Performance persistence in the presence of higher‐order resources

Research Summary This paper presents a formal model of how higher‐order resources affect profit persistence. Higher‐order resources provide an abstract representation of dynamic capabilities, and are defined as resources that do not affect profit directly, but can affect other resources that in turn affect profit over time. The model shows that higher‐order resources lead to persistence not only in the level of profit, but also in its growth. Estimation of the model using empirical profit data of more than 4,000 U.S. firms over 30 years implies an average duration of competitive advantage of about 18 years, which is almost four times as long as implied by traditionally used autoregressive models that exclude the effect of higher‐order resources.Managerial Summary If firms want to make more profit than their competitors for prolonged periods of time, they must have access to resources that competitors cannot effectively obtain, such as brands, patents, captive customers, or specialized plants. This paper shows that not only these “operating resources” drive long‐term profit differences across firms, but also “higher‐order resources,” such as strategic planning, M&A capabilities, and superior forecasts. Such higher‐order resources do not affect profits directly, but allow firms to obtain superior operating resources over time. A mathematical model incorporating higher‐order resources suggests an average duration of competitive advantage of about 18 years, almost four times as long as implied by traditionally used models.