How Long Is Long, and How Short Is Short?

6 December 2006 at 5:16 am Lasse 2 comments

| Lasse Lien |

Are spells of market leadership long or short? A Chandlerian will argue that they tend to be long, while a Schumpeterian will argue that they tend to be short. But what is long and what is short? This is a special case of a fairly frequent problem in empirical research, in which the ability to decide is limited by the lack of a clear benchmark. In a forthcoming AER paper John Sutton addresses this problem in a way that seems potentially useful in many situations with similar characteristics (testing the RBV is but one example).

What Sutton does is define a benchmark which is neither long or short. How? Essentially he compares the length of actual market leadership spells to what one would expect if market share changes followed a random walk (given the initial market share gap and a measure of the industry specific volatility in market shares). This benchmark is neither long or short in the following sense. If there is a narrowing of the market-share gap between a leader and its closest rivals, the random walk benchmark does not imply that this will tend to be followed by a further narrowing (as a Schumpeterian might predict). Hence it provides a benchmark that is not short. Neither does this benchmark imply that an initial narrowing of the gap will tend to be followed by a widening of the gap as the leader restores its position (as a Chandlerian might predict). Hence it provides a benchmark that is not long, either. Voila! — a benchmark that is neither short or long. His findings lean in the Chandlerian direction, but for several industries the null hypothesis of a random walk cannot be rejected. But the most important thing here (in my view) is not the findings, but how he went about it. Using randomness to create a benchmark has also been used in studies of diversification, where the frequency of particular industry combinations within firms are compared to what one would expect if combinations were random. See for example this and this.

Entry filed under: - Lien -, Former Guest Bloggers, Strategic Management.

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2 Comments Add your own

1. Joseph Mahoney | 6 December 2006 at 10:31 am

Dear Lasse,

Your question does remind me that when asked what he thought of the impact of the French Revolution of 1789 (by Henry Kissinger in 1972), Chou En Lai, the Chinese Premier and second to Mao Zedong, answered, “We Chinese feel that it is too soon to tell.”
2. Lasse | 6 December 2006 at 10:54 am

That’s a good one, Joe. So En Lai’s short is apparently rather long. I guess this is evidence for the claim that Asians tend to have longer planning horizons :-)