Is performance driven by industry‐ or firm‐specific factors? A reply to McNamara,Aime, and Vaaler

We revisit the questions of identification of outlying firms within industries and their impact on the relative importance of firm‐ and industry‐specific factors for firm performance. In response to McNamara, Aime and Valler (2005), we argue that the key results in Hawawini, Subramnian and Verdin (2003) are insensitive to the varying methods used to identify firm outliers. Further, we argue that conducting tests on industry outliers are inconsistent to what is indicated by theory and past empirical results on the relative importance of firm and industry effects to firm performance. Firm effects may matter most for outperforming and underpeforming firms, while industry effects may be at least as important to firms ‘stuck in the middle’. Copyright © 2005 John Wiley & Sons, Ltd.     

Demystifying variance in performance: A longitudinal multilevel perspective

Research summary : This study employs longitudinal multilevel modeling to re‐examine the relative importance of business unit, corporation, industry, and year effects on business unit performance. Total variance in performance is partitioned into stable variance and dynamic variance. Sources of these two parts of variance are explored. Empirical results indicate that (1) stable effects of corporation‐industry interaction are substantially important, but were unequally confounded with stable effects of business unit, corporation, and industry in results of previous studies; (2) stable effects of corporation, industry, and corporation‐industry interaction, taken together, are of similar relative magnitude to stable effects of business unit; and (3) random and nonlinear year effects are very important in explaining dynamic variance. These findings extend our theoretical and empirical understanding of performance variability. Managerial summary : Whether stable or changing, business units themselves, corporate‐parents, and industries influence business unit operations. This article investigates the relative effects of these factors on business unit performance. Although the traditional wisdom is that business unit is critical, this research finds that corporate‐parent, industry, and interactions between these, taken together, are as influential as business unit. Specifically, interactions between corporate‐parent and industry are important for over‐time average business unit performance, indicating that a given corporate‐parent unevenly influences its business units in different industries and that a particular industry unevenly influences business units within itself from different corporate‐parents. This study also demonstrates that changes in business unit, corporate‐parent, and industry are important drivers of over‐time volatility of business unit performance and that effects of these changes differ. Copyright © 2016 John Wiley & Sons, Ltd.     

Varieties of competitive parity

Strategy research explains why some firms outperform others, typically using profit rates, shareholder returns, and other continuous dependent variables. This paper investigates winning as the dependent variable, as measured by distributions of annual industry leadership in profits and returns to investors. This shift in dependent variable introduces alternative null models of competitive parity, including skew distributions derived from the natural sciences, and empirical distributions from nonbusiness domains such as chess, politics, sports, and beauty pageants. An empirical study of 20‐year leadership in U.S. industries shows that performance distributions in business follow statistical power laws resembling those in natural phenomena, and closely resemble distributions found in sports, politics, and other nonbusiness domains. The results support a presumption of persistent performance advantages in business, but show that business outcomes are indistinguishable from outcomes in the wider scientific and competitive landscape, and are amenable to explanation using relatively simple heuristics. The paper shows how the choice of null model shapes firm performance explanations, and explores the consequences of a more inclusive approach to null models in strategy research. Copyright © 2002 John Wiley & Sons, Ltd.     

Extending the firm vs. industry debate: Does industry life cycle stage matter?

A series of Strategic Management Journal studies have debated the extent to which business‐unit, corporate parent, and industry effects explain variance in firm performance. Despite evidence that the industry life cycle impacts competition and performance, the life cycle concept has yet to be incorporated into the firm vs. industry debate. Building on ideas from systems theory, we use longitudinal data from 1,957 firms in 49 industries to examine the relative importance of business‐unit, corporate parent, and industry effects during the growth, maturity, and decline stages of the industry life cycle. We find that corporate parent and industry effects increase as industries move through the life cycle while business‐unit effects decrease between maturity and decline. Thus, the life cycle concept should be incorporated within the firm vs. industry debate. Copyright © 2013 John Wiley & Sons, Ltd     

Competing for government procurement contracts: The role of corporate social responsibility

Research Summary: This study examines whether corporate social responsibility (CSR) improves firms’ competitiveness in the market for government procurement contracts. To obtain exogenous variation in firms’ social engagement, I exploit a quasi‐natural experiment provided by the enactment of state‐level constituency statutes, which allow directors to consider stakeholders’ interests when making business decisions. Using constituency statutes as instrumental variable (IV) for CSR, I find that companies with higher CSR receive more procurement contracts. The effect is stronger for more complex contracts and in the early years of the government‐company relationship, suggesting that CSR helps mitigate information asymmetries by signaling trustworthiness. Moreover, the effect is stronger in competitive industries, indicating that CSR can serve as a differentiation strategy to compete against other bidders. Managerial Summary: This study examines how companies can strategically improve their competitiveness in the market for government procurement contracts—a market of economic importance (15–20% of GDP). It shows that companies with higher social and environmental performance (CSR) receive more procurement contracts. This effect is stronger for more complex contracts, in the early years of the government–company relationship, and in more competitive industries. These findings indicate that firms’ CSR can serve as a signaling and differentiation strategy that influences the purchasing decision of government agencies. Accordingly, managers operating in the business‐to‐government (B2G) sector could benefit from integrating social and environmental considerations into their strategic decision making.     

Knowledge relatedness and the performance of multibusiness firms

This study examines corporate performance effects of cross‐business knowledge synergies in multibusiness firms. It synthesizes the resource‐based view of diversification and the economic theory of complementarities to conceptualize cross‐business knowledge synergies in terms of the relatedness and the complementarity of knowledge resources across business units of the multibusiness firm. The study hypothesizes that corporate performance is improved when the firm simultaneously exploits a complementary set of related knowledge resources across its business units. In a sample of 303 multibusiness firms, the study finds that synergies arising from product knowledge relatedness, customer knowledge relatedness, or managerial knowledge relatedness do not improve corporate performance on their own. Synergies arising from the complementarity of the three types of knowledge relatedness significantly improve both market‐based and accounting‐based performance of the multibusiness corporation. Copyright © 2004 John Wiley & Sons, Ltd.     

Strategic planning as a complex and enabling managerial tool

Research summary : The role of the strategic planning process in the ongoing generation of innovative knowledge is vital to the survival and growth of a firm, especially when technologies and market conditions are rapidly changing. We analyze data from a survey of firms in high‐technology industries to determine whether it is possible to break the commonly experienced trade‐off between strategic planning's positive influence on firm profitability and its negative influence on firm innovation. We draw on Adler and Borys's (1996) conceptualization of bureaucratic process types to identify several firm characteristics that have the potential to affect whether employees perceive strategic planning as enabling to their creative endeavors. We find that contingent effects between strategic planning and the identified firm characteristics exist that can break the trade‐off. Managerial summary : A tension exits in the literature about whether strategic planning hurts or helps innovative activity. Our analysis of data from 227 business units in high‐technology industries indicates that strategic planning is a complex process that can be perceived by employees as enabling or coercive. Our results confirm that strategic planning negatively affects innovative activity but positively affects profitability for average firms. We find, however, controllable firm characteristics—risk‐taking and knowledge‐based reward systems—affect the trade‐off. Given the higher levels of risk‐taking and knowledge‐based reward systems, firms can use strategic planning to achieve both high returns on investment and a high level of innovative activity. Copyright © 2015 John Wiley & Sons, Ltd.     

Strategic human capital management in the context of cross‐industry and within‐industry mobility frictions

Research Summary: We develop and test a theory examining how frictions that restrict mobility across industries and frictions constraining mobility within an industry can co‐occur to effectively isolate individual human capital, ultimately changing the firm's make‐versus‐buy decision for human capital. Empirically, we demonstrate that when cross‐industry frictions in the form of limited skill transferability and within‐industry frictions in the form of noncompete enforceability are both present, employees exhibit longer tenures, firms hire workers with less initial experience, firms change the amount and nature of training provided, and wages marginally increase. These findings suggest that sufficiently strong and complementary mobility frictions shift the emphasis of firms’ human capital management practices toward internal development of human capital relative to acquisition on the external market. Managerial Summary : In the face of frictions to employee mobility both within and across industries, which we capture empirically using measures of noncompete enforceability and limited skill transferability across industries, firms tend to hire less experienced workers, such workers exhibit longer tenures, and firms invest more in their training, particularly in the development of new skills. Our findings imply that for firms operating under such complementary frictions, better hiring and internal development capabilities are particularly important for performance, while those firms without such capabilities may benefit from considering ways to circumvent the mobility frictions, including moving out of the focal state or lobbying for different noncompete laws.     

When Research Meets Development: Antecedents and Implications of Transfer Speed

This paper focuses on the organization of new product development in large, R&D‐intensive firms. In these firms, research and development activities are often separated. Research is conducted in dedicated research projects at specialized research labs. Once research results are achieved by research projects, they are transferred to business units for further development and commercialization. We investigate the speed whereby research projects transfer their first research results to business units (hereafter: transfer speed). In particular, we analyze the antecedents and performance implications of transfer speed. Based on data of 503 research projects from a European R&D intensive manufacturing firm, our results suggest that a fast transfer speed (as measured by the time it takes for a research project to develop and transfer its first research result to business units) is associated with a better research performance (as measured by the total number of transfers the research project generates). Moreover, we find that different types of external R&D partners—science‐based and market‐based partners—play distinct roles in speeding up project first research transfers. While market‐based partnerships (i.e., customers and suppliers) generally contribute to a faster transfer of first research results, science‐based partnerships (i.e., universities and research institutions) only speed up first research transfers of technologically very complex projects. Our results also show that early patent filings by research projects accelerate first research transfers.     

Does a long‐term orientation create value? Evidence from a regression discontinuity

Research summary : In this paper, we theorize and empirically investigate how a long‐term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives' long‐term incentives. Specifically, we examine shareholder proposals on long‐term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long‐term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to (1) an increase in firm value and operating performance—suggesting that a long‐term orientation is beneficial to companies—and (2) an increase in firms' investments in long‐term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a “time‐based” agency conflict between shareholders and managers. Managerial summary : This paper shows that corporate short‐termism is hampering business success. We show clear, causal evidence that imposing long‐term incentives on executives—in the form of long‐term executive compensation—improves business performance. Long‐term executive compensation includes restricted stocks, restricted stock options, and long‐term incentive plans. Firms that adopted shareholder resolutions on long‐term compensation experienced a significant increase in their stock price. This stock price increase foreshadowed an increase in operating profits that materialized after two years. We unpack the reasons for these improvements in performance, and find that firms that adopted these shareholder resolutions made more investments in R&D and stakeholder engagement, especially pertaining to employees and the natural environment. Copyright © 2016 John Wiley & Sons, Ltd.     

When Product Development Performance Makes a Difference: A Statistical Analysis in the Electronics Industry

Throughout the pages of JPIM and other publications, researchers and practitioners devote considerable effort to identifying the dimensions of new-product development (NPD) performance that relate most closely to business success. Although we may hope to unveil a set of universal truths about the relationship between NPD performance and business success, the relevant NPD performance measures appear to depend on the industry in which a firm competes. In fact, Christian Terwiesch, Christoph Loch, and Martin Niederkofler suggest that the overall relevance of NPD performance to business success depends on the firm's competitive market environment. In a study of 86 business units operating in 12 different electronics industries worldwide, they develop a market contingency framework for understanding the impact of NPD performance on a firm's profitability. Their study uses data from the “Excellence in Electronics” project, a joint research effort by Stanford University, the University of Augsburg, and McKinsey & Co. They describe market context in terms of three dimensions: market share, market growth, and external stability—that is, the average product life cycle duration in the market. Looking at all 86 business units in the study, they find that industry membership accounts for 23% of the variance in profits, with 18 percent of the variance determined by industry profitability and 5% by the three dimensions of market context. For the firms in the study, development performance has the most significant effect in slow-growth markets and in markets with long product life cycles. In these stable industries, low development intensity, product line freshness, and technical product performance increase profitability. The results indicate that NPD performance plays a much more important role for explaining the profitability of dominant firms than that of the low-market-share firms in the study. NPD performance explains 30% of the profitability variance among the high-market-share business units in the study, but none of the variance for the low-market-share business units. Although the profitability of the smaller firms in the study is driven primarily by the industry environment, these firms can compete on the basis of superior technical performance.     

Money secrets: How does trade secret legal protection affect firm market value? Evidence from the uniform trade secret act

Research summary : We investigate the impact of trade secret legal protection on firm market value in the context of acquisitions. On one hand, market value may increase because trade secret assets become better protected from rivals. On the other hand, market value may decrease because trade secret protection reduces information about the target and its competitors available to potential buyers, increasing uncertainty about its value. Buyers will discount their offers in expectation of being compensated for riskier deals. Using a sample of private equity investments in the United States, we find that trade secret protection has a positive effect in industries with high mobility of knowledge workers, but a negative effect in industries with (1) high resource–value uncertainty and (2) high poor‐investment risk. Managerial summary : We argue that an increase in trade secret legal protection might not unequivocally benefit firm owners when selling their business. A stronger trade secret protection increases the market value of firms in industries with high workers' mobility, but it decreases the market value of firms in industries with uncertain resource value and/or high risk of poor‐acquisition investments. Based on the contingent effect of trade secret protection, companies may want to adjust their strategic decisions, including where to locate or relocate, based in part on whether they will derive benefits or suffer losses when trade secrets are better protected. Finally, our study should help policymakers understand more fully the economic impact of government policies associated with trade secrets. Copyright © 2016 John Wiley & Sons, Ltd.     

Status in a strange land? Context‐dependent value of status in cross‐border venture capital

Research Summary: While recent literature has depicted status as an intangible asset that is firm‐specific and mobile, we have a limited understanding of whether status confers advantage in a way similar to other intangible assets. This study examines the macro‐structural contingencies that influence the marginal value of firm status as firms expand to new markets. Building on the literatures on status and social approval assets, as well as globalization and international management, we hypothesize that two conditions influence how valuable home‐country status will be in a given host country: the interconnectedness of the home and host countries, and their relative position in the global network. We test our hypotheses in a study of 187 venture capital (VC)‐backed biotechnology ventures in 19 countries between 1990 and 2006. Managerial Summary: Startups typically prefer high‐status VC investors for endorsements, network connections, and resources. One might expect the benefits of high‐status VCs to be even higher when they invest across borders. Yet, we show that status is ingrained in context, and that the performance advantage of partnering with high‐status cross‐border VC firms depends on the relationship between the country of the VC firm and that of the startup. We find that, when the VC industries in the two countries are more connected, the positive effect of cross‐border VC firm status on successful exit is amplified. However, when the VC firm comes from a more central country than the startup, the benefits of VC firm status are less pronounced and vice versa.     

A path to value creation for foreign entrepreneurs

Research summary : Firms founded by foreign entrepreneurs constitute an influential and growing part of the world economy. Yet, the existing research has given little consideration to the strategies of foreign entrepreneurs beyond their decisions to start a firm. In this article, we address this gap by examining how foreign entrepreneurs may bring value to their firms as firm managers. We argue that foreign owner‐managers may benefit their firms by having access to home‐country resources. We demonstrate that, compared to hired local managers, foreign owner‐managers reduce firms' operating costs by disproportionately hiring home‐country labor when this labor is more cost‐efficient. This effect is larger for labor‐intensive industries and for entrepreneurs from less wealthy countries. Managerial summary : Foreign entrepreneurs represent an important part of the world economy. Yet, we know little of how foreign entrepreneurs manage their firms. In this article, we examine whether foreign entrepreneurs and domestic managers hire different employees. We find that when foreign entrepreneurs manage their firms personally, they hire a larger number of foreign workers, and such workers are cheaper and more productive than the local labor. Conversely, domestic managers tend to hire local employees, despite their higher relative wages. Foreign owner‐managers are particularly valuable in labor‐intensive industries and when their home‐country labor is inexpensive. Copyright © 2015 John Wiley & Sons, Ltd.     

The clock is ticking! Executive temporal depth,industry velocity,and competitive aggressiveness

We examine how the interplay between executive temporal depth (time horizons that executives consider when contemplating past and future events) and industry velocity (the rate at which new opportunities emerge and disappear in an industry) shapes competitive aggressiveness (a firm's propensity to challenge rivals directly and intensely in order to maintain or improve its market position) and firm performance. Based on panel data (from 1995 to 2000) from 258 firms in 23 industries, we found that executive temporal depth exhibited different patterns of relationships with competitive aggressiveness in low‐ and high‐velocity industries. Moreover, competitive aggressiveness had a positive main effect on firm performance, but this effect was stronger in high‐velocity industries than in low‐velocity industries. Copyright © 2015 John Wiley & Sons, Ltd.     

Offshoring Pollution while Offshoring Production?

Research summary: We examine the role of firm strategy in the global effort to combat pollution. We find that U.S. plants release less toxic emissions when their parent firm imports more from low‐wage countries (LWCs). Consistent with the Pollution Haven Hypothesis, goods imported by U.S. firms from LWCs are in more pollution‐intensive industries. U.S. plants shift production to less pollution‐intensive industries, produce less waste, and spend less on pollution abatement when their parent imports more from LWCs. The negative impact of LWC imports on emissions is stronger for U.S. plants located in counties with greater institutional pressure for environmental performance, but weaker for more‐capable U.S. plants and firms. These results highlight the role of local institutions and firm capability in explaining firms' offshoring and environmental strategies. Managerial summary: Using confidential trade, production, and pollution data of more than 8,000 firms and 18,000 plants from the U.S. Census Bureau for years 1992–2009, we find that U.S. plants release less toxic emissions when their parent firm imports more from low‐wage countries (LWCs). In addition, goods imported by U.S. firms from LWCs are in more pollution‐intensive industries. U.S. plants shift production to less pollution‐intensive industries, produce less waste, and spend less on pollution abatement when their parent imports more from LWCs. However, not all U.S. firms choose to “offshore pollution.” U.S. plants located in counties with greater institutional pressure for environmental performance offshore more, but more‐capable U.S. plants and firms offshore less. Copyright © 2017 John Wiley & Sons, Ltd.     

From Internal to Network Labor Markets? Insights on New Promotion Processes from the Call Center Industry

Research on network forms of organization suggests that “business units” may be a more useful analytical unit than “firms” in understanding restructuring of internal labor markets. We find evidence for this proposition by analyzing promotion opportunities in 1760 call centers in sixteen countries. We find substantial differences in promotion opportunities internal to the unit versus elsewhere, related to the use of explicit versus tacit knowledge in performance evaluation, distinctions between unit‐specific and general‐firm knowledge, and network‐bridging organizational characteristics.     

Strategy,human capital investments,business‐domain capabilities,and performance: a study in the global software services industry

Research summary : In knowledge‐based industries, continuous human capital investments are essential for firms to enhance capabilities and sustain competitive advantage. However, such investments present a dilemma for firms, because human resources are mobile. Using detailed project‐level operational, financial, and human capital data from a leading multinational firm in the global IT services industry, this study finds that deliberate investments in improving general human capital can help firms develop superior capabilities and maintain high profits. This paper identifies two types of capabilities essential for success in this industry—technological and business‐domain capabilities—and provides empirical evidence justifying such investments. Theoretical and practical implications of capability‐seeking general human capital investments are discussed. Managerial summary : The primary managerial implication of this research is that capability‐seeking investments in developing general human capital through strategic learning (training and internal certifications) can enhance firm performance. Although investing in general human capital is risky, the firm considered this a strategic necessity in order to thrive in the fast paced IT services industry. By leveraging general technological skills in combination with business‐domain knowledge to address customer's business problems firms can earn and sustain higher profits. Our study also demonstrates how a developing‐country firm responded to strong competitive challenge from global rivals possessing superior capabilities by upgrading the capabilities of its employees through internal development. In doing so the firm was able to narrow the capability gap vis‐à‐vis its foreign peers and expand its business globally. Copyright © 2016 John Wiley & Sons, Ltd.     

Profitability Goals,Control Goals,and the R&D Investment Decisions of Family and Nonfamily Firms

Research and development (R&D) investments can help build sustainable competitive advantages and improve firm performance. Nevertheless, managers also acknowledge the difficulties associated with managing R&D and the low chances of success of innovation programs. For this reason, researchers have long been interested in understanding how managers make R&D investment decisions. Research grounded in the behavioral theory of the firm suggests that a primary driver of R&D investment decisions is profitability: when profitability goals have not been met, managers are more likely to initiate a problemistic search through increasing R&D investments. While emphasizing profitability goals and their relationship with R&D investments, prior research largely downplays the role of goals beyond profitability that exist in a significant number of firms (family firms) that are owned and managed by family members whose primary concern is preserving their control over the organization. Research indicates that these family‐centered noneconomic goals lead family managers to minimize R&D investments and that the coexistence of multiple goals produces highly variable R&D investment behavior. Yet, how family‐centered goals for control and profitability enter decision‐making in family firms is not fully understood. In this study, we propose that family managers form distinctive reference points that capture supplier bargaining power and are used to evaluate the degree of external obstruction to their managerial control. The empirical analysis of panel data on 431 private Spanish manufacturing firms observed over the period 2000–2006 shows that the importance of profitability and control goals follows a sequential logic in family firms, such that family firms react more strongly to increasing supplier bargaining power when their profitability reference points have been reached. This study extends current understanding of the distinctive organizational processes engendered by family management in business organizations leading to new research opportunities at the intersection of the innovation management and family business literatures.     

Do‐no‐harm versus do‐good social responsibility: Attributional thinking and the liability of foreignness

Research summary: The efforts of multinational corporations to be socially responsible do not always engender positive evaluations from overseas stakeholders. Drawing on attribution theory, we argue that two heuristics guide stakeholders in evaluating firms' social performance: foreignness and the valence of firms' social responsibility. We provide evidence from a field study of secondary stakeholders and an experimental study involving 129 non‐governmental organizations. Consistent with attribution theory, the liability of foreignness is minimized when firms engage in “do‐good” social responsibility (focused on proactive engagement creating positive externalities) but is substantial when firms engage in “do‐no‐harm” social responsibility (focused on attenuating negative externalities). In online supporting information, Appendix S1, we demonstrate that these evaluations have consequences for whether stakeholders subsequently cooperate, or sow conflict, with firms. Managerial summary: There is no guarantee that efforts to be socially responsible will improve multinational corporations' relations with overseas stakeholders, such as customers, governments, and activists. In a field study and an experiment, we unpack when foreign firms suffer from harsh stakeholder evaluations. Foreign firms especially suffer from harsh evaluations when they conduct “do‐no‐harm” CSR rather than “do‐good” CSR. Stakeholders attribute the motive for foreign firms' do‐no‐harm CSR to managerial interests and shareholder pressures, perceiving a wedge between managers and owners (who may be unmotivated to reduce the negative impacts of their business activities) and local stakeholders (who bear the social costs). A practical implication is that foreign firms gain more from highlighting do‐good rather than do‐(no)‐harm CSR initiatives. Copyright © 2015 John Wiley & Sons, Ltd.