In 1982, Steven Lippman and I offered a very general logical answer to the puzzle of sustained differences in efficiency or effectiveness. Our theory—uncertain imitability1—argued that the inability to understand and explain the sources of efficiency differences is precisely what allows them to persist. The act of trying to build or replicate a business is fraught with uncertainty and error. Therefore, imitative attempts will not produce identical outcomes. In competition, after attempts to adopt “best” practices, some firms will still be more efficient than others.
Our model imagined new firms as coming into being, each with a level of efficiency (a cost function) that was determined randomly. Other researchers had already studied random outcomes to investment or R&D, but they had maintained the view that “winners” in these competitions would be imitated, eventually leading competitors to catch up. We went further, reasoning that if no one could understand the source of the random differences in efficiency, then they would not be erased by imitative efforts. We argued (p. 419) :
Ambiguity as to what factors are responsible for superior (or inferior) performance acts as a powerful block on both imitation and factor mobility. Demsetz (1973, p. 2) notes: “It is not easy to ascertain just why G.M. and I.B.M. perform better than their competitors. The complexity of these firms defies easy analysis, so that the inputs responsible for their success may be undervalued by the market for some time.,,6 It might be argued that these inputs are undervalued because competitors fail to recognize them, which implies that the issue is just one of information sharing. Instead, we hold that it may never be possible to produce a finite unambiguous list of the factors of production responsible for the success of such firms. This ambiguity is not just a private embarrassment to economists, but is the heart of the matter. Factors of production cannot become mobile unless they are known.
To study this idea, we used mathematical models. The results showed that this simple theory explained almost all of the stylized facts about industries, firms, and profits. That is, given uncertain imitability,
- More concentrated industries will be more profitable. This happens because because they are concentrated because they contain unusually efficient firms, grown large through their advantages.
- Firms with more market share will appear more profitable. Again, the more efficient firms will be larger.
- Entry into very profitable industries will appear blocked. This happens because because the high profits mark the presence of surprisingly efficient incumbents who one would be unlikely to displace.
Uncertain imitability keeps competition from equalizing costs and profits across firms. The theory is not a promise of profit. Rather, it says that if you do well, you may have much more protection against imitative competition than a naïve economist would predict.
The theory of uncertain imitability makes many people extremely uncomfortable. “You are just saying its all luck,” complained one student. “How can I tell my boss that our company’s success depends on `causal ambiguity?’ He would laugh me out of the room. We all know that our company has great competence at serving our high-tech customers.”
The straightforward answer to this student is that uncertain imitability does not rule out their competence. What it does say is that the source of that competence is probably ambiguous and difficult to replicate. And that difficulty and ambiguity is what protects the company from direct imitative competition.
- Lippman, Steven A. and Richard P. Rumelt, “Uncertain Imitability: an Analysis of Interfirm Differences in Efficiency Under Competition.” Bell Journal of Economics. 13 (1982): 418-438. [↩]
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I assume this works both ways.
Some strong firms remain successful because it is not clear why they have an advantage, so can’t easily be copied.
Some poor firms remain poor because they can’t identify the real cause of their problems.
I suppose the bottom line is that management requires intuition at times. And that it is also hard to separate good management idead from bad ones unless you are very smart and understand the context to which they will be applied.