firm engaging in ERA. Hence, I hypothesize that:

H1a. The higher the competitors ERA activity that the focal firm faces, the

higher the firm’s likelihood of engaging in ERA.

H1b. The higher the competitors’ ERA activity that the focal firm faces, the

higher the firm’s ERA intensity.

By testing hypotheses H1a and H1b, I aim to provide further empirical evidence on the link between competitors’ actions and firm strategy in the

context of ERA. To my knowledge, this is the first attempt to assess the relationship between competitors’ ERA related actions and the focal firm’s

ERA behaviour. Furthermore, this is a direct test of both competitive and institutional explanations of firm strategic behaviour in the context of ERA.

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In the case of frequency-based imitation, firm strategy may not be always a direct result of rational managerial decision making in terms of strategic objectives and outcomes. In contrast with this rational assumption adopted by Deephouse (1999) in his strategic balance theory, Haunschild and Miner (1997: 494) suggest that firms may adopt a strategy without having a specific intent but as a response for that strategy been taken-as-granted among competing firms.

102 Through the empirical test of the hypotheses proposed above, I also aim to identify other factors that may affect firm ERA behaviour over time. For example, I have assumed above that firms compete under both high environmental munificence and uncertainty40. As such, I expect that patterns of firm ERA behaviour evolve over time.