Identifying a distinctive competence: Forecasting ability in the money fund industry

Testing the causal link between a firm-specific competence and its antecede nts or consequences has become a key objective for strategy research over t he past decade. On one hand, case studies can identity a competence, but wi th their small sample size, their retrospective research design, and their tendency toward sampling on the dependent variable, they can not reliably r est the causal connection between a competence and its antecedents or its c onsequences. On the other hand, variance decomposition studies demonstrate the existence of firm-specific performance differentials bur have not ident ified which particular competencies are responsible for them. The present p aper avoids both of these problems by measuring a particular competence acr oss a large sample of organizations over a long period of time, so that a t est of statistical causality can be applied to the relationship of this com petence to both its antecedents and its consequences. The particular compet ence studied is the ability of money market mutual funds to forecast change s in short-term interest rates-a competence known from prior research to be both valuable and rare. In particular, we test the effect of forecasting a bility on the economic surplus generated by the fund and its growth. Conver sely we also test the effect of growth on the subsequent development of for ecasting ability Copyright (C) 2000 John Wiley & Sons, Ltd.