Taking a Chance: How Firms Differentiate in Risk

This paper provides a formal analysis of the interrelationships among risk in the development of a firm's value proposition and the fundamental profit-generating mechanisms of competitive advantage and rivalry restraint. Building on the insight from strategy theory that risk may be a good, not a bad in value creation, the paper shows that (a) the tradeoff between risk and expected value creation and (b) the shape of risk each define a different and previously unexplored dimension of differentiation along which firms choose distinctive competitive positions. The analysis also shows how two known drivers of rivalry restraint — the number of competing firms and their product market overlap — affect where firms position themselves and which firms are more profitable than others. The results have a number of implications for theoretical and empirical research in strategy.