Is performance driven by industry‐ or firm‐specific factors? A response to Hawawini,Subramanian, and Verdin

Hawawini, Subramanian, and Verdin (2003) examined the relative impact of industry‐ vs. firm‐level factors shaping firm performance. They demonstrated that variance in firm performance attributable to industry‐level factors increases, while variance attributable t to firm‐level factors decreases when ‘exceptionally’ higher‐ and lower‐performing ‘outlier’ firms in each industry are excluded. They concluded that previous research underestimated the relative impact of industry‐level factors for ‘average’ firms that make up the bulk of an industry. We take issue with their methods used to identify and exclude outliers as well as their conclusions drawn from such analyses. Rather than excluding true ‘outlier’ firms, we argue that they incorporated an artificial restriction of within‐industry sample variance that almost deterministically led to lower firm and higher industry variance component estimates. We demonstrate this point with a comparable sample of data to which we apply progressively greater restrictions on within‐industry sample variance leading to similar results. Finally, we show that exclusion of firms from a data sample based on commonly understood standards of outlier identification leads to little change in industry and firm variance component estimates compared to full‐sample estimates. Copyright © 2005 John Wiley & Sons, Ltd.     

Is performance driven by industry‐or firm‐specific factors? A new look at the evidence

In this study we revisit the question of whether firms' performance is driven primarily by industry or firm factors, extending past studies in two major ways. Firstly, in a departure from past research, we use value‐based measures of performance (economic profit or residual income and market‐to‐book value) instead of accounting ratios (such as return on assets). We also use a new data set and a different statistical approach for testing the significance of the independent effects. Secondly, we examine whether the findings of past research can be generalized across all firms in an industry or whether they apply to a particular class of firms within the same industry. We find that a significant proportion of the absolute estimates of the variance of firm factors is due to the presence of a few exceptional firms in any given industry. In other words, only for a few dominant value creators (leaders) and destroyers (losers) do firm‐specific assets seem to matter significantly more than industry factors. For most other firms, i.e., for those that are not notable leaders or losers in their industry, however, the industry effect turns out to be more important for performance than firm‐specific factors. Copyright © 2002 John Wiley & Sons, Ltd.     

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.     

Who competes with whom? A demand‐based perspective for identifying and representing asymmetric competition

A host of strategic management and marketing issues, including competitive analysis and strategic decision making, hinges on accurately identifying and representing competitive market structures. It is readily acknowledged that competitive market structures are typically asymmetric; namely, one firm may actively compete with another in a given market but not vice versa. However, empirical efforts to assess these competitive asymmetries have been lacking in the strategy literature. We propose a new spatial methodology to identify and represent asymmetric competitive market structures. Specifically, we devise a new stochastic multidimensional scaling procedure that is calibrated from actual consumer consideration/choice sets to estimate and uncover competitive asymmetries. The proposed methodology can be effectively employed in the analysis of appropriate data from either demand‐ or supply‐side approaches to assess competitive market structure. We illustrate our proposed methodology with survey data collected from two different commercial applications: one from the U.S. luxury automobile market and the other from the U.S. portable telephone market. We contrast the findings of the proposed methodology against traditional symmetric approaches for identifying and representing competitive market structures, and discuss the respective strategic insights. Copyright © 2005 John Wiley & Sons, Ltd.     

Influencing public policymaking: Firm‐, industry‐, and country‐level determinants

This paper examines the determinants of firms' public policymaking influence. Using a novel and global database that measures firms' perceived influence over the executive and legislative branches of government, a systematic analysis of the firm‐, industry‐, and country‐level determinants, and interrelationships among these determinants of firms' public policymaking influence is undertaken. The empirical results indicate that large firms perceive they have more public policymaking influence than small firms, but these differences are conditioned by the number of industry competitors and the structure of the country political institution environment. Nonmarket strategy implications that follow from this refined understanding are developed and discussed. Copyright © 2014 John Wiley & Sons, Ltd.     

Manufacturing‐based relatedness,synergy, and coordination

This paper explores the basic question of whether manufacturing‐based relatedness between business units within a multibusiness firm serves as a basis for a competitive advantage at the business unit level. We developed a system for describing manufacturing relatedness that combines the study of value chain activities with 4‐digit SIC codes, then we assessed presence of manufacturing synergies. We found no evidence that, on average, organizations involved in manufacturing‐related businesses are reaping financial benefits from shared resources in manufacturing. However, some firms, through explicit commitment to coordination, do realize performance benefits from such involvement. Copyright © 1999 John Wiley & Sons, Ltd.     

Strategic purity: A multi‐industry evaluation of pure vs. hybrid business strategies

Twenty‐five years of empirical research has failed to resolve a basic strategy question. Does strategic purity pay? Most theorists believe strategic purity—the extent to which a business pursues one type of generic strategy over another—contributes to better performance. By defining the strategy space consistent with the theory, and employing improved design and methods, our study of 2,351 businesses finds a significant relationship between strategic purity and performance. Purity does appear to pay. Some variations in strategic purity and performance relationship were observed across four major industry sectors: manufacturing, construction, retail, and business services. But in all instances pure strategies never did less well, and often did better than hybrid strategies. Copyright © 2007 John Wiley & Sons, Ltd.     

How much does owner type matter for firm performance? Manufacturing firms in China 1998–2007

Who owns the firm (the state, private ownership, foreign investors) has long been an important topic for research on organizations. This paper estimates how much ownership contributes to firm performance, compared to other factors, including industry, region, firm size, year, and the firm itself. The data are on manufacturing firms in mainland China from 1998 to 2007. We find that the effect of owner type is significant and pervasive across regions and interacts with both geography and time, reflecting China's decentralized system and the strong trend in privatization. Copyright © 2014 John Wiley & Sons, Ltd.     

Comparing the resource‐based and market‐based views of the firm: empirical evidence from Czech privatization

The recent privatization of state‐owned enterprises in the Czech Republic forms a natural experiment to test and compare the predictive ability of the resource‐based view (RBV) against the market‐based view (MBV) under conditions of great change. It has been recognized in the literature that, under normal stable circumstances, a firm's internal resources and its external market power are fundamentally intertwined. Consequently, it is difficult to identify the relative roles of these two theories in explaining expected firm performance and firm value. However, when market conditions are in a state of flux, as in the case of the Czech Republic in 1992, we expect the firm's resources to be the primary determinants of firm value. In order to test this notion, an RBV model was developed, based on a set of firm features reflecting the rare and valuable ability to compete in the emerging capitalistic economy (as opposed to the currently prevailing bureaucratically planned economy). A contrasting MBV model was also developed, highlighting the role of market power in this regard. These models were assessed in a cross‐sectional sample of 988 Czech firms undergoing privatization. The empirical findings show that the RBV‐driven variables are remarkably better at explaining share values of Czech firms in the period of privatization than MBV‐driven variables. These results underscore the role of firm resources as a primary determinant of firm value in rapidly changing environments. Copyright © 2003 John Wiley & Sons, Ltd.     

Demand‐side strategy,relational advantage,and partner‐driven corporate scope: The case for client‐led diversification

Research Summary: We advance research on corporate diversification by joining insights from the demand‐side and relational views in strategy to offer a novel theory of client‐led diversification. We propose that client‐led diversification results from a combination of the customer‐driven opportunities emphasized in the demand‐side view and the creation of added value through relational assets that is a central tenet of the relational view. Furthermore, we hypothesize that suppliers’ client‐specific knowledge, clients’ relational commitment to suppliers, and growth opportunities in clients’ markets (relative to the suppliers’ own markets) will magnify the client‐led diversification effect. We test our hypotheses using a longitudinal dataset on patent law firms and their diversification into new domains of patent prosecution work for their corporate clients. Managerial Summary: Explanations of why firms diversify into new lines of business have largely concerned the redeployment of underutilized resources, with little regard to opportunities or influences stemming from firms’ existing customers. In our article, we show how the changing scope of business needs from a knowledge‐based supplier firm's set of existing clients is a central driver of supplier‐firm diversification, and this is especially the case when the level of relational assets shared between a supplier and its clients is higher. In a competitive landscape where suppliers compete intensively for the business of clients, our results show how managers can increase the likelihood of capturing additional business from its existing exchange relationships rather than bearing the risks of seeking new exchange relationships.     

An examination into the causal logic of rent generation: contrasting Porter's competitive strategy framework and the resource‐based perspective

In this study we revisit some fundamental questions that are increasingly at the heart of current strategic management discourse regarding the relative impact of industry and firm‐specific factors on sustainable competitive advantage. We explore this issue by referring to respective assertions of two major perspectives that dominate the literature over the last two decades: the Porter framework of competitive strategy and the more recent resource‐based view of the firm. A composite model is proposed which elaborates upon both perspectives' divergent causal logic with respect to the conditions relevant for firm success. Empirical findings suggest that industry and firm specific effects are both important but explain different dimensions of performance. Where industry forces influence market performance and profitability, firm assets act upon accomplishments in the market arena (i.e., market performance), and via the latter, to profitability. The paper concludes with directions for future research that will seek to integrate both content and process aspects of firm behavior. Copyright © 2001 John Wiley & Sons, Ltd.     

Customer‐specific synergies and market convergence

We use an analytical model to study the effects of customer‐specific synergies, i.e., synergies that arise when firms sell multiple products to the same customers. At the firm level, we show that the profitability of a customer‐specific synergy depends upon cross‐market correlation of customer preferences, differs when the synergy is cost‐based versus differentiation‐based, and can even be negative when the synergy is kept proprietary to a single firm. We also show that returns to imitating such a synergy may decline as it strengthens. At the industry level, we find that exploiting customer‐specific synergies causes endogenous market convergence at a point that depends upon whether the synergy is cost‐based or differentiation‐based and whether it is imitated. Copyright © 2015 John Wiley & Sons, Ltd.     

Porter's ‘competitive advantage of nations’: An assessment

Porter's Competitive Advantage of Nations is an important book which bridges the gap between strategic management and international economics while contributing substantially to both. Porter's analysis of the impact of national environment on international competitive performance demonstrates the potential for the theory of competitive strategy to rescue international economics from its slide into refined irrelevance, while simultaneously broadening the scope of the theory of competitive strategy to encompass both the international dimension and the dynamic context of competition. Nevertheless, the breadth and relevance of Porter's analysis have been achieved at the expense of precision and determinancy. Concepts are often ill defined, theoretical relationships poorly specified, and empirical data chosen selectively and interpreted subjectively.     

How do interdependencies among human‐capital deployment,development, and diversification strategies affect firms' financial performance?

Using key insights from the resource‐based view of the firm, we develop and test a theory of how firms can successfully deploy and develop their strategic human assets while managing the trade‐offs in their service and geographical diversification strategies. In a sample of large law firms we find that, even though firms profit from expert human‐capital leveraging strategy and service and geographical diversification strategies individually, pursuing these strategies simultaneously at high levels produces negative interaction effects on firm profitability. In addition, the internally developed, firm‐specific associate human capital strategically fits better with high levels of expert human‐capital leveraging. While lateral hiring helps firms build new knowledge bases and take advantage of growth opportunities, pursuing high levels of both expert human‐capital leveraging and lateral hiring of associates results in lower profitability. To fully capture the economic benefits from strategies of diversification, human‐capital leveraging and lateral hiring, firms should understand and manage the complex interdependencies among multiple levels of strategy. Copyright © 2005 John Wiley & Sons, Ltd.     

Fast‐mover advantages: Speed capabilities and entry into the emerging submarket of atlantic basin LNG

Entry timing benefits and costs typically vary with firms' capabilities. In this study, we empirically examine the entry timing implications of firms' intrinsic speed capabilities, which refer to the ability to execute investment projects faster than competitors. We hypothesize that firms with intrinsic speed capabilities face low preemption risks and, thus, can afford to wait longer for uncertainty resolution before deciding to enter new markets. This hypothesis is more applicable when investment is associated with higher levels of commitment and, thus, greater option value of waiting. A direct implication is that late entrants with intrinsic speed capabilities should have greater expected post‐entry performance. We find support for these hypotheses in the Atlantic Basin liquefied natural gas (LNG) industry from 1996 to 2007. Copyright © 2013 John Wiley & Sons, Ltd.     

Within‐industry diversification and firm performance—an S‐shaped hypothesis

This study shows that the interplay between “adjustment costs”, “coordination costs” and within‐industry diversification benefits, results in an S‐shaped relationship between within‐industry diversification and firm performance. At low levels of within‐industry diversification, coordination costs are negligible but “adjustment costs” are higher than the synergy benefits of a limited product scope, hence leading to negative performance outcomes. At moderate levels of within‐industry diversification synergies between related product categories substantially increase and outweigh the rise in adjustment and coordination costs, resulting in positive performance outcomes. Yet, extensive within‐industry diversification gives rise to considerable coordination costs, which, coupled with adjustment costs, outweigh synergy effects and hamper performance. The study further shows that a greater change rate of within‐industry diversification results in negative performance outcomes. Copyright © 2014 John Wiley & Sons, Ltd.     

Strategy tools‐in‐use: A framework for understanding “technologies of rationality” in practice

In response to critiques of strategy tools as unhelpful or potentially dangerous for organizations, we suggest casting a sociological eye on how tools are actually mobilized by strategy makers. In conceptualizing strategy tools as tools‐in‐use, we offer a framework for examining the ways that the affordances of strategy tools and the agency of strategy makers interact to shape how and when tools are selected and applied. Further, rather than evaluating the correct or incorrect use of tools, we highlight the variety of outcomes that result, not just for organizations but also for the tools and the individuals who use them. We illustrate this framework with a vignette and propose an agenda and methodological approaches for further scholarship on the use of strategy tools. Copyright © 2014 John Wiley & Sons, Ltd.     

Self‐selection,endogeneity, and the relationship between CEO duality and firm performance

This study focuses explicitly on the methodological implications of the endogenous theory of governance as applied to firm performance. In particular, if firms choose their governance structures as part of a constrained performance maximization process, then application of an appropriate empirical methodology should reveal statistical evidence of such behavior. In this study we take advantage of the endogenous switching regression model framework to determine whether such predicted optimizing behavior can be corroborated by the data. The model allows us to test explicitly for selection behavior in accordance with comparative advantage and, concomitantly, the presence of selectivity bias, in estimating the impact of CEO duality on firm performance. The selection and performance equations are modeled in accordance with the extant accounting, economics, and management literature on the impact of the dual governance structure on firm performance. Overall, we tested four performance measures for the entire sample of firm‐year observations as well as for the largest three industries in terms of sample sizes. The major finding, robust in all cases, is that there is no evidence to support a contention that CEO duality is a structure purposefully chosen for optimizing performance. If firms are indeed choosing the dual leadership structure, they are doing so for reasons other than improving performance from what it would be otherwise. In fact, for performance measured as market return and earnings per share, there is evidence of a significant selectivity bias that acts to lower performance below what it would have been under random assignment. For performance measured by Tobin's q and return on assets, we found neither evidence of selectivity bias, nor any significant marginal performance impacts of CEO duality. Such findings are inconsistent with an endogenous governance theory, at least when applied to firm performance. Copyright © 2009 John Wiley & Sons, Ltd.     

Firm‐specific knowledge resources and competitive advantage: the roles of economic‐ and relationship‐based employee governance mechanisms

The resource‐based view of the firm emphasizes the role of firm‐specific resources, especially firm‐specific knowledge resources, in helping a firm to achieve sustainable competitive advantage. However, the deployment of firm‐specific knowledge often requires key employees to make specialized human capital investments that are not easily redeployable to other settings. Thus, in the absence of effective safeguards and trust building devices, employees with foresight may be reluctant to make such specialized investments. This study explores both economic‐ and relationship‐based governance mechanisms that might mitigate this underinvestment problem. Effective use of these governance mechanisms enables a firm to obtain greater performance from its efforts to deploy firm‐specific knowledge resources. Empirical results further support these key arguments. Copyright © 2009 John Wiley & Sons, Ltd.