A Dynamic Theory of the Strategic Firm

Abstract

What makes a robust strategic theory of the firm? Rumelt’s (1984) “Towards a Strategic Theory of the Firm” explains how variance in performance occurs and endures when decision-makers are boundedly rational and isolating mechanisms slow or prevent equilibration. How and why firms differ is a fundamental issue in strategic management. Ex ante uncertainty leads to heterogeneity. Causal ambiguity and other isolating mechanisms allow heterogeneity to endure. A central prescription is that firms often need to react quickly in spite of the uncertainty. Successful first movers can enjoy a durable advantage. This article expands on the contributions of Rumelt's 1984 article. Since strategy is situational, we begin by setting the ideas in context and illustrating how they challenged the received view. Next, we move onto the crux of the matter -- how these ideas created an agenda for strategy scholarship. We then cover work on isolating mechanisms and identify unexplored opportunities.