Business Imitation Research Paper

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Imitative behavior is pervasive in the business world, where it can be observed across a wide range of business decisions. For example, firms often imitate new products and processes introduced by others. Imitation is also prevalent in the adoption of managerial methods and organizational forms, and in the timing and choice of new technology, market entry, and other investments.

Not surprisingly, if a firm’s product or service proves successful in the marketplace, competitors will try to imitate it. This is the most common type of business imitation. The innovating firm’s profits will tend to fall as the imitation takes place. To prevent or reduce this erosion, the innovating firm may be able to create barriers to imitation using various methods, such as patents, copyrights, and secrecy. The firm may also strive to improve its products, thereby staying ahead of rivals. This type of imitation—where a clearly successful product or service is imitated—is a fundamental part of the competitive process. Successful firms may devote much time and effort to try to prevent imitation, and follower firms may work equally hard at copying. Nevertheless, this type of imitation is fairly straightforward, and its basic features are well understood.

Other types of imitation are more complex in their motivations. These forms of imitation can sometimes lead to extreme industry dynamics and outcomes. For example, we saw an unusually large number of firms began conducting sales via the Internet in the late 1990s. The surge of entry attracted more new entrants, promoted by the optimistic prospects of Internet analysts. In mid-2000, however, the Internet “bubble” collapsed. Internet stock prices crashed and firms disappeared from the market. The dramatic rise and fall took place within the span of just 2 or 3 years, much faster than the rate at which concrete data emerged on the long-term prospects for Internet commerce.

Similar “bunching” of entry has been also observed in an international context. Studies have found that when a firm makes a decision to enter a foreign market, sometimes its rivals will follow with the same decision. This can lead to rapid development of the market, which is potentially to the benefit of everyone, or to lower profits if an excessive number of firms enter at the same time.

After firms have entered a market, they may imitate others’ technology choice. In the early market for VCRs, for example, almost all of the Japanese producers focused their development efforts on magnetic tape as the storage medium, while United States and European counterparts developed different media. Early convergence among the Japanese manufacturers resulted in acceleration of development and improvement of product quality, which enabled the Japanese producers to dominate the global market.

While imitation and convergence in technology benefited the Japanese VCR manufacturers, if the wrong path is chosen, imitation can be costly for firms and for society. In high-definition television (HDTV), the Japanese electronics firms adopted analog technology in the 1980s and heavily promoted its development. The Japanese producers imitated each other’s innovations, which helped improve the analog technology, but eventually it became clear that the analog approach was inferior to digital, which was being pursued in other countries. Despite their dominance in many areas of consumer electronics, the Japanese firms found themselves at a serious disadvantage in world markets for HDTV, and the growth of this technology worldwide was probably hampered as a result.

Organizational innovations are also imitated. For example, Fligstein (1985) studied the causes of the dissemination of the multidivisional form among large U.S. firms from 1919 to 1979 and found that firms were more likely to alter their organizational structure to the multidivisional form when other firms in the industry did so. Today, the multidivisional form is widely considered as a superior organizational form for many companies, so its imitation was mostly beneficial. However, imitation has also led firms to adopt short-lived management fads and to devote substantial resources to their implementation. Corporate programs for “reengineering,” “employee empowerment,” and “management by objectives” were popular in the 1980s and 1990s, but have been largely been forgotten today.

As these examples reveal, imitation may have positive or negative implications for individual firms and for society. In some cases, such as imitation of a clearly superior process innovation, quick and widespread adoption is likely to be widely beneficial (although perhaps not for the pioneering firm). In other cases, imitation may lead firms astray, sometimes with dramatic outcomes. As the VCR and HDTV examples suggest, imitation may spur productive innovation, or it may amplify the errors of early movers. Only in retrospect can we see clearly whether the effects of imitation have been positive or negative in any given case.

Despite its frequent occurrence, the reason why imitation occurs is often not obvious. When the behavior of the first mover is clearly successful—that is, when it is apparent that the new business is growing, the foreign market is expanding, the new product is getting popular, or the technology is rightly chosen—it is natural for other firms to imitate the first mover. However, for most of the examples just described, this is not the situation. There is often much uncertainty about whether the behavior of the leader should be followed. Indeed, many leaders are later found to have pursued the wrong path. Then, why do firms imitate others? What is the motivation for imitation?

Various theories have been proposed on the causes of imitation, as we discuss here. A firm may imitate to avoid falling behind its rivals; such imitation reduces the risk faced by the follower firm. Alternatively, a firm may mimic its rival’s actions, because the firm believes that the rival has valuable information, and its actions convey that information. Moreover, depending on circumstances, matching of rivals’ actions can intensify competition or have the opposite effect by promoting collusion. Thus, in some cases firms may imitate to restrain competition and thereby attain abnormal returns.

We organize theories of business imitation into two broad theories: (a) information-based theories, where firms follow others that are perceived (sometimes erroneously) as having superior information, and (b) rivalry-based theories, where firms imitate others to maintain competitive parity or limit rivalry. The next two sections of this research-paper describe the information- and rivalry-based theories, respectively. We then discuss problems of identifying these two types of imitation. The task is made difficult by the fact that both types of imitation can arise simultaneously, and they can be hard to distinguish from the nonimitative case where firms respond independently but identically to the same external shock. The final section of the research-paper considers various performance implications of imitation.

Information-Based Theories Of Imitation

Information-based theories of imitation have been proposed in various fields such as economics, institutional sociology, and population ecology. These theories apply in uncertain and ambiguous environments. Managers may be unsure of the likelihood of possible outcomes, and they may have more fundamental difficulties recognizing cause-effect relationships and the full range of potential consequences. In such environments, managers are particularly likely to be receptive to information implicit in the actions of others. Such information, while highly imperfect, can have a strong influence on managerial perceptions and beliefs. Moreover, in uncertain environments managers may imitate to signal others about their own (or their firm’s) quality.

Economic Theories

Economic theories of imitation, where the information component has been developed most explicitly, are theories of herding or herd behavior. The most prominent economic theory of herd behavior is called “information cascades” or “social learning” (Banerjee, 1992; Bikhchandani, Hirshleifer, & Welch, 1992). Information cascades occur “when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information” (Bikhchandani et al., 1992).

Suppose that each individual receives either kind of signal, A or B, and sequentially decides whether to adopt or to reject a certain project. Signal A is more likely when adoption is desirable, while signal B is more likely when adoption is undesirable. The first individual decides based on her signal. That is, she adopts the project if she receives signal A, while she rejects it if she receives signal B. The second individual makes a decision after observing the decision of the first individual. If the second individual observes the first adopting, he thinks that the first individual received signal A. Then, if he also receives signal A, he adopts the project. If he receives signal B, on the other hand, he is indifferent between adopting and rejecting the project, and he tosses a coin to decide. The third individual faces one of the three possible situations: both predecessors adopt, both reject, or one adopts and the other rejects. In the first two cases, it is rational for the third individual to follow predecessors’ decisions, regardless of the signal he receives. That is, the third individual is in an information cascade. Specifically, if the first two individuals have adopted, the third individual concludes that the first individual received signal A, and the second received signal A with 75% prob-ability. Even if the third individual received signal B, the logical inference is that both predecessors likely received A, and hence the third individual will adopt.

Moreover, the decision of the third individual does not transmit any information to individuals that follow. Followers will decide based only on the first and second decisions. Thus, in information cascades, individuals imitate others, ignoring their private information.

A typical example is a restaurant with a long queue that becomes increasingly popular. Many of those waiting at the end of the line may have intended to visit other restaurants with which they are familiar, but they are swayed by the observation of the queue, which suggests (perhaps erroneously) that the restaurant is of high quality. Thus, decision makers may choose to go against their initial signals as they draw inferences from the observed behavior of others.

Such processes help to explain how the Internet bubble happened. Consider an entrepreneur contemplating a new retail venture, with an initial preference for “brick and mortar” outlets rather than Internet-based sales. Observing a surge of entry into the Internet sector (supported by the enthusiastic forecasts of analysts, the trade press, and rising stock prices), the entrepreneur concludes that perhaps others have superior information about the prospects for Internet retailing. Eventually, the observed signals grow in strength relative to the entrepreneur’s prior belief, and the entrepreneur decides to follow others and enter the Internet sector.

As more entrepreneurs are persuaded by such observations, the wave of entrants grows. But such processes are inherently fragile and subject to reversal. Just as a critical mass of positive actions is needed to start the cascade upward, if a sufficient number of negative signals emerge, the process will reverse. This may characterize the collapse of the Internet bubble in mid-2000, as pessimistic assessments began to appear and grew rapidly. Internet stock prices fell to a fraction of their previous levels and entry came to a virtual halt.

In driving such a bandwagon, the actions of some individuals or firms may be weighted more strongly than others. If some are perceived as likely to have superior information, they can become “fashion leaders.” For example, small firms may follow larger rivals if they believe the latter to be better informed. Similarly, firms that have been successful in the past are more likely to have their actions imitated. In the case of Internet retailing, the entry of prominent firms such as Barnes & Noble and Wal-Mart, and the enormous stock-price gains of Amazon helped legitimize the efforts of other retailers to quickly establish a presence on the Web.

A second economic theory of herd behavior is based upon the idea that managers ignore their own private information and imitate the decisions of others in an effort to avoid a negative reputation. By imitating, managers send signals to others about their own quality. Suppose that there are superior and inferior managers who have private information about investment. Outsiders do not know the type of each manager, but only that superior managers receive informative signals about the value of the investment while inferior managers receive purely noisy signals. Since the signals superior managers receive might be misleading, outsiders must not only rely on the outcome of the investment, but also on behavioral similarity among managers. Outsiders consider that managers who make the same decision as others are likely to be superior because the signals superior managers receive are correlated. Therefore, in order to be evaluated as a superior type, managers ignore their own information and imitate others (Palley, 1995; Scharfstein & Stein, 1990).

This theory may help to explain the herd behavior of analysts and institutional investors in driving the Internet bubble upward. Financial actors are often evaluated on performance relative to peers; those who deviate from the consensus and ultimately prove to be wrong are likely to suffer a fatal loss of reputation. During the rise of the bubble, it was widely believed that the leading Internet analysts had superior signals, which led them to be optimistic about the future of many Internet companies. Those who did not follow were often shunned for their failure to grasp the fundamental dimensions of the “new economy.” Under these circumstances, less-informed analysts and investors often chose to join with the crowd, pushing Internet stock prices higher. This example of the Internet bubble shows how the second economic theory of herd behavior can complement the first: Information cascades likely contributed to the emergence of the trend, which was further sustained by reputation-based signaling on the part of analysts and investors.

Theories of Organizational Sociology and Ecology

Organization theory gives a related explanation for behavioral similarity: institutional isomorphism. DiMaggio and Powell (1983) argue that rational actors make their organizations increasingly similar when they try to change them. This process of homogenization is captured by the concept of isomorphism. Isomorphism is a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions.

Among three kinds of institutional isomorphism (coercive, mimetic, and normative isomorphism), mimetic isomorphism is the process whereby organizations model themselves on other organizations when the environment is uncertain. The modeled organization is perceived as more legitimate or successful. Such mimetic behavior is rational because it economizes on search costs to reduce the uncertainty that organizations are facing. Empirical studies have shown the operation of mimetic isomorphism in a variety of organizational domains such as adoption of a new organizational structure (e.g., Fligstein, 1985) and diversification.

Mimetic isomorphism can be viewed as rational imitation of a superior organization, although sociologists often emphasize ritualistic rather than rational motivations. Once enough social actors adopt a certain behavior, the behavior is taken for granted or institutionalized, and thereafter, other social actors will adopt the behavior without thinking. Imitation and proliferation of quality circles and the multidivisional form are examples. Institutionalization can be viewed as a threshold effect that occurs once a critical mass of firms have adopted. In this sense, it bears resemblance to the information cascades theory.

The sociological theory differs from information cascades in that once a behavior is institutionalized, organizations are slow to respond to new information. Behavior is much more durable than in the economic theory where new information can lead to sudden reversals. Information cascades can be fragile, whereas the sociological theory points to the emergence of a permanent social order.

While the economic theory of information cascades allows for “fashion leaders,” organizational sociologists have probed in detail the issue of “who imitates whom.” Sociological studies indicate that a given firm’s propensity to be imitated increases with (a) the information content of its signal (where actions by larger, more successful, or more prestigious firms may be seen as more informative) and (b) the focal firm’s degree of contact and communication with other firms. Moreover, theories of social networks suggest that when organizations are linked by greater network ties, they are likely to have more detailed information about each other, which facilitates imitation. These firm and network characteristics often overlap: Organizations that are central in a network have links with the greatest number of others; such organizations also tend to be larger and more prestigious.

While the previous discussion emphasizes rational interpretation of signals, early and late movers may differ in their motivations. Sociologists suggest that late movers are often engaged in symbolic action and are merely seeking status. Such followers are not concerned about interpreting the signals of others; rather, by copying more prestigious firms, they seek to send a signal about their own legitimacy. This can enhance the firm’s relations with resource providers if the environment is uncertain. For instance, followers that entered Internet markets during the rise of the bubble were often able to raise large amounts of capital despite imitative strategies that later proved highly flawed. In such cases, status-seeking imitation can be viewed as rational behavior that benefits the firm and its owners, at least in the short run.

“Legitimation” is another concept of organization theory that is related to the cascade theories of economics. Scholars of organizational ecology have long noted that once a new industry has acquired a threshold number of entrants, the firms acquire a legitimacy that facilitates their growth (Hannan & Carroll, 1992). Banks, for example, become more willing to supply capital, and potential employees can be more easily hired. This expansion in the availability of resources, in turn, often leads to a further wave of entry. Thus, there is a threshold effect in entry processes, similar to the economist’s notion of an information cascade. One difference from the economic theory is that growth in the number of entrants increases legitimacy while also making competition more intense. The offsetting force of competition places a ceiling on the number of firms.

Rivalry-Based Theories Of Imitation

A second set of theories regards imitation as a response designed to mitigate competitive rivalry or risk. Firms imitate others in an effort to maintain their relative position or to neutralize the aggressive actions of rivals. Unlike the theories discussed in the previous section, firms’ actions do not convey information. The theories relating to rivalry and risk have their primary origin in the fields of economics and business strategy.

Imitation to mitigate rivalry is most common when firms with comparable resource endowments and market positions face each other. In such cases, it is often difficult and risky for firms to differentiate their resources and market position from those of competitors. It is not certain that the differentiated market position and resources will be superior. Therefore, firms often choose to pursue not differentiation strategies but homogeneous strategies, where they match the behavior of rivals in an effort to ease the intensity of competition or reduce risk.

Homogeneous Strategies to Mitigate Rivalry

When resource homogeneity creates a potential for intense competition, matching behavior may be a way to enforce tacit collusion among rivals. In early research on strategic groups, it was suggested that firms within the same group behave similarly because “divergent strategies reduce the ability of the oligopolists to coordinate their actions tacitly.. .reducing average industry profitability” (Porter, 1979, p. 217). In other words, firms within the same strategic group may adopt similar behavior to constrain competition and maintain tacit collusion. More recent work in strategy gives similar predictions. Studies on action-response dyads suggest that matching a competitor’s move indicates a commitment to defend the status quo, neither giving up the current position nor falling into mutually destructive warfare (Chen & MacMillan, 1992).

The hypothesis that firms adopt similar behavior to mitigate rivalry can be also derived from studies on multimarket contact (Bernheim & Whinston, 1990). When firms compete with each other in many markets, they can more easily sustain collusion, because deviations in one market can be met by aggressive responses in many places. This is the idea of “mutual forbearance.” The multimarket contact theories suggest two ways that competitors may imitate: (a) They may respond to a rival’s aggressive move in one market with a similar move in another market; (b) they may match rivals’ entry decisions in order to increase the extent of market contact.

Risk Minimization

Other researchers have proposed that imitation stems from rivals’ desire to maintain relative competitive position. One of the first documented examples was the bunching of foreign direct investment (FDI) as described in the introduction. Suppose that firms A and B compete in a domestic market and export their product to a foreign country, F. When firm A establishes a manufacturing subsidiary in F and firm B does not match, firm A can improve its performance at the expense of firm B if the FDI is successful. Firm A can drive out firm B’s exports from F’s market with the advantage of the local operation, or firm A can gain advantages over firm B in the domestic market if there are any economies of scope between domestic and foreign businesses. Of course, firm A’s FDI can be failure. Then, firm B may gain advantages relatively. Although it is uncertain whether or not firm A’s investment is successful, firm B’s performance greatly depends on the consequence of A’s investment. That is, failure to match is very risky. On the other hand, if firm B matches, it can gain the same advantages as firm A if the investment is successful. If the investment is a failure, B’s performance suffers to the same degree as firm A’s. That is, as long as they match each other, none become better or worse off relative to each other, and their competitive capabilities remain roughly in balance. Therefore, this imitative behavior can be interpreted as the result of risk minimization (Knickerbocker ,1973).

In “winner-takes-all” environments, rival firms may adopt similar behavior to prevent others from leading the race. For example, in research and development (R&D) competition, where the first inventor can obtain patent rights to a technology so that other firms cannot use it, R&D investments among firms are positively correlated. Similar winner-takes-all situations can arise when the market has bandwagon effects or network externalities (Katz & Shapiro, 1985). In markets for system goods composed of hardware and software such as PCs and audiovisual equipment, the technology format that gains a large installed base becomes a de facto standard and dominates the market—the winner takes all. Therefore, a format leader tries to ally with its rivals to increase the market share of compatible products, licensing out the technology. The rival firms supply compatible products (imitation) to avoid being left alone when the market tips in favor of the leader. Once a common industry standard has emerged, many firms and customers may choose to adopt it.

Adoption of standards, which benefits firms by minimizing cost, may appear as a form of imitation.

Distinguishing Among Theories

The information- and rivalry-based theories described previously are not mutually exclusive; both types of imitation can occur simultaneously. Firms may imitate rivals to maintain competitive parity and also out of belief that rivals may possess superior information. Nevertheless, one type of imitation or the other is apt to be predominant in any given context.

To distinguish between information-based and rivalry-based imitation, three criteria may be applied:

Do leaders and followers compete in the same market or niche?
Do leaders and followers have similar size or resources?
Is the environment highly uncertain?

The first two criteria, market overlap and resource similarity, establish whether the leader(s) and followers compete as rivals. Rivals have strong overlap in product lines and geographic market coverage. Often they have similar resources, and they may share similar origins and history.

If the firms are not rivals, the follower can be judged to have information-based motives for imitation. In general, information-based motives are likely to be dominant when firms differ in market position, size, or resources or when uncertainty is very high. Asymmetry limits rivalry and raises the likelihood that some firms possess superior information. High uncertainty implies that managers lack strong initial judgments about the likely success of alternative paths and are therefore more open to external sources of information. Furthermore, patterns may be observed— small firms following larger firms or general imitation of successful firms—suggesting that the imitation process is information based.

If firms do compete as rivals, both types of imitation may coexist. Even so, rivalry-based motives are likely to predominate when uncertainty is low, or when competitors are closely matched—such firms often have similar information but strong rivalry. Multimarket contact further increases the likelihood of rivalry-based imitation, as it expands the domains where imitation can occur and raises the probability that firms respond to each other in kind. Firms that are closely matched may also be risk averse, particularly to loss of market share, a condition that is necessary for some types of rivalry-based imitation.

The criteria do not provide a perfect guide to distinguish between information and rivalry motives. Indeed, when firms are direct competitors, the two sets of motives may be closely intertwined. Strong rivals that share common technology, organization, and market orientation may be particularly informative to each other.

Identical Response To Common Environmental Shock

As just argued, the characteristics of firms and their industry environment provide some basis for distinguishing between information- and rivalry-based imitation processes. One complication is that both types of imitation can occur simultaneously, even though one type is usually predominant. A further complication is that what appears to be imitation may simply be firms’ independent responses to a common external stimulus.

As an example, consider an economic recession that induces many firms to lay off part of their workforce. Such layoff decisions are primarily based on forecasts of future sales. To the extent that firms are subject to the same demand fluctuations and have access to the same public information about macroeconomic conditions, one would expect them to make reasonably similar and simultaneous cutbacks. To regard such behavior as imitation would clearly be incorrect.

Some degree of imitation may nevertheless occur in such situations, stemming from information or rivalry motives (or both). For example, firms may look to the announcements of others as a source of information about the likely depth of the recession in their industry. Moreover, if rivals have not yet announced layoffs, a firm may be reluctant to act alone for fear that it could lose competitive position. In such instances, once one firm announces cutbacks, others may follow suit.

Thus, we often observe the confluence of both imitative and nonimitative responses to external shocks. Since imitation takes some time, behavior that is simultaneous cannot be imitation. However, the time lag for imitation varies depending on the characteristics of the imitated behavior and the imitating firms. Therefore, clear-cut identification of imitative behavior represents a thorny problem for business researchers attempting to characterize imitation processes.

Resource Similarity and Complexity

Imitation processes are also influenced by resource constraints that limit the scope of firms’ behavior. Firms with very different resources and capabilities may be unable to behave similarly even if they face the same environment. For example, small firms may desire to match the investment behavior of large firms but lack the resources necessary to do so. Since firms with similar resources are often direct rivals, resource constraints can make it appear that rivals are responding to each other, even though their actions may be independent responses to a common environmental shock.

Complexity serves as a further constraint on imitative behavior. Firms with adequate resources can easily copy simple actions but not complex repertoires containing many elements, particularly when tacit skills are involved. For example, in recent decades, many auto companies have tried to copy the Toyota production system. Most have been able to adopt some elements of the system, but few have mastered the many subtleties needed to approach Toyota’s production efficiency.

Performance Implications

Many examples in this research-paper show that imitation can have amplification properties that make outcomes more extreme, with consequences that may be good or bad for firms and for society. On the positive side, information-based imitation can speed the adoption of useful innovations, and rivalry-based imitation can spur firms to improve their products and services. Both types of imitation have negative implications if they lead firms to squander resources on wasteful, duplicative investments. Thus, the two modes of imitation can have similar effects, although there can also be important differences.

Performance Implications of Both Imitation Types

Imitation processes lead firms to converge on common choices more rapidly and in larger numbers than they would otherwise. The consequences, when beneficial, are usually straightforward, but when negative they are often dramatic. Industries may lock in to inferior choices or greatly overshoot the optimum level of investment.

If early movers have chosen a productive path, imitation accelerates the industry’s convergence on a good solution. Imitation can help to promote network effects and common standards, with broad potential benefits for firms and consumers, as in the VCR example cited earlier. If the wrong path is chosen, however, imitation can be costly for firms and for society, as in the case of Japanese HDTV.

These examples illustrate the fact that imitation raises the odds of extreme outcomes when the environment is uncertain. If the leaders have superior information and luck, imitation leads to quick convergence on superior choices and is socially beneficial. Rivalry and shared learning may stimulate firms and accelerate progress. On the other hand, if the path that is imitated proves inferior, imitation can create an industrywide “competency trap” (Miner & Haunschild, 1995). By comparison, when firms act independently, they converge more slowly, but such diversity avoids the worst industry outcomes and is collectively more robust.

Thus, by reducing variation in firms’ strategies and technological paths, imitation raises the collective risk of an industry. When firms imitate each other in an uncertain environment, they place identical bets on the future, thereby raising the odds of large positive or negative outcomes. As a result, society bears higher risk, even though individual firms may diminish their own risk of falling behind rivals.

Imitation tends to be socially beneficial—and potentially profitable—in situations where the imitators complement each other. Complementarities often arise in environments with network externalities or agglomeration economies. For example, Baum and Haveman (1997) found that hoteliers tend to locate new hotels close to established hotels. Agglomeration of hotels attracts people, goods, and services, and consequently, it increases the attractiveness and reputation of the location. This is beneficial to society as well as to the hotels. At the same time, though, the close location of hotels can intensify price competition, making hotels less profitable. Thus, for imitating firms, the benefits of network effects, agglomeration economies, and other positive externalities can be offset by pressure for price competition. In other words, imitating firms have to think about what they imitate and what they differentiate carefully. Hotels may imitate others in terms of location in pursuit of agglomeration economics while they may differentiate from others in terms of target customer to avoid intense price competition.

Performance Implications Of Information-Based Imitation

While both types of imitation can have amplification effects, dramatic negative outcomes are more likely under information-based imitation. The information cascades theory is explicit about the potential for bubbles and sudden reversals. Other work in organization theory shows how lags in learning processes allow bandwagons to grow. The risk of inferior outcomes is greatest if managers perceive a need to commit before major uncertainties are resolved. For example, in the 1990s many entrepreneurs believed that early entry into the Internet sector was a requirement for business success. Eventually, as more information emerged about the prospects for Internet businesses, stock prices collapsed, and many firms failed. In retrospect, it is clear that much of the initial rush had been unnecessary and that it contributed to the magnitude of the collapse. Had more firms waited until major uncertainties resolved, many losses could have been avoided.

Individual firms fail when they attempt to imitate a successful leader but prove incapable of doing so. Smaller firms may imitate in an effort to elevate their status or legitimacy, despite a lack of resources to do so successfully (Fligstein, 1985). Moreover, even large firms may imitate the superficial features of complex innovations while failing to replicate more subtle but essential elements. Thus, followers fail when they lack critical resources, or when complexity, tacitness, and causal ambiguity prevent them from gaining a sufficient understanding of the innovations made by the target firm.

Performance Implications Of Rivalry-Based Imitation

The theories presented earlier suggest that rivalry-based imitation can reduce the intensity of competition in an industry, or increase it. Here again we have possibilities for diametrically opposite outcomes. Theory offers some basis for predicting which outcome will prevail: Collusion becomes more likely when firms have multimarket contact, whereas competition is promoted in winner-take-all environments. One conclusion is that intensification of competition is most common, but either type of response can arise depending on aspects of firm interaction and history that can be subtle and difficult to observe.

To say that imitation may enhance either competition or collusion may, however, be too simple. Rivalry-based imitation often proceeds over many rounds where firms repeatedly match each other’s moves. This process can strengthen firms that imitate relative to those that do not. Such imitation leads to differential performance among groups of firms and can create barriers to entry. If innovation is promoted and prices fall, the process is beneficial to consumers, but if only a few firms survive, it can lead to an increase in market power.

The electronic calculator industry provides one example. Casio and Sharp, the market leaders in Japan, responded to each other by introducing many new product features and cost reductions, leading to market growth and gains to consumers. Similarity of product and market position made each firm a good reference for the other, which facilitated learning. Ultimately, the accumulation of product enhancements enabled Casio and Sharp to drive out their American rivals who had pioneered the basic technology.

Another example is Coke and Pepsi, which matched each other’s advertising, promotion, and new product moves in the U.S. soft-drink market over many decades. Challenging and learning from each other, the two rivals became progressively stronger, squeezing out smaller producers while maintaining high profitability. One feature of the soft-drink industry is that it supports many dimensions of multimarket contact (over products, regions, etc.), which may have helped Coke and Pepsi to signal each other and prevent mutually destructive warfare.

Summary

We have surveyed theories of business imitation and have shown that they fall into two broad categories: information-based theories and rivalry-based theories. These two types of imitation often have different implications, although both have amplification properties that can make outcomes more extreme. Information-based imitation can speed the adoption of superior products and methods, or it can lead to dramatic failures if firms’ choices prove erroneous. Rivalry-based imitation can reduce risk and facilitate collusion although more commonly it intensifies competition. In the latter case, imitation may proceed over many rounds, strengthening firms if they have chosen a productive path or leading them further astray if they have not.

We have suggested some ways to distinguish between information-based and rivalry-based imitation, but this is not an easy task. Several problems make identification difficult. Firms may respond identically (but not imitatively) to common environmental shocks. Moreover, the two types of imitation often coexist, and distinguishing characteristics may be hard to assess objectively. Identification of imitation processes therefore remains a vexing challenge in many business contexts.

Note this research-paper has been significantly adapted from Lieberman and Asaba (2006), which provides additional detail and references.

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