Theoretical Background

Strategy scholars have long investigated the conditions under which firms strategically act to gain competitive advantage. While the quest for competitive advantage has been the major research agenda in the area of strategy (Hoopes et al., 2003), theories of strategic choice and firm behaviour have been very much developed independently. This is a serious limitation, if we are to better understand why firms engage in certain strategic actions and thus investigate patterns of strategic behaviour. Towards this end, I suggest that ERA is an excellent context of adopting a multi-theoretical perspective. I frame ERA in theories broadly concerned with strategic choice. I shall argue that firms

90 engage in ERA at the extremes of firm strategic behaviour; differentiation and imitation. As it has been illustrated earlier (chapter 3; section 2), the RBV suggests that the firm’s optimal strategic goal is to differentiate from its competitors by obtaining unique product market positions. However, firms may choose not to differentiate but imitate the strategic actions of their competitors. In this broad theoretical framework, scholars have been very much concerned with the link of such strategic behaviour (in the context of these two extremes) and competitive advantage (Deephouse, 1999). I add to this discussion by focusing on the strategic action of ERA.

In the context of ERA, scholars thus far have adopted a resource-based perspective of firm behaviour. Under this dominant logic, competitive advantage is a function of firm-specific resources which can be hardly imitated by competitors or substituted (Barney, 1991; Conner, 1991; Wernerfelt, 1984). Initial theoretical work on the resource-based view of the firm (RBV) suggests that only resources developed inside organizational boundaries can be a source of competitive advantage as they are idiosyncratic and costly-to-copy (Barney, 1991; Dierickx & Cool, 1989). Some scholars extend this initial thought and suggest that share resources—resources that span organizational boundaries— can also be a source of competitive advantage (Dyer & Singh, 1998).

Scholars are still in disagreement to the extent which external resources can contribute to competitive advantage. Previous empirical efforts have focused on identifying mechanisms where a firm can improve its competitive position through the acquisition of external resources. Such contributions go one step further and identify several firm-specific factors that may further impact on the ability of external resources to improve organizational performance. For

91 example, one way that external resources can lead to superior organizational performance is through new combination of value-generating resources given the firm’s ability to effectively acquire, assimilate, and utilize newly acquired resources (Cohen & Levinthal, 1990).

The acquisition of external resources, however, holds not only firm- but also competitor- specific implications. Focusing at the intra-industry level of analysis, scholars have illustrated several mechanisms where a firm can gain competitive advantage through ERA. A firm can gain competitive advantage through ERA by pre-empting critical resources (e.g., Lieberman & Montgomery, 1998). This is not to say however that resource pre-emption always leads to competitive advantage. Scholars have argued that often firms may acquire the ―wrong‖ resources and as such suffer a disadvantage over

their competitors (Lieberman & Montgomery, 1998: 1112). Furthermore, the focal firm may engage in ERA not necessarily under the incentive to improve its own resource position but to limit the competitive moves of other firms (―product space‖; the notion of spatial pre-emption) (Lieberman &

Montgomery, 1988: 44). More specifically, Capron and Chatain (2008) argue that the focal firm can gain competitive advantage by deploying strategies that decrease both the quantity and effectiveness of competitors’ resources.

In line with the RBV, we would expect that patterns of ERA among competing firms are associated with the firms’ idiosyncratic attributes. I develop a set of

hypotheses in order to provide a direct empirical test of the RBV in the context of ERA. However, I expect that varying levels of firm-specific idiosyncratic attributes will be associated with differences in ERA patterns. I thus expect heterogeneous firm behaviour among competing firms engaging in ERA.

92 While engaging in ERA can provide the firm with opportunities to differentiate and move away from competition, it also increases competitive interaction. A firm’s effort to either improve its competitive position or inhibit the

competitive position of its competitors will be likely to draw significant attention, and as such increase rivalry by initiating countermoves from its competitors (Young et al., 2000). It is thus likely that a firm may engage in ERA to respond to its competitors. One immediate response would be for the firm to imitate the strategic action of its competitors. Scholars have provided us with several mechanisms where imitation can either create or limit a firm’s competitive advantage in a number of contexts (Lieberman & Asaba, 2006). While imitative behaviour can increase competition for resources it can also be beneficial as it eliminates legitimacy34 challenges that may hinder the firm’s access to critical resources (Deephouse, 1999: 152). Scholars have paid significant attention on imitative behaviour in several empirical contexts such as international expansion (e.g., Delios, Gaur, & Makino, 2008), M&A activity (e.g., Haunschild, 1993; Yang & Hyland, 2006), strategic alliances (e.g., Garcia-Pont & Nohria, 2002) and international joint ventures (e.g., Xia, Tan, & Tan, 2008). In line with previous research in this area, I investigated whether firms engage in ERA in response to their competitors’ actions. Thus, I argue

that ERA can be seen as a competitor-driven action. I accordingly frame my arguments in the competitive dynamics (CD) literature and theories of interorganizational imitation.

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A legitimate firm obtains resources of higher quality and at more favourable terms than does a firm whose legitimacy is challenged (Deephouse, 1999: 152).

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