Strategic Aggressiveness, Variation, and Surprise: How the Sequential Pattern of Competitive Rivalry Influences Stock Market Returns *

In a boxing match, a boxer may use a particular sequence of punches, such as series of jabs followed by an uppercut punch. The opponent may respond adaptively with a similar sequence or a very different sequence of punches, such as a series of body punches followed by overhand punch. Indeed, as the fight progresses, the sequential pattern of punches influences not only the boxers' choice of punches in ensuing time periods, but also the judges' evaluation of each round and, most importantly, the eventual outcome of the fight. Likewise, head-to-head competition between rival firms has much in common with sports and games (O'Driscoll and Rizzo, 1985), and is a process very similar to that of a boxing match between two heavyweight fighters (D'Aveni, 1994). We thus apply a dynamic process model of competitive rivalry and examine how the sequential pattern of competitive behaviors among rivals influences firm performance. We developed our study to advance both theory and managerial thought rooted in the competitive dynamics stream of strategic management research that has recently developed theory and empirical methods centering on the conceptualization of firm strategy as competitive action (e.g., Chen, 1996; Ferrier et al., 1999; Grimm and Smith, 1997; Lee et al, 2000; Miller and Chen, 1996; Smith et al., 1992; Young et al., 1996). In general, early research in this stream focused attention on the action-react ion dyads level of analysis (Chen et al, 1992; Smith et at., 1991), whereby the characteristics of an individual competitive action, as well as the characteristics of the competing firms, are important predictors of the intensity of an individual competitive response. More recently, this research demonstrated a link between the characteristics of an aggregated set of actions over a finite time period and performance--the action repertoire-year level of analysis (e.g., Chen and Hambrick, 1995; Deephouse, 1999; Ferrier et al., 1999; Gimeno and Woo, 1996; Miller and Chen, 1996; Young et al, 1996). Overall, this stream of research suggests that aggressive competitive behavior--more actions, innovative and radical actions, quick response, complex and differentiated action repertoires--is related to better organizational performance. Unfortunately, this earlier research cannot completely inform managers as to how an aggressive, adaptive strategy impacts performance as the pattern of competitive moves unfolds dynamically throughout a given time period. In particular, limited insights may be gleaned at the action-reaction dyad level because pairs of actions are disconnected from other actions over time. Further, while the repertoire level of analysis accounts for the firm's entire set of actions, it is linked primarily to end-of-year financial outcomes such as market share and profitability. In fact, little research to date has examined the contemporaneous effect of a proximal pattern or stream of actions on performance, or employed a performance measure that captures the dynamic, fine-grained nature of com petitive interaction (except Bettis and Weeks, 1987; Lee et al., 2000). Accordingly, building on a few recent studies (i.e., Ferrier, 2001; Ferrier, 2000), we believe ours is the first to explore the relationship between stock market returns and patterns in the sequence of competitive behaviors that unfolds over time. Strategy as a Sequence of Competitive Actions Our definition of competitive action is consistent with prior research--competitive actions are externally directed, specific, and observable competitive moves initiated by a firm to enhance its relative competitive position (Ferrier et al., 1999; Smith et al., 1991; Young et al., 1996). Using individual competitive actions as building blocks, we define strategy at the action sequence level of analysis--the ordered pattern of repeatable competitive actions carried out in strategic time (Ferrier, 2001; Ferrier, 2000). …